Homeinns Hotel 20F 2008 Annual report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)


o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934


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

For the fiscal year ended December 31, 2008.


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

For the transition period from to


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

Date of event requiring this shell company report

Commission file number: 001-33082

HOME INNS & HOTELS MANAGEMENT INC.

(Exact Name of Registrant as Specified in Its Charter)

N/A

(Translation of Registrant’s Name Into English)

Cayman Islands

(Jurisdiction of Incorporation or Organization)

No. 124 Caobao Road
Xuhui District
Shanghai 200235
People’s Republic of China

(Address of Principal Executive Offices)

May Y. Wu, Chief Financial Officer
No. 124 Caobao Road
Xuhui District
Shanghai 200235
People’s Republic of China
Phone: +(86 21) 3401-9898
Fax: +(86 21) 6483-5661

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of Each Exchange On Which Registered

American Depositary Shares, each representing two ordinary shares, par value $0.005 per share		Nasdaq Global Market

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.71,212,795 ordinary shares, par value US$0.005 per share, as of December 31, 2008.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso Noþ

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yeso Noþ

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. Yesþ Noo

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 filero		Accelerated filerþ		Non-accelerated filero

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAPþ
International Financial Reporting Standards as issued by the International Accounting Standards Boardo
Othero

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17o Item 18o

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yeso Noo

TABLE OF CONTENTS


	Page

INTRODUCTION		1

PART I		2

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		2

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE		2

ITEM 3. KEY INFORMATION		3

ITEM 4. INFORMATION ON THE COMPANY		21

ITEM 4A. UNRESOLVED STAFF COMMENTS		36

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS		37

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		50

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		59

ITEM 8. FINANCIAL INFORMATION		60

ITEM 9. THE OFFER AND LISTING		61

ITEM 10. ADDITIONAL INFORMATION		62

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		68

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		69

PART II		69

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		69

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		69

ITEM 15. CONTROLS AND PROCEDURES		69

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT		70

ITEM 16B. CODE OF ETHICS		71

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES		71

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES		71

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS		71

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT		71

ITEM 16G. CORPORATE GOVERNANCE		71

PART III		72

ITEM 17. FINANCIAL STATEMENTS		72

ITEM 18. FINANCIAL STATEMENTS		72

ITEM 19. EXHIBITS		72

Exhibit 2.1
Exhibit 8.1
Exhibit 12.1
Exhibit 12.2
Exhibit 13.1
Exhibit 13.2
Exhibit 23.1
Exhibit 23.2

INTRODUCTION

Unless otherwise indicated and except where the context otherwise requires, references in this annual report on Form 20-F to:

•

“we,” “us,” “our company,” “our” and “Home Inns” refer to Home Inns & Hotels Management Inc., a Cayman Islands company, and its predecessor entities and subsidiaries, except in the context of discussing our consolidated financial data for the periods prior to April 2004, where the reference excludes Home Inns Beijing and its subsidiaries;

•

“BTG” refers to Beijing Tourism Group, a state-owned enterprise established in China, and its predecessors and subsidiaries, including Beijing Capital Travel International Hotel Group Co., Ltd.;

•

“China” or “PRC” refers to the People’s Republic of China, excluding solely for the purpose of this report Taiwan, Hong Kong and Macau;

•

“Home Inns Beijing” refers to Home Inns & Hotels Management (Beijing) Co., Ltd., and its subsidiaries, which have been our consolidated subsidiaries since April 2004;

•

“Home Inns Hong Kong” refers to Home Inns & Hotels Management (Hong Kong) Limited;

•

“Top Star” refers, collectively, to Hong Kong Ai Home Investment Company, Shanghai Chuwen Investment Holding Co., Ltd. and their subsidiaries, which we acquired in 2007;

•

“our hotels” refers, collectively, to our leased-and-operated and franchised-and-managed hotels;

•

“average daily rate” refers to total hotel room revenues divided by the total number of occupied rooms in a given period;

•

“occupancy rate” refers to the total number of occupied rooms divided by the total number of available rooms in a given period;

•

“RevPAR” represents revenue per available room, which is calculated by dividing total hotel room revenues by the total number of available rooms in a given period, or by multiplying average daily rates and occupancy rates in a given period;

•

“shares” or “ordinary shares” refers to our ordinary shares; “preferred shares” refers to our Series A convertible preferred shares, Series B convertible preferred shares and Series C convertible preferred shares, collectively, all of which were converted into an equal number of ordinary shares on October 31, 2006 upon the completion of our initial public offering;

•

“ADSs” refers to our American depositary shares, each of which represents two ordinary shares, and “ADRs” refers to the American depositary receipts that evidence our ADSs; and

•

“RMB” or “Renminbi” refers to the legal currency of China; “$,” “dollars,” “US$” or “U.S. dollars” refers to the legal currency of the United States; and “HK$” refers to the legal currency of Hong Kong.

This annual report on Form 20-F includes our audited consolidated financial statements for the years ended December 31, 2006, 2007 and 2008 and as of December 31, 2007 and 2008.

All translations from Renminbi to U.S. dollars were made at the noon buying rate in The City of New York for cable transfers in Renminbi per U.S. dollar as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise stated, the translation of Renminbi into U.S. dollar has been made at the noon buying rate in effect on December 31, 2008, which was RMB 6.8225 to US$1.00. We make no representation that the Renminbi or dollar amounts referred to in this annual report on Form 20-F could have been or could be converted into dollars or Renminbi, as the case may be, at any particular rate or at all. See “Item 3. Key Information—D. Risk Factors—Risk Related to Doing Business in China—Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.” On April 17, 2009, the noon buying rate was RMB 6.8325 to US$1.00.

FORWARD-LOOKING STATEMENTS

This annual report on Form 20-F contains forward-looking statements that involve risks and uncertainties. All statements other than statements of historical facts are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements.

You can identify these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “is/are likely to” or other and similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include:

•

our anticipated growth strategies;

•

our future business development, results of operations and financial condition;

•

expected changes in our revenues and certain cost or expense items;

•

our ability to attract customers, leverage our brand and provide high-quality services to our customers;

•

trends and competition in the lodging industry;

•

our ability to develop new hotels at desirable locations in a timely and cost-effective manner.

You should read thoroughly this annual report and the documents that we refer to in this annual report with the understanding that our actual future results may be materially different from and worse than what we expect. We qualify all of our forward-looking statements by these cautionary statements. Other sections of this annual report include additional factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

A.Selected Financial Data

Our Selected Consolidated Financial Data

The following table presents our selected consolidated financial information. The selected consolidated statement of operations data for the years ended December 31, 2006, 2007 and 2008 and the consolidated balance sheet data as of December 31, 2007 and 2008 have been derived from our audited consolidated financial statements included elsewhere in this annual report. Our selected consolidated statement of operations data for the years ended December 31, 2004 and 2005 and our consolidated balance sheet data as of December 31, 2004, 2005 and 2006 have been derived from our audited consolidated financial statements, which are not included elsewhere in this annual report. Our consolidated financial statements are prepared and presented in accordance with U.S. GAAP, and reflect our current corporate structure as if it had been in existence throughout the relevant periods.

Our historical results do not necessarily indicate our results expected for any future periods. You should read the following information in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report.

We have been actively managing Home Inns Beijing since its inception. Home Inns Hong Kong’s ownership in Home Inns Beijing was accounted for under the equity method since Home Inns Beijing’s inception until April 2004, because during this period of time, BTG had substantive participation rights that enabled it to veto significant decisions made by Home Inns Hong Kong. In April 2004, Home Inns Hong Kong and Beijing Capital Travel, a subsidiary of BTG, entered into a revised joint venture agreement, under which Home Inns Hong Kong obtained control of Home Inns Beijing. As a result, Home Inns Beijing has been our consolidated subsidiary since then.


	For the Year Ended December 31,
	2004			2005			2006			2007			2008
	RMB			RMB			RMB			RMB			RMB			US$
	(in thousands, except share, per share and per ADS data)
Consolidated Statement of Operations Data
Revenues:
Leased-and-operated hotels		93,687			279,948			567,895			963,050			1,771,762			259,694
Franchised-and-managed hotels		2,313			5,913			20,605			46,266			99,779			14,625

Total revenues		96,000			285,861			588,500			1,009,316			1,871,541			274,319
Less: Business tax and related surcharges		(5,101	)		(16,830	)		(33,977	)		(60,302	)		(111,870	)		(16,397	)

Net revenues		90,899			269,031			554,523			949,014			1,759,671			257,922

Operating costs and expenses⁽¹⁾:
Leased-and-operated hotel costs:
Rents and utilities		(30,703	)		(94,784	)		(171,576	)		(299,792	)		(643,694	)		(94,349	)
Personnel costs		(12,949	)		(41,225	)		(87,981	)		(155,611	)		(337,837	)		(49,518	)
Depreciation and amortization		(5,681	)		(23,335	)		(44,619	)		(85,600	)		(190,698	)		(27,951	)
Consumables, food and beverage		(6,441	)		(20,765	)		(43,482	)		(84,053	)		(143,555	)		(21,041	)
Others		(8,162	)		(26,100	)		(56,019	)		(98,644	)		(182,284	)		(26,718	)

Total leased-and-operated hotel costs		(63,936	)		(206,209	)		(403,677	)		(723,700	)		(1,498,068	)		(219,577	)
Sales and marketing expenses		(2,113	)		(7,691	)		(11,488	)		(19,632	)		(27,161	)		(3,981	)
General and administrative expenses		(16,127	)		(24,789	)		(64,793	)		(99,026	)		(152,648	)		(22,374	)

Total operating costs and expenses		(82,176	)		(238,689	)		(479,958	)		(842,358	)		(1,677,877	)		(245,932	)

Income from operations		8,723			30,342			74,566			106,656			81,794			11,990

Interest income		89			223			6,578			31,717			32,023			4,694
Interest expense		(98	)		(709	)		(6,143	)		(7,168	)		(28,136	)		(4,124	)
Gain on buy-back of convertible bond		—			—			—			—			103,291			15,140
Other non-operating income		325			2,146			5,309			8,434			10,971			1,608
Foreign exchange gain (loss), net		144			254			(6,990	)		(53,221	)		(65,524	)		(9,604	)

Income before income tax expense, minority interests and share of income of affiliated companies		9,183			32,256			73,319			86,418			134,419			19,704
Income tax expense		(5,738	)		(6,526	)		(21,391	)		(45,035	)		(28,107	)		(4,120	)
Minority interests		552			(4,797	)		(5,034	)		(5,627	)		(5,087	)		(746	)
Share of income of affiliated companies		1,972			—			—			—			—			—


	For the Year Ended December 31,
	2004			2005			2006			2007		2008
	RMB			RMB			RMB			RMB		RMB		US$
	(in thousands, except share, per share and per ADS data)
Net income		5,969			20,933			46,894			35,756		101,225		14,838

Amount allocated to participating preferred shareholders		(2,960	)		(9,487	)		(16,174	)		—		—		—

Net income available to ordinary shareholders		3,009			11,446			30,720			35,756		101,225		14,838

Earning per share:
Basic		0.15			0.42			0.86			0.52		1.43		0.21
Diluted		0.15			0.40			0.82			0.47		0.04		0.01
Earnings per ADS⁽²⁾:
Basic		0.30			0.84			1.73			1.05		2.86		0.42
Diluted		0.30			0.80			1.64			0.93		0.09		0.01
Weighted average ordinary shares outstanding:
Basic		19,981,424			27,399,140			35,550,114			68,323,370		70,863,336		70,863,336
Diluted		20,315,681			28,713,188			37,530,332			76,883,995		78,037,433		78,037,433


(1)		Share-based compensation expenses are included in the consolidated statement of operations data as follows:


	For the Year Ended December 31,
	2004		2005		2006		2007		2008
	RMB		RMB		RMB		RMB		RMB		US$
	(in thousands)
Leased-and-operated hotel costs—personnel costs		8		8		12		11		11		2
General and administrative expenses		141		952		16,283		15,060		24,833		3,640


(2)		Each ADS represents two ordinary shares.

The following table presents a summary of our consolidated balance sheet data as of December 31, 2004, 2005, 2006, 2007 and 2008:


	As of December 31,
	2004		2005		2006		2007		2008
	RMB		RMB		RMB		RMB		RMB		US$
	(in thousands)
Consolidated Balance Sheet Data
Cash and cash equivalents		26,292		37,727		758,004		1,562,600		608,445		89,182
Total assets		174,304		375,002		1,320,019		3,561,538		3,363,454		492,997
Current portion of long-term loan from a related party		—		—		10,000		—		—		—
Total current liabilities		39,768		119,187		323,229		804,922		639,518		93,737
Deferred rental		11,890		26,534		44,103		94,226		136,825		20,055
Long-term loan from a related party		—		40,000		50,000		—		—		—
Convertible bond		—		—		—		1,110,308		895,696		131,286
Convertible preferred shares		813		949		—		—		—		—
Ordinary shares		1,134		1,134		2,691		2,874		2,899		425
Additional paid-in capital		110,687		152,878		813,222		1,362,942		1,393,903		204,310
Total shareholders’ equity		116,861		179,083		889,739		1,475,397		1,607,608		235,634

Home Inns Beijing’s Selected Consolidated Financial Data

Home Inns Beijing’s consolidated statement of operations data and consolidated balance sheet data for the year ended December 31, 2004 and as of December 31, 2004 have been derived from its consolidated financial statements for the relevant periods which have been audited by PricewaterhouseCoopers Zhong Tian CPAs Limited Company, an independent registered public accounting firm, and are prepared and presented in accordance with U.S. GAAP.


	For the Year Ended
	December 31, 2004
	RMB
	(in thousands)
Consolidated Statement of Operations Data
Revenues:
Leased-and-operated hotels		112,914
Franchised-and-managed hotels		2,364

Total revenues		115,278
Less: Business tax and related surcharges		(6,150	)

Net revenues		109,128

Operating costs and expenses⁽¹⁾:
Leased-and-operated hotel costs:
Rents and utilities		(36,463	)
Personnel costs		(15,653	)
Consumables, food and beverage		(8,149	)
Depreciation and amortization		(6,685	)
Others		(10,019	)

Total leased-and-operated hotel costs		(76,969	)
Sales and marketing expenses		(2,563	)
General and administrative expenses		(16,607	)

Total operating costs and expenses		(96,139	)

Income from operations		12,989
Interest income		110
Interest expense		(125	)
Other non-operating income		328

Income before income tax expense and minority interests		13,302
Income tax expense		(6,861	)
Minority interests		1,294
Share of income of affiliated companies		—

Net income		7,735


(1)		Includes share-based compensation expenses in the statement of operations data as follows:


	For the Year Ended
	December 31, 2004
	RMB
	(in thousands)
Leased-and-operated hotel costs—personnel costs		8
General and administrative expenses		141

The following table presents a summary of Home Inns Beijing’s consolidated balance sheet data as of December 31, 2004:


	As of December 31,
	2004
	RMB
	(in thousands)
Consolidated Balance Sheet Data
Cash and cash equivalents		16,710
Total assets		130,562
Total current liabilities		39,900
Deferred rental		11,890
Paid-in capital		68,945
Additional paid-in capital		150
Total shareholders’ equity		78,346

Exchange Rate Information

Our business is conducted in China and substantially all of our revenues are denominated in RMB. However, periodic reports made to shareholders will be expressed in U.S. dollars using the then current exchange rates. This annual report contains translations of RMB amounts into U.S. dollars at specific rates solely for the convenience of the reader. The conversion of RMB into U.S. dollars in this annual report is based on the noon buying rate in The City of New York for cable transfers of RMB as certified for customs purposes by the Federal Reserve Bank of New York. Unless otherwise noted, all translations of financial data from RMB to U.S. dollars in this annual report were made at a rate of RMB 6.8225 to US$1.00, the noon buying rate in effect as of December 31, 2008. We make no representation that any RMB or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or RMB, as the case may be, at any particular rate, the rates stated below, or at all. The PRC government imposes control over its foreign currency reserves in part through direct regulation of the conversion of RMB into foreign exchange and through restrictions on foreign trade. On April 17, 2009 the noon buying rate was RMB 6.8325 to US$1.00.

The following table sets forth information concerning exchange rates between the RMB and the U.S. dollar for the periods indicated. These rates are provided solely for your convenience and are not necessarily the exchange rates that we used in this annual report or will use in the preparation of our periodic reports or any other information to be provided to you. The source of these rates is the Federal Reserve Bank of New York.


	Noon Buying Rate
	Period
Period	End		Average⁽¹⁾		Low		High
2004		8.2765		8.2768		8.2774		8.2764
2005		8.0702		8.1826		8.2765		8.0702
2006		7.8041		7.9579		8.0702		7.8041
2007		7.2946		7.5806		7.8127		7.2946
2008		6.8225		6.9193		7.2946		6.7800
October		6.8388		6.8342		6.8485		6.8171
November		6.8254		6.8281		6.8373		6.8220
December		6.8225		6.8539		6.8842		6.8225
2009
January		6.8392		6.8360		6.8403		6.8225
February		6.8395		6.8363		6.8470		6.8241
March		6.8329		6.8360		6.8438		6.8240
April (through April 17)		6.8325		6.8337		6.8361		6.8316


(1)		Annual averages are calculated from month-end rates. Monthly averages are calculated using the average of the daily rates during the relevant period.

B.Capitalization and Indebtedness

Not applicable.

C.Reasons for the Offer and Use of Proceeds

Not applicable.

D.Risk Factors

Risks Related to Our Business

Our operating results are subject to conditions typically affecting the lodging industry.

Our operating results are subject to conditions typically affecting the lodging industry, including the following:

•

changes in the national, regional or local economic conditions;

•

natural disasters or travelers’ fears of exposure to serious contagious diseases;

•

the attractiveness of our hotels to customers and competition from other hotels;

•

local market conditions such as an oversupply of, or a reduction in demand for, hotel rooms;

•

the performance of managerial and other employees of our hotels; and

•

increases in operating costs and expenses due to inflation and other factors.

Changes in any of these conditions could adversely affect our occupancy rates, average daily rates and RevPAR or otherwise adversely affect our results of operations and financial condition.

We may not be able to manage our expected expansion, which could adversely affect our operating results.

Since our inception, we have experienced substantial growth in our hotel network. We have increased the number of our hotels in operation in China from five in 2002 to 471 (with another 114 hotels under development) as of December 31, 2008. We intend to continue to develop or acquire additional hotels in different geographic locations in China and increase our number of hotels in operation. In addition, we may introduce and offer new hotel products from time to time. For example, in 2008, we introduced a new H Hotel product and opened the first H Hotel in Shanghai, China.

Our expansion has placed, and will continue to place, substantial demands on our managerial, operational, technological and other resources. Our planned expansion will also require us to maintain the consistency of each of our products and the quality of our services to ensure that our brands do not suffer as a result of any deviations, whether actual or perceived, in the consistency of each of our products and the quality of our services. In order to manage and support our growth, we must continue to improve our existing operational, administrative and technological systems and our financial and management controls, and recruit, train and retain qualified hotel management personnel as well as other administrative and sales and marketing personnel, particularly as we expand into new markets. We cannot assure you that we will be able to effectively and efficiently manage the growth of our operations, recruit and retain qualified personnel and integrate new hotels into our operations. Any failure to effectively and efficiently manage our expansion may materially and adversely affect our ability to capitalize on new business opportunities, which in turn may have a material adverse effect on our results of operation.

Expansion into new geographic markets and addition of new hotel products for which we have limited operating experience and brand recognition may present operating and marketing challenges that are different from those that we currently encounter in our existing markets for our Home Inn hotels. In addition, our expansion within existing markets may adversely affect the financial performance of our existing hotels in those markets and, as a result, negatively affect our overall results of operations. Our inability to anticipate the changing demands that expanding our operations will impose on our management and information and operational systems, or our failure to quickly adapt our systems and procedures to the new markets could result in lost revenue and increased expenses and otherwise harm our results of operations and financial condition.

We committed significant resources to the acquisition and integration of Top Star, and will continue to invest in the rebranding of the Top Star hotels to Home Inns. If we cannot improve the performance of these acquired hotels, our results of operations and return on capital may be materially and adversely affected.

We acquired the Top Star hotel chain in October 2007. The addition of Top Star’s hotels expanded our current holding by an additional 25 economy hotels with about 4,000 rooms located in 16 cities across China. Our total consideration for the Top Star acquisition amounted to approximately RMB 350 million, or about RMB 87,500 per room. The acquisition of Top Star exposes us to potential risks, including risks associated with inability to generate sufficient revenues to offset the costs and expenses of the acquisition, unforeseen or hidden liabilities, and diversion of management attention and resources from our existing business.

We took over the operations of the Top Star hotels in November 2007, and have since completed the systems, personnel and operations integration of these hotels. However, the performance of these acquired hotels in general have not met our targets. We believe the causes include the mismatch between certain hotel room features and the preferences of our customers, especially our members, the negative impact resulting from the May 2008 Sichuan earthquake on acquired hotels in the affected region, and the macro economic condition.

While we have no control over the external factors, we are responding to the customer preference issue by modifying certain aspects of the acquired hotels’ rooms to make them conform more with our existing Home Inns hotel rooms, and we will rebrand all the acquired Top Star hotels to Home Inns after the modifications are completed. There is no assurance, however, that such efforts will substantially improve the performance of these acquired hotels.

Historically, the 25 Top Star legacy hotels as a whole have not been profitable. As such, the inclusion of these hotels in our financial results have had a negative impact on our financial condition and results of operations for the quarter ended December 31, 2007 and the years ended December 31, 2007 and 2008. We cannot assure you when the Top Stars legacy hotels will achieve profitability, if at all.

If the value of our brand or image diminishes, it could have a material and adverse effect on our business and results of operations.

Our “Home Inn” brand is associated with a leading economy hotel chain offering cleanness, convenience and comfort with consistent, high-quality service among value-conscious individual business and leisure travelers in China. Our continued success in maintaining and enhancing our brand and image depends, to a large extent, on our ability to satisfy customer needs by further developing and maintaining our innovative and distinctive product and maintaining consistent quality of services across our hotel chain, as well as our ability to respond to competitive pressures. If we are unable to do so, our occupancy rates may decline, which could in turn adversely affect our results of operations. Our business may also be adversely affected if our public image or reputation were to be diminished by the operations of any of our hotels, whether due to unsatisfactory service, accidents or otherwise. Our brand is integral to our sales and marketing efforts. If the value of our brand or image is diminished or if our brand does not continue to be attractive to customers, our business and results of operations may be materially and adversely affected.

Our effort in developing a new hotel brand, the H Hotel, may divert management attention and resources from our existing business, and if the new product is not well received by the market, we may not be able to generate sufficient revenue to offset the costs and expenses, and our overall financial performance and condition may be adversely affected.

We developed a new hotel brand and product in 2008, the H Hotel, which is positioned to target individual business and leisure customers who have a higher travel budget than our core Home Inns customers, but a lower travel budget than the customers of high star-rated hotels. We opened our first H Hotel, which is a leased-and-operated hotel, in Shanghai, in December 2008. So far we have limited evidence and operational experience to determine if this hotel will be successful, and if the hotel brand has potential for further expansion.

If we are not able to hire, train and retain qualified managerial and other employees, our brand and our business may be materially and adversely affected.

Our managerial and other employees manage our hotels and interact with our customers on a daily basis. They are critical to maintaining the quality and consistency of our services as well as our established brand and reputation. It is important for us to attract qualified managerial and other employees who have experience in lodging or other consumer-service industries and are committed to our “customer-first” approach. There may be a limited supply of such qualified individuals in some of the cities in China where we have operations and other cities into which we intend to expand. In addition, criteria such as dedication are difficult to ascertain during the recruitment process. We must hire and train qualified managerial and other employees on a timely basis to keep pace with our rapid growth while maintaining consistent quality of services across our hotels in various geographic locations. We must also provide continuous training to our managerial and other employees so that they are equipped with up-to-date knowledge of various aspects of our hotel operations and can meet our demand for high-quality services. If we fail to do so, the quality of our services may decrease in one or more of the markets where we operate, which in turn may have a material and adverse effect on our brand and our business.

We may not be able to successfully identify and secure additional hotel properties.

We plan to open more hotels in targeted markets to further grow our business. We may not be successful in identifying and leasing or franchising additional hotel properties at desirable locations and on commercially reasonable terms or at all. Some cities in China have undergone economic development and expansion for several decades while others are still at an early stage of development. In more developed cities, it may be difficult to increase the number of hotels because we or our competitors already have operations in such cities. In less developed cities, demand for our hotels may not increase as rapidly as we expect. Even if we are able to successfully identify and acquire new hotel properties via lease or franchise arrangements, new hotels may not generate the returns we expect. We also may incur costs in connection with evaluating hotel properties and negotiating with property owners, including ones that we are subsequently unable to lease or franchise. If we fail to successfully identify or compete for additional hotel properties, our ability to execute our growth strategy could be impaired and our business and prospects may be materially and adversely affected.

Future acquisitions may have an adverse effect on our ability to manage our business.

If we are presented with appropriate opportunities, we may acquire businesses or assets that are complementary to our business. Future acquisitions would expose us to potential risks, including risks associated with unforeseen or hidden liabilities, the diversion of management attention and resources from our existing business and the inability to generate sufficient revenues to offset the costs and expenses of acquisitions. Any difficulties encountered in the acquisition and integration process may have an adverse effect on our ability to manage our business.

Our business is sensitive to the current global economic crisis. A severe or prolonged downturn in the global or Chinese economy could materially and adversely affect our revenues and results of operations.

Recent global market and economic conditions have been unprecedented and challenging with tight credit conditions and recession in most major economies continuing into 2009. Continued concerns about the systemic impact of potential long-term and wide-spread recession, energy costs, geopolitical issues, the availability and cost of credit, and the global housing and mortgage markets have contributed to increased market volatility and diminished expectations for economic growth around the world. The grim economic outlook has negatively affected business and consumer confidence and contributed to volatility of unprecedented levels.

The current deterioration in economic conditions has reduced and could continue to reduce business travel activities. Our operational metrics and results of operations for 2008 were adversely affected by the economic slowdown in the fourth quarter, and there are still great uncertainties regarding the economic conditions and the demand for travel in China for 2009. Continued turbulence in the international markets and economies and prolonged declines in business consumer spending in China may adversely affect our liquidity and financial condition, including our ability to access the capital markets to meet liquidity needs.

Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes.

Our financial and operating performance may be adversely affected by epidemics, natural disasters and other catastrophes, particularly in locations where we operate a large number of hotels. In early 2003, several economies in Asia, including China, were affected by the outbreak of severe acute respiratory syndrome, or SARS. During May and June of 2003, many businesses in China were closed by the PRC government to prevent transmission of SARS. Our business and results of operations were materially and adversely affected by the outbreak of SARS. In addition, some Asian countries, including China, have encountered incidents of the H5N1 strain of bird flu, or avian flu. This disease, which originally spread through poultry populations, is capable in some circumstances of being transmitted to humans and is often fatal. More recently, the 2008 Sichuan earthquake also had a negative impact on many businesses in the region, and reduced the operational performance of Home Inns’ existing and acquired hotels in the region due to reduced economic and travel activity in the affected region. As a result of damage caused by the 2008 Sichuan earthquake, seven of our hotels in Chengdu have filed insurance claims of approximately RMB 0.6 million (US$0.1 million). Losses caused by epidemics, natural disasters and other catastrophes, including SARS, avian flu, earthquakes or typhoons, are either uninsurable or too expensive to justify insuring against in China. In the event an uninsured loss or a loss in excess of insured limits occurs, we could lose all or a portion of the capital we have invested in a hotel, as well as the anticipated future revenue from the hotel. In that event, we might nevertheless remain obligated for any financial obligations related to the hotel. Similarly, war (including the potential for war), terrorist activity (including threats of terrorist activity) and travel-related accidents, as well as geopolitical uncertainty and international conflict, will affect travel and may in turn have a material adverse effect on our business and results of operation. In addition, we may not be adequately prepared in contingency planning or recovery capability in relation to a major incident or crisis, and as a result our operational continuity may be adversely affected and our reputation may be harmed.

Our legal right to lease certain properties could be challenged by property owners or other third parties, which could prevent us from continuing to operate the affected hotels or increase the costs associated with operating these hotels.

Except for two properties in Chongqing and Luoyang, we do not hold any land-use rights with respect to the land on which our hotels are located nor do we own any of the hotel properties we operate. Instead, our business model relies on leases with third parties who either own the properties or lease the properties from the ultimate property owner. As of December 31, 2008, title certificates for 48 of the properties operated by us had not been obtained. We cannot assure you that title to properties we currently lease or franchise will not be challenged, and such challenges, if successful, could impair the development or operations of our hotels on such properties. In addition, we are subject to the risk of potential disputes with property owners. Such disputes, whether resolved in our favor or not, may divert management attention, harm our reputation or otherwise disrupt our business.

In several instances where our immediate lessors are not the ultimate owners of hotel properties, no consent was obtained from the owners to sublease the hotel properties to us. A lessor’s failure to duly obtain the title to the property or to receive any necessary approvals from the ultimate owner or the primary lease holder, as applicable, could potentially invalidate our lease or result in the renegotiation of such lease leading to less favorable terms. Moreover, we cannot assure you that the building ownership or leasehold in connection with our franchised-and-managed hotels will not be subject to similar third-party challenges. Some of the properties we or our franchisees lease from third parties were subject to mortgages at the time the leases were signed. In such circumstances and where consent to the lease was not obtained from the mortgage holder, the lease may not be binding on the transferee of the property if the mortgage holders foreclose on the mortgage and transfer the property, which could in turn materially and adversely affect our ability to operate the hotel facility.

The lodging industry in China is highly competitive with relatively low barriers to entry, and if we are unable to compete successfully our financial condition and results of operations may be harmed.

The lodging industry in China is highly competitive. Competition in the industry is primarily based on room rates, quality of accommodations, brand name recognition, convenience of location, geographic coverage, service quality, range of services, and guest amenities. We compete primarily with other economy hotel chains as well as various regional and local economy hotels. We also compete with two- and three-star hotels, as we offer rooms with standards comparable to many of those hotels while maintaining competitive pricing. In addition, we may also face competition from new entrants in the economy hotel segment in China. As compared to developing four- or five-star hotels, developing economy hotels does not require significant capital commitments or human resources. This relatively low barrier to entry potentially allows new competitors to enter our markets quickly to compete with our business. Furthermore, we compete with all other hotels for guests in each market in which we operate, as our typical business and leisure traveler customers may change their travel, spending and consumption patterns and choose to stay in hotels in different segments. New and existing competitors may offer competitive rates, greater convenience, services or amenities or superior facilities, which could attract customers away from our hotels, resulting in a decrease in occupancy and average daily rates for our hotels. Any of these factors may have an adverse effect on our competitive position, results of operations and financial condition.

Our limited operating history makes it difficult to evaluate our future prospects and results of operations.

We believe that our future success depends on our ability to increase revenue and profitability from our operations. We have a limited operating history, having only commenced operations in 2002. Accordingly, you should consider our future prospects in light of the risks and challenges encountered by a company with a limited operating history. These risks and challenges include:

•

the uncertainties associated with our ability to continue our growth while maintaining our profitability;

•

preserving our competitive position in the economy hotel segment of the lodging industry in China;

•

offering an innovative product to attract recurring and new customers;

•

implementing our strategy and modifying it from time to time to respond effectively to competition and changes in customer preferences and needs;

•

increasing awareness of our “Home Inn” brand and continuing to develop customer loyalty; and

•

attracting, training, retaining and motivating qualified personnel.

If we are unsuccessful in addressing any of these risks or challenges, our business may be materially and adversely affected.

Failure to retain our senior management could harm our business.

We place substantial reliance on the lodging and other consumer-service industry experience and the institutional knowledge of members of our senior management team. Mr. David Jian Sun, our chief executive officer, Ms. May Wu, our chief financial officer, and Mr. Jason Zong, our chief operating officer are particularly important to our future success due to their substantial experience in the lodging and other consumer service industries. We do not carry key person insurance on any of our senior management team. The loss of the services of one or more of these members of our senior management team due to their departure or otherwise could hinder our ability to effectively manage our business and implement our growth strategies. Finding suitable replacements for Mr. Sun, Ms. Wu and Mr. Zong could be difficult, and competition for such personnel of similar experience is intense. If we lose the services of any of them, our business may be adversely affected.

Interruption or failure of our information and operational systems could impair our ability to effectively provide our services, which could damage our reputation.

Our ability to provide consistent and high-quality services throughout our hotel chain depends on the continued operation of our proprietary information and operational systems, including our property management, central reservation, customer relationship management and management reporting systems. Any damage to, or failure of, our systems could interrupt our service. Our systems are vulnerable to damage or interruption as a result of power loss, telecommunications failures, computer viruses, fires, floods, earthquakes, interruptions in access to our toll-free numbers, hacking or other attempts to harm our systems, and similar events. Our servers, which are maintained in Shanghai, may also be vulnerable to break-ins, sabotage and vandalism. Some of our systems are not fully redundant, and our disaster recovery planning does not account for all possible scenarios. In addition, our systems and technologies may become outdated and we may not be able to replace or introduce upgraded systems as quickly as our competitors or within budgeted costs for such upgrades. If we experience frequent or persistent system failures, our quality of services and our reputation could be harmed. The steps we need to take to increase the reliability and redundancy of our systems may be costly, which could reduce our operating margin, and there can be no assurance that whatever increased reliability may be achievable in practice would justify the costs incurred.

Any failure to protect our trademarks and other intellectual property rights could have a negative impact on our business.

We believe our brand, trade name, trademarks and other intellectual property are critical to our success. “Home Inn” is a highly recognized brand in the economy hotel segment of China’s lodging industry. The success of our business depends in part upon our continued ability to use our brand, trade names and trademarks to increase brand awareness and to further develop our brand. The unauthorized reproduction of our trademarks could diminish the value of our brand and its market acceptance, competitive advantages or goodwill. In addition, our proprietary information and operational systems, which have not been patented or otherwise registered as our property, are a key component of our competitive advantage and our growth strategy.

Monitoring and preventing the unauthorized use of our intellectual property is difficult. The measures we take to protect our brand, trade names, trademarks and other intellectual property rights may not be adequate to prevent their unauthorized use by third parties. Furthermore, the application of laws governing intellectual property rights in China and abroad is uncertain and evolving, and could involve substantial risks to us. If we are unable to adequately protect our brand, trade names, trademarks and other intellectual property rights, we may lose these rights and our business may suffer materially.

We are subject to various hotel industry, health and safety, and environmental laws and regulations that may subject us to liability.

Each hotel that we operate must hold a special industry license issued by the local public security bureau and must have hotel operation included in the business scope of its business license. Our business also is subject to various health and safety and environmental laws and regulations that affect our operations and development activities in the jurisdictions in which we operate, including building, zoning, fire prevention, public safety, health and sanitary requirements.

If we fail to comply with any applicable environmental, health and safety laws and regulations related to our business, we may be subject to potentially significant monetary damages and fines or the suspension of our operations or development activities. Furthermore, new regulations could also require us to retrofit or modify our hotels or incur other significant expenses. Any failure by us to control the use of, or to adequately restrict the discharge of, hazardous substances in our development activities, or to otherwise operate in compliance with environmental laws could also subject us to potentially significant monetary damages and fines or the suspension of our hotel development activities or hotel operations, which could materially adversely affect our financial condition and results of operations.

Accidents or injuries in our hotels may adversely affect our reputation and subject us to liability.

There are inherent risks of accidents or injuries in hotels. One or more accidents or injuries at any of our hotels could adversely affect our safety reputation among customers and potential customers, decrease our overall occupancy rates and increase our costs by requiring us to take additional measures to make our safety precautions even more visible and effective. If accidents or injuries occur at any of our hotels, we may be held liable for costs related to the injuries. Our current property and liability insurance policies may not provide adequate coverage and we may be unable to renew our insurance policies or obtain new insurance policies without increases in cost or decreases in coverage levels.

We may not be able to develop hotel properties on a timely or cost-efficient basis, which may adversely affect our growth strategy and business.

