SECURITIES AND EXCHANGE COMMISSION

o		REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (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

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

eLong, Inc.

Xingke Plaza Building, Tower B, Third Floor
10 Middle Jiuxianqiao Road, Chaoyang District

Beijing 100016, People’s Republic of China

Guangfu Cui, Chief Executive Officer
Telephone: +(8610) 5806-2288 / Facsimile: +(8610) 6436-6019
Xingke Plaza Building, Tower B, Third Floor
10 Middle Jiuxianqiao Road, Chaoyang District
Beijing 100016, People’s Republic of China

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 $0.01 per ordinary share		The NASDAQ Global Market

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

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

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2008: 18,513,519 ordinary shares, par value US$0.01 per share; 28,550,704 high-vote ordinary shares, par value US$0.01 per share.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ

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. Yes o No þ

Note—checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the U.S. Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

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

Large accelerated filer  o		Accelerated filer  þ		Non-accelerated filer  o

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

U.S. GAAP þ International Financial Reporting Standards as issued by the International Accounting Standards Board o Other o

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 17 o Item 18 o

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). Yes o No þ

 

 

TABLE OF CONTENTS

		Page
PART I
Item 1: Identity of Directors, Senior Management and Advisers			3
Item 2: Offer Statistics and Expected Timetable			3
Item 3: Key Information			3
Item 4: Information on the Company			17
Item 4A: Unresolved Staff Comments			31
Item 5: Operating and Financial Review and Prospects			31
Item 6: Directors, Senior Management and Employees			52
Item 7: Major Shareholders and Related Party Transactions			66
Item 8: Financial Information			77
Item 9: The Offer and Listing			78
Item 10: Additional Information			79
Item 11: Quantitative and Qualitative Disclosure About Market Risk			84
Item 12: Description of Securities other than Equity Securities			84
PART II
Item 13: Defaults, Dividend Arrearages and Delinquencies			84
Item 14: Material Modifications to the Rights of Security Holders and Use of Proceeds			84
Item 15: Controls and Procedures			85
Item 16A: Audit Committee Financial Expert			87
Item 16B: Code of Ethics			87
Item 16C: Principal Accountant Fees and Services			87
Item 16D: Exemptions from the Listing Standards for Audit Committees			88
Item 16E: Purchases of Equity Securities by the Issuer and Affiliated Purchasers			88
Item 16G: Corporate Governance			88
PART III
Item 17: Financial Statements			89
Item 18: Financial Statements			89
Item 19. Exhibits			89
Exhibit 4.24
Exhibit 4.27
Exhibit 4.28
Exhibit 4.29
Exhibit 4.30
Exhibit 4.31
Exhibit 4.32
Exhibit 4.33
Exhibit 4.34
Exhibit 4.35
Exhibit 4.36
Exhibit 8.1
Exhibit 12.1
Exhibit 12.2
Exhibit 13.1
Exhibit 13.2
Exhibit 15.1
Exhibit 15.2
Exhibit 15.3

In this annual report on Form 20-F, references to “we,” “us,” “our company,” “our” and “eLong” are to eLong, Inc., its subsidiaries, and additionally, in the context of describing our operations, our affiliated Chinese entities. References to “China” or the “PRC” are to the People’s Republic of China, excluding for the purpose of this annual report Hong Kong, Macau and Taiwan. Unless otherwise noted, references to “Expedia” are to Expedia, Inc. (NASDAQ: EXPE), and references to “Expedia Asia Pacific” are to Expedia Asia Pacific-Alpha Limited.

Unless the context otherwise requires, references in this annual report to “shares” or “ordinary shares” are to our ordinary shares, par value US$0.01 per share. Such references do not cover our high-vote ordinary shares, as we refer separately to such shares using the term “high-vote ordinary shares.” References to “ADSs” are to our American depositary shares, each of which represents two ordinary shares, and references to “ADRs” are to the American depositary receipts that evidence our ADSs. References to the “NASDAQ stock market” are to the NASDAQ Global Market. References to our “articles of association” are to our Second Amended and Restated Articles of Association.