We develop almost all of our leased-and-operated hotels directly. Our involvement in the development of properties presents a number of risks, including construction delays or cost overruns, which may result in increased project costs or forgone revenue. We may be unable to recover development costs we incur for projects that are not pursued to completion. Properties that we develop could become less attractive due to market saturation or oversupply, with the result that we may not be able to recover development costs at the expected rate, or at all. In addition, we may not have available cash to complete projects that have commenced, or we may be unable to obtain financings for development of future properties on favorable terms, if at all. If we are unable to successfully manage our hotel development to minimize these risks, our growth strategy and business prospects may be adversely affected.

Our costs and expenses may remain constant or increase even if our revenues decline.

A significant portion of our operating costs, including rent, is fixed. Accordingly, a decrease in our revenues could result in a disproportionately higher decrease in our earnings because our operating costs and expenses are unlikely to decrease proportionately. For example, the period during which China’s Spring Festival holiday occurs generally accounts for a lower portion of our annual revenues than the other periods, but our expenses do not vary as significantly as changes in occupancy and revenues, since we need to continue to pay rent and salary, make regular repairs, maintenance and renovations and invest in other capital improvements throughout the year to maintain the attractiveness of our hotels. Our property development and renovation costs may increase as a result of increasing costs of materials. However, we have a limited ability to pass increased costs to customers through room rate increases. Therefore, our costs and expenses may remain constant or increase even if our revenues decline.

Our financial leverage may hamper our ability to expand and may materially affect our results of operations.

We have significant borrowings. In December 2007, we issued RMB 1.1 billion aggregate principal amount of our US$ settled zero coupon convertible bonds due December 10, 2012, of which RMB 895.7 million remains outstanding. We will be required to allocate a significant portion of our cash flow to service our obligations when our convertible bonds mature. This could impair our ability to make necessary capital expenditures, develop business opportunities or make strategic acquisitions. We cannot assure you that our business will generate sufficient cash flow from operations in the future to service our bonds and make necessary capital expenditures, in which case we may seek additional financing or dispose of certain assets. We cannot assure you that any of these alternatives can be implemented on satisfactory terms, if at all, or without breach of the terms and conditions of existing or future financing arrangements. In the event that we are unable to meet our obligations when they become due or if our bondholders take legal action against us for payment, we may have to liquidate our long-term assets to repay our bondholders. We may have difficulty converting our long-term assets into current assets in such a situation and may suffer losses from the sale of our long-term assets. This would materially and adversely affect our operations and prevent us from successfully implementing our business strategy.

Our lessors’ failure to comply with lease registration and other compliance requirements under PRC law may subject these lessors or us to fines or other penalties that may negatively affect our ability to operate our hotels.

As an operator and manager of hotel properties, we, our franchisees and those from whom we lease properties, are subject to a number of land- and property-related legal requirements. For instance, under PRC law, all lease agreements are required to be registered with the local housing bureau. Our standard lease agreement generally requires the lessor to make such registrations. However, as of December 31, 2008, lessors of 256 out of the 326 hotels in operation that we lease and operate had not obtained registrations of their leases from the relevant authorities as required. We continue to remind these lessors to obtain registrations under our lease agreements with them. In addition, based on the specific land use right certificates and property ownership certificates currently held by some of our lessors, certain hotel properties we lease are restricted to industrial and other uses, rather than for commercial service use. The failure of our lessors to register lease agreements as required by law or to ensure that the hotel properties are operated in compliance with their designated use may subject these lessors or us to fines or other penalties which may negatively affect our ability to operate the hotels covered under those leases.

We have limited insurance coverage.

We carry property insurance that covers the assets that we own at our hotels, but not the buildings or any other assets owned by our lessors. Although we require our lessors to purchase customary insurance policies, we cannot guarantee that they will adhere to such requirements. As a result of damage caused by the 2008 Sichuan earthquake, seven of our hotels in Chengdu have filed insurance claims of approximately RMB 0.6 million (US$0.1 million). If we were held liable for amounts and claims exceeding the limits of our insurance coverage or outside the scope of our insurance coverage, our business, results of operations and financial condition may be materially and adversely affected. In addition, we do not have any business disruption insurance coverage for our operations to cover losses that may be caused by natural disasters or catastrophic events, such as epidemics or earthquakes. Any business disruption or natural disaster may result in our incurring substantial costs and diversion of our resources.

If we are unable to maintain our hotels’ good condition and attractive appearance, our hotel occupancy rates may decline.

In order to maintain our hotels’ good condition and attractive appearance, our hotels require ongoing renovations and other leasehold improvements, including periodic replacement of furniture, fixtures and equipment. If we and our franchisees do not make needed leasehold investments and improvements, we could lose our market share to our competitors and our hotel occupancy rates may decline.

The growth of on-line and other hotel reservation intermediaries and travel consolidators may adversely affect our margins and profitability.

Some of our hotel rooms are booked through travel intermediaries and consolidators to whom we pay commissions for such services. If these intermediaries and consolidators become the primary channel through which our customers make their bookings, they may be able to negotiate higher commissions, reduced room rates, or other significant concessions from us. We believe that the aim of such intermediaries and consolidators is to have consumers develop loyalties to their reservation systems rather than to our brand. The operations of these travel intermediaries and consolidators may adversely affect our ability to control the supply and price of our room inventory, which would in turn adversely affect our margins and profitability.

If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud.

We are subject to reporting obligations under the U.S. securities laws. The SEC, as required by Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, adopted rules requiring every public company to include a management report on such company’s internal control over financial reporting in its annual report, which contains management’s assessment of the effectiveness of our internal control over financial reporting. In addition, an independent registered public accounting firm must report on management’s assessment of the effectiveness of the company’s internal control over financial reporting. Our management has concluded that our internal control over financial reporting was effective as of December 31, 2008. See “Item 15. Control and Procedures.” Our independent registered public accounting firm has issued an attestation report as of December 31, 2008. See “Item 15. Control and Procedures—Attestation Report of the Registered Public Accounting Firm.” However, if we fail to maintain effective internal control over financial reporting in the future, our management and our independent registered public accounting firm may not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level. This could in turn result in the loss of investor confidence in the reliability of our financial statements and negatively impact the trading price of our ADSs. Furthermore, we have incurred and anticipate that we will continue to incur considerable costs, management time and other resources in an effort to comply with Section 404 and other requirements of the Sarbanes-Oxley Act.

The new M&A rule sets forth complex procedures for acquisitions conducted by foreign investors which could make it more difficult to pursue growth through acquisitions.

On August 8, 2006, six PRC regulatory agencies, namely, the PRC Ministry of Commerce, or the MOC, the State Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or the CSRC, and the PRC State Administration of Foreign Exchange, or SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the New M&A Rule, which became effective on September 8, 2006. The New M&A Rule sets forth complex procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the MOC be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise. We may expand our business in part by acquiring complementary businesses or assets in China. Complying with the requirements of the New M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval from the MOC, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.

Risks Related to Doing Business in China

Adverse changes in economic and political policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could adversely affect our business.

We conduct substantially all of our business operations in China. As the travel industry is highly sensitive to business and personal discretionary spending levels, it tends to decline during general economic downturns. Accordingly, our results of operations, financial condition and prospects are subject to a significant degree to economic, political and legal developments in China. China’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the PRC economy has experienced significant growth in the past 20 years, growth has been uneven across different regions and among various economic sectors of China. The PRC government has implemented various measures to encourage economic development and guide the allocation of resources. While some of these measures benefit the overall PRC economy, they may also have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations that are applicable to us. As the PRC economy is increasingly intricately linked to the global economy, it is affected in various respects by downturns and recessions of major economies around the world, such as the recent financial services and economic crises of these economies. The various economic and policy measures the PRC government enacts to forestall economic downturns or shore up the PRC economy could affect our business.

The PRC economy has been transitioning from a planned economy to a more market-oriented economy. Although the PRC government has implemented measures since the late 1970s emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the PRC government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Future actions and policies of the PRC government could materially affect our liquidity and access to capital and our ability to operate our business.

Uncertainties with respect to the Chinese legal system could adversely affect us.

We conduct our business primarily through our subsidiaries in China. Our operations in China are governed by PRC laws and regulations. Our subsidiaries are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises. The PRC legal system is based on written statutes. Prior court decisions may be cited for reference but have limited precedential value. Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published court decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.

Governmental control of currency conversion may affect the value of your investment.

The PRC government imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in RMB. Under our current structure, our income will be primarily derived from dividend payments from our PRC subsidiaries. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiaries and our affiliated entity to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy their foreign currency dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from SAFE, by complying with certain procedural requirements. However, for most capital account items, approval from appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of bank loans denominated in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.

Fluctuation in the value of the Renminbi may have a material adverse effect on your investment.

The value of the Renminbi against the U.S. dollar, Euro and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy caused the Renminbi to appreciate approximately 21.5% against the U.S. dollar over the following three years. Since reaching a high against the U.S. dollar in July 2008, however, the Renminbi has traded within a narrow band against the U.S. dollar, remaining within 1% of its July 2008 high but never exceeding it. As a consequence, the Renminbi has fluctuated sharply since July 2008 against other freely traded currencies, in tandem with the U.S. dollar. For example, the Renminbi appreciated approximately 27% against the Euro between July 2008 and November 2008. It is difficult to predict how long the current situation may last and when and how it may change again.

As we rely entirely on dividends paid to us by our operating subsidiaries in China, any significant depreciation of the Renminbi against the U.S. dollar may have a material adverse effect on our revenues and financial condition, and the value of, and any dividends payable on, our ADSs and common shares. If we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or for other business purposes, depreciation of the Renminbi against the U.S. dollar would reduce the U.S. dollar amount available to us. On the other hand, to the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we receive from the conversion. As of December 31, 2008, our U.S. dollar denominated financial assets consisted of a cash balance of approximately US$22.0 million. Fluctuation in the value of the Renminbi in either direction could have a material adverse effect on the value of our company and the value of your investment.

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident shareholders to personal liability and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits to us, or otherwise adversely affect us.

SAFE issued a public notice in October 2005 along with related procedural guidance in January 2007 requiring PRC residents to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of capital financing with assets or equity of PRC companies, referred to in the notice as an “offshore special purpose company.” Under this public notice, PRC residents who are shareholders and/or beneficial owners of such offshore special purpose companies were required to register with the local SAFE branch before March 31, 2006. We have requested our shareholders and/or beneficial owners who are subject to the registration requirements under the SAFE notice to register with the local SAFE branch. Failure of these shareholders and/or beneficial owners to register with the local SAFE branch as required by the SAFE notice or failure of future shareholders of our company who are PRC residents to comply with the registration procedures set forth in the SAFE notice may subject such shareholders and/or beneficial owners to fines and other government actions and may also limit our ability to fund our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute dividends to our company or otherwise adversely affect our business.

We rely principally on dividends and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries entities to make payments to us could have a material adverse effect on our ability to conduct our business.

We are a holding company and we rely principally on dividends from our subsidiaries in China for our cash requirements, including any debt we may incur. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside a certain amount of its after-tax profits each year, if any, to fund certain statutory reserves. These reserves are not distributable as cash dividends. As of December 31, 2008, aggregate net assets of RMB 1,956.8 million (US$286.8 million) were not distributable in the form of dividends to us due to these PRC regulations. Furthermore, if our subsidiaries in China incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us. In addition, the PRC tax authorities may require us to adjust our taxable income under the contractual arrangements we currently have in place in a manner that would materially and adversely affect our subsidiaries’ ability to pay dividends and other distributions to us. Any limitation on the ability of our subsidiaries to distribute dividends or other payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our businesses, pay dividends, or otherwise fund and conduct our business.

We have benefited from certain financial subsidies and preferential tax treatments in China. Reduction or elimination of these subsidies or preferential tax treatments may have an adverse effect on our income tax expense and net income.

Various local tax authorities in China have provided financial subsidies in the form of certain tax refunds to us. However, these tax authorities may reduce or eliminate any or all of these financial subsidies at any time in the future. There is no assurance that we will continue to receive any financial subsidies in the form of tax refunds or otherwise as the grant of such subsidies is within the discretion of relevant local government authorities.

Some of our subsidiaries are subject to lower enterprise income tax rates or tax exemptions due to the preferential tax treatments granted by the local tax authorities. For example, our wholly owned subsidiary, Hemei Hotel Management Company, enjoyed an 18% enterprise income tax rate during 2008 due to its place of incorporation and operation in the Pudong New District of Shanghai. It is subject to a 20% tax rate in 2009, and its tax rate is expected to increase to 22%, 24% and then 25% in 2010, 2011 and 2012, respectively. If such preferential tax treatments granted by local tax authorities are deemed to be in violation of national laws and regulations or are abolished or altered, our subsidiaries will be subject to the standard enterprise income tax rate, which currently is 25%. Under current PRC regulations, if it is determined that a taxpayer has underpaid tax due to prior advice from relevant tax authorities, the taxpayer may still be required to pay the full amount of unpaid tax within three years after such determination but the taxpayer will not be subject to any penalty or late payment fee.

There is no assurance that our subsidiaries will continue to receive the above preferential tax treatments. We will be required to pay more taxes if they fail to become or continue to be eligible to receive PRC tax benefits, which may have a material adverse effect on our result of operations.

The PRC tax treatment of our holding company structure under the new EIT law is subject to uncertainties, and if such uncertainties are resolved unfavorably to us, we may incur higher taxes than we anticipate, and our net income and ability to pay dividends could be hampered.

We are a holding company incorporated in the Cayman Islands, which indirectly holds, through Home Inns Hong Kong, our subsidiaries in the PRC. We conduct substantially all of our business operations in China. The EIT Law and its implementation rules provide that China-sourced income of foreign enterprises, such as dividends paid by a PRC subsidiary to its non-PRC resident overseas parent, will normally be subject to PRC withholding tax at a rate of 10%, unless there are applicable treaties that reduce such rate. Under a special arrangement between China and Hong Kong, such dividend withholding tax rate is reduced to 5% if a Hong Kong resident enterprise owns over 25% of the PRC enterprise distributing the dividends. As Home Inns Hong Kong is a Hong Kong company and owns over 25% of our foreign-invested enterprises, or FIEs, any dividends that our FIEs pay Home Inns Hong Kong will be subject to a withholding tax at the rate of 5%, provided that Home Inns Hong Kong and we are not considered to be PRC tax resident enterprises.

Under the EIT Law, enterprises established under the laws of jurisdictions outside China with their “de facto management bodies” located within China may be considered to be PRC tax resident enterprises for tax purposes. A substantial majority of the members of our management team as well as the management team of Home Inns Hong Kong are located in China. If we or Home Inns Hong Kong is considered as a PRC tax resident enterprise under the above definition, then our global income will be subject to PRC enterprise income tax at the rate of 25%, excluding dividends received directly from another PRC tax resident. Currently no official interpretation or application of this new “resident enterprise” classification is available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each company. If such uncertainties are resolved unfavorably to us, we may incur higher taxes than we anticipate, and our net income and our ability to pay dividends could be hampered.

Our foreign ADS holders may be subject to PRC withholding tax on the dividends payable by us and upon gains realized on their sales of our ADSs if we are classified as a PRC “resident enterprise.”

The new EIT law also provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and will generally be subject to the uniform 25% enterprise income tax rate on their global income. The “de facto management body” is defined as the organizational body that effectively exercises overall management and control over production and business operations, personnel, finance and accounting, and properties of the enterprise. Moreover, under the new EIT law, foreign ADS holders may be subject to a 10% withholding tax upon dividends payable by us and gains realized on their sales or other dispositions of our ADSs or ordinary shares, if such income is sourced from within the PRC. Although Home Inns & Hotels Management Inc. is incorporated in the Cayman Islands, it remains unclear whether the gains our foreign ADS holders may realize will be regarded as income from sources within the PRC if we are classified as a PRC resident enterprise. Any such tax will reduce the returns on your investment in our ADSs.

Risks Related to Our ADSs

The market price for our ADSs may be volatile.

The market price for our ADSs has been and may continue to be volatile and subject to wide fluctuations in response to factors including the following:

•

revisions to our projected financial or operational performance by ourselves or by securities research analysts;

•

actual or anticipated fluctuations in our quarterly operating results;

•

conditions in the travel and lodging industries;

•

changes in the performance or market valuations of other lodging companies;

•

announcements by us or our competitors of new products, acquisitions, strategic partnerships, expansions or capital commitments;

•

addition or departure of key personnel;

•

fluctuations of exchange rates between the RMB and U.S. dollar or other foreign currencies;

•

potential litigation or administrative investigations; and

•

general economic or political conditions in China and elsewhere.

In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our ADSs.

We may need additional capital, and the sale of additional ADSs or other equity securities could result in additional dilution to our shareholders.

We believe that our current cash and cash equivalents, anticipated cash flow from operations and the proceeds from our initial public offering in October 2006, from our second public offering in May 2007, from our sale of convertible bonds in December 2007, and from undrawn bank credit facilities available to us will be sufficient to meet our anticipated cash needs for the foreseeable future. We may, however, require additional cash resources due to changed business conditions or other future developments, including any re-financing needs or any investments or acquisitions we may decide to pursue. If these resources are insufficient to satisfy our cash requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in additional dilution to our shareholders. The incurrence of indebtedness would result in increased debt service obligations and could result in operating and financing covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms acceptable to us, if at all, particularly in light of the current global economic crisis.

Substantial future sales of our ADSs in the public market, or the perception that these sales could occur, could cause the price of our ADSs to decline.

Additional sales of our ordinary shares in the public market, or the perception that these sales could occur, could cause the market price of our ADSs to decline. In particular, certain holders of our ordinary shares have the right to cause us to register the sale of a certain number of our shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming freely tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. Sales of these registered shares in the public market could cause the price of our ADSs to decline.

Our corporate actions are substantially controlled by our officers, directors and principal shareholders.

Our current directors and officers beneficially own a total of 10,828,284 of our ordinary shares. In addition, BTG, through its affiliate Poly Victory, currently owns 13,805,809 of our ordinary shares and has the right to appoint, and has appointed, two directors of our company. Furthermore, Ctrip.com International, Ltd., or Ctrip, reported that it and its subsidiary had acquired ADSs on the open market representing 6,187,720 of our ordinary shares; two of Ctrip’s co-founders and directors are also our co-founders and directors. If our officers, directors and these two principal shareholders choose to act in concert, they would beneficially own 42.6% of our ordinary shares and could exert substantial influence over matters requiring approval by our shareholders, including electing directors and approving mergers or other business combination transactions. The concentration of our share ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the price of our ADSs or the value of our ordinary shares. These actions may be taken even if they are opposed by our other shareholders.

You may not have the same voting rights as the holders of our ordinary shares and may not receive voting materials in time to be able to exercise your right to vote.

Except as described in this annual report and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the shares evidenced by our ADSs on an individual basis. Holders of our ADSs have appointed the depositary or its nominee as their representative to exercise the voting rights attaching to the shares represented by the ADSs. You may not receive voting materials in time to instruct the depositary to vote, and it is possible that you, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise a right to vote.

You may not be able to participate in rights offerings and may experience dilution of your holdings as a result.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. Under the deposit agreement for the ADSs, the depositary will not offer those rights to ADS holders unless both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from registration under the Securities Act with respect to all holders of ADSs. We are under no obligation to file a registration statement with respect to any such rights or underlying securities or to endeavor to cause such a registration statement to be declared effective. In addition, we may not be able to take advantage of any exemptions from registration under the Securities Act. Accordingly, holders of our ADSs may be unable to participate in our rights offerings and may experience dilution in their holdings as a result.

You may be subject to limitations on transfer of your ADSs.

Your ADSs represented by the ADRs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems expedient in connection with the performance of its duties. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deem it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.

You may face difficulties in protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited, because we are incorporated under Cayman Islands law, we conduct substantially all of our operations in China and the majority of our officers reside outside the United States.

We are incorporated in the Cayman Islands, and conduct substantially all of our operations in China through our wholly owned subsidiaries in China. Most of our officers reside outside the United States and some or all of the assets of those persons are located outside of the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.

Our corporate affairs are governed by our memorandum and articles of association and by the Companies Law (2007 Revision) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.

As a result of all of the above, our public shareholders may have more difficulty in protecting their interests through actions against our management, directors or major shareholders than would shareholders of a corporation incorporated in a jurisdiction in the United States.

Our articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.

Our articles of association contain provisions limiting the ability of others to acquire control of our company or cause us to enter into change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our common shares and ADSs may be materially and adversely affected.

We may be classified as a passive foreign investment company, which could result in adverse United States federal income tax consequences for U.S. Holders.

Based on the price of our ADSs and ordinary shares and the composition of our income and assets, we believe that we were not a “passive foreign investment company,” or PFIC, for United States federal income tax purposes for our taxable year ending December 31, 2008. However, the application of the PFIC rules is subject to ambiguity in several aspects and, in addition, we must make a separate determination each year as to whether we are a PFIC (after the close of each taxable year). Accordingly, we cannot assure you that we will not be a PFIC for our current taxable year ending December 31, 2009 or any future taxable year. A non-U.S. corporation will be considered a PFIC for any taxable year if either (i) at least 75% of its gross income is passive income or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. The value of our assets generally will be determined by reference to the market price of our ADSs and ordinary shares, which may fluctuate considerably. In addition, the composition of our income and assets will be affected by how, and how quickly, we spend the cash we raise in any offering. If we were treated as a PFIC for any taxable year during which a U.S. Holder held an ADS or an ordinary share, certain adverse United States federal income tax consequences could apply to the U.S. Holder. For the definition of “U.S. Holder” and a more detailed discussion of United States federal income tax consequences to U.S. Holders, see “ Item 10. Additional Information—E. Taxation—United States Federal Income Taxation—Passive Foreign Investment Company.”

ITEM 4. INFORMATION ON THE COMPANY

A.History and Development of the Company

Home Inns & Hotels Management (Hong Kong) Limited, or Home Inns Hong Kong, was incorporated in Hong Kong in May 2001 by its individual founders and Ctrip, a leading China-based travel consolidator. Through a series of transactions, Ctrip disposed of all of its ownership interest in Home Inns Hong Kong in August 2003 to focus on its core business of travel consolidation and to prepare for Ctrip’s initial public offering, which was completed in December 2003. Subsequently, during the period from September 12 to December 29, 2008, Ctrip and its wholly owned subsidiary purchased ADSs on the open market representing an aggregate of 6,187,720 of our ordinary shares.

In April 2002, Home Inns Hong Kong and Beijing Capital Travel International Hotel Group Co., Ltd., or Beijing Capital Travel, entered into a joint venture agreement to form Home Inns & Hotels Management (Beijing) Co, Ltd., or Home Inns Beijing, to operate branded economy hotels in China. Beijing Capital Travel is a subsidiary of Beijing Tourism Group, or BTG. Home Inns Hong Kong and BTG owned 55% and 45%, respectively, of Home Inns Beijing when it commenced operations in July 2002. Subsequently, Home Inns Hong Kong gradually increased its ownership interest in Home Inns Beijing by contributing additional funds to the registered capital of Home Inns Beijing. Home Inns Hong Kong’s ownership interest in Home Inns Beijing was increased to 95.59% as of February 2005. In July 2007, we acquired the remaining 4.41% stake in Home Inns Beijing from BTG, making Home Inns Beijing our wholly-owned subsidiary. We paid a total consideration of RMB 60 million and 441,669 of our ordinary shares to BTG for the acquisition.

We have been actively managing Home Inns Beijing since its inception. Home Inns Hong Kong’s ownership in Home Inns Beijing was accounted for under the equity method since Home Inns Beijing’s inception until April 2004, because during this period of time, BTG had substantive participation rights that enabled it to veto significant decisions made by Home Inns Hong Kong. In April 2004, Home Inns Hong Kong and Beijing Capital Travel entered into a revised joint venture agreement, under which Home Inns Hong Kong obtained control of Home Inns Beijing. As a result, Home Inns Beijing has been our consolidated subsidiary since then.

In May 2006, we incorporated Home Inns & Hotels Management Inc. in the Cayman Islands in preparation for our initial public offering. In June 2006, all of the then-existing shareholders of Home Inns Hong Kong exchanged their respective shares of Home Inns Hong Kong for an equivalent number of shares of Home Inns & Hotels Management Inc. of equivalent classes. As a result, Home Inns Hong Kong became our wholly owned subsidiary in June 2006. Our consolidated financial statements reflect the share exchange in June 2006 and have been prepared as if our current corporate structure had been in existence throughout the relevant periods. On October 31, 2006, we completed our initial public offering, in which we issued and sold 5,874,237 ADSs, representing 11,748,474 of our ordinary shares, and certain of our then shareholders sold 3,210,763 ADSs, representing 6,421,526 of our ordinary shares, in each case at a public offering price of US$13.80 per ADS. On May 4, 2007, we completed our second public offering, in which we issued and sold 1,478,155 ADSs, representing 2,956,310 of our ordinary shares, and certain of our shareholders sold 2,021,845 ADSs, representing 4,043,690 of our ordinary shares, in each case at a public offering price of US$34.27 per ADS. In December 2007, we issued and sold RMB 1.1 billion aggregate principal amount of US$ settled zero coupon convertible senior bonds due 2012 to non-US investors under Regulation S of the Securities Act.

Our principal executive offices are located at No. 124 Caobao Road, Xuhui District, Shanghai 200235, People’s Republic of China. Our telephone number at this address is +(8621) 3401-9898. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. In addition, we have two branch offices in China.

Acquisition of Top Star Hotels

In October 2007, as part of our strategy to expand our geographic coverage and increase our market penetration, we acquired the Top Star hotel chain. The holdings we acquired from Top Star currently include 25 economy hotels with about 4,000 rooms located in 16 cities across China. Established in 2005, the Top Star hotel chain rapidly became one of the ten largest economy hotel chains in China and has been a popular economy hotel brand among domestic business and leisure travelers.

Top Star operated on a business model similar to ours and, for this reason, fits well into our growth plan. Top Star hotels are conveniently located in the more developed second-tier cities in China and are priced in the same range as ours. Top Star’s hotels have on average 160 rooms, making them slightly larger than our average hotel. At the time of the acquisition, the addition of Top Star’s hotels significantly expanded our network and brand awareness. The addition of the acquired hotels will also allow us to leverage on our customer bases and systems and management infrastructure.

We took control over the operation of the Top Star hotels beginning November 1, 2007, and we fully integrated its operations by the second quarter of 2008. The closing of the acquisition occurred around the end of 2007. During the first year after the acquisition, we retained the Top Star brand while adding our own “Home Inn” logo to the acquired hotels. However, based on our customer feedback and the acquired hotels’ performance, we have decided to re-brand all Top Star hotels to Home Inns hotels after we complete certain room feature modifications during 2009.

Our consideration for the Top Star acquisition included assumptions of approximately RMB 192 million in debt, which was repaid shortly after completion of the acquisition, and the issuance of 655,831 of our ordinary shares, or the equivalent of 327,916 ADSs, as well as a cash payment of RMB 52 million. We filed with the SEC a registration statement on Form F-3, as amended, and a prospectus under the Securities Act with respect to 655,830 of these ordinary shares. The total consideration amounted to approximately RMB 350 million, or approximately RMB 87,500 per room, calculated by adding the RMB 192 million in debt that we assumed and the cash payment of RMB 52 million to the fair market value of the 655,831 ordinary shares, which was determined by using a US$43.00 per ADS price, representing the average price of our ADSs for the three days prior to and two days after the acquisition agreement was signed on October 21, 2007.

Convertible Bond Offering

In December 2007, we issued and sold RMB 1.1 billion aggregate principal amount of US$ settled zero coupon convertible senior bonds due 2012 to non-US investors under Regulation S of the Securities Act. The bonds have a conversion price of US$26.545 per ordinary share (equal to US$53.09 per ADS), based on a fixed exchange rate of RMB 7.4 toUS$1.00. According to the terms of our convertible bonds, the number of ordinary shares to be issued on conversion is fixed. A holder will receive 509.079 ordinary shares per RMB 100,000 principal amount of bonds upon conversion, subject only to contingent adjustment for dilutive events or change of control. The bond holders have the option to put the bonds after three years, and we can call the bonds after three years if the price of our ADSs reaches a certain hurdle. The bonds have a yield to maturity or yield to put of 0.50%. Proceeds from the sale of the bonds have been used to fund the development of our leased-and-operated hotels and for general corporate purposes. The remaining proceeds from the offering are expected to be used to fund further expansion through developing new hotels as well as through acquisitions of other hotels.

During the fourth quarter of 2008, we repurchased and retired RMB 219 million of our convertible bonds for a total cash consideration of US$16.6 million. Following the repurchase, we now have RMB 895.7 million convertible bonds outstanding including principal and accrued interest.

B.Business Overview

We are a leading economy hotel chain in China, based on the number of our hotels, the number of our hotel rooms, and the geographic coverage of our hotel chain. We develop and operate economy hotels across China under our award-winning “Home Inn” brand. Since we commenced operations in 2002, we have become one of the best-known economy hotel brands in China. We offer a consistent product and high-quality services to primarily serve the fast growing population of value-conscious individual business and leisure travelers who demand clean, comfortable and convenient lodging.

We have achieved our growth by utilizing two business models. We either lease real estate properties on which we develop and operate hotels, or we franchise our brand to hotel owners and manage these hotel properties. We refer to the former type of hotels as “leased-and-operated hotels” and to the latter type of hotels as “franchised-and-managed hotels.” As of December 31, 2008, our Home Inns hotel chain consisted of 326 leased-and-operated hotels in operation with an additional 54 leased-and-operated hotels under development and 145 franchised-and-managed hotels in operation with an additional 60 franchised-and-managed hotels under development, covering 108 cities in China. We have received many awards and accolades for our innovative, consistent and high-quality product and services across our hotel chain. We received the “2006 Leading Brand in Economy Hotels in China” award from the Chinese Hotel Industry Association and the “Golden Pillow Award” for best brand in economy hotels in China in 2006, 2007 and 2008 from the 21st Century Business Herald, a nationwide economic journal in China. We have been recognized with inclusion in numerous top 10 lists, most notably Hotels China Magazine’s “Hotel Corporate Top 10” and “Budget Hotel Top 10” awards for 2008, the China Chain Store & Franchise Association’s “China Top 10 Brands” award for 2007-2008, and the China Enterprise Culture Improvement Association’s “Top 10 Leading Consumer Brands�� award for 2006. The Corporate Research Foundation named us as one of “China’s Top Employers” for 2007 and 2009, and Forbes Magazine named us among its “Chinese Enterprises with Most Growth Potential” for 2007.

We have experienced substantial growth while maintaining profitability since 2003. Our Home Inns hotels in operation grew rapidly from 10 hotels in four cities as of the end of 2003 to 471 hotels in 94 cities as of the end of 2008, and our total revenue grew from RMB nil in 2003 to RMB 1,871.5 million (US$274.3 million) in 2008, while our income from operations grew from negative RMB 0.4 million in 2003 to positive RMB 81.8 million (US$12.0 million) in 2008.

Our Home Inns Hotel Chain

We are dedicated to providing a consistent and high-quality product to our customers, allowing them to enjoy the comforts of home while staying at any Home Inns hotel. Our Home Inns hotel chain is a leading economy hotel chain in China offering cleanliness, convenience, comfort and value to individual business and leisure travelers.

As of December 31, 2008, our Home Inns hotel chain, including the Top Star hotels we acquired, consisted of 471 hotels in operation and an additional 114 hotels under development, covering 108 cities in China.

Our Home Inns hotel chain covers most major metropolitan areas in China. We intend to further penetrate the existing cities and metropolitan areas where we have a presence and also expand into additional cities in China with a population of over two million, annual GDP of over RMB 35 billion (US$5.1 billion), or both. We believe cities meeting these criteria generally have the potential for sustainable economic growth and increasing demand for hotel accommodation services.

A typical Home Inns hotel has 80 to 160 guest rooms. Each hotel has a standardized design, appearance, decor, color scheme, lighting scheme and set of guest amenities in each room, including a bedding package featuring mattresses meeting the standards of four-star hotels in China, free in-room broadband Internet access, a comfortable work space, air-conditioning and a supply of cold and hot drinking water. Home Inns hotels are strategically located to provide our guests with convenient access to major business districts, ground transportation hubs, major highways, shopping centers, industrial development zones, colleges and universities, and/or large residential neighborhoods.

The following table sets forth a complete listing of all of our hotels as of December 31, 2008.


	Hotels in Operation					Hotels Contracted⁽¹⁾
	Leased-and			Franchised-		Leased-and		Franchised-
	Operated			and-Managed		Operated		and-Managed
	Hotels			Hotels		Hotels		Hotels
Beijing		18			41		3		4
Shanghai		28	⁽²⁾		25		2		16
Fuzhou		4			—		—		3
Hangzhou		4			10		—		1
Suzhou		6			5		—		1
Tianjin		12			16		—		3
Wuxi		4			2		—		3
Changzhou		7			—		—		—
Ningbo		4			3		—		—
Shenzhen		7			—		—		—
Xiamen		2			2		—		1
Nantong		1			—		1		—
Chengdu		9			1		—		—
Chongqing		5			1		1		—
Guangzhou		5			1		6		2
Wuhan		12			1		—		—
Shaoxing		2			—		—		—
Hefei		4			—		—		—
Jiangyin		1			1		—		—
Nanjing		11			3		1		—


	Hotels in Operation				Hotels Contracted⁽¹⁾
	Leased-and		Franchised-		Leased-and		Franchised-
	Operated		and-Managed		Operated		and-Managed
	Hotels		Hotels		Hotels		Hotels
Dalian		6		1		—		2
Zhengzhou		10		4		2		—
Shenyang		7		4		2		3
Shijiazhuang		4		4		1		—
Zhuhai		2		—		1		—
Qingdao		6		—		1		—
Zhangjiajie		—		1		—		—
Zibo		2		—		2		—
Jilin		4		—		—		—
Baoding		2		—		—		—
Luoyang		2		—		—		—
Zhongshan		1		—		—		—
Haerbin		11		1		—		—
Yangzhou		2		—		—		—
Xi’an		11		5		2		3
Yantai		4		—		—		—
Bengbu		2		—		—		—
Nanchang		4		1		—		1
Baotou		2		1		—		—
Huhehaote		4		1		1		—
Foshan		2		—		—		—
Weihai		1		—		—		2
Jinan		7		—		2		1
Weifang		2		—		—		—
Changchun		6		1		—		1
Nanning		5		—		—		—
Dezhou		1		—		—		—
Taiyuan		2		2		1		1
Changshu		—		1		1		—
Xuzhou		3		—		—		—
Guiyang		3		—		1		1
Changsha		4		1		—		—
Guilin		2		—		—		1
Yixing		6		—		3		—
Yinchuan		2		—		1		1
Yueyang		1		—		—		—
Lanzhou		1		—		—		—
Qiqihaer		2		—		—		—
Jiaxing		1		—		—		—
Yanji		1		—		—		—
Wuhu		1		1		—		—
Tangshan		1		—		1		—
Tai’an		2		—		—		—
Ma’anshan		1		—		—		—
Wulumuqi		5		—		1		—
Heze		1		—		—		—
Yingkou		1		—		—		—
Dongying		1		—		—		—
Shunde		1		—		1		—
Rizhao		1		—		—		—
Dandong		—		1		—		1
Fushun		1		—		—		—
Dongguan		3		—		1		—
Liaocheng		1		—		—		—
Binzhou		2		—		—		—
Langfang		1		—		—		—
Yichang		1		—		1		—
Kunming		3		—		1		1


	Hotels in Operation				Hotels Contracted⁽¹⁾
	Leased-and		Franchised-		Leased-and		Franchised-
	Operated		and-Managed		Operated		and-Managed
	Hotels		Hotels		Hotels		Hotels
Tonghua		1		—		—		—
Zhenjiang		1		—		—		—
Haikou		2		—		—		—
Kunshan		—		1		—		—
Shishi		1		—		—		—
Yancheng		1		—		—		1
Anqing		1		—		—		—
Jinhua		—		—		2		—
Cangzhou		1		—		—		—
Wuyishan		1		—		—		—
Zhangjiagang		1		—		—		—
Xining		1		1		—		—
Deyang		1		—		—		—
Laiyang		1		—		—		—
Jinzhou		1		—		—		—
Quanzhou		—		—		1		—
Zaozhuang		—		—		1		—
Lianyungang		—		—		1		1
Puyang		—		—		—		1
Luohe		—		—		1		—
Shantou		—		—		1		—
Taicang		1		—		—		—
Linyi		—		—		1		3
Xinxiang		—		—		1		—
Zhaoqing		—		—		1		—
Huludao		—		—		1		—
Weiwu		—		—		1		—
Panjing		—		1		—		—
Wuzhong		—		—		1		—
Daqing		—		—		—		1

Total		326		145		54		60


(1)		Contracted hotels include hotels which have not commenced operations but for which we have entered into binding leases or franchise agreements with the respective lessors or franchisees.

(2)		Leased-and-operated hotels include one H Hotel located in Shanghai.

Leased-and-operated Hotels. For our leased-and-operated hotels, we lease properties from real estate owners or lessors. We are responsible for hotel development and customization to conform to the standards of Home Inns, as well as repairs and maintenance and operating expenses of properties over the term of the lease. We are also responsible for all aspects of hotel operations and management, including hiring, training and supervising the managers and employees required to operate our hotels as well as purchasing supplies. We typically enjoy rental holidays of three to six months and pay fixed rent on a quarterly basis for the first three or five years of the lease term, after which we may be subject to a 3% to 5% increase every three to five years. We generally have a right of first refusal to extend the lease after the initial term expires. The annual rent for each of our leased-and-operated hotels ranges from RMB 0.35 million (US$0.05 million) to RMB 15.7 million (US$2.3 million), depending on the location, size and condition of each hotel property. The terms of our leases range from 6 to 21 years, most of which are 15 years. In general, upon expiration of these leases, we may dispose of the removable facilities, equipment and appliances installed by us while leasehold improvements and fixtures may be kept by the lessor on the premises.

In the case of early termination of a lease due to the lessor’s default, we are generally entitled to take all removable items installed by us and may also be compensated for the amount we spent in connection with the leasehold improvements. In the case of early termination of a lease due to our default, we are generally entitled to take all removable items installed by us and the lessor is entitled to the leasehold improvements which result from our investments.

Franchised-and-managed Hotels. For our franchised-and-managed hotels, we franchise our “Home Inn” brand to franchisees who are property owners, lessors or existing hotel operators, and we are generally responsible for managing these hotels, typically including the hiring and appointing of the general managers of these hotels. Under a typical franchise agreement between us and a franchisee, the franchisee is generally required to pay us an initial franchise fee of RMB 0.2 million (US$0.03 million) to RMB 0.3 million (US$0.04 million), annual franchise fees of 3% of the revenues of the hotel, as well as an annual management fee of 3% of the revenues of the hotel. The franchisee is responsible for the costs of hotel development and customization to conform to the standards of Home Inns, as well as for repairs and maintenance and operating expenses of the hotel. In general, we enter into franchise arrangements in markets where we have established leased-and-operated hotels and are able to leverage our local knowledge and experience as well as marketing and administrative resources to better assist our franchised-and-managed hotels in these localities. The typical term for our franchise agreements is eight years.

The following table sets forth the number of our hotels in operation as of December 31, 2008.

Number of

Hotels Opened

Average

Hotels Opened

for No More

Number of

Typical

Total Number

for Over Six

Than Six

Rooms per

Lease/Franchise

of Hotels

Months

Hotel

Term

Leased-and-operated Hotels

326

270

120

15 years

Franchised-and-managed Hotels

145

113

8 years

We also operate seven leased-and-operated hotels through separate joint ventures with third parties. Home Inns & Hotels Management (Shanghai) Co., Ltd. owns 51% of three joint ventures, 65% of one joint venture, 70% of two joint ventures and 75% of one other joint venture.

We set the room rates of our hotels based on local market conditions with reference to room rates set by our competitors. As we primarily target individual business and leisure travelers, the month that includes Chinese New Year (which can fall in late January or early February) generally accounts for a lower portion of our annual revenues than other months. The following table presents certain selected operating data as of and for the dates and periods indicated. Our results of operations have been and will continue to be significantly affected by changes in these operating measures which are widely used in the hospitality industry.


	As of and for the Year Ended
	December 31,
	2006		2007		2008
Operating Data
Total hotels in operation⁽¹⁾:
Leased-and-operated hotels⁽²⁾		94		195		326
Franchised-and-managed hotels		40		71		145
Total rooms⁽¹⁾		16,162		32,726		55,631
Geographic coverage⁽¹⁾:
Number of cities		39		66		94
Occupancy rate (as a percentage)		92.8		91.1		85.0
Average daily rate (in RMB)		182		179		173
RevPAR (in RMB)		169		163		147


(1)		As of the end of each period.

(2)		Includes five hotels operated through separate joint ventures with third parties.

Hotel Development

We follow a structured and systematic development and construction process with respect to our development of new hotel properties. Our multi-step development process starts with planning and site identification. We have staff based in our head office in Shanghai focusing on identifying potential new markets and performing a comprehensive study of each new market by conducting site visits and gathering background information such as the regional economic conditions and availability of existing hotel accommodation services in the prospective new market. After the development team at our head office decides to pursue opportunities in a new market, we assign our regional development staff and the city general manager in each region to select ideal hotel locations in the chosen market. Once a site has been selected, we negotiate with the property owner while concurrently conducting due diligence investigations with respect to a number of major legal and regulatory aspects, including the owner’s land title and relevant zoning regulations. For our leased-and-operated hotels, we lease properties from real estate owners or lessors and we convert the properties into standardized Home Inns hotels. Our lease term negotiations are guided by a comprehensive set of criteria, including certain financial return requirements. All new hotel leases are subject to the final approval of four designated directors of Home Inns Beijing, including our chief executive officer, David Jian Sun. As a leading branded economy hotel chain in China, we are generally able to establish credibility with property owners and secure desirable properties on reasonable terms. We commence constructing a standardized Home Inns hotel after definitive agreements with the owner have been executed. A majority of the construction materials and supplies for the new hotel are purchased through our centralized procurement system. For our franchised-and-managed hotels, we assist franchisees in refurbishing, renovating or constructing their properties after they join our branded hotel chain, and in meeting our brand specifications by providing technical expertise and cost-savings suggestions. Before completion of construction, we carry out a series of pre-opening activities, such as identifying and appointing the general manager and other members of the hotel management team, and hiring and training hotel staff in anticipation of the hotel opening. It typically takes four to six months from execution of a lease or franchise agreement to hotel opening.

We have incurred capital expenditures primarily in connection with leasehold improvements and investments in furniture, fixtures and equipment, technology and information and operational systems. Our capital expenditures totaled RMB 237.9 million, RMB 581.6 million and RMB 996.4 million (US$146.0 million) in 2006, 2007 and 2008 respectively. We will continue to make capital expenditures to meet the expected growth of our operations. We expect to meet our capital expenditure needs in the foreseeable future with cash generated from our operating activities and financing activities. We have not had any material divestiture during the past three years.

We seek to lease or franchise properties that meet the following market- and hotel-specific criteria:

General Market Criteria

Economic Growth. We focus on cities and metropolitan areas that are approaching, or have already entered into, periods of significant economic growth. Such cities and metropolitan areas generally show growth in certain business activities as measured by employment opportunities, population growth rates, tourism and convention activities, air traffic volume, local commercial real estate occupancy, and retail sales volume. Markets that exhibit growth in these metrics typically have strong demand for hotel facilities and services. Provincial capitals also have strong demand for hotel facilities and services. We have identified over 180 such cities in China, including cities with a population of over two million, annual GDP of over RMB 35 billion (US$5.1 billion) or both. We intend to continue focusing on these cities and metropolitan areas going forward.

Geographic Diversification. We seek to maintain a geographically diverse portfolio of hotels to offset the effects of regional economic cycles. We will continue to expand into new urban business centers as opportunities arise that meet our investment criteria.

Favorable Development Environment. We seek lodging markets with favorable hotel development environment, including an absence of or minimal zoning constraints, an absence of lengthy local development approval and registration processes, as well as the availability of suitable sites and construction contractors.

Specific Hotel Criteria

Location and Market Appeal. We seek to invest in hotels situated near both business and leisure centers that tend to generate a broad base of demand for hotel accommodations and facilities. These demand drivers include transportation hubs, convention centers, business parks, shopping centers and other retail areas, major highways, tourist destinations, major universities and cultural and entertainment centers. The proximity of business and leisure centers will enable us to attract both weekday business travelers and weekend leisure guests.

Size and Facilities. We seek to develop and operate economy hotels with 80 to 160 guest rooms, which include amenities that are attractive to key demand segments such as individual business and leisure travelers. We believe operating economy hotels with 80 to 160 rooms allows us to best leverage our competitive strengths and maximize our profitability.

Financial Return Requirements. We require our development team, marketing team and city general managers to assess the potential financial return of every proposed new hotel. We will only develop hotels that exhibit a potential for meeting our internal financial return objectives both in the near term and over the term of the lease agreement.

Hotel Management

We believe that skilled management is a critical element in maximizing revenues and profitability of our hotel operations. A majority of our senior hotel management team has extensive experience in the hospitality and other consumer-services industries. Personnel at our corporate office perform strategic planning, finance, project development, sales and marketing, training and other functions and guide, support and monitor our on-site hotel operations and executives. Each of our departments, including hotel operations, sales and marketing, human resources, training, information technology, development, legal, and accounting and finance, is staffed by an experienced team with significant expertise in their respective area. These departments support each hotel and its management in day-to-day activities by providing operating statistics, accounting and budgeting services, sales and revenue management, marketing and promotion support, cost controls, property management tools and other resources that we develop, maintain and deliver efficiently and effectively using our centralized corporate office resources. Key elements of our centralized hotel management programs include the following:

Budgeting and Monitoring. Our corporate office personnel work with the general manager of each hotel to set a detailed annual budget for revenues and cost categories of the hotel. The annual budget is based on historical operating performance of the hotel, planned targeted marketing, planned renovations, operational efficiencies and local market conditions. Through the use of our online property management and management reporting systems, we are able to track each hotel’s daily occupancy, average daily rates, RevPAR and other operating data. As a result, we can effectively and timely monitor the actual performance of each hotel and adjust sales efforts and other resources in time to take advantage of changes in the market and to maximize our profitability.

Quality Assurance and Training. We are dedicated to providing value and consistent quality standards to our customers. We have established quality standards for all aspects of our hotel operations that cover, among other areas, housekeeping, hotel maintenance and renovation, and service offering. To ensure compliance with our quality standards, we have developed a comprehensive set of procedural manuals relating to all aspects of our hotel operations to ensure that our employees follow the same standards. We have implemented comprehensive training programs to ensure the effectiveness and uniformity of our employee training through our centralized human resources department at our corporate office as well as through our dedicated training facility, Home Inns Academy.

The compliance of our hotels with quality standards is monitored through both scheduled and unannounced visits and reviews conducted periodically at each hotel. We require most of our employees to take periodic tests in order to monitor compliance with our quality standards. In addition, our practice of tracking customer comments through guest comment cards, and the direct solicitation of guest opinions regarding specific items, allows us to improve services and amenities at each hotel across our hotel chain.

Strategic Capital Improvements. To maintain our competitiveness and enhance our hotels’ appeal to targeted market segments, we require each of our hotels to allocate a fixed percentage of its revenue for periodic renovation and replacement of furnishings and equipment to maintain the quality and standards of our facilities. We base recommendations on capital spending decisions on customer feedback, strategic needs, and our targeted financial return on a given capital investment.

Centralized Procurement. We have implemented a centralized procurement system to allow us to obtain the best pricing available for the quality of goods sourced to our hotels in order to minimize the operating expenses of our hotels. As a leading branded economy hotel chain in China with nationwide scale, we are able to exert leverage over our suppliers of commodity goods and services.

Targeted Sales. We support each hotel’s local sales efforts with corporate office sales executives who develop and implement new marketing programs, and monitor and respond to specific market needs and preferences. We use a property management system, or PMS, to manage each property’s use of the various distribution channels in the lodging industry. Those channels include our central reservation system and toll-free numbers, third-party travel agents and other travel intermediaries, corporate travel offices and office managers. Based on market conditions, we adjust the number of rooms allocated to each of our sales channels on a daily basis in order to optimize our profitability.

Hotel Information and Operational Systems

The principal objectives of our hotel operations are to generate higher RevPAR, control costs and increase the net operating income of our hotels, while providing our customers with high-quality services and value. Our integrated proprietary information and operational systems are designed to distinguish us in the marketplace, operate efficiently and cost-effectively and accommodate future growth. Our investment in our sophisticated system infrastructure has several key benefits: better customer service, simplification of the storage and processing of large amounts of data, facilitation of the large-scale operation and automation of the administration of our business and generating financial and operational information for each hotel to assist our corporate management in adjusting business strategies on a timely basis.

Our key hotel information and operational systems include the following:

Property Management System (PMS). Our proprietary PMS is designed to help our hotels maximize profitability and compete more effectively by managing their room inventory, rates and reservations. The PMS synchronizes each hotel’s room inventory with our reservation system, giving our reservation agents the capability to sell available rooms at our hotels. The PMS also includes a revenue management feature that calculates and suggests optimum rates based on each hotel’s past performance and projected occupancy. These tools enhance our ability to effectively manage our hotel operations and maximize RevPAR.

Central Reservation System (CRS). In 2008, approximately 11.5% of our total hotel room nights were booked through our proprietary CRS, which primarily consists of our toll-free telephone reservation system. As of December 31, 2008, we employed 140 reservation agents to serve customers who make hotel reservations by phone. Our trained reservation agents can match each caller with a Home Inns hotel that meets the caller’s needs. Our CRS provides a data link to all of our hotels so that confirmations are transmitted automatically to the hotel for which the reservations are made.

Customer Relationship Management System (CRM). Our proprietary CRM system tracks the consumption patterns and accumulated and redeemed points of the active members of our Home Inns membership rewards program. This information enables us to analyze customer data on a company-wide basis as well as to develop a more specific and targeted marketing strategy.

Management Reporting System. We have designed a proprietary web-based management reporting system at each of our hotels and at our corporate office to monitor the daily financial and operating performance of each of our hotels. This system allows us to track each hotel’s daily occupancy, average daily rates, RevPAR and other operating and financial data. One of our ongoing primary objectives is to maintain reliable information, management and operational systems. We have implemented performance monitoring for all key systems to enable us to respond quickly to potential problems. Our computers and servers are hosted at a facility in Shanghai. This facility provides redundant utility systems, a backup electric generator and 24-hour server support. All servers have uninterrupted power supplies and redundant file systems to maximize system and data availability. We regularly back up our data to minimize the impact of data loss due to system failure.

Sales and Marketing

Our core targeted customers consist of value-oriented individual small-and-medium-enterprise business travelers and leisure travelers seeking comfortable and convenient lodging at an affordable price. We review our hotel pricing twice a year and typically adjust room rates annually based on the local market conditions of the city and the specific location of each hotel. Our head office team and our city and hotel managers jointly develop tailored marketing plans to drive sales for each hotel and in each city. We use management and operational systems to manage each hotel’s use of the various distribution channels in the lodging industry. Those channels include our centralized reservation system and toll-free numbers, third-party travel agents and other travel intermediaries and corporate travel offices. Our access to these channels allows us to further enhance occupancy rates of our hotels on a day-to-day basis.

The following table presents the approximate percentage of room nights stayed in 2008 by customer channel:


	Approximate Percentage of
	Total Room Nights Stayed
Customer Channel	in 2008
CRS bookings by members of our Home Inns membership network		10.6
CRS bookings by non-members of our Home Inns membership network		0.9
Reservations not booked through CRS by members of our Home Inns membership network		39.6
Walk-ins		16.4
Corporate account		9.7
Travel agencies and consolidators		7.1
Others		15.7

Total		100.0

Our centralized reservation center is located in Shanghai, China and is operated daily from 9:00 A.M. to 9:30 P.M., seven days a week. Customers can call our nationwide toll free number to consult with our reservation agents, receive real-time hotel information and make hotel bookings. As of December 31, 2008, we employed 140 reservation agents, all of whom participated in a formal training program before commencing work. We believe we have sufficient capacity to meet the currently anticipated increases in call volume. Nevertheless, if we exceed this capacity, we believe we can add, within a reasonable time and at a reasonable cost, additional phone lines, computer systems and reservation agents to handle increasing call volumes without the need to undertake system redesign to our existing systems.

Our corporate marketing and advertising programs are designed to enhance consumer awareness and preference for the “Home Inn” brand as offering the greatest value, convenience and comfort in the economy hotel segment of the Chinese lodging industry, and to encourage customers’ use of our centralized reservation system. Marketing and advertising efforts include outdoor advertisements, distribution of flyers and other marketing materials on our hotel properties, television, internet and radio advertising, print advertising in consumer media and promotional events, special holiday promotions and joint promotional activities.

Since 2004, we have operated a Home Inns membership reward program to attract travelers by rewarding frequent stays with points towards free hotel stays, discounts on room rates, priority in hotel reservations and other rewards. As of December 31, 2008, our membership reward program had approximately 1,283,000 active members as compared to approximately 105,000, 200,000 and 522,000 active members as of December 31, 2005, 2006 and 2007, respectively. This program allows us to build customer loyalty as well as conduct lower cost, more targeted marketing campaigns.

Employees and Training

We believe that developing and maintaining a team of capable and motivated managerial and other employees are critical to our success. Because our managerial and other employees manage our hotels and interact with our customers on a daily basis, they are critical to maintaining the quality and consistency of our services as well as our brand and reputation. We seek to hire managerial employees with background and experience in hotel and other consumer services industries with a customer-first mentality. We aim to recruit, train and retain the best talent through a multi-step recruiting and training process while offering competitive performance-linked compensation packages and career advancement opportunities.

We have implemented extensive training programs and periodic tests for managerial and other hotel-based staff primarily through our training facility, “Home Inns Academy.” New general managers of our hotels and executive assistants to general managers are required to undergo a two-month training period, during which they receive training in managing all core aspects of our hotel operations, as well as our company culture and philosophy. We also require our hotel general managers and city managers to participate in annual training programs so that they can stay abreast of changes in our hotel operations and consumer preferences and demands. In addition, all employees of a new hotel are required to undergo an approximately 25-day job training prior to commencing their duties. We also have trained on-site managers in many of our hotels to provide continuous training to our hotel staff. In addition to training, we have implemented periodic tests to assess the relevant knowledge and skills of our managerial and other employees.

To ensure that all of our hotels have optimal and satisfactory performance, we have established an effective and clearly defined performance evaluation system based on a comprehensive set of key performance indicators that are aligned with a corresponding compensation structure. In addition, we provide capable and experienced hotel staff with opportunities to be promoted to management positions. We believe our performance-linked compensation structure, career-oriented training and career advancement opportunities are the key drivers that motivate our employees. As a result, we have experienced a very low attrition rate among our managerial staff since our inception. We were included in the Corporate Research Foundation’s list of “2007 China Top Employers.”

Excluding employees of our franchised-and-managed hotels, we had 4,593, 8,309 and 12,686 employees as of December 31, 2006, 2007 and 2008, respectively. As of December 31, 2008, our employees consisted of 11,978 hotel-based employees, 140 reservation agents at our centralized reservation center, and 568 corporate staff. Less than 1% of our employees are associated with labor unions. We consider our relations with our employees to be good.

Competition

The lodging industry in China is highly fragmented and competitive, and we expect competition to persist and intensify. Hotels in China are not required to, but may, apply for star ratings as approved by tourism bureaus of local governments or the National Tourist Administration, or the NTA, based on the star rating regulations in China. This standard defines five distinct star ratings, i.e., 1-Star, 2-Star, 3-Star, 4-Star and 5-Star, including Platinum 5-star. In order to obtain a particular star rating, a hotel must meet certain defined standards for the availability and quality of hotel facilities and public area, availability and quality of amenities in guest rooms, food and beverage facility, scope of guest services, and scope and quality of management infrastructure, etc. We have not applied for star ratings because we do not consider obtaining a star rating as necessary and our business has not been affected as we focus on meeting individual business and leisure travelers’ basic accommodation needs with affordable pricing, a comfortable lodging experience, high-quality services and standardized hotel rooms and amenities across our hotel chain.

We compete with other hotels for guests in each of the markets in which we operate. Competition in the industry is primarily based on room rates, quality of accommodations, brand name recognition, convenience of location, geographic coverage, service quality, range of services, and guest amenities. We compete primarily with other economy hotel chains, such as Jinjiang Star, Motel 168, 7 Days Inn, Han Ting, Green Tree Inn and Super 8, as well as various regional and local economy hotel chains. We also compete with two- and three-star hotels, as we offer rooms with standards comparable to many of those hotels and many of the amenities available at those hotels while maintaining competitive pricing and high-quality services tailored to individual business and leisure travelers. In addition, we may also face competition from new players in the economy hotel segment in China. As compared to four- or five-star hotels, developing an economy hotel requires a smaller commitment of capital and human resources. This relatively lower barrier of entry permits new competitors to enter our markets quickly and compete with our business. Furthermore, we may face competition from all other hotels for guests in each of our markets, as our typical business and leisure traveler customers may change their travel and spending patterns and choose to stay in hotels in different segments.

Intellectual Property

Our brand, trade names, trademarks, trade secrets and other intellectual property rights distinguish and protect our technology platforms, services and products from those of our competitors, and contribute to our competitive advantage in the economy hotel segment of the lodging industry in China. To protect our brand and other intellectual property, we rely on a combination of trademark, trade secret and copyright laws as well as imposing confidentiality obligations on our employees, contractors and others. We have a total of 11 registered trademarks in China, including “ (CHINESE CHARACTERS)

”, and are applying for registration of 33 new trademarks in China, which includes 8 trademarks for which Top Star had been applying. We have registered our domain name www.homeinns.com with the Internet Corporation for Assigned Names and Numbers.

We cannot assure you that our efforts to protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate these rights. If others are able to copy and use our proprietary information and operational system and other proprietary technology platform without spending time and resources to develop their own, we may not be able to maintain our competitive position. Furthermore, the application of laws governing intellectual property rights in China is uncertain and evolving and could involve substantial risks to us. If litigation is necessary to enforce our intellectual property rights or determine the scope of the proprietary rights of others, we may have to incur substantial costs or divert other resources, which could harm our business and prospects.

Insurance

We believe that our hotels are covered by adequate property and liability insurance policies, with coverage features and insured limits that we believe are customary for similar companies in China. We carry property insurance that covers the assets that we own at our hotels, but not the buildings or any other assets owned by our lessors. As a result of damages caused by the 2008 Sichuan earthquake, seven of our hotels in Chengdu have filed insurance claims for approximately RMB 0.6 million (US$0.1 million). Although we require our lessors to purchase customary insurance policies, we cannot guarantee that they will adhere to such requirements. If we suffered losses or were held liable for amounts and claims exceeding the limits of our insurance coverage or outside the scope of our insurance coverage, our business, results of operations and financial condition may be materially and adversely affected.

Regulation

The hotel industry in China is subject to a number of laws and regulations, including laws and regulations relating specifically to hotel operation and management and commercial franchising, as well as those relating to environmental and consumer protection. The principal regulation governing foreign ownership of hotel businesses in the PRC is the Foreign Investment Industrial Guidance Catalogue, which became effective as of December 1, 2007. Under the regulation, the hotel industry belongs to the category of permitted foreign investment industry and there is no restriction on foreign investment in hotel businesses in China, other than regular business license and other permits that must be possessed by every lodging business in China. There are no regulatory ceilings on room rates in China. The market-based pricing is permissible for the hotel industry and room rates may be determined at the sole discretion of hotel management. Relative to other industries in China, regulation of the hotel industry in China is still developing and evolving. As a result, most legislative action has consisted of general measures such as industry standards, rules or circulars issued by different ministries rather than detailed legislation. Many of these standards, rules and circulars date from the late 1990’s, and it is expected that they may be amended, revised or expanded in the coming years as the hotel industry in China matures. This section summarizes the principal PRC regulations currently relevant to our business and operations.

Regulations on Hotel Operation

In November 1987, the Ministry of Public Security issued theMeasures for the Control of Security in the Hotel Industry, and in June 2004, the State Council promulgatedDecision of the State Council on Establishing Administrative License for the Administrative Examination and Approval Items Really Necessary To Be Retained.Under these two regulations, anyone who applies to operate a hotel is subject to examination and approval by the local public security authority and must obtain a Special Industry License. TheMeasures for the Control of Security in the Hotel Industryimpose certain security control obligations on the operators. For example, the hotel must examine the identification card of any guest to whom accommodation is provided and make an accurate registration. The hotel must also report to the local public security authority if it discovers anyone violating the law, behaving suspiciously or an offender wanted by the public security authority.

In April 1987, the State Council promulgated thePublic Area Hygiene Administration Regulations, according to which, a hotel must obtain a public area hygiene license before opening for business. In October 1995, the Standing Committee of the National People’s Congress, or the SCNPC, enacted thePRC Law on Food Hygiene, according to which any hotel that provides food must obtain a food hygiene license. In April 1998, SCNPC enacted theFire Prevention Law. The Fire Prevention Law requires that public gathering places such as hotels pass a fire prevention safety inspection by the local public security fire-fighting department prior to opening for business. In January 2006, the State Council promulgated theRegulations for Administration of Entertainment Places, In March 2006, the Ministry of Culture issued theCircular on Carrying out the Regulations for Administration of Entertainment Places, under these regulations, hotels that provide entertainment facilities, such as discos or ballrooms, are required to obtain a license for entertainment business operations. The above regulations also set forth obligations concerning public security, hygiene, fire prevention, and other standards relating to the operation of public facilities. The relevant administrative authorities may impose penalties and even shut down hotels that violate the provisions.

In 2003, the NTA promulgated theRegulations on the Assessment of the Star Rating of Tourist Hotels, or the Star Rating Regulations. Under the Star Rating Regulations, all hotels with operations of over one year are eligible to apply for a star rating assessment. There are five ratings from one star to five stars for tourist hotels, assessed based on the level of facilities, management standards and quality of service. A star rating, once granted, is valid for five years.

Regulations on Consumer Protection

In October 1993, the SCNPC promulgated theLaw on the Protection of the Rights and Interests of Consumers, or the Consumer Protection Law. Under the Consumer Protection Law, a business operator providing a commodity or service to a consumer is subject to a number of requirements, including the following:

(1) to ensure that commodities and services meet with certain safety requirements;

(2) to disclose serious defects of a commodity or a service and adopt preventive measures against damage occurrence;

(3) to provide consumers with true information and to refrain from conducting false advertising;

(4) not to set unreasonable or unfair terms for consumers or alleviate or release itself from civil liability for harming the legal rights and interests of consumers by means of standard contracts, circulars, announcements, shop notices or other means; and

(5) not to insult or slander consumers or to search the person of, or articles carried by, a consumer or to infringe upon the personal freedom of a consumer.

Business operators may be subject to civil liabilities for failing to fulfill the obligations discussed above. These liabilities include restoring the consumer’s reputation, eliminating the adverse effects suffered by the consumer, and offering an apology and compensation for any losses incurred. The following penalties may also be imposed upon business operators for the infraction of these obligations: issuance of a warning, confiscation of any illegal income, imposition of a fine, an order to cease business operation, revocation of its business license or imposition of criminal liabilities under circumstances that are specified in laws and statutory regulations.

In December 2003, the Supreme People’s Court enacted theInterpretation of Some Issues concerning the Application of Law for the Trial of Cases on Compensation for Personal Injury, which further increases the liabilities of a business operator engaged in the operation of hotels, restaurants, or entertainment facilities and subjects such operators to compensatory liability for failing to fulfill their statutory obligation to a reasonable extent or to guarantee the personal safety of others.

Regulations on Environmental Protection

In June 2002, the SCNPC issued theLaw on Promoting Clean Productionwhich regulates service enterprises such as restaurants, entertainment establishments and hotels and requires them to use technologies and equipment that conserve energy and water, serve other environmental protection purposes, and reduce or stop the use of consumer goods that waste resources or pollute the environment.

Regulations on Commercial Franchising

Franchise activities are subject to the supervision and administration of the MOC and its regional counterparts. Such activities are currently regulated by the Regulations for Administration of Commercial Franchising promulgated by the State Council on February 6, 2007, effective as of May 1, 2007. The Regulations for Administration of Commercial Franchising were later supplemented by the Administrative Measures for Archival Filing of Commercial Franchise and the Administrative Measures for Information Disclosure of Commercial Franchise, both of which were issued by the MOC on April 30, 2007 and took effect on May 1, 2007.

Under these regulations, franchisors must satisfy certain requirements including, among other things, having mature business models, the capacity to provide operation instruction, technical support and training to franchisees and ownership of at least two self-operated shops that have been in operation for at least one year in China. Franchisors already engaged in franchising activities before May 1, 2007 are not subject to the requirement of owning at least two self-operated shops in operation for at least one year. Franchisors engaged in franchising activities without satisfying the above requirements may be subject to penalties such as the forfeit of illegal income and the imposition of monetary fines between RMB 100,000 and RMB 500,000 and may be bulletined by the MOC or its local counterparts. Franchise contracts shall include certain required provisions, such as terms, termination rights and payments.

Franchisors are generally required to file franchise contracts with the MOC or its local counterparts. Failure to report franchising activities may result in penalties such as fines up to RMB 100,000. Such noncompliance may also be bulletined. In the first quarter of every year, franchisors are required to report to MOC or its local counterparts any franchising contracts they executed, canceled, renewed or amended in the previous year.

The term of the franchising contracts shall be no less than three years unless franchisees otherwise agree. The franchisee is entitled to terminate the franchise contract at his sole discretion after a period of time.

Pursuant to the Administrative Measures for Information Disclosure of Commercial Franchise, franchisors are also required to provide franchisees with basic information in writing and franchise contracts 30 days prior to the execution of such contracts. Failure to disclose or misrepresentation entitles the franchisee to terminate the franchise contact and may also result in fines for the franchisor of up to RMB 100,000. In addition, such noncompliance may be bulletined.

Regulations on Trademarks

Both thePRC Trademark Law, adopted in 1982 and revised in 2001, andthe Implementation Regulation of the PRC Trademark Lawadopted by State Council in 2002, give protection to the holders of registered trademarks and trade names. The Trademark Office under the State Administration for Industry and Commerce handles trademark registrations and grants a term of ten years to registered trademarks. Trademark license agreement must be filed with the Trademark Office or its regional counterpart.

Regulations on Foreign Currency Exchange

Under theForeign Currency Administration Rulespromulgated in 1996 and revised in 1997 and various regulations issued by SAFE and other relevant PRC government authorities, the Renminbi is convertible for current account items, such as trade related receipts and payments, interest and dividends. Capital account items, such as direct equity investments, loans and repatriation of investment, require the prior approval from SAFE or its local counterpart for conversion of Renminbi into a foreign currency, such as U.S. dollars, and remittance of the foreign currency outside the PRC.

Payments for transactions that take place within the PRC must be made in RMB. Unless otherwise approved, PRC companies must repatriate foreign currency payments received from abroad. Foreign-invested enterprises may retain foreign exchange in accounts with designated foreign exchange banks subject to a cap set by SAFE or its local counterpart. Unless otherwise approved, domestic enterprises must convert all of their foreign currency receipts into RMB.

Regulations on Dividend Distribution

The principal regulations governing dividend distributions by wholly foreign owned enterprises and Sino-foreign equity joint ventures include:

•

the Wholly Foreign Owned Enterprise Law (1986), as amended;

•

the Wholly Foreign Owned Enterprise Law Implementing Rules (1990), as amended;

•

the Sino-foreign Equity Joint Venture Enterprise Law (1979), as amended; and

•

the Sino-foreign Equity Joint Venture Enterprise Law Implementing Rules (1983), as amended.

Under these regulations, wholly foreign owned enterprises and Sino-foreign equity joint ventures in the PRC may pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, these foreign-invested enterprises are required to set aside certain amounts of their accumulated profits each year, if any, to fund certain reserve funds. These reserves are not distributable as cash dividends except in the event of liquidation and cannot be used for working capital purposes.

Regulations on Employee Stock Holding Plan or Stock Option Plan

On December 25, 2006, the People’s Bank of China issued theAdministration Measures on Individual Foreign Exchange Control, and their Implementation Rules were issued by SAFE on January 5, 2007, both of which became effective on February 1, 2007. Under these regulations, all employee stock ownership plans, stock option plans and other similar plans with onshore individual participants and involving foreign exchange matters must be approved by SAFE or its authorized branch. On March 28, 2007, SAFE promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. Under the Stock Option Rule, PRC citizens who are granted stock options or restricted share units or issued restricted shares by an overseas publicly listed company are required, through a PRC agent or PRC subsidiary of such overseas publicly listed company, to complete certain procedures and transactional foreign exchange matters upon the examination by, and approval of, SAFE. We and our PRC employees who have been granted stock options or restricted share units or issued restricted shares are subject to the Stock Option Rule.

Regulation on Mergers and Acquisitions

On August 8, 2006, six PRC regulatory agencies, namely, the PRC MOC, SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the CSRC, and the SAFE, jointly adopted the New M&A Rule which became effective on September 8, 2006. The New M&A Rule sets forth complex procedures and requirements, including requirements in some instances that the MOC be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise.

Tax

On March 16, 2007, the National People’s Congress, the Chinese legislature, passed the Enterprise Income Tax Law, and on December 6, 2007, the PRC State Council issued the Implementation Regulations of the Enterprise Income Tax Law, both of which became effective on January 1, 2008. The Enterprise Income Tax Law and its Implementation Regulations, or the new EIT law, applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises. There is a transition period for the enterprises, whether foreign-invested or domestic, which currently receive preferential tax treatments granted by relevant tax authorities. Enterprises that are subject to an enterprise income tax rate lower than 25% may continue to enjoy the lower rate and gradually transfer to the new tax rate within five years after the effective date of the new EIT law. Enterprises that are currently entitled to exemptions or reductions from the standard income tax rate for a fixed term may continue to enjoy such treatment until the fixed term expires. Preferential tax treatments will continue to be granted to industries and projects that are strongly supported and encouraged by the state, and enterprises classified as “new and high technology enterprises strongly supported by the state” are entitled to a 15% enterprise income tax rate. The new EIT law also provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and will generally be subject to the uniform 25% enterprise income tax rate on their global income. Moreover, under the new EIT law, foreign ADS holders may be subject to a 10% withholding tax upon dividends payable by us and gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is sourced from within the PRC. Reduction or elimination of the financial subsidies or preferential tax treatments we currently enjoy or imposition of additional taxes on us or our subsidiaries in China may have a material adverse effect on our income tax expense and net income. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We have benefited from certain financial subsidies and preferential tax treatments in China. Reduction or elimination of these subsidies or preferential tax treatments may have an adverse effect on our income tax expense and net income.”

C.Organizational Structure

The following diagram illustrates our company’s organizational structure, and the place of formation, ownership interest and affiliation of each of our subsidiaries.

Home Inns & Hotels Management (Shanghai) Co., Ltd. owns 51% of three joint ventures, 65% of one joint venture, 70% of two joint ventures and 75% of one other joint venture.

D.Property, Plant and Equipment

Our headquarters are located in Shanghai, China, where we lease approximately 3,123 square meters of office space. As of December 31, 2008, we leased 35 out of our 471 hotel facilities with an aggregate size of 13,474 square meters. For detailed information about the locations of our hotels, see “Item 4. Information On the Company—B. Business Overview—Our Home Inns Hotel Chain.”

ITEM 4A. UNRESOLVED STAFF COMMENTS

None.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report onForm 20-F. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors” or in other parts of this annual report onForm 20-F.

A.Operating Results

Key Performance Indicators

We utilize a set of non-financial and financial key performance indicators which our senior management reviews frequently. The review of these indicators facilitates timely evaluation of the performance of our business and effective communication of results and key decisions, allowing us to react promptly to changing customer demands and market conditions.