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America, or “U.S. GAAP.” Our consolidated financial statements are expressed in Renminbi, the legal currency of China. In this annual report, references to “RMB” are to Renminbi and references to “U.S. dollars,” “US$” or “$” are to United States dollars. Our financial year ends on December 31 of each calendar year and, unless indicated otherwise, references to any year refer to the calendar year ended December 31 of the year specified.

The “eLong” characters in Chinese as well as “eLong.com” in English are among our registered trademarks in China. This annual report also contains product and service names of companies other than eLong that are trademarks of their respective owners.

We intend to make this annual report publicly available from our Internet website (http://www.eLong.net) without charge promptly following the date of filing with the U.S. Securities and Exchange Commission (the “SEC”). None of the information contained on our websites is incorporated by reference into this annual report. We assume no obligation to update or revise any part of this annual report, whether as a result of new information, future events or otherwise, unless required to do so by applicable law.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This annual report contains certain forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements, which are contained principally in the sections entitled “Item 3: Key Information—Risk Factors,” “Item 4: Information on the Company—Business” and “Item 5: Operating and Financial Review and Prospects,” relate to future events or our future financial performance, our ability to continue to control our costs and maintain the quality of our services, the expected growth of and change in the travel and online commerce industries in China, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks and other factors include those listed under “Item 3: Key Information—Risk Factors.” In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other comparable terminology. One or more of these factors could materially and adversely affect our operating results and financial condition in future periods. We cannot assure you that we will attain any estimates or become profitable or that the assumptions on which they are based are reliable.

You should not rely upon forward-looking statements as predictions of future events. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements contained in this annual report are qualified by reference to this cautionary statement.

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.

Selected Financial Data

You should read the following information in conjunction with our consolidated financial statements and related notes and “Item 5: Operating and Financial Review and Prospects” below.

The selected consolidated statements of operations (other than ADS data) and selected consolidated cash flow data for the years ended December 31, 2006, 2007 and 2008, and the selected consolidated balance sheet data as of December 31, 2007 and 2008, are derived from our audited consolidated financial statements included elsewhere in this annual report and should be read in conjunction with these consolidated financial statements and related notes. The selected consolidated statements of operations (other than ADS data) and selected consolidated cash flow data for the years ended December 31, 2004 and 2005 and the selected consolidated balance sheet data as of December 31, 2004, 2005 and 2006 are derived from our audited consolidated balance sheet and related notes which are not included in this annual report. These consolidated financial statements are prepared in accordance with U.S. GAAP.

Our consolidated financial statements are expressed in Renminbi, the legal currency of China. Solely for convenience, this annual report contains translations of Renminbi amounts into U.S. dollars at specified rates. For more information regarding exchange rates, see the section entitled “Exchange Rate Information” below.

SELECTED CONSOLIDATED FINANCIAL DATA

		eLong, Inc.
		Year ended December 31,
		2004				2005				2006				2007				2008				2008
		RMB				RMB				RMB				RMB				RMB				US$
		(in thousands, except for per share data)
Selected Consolidated Statements of Operations Data
Net revenues			124,767				179,842				249,841				297,586				327,313				47,975
Gross profit			108,273				139,395				187,596				215,089				230,317				33,758
Total operating expenses			(131,059	)			(185,624	)			(203,608	)			(229,678	)			(271,999	)			(39,867	)
Income (loss) from operations			(22,786	)			(46,229	)			(16,012	)			(14,589	)			(41,682	)			(6,109	)
Income (loss) from continuing operations			(20,803	)			(43,285	)			(444	)			(25,691	)			(76,593	)			(11,227	)
Net income (loss)			(18,982	)			(60,518	)			1,040				(25,588	)			(76,593	)			(11,227	)
Income (loss) per share from continuing operations			(1.14	)			(0.87	)			(0.01	)			(0.51	)			(1.54	)			(0.23	)
Total basic income (loss) per share			(1.04	)			(1.22	)			0.02				(0.51	)			(1.54	)			(0.23	)
Total diluted income (loss) per share			(1.04	)			(1.22	)			0.02				(0.51	)			(1.54	)			(0.23	)
Income (loss) per ADS from continuing operations			(2.28	)			(1.74	)			(0.02	)			(1.02	)			(3.08	)			(0.46	)
Total basic income (loss) per ADS			(2.08	)			(2.44	)			0.04				(1.02	)			(3.08	)			(0.46	)
Total diluted income (loss) per ADS			(2.08	)			(2.44	)			0.04				(1.02	)			(3.08	)			(0.46	)