Our non-financial key performance indicators consist of the increase in the total number of hotels and hotel rooms in our Home Inns hotel chain as well as the RevPAR achieved by our hotels. The increase in the number of hotels in our hotel chain is largely affected by the demand for our hotels in various cities and our ability to successfully identify and secure new properties and develop new hotels at desirable locations. RevPAR is a commonly used operating measure in the hospitality industry and is defined as the product of average occupancy rates and average daily rates achieved. Occupancy rates of our hotels mainly depend on the locations of our hotels, the effectiveness of our sales and brand promotion efforts, our ability to maintain the consistency and quality of our facilities and service, the performance of managerial and other employees of our hotels, as well as our ability to respond to competitive pressure. We set room rates of our hotels primarily based on the location of a hotel and room rates charged by our competitors within the same locality. Changes in RevPAR primarily due to changes in average occupancy rates achieved have different implications on our total revenues and profitability than changes in RevPAR primarily due to changes in average daily rates achieved. For example, increases in occupancy at our hotels would generally lead to increases in room revenues as well as additional incremental costs, such as housekeeping services, utilities and room amenity costs. However, RevPAR increases due to higher room rates generally would not result in these additional room-related costs. As a result, RevPAR increases due to higher room rates would have a greater positive effect on our profitability.

Our financial key performance indicators consist of our revenue and cost structure, which are discussed in greater details in the following paragraphs. In addition, we use EBITDA, a non-GAAP financial measure, as a key financial performance indicator to assess our operating results before the impact of interest, income taxes, depreciation and amortization. Given the significant investments that we have made in leasehold improvements, depreciation and amortization expense comprises a significant portion of our cost structure. We believe that EBITDA is widely used by other companies in the lodging industry and may be used by investors as a measure of our financial performance.

Revenues. In 2008, we generated total revenues of RMB 1.87 billion (US$274.3 million). Our revenues are significantly affected by the following operating measures, which are widely used in the hospitality industry and appear throughout this annual report:

•

the total number of hotels in our hotel chain;

•

the total number of hotel rooms in our hotel chain;

•

occupancy rates achieved by our hotels;

•

average daily rates achieved by our hotels; and

•

the RevPAR achieved by our hotels, which represents the product of average daily rates and occupancy rates.

Our future revenue growth will depend significantly upon our ability to expand our hotel chain into new markets in China and maintain and further increase occupancy rates, average daily rates and RevPAR at existing hotels. As of December 31, 2008, we had entered into binding contracts with lessors of 54 properties for our leased-and-operated hotels which are currently under development. We expect to incur an additional RMB 324.0 million (US$47.5 million) in capital expenditures in connection with the completion of the leasehold improvements of these hotels. We intend to fund this planned expansion with our operating cash flow, existing cash balance and bank credit facilities.

The following table sets forth the revenues generated by our leased and-operated hotels and franchised-and-managed hotels, both in absolute amount and as a percentage of total revenues for the periods indicated.


	For the Year Ended December 31,
	2006						2007						2008
	RMB			%			RMB			%			RMB			US$			%
	(in thousands, except share, per share and per ADS data)
Consolidated Statement of Operations Data
Revenues:
Leased-and-operated hotels		567,895			96.5			963,050			95.4			1,771,762			259,694			94.7
Franchised-and-managed hotels		20,605			3.5			46,266			4.6			99,779			14,625			5.3

Total revenues		588,500			100.0			1,009,316			100.0			1,871,541			274,319			100.0
Less: Business tax and related surcharges		(33,977	)		(5.8	)		(60,302	)		(6.0	)		(111,870	)		(16,397	)		(6.0	)

Net revenues		554,523			94.2			949,014			94.0			1,759,671			257,922			94.0

Leased-and-operated Hotels. In 2008, we generated revenues of RMB 1.77 billion (US$259.7 million) from our leased-and-operated hotels, which accounted for 94.7% of our total revenues for the year. We expect that revenues from our leased-and-operated hotels will continue to constitute a substantial majority of our total revenues in the foreseeable future.

For our leased-and-operated hotels, we lease properties from real estate owners or lessors and we are responsible for hotel development and customization to conform them to the standards of Home Inns, as well as for repairs and maintenance and operating costs and expenses of properties over the term of the lease. We are also responsible for all aspects of hotel operations and management, including hiring, training and supervising the managers and employees required to operate our hotels and purchasing supplies. We typically pay fixed rent on a quarterly basis for the first three or five years of the lease term, after which we are generally subject to a 3% to 5% increase every three to five years.

Revenues from our leased-and-operated hotels primarily consist of revenues from sales of room stays and, to a much lesser extent, revenues from sales of food and beverage at our hotels and other services. We recognize revenues from sales of room stays, food and beverage when our services are rendered.

Franchised-and-managed Hotels. In 2008, we generated revenues of RMB 99.8 million (US$14.6 million) from our franchised-and-managed hotels, which accounted for 5.3% of our total revenues for the year. We expect that revenues from our franchised-and-managed hotels will increase in the foreseeable future as we add more franchised-and-managed hotels in our hotel chain.

For our franchised-and-managed hotels, we franchise our “Home Inn” brand to franchisees who are property owners, lessors or existing hotel operators, and we are generally responsible for managing these hotels. Under a typical franchise agreement between us and a franchisee, the franchisee is generally required to pay us an initial franchise fee of RMB 3,000 per room, annual franchise fees of 3% of the revenues of the hotel, as well as annual supporting service fees of 3% of the revenues of the hotel. The franchisee is responsible for the costs of hotel development and customization to conform to the standards of Home Inns, as well as for repairs and maintenance and operating expenses of the hotel. We assist the franchisee in property design, construction, systems installation, and hotel personnel recruiting and training before the franchised-and-managed hotel commences operations. We allow our franchisees to utilize our integrated hotel information and operational systems, such as central reservation system, and charge them an annual or variable fee for such use.

We recognize the initial franchise fee as revenue when the franchised-and-managed hotel opens for business, the fee becomes non-refundable, and we have fulfilled all our commitments and obligations. We recognize ongoing franchise and management fees as revenues when the franchised-and-managed hotel recognizes revenues from which we derive the fees. We recognize fees received from franchisees for system usage, maintenance and support as revenues when our services are rendered.

Operating Costs and Expenses. Our operating costs and expenses consist of costs for our leased-and-operated hotels, sales and marketing expenses, general and administrative expenses and other operating expenses. The following table sets forth the components of our operating costs and expenses, both in absolute amount and as a percentage of total revenues for the periods indicated.


	For the Year Ended December 31,
	2006						2007						2008
	RMB			%			RMB			%			RMB			US$			%
	(in thousands except percentages)
Total revenues		588,500			100.0			1,009,316			100.0			1,871,541			274,319			100.0
Less: Business tax and related surcharges		(33,977	)		(5.8	)		(60,302	)		(6.0	)		(111,870	)		(16,397	)		(6.0	)

Net revenues		554,523			94.2			949,014			94.0			1,759,671			257,922			94.0

Operating costs and expenses:
Leased-and-operated hotel costs:
Rents and utilities		(171,576	)		(29.2	)		(299,792	)		(29.7	)		(643,694	)		(94,349	)		(34.4	)
Personnel costs		(87,981	)		(15.0	)		(155,611	)		(15.4	)		(337,837	)		(49,518	)		(18.1	)
Depreciation and amortization		(44,619	)		(7.6	)		(85,600	)		(8.5	)		(190,698	)		(27,951	)		(10.2	)
Consumables, food and beverage		(43,482	)		(7.4	)		(84,053	)		(8.3	)		(143,555	)		(21,041	)		(7.7	)
Others		(56,019	)		(9.5	)		(98,644	)		(9.8	)		(182,284	)		(26,718	)		(9.7	)

Total leased-and-operated hotel costs		(403,677	)		(68.6	)		(723,700	)		(71.7	)		(1,498,068	)		(219,577	)		(80.0	)
Sales and marketing expenses		(11,488	)		(2.0	)		(19,632	)		(1.9	)		(27,161	)		(3,981	)		(1.5	)
General and administrative expenses		(64,793	)		(11.0	)		(99,026	)		(9.8	)		(152,648	)		(22,374	)		(8.2	)

Total operating costs and expenses		(479,958	)		(81.6	)		(842,358	)		(83.5	)		(1,677,877	)		(245,932	)		(89.7	)

Leased-and-operated Hotel Costs. Our leased-and-operated hotel costs consist of costs and expenses directly attributable to our operation of leased-and-operated hotels, primarily including rental payments and utility costs for hotel properties, compensation and benefits for our hotel-based employees, costs of hotel room consumable products, depreciation and amortization of leasehold improvements, and commissions to travel intermediaries and consolidators. We anticipate that our leased-and-operated hotel costs will increase as we continue to open new leased-and-operated hotels and hire additional hotel-based employees.

Sales and Marketing Expenses. Our sales and marketing expenses primarily consist of advertising expenses, production costs of marketing materials, expenses associated with our membership reward program, and compensation and benefits for our sales and marketing personnel, including personnel at our centralized reservation center. We expect that our sales and marketing expenses will increase as we further expand into new geographic locations and promote our brand.

General and Administrative Expenses. Our general and administrative expenses primarily consist of compensation and benefits for our corporate office employees and other employees who are not sales and marketing or hotel-based employees, costs of third-party professional services, and rental payments relating to office and administrative functions. We expect that our general and administrative expenses will increase in the near term as we hire additional personnel and incur additional costs in connection with the expansion of our business.

Our leased-and-operated hotel costs and general and administrative expenses include share-based compensation expenses. The following table sets forth the allocation of our share-based compensation expenses both in absolute amount and as a percentage of total share-based compensation expenses, among the cost and expense items set forth below. Share-based compensation expenses are allocated among these items based on the nature of the work our employees were assigned to perform.


	For the Year Ended December 31,
	2006				2007				2008
	RMB		%		RMB		%		RMB		US$		%
	(in thousands except percentages)
Leased-and-operated hotel costs—personnel costs		12		0.1		11		0.1		11		2		0.0
General and administrative expenses		16,283		99.9		15,060		99.9		24,833		3,640		100.0

Total share-based compensation expenses		16,295		100.0		15,071		100.0		24,844		3,642		100.0

Taxation

We are incorporated in the Cayman Islands. Under Cayman Islands law, we are not subject to income or capital gains tax. In addition, dividend payments are not subject to withholding tax in the Cayman Islands.

Home Inns Hong Kong was subject to a profit tax at the rate of 17.5% on assessable profit determined under relevant Hong Kong tax regulations. To date, Home Inns Hong Kong has not been required to pay profit tax as it had no assessable profit.

Our subsidiaries and affiliated entities in China are subject to a business tax at a rate of approximately 6% on revenues generated from providing services and related surcharges by various local tax authorities. In addition, our subsidiaries and affiliated entities in China were generally subject to the standard enterprise income tax rate, which was 33% prior to January 1, 2008. However, some of our subsidiaries are subject to lower enterprise income tax rates due to the preferential tax treatments granted by the local tax authorities. For example, our wholly owned subsidiary, Hemei Hotel Management Company, enjoyed an 18% enterprise income tax rate during 2008 due to its place of incorporation and operation in the Pudong New District of Shanghai. It is now subject to a tax rate of 20% in 2009, and its tax rate is expected to increase to 22%, 24% and then 25% in 2010, 2011 and 2012, respectively.

Various local tax authorities in China have provided financial subsidies in the form of certain tax refunds to us. However, these tax authorities could reduce or eliminate any or all of these financial subsidies at any time in the future. Reduction or elimination of the financial subsidies we currently enjoy may have an adverse effect on our results of operations.

On March 16, 2007, the National People’s Congress, the Chinese legislature, passed a new tax law, which took effect on January 1, 2008. The new EIT law applies a uniform 25% enterprise income tax rate to both foreign-invested enterprises and domestic enterprises. There is a transition period for the enterprises, whether foreign-invested or domestic, which currently receive preferential tax treatments granted by relevant tax authorities. Enterprises that are subject to an enterprise income tax rate lower than 25% may continue to enjoy the lower rate and gradually transfer to the new tax rate within five years after the effective date of the new EIT law. Enterprises that are currently entitled to exemptions or reductions from the standard income tax rate for a fixed term may continue to enjoy such treatment until the fixed term expires. Preferential tax treatments will continue to be granted to industries and projects that are strongly supported and encouraged by the state, and enterprises classified as “new and high technology enterprises strongly supported by the state” are entitled to a 15% enterprise income tax rate. However, the new EIT law does not define this term. The new EIT law also provides that enterprises established outside of China whose “de facto management bodies” are located in China are considered “resident enterprises” and will generally be subject to the uniform 25% enterprise income tax rate on their global income. Moreover, under the new EIT law, foreign ADS holders may be subject to a 10% withholding tax upon dividends payable by us and gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is sourced from within the PRC. Reduction or elimination of the financial subsidies or preferential tax treatments we currently enjoy or imposition of additional taxes on us or our subsidiaries in China may have a material adverse effect on our income tax expense and net income. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We have benefited from certain financial subsidies and preferential tax treatments in China. Reduction or elimination of these subsidies or preferential tax treatments may have an adverse effect on our income tax expense and net income.”

Critical Accounting Policies

We prepare financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect the reported amounts of our assets and liabilities and the disclosure of our contingent assets and liabilities at the end of each fiscal period and the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.

Basis of Consolidation

Our consolidated financial statements included elsewhere in this annual report include the financial statements of Home Inns & Hotels Management Inc., its subsidiaries and variable interest entities, or VIEs (of which we are the primary beneficiary), and their subsidiaries.

We applied the provisions of Financial Accounting Standards Board, or FASB, Interpretation No. 46 (Revised 2003),“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51,” or FIN46(R), to account for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support.

Under FIN46(R), a company is required to consolidate a VIE if that company has a variable interest that will absorb a majority of the expected losses, receives a majority of the entity’s expected residual returns, or both. The company that absorbs a majority of the VIE’s expected losses and receives a majority of the VIE’s expected residual returns is a primary beneficiary.

We are the primary beneficiary of six VIEs: Home Inns & Hotels Management (Xiamen) Co., Ltd, or Home Inns Xiamen, Home Inns & Hotels Management (Fuzhou) Co., Ltd, or Home Inns Fuzhou, Home Inns & Hotels Management (Caoxi) Co., Ltd, or Home Inns Caoxi, Home Inns & Hotels Management (Caobao) Co., Ltd, or Home Inns Caobao, Home Inns & Hotels Kuaijie (Fuzhou) Co., Ltd, or Home Inns Kuaijie Fuzhou and Home Inns & Hotels Management (Dongguan) Co. Ltd., or Home Inns Dongguan. The principal activity of these VIEs generally relates to hotel management. The total registered capital of the six VIEs was RMB 6.0 million (US$0.9 million) as of December 31, 2008. The entities were considered VIEs because the equity at risk of each entity was not sufficient to finance its intended activities without additional financial support. We have a 51% ownership interest in Home Inns Xiamen, Home Inns Fuzhou and Home Inns Caoxi, a 70% ownership interest in Home Inns Kuaijie Fuzhou, a 75% ownership interest in Home Inns Caobao and a 65% ownership interest in Home Inns Dongguan, and we are considered the primary beneficiary of these entities because we absorb a majority of the entities’ expected losses and receive a majority of the entities’ expected residual returns. As a result, the operations of the VIEs are included in our consolidated financial statements since their incorporation.

The entities that operate the franchised-and-managed hotels are considered variable interest entities as the franchisees do not have the ability to make decisions that have a significant impact on the success of the franchise arrangement. However, as the franchisees provide all necessary capital to finance the operation of the franchised properties and absorb a majority of the expected losses, we are not considered the primary beneficiary of those entities.

Goodwill

Goodwill represents the excess of the cost of an acquired entity over the appropriate share of the fair value of the identifiable assets, including separately identifiable intangible assets, and liabilities acquired. Goodwill is allocated to respective reporting units. The provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” or SFAS 142, require that a two-step impairment test be performed annually or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The first step of the test for impairment compares the book value of our reporting unit under which goodwill is recorded to its estimated fair value. The second step of the goodwill impairment test, which is only required when the net book value of the reporting unit exceeds the fair value, measures impairment as the difference between the implied fair value of goodwill and its book value. Goodwill is not amortized. No impairment was recognized for the years ended December 31, 2006, 2007 and 2008. As of December 31, 2008, all goodwill is allocated to the hotel operations reporting unit.

Impairment of Long-lived Assets and Definite-lived Intangible Assets

We review long-lived assets and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that carrying amount of an asset may not be recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-lived Assets,” or SFAS 144. We assess the recoverability of the long-lived assets and definite-lived intangible assets (other than goodwill) by comparing the carrying amount to the estimated future undiscounted cash flow associated with the related assets. If the estimated future undiscounted cash flows are less than the carrying value, an indication of impairment is present and we recognize a loss for the difference between fair value, using the expected discounted cash flows, and the carrying value of the assets. We use estimates and judgments in these impairment tests, and if different estimates or judgments had been utilized, the timing or the amount of the impairment charges could be different. No impairment was recognized for the years ended December 31, 2006, 2007 and 2008.

Accruals for Customer Reward Program

We invite our customers to participate in a customer reward program. Prior to November 14, 2004, membership was free of charge. We commenced charging a one-time membership fee after that date for new members. Members enjoy discounts on room rates, priority in hotel reservation, and accumulate membership points for their paid stays, which can be redeemed for membership upgrades, room night awards and other gifts. The estimated incremental costs to provide membership upgrades, room night awards and other gifts are accrued and recorded as a provision for customer reward program as members accumulate points and recognized as sales and marketing expense in the accompanying statement of operations. As members redeem awards or their entitlements expire, the provision is reduced correspondingly. As of December 31, 2006, 2007 and 2008, we made provisions of RMB 2.7 million, RMB 5.4 million and RMB 8.6 million (US$1.3 million), respectively, based on the estimated liabilities under the customer reward program.

Revenue Recognition

Revenue from leased-and-operated hotels represents primarily room rentals and food and beverage sales from the leased-and-operated hotels. We recognize such revenues when goods are delivered and services are provided.

Revenues from franchised-and-managed hotels are derived from franchise agreements where the franchisees are required to pay (i) an initial one-time franchise fee and (ii) on-going management and service fees based on a percentage of revenue, which approximated 5% to 6% of the room revenues of the franchised hotels. The one-time franchise fee is recognized when the franchised hotel opens for business, the fee becomes non-refundable, and we have fulfilled all of our commitments and obligations, including having provided the assistance to the franchisees in property design, leasehold improvement construction project management, systems installation, personnel recruiting and training. On-going management and service fees are recognized when the underlying service revenue is recognized by the franchisees’ operations. Other revenues generated from franchise agreements include system maintenance and support fee and central reservation system usage fee, which are recognized when services are provided.

Revenues from the one-time membership fees are recognized over the estimated average customer relationship period or deferred and recognized once the probability that the member will demand further service becomes remote. Prior to 2006, given the limited history in operating our customer reward program, all one-time membership fees were recognized as deferred revenue when received. In 2006, our management made an analysis on the historic pattern of the activities of membership cards and noted that membership cards with no activities for more than one year are most likely to expire in the future and therefore we recognized revenue from one-time membership fees when membership records show lack of usage activity for a year. For the year ended December 31, 2006, 2007 and 2008, we recognized revenues of RMB 1.8 million, RMB 3.4 million and RMB 11.0 million (US$1.6 million), respectively, from one-time membership fees.

We will continue to monitor membership activity patterns and will utilize such information to estimate the average life of members for future revenue recognition purposes once we have obtained sufficient historical data.

Share-based Compensation

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123(R), which revises SFAS No. 123, and supersedes APB No. 25. Under the fair value recognition provisions of SFAS No. 123(R), we applied the prospective transition method and measured share-based compensation at fair value on the awards’ grant date based on the estimated number of awards that are expected to vest. Under the prospective transition method, we continued to account for non-vested awards outstanding under the provisions of APB No. 25. Only awards granted (or modified, repurchased, or cancelled) after the adoption of SFAS No. 123(R) were accounted for under the provisions of SFAS No. 123(R).

In conjunction with the adoption of SFAS No. 123(R), we are required to estimate forfeitures at the time of grant and revise in subsequent periods if actual forfeitures differ from those estimates. Compensation expense is recognized on a straight-line basis over the requisite service period of the award based on the fair value of the award on grant date. The requisite service period is the vesting period, which is generally four years.

We have granted options to our directors, officers and other employees under our option plans. Determination of the amount of share-based compensation expense to be recognized requires significant judgment, including, most importantly, the estimated fair value of our ordinary shares underlying the options as of each date of grant. Before we were listed on the Nasdaq Global Market in October 2006, we engaged an independent appraiser to assist in the determination of the fair value of our ordinary shares underlying options for most of our option grants. Since our ADSs were listed on the Nasdaq Global Market in October 2006, we have determined the estimated fair value of our ordinary shares underlying the options based on the closing trading price of our ADSs as of the option grant date.

The determination of the fair value of stock options on the date of grant using an option-pricing model is affected by assumptions regarding a number of complex and subjective variables, including our expected stock price volatility over the vesting period, risk-free interest rate, expected dividend yield, and actual and projected employee stock option exercise behaviors. Furthermore, we are required to estimate forfeitures for options granted or modified after January 1, 2006 at the time of grant and recognize stock-based compensation expense only for those awards that are expected to vest. If actual forfeitures differ from those estimates, we may need to revise those estimates used in subsequent periods.

Share-based compensation expense recognized for the years ended December 31, 2006, 2007 and 2008 amounted to RMB 16.3 million, RMB 15.1 million and RMB 24.8 million (US$3.6 million), respectively.

Taxation

Income tax expenses are recorded using the liability method. Deferred tax assets or liabilities are recognized for the estimated future tax effects attributable to temporary differences and tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in statements of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the amount of deferred tax assets if it is considered more likely than not that such assets will not be realized. In doing so, management must make judgments and estimates as to whether we have future taxable income available to utilize the deferred tax assets. As of December 31, 2007 and 2008, we had deferred tax assets of RMB 65.6 million and RMB 119.4 million (US$17.5 million), respectively. As of December 31, 2007 and 2008, a valuation allowance of RMB 37.4 million and RMB 42.5 million (US$6.2 million), respectively, was made against deferred tax assets of RMB 40.5 million and RMB 42.5 million (US$6.2 million), respectively. This valuation allowance was made because we considered it more than likely that such assets will not be realized because Top Star has not historically been profitable.

Selected Operating Data

The following table presents certain selected operating data of our company as of and for the dates and periods indicated. Our revenues have been and will continue to be significantly affected by these operating measures which are widely used in the hospitality industry.


	As of and for the Year Ended
	December 31,
	2006		2007		2008
Operating Data
Total hotels in operation⁽¹⁾:
Leased-and-operated hotels⁽²⁾		94		195		326
Franchised-and-managed hotels		40		71		145
Total rooms⁽¹⁾		16,162		32,726		55,631
Geographic coverage⁽¹⁾:
Number of cities		39		66		94
Occupancy rate (as a percentage)		92.8		91.1		85.0
Average daily rate (in RMB)		182		179		173
RevPAR (in RMB)		169		163		147


(1)		As of the end of each period.

(2)		Includes seven hotels operated through separate joint ventures with third parties. Home Inns & Hotels Management (Shanghai) Co., Ltd. owns 51% of three joint ventures, 65% of one joint venture, 70% of two joint ventures and 75% of one other joint venture.

Results of Operations

The following table sets forth a summary of our consolidated results of operations, both in absolute amount and as a percentage of total revenues for the periods indicated. This information should be read together with our consolidated financial statements and related notes included at the end of this annual report. Our business has grown rapidly and substantially since we commenced operations in July 2002. Our limited operating history makes it difficult to predict future operating results. We believe that the period-to-period comparison of operating results should not be relied upon as being indicative of future performance.


	For the Year Ended December 31,
	2006						2007						2008
	RMB			%			RMB			%			RMB			US$			%
	(in thousands except percentages)
Consolidated Statement of Operations Data
Revenues:
Leased-and-operated hotels		567,895			96.5			963,050			95.4			1,771,762			259,694			94.7
Franchised-and-managed hotels		20,605			3.5			46,266			4.6			99,779			14,625			5.3

Total revenues		588,500			100.0			1,009,316			100.0			1,871,541			274,319			100.0
Less: Business tax and related surcharges		(33,977	)		(5.8	)		(60,302	)		(6.0	)		(111,870	)		(16,397	)		(6.0	)

Net revenues		554,523			94.2			949,014			94.0			1,759,671			257,922			94.0

Operating costs and expenses:
Leased-and-operated hotel costs:
Rents and utilities		(171,576	)		(29.2	)		(299,792	)		(29.7	)		(643,694	)		(94,349	)		(34.4	)
Personnel costs		(87,981	)		(15.0	)		(155,611	)		(15.4	)		(337,837	)		(49,518	)		(18.1	)
Depreciation and amortization		(44,619	)		(7.6	)		(85,600	)		(8.5	)		(190,698	)		(27,951	)		(10.2	)
Consumables, food and beverage		(43,482	)		(7.4	)		(84,053	)		(8.3	)		(143,555	)		(21,041	)		(7.7	)
Others		(56,019	)		(9.5	)		(98,644	)		(9.8	)		(182,284	)		(26,718	)		(9.7	)

Total leased-and-operated hotel costs		(403,677	)		(68.6	)		(723,700	)		(71.7	)		(1,498,068	)		(219,577	)		(80.0	)
Sales and marketing expenses		(11,488	)		(2.0	)		(19,632	)		(1.9	)		(27,161	)		(3,981	)		(1.5	)
General and administrative expenses		(64,793	)		(11.0	)		(99,026	)		(9.8	)		(152,648	)		(22,374	)		(8.2	)

Total operating costs and expenses		(479,958	)		(81.6	)		(842,358	)		(83.5	)		(1,677,877	)		(245,932	)		(89.7	)

Income from operations		74,565			12.7			106,656			10.6			81,794			11,990			4.4

Interest income, net		435			0.1			24,549			2.4			3,887			570			0.2
Gain on buy-back of convertible bond		—			—			—			—			103,291			15,140			5.5
Other non-operating income		5,309			0.9			8,434			0.8			10,971			1,608			0.6
Foreign exchange loss, net		(6,990	)		(1.2	)		(53,221	)		(5.3	)		(65,524	)		(9,604	)		(3.5	)
Income tax expense		(21,391	)		(3.6	)		(45,035	)		(4.5	)		(28,107	)		(4,120	)		(1.5	)
Minority interests		(5,034	)		(0.9	)		(5,627	)		(0.6	)		(5,087	)		(746	)		(0.3	)
Share of income of affiliated companies		—			—			—			—			—			—			—

Net income		46,894			8.0			35,756			3.5			101,225			14,838			5.4

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Revenues. Our total revenues increased by 85.4% from RMB 1.01 billion in 2007 to RMB 1.87 billion (US$274.3 million) in 2008.

•

Leased-and-operated Hotels. Revenues from our leased-and-operated hotels increased by 84.0% from RMB 963.1 million in 2007 to RMB 1.77 billion (US$259.7 million) in 2008. This increase was primarily due to our substantial expansion of leased-and-operated hotels in operation from 195 hotels and 24,336 rooms as of December 31, 2007 to 326 hotels and 39,188 rooms as of December 31, 2008. This was offset by lower average RevPAR due to a higher proportion of hotels in lower tier cities where room rates are typically lower, the negative impact of the May 2008 Sichuan earthquake and the economic slowdown in the fourth quarter of the year, as well as the below average performance of the acquired Top Star hotels.

•

Franchised-and-managed Hotels. Revenues from our franchised-and-managed hotels increased substantially by 115.7% from RMB 46.3 million in 2007 to RMB 99.8 million (US$14.6 million) in 2008. This growth was primarily due to an increase in the number of franchised-and-managed hotels in operation from 71 hotels with 8,390 rooms as of December 31, 2007 to 145 hotels with 16,443 rooms as of December 31, 2008.

Operating Costs and Expenses. Our total operating costs and expenses increased substantially from RMB 842.4 million in 2007 to RMB 1.68 billion (US$245.9 million) in 2008. This increase resulted from increases in all of our cost and expense line items as we substantially expanded our operations in 2008.

•

Leased-and-operated Hotel Costs. Our leased-and-operated hotel costs increased substantially from RMB 723.7 million in 2007 to RMB 1.5 billion (US$219.6 million) in 2008. This increase was primarily because all items comprising our leased-and-operated hotel costs increased substantially as we expanded our leased-and-operated hotels from 195 hotels and 24,336 rooms as of December 31, 2007 to 326 hotels and 39,188 rooms as of December 31, 2008. In particular, rents and utilities increased from RMB 299.8 million in 2007 to RMB 643.7 million (US$94.3 million) in 2008 as a result of not only an increase in hotel numbers but also inflationary pressures caused by intensified competition for new properties, while personnel costs increased from RMB 155.6 million in 2007 to RMB 337.8 million (US$49.5 million) in 2008 as a result of an increase in hotel numbers and inflation in wage and benefit costs.

•

Sales and Marketing Expenses. Our sales and marketing expenses increased from RMB 19.6 million in 2007 to RMB 27.2 million (US$4.0 million) in 2008. This increase was primarily due to increased marketing and promotional expenses in connection with 205 new hotels that opened in 2008.

•

General and Administrative Expenses. Our general and administrative expenses increased by 54.1% from RMB 99.0 million in 2007 to RMB 152.6 million (US$22.4 million) in 2008, primarily due to increased total compensation and benefits for our corporate administrative staff, as well as increase in costs incurred for office rental, depreciation, communications and other corporate support activities. We incurred these additional costs as we substantially expanded our hotel chain with 205 new hotels added during the year and 114 additional hotels under development.

Income from Operations.Our income from operations decreased by 23.3% from RMB 106.7 million in 2007 to RMB 81.8 million (US$12.0 million) in 2008 as a cumulative result of the above factors. Our income from operations in 2008 was negatively impacted by lower RevPAR at our hotels primarily as a result of the high proportion of hotels that are newly opened and still ramping up, the high proportion of hotels in lower tier cities where room rates are lower, and the below average performance of the recently acquired hotels, while costs increased proportionally with the increase in the number of hotels or due to inflationary pressures.

Interest Income (Expense), Net. Our net interest income decreased substantially from RMB 24.5 million in 2007 to RMB 3.9 million (US$0.6 million) in 2008, primarily because cash was invested in new hotel development and general corporate purposes throughout the year, and interest rates declined.

Gain on Buy-back of Convertible Bond.Our gain on buy-back of convertible bond increased from nil in 2007 to RMB 103.3 million (US$15.0 million) in 2008 because we repurchased part of our outstanding convertible bonds.

Foreign Exchange Loss, Net. Our net foreign exchange loss increased from RMB 53.2 million in 2007 to RMB 65.5 million (US$9.6 million) in 2008, primarily because we started 2008 with a large U.S. dollar cash balance from our convertible offering completed in December 2007 and the U.S. dollar depreciated against the RMB during the course of that year.

Income Tax Expense. Our income tax expense decreased by 37.6% from RMB 45.0 million in 2007 to RMB 28.1 million (US$4.1 million) in 2008, primarily because our income before tax expenses decreased. In addition, 2007 income tax expense had been increased by the inclusion of a one-time deferred tax asset adjustment of RMB 6.1 million as a result of lowered tax rates at our hotels.

Minority Interests.Minority interests represent BTG’s share of our net income based on its equity interest in Home Inns Beijing prior to our acquisition of this minority stake from BTG in July 2007 and our joint venture partners’ share of the net income of the four leased-and-operated hotels owned by the joint ventures in 2007 and seven in 2008. Minority interests amounted to RMB 5.1 million (US$0.7 million) in 2008 compared to RMB 5.6 million in 2007.

Net Income. As a result of the foregoing, we had net income of RMB 101.2 million (US$14.8 million) in 2008, an increase of 183.1% from net income of RMB 35.8 million in 2007. Our net income in 2008 was negatively impacted by lower income from operations and higher foreign exchange losses, offset by a gain from convertible bond repurchasing.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Revenues. Our total revenues increased by 71.5% from RMB 588.5 million in 2006 to RMB 1.01 billion in 2007.

•

Leased-and-operated Hotels. Revenues from our leased-and-operated hotels increased by 69.6% from RMB 567.9 million in 2006 to RMB 963.1 million in 2007. This increase was primarily due to our substantial expansion of leased-and-operated hotels in operation from 94 hotels and 11,395 rooms as of December 31, 2006 to 195 hotels and 24,336 rooms as of December 31, 2007.

•

Franchised-and-managed Hotels. Revenues from our franchised-and-managed hotels increased substantially by 124.5% from RMB 20.6 million in 2006 to RMB 46.3 million in 2007. This growth was primarily due to an increase in the number of franchised-and-managed hotels in operation from 40 hotels with 4,767 rooms as of December 31, 2006 to 71 hotels with 8,390 rooms as of December 31, 2007.

Operating Costs and Expenses. Our total operating costs and expenses increased substantially from RMB 480.0 million in 2006 to RMB 842.4 million in 2007. This increase resulted from increases in all of our cost and expense line items as we substantially expanded our operations in 2007.

•

Leased-and-operated Hotel Costs. Our leased-and-operated hotel costs increased substantially from RMB 403.7 million in 2006 to RMB 723.7 million in 2007. This increase was primarily because all items comprising our leased-and-operated hotel costs increased substantially as we expanded our leased-and-operated hotels from 94 hotels and 11,395 rooms as of December 31, 2006 to 195 hotels and 24,336 rooms as of December 31, 2007.

•

Sales and Marketing Expenses. Our sales and marketing expenses increased substantially from RMB 11.5 million in 2006 to RMB 19.6 million in 2007. This increase was primarily due to increased marketing and promotional expenses in connection with 132 new hotels that opened in 2007.

•

General and Administrative Expenses. Our general and administrative expenses increased by 52.8% from RMB 64.8 million in 2006 to RMB 99.0 million in 2007, primarily due to an increase in the total compensation and benefits for our administrative staff as a result of our hiring of over 280 new employees in the areas of finance and accounting, human resources and general administration to support our expanded operations in 2007.

Income from Operations. Our income from operations increased by 43.0% from RMB 74.6 million in 2006 to RMB 106.7 million in 2007 as a cumulative result of the above factors. Our income from operations in 2007 was negatively impacted by our acquisition and consolidation of Top Star as, historically, the Top Star hotels have not been profitable.

Interest Income (Expense), Net. Our net interest income increased substantially from RMB 0.4 million in 2006 to RMB 24.5 million in 2007, primarily due to interest income from proceeds of our initial public offering and our additional public offering.

Foreign Exchange Gain (Loss), Net. Our net foreign exchange loss increased substantially from RMB 7.0 million in 2006 to RMB 53.2 million in 2007, primarily due to the U.S. dollar net proceeds we received from both our initial public offering in October 2006, our additional public offering in May 2007 and the convertible bonds we issued in December 2007 as well as the RMB appreciation since then until the end of 2007.

Income Tax Expense. Our income tax expense increased by 110.5% from RMB 21.4 million in 2006 to RMB 45.0 million in 2007, primarily because of the increased income of our operating subsidiaries in China. In addition, 2007 income tax expense were increased by the inclusion of a one-time deferred tax asset adjustment of RMB 6.1 million as a result of lowered tax rates at our hotels.

Minority Interests. Minority interests represent BTG’s share of our net income based on its equity interest in Home Inns Beijing and our joint venture partners’ share of the net income of the four leased-and-operated hotels owned by the joint ventures. Minority interests increased to RMB 5.6 million in 2007 compared to RMB 5.0 million in 2006, due to our increased net income in 2007 partially offset by the fact that we purchased the remaining stake in Home Inns Beijing from BTG in July 2007.

Net Income. As a result of the foregoing, we had net income of RMB 35.8 million in 2007, a decrease of 23.8% from net income of RMB 46.9 million in 2006. Our net income in 2007 was negatively impacted by foreign exchange loss and our acquisition and consolidation of Top Star as, historically, the Top Star hotels have not been profitable.

B.Liquidity and Capital Resources

Our principal sources of liquidity have been cash generated from operating activities, our sale of ordinary shares and preferred shares through private placements, borrowings from BTG and third-party lenders as well as the proceeds we received from our public offerings of ordinary shares and our offering of convertible bonds. Our cash and cash equivalents consist of cash on hand and liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less that are placed with banks and other financial institutions. As of December 31, 2008, we had entered into binding contracts with lessors of 54 properties for our leased-and-operated hotels under development. We expect to incur an additional RMB 324.0 million (US$47.5 million) in capital expenditures in connection with the completion of the leasehold improvements of these hotels. We intend to fund this planned expansion with our operating cash flow, our existing cash balance and bank credit facilities.