		eLong, Inc.
		As of December 31,
		2004				2005				2006				2007				2008				2008
		RMB				RMB				RMB				RMB				RMB				US$
		(in thousands)
Selected Consolidated Balance Sheet Data
Cash and cash equivalents			610,047				988,560				1,199,323				1,138,447				321,541				47,130
Working capital(1)			639,099				1,013,590				1,106,345				1,079,590				898,693				131,725
Property and equipment, net			15,428				33,306				37,809				43,962				52,484				7,693
Total assets			741,074				1,188,421				1,334,908				1,331,668				1,137,964				166,796
Long-term obligation			—				2,287				980				—				—				—
Accumulated deficit			(43,205	)			(103,097	)			(102,056	)			(127,644	)			(204,237	)			(29,936	)
Shareholders’ equity			678,889				1,088,330				1,199,799				1,184,611				1,012,181				148,359

		eLong, Inc.
		Year ended December 31,
		2004				2005				2006				2007				2008				2008
		RMB				RMB				RMB				RMB				RMB				US$
		(in thousands)
Selected Consolidated Cash Flow Data
Net cash provided by (used in) operating activities			(5,339	)			30,478				76,554				42,349				(14,076	)			(2,063	)
Net cash provided by (used in) investing activities			(30,140	)			(32,813	)			72,985				(43,638	)			(641,501	)			(94,027	)
Net cash provided by (used in) financing activities			572,460				404,058				95,140				7,355				(98,331	)			(14,413	)

Exchange Rate Information

We conduct our business primarily in China and our revenues and expenses are primarily denominated in Renminbi. This annual report contains translations of Renminbi amounts into U.S. dollar amounts at specific rates solely for the convenience of the reader.

The translations of Renminbi amounts into U.S. dollar amounts in this annual report are based on the noon buying rate in the City of New York for cable transfers of Renminbi as published by the Federal Reserve Bank of New York. Unless otherwise noted, all translations from Renminbi amounts to U.S. dollar amounts and from U.S. dollar amounts to Renminbi amounts 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. The noon buying rate as of April 30, 2009 was RMB6.8180 to US$1.00. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollar or Renminbi amounts, as the case may be, at any particular rate, the rates stated herein, or at all. The Chinese government imposes controls over the conversion of Renminbi into foreign currencies. For discussion of the effects of currency control and fluctuating exchange rates on the value of our shares and ADSs, see “Item 3: Key Information—Risk Factors—Risks Related to Doing Business in the People’s Republic of China—Governmental control of currency conversion may affect our ability to pay dividends and the value of our ADSs” and “Item 3: Key Information—Risk Factors—Risks Related to Doing Business in the People’s Republic of China—Fluctuation in the value of the Renminbi may materially and adversely affect our financial results and the value of our company and ADSs.”

The tables below sets forth the average noon buying rates between Renminbi and U.S. dollars for each of the years indicated, calculated by averaging the noon buying rates on the last day of each month of the years shown.

Average Exchange Rates of Renminbi per U.S. Dollar

		Average
Year ended December 31, 2004			8.2768
Year ended December 31, 2005			8.1826
Year ended December 31, 2006			7.9579
Year ended December 31, 2007			7.5806
Year ended December 31, 2008			6.9193

The table below sets forth the high and low exchange rate between Renminbi and U.S. dollars for each of the six months from November 2008 through April 2009.