We have been able to meet our working capital needs, and we believe that we will be able to meet our working capital needs in the foreseeable future, with our operating cash flow, existing cash balance and bank credit facilities.

The following table sets forth a summary of our cash flows for the periods indicated:


	For the Year Ended December 31,
	2006			2007			2008
	RMB			RMB			RMB			US$
	(in thousands)
Net cash provided by operating activities		161,972			214,631			356,886			52,310
Net cash used in investing activities		(213,795	)		(613,419	)		(964,315	)		(141,342	)
Net cash provided by/used in financing activities		779,089			1,256,606			(281,202	)		(41,216	)
Effect of foreign exchange rate changes on cash and cash equivalents		(6,990	)		(53,221	)		(65,524	)		(9,604	)
Net increase/(decrease) in cash and cash equivalents		720,276			804,597			(954,155	)		(139,852	)
Cash and cash equivalents at beginning of period		37,727			758,003			1,562,600			229,034
Cash and cash equivalents at end of the period		758,003			1,562,600			608,445			89,182

Operating Activities

We have financed our operating activities primarily through cash generated from operations. We currently anticipate that we will be able to meet our needs to fund operations beyond the next twelve months with operating cash flow and existing cash balances.

Net cash provided by operating activities increased from RMB 214.6 million in 2007 to RMB 356.9 million (US$52.3 million) in 2008. The increase resulted from our expanded operations from 266 hotels in operation with 32,726 hotel rooms as of December 31, 2007 to 471 hotels in operation with 55,631 hotel rooms as of December 31, 2008.

Net cash provided by operating activities increased substantially from RMB 162.0 million in 2006 to RMB 214.6 million in 2007. The increase resulted from our expanded operations in 2007. These changes were primarily attributable to the expansion of the Home Inns hotel chain from 134 hotels in operation with 16,162 hotel rooms as of December 31, 2006 to 266 hotels in operation with 32,726 hotel rooms as of December 31, 2007.

Investing Activities

Our cash used in investing activities is primarily related to our leasehold improvements and purchase of equipment and fixtures used in leased-and-operated hotels. Net cash used in investing activities increased from RMB 613.4 million in 2007 to RMB 964.3 million (US$141.3 million) in 2008, primarily due to capital expenditures for new hotels opened and payment for consideration of the prior year’s acquisitions. Net cash used in investing activities increased from RMB 213.8 million in 2006 to RMB 613.4 million in 2007, primarily due to capital expenditures for new hotels opened, our acquisition of the remaining equity interest of Home Inns Beijing and our acquisition of Top Star.

Financing Activities

Our financing activities consist of issuance and sale of our shares and convertible bonds to investors and related parties, borrowings from third-party lenders and our public offerings of our shares. As of March 31, 2009, we had no outstanding indebtedness, and the remaining funds available under our credit facilities in the aggregate amounted to approximately RMB 300.0 million (US$44.0 million). We expect these one-year facilities to be renewable under similar terms and conditions upon expiration if we are not in default under the existing terms.

Net cash used in financing activities in 2008 amounted to RMB 281.2 million (US$41.2 million) and was primarily attributable to the repurchasing of part of our outstanding convertible bonds and the repayment of our bank debt. Net cash provided by financing activities in 2007 amounted to RMB 1,256.6 million and was primarily attributable to the net proceeds from our additional public offering as well as our sale of convertible bonds, offset in part by the amount of debt we repaid during the period. Net cash provided by financing activities in 2006 amounted to RMB 779.1 million and was primarily attributable to the net proceeds from our initial public offering, offset in part by the amount of debt we repaid during the period.

Capital Expenditures

Our capital expenditures were incurred primarily in connection with leasehold improvements, investments in furniture, fixtures and equipment and technology, information and operational software. Our capital expenditures totaled RMB 237.9 million, RMB 581.6 million and RMB 996.4 million (US$146.0 million) in 2006, 2007 and 2008, respectively. We will continue to make capital expenditures to meet the expected growth of our operations and expect cash generated from our operating activities and financing activities will meet our capital expenditure needs in the foreseeable future.

C.Research and Development, Patents and Licenses, Etc.

Intellectual Property

We cannot assure you that our efforts to protect our intellectual property rights will be adequate or that third parties will not infringe or misappropriate these rights. If others are able to copy and use our proprietary information and operational system and other proprietary information and operational system and other proprietary technology platform without spending time and resources to develop their own, we may not be able to maintain our competitive position. Furthermore, the application of laws governing intellectual property rights in China is uncertain and evolving and could involve substantial risks to us. If litigation is necessary to enforce our intellectual property rights or determine the scope of the proprietary rights of others, we may have to incur substantial costs or divert other resources, which could harm our business and prospects.

D.Trend Information

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events since January 1, 2008 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

E.Off-balance Sheet Arrangements

Other than operating lease obligations set forth in the table below in “Item 5. Operating and Financial Review and Prospects—F. Tabular Disclosure of Contractual Obligations,” we have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity, or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

F.Tabular Disclosure of Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2008:


	Payment Due by Period
									More
			Less than						than 5
	Total		1 year		1-3 years		3-5 years		years
	(in RMB millions)
Convertible bonds		895		—		895		—		—
Operating lease obligations		7,044		556		1,717		1,712		3,059
Purchase obligations		83		83		—		—		—

Total		8,022		639		2,612		1,712		3,059

Our convertible bonds will mature in December 2012, unless previously converted into our ordinary shares at a conversion price of US$26.545 (equal to US$53.09 per ADS), based on a fixed exchange rate of RMB 7.4 to US$1.00. According to the terms of our convertible bonds, the number of ordinary shares to be issued on conversion is fixed. A holder will receive 509.079 ordinary shares per RMB 100,000 principal amount of bonds upon conversion, subject only to contingent adjustment for dilutive events or change of control. Our operating lease obligations relate to our obligations under lease agreements with lessors of our leased-and-operated hotels. Our purchase obligations primarily consisted of our contractual commitments relating to leasehold improvements and installation of equipment for our leased-and-operated hotels.

G.Safe Harbor

This annual report on Form 20-F contains forward-looking statements that relate to future events, including our future operating results and conditions, our prospects and our future financial performance and condition, all of which are largely based on our current expectations and projections. The forward-looking statements are contained principally in the sections entitled “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects.” These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. You can identify these forward-looking statements by terminology such as “may,” “will,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,” “estimate,” “is/are likely to” or other and similar expressions. Forward-looking statements involve inherent risks and uncertainties.

We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include:

•

our anticipated growth strategies;

•

our future business development, results of operations and financial condition;

•

expected changes in our revenues and certain cost or expense items;

•

our ability to attract customers and leverage our brand;

•

trends and competition in the lodging industry; and

•

our ability to develop new hotels at desirable locations in a timely and cost-effective manner.

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.Directors and Senior Management

The following table sets forth information regarding our executive officers and directors as of the date of this annual report.


Name	Age	Position/Title
Yunxin Mei	60	Co-Chairman of the Board of Directors
Neil Nanpeng Shen	41	Co-Founder, Co-Chairman of the Board of Directors
David Jian Sun	44	Chief Executive Officer, Director
May Wu	41	Chief Financial Officer
Jason Zong	44	Chief Operating Officer
Rixin Liang	54	Chief Branding Officer
Min Bao	49	Independent Director
James Jianzhang Liang	39	Co-Founder, Independent Director
Kenneth Gaw	38	Independent Director
Terry Yongmin Hu	39	Independent Director

Yunxin Meihas served as our director since May 2004. Since 2000, Mr. Mei has been the vice chairman and president of BTG responsible for the overall operations and management as well as executing BTG’s mid- and long-term development plans. He also serves on the boards of Home Inns Hong Kong, Home Inns Beijing and Beijing Tourism Group (HK) Holdings Company Ltd. as well as on the boards of several other companies, including Poly Victory Investments Limited, Viobright International Investments Ltd. and Profit Act Investment Ltd., all of which are holding companies investing in the hotel business in China.

Neil Nanpeng Shenis one of the co-founders of our company and has been our company’s director since our inception. Mr. Shen is the founding managing partner of Sequoia Capital China Advisors (Hong Kong) Limited. Mr. Shen co-founded Ctrip, the largest travel consolidator in China, and has been a director of Ctrip since its inception. Mr. Shen also served as Ctrip’s chief financial officer from 2000 to October 2005 and its president from August 2003 to October 2005. Prior to founding Ctrip, Mr. Shen had worked for more than eight years in the investment banking industry in New York and Hong Kong. Currently, Mr. Shen is a director of E-House (China) Holdings Limited, a leading real estate service company based in China and listed on the New York Stock Exchange, and an independent director and a member of the nominating committee of Focus Media Holding Limited, a Nasdaq-listed media advertising company based in China. He also serves on the boards of a number of privately owned companies based in China. Mr. Shen received his bachelor’s degree from Shanghai Jiao Tong University in China and his master’s degree from the School of Management at Yale University.

David Jian Sunhas served as our director and chief executive officer since December 2004. Mr. Sun has over ten years of consumer industry experience. From 2003 to December 2004, Mr. Sun served as a vice president of operations for B&Q (China) Ltd., a subsidiary of Kingfisher plc, the third largest home improvement retail group in the world, overseeing the operation of 15 B&Q superstores in China. From 2000 to 2003, Mr. Sun served as a vice president of marketing for B&Q (China) Ltd., leading B&Q’s market positioning and branding efforts in China. Mr. Sun holds a bachelor’s degree from Shanghai Medical University in China.

May Wuhas served as our chief financial officer since July 2006. She served as our senior vice president of finance from March 2006 to June 2006. Prior to joining Home Inns, Ms. Wu was a first vice president at Schroder Investment Management North America Inc. from January 2005 to March 2006, and a vice president from January 2003 to December 2004. She was responsible for investment research and management for various funds, specializing in consumer and services sectors. From 1998 to 2002, Ms. Wu was an equity research analyst at JP Morgan Asset Management where she also served as a vice president from 2000 to 2002. She has served as an independent director and chairwoman of the audit committee of E-House (China) Holdings Limited, a leading real estate service company based in China and listed on the New York Stock Exchange, since August 2008. Ms. Wu holds a bachelor’s degree from Fudan University in China, a master’s degree from Brooklyn College at the City University of New York and an MBA degree from the J.L. Kellogg Graduate School of Management at Northwestern University.

Jason Zonghas served as our chief operating officer since January 2008. He served as our senior vice president of operations from October 2006 to December 2007. Mr. Zong has more than 10 years of consumer industry experience. From December 2004 to October 2006, Mr. Zong served as vice president of operations and east region general manager of China for B&Q (China) Ltd., a subsidiary of Kingfisher plc, the third largest home improvement retail group in the world. From June 2001 to December 2004, Mr. Zong served as vice president of operations for Lotus Supermarket Chain Store Co., Ltd. Mr. Zong holds a bachelor’s degree from Fudan University.

Rixin Lianghas served as our chief branding officer since January 2008. She served as our chief operating officer since the formation of Home Inns Beijing in April 2002 to December 2007. Prior to joining Home Inns, Ms. Liang was the vice president of the International Hotel Group, a subsidiary of BTG, from 1999 to 2002, during which she co-founded Jian Guo Inns, one of the earliest economy hotel brands in China, in 2000, and served as the general manager of Jian Guo Inns Beijing Ltd. from 2000 to 2002. Ms. Liang has worked in the hotel industry in China since 1972. She is a member of the Expert Committee of the China Hotel Association. Ms. Liang holds a bachelor’s degree from Capital Economics and Business University in China. She also attended the MBA program at Tsing-Hua University in China.

Min Baohas served as our director since March 2006. Mr. Bao has served as the vice president of BTG since July 2008. From February 2007 to July 2008, he was the assistant general manager of BTG. From February 2006 to February 2007, Mr. Bao was the general manager of BTG Hotel & Resorts Co., Ltd. From June 2002 to February 2006, he was the general manager of Beijing Chang Fu Gong Center Co., Ltd., a holding company that owns a hotel and residential and commercial properties. Prior to that, he served as the general manager of Beijing Xin Qiao Hotel Co., Ltd. Mr. Bao currently serves on the boards of Home Inns Beijing and Home Inns Hong Kong as well as the boards of several companies, including Poly Victory Investments Ltd., BTG Hotel & Resorts Co., Ltd., Beijing Jian Guo Hotel Co., Ltd., Beijing Peace Hotel Co., Ltd., Yue Xiu Hotel Co., Ltd. and Henan Xing Ya Jian Guo Hotel, all of which are China-based hotel companies.

James Jianzhang Liangis one of the co-founders of our company. He has served as our director since our inception. Mr. Liang co-founded Ctrip and has been a director of Ctrip since its inception and the chairman of its board of directors since August 2003. Mr. Liang also served as Ctrip’s chief executive officer from 2000 to January 2006. Prior to founding Ctrip, Mr. Liang held a number of technical and managerial positions with Oracle Corporation from 1991 to 1999 in the United States and China, including the head of the ERP consulting division of Oracle China from 1997 to 1999. Mr. Liang received his master’s and bachelor’s degrees from Georgia Institute of Technology. He also attended an undergraduate program at Fudan University in China.

Kenneth Gawhas served as our independent director since October 2006. Since 1999, Mr. Gaw has been a managing director of Pioneer Global Group Limited, a company listed on the Hong Kong Stock Exchange that primarily focuses on real estate and hotel investments in Hong Kong, Macau, China and South East Asia. Mr. Gaw is also a co-founder of Gateway Capital, a real estate investment and management company. Mr. Gaw currently serves on the boards of several companies, including Hong Kong Thailand Business Council, a non-profit organization, Dusit Thani Public Company Limited, a company that owns and operates hotels in Thailand, Gaw Capital Partners, a private equity fund and property developer and Japan Opportunities Fund II, a real estate fund investing in Japan. Mr. Gaw received a bachelor’s degree in applied mathematics and economics from Brown University in the United States.

Terry Yongmin Huhas served as our independent director since October 2006. Mr. Hu is a partner at FountainVest Partners (Asia) Limited, a China-focused private equity firm, and is also an advisory director of Temasek Holdings (HK) Limited, an investment company that focuses on private equity investments in China, where he served as a managing director from May 2005 to October 2007. Prior to joining Temasek Holdings in May 2005, Mr. Hu was a director at Credit Suisse (HK) Limited where he was responsible for its technology, media and telecommunications investment banking efforts in China. Before joining Credit Suisse in August 2004, Mr. Hu worked for a number of years at Bear Stearns Asia Limited where he last served as a vice president of investment banking and the chief representative of its Shanghai office. Mr. Hu received a bachelor’s degree in English language and literature from Fudan University in China.

Employment Agreements

We have entered into an employment agreement with each of our senior executive officers. We may terminate a senior executive officer’s employment for cause, at any time, without notice or remuneration, for certain acts of the officer, including, but not limited to, a conviction or plea of guilty to a felony, willful misconduct to our detriment or a failure to perform agreed duties. A senior executive officer may terminate his or her employment at any time without penalty if there is a material reduction in his or her authority, duties and responsibilities or if there is a material breach by us, provided that we are allowed to correct or cure within 30 days upon receipt of his or her written notice of intent to terminate on such basis. Furthermore, either we or an executive officer may terminate employment at any time without cause upon advance written notice to the other party. Each senior executive officer is entitled to certain benefits upon termination, including a severance pay equal to three months’ salary, if he or she resigns for certain specified good reasons or if we terminate his or her employment due to his or her incapacitation. We will indemnify an executive officer for his losses based on or related to his or her acts and decisions made in the course of his or her performance of duties within the scope of his or her employment.

Each senior executive officer has agreed to hold in strict confidence any trade secrets or technical secrets of our company. Each officer also agrees to comply with all material applicable laws and regulations related to his or her responsibilities at our company as well as all material written corporate and business policies and procedures of our company.

B.Compensation of Directors and Executive Officers

For the fiscal year ended December 31, 2008, we paid an aggregate of approximately RMB 5.5 million (US$0.8 million) in cash to our senior executive officers, and we did not pay any cash compensation to our non-executive directors.

Share Incentives

Option Plan. We adopted the Employee’s Stock Option Plan, or the Option Plan, in 2003 to attract and retain the best available personnel, provide additional incentives to employees, directors and consultants, and promote the success of our business. Our board of directors authorized the issuance of up to 4,784,226 ordinary shares upon exercise of awards granted under our Option Plan. We no longer grant options or other awards under the Option Plan as we now grant options and other awards under the 2006 Share Incentive Plan, or the 2006 Plan.

Plan Administration. Our board of directors, or a committee designated by our board or directors, administers the Option Plan. The committee or the full board of directors, as appropriate, determines the provisions and terms and conditions of each option grant.

Stock Option and Stock Purchase Right Agreements. Options and stock purchase rights granted under our Option Plan are evidenced by a stock option agreement or a stock purchase right agreement, as applicable, that sets forth the terms, conditions and limitations for each grant. In addition, the stock option agreement and the stock purchase right agreement also provide that securities granted are subject to a 180-day lock-up period following the effective date of a registration statement filed by us under the Security Act, if so requested by us or any representative of the underwriters in connection with any registration of the offering of any of our securities.

Eligibility. Employees, directors and consultants of our company or any of our related entities, which include our subsidiaries or any entities in which we hold a substantial ownership interest, are eligible for awards under the Option Plan.

Acceleration of Options upon Corporate Transactions. The outstanding options will terminate and accelerate upon occurrence of a change-of-control corporate transaction where the successor entity does not assume our outstanding options under the Option Plan. In such event, each outstanding option will become fully vested and immediately exercisable, and the transfer restrictions on the awards will be released and the repurchase or forfeiture rights will terminate immediately before the date of the change-of-control transaction provided that the grantee’s continuous service with us shall not be terminated before that date.

Term of the Options. The term of each option grant are stated in the applicable stock option agreement, provided that the term may not exceed 10 years from the date of the grant.

Vesting Schedule. In general, the plan administrator determines, or the stock option agreement specifies, the vesting schedule.

Transfer Restrictions. Options to purchase our ordinary shares may not be transferred in any manner by the optionee other than by will or the laws of succession and may be exercised during the lifetime of the optionee only by the optionee.

Termination of the Option Plan. Unless terminated earlier, the Option Plan will terminate automatically in 2013. Our board of directors has the authority to amend or terminate the Option Plan subject to shareholder approval to the extent necessary to comply with applicable law. However, no such action may (i) impair the rights of any optionee unless agreed by the optionee and the Option Plan administrator or (ii) affect the Option Plan administrator’s ability to exercise the powers granted to it under our Option Plan.

2006 Plan. In 2006, our board of directors and shareholders approved a new share incentive plan, the 2006 Plan. As of December 31, 2008, 2,827,400 shares were permitted to be issued upon exercise of awards granted under our 2006 Plan.

Types of Awards. The types of awards we may grant under our 2006 Plan include the following:

•

options to purchase our ordinary shares;

•

restricted shares, which may be subject to forfeiture, representing non-transferable ordinary shares;

•

restricted share units, which may be subject to forfeiture, representing the right to receive our ordinary shares at a specified date in the future;

•

share appreciation rights, which provide for payment to the grantee based upon increases in the price of our ordinary shares over a set base price; and

•

dividend equivalent rights, which represent the value of the dividends per share that we pay.

Awards may be designated in the form of ADSs instead of ordinary shares. If we designate an award in the form of ADSs, the number of shares issuable under the 2006 Plan will be adjusted to reflect a ratio of one ADS to two ordinary shares.

Eligibility. We may grant awards to employees, directors and consultants of our company or any of our related entities, which include our subsidiaries or any entities in which we hold a substantial ownership interest. However, we may grant options that are intended to qualify as incentive stock options, or ISOs, only to our employees and employees of our majority-owned subsidiaries.

Plan Administration. The compensation committee of our board of directors, or a committee designated by the compensation committee, will administer the 2006 Plan. However, with respect to awards made to our independent directors and executive officers, the entire board of directors will administer the 2006 Plan. The compensation committee or the full board of directors, as appropriate, will determine the individuals who will receive grants, the types of awards to be granted and terms and conditions of each award grant, including any vesting or forfeiture restrictions.

Award Agreement. Awards granted under our 2006 Plan will be evidenced by an award agreement that will set forth the terms, conditions and limitations for each award. In addition, in the case of options, the award agreement will also specify whether the option constitutes an ISO or a non-qualifying stock option.

Acceleration of Awards upon Corporate Transactions. The outstanding awards will accelerate upon occurrence of a change-of-control corporate transaction where the successor entity does not assume our outstanding awards under the 2006 Plan. In such event, each outstanding award will become fully vested and immediately exercisable, and the transfer restrictions on the awards will be released and any forfeiture provisions will terminate immediately before the date of the change-of-control transaction. If the successor entity assumes our outstanding awards and later terminates the grantee’s service without cause within 12 months of the change-of-control transaction, the outstanding awards will automatically become fully vested and exercisable.

Exercise Price and Term of Awards. In general, the plan administrator determines the exercise price of an award and sets forth the price in the award agreement. The exercise price may be fixed or variable price related to the fair market value of our ordinary shares. However, ISOs may not be granted to any individual if the fair market value of the shares underlying such ISOs that are exercisable in any calendar year exceeds US$100,000 or other limitations imposed by law. Also, if we grant an ISO to an employee, who, at the time of that grant, owns shares representing more than 10% of the voting power of all classes of our share capital, the exercise price cannot be less than 110% of the fair market value of our ordinary shares on the date of that grant.

The term of each award will be stated in the award agreement. The term of an award shall not exceed 10 years from the date of the grant, except that five years is maximum term of an ISO granted to an employee who holds more than 10% of the voting power of our share capital.

Amendment and Termination. Our board of directors may at any time amend, suspend or terminate the 2006 Plan. Amendments to the 2006 Plan are subject to shareholder approval to the extent required by law, or stock exchange rules or regulations. Additionally, shareholder approval will be specifically required to increase the number of shares available for issuance under the 2006 Plan or to extend the term of an option beyond ten years. Unless terminated earlier, the 2006 Plan will expire and no further awards may be granted after the tenth anniversary of the shareholder approval of the 2006 Plan.

The following table summarizes the options granted to our directors and executive officers and other individuals as a group as of March 31, 2009, without giving effect to options that were exercised or terminated.


	Options		Exercise Price					Date of
Name	Awarded		(US$/Share)			Date of Grant		Expiration
Yunxin Mei		150,000		2.72			3/17/2006		3/16/2011
		50,000		5.50			10/2/2006		10/1/2011
		7,500		17.395			4/20/2007		4/19/2012
		46,500		3.63	*		10/27/2008		10/26/2013
Neil Nanpeng Shen		100,000		0.3309			1/1/2005		12/31/2009
		150,000		2.72			3/17/2006		3/16/2011
		50,000		5.50			10/2/2006		10/1/2011
		7,500		17.395			4/20/2007		4/19/2012
		46,500		3.63	*		10/27/2008		10/26/2013
David Jian Sun		271,000		0.3309			1/1/2005		12/31/2009
		109,000		2.25			12/1/2005		11/30/2010
		70,000		2.72			3/17/2006		3/16/2011
		142,500		5.50			10/2/2006		10/1/2011
		30,000		17.395			4/20/2007		4/19/2012
		170,000		3.63	*		10/27/2008		10/26/2013
May Wu		300,000		1.53			3/1/2006		2/28/2011
		142,500		5.50			10/2/2006		10/1/2011
		26,000		17.395			4/20/2007		4/19/2012
		150,000		3.63	*		10/27/2008		10/26/2013
Jason Zong		200,000		5.50			10/2/2006		10/1/2011
		12,500		17.395			4/20/2007		4/19/2012
		101,500		3.63	*		10/27/2008		10/26/2013
Rixin Liang		158,858		0.232			3/1/2003		2/28/2008
		105,844		0.3309			3/1/2004		2/28/2009
		75,298		2.25			12/1/2005		11/30/2010
		10,000		16.64			12/26/2006		12/25/2011
		17,500		17.395			4/20/2007		4/19/2012
		130,500		3.63	*		10/27/2008		10/26/2013
Min Bao		70,000		2.72			3/17/2006		3/16/2011
		4,000		17.395			4/20/2007		4/19/2012
		24,000		3.63	*		10/27/2008		10/26/2013
James Jianzhang Liang		70,000		2.72			3/17/2006		3/16/2011
		4,000		17.395			4/20/2007		4/19/2012
		24,000		3.63	*		10/27/2008		10/26/2013
Kenneth Gaw		70,000		3.202			7/4/2006		7/3/2011
		4,000		17.395			4/20/2007		4/19/2012
		24,000		3.63	*		10/27/2008		10/26/2013
Terry Yongmin Hu		70,000		3.202			7/4/2006		7/3/2011
		4,000		17.395			4/20/2007		4/19/2012
		24,000		3.63	*		10/27/2008		10/26/2013
Other individuals as a group		4,787,662			*


*		On October 27, 2008, we cancelled the unvested portion of the options held by each of our option grantees and granted them new options that would entitle each of them to acquire the same number of our ordinary shares underlying the cancelled options at a new strike price, with a new vesting schedule beginning from October 27, 2008. The information in the above table gives effect to the cancellation of the unvested portion of the old options and grant of the new options to each of the directors and officers named in the table.

C.Board Practices

Our board of directors currently consists of seven directors. A director is not required to hold any shares in the company by way of qualification. A director may vote with respect to any contract, proposed contract or arrangement in which he is materially interested. A director may exercise all the powers of the company to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for any obligation of the company or of any third party.

In 2008, our board held meetings or passed resolutions by unanimous written consent nine times.

Committees of the Board of Directors

We have established two committees under the board of directors: the audit committee and the compensation committee. We currently do not plan to establish a nominating committee. The independent directors of our company will select and recommend to the board for nomination by the board such candidates as the directors, in the exercise of their judgment, have found to be well qualified and willing and available to serve as our directors prior to each annual meeting of our shareholders at which meeting directors are to be elected or re-elected. In addition, our board of directors has resolved that director nomination be approved by a majority of the board as well as a majority of the independent directors of the board. In compliance with Rule 5605(b)(1) of the Nasdaq Stock Market Marketplace Rules, all members of each of our board committees will be independent directors. We have adopted a charter for each of the board committees. Each committee’s members and functions are described below.

Audit Committee. Our audit committee consists of Messrs. James Jianzhang Liang, Kenneth Gaw and Terry Yongmin Hu. We have determined that all the members of our audit committee satisfy the “independence” requirements of Rule 10A-3 under the Securities Exchange Act of 1934, as amended, and Rule 5605(c)(2)(A) of Nasdaq Stock Market Marketplace Rules and all the members of our audit committee are “financial experts” as defined under Rule 5605(c)(2)(A) of Nasdaq Stock Market Marketplace Rules. The audit committee will oversee our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee will be responsible for, among other things:

•

selecting the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;

•

reviewing with the independent auditors any audit problems or difficulties and management’s response;

•

reviewing and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K under the Securities Act;

•

discussing the annual audited financial statements with management and the independent auditors;

•

reviewing major issues as to the adequacy of our internal control; and

•

meeting separately and periodically with management and the independent auditors.

In 2008, our audit committee held meetings or passed resolutions by unanimous written consent 10 times.

Compensation Committee.Our compensation committee consists of Messrs. Neil Nanpeng Shen, Kenneth Gaw and Terry Yongmin Hu. We have determined that all the members of our compensation committee satisfy the “independence” requirements of Rule 5605(d) of Nasdaq Stock Market Marketplace Rules. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee will be responsible for, among other things:

•

reviewing and approving the total compensation package for our three most senior executives;

•

reviewing and recommending to the board with respect to the compensation of our directors; and

•

reviewing periodically and approving any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.

In 2008, our compensation committee held meetings or passed resolutions by unanimous written consent twice.

Duties of Directors

Under Cayman Islands law, our directors have a duty of loyalty to act honestly in good faith with a view to our best interests. Our directors also have a duty to exercise the skill they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association.

Terms of Directors and Officers

Our officers are elected by and serve at the discretion of the board of directors. Our directors are not subject to a term of office and hold office until such time as they are removed from office by special resolution or the unanimous written resolution of all shareholders. A director will be removed from office automatically if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; or (ii) dies or is found by our company to be or becomes of unsound mind.

D.Employees

E.Share Ownership

The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of March 31, 2009 by:

•

each of our directors and executive officers; and

•

each person known to us to own beneficially more than 5% of our ordinary shares.


	Shares Beneficially Owned
	Number⁽¹⁾		%⁽²⁾
Directors and Executive Officers:
Neil Nanpeng Shen⁽³⁾		4,900,389		6.8
James Jianzhang Liang⁽⁴⁾		3,972,250		5.6
Rixin Liang⁽⁵⁾		679,218		*
David Jian Sun⁽⁶⁾		648,056		*
May Wu⁽⁷⁾		297,021		*
Yunxin Mei⁽⁸⁾		126,000		*
Min Bao⁽⁹⁾		49,850		*
Kenneth Gaw⁽¹⁰⁾		39,000		*
Terry Yongmin Hu⁽¹¹⁾		4,000		*
Jason Zong⁽¹²⁾		112,500		*
All Directors and Executive Officers as a Group⁽¹³⁾		10,828,284		15.0
Principal Shareholders:
Poly Victory Investments Limited⁽¹⁴⁾		13,805,809		19.3
Ctrip.com International, Ltd.⁽¹⁵⁾		6,187,720		8.7
Maverick Capital, Ltd.⁽¹⁶⁾		5,911,922		8.3
Yijun Liu⁽¹⁷⁾		5,176,660		7.2
Chung Lau⁽¹⁸⁾		3,915,750		5.5


*		Less than 1%.

(1)		Beneficial ownership is determined in accordance with the rules of the SEC and includes voting or investment owner with respect to the securities.

(2)		For each person and group included in this table, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group by the sum of (i) 71,413,780, which was the number of ordinary shares outstanding as of March 31, 2009, (ii) the number of restricted shares held by such person or group that will become vested within 60 days after March 31, 2009 and (iii) the number of ordinary shares underlying share options held by such person or group that are exercisable within 60 days after March 31, 2009.

(3)		Includes 3,955,389 ordinary shares and 350,000 ADSs representing 700,000 ordinary shares held by Max Wealth Enterprise Limited, a British Virgin Islands company solely owned and controlled Mr. Shen, and 245,000 ordinary shares issuable upon exercise of options held by Mr. Shen that are exercisable within 60 days after March 31, 2009. The business address of Mr. Shen is Suite 2215, Two Pacific Place, 88 Queensway Road, Hong Kong.


(4)		Includes 3,915,750 ordinary shares held by Ms. Lau, Mr. Liang’s wife, and 56,500 ordinary shares issuable upon exercise of options held by Mr. Liang that are exercisable within 60 days after March 31, 2009. Mr. Liang disclaims the beneficial ownership of all the shares held by his wife. The business address of Mr. Liang is Ctrip.com International, Ltd., 99 Fu Quan Road, Shanghai 2000335, People’s Republic of China.

(5)		Includes 651,718 ordinary shares held by Ms. Liang as well as 27,500 ordinary shares issuable upon exercise of options held by Ms. Liang that are exercisable within 60 days after March 31, 2009. Does not include 18,825 restricted shares that will not become vested within 60 days after March 31, 2009. The business address of Ms. Liang is No. 124, Caobao Road, Xuhui District, Shanghai 200235, People’s Republic of China.

(6)		Includes 494,306 ordinary shares held by Peace Unity Investments Limited, a company solely owned and controlled by Mr. Sun, as well as 153,750 ordinary shares issuable upon exercise of options held by Mr. Sun that are exercisable within 60 days after March 31, 2009. Does not include 27,250 restricted shares that will not become vested within 60 days after March 31, 2009. The business address of Mr. Sun is No. 124, Caobao Road, Xuhui District, Shanghai 200235, People’s Republic of China.

(7)		Includes 109,771 ordinary shares held by Ms. Wu and 90,000 ordinary shares held by Spring Crest Group Limited, which is controlled by Ms. Wu’s mother, Ruiwen Jin, as well as 97,250 ordinary shares issuable upon exercise of options held by Ms. Wu that are exercisable within 60 days after March 31, 2009. Does not include 75,000 restricted shares that will not become vested within 60 days after March 31, 2009. The business address of Ms. Wu is No. 124, Caobao Road, Xuhui District, Shanghai 200235, People’s Republic of China.

(8)		Includes 31,000 ordinary shares held by Mr. Mei and 95,000 ordinary shares issuable upon exercise of options held by Mr. Mei that are exercisable within 60 days after March 31, 2009. The business address of Mr. Mei is No.10 Yabao Road, Chaoyang District, Beijing 100020, People’s Republic of China.

(9)		Includes 10,850 ordinary shares held by Mr. Bao and 39,000 ordinary shares issuable upon exercise of options held by Mr. Bao that are exercisable within 60 days after March 31, 2009. The business address of Mr. Bao is No.10 Yabao Road, Chaoyang District, Beijing 100020, People’s Republic of China.

(10)		Includes 39,000 ordinary shares issuable upon exercise of options held by Mr. Gaw that are exercisable within 60 days after March 31, 2009. The business address of Mr. Gaw is 22nd Floor, 1 Lyndhurst Tower, No. 1 Lyndhurst Terrace, Central, Hong Kong.

(11)		Includes 4,000 ordinary shares issuable upon exercise of options held by Mr. Hu that are exercisable within 60 days after March 31, 2009. The business address of Mr. Hu is Suite 906 ICBC Tower, 3 Garden Road, Central, Hong Kong.

(12)		Includes 112,500 ordinary shares issuable upon exercise of options held by Mr. Zong that are exercisable within 60 days after March 31, 2009. The business address of Mr. Zong is No. 124, Caobao Road, Xuhui District, Shanghai 200235, People’s Republic of China.

(13)		Includes ordinary shares, restricted shares that will become vested within 60 days after March 31, 2009 and ordinary shares issuable upon exercise of all of the options that are exercisable within 60 days after March 31, 2009 held by all of our directors and senior executive officers as a group.

(14)		Poly Victory Investments Limited, a company incorporated in the British Virgin Islands, is beneficially owned by Beijing Tourism Group., which is a state-owned enterprise in China. Poly Victory Investment Limited’s registered office is at Palm Grove House, P.O. Box 432, Road Town, Tortola, British Virgin Islands.

(15)		Based on the Schedule 13D/A filed with the SEC on December 30, 2008. The ordinary shares are represented by 3,093,860 ADSs purchased by Ctrip and its wholly-owned subsidiary.

(16)		Based on the Schedule 13G filed with the SEC on February 17, 2009.

(17)		Based on the Schedule 13G filed with the SEC on February 17, 2009. In addition to convertible bonds convertible into 178,177 ADSs representing 356,354 ordinary shares beneficially owned by Mr. Liu, this also includes 2,323,865 ADSs representing 4,647,730 ordinary shares and convertible bonds convertible into 86,288 ADSs representing 172,576 ordinary shares that may also be deemed to be beneficially owned by Prime Capital Management Company (Cayman) Limited, Prime Capital Management Company Limited and Dragon Billion China Master Fund. Mr. Liu is the director of Prime Capital Management Company (Cayman) Limited and Prime Capital Management Company Limited and the fund manager of Dragon Billion China Master Fund; Prime Capital Management Company (Cayman) Limited and Prime Capital Management Company Limited are the investment manager and the investment adviser, respectively, of Dragon Billion China Master Fund. The business address of Prime Capital Management Company (Cayman) Limited and Dragon Billion China Master Fund is c/o Campbell Corporate Services Limited, 4th Floor, Scotia Centre, P.O. Box 268, George Town, Grand Cayman KY1-1104, Cayman Islands. The business address of Prime Capital Management Company Limited is Unit 2303, 23rd Floor, Low Block, Grand Millennium Plaza, 181 Queen’s Road Central, Hong Kong.

(18)		Ms. Lau is the wife of our director, James Jianzhang Liang. The address of Ms. Lau is c/o James Jianzhang Liang, Ctrip.com International, Ltd., 99 Fu Quan Road, Shanghai 2000335, People’s Republic of China.