Recent Exchange Rates of Renminbi per U.S. Dollar

		High				Low
November 2008			6.8373				6.8220
December 2008			6.8842				6.8225
January 2009			6.8403				6.8225
February 2009			6.8470				6.8241
March 2009			6.8438				6.8240
April 2009			6.8361				6.8180

Risk Factors

You should carefully consider each of the following risks and uncertainties associated with our company and the ownership of our securities. You should pay particular attention to the fact that we conduct our operations in China and are governed by a legal and regulatory environment that differs significantly from the environment of the United States or other countries with which you may be familiar. Additional risks not currently known to us or that we currently deem immaterial may also have an adverse impact on our business operations.

Risks Related to Our Business

We have sustained losses in the past and cannot assure you that we will grow or be profitable in the future.

We sustained net losses in each of our fiscal years from 2004 through 2008, other than 2006. Moreover, our growth rate has fluctuated significantly during the period from 2004 through 2008. As a result, we cannot assure you that we will be able to grow our business or to be profitable at any time in the future.

Declines or disruptions in the travel industry may reduce our revenues.

Our business is affected by the condition of the travel industry in China. Travel expenditures are highly sensitive to business and personal discretionary spending levels and thus tend to decline during general economic downturns, such as the slowdown in economic growth arising from the international financial crisis which began in 2008. Adverse trends or events that tend to reduce travel and are likely to reduce our revenues include:

	•		declines in economic growth, recessions, and financial or other economic crises;
	•		increases in prices in the hotel, airline or other travel-related sectors;

	•		the occurrence of travel-related accidents;
	•		outbreaks, or the fear of outbreaks, of H1N1 flu (swine flu), severe acute respiratory syndrome, avian flu or other diseases;
	•		terrorist attacks or threats of terrorist attacks or wars;
	•		natural disasters or poor weather conditions.

As a result of any of these events, over which we have no control, our results could be severely and adversely affected.

Our business may be harmed if we fail to strengthen our brand and provide high quality service to our customers and business partners.

We must successfully promote our eLong brand in order to grow our business. We must introduce new consumers to the eLong brand and ensure high levels of service in order for the eLong brand to be associated with quality and value. If we fail to ensure high service levels and strengthen our brand recognition among our current and potential customers and business partners, our operating results and financial condition may be adversely affected.

We may not be able to compete successfully against our current or future competitors.

We face many sources of competition, including other providers of hotel and flight reservation services, such as Ctrip.com and traditional travel agencies. As we do not have exclusive arrangements with our suppliers and our business involves relatively low fixed costs, new competitors face low barriers to entry in our industry. We also face increasing competition from hotels and airlines as they increase their efforts to sell directly to consumers and may engage in alliances with other travel service providers. Moreover, large state-owned companies and/or established international players may choose to enter the PRC travel market in the future, either as sole entrants or in conjunction with our existing or future competitors. Our potential and existing competitors may have competitive advantages over us including more well-known brand names, larger customer bases and greater financial, marketing and other expertise and resources. Therefore, we cannot assure you that we will be able to successfully compete against our current or future competitors.

We are dependent on our ability to establish and maintain favorable arrangements with our travel suppliers and distribution partners.

We are dependent on continued relationships on satisfactory terms with our air, hotel and other travel service providers. In particular, the ability to contract in advance for the guaranteed availability of hotel rooms is crucial to our business. However, we do not have exclusive contractual arrangements with our travel suppliers, and we must renew these contracts on an ongoing basis. In addition, third party service providers may impose new or greater requirements upon us to provide guaranteed deposits, escrow funds, prepayment of commission or other preferential terms. We cannot assure you that we will be able to maintain our current relationships, establish new ones, or obtain favorable contractual terms from our service providers.