None of our existing shareholders have different voting rights from other shareholders. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

As of March 31, 2009, we had 71,413,780 ordinary shares issued and outstanding. To our knowledge, we had only one record shareholder in the United States, The Bank of New York Mellon, which is the depositary of our ADS program and held approximately 66.9% of our total outstanding ordinary shares. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United States.

ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.Major Shareholders

Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”

B.Related Party Transactions

Private Placement

In June 2006, all of the then-existing shareholders of Home Inns Hong Kong exchanged their respective shares of Home Inns Hong Kong for an equivalent number of shares of Home Inns & Hotels Management Inc. of equivalent classes. As a result, Home Inns Hong Kong has become our wholly owned subsidiary.

In July 2006, we sold 2,834,037 ordinary shares in a private placement at a price of US$2.77 per share. The purchasers consisted of the following individuals: Neil Nanpeng Shen, one of our directors, who purchased 1,444,095 shares; Chung Lau, the spouse of one of our directors, James Jianzhang Liang, who purchased 722,048 shares; Min Fan, who purchased 361,024 shares; David Jian Sun, our chief executive officer, who purchased 111,556 shares; May Wu, our chief financial officer, who purchased 144,771 shares; and Rixin Liang, our then chief operating officer and current chief branding officer, who purchased 50,543 shares. The sale was approved by our board of directors and shareholders.

In conjunction with the transaction above, the purchasers and Qi Ji entered into an acting-in-concert agreement in July 2006, whereby they have agreed to act together on all matters requiring shareholder approval and to appoint one representative to vote on behalf of all of them at our shareholder meetings. This agreement expired in July 2007.

Shareholders’ Agreement

In connection with our reorganization in June 2006, we and our then existing shareholders entered into a shareholders agreement, which incorporates the principal terms of the previous shareholders agreements between Home Inns Hong Kong and our shareholders. Under this agreement, these shareholders are entitled to certain registration rights, including demand registration and Form F-3 or Form S-3 registration.

Transactions with BTG

BTG is the parent company of Beijing Capital Travel, which was a minority equity interest holder of Home Inns Beijing. It is also the parent company of Poly Victory, which is one of our principal shareholders. In addition to the transactions with BTG involving shares of Home Inns Hong Kong and Hong Inns Beijing as described above under “—Private Placement,” we have entered into the following transactions with BTG during the past three years.

Financing Transactions with BTG. In June 2005, Home Inns Hong Kong, Home Inns Beijing and BTG entered into a financing transaction agreement whereby BTG agreed to provide up to RMB 80 million (US$10 million) financing to Home Inns Beijing in the form of loans through a third-party commercial bank to facilitate the anticipated rapid expansion of the Home Inns hotel chain throughout China. We repaid all indebtedness to BTG in the first quarter of 2007.

Rental Payments to Jian Guo Inns. Jian Guo Inns Beijing Ltd., or Jian Guo Inns, is a subsidiary of BTG. Jian Guo Inns was the lessor of four leased-and-operated Home Inns hotels in 2003. Since 2004, Jian Guo Inns has been the lessor of three leased-and-operated Home Inns hotels. In 2006, 2007 and 2008, we paid RMB 3.5 million, RMB 2.8 million and RMB 2.8 million (US$0.4 million), respectively, to Jian Guo Inns as rental payments.

Acquisition of BTG’s Remaining 4.41% Stake in Home Inns Beijing. In July 2007, we acquired the remaining 4.41% stake in Home Inns Beijing from BTG, making Home Inns Beijing our wholly-owned subsidiary. We paid a total consideration consisting of RMB 60 million and 441,669 of our ordinary shares to BTG for the acquisition.

Transactions with Ctrip

Two of Ctrip’s directors, Neil Nanpeng Shen and James Jianzhang Liang, are also our directors. In addition, one of Ctrip’s directors, Qi Ji, was our director and chief executive officer from 2002 to January 2005, and another of Ctrip’s directors, Suyang Zhang, was our director from 2001 to 2006. Some of our customers book our hotel rooms through Ctrip and we pay sales commissions to Ctrip for such bookings. In 2006, 2007 and 2008, we paid RMB 6.0 million, RMB 8.9 million and RMB 14.8 million (US$2.2 million), respectively, to Ctrip as sales commissions.

During the period from September 12 to December 29, 2008, Ctrip and its wholly owned subsidiary purchased our ADSs on the open market representing an aggregate of 6,187,720 of our ordinary shares.

Employment Agreements

See “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—Employment Agreements” for a description of the employment agreements we have entered into with our senior executive officers.

Share Incentives

See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—Share Incentives” for a description of share options and stock purchase rights we have granted to our directors, officers and other individuals as a group.

C.Interests of Experts and Counsel

Not applicable.

ITEM 8. FINANCIAL INFORMATION

A.Consolidated Statements and Other Financial Information

We have appended consolidated financial statements filed as part of this annual report.

Legal and Administrative Proceedings

We are subject to legal proceedings, investigations and claims incidental to the conduct of our business from time to time. We are not currently a party to, nor are we aware of, any legal proceeding, investigation or claim which, in the opinion of our management, is likely to have a material adverse effect on our business, financial condition or results of operations.

Dividend Policy

We have no present plan to declare and pay any dividends on our shares or ADSs in the near future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

We are a holding company incorporated in the Cayman Islands. We rely on dividends from our subsidiaries in China. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our subsidiaries in China is required to set aside a certain amount of its accumulated after-tax profits each year, if any, to fund certain statutory reserves. These reserves may not be distributed as cash dividends. Further, if our subsidiaries in China incur debt on their own behalf, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us.

Our board of directors has complete discretion as to whether to distribute dividends, subject to the approval of our shareholders. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends, we will pay our ADS holders to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder.

B.Significant Changes

Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.

ITEM 9. THE OFFER AND LISTING

A.Offering and Listing Details

Market Price Information for our American Depositary Shares

Our ADSs, each representing two of our ordinary shares, have been listed on the Nasdaq Global Market since October 26, 2006. Our ADSs trade under the symbol “HMIN.”

The following table provides the high and low trading prices for our ADSs on the Nasdaq Global Market for each period indicated.


	Trading Price
	High		Low
	US$		US$
Annual Highs and Lows
2006 (from October 26, 2006)		39.02		21.50
2007		50.08		24.00
2008		36.00		7.00

Quarterly Highs and Lows
First Quarter 2007		49.50		33.74
Second Quarter 2007		37.39		28.26
Third Quarter 2007		36.96		24.00
Fourth Quarter 2007		50.08		30.63
First Quarter 2008		36.00		17.79
Second Quarter 2008		26.44		17.56
Third Quarter 2008		19.03		12.60
Fourth Quarter 2008		14.21		7.00
First Quarter 2009		11.11		7.50

Monthly Highs and Lows
2008
October		14.21		7.00
November		11.71		7.06
December		11.61		8.04
2009
January		11.11		7.50
February		9.15		7.65
March		10.44		7.60
April (through April 21)		14.43		9.37

B.Plan of Distribution

Not applicable.

C.Markets

Our ADSs, each representing two of our ordinary shares, have been listed on the Nasdaq Global Market since October 26, 2006 under the symbol “HMIN.”

D.Selling Shareholders

Not applicable.

E.Dilution

Not applicable.

F.Expenses of the Issue

Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A.Share Capital

Not applicable.

B.Memorandum and Articles of Association

We incorporate by reference into this annual report our amended and restated memorandum and articles of association filed as Exhibit 3.2 to our F-1 registration statement (File No. 333-137800), as amended, initially filed with the SEC on October 4, 2006.

C.Material Contracts

We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company” or elsewhere in this annual report on Form 20-F.

D.Exchange Controls

See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on Foreign Currency Exchange.”

E.Taxation

The following summary of the material Cayman Islands, Hong Kong, People’s Republic of China and United States federal income tax consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under state, local and other tax laws.

Cayman Islands Taxation

The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the Government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties. There are no exchange control regulations or currency restrictions in the Cayman Islands.

Hong Kong Taxation

Home Inns Hong Kong was subject to Hong Kong profit tax at a rate of 17.5% on its assessable profit. No Hong Kong profit tax has been assessed as we did not have assessable profit that was earned in or derived from Hong Kong during the years presented.

People’s Republic of China Taxation

Under the former Income Tax Law for Enterprises with Foreign Investment and Foreign Enterprises, any dividends payable by foreign-invested enterprises to non-PRC investors were exempt from any PRC withholding tax. In addition, any dividends payable, or distributions made, by us to holders or beneficial owners of our ADSs would not have been subject to any PRC tax, provided that such holders or beneficial owners, including individuals and enterprises, were not deemed to be PRC residents under the PRC tax law and had not become subject to PRC tax.

Under the new EIT law which became effective on January 1, 2008, enterprises established outside of China but whose “de facto management body” is located in China are considered “resident enterprises” for PRC tax purposes. Under the implementation regulations issued by the State Council relating to the new EIT law, “de facto management body” is defined as the organizational body that effectively exercises overall management and control over production and business operations, personnel, finance and accounting, and properties of the enterprise. Substantially all of our management is currently based in China, and may remain in China in the future. If we are treated as a “resident enterprise” for PRC tax purposes, we will be subject to PRC income tax on our worldwide income at a uniform tax rate of 25%. In addition, the new EIT law provides that dividend income between “resident enterprises” is exempted from income tax.

Moreover, the new EIT law provides that an income tax rate of 10% is normally applicable to dividends payable to non-PRC investors who are “non-resident enterprises,” to the extent such dividends are derived from sources within China. We are a Cayman Islands holding company and substantially all of our income is derived from sources within China. Thus, dividends paid to us by our subsidiaries in China may be subject to the 10% income tax if we are considered as a “non-resident enterprise” under the new EIT law.

Under the existing implementation regulations of the new EIT Law, foreign ADS holders may be subject to a 10% withholding tax upon dividends payable by us and gains realized on their sales or other dispositions of our ADSs or ordinary shares, if such income is sourced from within the PRC. Although Home Inns & Hotels Management Inc. is incorporated in the Cayman Islands, it remains unclear whether the gains our foreign ADS holders may realize will be regarded as income from sources within the PRC if we are classified as a PRC resident enterprise. In addition, it is possible that these rules may change in the future, possibly with retroactive effect.

United States Federal Income Taxation

The following discussion describes the material U.S. federal income tax consequences to U.S. Holders (defined below) under present law of an investment in the ADSs or ordinary shares. This summary applies only to investors that hold the ADSs or ordinary shares as capital assets and that have the U.S. dollar as their functional currency. This discussion is based on the tax laws of the United States as in effect on the date of this annual report and on U.S. Treasury regulations in effect or, in some cases, proposed, as of the date of this annual report, as well as judicial and administrative interpretations thereof available on or before such date. All of the foregoing authorities are subject to change, which change could apply retroactively and could affect the tax consequences described below.

The following discussion does not deal with the tax consequences to any particular investor or to persons in special tax situations such as:

•

banks;

•

certain financial institutions;

•

regulated investment companies;

•

real estate investment trusts;

•

insurance companies;

•

broker dealers;

•

U.S. expatriates;

•

traders that elect to mark to market;

•

tax-exempt entities;

•

persons liable for alternative minimum tax;

•

persons holding an ADS or ordinary share as part of a straddle, hedging, constructive sale, conversion or integrated transaction;

•

persons that actually or constructively own 10.0% or more of our voting stock;

•

persons who acquired ADSs or ordinary shares pursuant to the exercise of any employee share option or otherwise as compensation; or

•

persons holding ADSs or ordinary shares through partnerships or other pass-through entities for U.S. federal income tax purposes.

U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS ABOUT THE APPLICATION OF THE U.S. FEDERAL TAX RULES TO THEIR PARTICULAR CIRCUMSTANCES AS WELL AS THE STATE AND LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ADSs OR ORDINARY SHARES.

The discussion below of the U.S. federal income tax consequences to “U.S. Holders” will apply if you are a beneficial owner of ADSs or ordinary shares and you are, for U.S. federal income tax purposes,

•

an individual who is a citizen or resident of the United States;

•

a corporation (or other entity taxable as a corporation) organized under the laws of the United States, any State or the District of Columbia;

•

an estate whose income is subject to U.S. federal income taxation regardless of its source; or

•

a trust that (1) is subject to the supervision of a court within the United States and the control of one or more U.S. persons or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.

If you are a partner in partnership or other entity taxable as a partnership that holds ADSs or ordinary shares, your tax treatment generally will depend on your status and the activities of the partnership.

The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement will be complied with in accordance with their terms. If you hold ADSs, you should be treated as the holder of the underlying ordinary shares represented by those ADSs for U.S. federal income tax purposes. Accordingly, deposits or withdrawals of ordinary shares for ADSs will not be subject to U.S. federal income tax.

The U.S. Treasury has expressed concerns that parties to whom ADSs are pre-released may be taking actions that are inconsistent with the claiming, by U.S. Holders of ADSs, of foreign tax credits for U.S. federal income tax purposes. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain non-corporate U.S. Holders, as described below. Accordingly, the availability of the reduced tax rate for dividends received by certain non-corporate U.S. Holders could be affected by future actions that may be taken by the U.S. Treasury or parties to whom ADSs are pre-released.

Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares

Subject to the passive foreign investment company rules discussed below, the gross amount of all our distributions to you with respect to the ADSs or ordinary shares generally will be included in your gross income as ordinary dividend income on the date of actual or constructive receipt by the depositary, in the case of ADSs, or by you, in the case of ordinary shares, but only to the extent that the distribution is paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). To the extent that the amount of the distribution exceeds our current and accumulated earnings and profits, it will be treated first as a tax-free return of your tax basis in your ADSs or ordinary shares, and to the extent the amount of the distribution exceeds your tax basis, the excess will be taxed as capital gain. As we do not maintain records of earnings and profits in accordance with U.S. Federal income tax principles, U.S. Holders should expect that the full amount of any distribution will be reported as dividend. The dividends will not be eligible for the dividends-received deduction allowed to corporations in respect of dividends received from other U.S. corporations.

With respect to non-corporate U.S. Holders including individual U.S. Holders, for taxable years beginning before January 1, 2011, dividends may constitute “qualified dividend income” that is taxed at the lower applicable capital gains rate provided that (1) the ADSs or ordinary shares, as applicable, are readily tradable on an established securities market in the United States or we are eligible for the benefit of the income tax treaty between the United States and the PRC, (2) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend was paid or the preceding taxable year, and (3) certain holding period requirements are met. Under Internal Revenue Service authority, ordinary shares, or ADSs representing such shares, are considered for the purpose of clause (1) above to be readily tradable on an established securities market in the United States if they are listed on the Nasdaq Global Market, as our ADSs are (but not our ordinary shares). Thus, we do not believe that dividends that we pay on our ordinary shares that are not backed by ADSs currently meet the conditions required for these reduced tax rates. There can be no assurance that our ADSs will be considered readily tradable on an established securities market in later years. You should consult your tax advisors regarding the availability of the lower rate for dividends paid with respect to our ADSs or ordinary shares.

Dividends will constitute foreign source income for foreign tax credit limitation purposes. If the dividends are qualified dividend income (as discussed above), the amount of the dividend taken into account for purposes of calculating the foreign tax credit limitation generally will be limited to the gross amount of the dividend, multiplied by the reduced rate divided by the highest rate of tax normally applicable to dividends. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by us with respect to the ADSs or ordinary shares generally will constitute “passive category income” or, in the case of certain U.S. Holders, constitute “general category income.” Subject to certain conditions and limitations, any PRC withholding taxes on dividends may be treated as foreign taxes eligible for credit against your U.S. federal income tax liability. U.S. Holders should consult their tax advisors regarding the creditability of any PRC tax.

Taxation of Disposition of ADSs or Ordinary Shares

Subject to the passive foreign investment company rules discussed below, you will recognize taxable gain or loss on any sale, exchange or other taxable disposition of an ADS or ordinary share equal to the difference between the amount realized for the ADS or ordinary share and your tax basis in the ADS or ordinary share. The gain or loss generally will be capital gain or loss. If you are a non-corporate U.S. Holder, including an individual U.S. Holder, who has held the ADS or ordinary share for more than one year, you will be eligible for reduced tax rates. The deductibility of capital losses is subject to limitations. Any such gain or loss that you recognize generally will be treated as U.S. source income or loss for foreign tax credit limitation purposes. However, in the event we are deemed to be a Chinese resident enterprise under PRC tax law, we may be eligible for the benefits of the income tax treaty between the United States and the PRC. In such event, if PRC tax were to be imposed on any gain from the disposition of the ADSs or ordinary shares, a U.S. Holder that is eligible for the benefits of the income tax treaty between the United States and the PRC may elect to treat such gain as PRC source income. U.S. Holders should consult their tax advisors regarding the creditability of any PRC tax.

Passive Foreign Investment Company

Based on the price of our ADSs and ordinary shares and the composition of our income and assets, we believe that we were not a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for our taxable year ending December 31, 2008. However, the application of the PFIC rules is subject to ambiguity in several aspects and, in addition, we must make a separate determination each year as to whether we are a PFIC (after the close of each taxable year). Accordingly, we cannot assure you that we will not be a PFIC for our current taxable year ending December 31, 2009 or any future taxable year. A non-U.S. corporation is considered to be a PFIC for any taxable year if either:

•

at least 75% of its gross income is passive income (the “income test”), or

•

at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income (the “asset test”).

We will be treated as owning our proportionate share of the assets and earning our proportionate share of the income of any other corporation in which we own, directly or indirectly, 25% or more (by value) of the stock.

We must make a separate determination each year as to whether we are a PFIC. As a result, our PFIC status may change. In particular, because the total value of our assets for purposes of the asset test generally will be calculated using the market price of our ADSs and ordinary shares, our PFIC status will depend in large part on the market price of our ADSs and ordinary shares, which may fluctuate considerably. Accordingly, fluctuations in the market price of the ADSs and ordinary shares may result in our being a PFIC for any year. In addition, the composition of an income or assets will be affected by how, and how quickly, we spend the cash we raise in any offering. If we are a PFIC for any year during which you hold ADSs or ordinary shares, we generally will continue to be treated as a PFIC for all succeeding years during which you hold ADSs or ordinary shares. However, if we cease to be a PFIC, you may avoid some of the adverse effects of the PFIC regime by making a deemed sale election with respect to the ADSs or ordinary shares, as applicable. If we are a PFIC for any taxable year and any of our foreign subsidiaries is also a PFIC, a U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. You are urged to consult your tax advisors about the application of the PFIC rules to any of our subsidiaries.

If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, you will be subject to special tax rules with respect to any “excess distribution” that you receive and any gain you realize from a sale or other disposition (including a pledge) of the ADSs or ordinary shares, unless you make a “mark-to-market” election as discussed below. Distributions you receive in a taxable year that are greater than 125% of the average annual distributions you received during the shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as an excess distribution. Under these special tax rules:

•

the excess distribution or gain will be allocated ratably over your holding period for the ADSs or ordinary shares,

•

the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we became a PFIC, will be treated as ordinary income, and

•

the amount allocated to each other year will be subject to the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year.

The tax liability for amounts allocated to years prior to the year of disposition or “excess distribution” cannot be offset by any net operating losses for such years, and gains (but not losses) realized on the sale of the ADSs or ordinary shares cannot be treated as capital, even if you hold the ADSs or ordinary shares as capital assets.

If a company that is a PFIC provides certain information to U.S. Holders, a U.S. Holder can then avoid certain adverse tax consequences described above by making a “qualified electing fund” election to be taxed currently on its proportionate share of the PFIC’s ordinary income and net capital gains. However, we do not intend to prepare or provide the information that would enable you to make a qualified electing fund election.

Alternatively, a U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market election with respect to such stock to elect out of the tax treatment discussed above. If you make a valid mark-to-market election for the ADSs or ordinary shares, you will include in income each year an amount equal to the excess, if any, of the fair market value of the ADSs or ordinary shares as of the close of your taxable year over your adjusted basis in such ADSs or ordinary shares. You are allowed a deduction for the excess, if any, of the adjusted basis of the ADSs or ordinary shares over their fair market value as of the close of the taxable year. However, deductions are allowable only to the extent of any net mark-to-market gains on the ADSs or ordinary shares included in your income for prior taxable years. Amounts included in your income under a mark-to-market election, as well as gain on the actual sale or other disposition of the ADSs or ordinary shares, are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the ADSs or ordinary shares, as well as to any loss realized on the actual sale or disposition of the ADSs or ordinary shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such ADSs or ordinary shares. Your basis in the ADSs or ordinary shares will be adjusted to reflect any such income or loss amounts. If you make such an election, the tax rules that apply to distributions by corporations that are not PFICs would apply to distributions by us, except that the lower applicable capital gains rate discussed above under “—Taxation of Dividends and Other Distributions on the ADSs or Ordinary Shares” would not apply.

The mark-to-market election is available only for “marketable stock,” which is stock that is traded in other than de minimis quantities on at least 15 days during each calendar quarter (“regularly traded”) on a qualified exchange or other market, as defined in applicable U.S. Treasury regulations. The Nasdaq Global Market is a qualified exchange and, consequently, provided that the ADSs continue to be listed on the Nasdaq Global Market and are regularly traded, if you are a holder of ADSs, the mark-to-market election would be available to you were we to be a PFIC.

If you hold ADSs or ordinary shares in any year in which we are a PFIC, you will be required to file Internal Revenue Service Form 8621 regarding distributions received on the ADSs or ordinary shares and any gain realized on the disposition of the ADSs or ordinary shares.

You are urged to consult your tax advisor regarding the application of the PFIC rules to your investment in ADSs or ordinary shares.

Information Reporting and Backup Withholding

Dividend payments with respect to ADSs or ordinary shares and proceeds from the sale, exchange or redemption of ADSs or ordinary shares may be subject to information reporting to the Internal Revenue Service and possible U.S. backup withholding at a current rate of 28%. Backup withholding will not apply, however, to a U.S. Holder who furnishes a correct taxpayer identification number and makes any other required certification or who is otherwise exempt from backup withholding. U.S. Holders who are required to establish their exempt status generally must provide such certification on Internal Revenue Service Form W-9. U.S. Holders should consult their tax advisors regarding the application of the U.S. information reporting and backup withholding rules.

Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against your U.S. federal income tax liability, and you may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim for refund with the Internal Revenue Service and furnishing any required information.

F.Dividends and Paying Agents

Not applicable.

G.Statement by Experts

Not applicable.

H.Documents on Display

We have filed with the SEC registration statements on Form F-1, including relevant exhibits and securities under the Securities Act with respect to underlying ordinary shares represented by the ADSs. We have also previously filed with the SEC our registration statement on Form F-3, as amended, and a prospectus under the Securities Act with respect to 655,830 ordinary shares held by a shareholder.

We are subject to the periodic reporting and other informational requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F no later than six months after the close of each fiscal year, which is December 31. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the Securities and Exchange Commission at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site atwww.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.

We will furnish The Bank of New York, the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.

I.Subsidiary Information

For a listing of our subsidiaries, see “Item 4. Information on the Company—C. Organizational Structure.”

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to interest rate risk primarily relates to the interest rates for our outstanding debt and the interest income generated by excess cash invested in liquid investments with original maturities of three months or less. Other than our convertible bonds, we did not have any outstanding loans as of March 31, 2009. We have not used any derivative financial instruments to manage our interest risk exposure. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates. However, our future interest income may be lower than expected due to changes in market interest rates.

Foreign Exchange Risk

Substantially all of our revenues and most of our expenses are denominated in RMB. Our exposure to foreign exchange risk primarily relates to cash and cash equivalent denominated in U.S. dollars as a result of our proceeds from our public offerings and our convertible bond offering. For every 1% that the U.S. dollar appreciates or depreciates against the RMB, the value of our U.S. dollar-denominated cash and cash equivalents in RMB terms would rise or fall in value by RMB 1.5 million. We have not hedged exposures denominated in foreign currencies or any other derivative financial instruments. Although in general, our exposure to foreign exchange risks should be limited, the value of your investment in our ADSs will be affected by the foreign exchange rate between U.S. dollars and RMB because the value of our business is effectively denominated in RMB, while the ADSs will be traded in U.S. dollars.

The value of the Renminbi against the U.S. dollar, Euro and other currencies is affected by, among other things, changes in China’s political and economic conditions and China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar. Under the new policy, the Renminbi was permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. This change in policy caused the Renminbi to appreciate approximately 21.5% against the U.S. dollar over the following three years. Since reaching a high against the U.S. dollar in July 2008, however, the Renminbi has traded within a narrow band against the U.S. dollar, remaining within 1% of its July 2008 high but never exceeding it. It is difficult to predict how long the current situation may last and when and how it may change again.

We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency exchange risk.

Inflation

Inflation in China has not materially impacted our results of operations in recent years. According to the National Bureau of Statistics of China, the change of consumer price index in China was 1.5%, 4.8% and 5.9% in 2006, 2007 and 2008, respectively.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

None.

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

Not applicable.

ITEM 15. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures within the meaning of Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered by this report. Based on such evaluation, our management has concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures were effective.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) under the Exchange Act. Our management evaluated the effectiveness of our internal control over financial reporting based on criteria established in the framework inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial reporting was effective as of December 31, 2008.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness of our internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

Our independent registered public accounting firm, PricewaterhouseCoopers Zhong Tian CPAs Limited Company, has audited the effectiveness of our internal control over financial reporting as of December 31, 2008, as stated in its report, which appears on page F-2 of this annual report on Form 20-F.

Attestation Report of the Registered Public Accounting Firm

See the consolidated financial statements of Home Inns & Hotels Management Inc., which are included at the end of this annual report.

Changes in Internal Control

There were no significant changes in internal control for the year ended December 31, 2008.

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

Our board of directors has determined that James Jianzhang Liang, Kenneth Gaw and Terry Yongmin Hu, all of whom are members of our audit committee and independent directors, are audit committee financial experts.

ITEM 16B. CODE OF ETHICS

Our board of directors has adopted a code of ethics that applies to our directors, officers, employees and agents, including certain provisions that specifically apply to our chief executive officer, chief financial officer, chief operating officer, chief technology officer, vice presidents and any other persons who perform similar functions for us. We have filed our code of business conduct and ethics as an exhibit to our registration statement on Form F-1 (No. 333-137800).

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by PricewaterhouseCoopers Zhong Tian CPAs Limited Company, our principal external auditors, for the periods indicated. We did not pay any other fees to our auditors during the periods indicated below.


	For the Year Ended
	December 31,
	2006		2007		2008
	(in thousands of RMB)
Audit fees⁽¹⁾		10,310		7,202		7,315
Audit-related fees⁽²⁾		3,246		4,546		—
Tax fees		—		—		—
All other fees		—		—		—


(1)		“Audit fees” means the aggregate fees billed for professional services rendered by our principal auditors for the audit of our annual financial statements and the review of our comparative interim financial statements.

(2)		“Audit related fees” represents aggregate fees billed for professional services rendered by our principal auditors for the assurance and related services, which mainly included the review of registration documents in connection with our initial public offering in 2006, our additional public offering and our convertible bond offering in 2007.

The policy of our audit committee is to pre-approve all audit and non-audit services provided by PricewaterhouseCoopers Zhong Tian CPAs Limited Company, including audit services, audit-related services, tax services and other services as described above, other than those forde minimus services which are approved by the Audit Committee prior to the completion of the audit.

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable.

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

None.

ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

Not applicable.

ITEM 16G. CORPORATE GOVERNANCE

Nasdaq Marketplace Rule 5250(d)(1) requires each issuer to distribute to shareholders copies of an annual report containing audited financial statements of the company and its subsidiaries. It further requires that the report be distributed to shareholders a reasonable period of time prior to the company’s annual meeting of shareholders and that it be filed with Nasdaq at the time it is distributed to shareholders. Nasdaq Marketplace Rule 5620(a) requires each issuer to hold an annual meeting of shareholders no later than one year after the end of the issuer’s fiscal year-end. Nasdaq Marketplace Rule 5635(c) and IM-5635-1 require each issuer to seek shareholder approval for any material amendments to the issuer’s equity compensation plans or other equity compensation arrangements, including a repricing of outstanding options. However, Nasdaq Marketplace Rule 5615(a)(3) permits foreign private issuers like us to follow “home country practice” in certain corporate governance matters.

Maples and Calder, our Cayman Islands counsel, has provided a letter to the Nasdaq Stock Market certifying that under Cayman Islands law, we are not required to hold annual shareholder meetings. We followed home country practice with respect to annual meetings and did not hold an annual shareholder meeting in 2008. We may hold annual shareholder meetings in the future if there are significant issues that require shareholder approval.

Maples and Calder has also provided a letter to the Nasdaq Stock Market certifying that under Cayman Islands law, we are not required to seek shareholder approval for amendments to our existing equity incentive plans or arrangements. We followed home country practice with respect to certain equity incentive arrangements with our option grantees. In October 2008, we cancelled the unvested portion of the options of each of our option grantees and issued them new options for the same number of underlying ordinary shares, with new vesting schedules and a reduced strike price.

Other than the above, we have followed and intend to continue to follow the applicable corporate governance standards under Nasdaq Marketplace Rules.

In accordance with Nasdaq Marketplace Rule 5250(d)(1), we will post this annual report on Form 20-F on our company website english.homeinns.com. In addition, we will provide hardcopies of our annual report free of charge to shareholders and ADS holders upon request.

PART III

ITEM 17. FINANCIAL STATEMENTS

We have elected to provide financial statements pursuant to Item 18.

ITEM 18. FINANCIAL STATEMENTS

The consolidated financial statements of Home Inns & Hotels Management Inc. are included at the end of this annual report.

ITEM 19. EXHIBITS


Exhibit
Number			Description of Document

	1.1		Amended and Restated Memorandum and Articles of Association (incorporated by reference to Exhibit 3.2 from our F-1 registration statement (File No. 333-142190), as amended, initially filed with the SEC on April 18, 2007)

	2.1	*	Indenture, dated December 10, 2007, constituting RMB 1,110,000,000 USD Settled Zero Coupon Convertible Senior Bonds due December 10, 2012

	4.1		Employment Agreement between the Registrant and James Zong (incorporated by reference to Exhibit 4.1 of our annual report on Form 20-F (File No. 001-33082) filed with the SEC on April 18, 2008)

	4.2		Agreement for the Sale and Purchase of Hong Kong AI Home Hotel Investment Limited dated October 21, 2007 (incorporated by reference to Exhibit 4.2 of our annual report on Form 20-F (File No. 001-33082) filed with the SEC on April 18, 2008)

	4.3		English translation of Agreement for the Sale and Purchase of Shanghai Chuwen Holding Investment Ltd. dated October 21, 2007 (incorporated by reference to Exhibit 4.3 of our annual report on Form 20-F (File No. 001-33082) filed with the SEC on April 18, 2008)

	8.1	*	Subsidiaries of the Registrant

	9.1		Shareholders agreement, dated June 29, 2006 (incorporated by reference to Exhibit 4.8 from our F-1 registration statement (File No. 333-142190), as amended, initially filed with the SEC on April 18, 2007)

	11.1		Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 from our F-1 registration statement (File No. 333-137800), as amended, initially filed with the SEC on October 4, 2006)

	12.1	*	CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	12.2	*	CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	13.1	*	CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	13.2	*	CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	23.1	*	Consent of Maples and Calder

	23.2	*	Consent of PricewaterhouseCoopers Zhong Tian CPAs Limited Company


*		Filed with this Annual Report on Form 20-F.

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.


HOME INNS & HOTELS MANAGEMENT INC.

By:	/s/ David Jian Sun

	Name:	David Jian Sun
	Title:	Director and Chief Executive Officer

Date: April 24, 2009

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

HOME INNS & HOTELS MANAGEMENT INC.


	Page

Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm		F-2

Consolidated Statements of Operations for the Years Ended December 31, 2006, 2007 and 2008		F-3

Consolidated Balance Sheets as of December 31, 2007 and 2008		F-4

Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2006, 2007 and 2008		F-6

Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2007 and 2008		F-8

Notes to the Consolidated Financial Statements		F-10

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Home Inns & Hotels Management Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Home Inns & Hotels Management Inc. (the “Company”) and its subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established inInternal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing in Item 15 of the accompanying Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our audits (which were integrated audits in 2008 and 2007). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers Zhong Tian CPAs Limited Company
PricewaterhouseCoopers Zhong Tian CPAs Limited Company

Shanghai, the People’s Republic of China

April 24, 2009

F-2

HOME INNS & HOTELS MANAGEMENT INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)


	Note			2006			2007			2008			2008
													US$ thousands
													(Note 2(d))
Revenues:
Leased-and-operated hotels					567,895			963,050			1,771,762			259,694
Franchised-and-managed hotels					20,605			46,266			99,779			14,625

Total revenues					588,500			1,009,316			1,871,541			274,319
Less: Business tax and related surcharges					(33,977	)		(60,302	)		(111,870	)		(16,397	)
Net revenues					554,523			949,014			1,759,671			257,922
Operating costs and expenses:
Leased-and-operated hotel costs —
Rents and utilities					(171,576	)		(299,792	)		(643,694	)		(94,349	)
Personnel costs					(87,981	)		(155,611	)		(337,837	)		(49,518	)
Depreciation and amortization					(44,619	)		(85,600	)		(190,698	)		(27,951	)
Consumables, food and beverage					(43,482	)		(84,053	)		(143,555	)		(21,041	)
Others					(56,019	)		(98,644	)		(182,284	)		(26,718	)

Total leased-and-operated hotel costs					(403,677	)		(723,700	)		(1,498,068	)		(219,577	)
Sales and marketing expenses					(11,488	)		(19,632	)		(27,161	)		(3,981	)
General and administrative expenses					(64,793	)		(99,026	)		(152,648	)		(22,374	)

Total operating costs and expenses					(479,958	)		(842,358	)		(1,677,877	)		(245,932	)

Income from operations					74,565			106,656			81,794			11,990

Interest income					6,578			31,717			32,023			4,694
Interest expense					(6,143	)		(7,168	)		(28,136	)		(4,124	)
Gain on buy-back of convertible bond		11			—			—			103,291			15,140
Other non-operating income	2		(aa)		5,309			8,434			10,971			1,608
Foreign exchange loss, net		2	(c)		(6,990	)		(53,221	)		(65,524	)		(9,604	)

Income before income tax expense and minority interests					73,319			86,418			134,419			19,704
Income tax expense		5			(21,391	)		(45,035	)		(28,107	)		(4,120	)
Minority interests					(5,034	)		(5,627	)		(5,087	)		(746	)

Net income					46,894			35,756			101,225			14,838

Amount allocated to participating preference shareholders					(16,174	)		—			—			—

Net income available to ordinary shareholders					30,720			35,756			101,225			14,838

Earnings per share		14
— Basic					0.86			0.52			1.43			0.21

— Diluted					0.82			0.47			0.04			0.01

Weighted average ordinary shares outstanding
— Basic					35,550,114			68,323,370			70,863,336			70,863,336

— Diluted					37,530,332			76,883,995			78,037,433			78,037,433

Share-based compensation expense was included in the statement of operations as follows:
Leased-and-operated hotel costs — Personnel costs					12			11			11			2
General and administrative expenses					16,283			15,060			24,833			3,640

The accompanying notes are an integral part of these consolidated financial statements.

F-3

HOME INNS & HOTELS MANAGEMENT INC.

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 2007 AND 2008

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)


	Note			2007		2008		2008
								US$ thousands
								(Note 2(d))
ASSETS
Current assets:
Cash and cash equivalents					1,562,600		608,445		89,182
Restricted cash					173,849		—		—
Short-term investment		3			—		100,000		14,657
Accounts receivable		2	(h)		16,913		23,263		3,410
Receivables from related parties		15			1,372		1,617		237
Consumables					18,992		26,885		3,941
Prepayments and other current assets, net of allowance		4, 2	(h)		61,927		63,904		9,370
Deferred tax assets, current		5			16,574		41,824		6,130

Total current assets					1,852,227		865,938		126,927

Property and equipment, net		6			1,147,682		1,950,900		285,951
Goodwill		7			397,778		390,882		57,293
Intangible assets, net		8			46,739		44,977		6,592
Other assets					68,088		33,177		4,863
Deferred tax assets, non-current		5			49,024		77,580		11,371

Total assets					3,561,538		3,363,454		492,997

LIABILITIES
Current liabilities:
Accounts payable					13,007		22,438		3,289
Payables to related parties		15			6,651		6,668		977
Short-term borrowings		9			269,000		—		—
Salaries and welfare payable					48,260		69,635		10,207
Income tax payable					43,083		52,458		7,689
Other taxes payable					8,901		12,691		1,860
Deferred revenues					23,807		38,082		5,582
Accruals for customer reward program		2	(p)		5,439		8,587		1,259
Other unpaid and accruals		10			36,570		52,220		7,654
Other payables		10			350,204		376,739		55,220

Total current liabilities					804,922		639,518		93,737

The accompanying notes are an integral part of these consolidated financial statements.