We are also dependent on continued relationships and agreements with certain third-party distribution partners, such as telecommunications companies to which we pay a commission for hotel reservations they generate for us by transferring their customer calls and online inquiries to our call center and online reservation systems. Third-party distribution partners accounted for approximately one-third of our total revenue for the year ended December 31, 2008. Our relationships with the third parties are non-exclusive, and thus the third parties are generally able to choose other service providers for all or a portion of their commercial cooperation, rather than continuing such commercial relationships with us. We cannot assure you that we will be able to maintain satisfactory relationships, obtain favorable contractual terms with such distribution partners or establish new relationships with distribution partners on satisfactory terms in the future.

Substantial uncertainties exist with respect to the interpretation and application of PRC laws and regulations restricting foreign investment in the air ticketing, travel agency and Internet content provision businesses as well as other laws affecting our ownership structure and business operations.

We are a Cayman Islands corporation, and are therefore treated as a foreign entity under applicable PRC laws and regulations. The PRC government regulates Internet access, the distribution of online information, the conduct of online commerce, and the provision of travel agency services through strict licensing requirements and other regulations. These regulations include provisions limiting foreign ownership in PRC companies providing Internet information and other online Internet services, air ticket booking services and travel agency services. As a result, we conduct our business through contractual arrangements between our subsidiaries, including eLongNet Information Technology (Beijing) Co., Ltd. (“eLong Information”) and our affiliated Chinese entities, including Beijing eLong Information Technology Co., Ltd. (“Beijing Information”), Beijing eLong Air Services Co., Ltd. (“Beijing Air”), Hangzhou eLong Air Service Co., Ltd. (“Hangzhou Air”) and Beijing eLong International Travel Co., Ltd. (“Beijing Travel”), and Beijing Xici Interactive Information Technology Co., Ltd. (“Beijing Xici”). Beijing Information and Beijing Xici each holds a license for Internet content provision services; Beijing Information holds a license for call center services, and a license for wireless services; Beijing Air holds air ticketing licenses; and, Beijing Travel holds domestic travel agency and international inbound and outbound travel licenses. These licenses and approvals are essential for our business operations.

We cannot assure you that PRC government authorities will not determine that our current ownership structure and these contractual arrangements are not in compliance with applicable laws and regulations. If we or any of our affiliated Chinese entities are found to be in violation of any existing or future PRC laws or regulations, the relevant governmental authorities would have broad discretion in taking action to address such violation, including, without limitation:

	•		levying fines or confiscating our income or the income of our affiliated Chinese entities;
	•		revoking our business licenses or the business licenses of our affiliated Chinese entities;
	•		requiring us and/or our affiliated Chinese entities to restructure our ownership structure or operations; and
	•		requiring that we discontinue any or all portions of our Internet content provision, air ticketing or travel agency businesses.

Any of the above could cause significant disruptions to, and have a material adverse effect on, our operations.

Our operations may be materially and adversely affected if we or any of our affiliated Chinese entities fails to obtain or maintain all relevant permits and approvals in the heavily regulated air ticketing, travel agency, and Internet industries.

The Chinese government extensively regulates the air ticketing and travel agency industries, as well as most Internet related activities. In order to conduct our business, we or our affiliated Chinese entities must possess and maintain valid permits or approvals from different regulatory authorities. Any failure to obtain or maintain any of the required permits or approvals may subject us to various penalties, such as fines or suspension of operations in these regulated businesses, which could severely disrupt our business operations.

We are controlled by Expedia and conflicts of interest may arise.

Expedia controls approximately 96% of our voting power and has the power to control the election and appointment of our board of directors, and thus we are a “controlled company” as defined in Rule 5615 of the NASDAQ Listing Rules. As a result of our ownership structure, Expedia is generally able to exercise control over all matters requiring approval by our board of directors or our shareholders.

Conflicts of interest may arise between Expedia and us, including corporate opportunities, potential acquisitions or transactions as well as other matters. Expedia’s control could prevent a sale of our company or removal or replacement of any or all of our board of directors, even if such actions would be beneficial to our other shareholders. In addition, some of our directors may have interests in both us and in Expedia, which could cause them to have conflicts of interest.