F-4

HOME INNS & HOTELS MANAGEMENT INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 2007 AND 2008

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)


	Note		2007		2008		2008
							US$ thousands
							(Note 2(d))
Deferred rental				94,226		136,825		20,055
Deferred revenues, non-current				14,031		22,697		3,327
Long-term loan		9		18,036		—		—
Deposits from franchised-and-managed hotels				—		13,741		2,014
Unfavorable lease liability				19,894		16,017		2,348
Convertible bond		11		1,110,308		895,696		131,286
Deferred tax liability, non-current		5		13,637		12,279		1,800

Total liabilities				2,075,054		1,736,773		254,567

Minority interest				11,087		19,073		2,796
Commitments and contingencies		16
Shareholders’ equity
Ordinary shares (US$0.005 par value; 200,000,000 shares authorized, 70,487,385 and 71,212,795 shares issued and outstanding as of December 31, 2007 and 2008, respectively)		12		2,874		2,899		425
Additional paid-in capital				1,362,942		1,393,903		204,310
Statutory reserves				41,333		49,994		7,328
Retained earnings				68,248		160,812		23,571

Total shareholders’ equity				1,475,397		1,607,608		235,634

Total liabilities and shareholders’ equity				3,561,538		3,363,454		492,997

The accompanying notes are an integral part of these consolidated financial statements.

F-5

HOME INNS & HOTELS MANAGEMENT INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)


	Preferred Shares																						Additional					Deferred						Total
	Series A						Series B						Series C						Ordinary shares				paid-in			Statutory		share-based			Retained			share-holders’
	Shares			Amount			Shares			Amount			Shares			Amount			Shares		Amount		capital			reserves		compensation			earnings			equity
Balance as of January 1, 2006		17,241,400			714			2,417,645			100			3,265,841			135			27,399,140		1,134		152,879			11,360		(2,810	)		15,571			179,083

Adjustment as a result of adoption of SFAS No.123(R) (Note 2(v))		—			—			—			—			—			—			—		—		(2,810	)		—		2,810			—			—
Issuance of ordinary shares in a private placement(Note 12)		—			—			—			—			—			—			2,834,037		113		72,369			—		—			—			72,482
Issuance of ordinary shares in an initial public offering (Note 12)		—			—			—			—			—			—			11,748,474		463		580,789			—		—			—			581,252
Conversion of convertible preferred shares to ordinary shares (Note 12)		(17,241,400	)		(714	)		(2,417,645	)		(100	)		(3,265,841	)		(135	)		22,924,886		949		—			—		—			—			—
Exercise of stock purchase right (Note 13)		—			—			—			—			—			—			806,302		32		6,579			—		—			—			6,611
Net income		—			—			—			—			—			—			—		—		—			—		—			46,894			46,894
Recognition of share-based compensation costs		—			—			—			—			—			—			—		—		3,416			—		—			—			3,416
Appropriations to statutory reserves		—			—			—			—			—			—			—		—		—			12,054		—			(12,054	)		—


Balance as of December 31, 2006		—			—			—			—			—			—			65,712,839		2,691		813,222			23,414		—			50,411			889,738

The accompanying notes are an integral part of these consolidated financial statements.

F-6

HOME INNS & HOTELS MANAGEMENT INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)


	Preferred Shares																Additional				Deferred					Total
	Series A				Series B				Series C				Ordinary shares				paid-in		Statutory		share-based		Retained			share-holders’
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		capital		reserves		compensation		earnings			equity
Balance as of December 31, 2006		—		—		—		—		—		—		65,712,839		2,691		813,222		23,414		—		50,411			889,738

Issuance of ordinary shares to acquire additional shares of Home Inns Beijing		—		—		—		—		—		—		441,669		17		53,187		—		—		—			53,204
Issuance of ordinary shares in the acquisition of Top Star		—		—		—		—		—		—		655,831		25		105,997		—		—		—			106,022
Issuance of ordinary shares in a secondary offering (Note 12)		—		—		—		—		—		—		2,956,310		114		370,265		—		—		—			370,379
Exercise of stock purchase right (Note 13)		—		—		—		—		—		—		255,000		10		2,316		—		—		—			2,326
Exercise of stock option (Note 13)		—		—		—		—		—		—		465,736		17		2,884		—		—		—			2,901
Recognition of share-based compensation costs		—		—		—		—		—		—		—		—		15,071		—		—		—			15,071
Net income		—		—		—		—		—		—		—		—		—		—		—		35,756			35,756
Appropriations to statutory reserves		—		—		—		—		—		—		—		—		—		17,919		—		(17,919	)		—


Balance as of December 31, 2007		—		—		—		—		—		—		70,487,385		2,874		1,362,942		41,333		—		68,248			1,475,397

Exercise of stock purchase right (Note 13)		—		—		—		—		—		—		215,286		8		1,982		—		—		—			1,990
Exercise of stock option (Note 13)		—		—		—		—		—		—		510,124		17		4,135		—		—		—			4,152
Recognition of share-base compensation costs		—		—		—		—		—		—		—		—		24,844		—		—		—			24,844
Net income		—		—		—		—		—		—		—		—		—		—		—		101,225			101,225
Appropriations to statutory reserve		—		—		—		—		—		—		—		—		—		8,661		—		(8,661	)		—


Balance as of December 31, 2008		—		—		—		—		—		—		71,212,795		2,899		1,393,903		49,994		—		160,812			1,607,608

The accompanying notes are an integral part of these consolidated financial statements.

F-7

HOME INNS & HOTELS MANAGEMENT INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)


	2006			2007			2008			2008
										US$ thousands
										(Note 2(d))
Cash flows from operating activities:
Net income		46,894			35,756			101,225			14,838
Adjustments to reconcile net income to net cash provided by operating activities:
Share-based compensation		16,295			15,071			24,844			3,642
Depreciation and amortization		46,603			87,618			199,989			29,313
Foreign exchange loss, net		6,990			53,221			65,524			9,604
Minority interests		5,034			5,627			5,087			746
Loss from disposal of property and equipment		192			4,030			2,315			339
Gain on buy-back of convertible bond		—			—			(103,290	)		(15,140	)
Deferred income tax		(17,345	)		(23,632	)		(55,572	)		(8,145	)
Change in assets and liabilities, net of effects of acquisitions:
Decrease in restricted cash		1,900			—			—			—
Increase in accounts receivable		(5,772	)		(6,126	)		(6,163	)		(903	)
Increase in receivables from related parties		(182	)		(1,174	)		(245	)		(36	)
Increase in consumables		(6,601	)		(2,878	)		(7,391	)		(1,083	)
(Increase)/decrease in prepayments and other current assets		(5,046	)		(22,098	)		1,116			163
(Increase)/decrease in other assets		(1,207	)		(10,121	)		19,017			2,787
Increase/(decrease) in accounts payable		5,528			(9,051	)		7,260			1,064
Increase/(decrease) in payables to related parties		25			(739	)		17			2
Increase in salaries and welfare payable		14,203			21,309			21,236			3,113
Increase in income tax payable		7,010			22,421			9,375			1,374
Increase in other taxes payable		2,533			4,353			3,718			545
Increase in accruals for customer reward program		1,967			2,696			3,148			461
Increase/(decrease) in other payables and accruals		13,211			(6,987	)		(18,993	)		(2,785	)
Increase in deferred revenues, current and non-current		12,170			18,752			22,941			3,363
Increase in deferred rental		17,570			26,275			42,599			6,244
Increase in deposits from franchised-and-managed hotels, non-current		—			—			13,741			2,014
Increase in interest accruals for convertible bond		—			308			5,388			790

Net cash provided by operating activities		161,972			214,631			356,886			52,310

The accompanying notes are an integral part of these consolidated financial statements.

F-8

HOME INNS & HOTELS MANAGEMENT INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2006, 2007 AND 2008

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)


	2006			2007			2008			2008
										US$ thousands
										(Note 2(d))
Cash flows from investing activities:
Proceeds from sale of fixed assets		71			859			1,657			243
Purchase of property and equipment		(212,625	)		(462,295	)		(828,484	)		(121,434	)
Purchase of intangible assets		(1,241	)		(5,236	)		(3,905	)		(572	)
Cash paid for short term investments (Note 3)		—			—			(100,000	)		(14,657	)
Net cash used for the acquisition of subsidiaries		—			(146,747	)		(33,583	)		(4,922	)

Net cash used in investing activities		(213,795	)		(613,419	)		(964,315	)		(141,342	)

Cash flows from financing activities:
Net proceeds from issuance of ordinary shares		650,588			366,866			—			—
Proceeds from share option exercise		—			1,917			4,872			714
Net proceeds from issuance of convertible bond		—			1,082,268			—			—
Buy-back of convertible bond		—			—			(113,370	)		(16,617	)
Payment for bond offering related transaction costs		—			—			(4,885	)		(716	)
Repayment of acquired subsidiaries’ debts to original shareholders		—			(84,000	)		(52,467	)		(7,690	)
Restricted cash paid and collected for short-term borrowings		—			(173,849	)		173,849			25,482
Proceeds from short-term borrowings		190,000			768,000			340,000			49,835
Proceeds from long-term loans from a related party		20,000			—			—			—
Advance from a related party		6,747			—			—			—
Repayment of short-term borrowings		(86,000	)		(643,000	)		(609,000	)		(89,263	)
Repayment of long-term loan		—			(60,000	)		(18,036	)		(2,644	)
Dividend paid by VIE subsidiaries to minority shareholders		(2,246	)		(1,877	)		(3,515	)		(515	)
Other financing activities		—			281			1,350			198

Net cash provided/(used) by financing activities		779,089			1,256,606			(281,202	)		(41,216	)


Effect of foreign exchange rate changes on cash and cash equivalents		(6,990	)		(53,221	)		(65,524	)		(9,604	)

Net increase/(decrease) in cash		720,276			804,597			(954,155	)		(139,852	)
Cash, beginning of year		37,727			758,003			1,562,600			229,034

Cash, end of year		758,003			1,562,600			608,445			89,182


Supplemental disclosure of cash flow information
Cash paid during the year for income taxes		(31,726	)		(45,977	)		(73,897	)		(10,831	)
Cash paid during the year for interest		(6,143	)		(7,168	)		(7,733	)		(1,133	)

Supplemental schedule of non-cash investing and financing activities:
Increase in payables for property and equipment		24,035			113,677			163,967			24,033
Increase in accruals for share issuance costs		3,763			—			—			—
Decrease in advance from related parties on issuance of ordinary shares		642			—			—			—
Issuance of ordinary shares related to acquisition of 4.412% in Home Inns Beijing		—			53,204			—			—
Issuance of ordinary shares related to acquisition of Top Star		—			106,022			—			—

The accompanying notes are an integral part of these consolidated financial statements.

F-9

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

1. ORGANIZATION AND NATURE OF OPERATIONS

The consolidated financial statements include the financial statements of Home Inns & Hotels Management Inc. (“the Company”), its subsidiaries, and variable interest entities (“VIEs”) for which the Company is the primary beneficiary (“VIE subsidiary”). The Company and its consolidated subsidiaries and VIE subsidiaries are collectively referred to as the “Group”.

The Company was established in Cayman Islands on May 30, 2006. In June 2006, all the then existing shareholders of Home Inns & Hotels Management (Hong Kong) Limited (“Home Inns HK”), the Company’s predecessor, exchanged their respective shares in Home Inns HK for an equivalent number of shares in the Company. As a result, Home Inns HK became a wholly-owned subsidiary of the Company. Home Inns HK did not have any operations until April 2002 when Home Inns & Hotels Management (Beijing) Co., Ltd. (“Home Inns Beijing”), a hotel operation and management company, was established as a joint venture of Home Inns HK and Beijing Capital Travel International Hotel Group Co., Ltd. (“Beijing Capital Travel”), a subsidiary of Beijing Tourism Group (“BTG”). At inception, Home Inns HK and BTG, through Beijing Capital Travel, owned 55% and 45% interest in Home Inns Beijing, respectively. Through a series of financing activities and acquisitions, Home Inns Beijing has become a wholly-owned subsidiary in July 2007.

In October 2006, the Company completed an initial public offering of American Depositary Shares (“ADSs”). ADSs of the Company are traded from October 26, 2006 on Nasdaq Global Market under the symbol “HMIN” in the United States.

The principal activities of the Group are to develop, lease, operate, franchise, and manage economy hotels under the Home Inn brand in the People’s Republic of China (“PRC”). The Group either leases real estate properties on which it develops and operates hotels or it franchises the Home Inn brand to hotel owners and manages these hotels. The former type of hotels is referred to as “leased-and-operated hotels” and the latter type of hotels as “franchised-and-managed hotels.”

Leased-and-operated hotels

The Group leases hotel properties from property owners and develops these hotels directly, by hiring, training and supervising the managers and employees to operate the hotels. The Group is responsible for hotel development and customization to conform to the standards of Home Inns, as well as repairs and maintenance, operating expenses and management of properties over the term of the lease. Under the lease arrangements, the Group typically enjoys rental holiday of three to six months and pays fixed rent on a quarterly basis for the first three or five years of the lease term, after which the rental payments may be subject to an increase every three to five years.

Franchised-and-managed hotels

The Group enters into certain franchise arrangements with property owners for which the Group is responsible for managing the hotels, including hiring and appointment of the general manager of each franchised-and-managed hotel. Under a typical franchise agreement, the franchisee is required to pay an initial franchise fee and ongoing management service fees equal to a certain percentage of the revenues of the hotel. The franchisee is responsible for the costs of hotel development and customization and the costs of its operations. The term of the franchise agreement is typically 5 years or 8 years and is renewable only upon mutual agreement between the Group and the franchisee.

F-10

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

2. ACCOUNTING POLICIES

The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below:

a. Basis of presentation and use of estimates

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ materially from those estimates.

b. Basis of consolidation and accounting for investments

The consolidated financial statements include the financial statements of the Company, its subsidiaries and VIE subsidiaries.

The Group applies the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (Revised 2003), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46(R)”) to account for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support.

Under FIN 46(R), a company consolidates a VIE if that company has a variable interest that will absorb a majority of the expected losses, receives a majority of the entity’s expected residual returns, or both. The company that absorbs a majority of the VIE’s expected losses and receives a majority of the VIE’s expected residual returns is a primary beneficiary.

The Group is the primary beneficiary of six variable interest entities, Home Inns & Hotels Management (Xiamen) Co., Ltd. (“Home Inns Xiamen”), Home Inns & Hotels Management (Fuzhou) Co., Ltd. (“Home Inns Fuzhou”), Home Inns & Hotels Management (Caoxi) Co., Ltd. (“Home Inns Caoxi”), Home Inns & Hotels Management (Caobao) Co., Ltd. (“Home Inns Caobao”), Home Inns & Hotels Management (Dongguan) Co., Ltd. (“Home Inns Dongguan”), and Home Inns & Hotels Kuaijie (Fuzhou) Co., Ltd. (“Home Inns Fuzhou Kuaijie”), of which the principal activity generally relates to hotel management.

The total registered capital of the six VIEs was RMB 6,010 as of December 31, 2008. The entities were considered variable interest entities because the equity at risk of each entity was not sufficient to finance its intended activities without additional financial support. The Company has 51% ownership interest in Home Inns Xiamen, Home Inns Fuzhou and Home Inns Caoxi, 70% ownership interest in Home Inns Fuzhou Kuaijie, 75% ownership interest in Home Inns Caobao, 65% ownership interest in Home Inns Dongguan and the Company is considered the primary beneficiary of these entities because it absorbs a majority of the entities’ expected losses and receives a majority of the entities’ expected residual returns. As a result, the operations of the VIEs are included in the consolidated financial statements since their incorporation.

The entities that operate the franchised-and-managed hotels (Note 1) are considered variable interest entities as the franchisees do not have the ability to make decisions that have a significant impact on the success of the franchise arrangement. However, as the franchisees provide all necessary capital to finance the operation of the franchised hotels and absorb a majority of any expected losses, the Company is not considered the primary beneficiary of those entities.

Subsidiaries are those consolidated entities in which the Company directly or indirectly controls more than one half of the voting power; has the power to govern the financial and operating policies; to appoint or remove the majority of the members of the board of directors; to cast majority of votes at the meetings of the board of directors; or to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.

F-11

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

All inter-company transactions and balances within the Group are eliminated upon consolidation. Minority interests represent the interests of outside minority shareholders in the operating results and net assets of certain consolidated subsidiaries.

c. Foreign currencies

The Group’s functional currency and reporting currency is Renminbi (“RMB”). Transactions denominated in currencies other than RMB are translated into RMB at the exchange rates quoted by the People’s Bank of China (the “PBOC”) prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into RMB using the applicable exchange rates quoted by the PBOC at the balance sheet dates. All such exchange gains and losses resulting from foreign currency transactions are included in the consolidated statements of operations.

The RMB is not a freely convertible currency. The PRC State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMB into foreign currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China foreign exchange trading system market.

d. Convenience translation

Translations of balances in the statements of operations, balance sheet and statement of cash flows from RMB into United States dollars (“US$”) as of and for the year ended December 31, 2008 are solely for the convenience of the reader and were calculated at the rate of US$ 1.00 = RMB 6.8225, on December 31, 2008, representing the noon buying rate in The City of New York for cable transfers of RMB, as certified for customs purposes by the Federal Reserve Bank of New York. No representation is intended to imply that the RMB amounts could have been, or could be, converted, realized or settled into US$ at that rate on December 31, 2008, or at any other rate.

e. Cash and cash equivalents

Cash and cash equivalents comprise cash on hand and liquid investment which are unrestricted as to withdrawal or use, and which have original maturities of three months or less that are placed with banks or other financial institutions. Cash and cash equivalents balance as of December 31, 2007 include US$ 208,423 thousand and HK$ 2,105 thousand. Cash and cash equivalents balance as of December 31, 2008 include US$ 22,372 thousand and HK$ 0.4 thousand.

f. Restricted cash

Restricted cash is comprised of securities pledged for short-term loans.

g. Short-term investment

Short-term marketable securities are carried at cost, which approximates fair value. Short-term investments balance of RMB100 million at December 31, 2008 represents cash invested in close-end fund with original maturities greater than three months and remaining maturities less than one year.

h. Allowance for doubtful accounts

Provision is made against receivables to the extent collection is considered to be doubtful. Accounts receivable and other receivables in the balance sheet are stated net of such provision, if any. As of December 31, 2007 and 2008, no allowance was provided for accounts receivable and other receivables.

i. Consumables

The Group purchases consumables mainly for the operation of leased-and-operated hotels. Consumables include fabrics, such as towels and beddings, which need to be renewed periodically. Consumables are amortized over their useful lives, generally one year or less, from the time they are put into use and are stated at purchase price less accumulated amortization.

F-12

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

j. Property and equipment, net

Property and equipment are stated at cost less accumulated depreciation and amortization and impairment losses, if any. The cost of property and equipment comprises its purchase price and any directly attributable costs, including interest cost capitalized in accordance with SFAS No. 34, “Capitalization of Interest Costs” (“SFAS No. 34”), during the period the asset is brought to its working condition and location for its intended use.

Depreciation and amortization of property and equipment is provided using the straight line method over their expected useful lives. The expected useful lives are as follows:


Buildings		40 years
Leasehold improvements		Over the shorter of the economic useful life or the lease period
Machinery and equipment		5 to 10 years
Furniture, fixtures and office equipment		3 to 5 years

Construction in progress represents leasehold improvements under construction or installation and is stated at cost. Cost comprises original cost of property and equipment, installation, construction and other direct costs. Construction in progress is transferred to property and equipment and depreciation commences when the asset is ready for its intended use.

Expenditures for repairs and maintenance are expensed as incurred. Gain or loss on disposal of property and equipment, if any, is recognized in the statements of operations as the difference between the net sales proceeds and the carrying amount of the underlying asset.

k. Goodwill

Goodwill represents the excess of the cost of an acquired entity over the appropriate share of the fair value of the identifiable assets and liabilities acquired including separately identifiable intangible assets and is allocated to respective reporting units. The provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”) require that a two-step impairment test be performed annually or whenever events or changes in circumstances indicate that the carrying value of the goodwill may not be recoverable. The first step of the test for impairment compares the book value of the Group’s reporting unit under which goodwill is recorded to its estimated fair value. The second step of the goodwill impairment test, which is only required when the net book value of the reporting unit exceeds the fair value, measures the impairment as the difference between the implied fair value of goodwill and its book value. Goodwill is not amortized. No impairment was recognized for the years ended December 31, 2006, 2007 and 2008. At December 31, 2008, all of the Company’s goodwill is allocated to the hotel operations reporting unit.

l. Intangible assets, net

Intangible assets consist primarily of intangible assets acquired in business combinations. The Group applies the criteria specified in SFAS No. 141 “Business Combinations” (“SFAS No. 141”) to determine whether an intangible asset should be recognized separately from goodwill. Intangible assets acquired through business combinations are recognized as assets separate from goodwill if they satisfy either the “contractual-legal” or “separability” criterion. Intangible assets, including favorable lease agreements and certain franchise agreements existing as of the date of acquisition, are recognized and measured at fair value upon acquisition. Intangible assets from such business combination transactions are amortized over the remaining operating lease term or the franchise agreement term, as appropriate. Unfavorable lease agreements acquired through business combinations is recognized as a liability.

Purchased software is stated at cost less accumulated amortization and impairment, if any.

m. Impairment of long-lived assets and definite-lived intangible assets

Long-lived assets and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that carrying amount of an asset may not be recoverable in accordance with SFAS No.144, “Accounting for the Impairment or Disposal of Long-lived Assets” (“SFAS No. 144”). If the total of the expected future undiscounted cash flows is less than the carrying value, an indication of impairment is present and a loss is recognized in the statements of operations for the difference between the fair value, using the expected future discounted cash flows, and the carrying value of the assets. No impairment was recognized for the years ended December 31, 2006, 2007 and 2008.

F-13

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

n. Fair value of financial instruments

Financial instruments of the Group primarily comprise of cash and cash equivalents, restricted cash, short-term investments, receivables, payables, accruals, borrowings and convertible bonds. As of December 31, 2007 and 2008, due to their short-term nature the carrying values of these financial instruments approximated their fair values, except for the convertible bonds(Note 11).

o. Employee benefits

The employees of the Company’s PRC subsidiaries and VIE subsidiaries are entitled to staff welfare benefits including medical care, housing fund, unemployment insurance and pension benefits. These entities are required to accrue for these benefits based on certain percentages of the employees’ salaries, subject to certain ceilings, in accordance with the relevant PRC regulations and make contributions to the government-sponsored plans out of the amounts accrued. Employee benefits expense was RMB 18,525, RMB 37,576 and RMB 77,916 for the years ended December 31, 2006, 2007 and 2008, respectively. Amounts accrued and included in salaries and welfare payable and other unpaid and accruals in the accompanying balance sheets were RMB 3,063 and RMB 4,203 for the years ended December 31, 2007 and 2008, respectively.

p. Accruals for customer reward program

The Group invites its customers to participate in a customer reward program. Prior to November 14, 2004, membership was free of charge. A one-time membership fee was charged after that date for new members. Members enjoy discounts on room rates, priority in hotel reservation, and accumulate membership points for their paid stays, which can be redeemed for membership upgrades, room night awards and other gifts. The estimated incremental costs to provide membership upgrades, room night awards and other gifts are accrued and recorded as accruals for customer reward program as members accumulate points and recognized as sales and marketing expenses in the accompanying statements of operations. As members redeem awards or their entitlements expire, the provision is reduced correspondingly. As of December 31, 2007 and 2008, the accruals for customer reward program amounted to RMB 5,439 and RMB 8,587, respectively, based on the estimated liabilities under the customer reward program.

q. Deferred Revenue

Deferred revenue generally consists of advances received from customers for room stays, initial franchise fees received prior to the Group fulfilling its commitments to the franchisee, and cash received from sale of membership programs. Non-current portion of deferred revenue represents cash received from sales of membership programs, which should be recognized after one year from the balance sheet date.

r. Revenue recognition

Revenues from leased-and-operated hotels represent primarily room rentals and food and beverage sales from the leased-and-operated hotels. Such revenues are recognized when goods are delivered and services are provided.

Revenues from franchised-and-managed hotels are derived from franchise agreements where the franchisees are required to pay (i) an initial one-time franchise fee and (ii) on-going management and service fees based on a percentage of revenue, which approximate 5% to 6% of the room revenues of the franchised hotels for the years ended December 31, 2008 and 2007. The one-time franchise fee is recognized when the franchised hotel opens for business, the fee becomes non-refundable, and the Group has fulfilled all its commitments and obligations, including the assistance to the franchisees in property design, leasehold improvement construction project management, systems installation, personnel recruiting and training. On-going management and service fees are recognized when the underlying service revenue is recognized by the franchisees’ operations. Other revenues generated from franchise agreements include system maintenance and support fee and central reservation system (“CRS”) usage fee, which are recognized when services are provided.

Revenues from the one-time membership fees are recognized over the estimated average customer relationship period or deferred and recognized once the probability that the member will demand further service becomes remote. Prior to 2006, given the limited history in operating the Group’s customer reward program (Note 2(p)), all one-time membership fees were recognized as deferred revenue when received. In 2006, management made an analysis of the historic activity pattern of membership cards and noted that membership cards with no activity for more than a year are most likely to expire in the future and therefore the Group recognizes revenue from one-time membership fees when membership records show no activity within a year. For the years ended December 31, 2006, 2007 and 2008, the Company recognized revenue of RMB 1,802, RMB 3,381 and RMB 10,958 from one-time membership fees.

The Group will continue to monitor membership activity patterns and will utilize such information to estimate the average life of members for future revenue recognition purposes once the Group has obtained sufficient historical data.

F-14

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

s. Business tax and related surcharge

The Group is subject to business tax and related surcharges on the services provided in the PRC. Such tax is levied based on turnover at an applicable rate of approximately 5.5% and is recorded as a reduction of revenues.

t. Leased-and-operated hotel costs

Leased-and-operated hotel costs include all direct costs incurred in the operation of the leased-and-operated hotels and consist primarily of property rentals and related expenses, utility costs, personnel compensation, amortization of guest room consumables, amortization of leasehold improvements, depreciation of equipment, costs of consumables, food and beverage.

u. Sales and marketing expenses

Sales and marketing expenses consist primarily of advertising related expenses, expenses associated with the Company’s membership reward program, payroll and related compensation for the Group’s sales and marketing personnel and entertainment expenses relating to marketing activities. Advertising related expenses, including promotion expenses and production costs of marketing materials, are charged to the statements of operations as incurred and amounted to RMB 5,334, RMB 10,434 and RMB 11,972 for the years ended December 31, 2006, 2007 and 2008, respectively.

v. Share-based compensation

Effective January 1, 2006, the Group adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123(R)”), which revises SFAS No. 123, and supersedes APB No. 25. Under the fair value recognition provisions of SFAS No. 123(R), the Group applied the prospective transition method and measured share-based compensation at fair value on the awards’ grant date based on the estimated number of awards that are expected to vest. Under the prospective transition method, the Group continued to account for non-vested awards outstanding under the provisions of APB No. 25. Only awards granted (or modified, repurchased, or cancelled) after the adoption of SFAS No. 123(R) was accounted for under the provisions of SFAS No. 123(R).

In conjunction with the adoption of SFAS No. 123(R), the Group is required to estimate forfeitures at the time of grant and revise in subsequent periods if actual forfeitures differ from those estimates. Compensation expense is recognized on a straight-line basis over the requisite service period of the award based on the fair value of the award on grant date. The requisite service period is the vesting period, which is generally 4 years.

w. Operating leases

Leases where substantially all the risks and rewards of ownership of assets remain with the lessor are accounted for as operating leases. Payments made under operating leases net of any incentives received from the lessor are charged to the consolidated statements of operations on a straight-line basis over the terms of the underlying lease.

x. Borrowing costs

Interest costs are capitalized for qualifying assets in accordance with SFAS No. 34, “Capitalization of Interest Cost”. For the years ended December 31, 2006, 2007 and 2008, total interest capitalized was RMB 966, RMB 1,558 and RMB 1,127, respectively.

y. Pre-operating expenditure

Pre-operating expenditure represents start-up costs, other than amounts capitalized as leasehold improvements, for leased-and-operated hotels is charged to the consolidated statements of operations in the period in which it is incurred.

F-15

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

z. Taxation

The provision for income taxes is based on the income and expense amounts recorded in our consolidated statement of income. Income tax expenses are recorded using the liability method. Deferred tax assets or liabilities are recognized for the estimated future tax effects attributable to temporary differences and tax loss carry forwards. Deferred tax assets and liabilities are recognized in accordance with SFAS 109, “Accounting for Income Taxes,” and measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in statements of operations in the period that includes the enactment date. A valuation allowance is recorded to reduce the amount of deferred tax assets if it is considered more likely than not that such assets will not be realized.

aa. Other non-operating income

Other non-operating income primarily consists of financial subsidies received from provincial and local governments for operating a business in their jurisdictions and compliance with specific policies promoted by the local governments. During the years ended December 31, 2006, 2007 and 2008, the Group received financial subsidies of RMB 4,934, RMB 6,854 and RMB 9,786, respectively, from various local PRC government authorities. There are no defined rules and regulations to govern the criteria necessary for companies to receive such benefits, and the amount of financial subsidy is determined at the discretion of the relevant government authorities. Such amounts are recorded as other non-operating income when received.

ab. Statutory reserves

Based on the legal formation of the entities, appropriation of statutory reserves is different. The Group’s PRC subsidiaries and VIE subsidiaries, except for the wholly foreign owned enterprises, are required to set aside 10% of its net income, after offsetting accumulated losses from prior years, and before profit distributions to the investors, as reported in its statutory accounts on an annual basis to the Statutory Surplus Reserve Fund. Once the total Statutory Surplus Reserve Fund reaches 50% of the registered capital of the respective subsidiaries and VIE subsidies, further appropriations are discretionary. The Statutory Surplus Reserve Fund can be used to increase the registered capital and eliminate future losses of the respective companies under PRC regulations. The Group’s Statutory Surplus Reserve Fund is not distributable to shareholders except in the event of liquidation. Before January 1, 2006, the above subsidiaries were also required on an annual basis to set aside at least 5% of after-tax profit, after offsetting accumulated losses from prior years, and before profit distributions to the investors, to the Statutory Surplus Welfare Fund, which can be used for staff welfare of the Group. Effective January 1, 2006, the appropriation to the Statutory Surplus Welfare Fund is no longer required.

The foreign owned enterprises are required to set aside at least a 10% of their net income as reported in their PRC statutory accounts on an annual basis to the Reserve Fund. Once the total Reserve Fund reaches 50% of the registered capital, further appropriations are discretionary.

Appropriations to the Statutory Surplus Reserve Fund and Reserve Fund are accounted for as a transfer from retained earnings to statutory reserves. During the years ended December 31, 2006, 2007 and 2008, the Group made total appropriations to these statutory reserves of RMB 12,054, RMB 17,919 and RMB 8,661, respectively.

ac. Dividends

Dividends are recognized when declared. The Company has not declared or paid any dividends.

The Company relies principally on dividends from its subsidiaries and VIE subsidiaries in the PRC for its cash requirements. Current PRC regulations permit PRC companies to pay dividends only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. Additionally, the Company’s PRC subsidiaries and VIE subsidiaries can only distribute dividends after they have met the PRC requirements for appropriation to statutory reserves (Note 2ab). Restricted net assets of the Company’s PRC subsidiaries and VIE subsidiaries not distributable in the form of dividends to the parent as a result of the aforesaid PRC regulations were RMB 1,956,812 as of December 31, 2008. In addition to the typical statutory reserves of the Company’s PRC subsidiaries and VIE subsidiaries, the restricted net assets also includes RMB 1,906,817 paid in capital, contributed by Home Inns HK and paid by the Company on behalf of Home Inns HK through the proceeds from public offerings and issuance of convertible bond, resulting in a significant level of restricted net assets.

F-16

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

ad. Earnings per share

In accordance with SFAS No. 128, “Computation of Earnings Per Share” (“SFAS No. 128”) and EITF No. 03-6, “Participating Securities and the Two-Class Method under FASB Statement No. 128” (“EITF No. 03-6”), basic earnings per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year using the two-class method. Under the two class method, net income is allocated between ordinary shares and other participating securities based on their respective participating rights. The Company’s convertible preferred shares are participating securities. Diluted earnings per share is calculated by dividing net income attributable to ordinary shareholders as adjusted for the effect of dilutive ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the year. Ordinary equivalent shares consist of the ordinary shares issuable upon the conversion of the convertible redeemable preferred shares and convertible bond (using the if-converted method) and restricted stock and ordinary shares issuable upon the exercise of outstanding share options (using the treasury stock method).

ae. Segment reporting

The Company follows SFAS No. 131, “Disclosures about Segment of an Enterprise and Related Information” for its segment reporting.

The Group operates and manages its business as a single segment. The Group primarily generates its revenues from customers in the PRC. Accordingly, no geographical segments are presented.

af. Recent accounting pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. However, on February 12, 2008, the FASB issued FSP FAS 157-2 which delays the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). This FSP partially defers the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. Effective for 2008, the Company adopted SFAS No. 157 except as it applies to those nonfinancial assets and nonfinancial liabilities as noted in FSP FAS 157-2. The partial adoption of SFAS No.157 did not have a material impact on the Company’s consolidated financial position, cash flows, or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”) which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 is effective for the Company on January 1, 2008. The adoption of SFAS No. 159 did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”) and SFAS No. 160, “Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB 51” (“SFAS No. 160”), which will change the accounting for and reporting of business combination transactions and noncontrolling interests in consolidated financial statements. SFAS No.141R and SFAS No.160 will be effective for the Company on January 1, 2009. The Company does not expect the adoption of SFAS No.141R and SFAS No.160 to have material impact on its consolidated financial statements.

In June 2008, the FASB ratified EITF No. 07-5, “Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock” (“EITF 07-5”). EITF 07-5 provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. EITF 07-5 is effective for financial statements issued for fiscal years beginning after December 15, 2008. The Company does not expect EITF 07-5 to impact the accounting for our convertible bonds.

F-17

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

ag. Certain risks and concentration

Financial instruments that potentially subject the Group to significant concentrations of credit risk consist primarily of cash, short-term investments and accounts receivable. As of December 31, 2007 and 2008, substantially all of the Company’s cash was held in major financial institutions located in the PRC, Hong Kong and the United States of America, which management considers to be of high credit quality. Accounts receivable are typically not collateralized and are denominated in RMB, and are derived from revenues earned from operations arising in the PRC. No individual customer accounted for more than 10% of net revenues for the years ended December 31, 2006, 2007 and 2008. No individual customer accounted for more than 10% of accounts receivable at December 31, 2007 and 2008.

3. SHORT TERM INVESTMENT

Short term investment represents RMB100 million in China Merchants Bank close-ended fund purchased by the Company in July 2008. The fund’s permissible investments, are mainly the discounted bank guaranteed bills and related rights and obligations. The term of this fund was from July 25, 2008 to January 15, 2009. The Company redeemed this investment on January 15, 2009.

4. PREPAYMENTS AND OTHER CURRENT ASSETS

Components of prepayments and other current assets as of December 31 are as follows:


	2007		2008
Prepayment for rental expenses		31,891		16,683
Convertible bonds issuance cost		—		11,699
Prepayment for utility and telecom expenses		5,237		11,122
Prepayment for advertisement, consultation and insurance		1,554		4,081
Deposits for utility expenses		1,251		2,782
Employee advances		2,965		2,496
Interest receivable		5,462		133
Receivables related to acquisition of Top Star Hotel Chain		4,500		—
Other current assets		9,067		14,908

Total		61,927		63,904

F-18

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

5. INCOME TAXES

Cayman Islands

Under the current laws of the Cayman Islands, the Company is not subject to tax on income or capital gain. In addition, upon payments of dividends by the Company to its shareholders, no Cayman Islands withholding tax will be imposed.

Hong Kong

Home Inns Hong Kong subsidiaries were subject to Hong Kong profit tax at a rate of 17.5% on their assessable profits. No Hong Kong profit tax has been provided as the Group did not have assessable profit that was earned in or derived from Hong Kong subsidiaries during the years presented.

PRC

The Company’s subsidiaries and its VIE subsidiaries incorporated in the PRC are subject to PRC Corporate Income Tax (“CIT”) on the taxable income as reported in their respective statutory financial statements adjusted in accordance with relevant PRC income tax laws. Effective January 1, 2008, the Company’s subsidiaries and its VIE subsidiaries are subject to the Corporate Income Tax Law of the People’s Republic of China (hereinafter “the new CIT Law”) as approved by the National People’s Congress on March 16, 2007, under which the corporate income tax rate applicable to most of the Group’s PRC entities adjusted from 33% to 25%. Five of the Group’s subsidiaries and VIE subsidiaries enjoyed a preferential income tax rate of 15% before 2008, and the income tax rate applicable to these subsidiaries is phased in at 18%, 20%, 22%, 24% and 25% in a 5 year period from 2008 to 2012.

Additionally, according to the tax law, 10% withholding income tax (“WHT”) will be levied on foreign investors for dividends arising from foreign investment enterprises (“FIEs”) profit earned after January 1, 2008. Where FIEs declare dividend in 2008 and beyond out of the cumulative retained earnings as of December 31, 2007, such dividends earned by foreign investors shall be exempt from WHT. For certain jurisdictions that have signed tax treaties with the PRC, the WHT rate is 5%. Hong Kong also has an arrangement with the PRC that limits the WHT to 5%.

Composition of income tax expense

The current and deferred portion of income tax expense (benefit) included in the consolidated statements of operations for the years ended December 31 is as follows:


	2006			2007			2008
Current income tax expense		38,736			68,667			83,679
Deferred income tax benefit		(17,345	)		(23,632	)		(55,572	)

Income tax expense		21,391			45,035			28,107

F-19

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

Reconciliation of the differences between statutory tax rate and the effective tax rate

A reconciliation between the statutory CIT rate and the Group’s effective tax rate for the years ended December 31 is as follows:


	2006			2007			2008
Statutory CIT rate		33	%		33	%		25	%
Tax differential from statutory rate applicable to subsidiaries in the PRC		(18	%)		(27	%)		(5	%)
Impacts from changed CIT rate from 33% to 25%		—			18	%		—
Permanent difference (non-deductible expenses)		14	%		28	%		21	%
Permanent difference (gain on buy-back of convertible bond)		—			—			(19	%)
CIT refund		—			—			(1	%)

Effective CIT rate		29	%		52	%		21	%

Deferred tax assets and liabilities comprised:


	2007			2008
Deferred tax assets, current:
Tax loss carry forwards		10,813			16,521
Deductible temporary differences related to:
-pre-operating expenses		4,002			16,264
-rental expenses		479			671
-deferred revenue, current		—			7,366
-accruals for customer reward program		1,374			2,147
-others		956			1,002
Valuation allowance		(1,050	)		(2,147	)

		16,574			41,824

Deferred tax assets, non-current:
Tax loss carry forwards		30,373			31,456
Deductible temporary differences related to:
-rental expenses		28,735			46,235
-pre-operating expenses		15,108			30,217
-deferred revenue, non current		7,390			5,615
-unfavorable lease		3,283			2,643
-depreciation of property and equipment		—			1,464
-others		437			257
Valuation allowance		(36,302	)		(40,307	)

		49,024			77,580

Total deferred tax assets		65,598			119,404


Deferred tax liabilities, non-current:
Taxable temporary differences related to intangible assets and other GAAP differences		13,637			12,279

Total deferred tax liabilities		13,637			12,279

The Group had tax loss carryforward of RMB 191,908 as of December 31, 2008 which contained Top Star’s tax loss carryforward of RMB 125,824. The Group’s remaining tax loss carryforward will be netted against future taxable income. According to the PRC CIT regulations, the loss incurred during a tax year may be carried forward to the following years and set off against the profits of the following years, but the period shall not exceed a maximum of 5 years. These accumulated tax losses will expire on or before January 1, 2014.

A valuation allowance was fully provided for the net deferred tax assets of Top Star occurred before 31 December 2008, primarily consisting of net operating loss carryforwards.

F-20

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

6. PROPERTY AND EQUIPMENT

The components of property and equipment are as follows:


	2007			2008
Buildings		9,814			23,764
Leasehold improvements		895,414			1,589,190
Machinery and equipment		68,876			135,248
Furniture, fixtures and office equipment		193,403			341,912
Construction in progress		161,583			233,889

		1,329,090			2,324,003
Less: Accumulated depreciation		(181,408	)		(373,103	)

Property and equipment, net		1,147,682			1,950,900

Depreciation expenses incurred for the years ended December 31, 2006, 2007 and 2008 are RMB 46,014, RMB 85,405 and RMB 195,632 respectively.

Included in leasehold improvements and construction in progress is accumulated capitalized interest of RMB 1,231, RMB 2,789 and RMB 3,916 as of December 31, 2006, 2007 and 2008, respectively.

7. GOODWILL

Components of goodwill as of December 31, 2007 and 2008 are as follows:


	2007		2008
Acquisition of Home Inns Beijing		137,072		137,072
Acquisition of Top Star hotel chain (a)		198,264		191,368
Other acquisitions		62,442		62,442

Total goodwill		397,778		390,882


(a)		Acquisition of Top Star hotel chain

Hong Kong Ai Home Hotel Investment Company and Shanghai Chuwen Investment Co., Ltd., collectively the Top Star hotel chain (Top Star), and the Group entered into an equity transfer agreement in October 2007 for the Group to acquire 100% equity of Top Star. The cost of the acquisition was based on the sum of (i) the estimated fair value of the 655,831 shares issued, (ii) cash consideration of RMB 68 million, and (iii) the assumption of debts for RMB 192 million. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition and as at December 31, 2008:


				Amount as at December 31, 2008
	Amount at the			after subsequent
	date of acquisition			adjustment

Fair value of net tangible assets acquired		170,404			163,268
Intangible assets-favorable lease		18,345			18,345
Unfavorable lease liability		(16,198	)		(13,724	)
Goodwill		198,264			191,368
Deferred tax assets, non-current		2,673			2,265
Deferred tax liability, non-current		(3,027	)		(3,027	)

Total purchase price		370,461			358,495

The changes in the carrying amount of goodwill for the year ended December 31, 2008 represent the subsequent adjustment for the consideration amount relating to the acquisition of Top Star Hotel Chain.

F-21

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

8. INTANGIBLE ASSETS AND UNFAVORABLE LEASE

Intangible assets and unfavorable lease as of December 31 are as follows:


	2007			2008
Intangible assets, original cost —
Favorable lease agreements		41,689			41,689
Franchise agreements		804			804
Customer relationship		83			83
Purchased software		7,896			11,890

		50,472			54,466

Less: Accumulated amortization —
Favorable lease agreements		(1,497	)		(4,958	)
Franchise agreements		(616	)		(788	)
Customer relationship		(2	)		(8	)
Purchased software		(1,618	)		(3,735	)

		(3,733	)		(9,489	)

Intangible assets, net		46,739			44,977


Unfavorable lease liability —


	2007			2008
Unfavorable lease agreements, original cost		20,247			17,773
Less: Accumulated amortization		(352	)		(1,756	)

Unfavorable lease liability, net		19,895			16,017

Franchise agreements, favorable and unfavorable leases agreements were acquired primarily for the acquisition of Top Star and the purchase of minority interests in Home Inns Beijing. The value of the favorable lease agreements was determined based on the estimated present value of the amount the company has avoided paying as a result of entering into the lease agreements. Unfavorable lease agreements were determined based on the estimated present value of the acquired leases that exceed market prices and is recognised as a liability. Franchise agreements were determined at the estimated present value of net cash flows expected to be received over the remaining terms of the franchise agreements. The value of favorable and unfavorable lease agreements is amortized using the straight-line method over the remaining lease term. The value of franchise agreements is amortized using the straight-line method over the remaining terms of the franchise agreements.

Amortization expense of intangible assets for the years ended December 31, 2006, 2007 and 2008 amounted to RMB 589, RMB 2,566 and RMB 5,781, respectively.

The annual estimated amortization expense for intangible assets and unfavorable lease liability for the following years is as follows:


	Amortization for		Amortization for			Net
	Intangible Assets		Unfavourable Lease			Amortization
2009		5,721		(1,379	)		4,342
2010		5,721		(1,372	)		4,349
2011		5,605		(1,334	)		4,271
2012		4,712		(1,260	)		3,452
2013		3,532		(1,110	)		2,422

		25,291		(6,455	)		18,836

F-22

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

9. BORROWINGS


	2007		2008
Short-term bank loans		269,000		—

Short-term bank loans bear interests at a rate ranging from 6.39% to 7.23% per annum for 2008 and 6.48% to 6.84% per annum for 2007. All principal and interest were repaid during 2008.


	2007		2008
Long-term bank loans		18,036		—

Long-term bank loans bear interests at the rate of 6.57% for 2007, and all principal and interest were repaid during 2008.

10. OTHER PAYABLES AND ACCRUALS


	2007		2008
Accrued expenses for utilities, rental expenses, professional fee and etc.		34,424		46,378
Others		2,146		5,842

Other unpaid and accruals-subtotal		36,570		52,220

Payables on construction cost of leasehold improvement		185,827		350,292
Payables related to acquisitions		122,278		10,790
Payables to employees for exercised options		17,693		1,379
Deposit from franchised-and-managed hotels, current		6,859		1,700
Other Deposits		497		988
Others		17,050		11,590

Other payables-subtotal		350,204		376,739

Total		386,774		428,959

F-23

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

11. CONVERTIBLE BOND

In December 2007, the Company issued RMB 1,110 million of USD settled zero coupon convertible bonds (the “Bonds”). The Bonds will mature on December 10, 2012.

Each Bond is, at the option of the holder, convertible (unless previously redeemed, converted or purchased and cancelled) on or after March 9, 2008 into fully paid ordinary shares with a par value of US$ 0.005 each of the Company at the USD equivalent of its RMB principal amount. The number of shares issuable upon conversion will be a fixed amount, subject only to adjustments for dilutive events.

Unless previously redeemed, converted or purchased and cancelled, the Bonds will be redeemed on December 10, 2012 at an amount equal to the USD equivalent of their RMB principal amount multiplied by 102.53%. At any time after December 10, 2010 and prior to December 10, 2012, the Company may redeem all but not a portion of the Bonds at a redemption price equal to the USD equivalent of their redemption amount (represents for the bondholder a gross yield to maturity of 0.5% per annum calculated on a semi-annual basis) on the redemption date if the closing price of the ADSs for each of 20 out of 30 consecutive trading days prior to the date upon which notice of such redemption is given, was at least 125% of the convention price then in effect translated into RMB at the fixed exchange rate of US$ 1.00 to RMB 7.40. The Company may redeem all and not some only of the Bonds at a redemption price equal to the USD equivalent of their early redemption amount on the redemption amount if at any time at least 90% in principal amount of the Bonds has already been converted, redeemed or purchased and cancelled.

The bonds may also be redeemed at the option of the holders at a redemption price equal to the USD equivalent of their early redemption amount upon the ADSs ceasing to be listed on the Nasdaq Global Market or the occurrence of a change of control. All and not some only of the Bonds may be redeemed at any time at a redemption price equal to the USD of their early redemption amount in the event of certain changes relating to Cayman Island or PRC taxation, subject to the non-redemption of each bondholder after the exercise by the Company of its tax redemption option.

The Company will, at the option of the holder of any Bond, redeem, in whole or in part, that holder’s Bonds on December 10, 2010 (the “Put Option Date”), at an amount equal to the USD Equivalent of its RMB principal amount, multiplied by 101.51%. To exercise such right, the holder of the relevant Bond must complete, sign and deposit at the specified office of any Paying Agent a duly completed and signed notice (the “Put Option Notice”) together with the Certificate evidencing the Bonds to be redeemed not earlier than 60 days and not later than 20 days prior to the Put Option Date. A Put Option Notice, once delivered, shall be irrevocable (and may not be withdrawn unless the Company consents to such withdrawal) and the Company shall redeem the Bonds the subject of a Put Option Notice delivered as aforesaid on the Put Option Date.

The Bonds were recorded as a long-term liability. Its embedded redemption and conversion features are not required to be bifurcated under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”.

As of December 31, 2008, the fair value of the Bonds is approximately 557 million or approximately 62.5% of face value, based on quotes obtained from over-the-counter trading activities. As a result of the depressed market conditions, the Company repurchased approximately 219 million or 20% of the Bonds at approximately 51.8% of face value in November and December 2008, which resulted in a non-taxable gain of RMB 103.3 million in 2008. The shares issuable upon conversion of the Bonds have been included in the computation of diluted earning per share.

The issuance costs related to the convertible bond offering was amortized within two years from December 2007. Amortization expense for the years ended December 31, 2007 and 2008 amounted to RMB 1,325 and RMB 15,436 and was included within interest expense.

F-24

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

12. SHARE CAPITAL

As of December 31, 2007 and 2008, the authorized share capital of the Company was US$ 1,000,000, divided into 200,000,000 ordinary shares.

(a) Convertible preferred shares

In 2003, the Company issued 17,241,400 and 2,417,605 of Series A and Series B convertible preferred shares at issuance prices of US$ 0.232 and US$ 0.3309, respectively.

On January 24, 2005, the Company also entered into a Series C Preferred Share Subscription Agreement, whereby the Company authorized and issued 3,265,841 shares of the Company’s Series C convertible preferred shares at an issue price of US$ 1.531 per share. On October 31, 2006, upon completion of the Company’s initial public offering, convertible preferred shares were automatically converted into ordinary shares.

(b) Ordinary Shares

In July 2006, the Company issued 2,834,037 ordinary shares in a private placement to certain individuals including certain executives and directors of the Company, for RMB 62,918 or US$ 2.77 per share, pursuant to a financing arrangement agreed amongst the shareholders and the Company’s board of directors in July 2006. The issuance price per ordinary share of US$ 2.77 was lower than the fair value of the Company’s ordinary shares as of the date of the agreement and the difference of RMB 9,564 was recognized as share-based compensation expenses.

On October 31, 2006, upon the completion of the initial public offering, the Company issued 5,874,237 ADSs or 11,748,474 shares, which were priced at US$ 13.8 per ADS. Each ADS represents two ordinary shares. Total proceeds, net of issuance costs paid and payable from the offering, amounted to RMB 581,252. Upon completion of the Company’s initial public offering, all convertible preferred shares were automatically converted into 22,924,886 ordinary shares. The Company’s authorized shares became 200,000,000 shares of US$ 0.005 par value per ordinary share.

In May 2007, the Company completed a secondary offering, during which it issued 1,478,155 ADSs or 2,956,310 shares, which were priced at US$ 34.27 per ADS, or US$ 17.135 per share. Total proceeds, net of issuance costs paid and payable from the offering, amounted to RMB 370,379.

F-25

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

13. SHARE BASED COMPENSATION

On February 28, 2003, the Company adopted a share option plan (“2003 Option Plan”) under which the directors of the Company may, at their discretion, grant options to acquire ordinary shares to any senior executives (including directors) and employees of the Company and/or its subsidiaries. Share options vest annually over a period of 4 years and once vested can be exercised within 5 years from the date of grant. The 2003 Option Plan provides for the issuance of options of the Company’s ordinary shares in the amount of up to 5% of total ordinary and preferred shares outstanding. On May 30, 2005, the Company adopted a board resolution to increase shares reserved under the share option plan to 6% of total ordinary and preferred shares outstanding. On March 30, 2006, the Company adopted a shareholders resolution to increase shares reserved for the share options plan to 9% of total ordinary and preferred shares outstanding. This represented 4,784,226 options based on the then outstanding ordinary shares, which have been fully issued.

In July 2006, the Company also issued 1,020,000 shares of restricted stocks to certain current senior managers to replace the option awards previously granted under the 2003 Option Plan. The restricted stocks were exercisable immediately upon issuance. However, the vesting and other requirements imposed on these restricted stocks were identical to the terms under the original option awards, and therefore, the modification did not result in any incremental compensation cost. At December 31, 2008, there was approximately RMB 901 in deferred compensation costs related to restricted stocks. Share-based compensation expenses associated with restricted stocks were RMB 584, RMB 1,038 and RMB 903 during the years ended December 31, 2006, 2007 and 2008, respectively. The weighted average remaining contractual life was 1.8 years for restricted stock grants outstanding at December 31, 2008.

Changes in the restricted stock grants in 2008 were as follows:


				Weighted
	Number of			Average
	Restricted			Grant-Date
	Stocks			Fair Value (US$)
Outstanding at the beginning of the year		479,110		US$	1.9274
Granted		—			—
Vested		(215,286	)	US$	1.6785
Forfeited		—			—

Outstanding and unvested at the end of the year		263,824		US$	2.1305

On October 2, 2006, the Company adopted a share incentive plan (“2006 Share Incentive Plan”) under which the directors of the Company may, at their discretion, grant awards to employees, directors and consultants of our company or any of our related entities, which include our subsidiaries or any entities in which we hold a substantial ownership interest. Such awards include 1) share options; 2) restricted shares, which represent non-transferable ordinary shares, that may be subject to forfeiture; 3) restricted share units, which represent the right to receive the Company’s ordinary shares at a specified date in the future, which may be subject to forfeiture; 4) share appreciation rights, which provide for payment to the grantee based upon increases in the price of our ordinary shares over a set base price; and 5) dividend equivalent right, which represent the value of the dividends per share that the Company pay. The term of an award shall not exceed 10 years from the date of the grant, except that 10 years is the maximum term of share option granted. The term of each award will be stated in the award agreement. The number of ordinary shares that may be issued under the 2006 Share Incentive Plan is up to 6% of the total outstanding ordinary shares (excluding ordinary shares issued upon exercise of awards pursuant to the 2003 Option Plan and 2006 Share Incentive Plan) from time to time. As of December 31, 2008, this represented 4,409,804 options. The 2006 Share Incentive Plan will expire in 2016. The characteristics of the awards granted during 2006 under this plan are similar to the awards granted under the 2003 Option Plan.

In March 2008, the Company granted 1,093,200 share options to its employees and directors under 2006 Share Incentive Plan, which had a fair value of US$ 3.1826 per option.

F-26

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

The Company entered into an option cancellation and replacement (“modification”) agreement for all unvested options under the 2006 Share Incentive Plan as of October 27, 2008 and adjusted the exercise price to current market price of US$ 3.63. The Company modified 2,443,000 share options with an incremental value of US$ 1.2415, US$ 1.2601, US$ 1.2588 and US$ 0.9830 per option for 26/12/2006 program, 20/04/2007 program, 21/12/2007 program and 27/03/2008 program, respectively. The modification had an immaterial impact on 2008 stock compensation expense and will increase stock compensation expenses by US$ 4,628 thousand from 2009 to 2012.

On October 27, 2008, the Company also granted 280,000 share options to its employees under 2006 Share Incentive Plan, which had a fair value of US$ 1.3942 per option.

The following summarizes the Company’s share option activity under the 2003 Option Plan and 2006 Share Incentive Plan as of and for the year ended December 31, 2006, 2007 and 2008:


						Weighted-		Aggregate
				Weighted		average		Intrinsic
				Average		remaining		Value
				Exercise Price		contractual life		(US$
	Options			(US$)		(years)		millions)

Outstanding as of January 1, 2006		2,831,886		US$	0.7830
Granted		1,927,000		US$	4.6871
Exercised		(520,412	)	US$	0.4521
Forfeited		(19,588	)	US$	1.7353
Cancelled		(1,020,000	)	US$	1.0149

Outstanding as of December 31, 2006		3,198,886		US$	3.1092		3.7	US$	50.1
Vested and exercisable as of December 31, 2006		1,019,826		US$	1.1192		2.9	US$	18.0

Outstanding as of December 31, 2006		3,198,886		US$	3.1092		3.7	US$	50.1
Granted		1,713,600		US$	17.4115
Exercised		(465,736	)	US$	0.8340
Forfeited		(117,848	)	US$	9.9779
Cancelled		(500	)	US$	3.2000

Outstanding as of December 31, 2007		4,328,402		US$	8.8284		3.5	US$	38.9
Vested and exercisable as of December 31, 2007		1,545,083		US$	4.8080		2.9	US$	20.1

Outstanding as of December 31, 2007		4,328,402		US$	8.8284		3.5	US$	38.9
Granted		1,373,200		US$	8.4543
Exercised		(510,124	)	US$	1.1731
Forfeited		(86,808	)	US$	12.5086
Cancelled		(2,444,000	)	US$	14.0088
Modified		2,443,000		US$	3.6300

Outstanding as of December 31, 2008		5,103,670		US$	4.4353		3.6	US$	(0.74	)
Vested and exercisable as of December 31, 2008		1,512,594		US$	6.3937		2.2	US$	(3.18	)

The aggregate intrinsic value represents the total intrinsic value based on the Company’s closing stock price of US$ 18.77, US$ 17.81 and US$ 4.29 per share as of December 31, 2006, 2007 and 2008, respectively.

F-27

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

The following is information relating to options outstanding as of December 31, 2008:


			Outstanding				Exercisable
					Weighted-
	Weighted-				average				Weighted-
	average grant				remaining				average
	date fair value of		Number of		contractual		Number of		remaining
Exercise price	ordinary shares		shares		life (years)		shares		contractual
US$0.3309	US$	0.5701		382,884		0.78		335,234		0.57
US$1.531	US$	1.3327		66,000		1.50		31,000		1.53
US$2.25	US$	1.9730		248,806		1.92		167,880		1.92
US$2.72	US$	2.720		455,000		2.21		200,000		2.21
US$3.20	US$	3.200		247,080		2.50		102,080		2.50
US$5.50	US$	5.500		596,500		2.75		292,000		2.75
US$16.64	US$	16.64		37,000		2.98		37,000		2.98
US$17.39	US$	17.39		347,400		3.30		347,400		3.30
US$3.63	US$	3.63		2,723,000		4.82		—		4.82

				5,103,670				1,512,594

In connection with the share options granted during the years ended December 31, 2006, 2007 and 2008, the Company recognized share-based compensation expense of RMB 2,833, RMB 14,033 and RMB 23,941, respectively. As of December 31, 2008, there was RMB 95,241 of unrecognized share-based compensation cost related to unvested share options which is expected to be recognized over a weighted average period of 3.4 years.

The Company calculated the estimated fair value of share options on the date of grant using the Black-Scholes pricing model with the following assumptions:

2006

2007

2008

Risk-free interest rate⁽¹⁾

4.983% to 5.204%

3.2% to 3.58%

1.6284% to 2.15%

Expected life (years)⁽²⁾

3 to 4.5

2.2 to 4.5

Expected dividend yield⁽³⁾

—

Expected Volatility⁽⁴⁾

28.6% to 34.3%

36.8%

40.12% to 63.14%


(1)		The risk-free interest rate is based on the US Treasury yield for a term consistent with the expected life of the awards in effect at the time of grant.

(2)		The expected life of share options granted under the 2003 Option Plan and the 2006 Share Incentive Plan is generally based on the average between the vesting period and the contractual term for each grant, the “simplified” method for stock option awards with the characteristics of “plain vanilla” option according to Staff Accounting Bulletin No.107.

(3)		The Company has no history or expectation of paying dividends on its ordinary share.

(4)		For the year ended December 31, 2008, the Company estimates the volatility of its ordinary shares at the date of grant based on the historical volatility and implied volatility of comparable companies and itself for a period equal to time from the grant date to the assumed exercised date of the respective options in accordance with the vesting schedule.

F-28

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

14. EARNINGS PER SHARE

Basic earnings per share and diluted earnings per share have been calculated in accordance with SFAS No. 128 as follows:


	2006			2007		2008
Numerator:
Net income for the year		46,894			35,756		101,225
Amount allocated to participating preference shareholders		(16,174	)		—		—

Net income available to ordinary shareholders		30,720			35,756		101,225

Dilutive effect of issuance and buy-back of convertible bond		—			308		(97,903	)
Net income for diluted earnings		30,720			36,064		3,322

Denominator:
Denominator for basic earnings per share—weighted average ordinary shares outstanding		35,550,114			68,323,370		70,863,336
Dilutive effect of share options		1,980,218			2,909,845		1,688,387
Dilutive effect of issuance and buy-back of convertible bond		—			5,650,780		5,485,755

Denominator for diluted earnings per share		37,530,332			76,883,995		78,037,478

Basic earnings per share		0.86			0.52		1.43

Diluted earnings per share		0.82			0.47		0.04

Net income for the year has been allocated to common shares and preference shares based on their respective rights to share in dividends in 2006. The dilutive effect of convertible bond on numerator in 2008 included the impact from the gain on buy-back of convertible bond and interest expense accrued.

15. RELATED PARTY TRANSACTIONS


Name of related parties		Relationships with the Company
Poly Victory Investments Ltd.		Principal shareholder of the Company
BTG		Parent company of Poly Victory Investments Ltd.
Ctrip.com International, Ltd.		Principal shareholder of the Company, common directors
Jian Guo Inns Beijing Ltd. (“Jian Guo Inns”)		Subsidiary of BTG
Shanghai Xin Zhi Trading Co., Ltd.		Minority interest of subsidiary
Fujian Yun Tong Co., Ltd.		Minority interest of subsidiary
Dongguan Kanglv Co., Ltd.		Minority interest of subsidiary
Sun Jian		Director of the Company
May Wu		Senior management of the Company
Liang Rixin		Senior management of the Company

F-29

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

Related party transactions during the years ended December 31 is as follows:


	2006		2007		2008
Sales commissions paid to Ctrip.com International, Ltd.		5,997		8,937		14,767
Rental fees paid to Jian Guo Inns		3,500		2,800		2,800
Long-term loan obtained from BTG		20,000		—		—

As of December 31, significant balances with related parties are as follows:

Due from related parties:


	2007		2008
Shanghai Xin Zhi Trading Co., Ltd.(a)		1,372		1,617


(a)		The amount due from Shanghai Xin Zhi Trading Co., Ltd. represented the advance payment for dividends.

Due to related parties:


	2007		2008
Ctrip.com International, Ltd.		1,298		1,533
Dongguan Kanglv Co., Ltd.		—		1,750
May Wu (b)		2,515		1,569
Sun Jian (b)		1,223		572
Liang Rixin (b)		683		289
Fujian Yun Tong Co., Ltd.		900		900
Jian Guo Inns		32		55

		6,651		6,668


(b)		The amounts due to Sun Jian, Liang Rixin and May Wu represented the consideration paid by them in July 2006 for restricted shares with repurchase feature (Note 13).

The amounts due from and due to related parties as of December 31, 2007 and 2008 mainly arose from the above transactions and payments made by the Company and related parties on behalf of each other. These amounts are not collateralized, free of interest and receivable or payable on demand.

F-30

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

16. COMMITMENTS AND CONTINGENCIES

(a) Capital commitments

As of December 31, 2008, the Group’s commitments related to leasehold improvements, installation of machinery and equipment for the hotel operations amounted to RMB 83,348.

(b) Commitments under operating leases

The Group has entered into lease agreements relating to leased-and-operated hotels that are classified as operating leases.

Future minimum lease payments for non-cancelable operating leases at December 31 are as follows:


	Related party		Non-related party		Total
	RMB		RMB		RMB
2009		2,800		552,735		555,535
2010		2,800		562,358		565,158
2011		2,800		570,227		573,027
2012		2,800		576,218		579,018
2013		2,800		574,770		577,570
Thereafter		9,167		4,184,262		4,193,429

Total		23,167		7,020,570		7,043,737

Rental expenses amounted to RMB 129,534, RMB 223,311 and RMB 491,724 during the years ended December 31, 2006, 2007 and 2008, respectively.

(c) Contingencies

As of December 31, 2008 the Group had no significant outstanding contingency.

17. SUBSEQUENT EVENTS

As of April 24, 2009, the Group had no significant subsequent events.

F-31

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)

18. ADDITIONAL INFORMATION-CONDENSED FINANCIAL STATEMENTS OF THE COMPANY

The separate condensed financial statements of the Company as presented below have been prepared in accordance Securities and Exchange Commission Regulation S-X Rule 5-04 and Rule 12-04 and present the Company’s investments in its subsidiaries under the equity method of accounting as prescribed in APB No.18. Such investment is presented on the separate condensed balance sheets of the Company as ‘Investments in subsidiaries.” The Company was incorporated in May 2006 and immediately became the parent company of Home Inns & Hotels Management (Hong Kong) Limited and its operating subsidiaries. The condensed financial statements have been prepared as if the Company had been in existence since January 1, 2006. Subsidiaries income or loss is included as the Company’s “Share of income from subsidiaries” on the statement of operations. The subsidiaries did not pay any dividend to the Company for the periods presented.

The Company did not have any significant commitment or guarantee as of December 31, 2007 and 2008.


	2006			2007			2008			2008
										US$ thousands
										(Note 2(d))
Condensed statements of operations:
Net revenues		—			—			—			—
Operating expenses		(900	)		(2,503	)		(3,642	)		(534	)

Loss from operations		(900	)		(2,503	)		(3,642	)		(534	)
Share of income from subsidiaries		52,532			78,028			50,364			7,382
Interest income		265			27,250			16,738			2,453
Interest expense		—			(310	)		(20,824	)		(3,052	)
Foreign exchange loss		(5,003	)		(66,709	)		(44,702	)		(6,552	)
Gain on buy-back of convertible bond		—			—			103,291			15,140

Income before income tax expense		46,894			35,756			101,225			14,837

Income tax expense		—			—			—			—
Net income		46,894			35,756			101,225			14,837


Amount allocated to participating preference shareholders		(16,174	)		—			—			—

Net income available to ordinary shareholders		30,720			35,756			101,225			14,837

F-32

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)


	2007		2008		2008
					US$ thousands
					(Note 2(d))
Condensed balance sheet:
Assets
Current assets:
Cash and cash equivalents		1,115,935		149,519		21,916
Restricted cash		173,849		—		—
Prepayments and other current assets		8,100		13,589		1,991
Receivables from related parties		879,897		—		—

Total current assets		2,177,781		163,108		23,907

Investments in subsidiaries (a)		403,370		2,366,312		346,840
Other assets		30,474		—		—
Total assets		2,611,625		2,529,420		370,747

Liabilities
Current liabilities
Payables to related parties		7,017		23,849		3,496
Other payables and accruals		18,903		2,267		331

Total current liabilities		25,920		26,116		3,827

Non-current liabilities
Convertible bond		1,110,308		895,696		131,286

Total liabilities		1,136,228		921,812		135,113

Shareholder’s equity
Ordinary shares (US$0.005 par value; 200,000,000 shares authorized, 70,487,385 and 71,212,795 shares issued and outstanding as of December 31, 2007 and 2008, respectively)		2,874		2,899		425
Additional paid-in capital		1,362,942		1,393,903		204,310
Retained earnings		109,581		210,806		30,899

Total shareholder’s equity		1,475,397		1,607,608		235,634

Total liabilities and shareholder’s equity		2,611,625		2,529,420		370,747


(a)		Investments in subsidiaries include the amounts contributed to Home Inns HK by the Company for Home Inns HK’s investments in PRC subsidiaries.

F-33

HOME INNS & HOTELS MANAGEMENT INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Amounts expressed in RMB in thousands, except share and per share data and where otherwise stated)


	2006			2007			2008			2008
										US$ thousands
										(Note 2(d))
Cash flows used in operating activities:
Net income		46,894			35,756			101,225			14,837
Adjustments to reconcile net income to net cash used in operating activities:
Amortization		—			1,325			—			—
Share of income from subsidiaries		(52,532	)		(78,028	)		(50,364	)		(7,382	)
Interest expense		—			310			5,387			790
Foreign exchange loss		5,003			66,709			44,702			6,552
Gain on buy-back of convertible bonds		—			—			(103,290	)		(15,140	)
Increase in receivables from related parties		—			(700,581	)		—			—
Increase in prepayments and other current assets		—			(7,117	)		(6,207	)		(910	)
Decrease in other assets		—			—			27,135			3,977
(Decrease)/increase in payables to related parties		(37,965	)		(18,175	)		23,717			3,476
Increase/(decrease) in other payables and accruals		3,764			14,583			(16,636	)		(2,438	)

Net cash used in operating activities		(34,836	)		(685,218	)		25,669			3,762


Cash flows used in investing activities:
Investments in subsidiaries		—			—			(1,007,849	)		(147,724	)
Borrowings to a subsidiary		—			(20,090	)		—			—

Cash flows used in investing activities:		—			(20,090	)		(1,007,849	)		(147,724	)


Cash flows from financing activities:
Proceeds from issuance of ordinary shares, net with share issuance costs		650,588			366,866			—			—
Proceeds from issuance of preferred shares		—			1,917			4,872			714
Restricted cash paid and collected for short-term Borrowings of subsidiaries		—			(173,849	)		173,849			25,482
Buy-back of convertible bonds		—			—			(113,370	)		(16,617	)
Payment for bond offering related transaction costs		—			—			(4,884	)		(716	)
Net proceeds from issuance of convertible bond		—			1,082,268			—			—


Net cash provided by financing activities		650,588			1,277,202			60,467			8,863


Effect of foreign exchange rate changes on cash and cash equivalents		(5,003	)		(66,709	)		(44,702	)		(6,552	)


Net increase (decrease) in cash		610,749			505,185			(966,415	)		(141,651	)


Cash, beginning of year		—			610,749			1,115,934			163,567

Cash, end of the year		610,749			1,115,934			149,519			21,916


Supplemental schedule of non-cash investing activities:

Increase of investments in subsidiaries transferred from receivables due from Home Inns HK		—			—			879,897			128,970

F-34

EXHIBIT INDEX


Exhibit
Number			Description of Document

	1.1		Amended and Restated Memorandum and Articles of Association (incorporated by reference to Exhibit 3.2 from our F-1 registration statement (File No. 333-142190), as amended, initially filed with the SEC on April 18, 2007)

	2.1	*	Indenture, dated December 10, 2007, constituting RMB 1,110,000,000 USD Settled Zero Coupon Convertible Senior Bonds due December 10, 2012

	4.1		Employment Agreement between the Registrant and James Zong (incorporated by reference to Exhibit 4.1 of our annual report on Form 20-F (File No. 001-33082) filed with the SEC on April 18, 2008)

	4.2		Agreement for the Sale and Purchase of Hong Kong AI Home Hotel Investment Limited dated October 21, 2007 (incorporated by reference to Exhibit 4.2 of our annual report on Form 20-F (File No. 001-33082) filed with the SEC on April 18, 2008)

	4.3		English translation of Agreement for the Sale and Purchase of Shanghai Chuwen Holding Investment Ltd. dated October 21, 2007 (incorporated by reference to Exhibit 4.3 of our annual report on Form 20-F (File No. 001-33082) filed with the SEC on April 18, 2008)

	8.1	*	Subsidiaries of the Registrant

	9.1		Shareholders agreement, dated June 29, 2006 (incorporated by reference to Exhibit 4.8 from our F-1 registration statement (File No. 333-142190), as amended, initially filed with the SEC on April 18, 2007)

	11.1		Code of Business Conduct and Ethics of the Registrant (incorporated by reference to Exhibit 99.1 from our F-1 registration statement (File No. 333-137800), as amended, initially filed with the SEC on October 4, 2006)

	12.1	*	CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	12.2	*	CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	13.1	*	CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	13.2	*	CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	23.1	*	Consent of Maples and Calder

	23.2	*	Consent of PricewaterhouseCoopers Zhong Tian CPAs Limited Company


*		Filed with this Annual Report on Form 20-F.

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

Homeinns Hotel (HMIN) Inactive 20-F2008 FY Annual report (foreign)

Content analysis