Other than contracts for cooperation in certain specific areas as discussed in this annual report, Expedia is under no obligation to provide us with benefits relating to its travel related businesses. Thus we cannot assure you that we will realize any future benefits as a result of being controlled by Expedia, and we may be adversely affected by any conflicts of interest between eLong and Expedia.

We depend on our senior executives and other employees, and our business may be severely disrupted if we lose their services.

Our business operations depend on the continuing performance and service of our senior executives and other key employees. We rely on their expertise in operations, finance, technology and travel services and we depend on their relationships with suppliers and regulators. In the last two years, we have experienced substantial turnover at all levels of our company including our senior management. If one or more of our senior executives or other key employees are unable or unwilling to continue in their present positions, we may not be able to easily replace them, and may incur additional expenses to recruit and train replacement personnel. Moreover, if any of our senior executives joins or forms a competitor, we may lose customers and suppliers. We cannot guarantee that we will be able to successfully enforce the noncompetition provisions of our employment agreements with such senior executives or key employees.

We may not use our existing cash, cash equivalents and short-term investments effectively.

Cash, cash equivalents and short-term investments comprise a significant portion of our total assets. Our failure to make effective use of our cash, cash equivalents and short-term investments could prevent us from improving our financial results, operations and competitive position. A significant portion of our cash, cash equivalents and short-term investments are denominated in U.S. dollars. In 2008, we recorded a foreign exchange loss of RMB61.1 million (US$9.0 million) resulting from the appreciation of the Renminbi. If the Renminbi continues to appreciate we will continue to record exchange losses on these cash, cash equivalents and short-term investments and these losses could be material to our results of operations.

Our quarterly results may fluctuate due to seasonality in the travel industry in China.

Our business experiences fluctuations, reflecting seasonal variations in demand for travel services in China. For example, the first calendar quarter of each year generally contributes the lowest portion of our annual net revenues primarily due to a slowdown in business activity during the Chinese New Year holiday. In addition, seasonality of the PRC travel market is affected by PRC national and provincial government regulation of the calendar of public holidays, including for example, the decision by the State Council in 2008 to restructure the annual calendar of public holidays by adding a few shorter holidays and reducing the May 1st holiday period from one week to three days. Consequently, our revenues may fluctuate significantly from quarter to quarter.

We may not be able to successfully execute future acquisitions or efficiently manage any acquired business.

A component of our business strategy is to consider acquisitions of businesses in areas that may provide incremental revenue. This may require a significant commitment of management time, capital investment and other resources. We cannot assure you that we will be successful in identifying, negotiating and completing acquisitions on terms favorable to us. In addition, acquisitions that we complete may not be successfully integrated into our existing operations, and thus our operations and results may be adversely affected.

Our business depends on the technology infrastructure and service of third parties.

We rely on third-party computer systems and service providers, including the computerized reservation systems of hotels, airlines and third party service providers such as TravelSky as well as our distribution partners, to make reservations and confirmations, issue air tickets, make deliveries and receive payments. Third parties provide, for instance, telecommunications access lines, significant computer systems and software licensing, support and maintenance service and air ticket delivery. Any interruption in these or other third-party services or deterioration in their performance could impair the quality of our service. Furthermore, if our arrangements with any of these third parties are terminated, we may not find an alternate source of support on a timely basis or on satisfactory terms.

Our business is subject to risks associated with protection of confidential data and credit card fraud.

An increasing portion of our revenue is paid by customers using credit cards. There have been and likely will continue to be attempts to use fraudulently obtained credit card information to pay for our products and services. As fraudulent credit card schemes become more sophisticated, it may become increasingly difficult and costly for us to detect and prevent such fraud, which could cause us to incur significant and unforeseen losses adversely affecting our results of operations.

Our transactions are conducted through our websites or through other network and telecommunications systems. In such transactions, maintenance and secure transmission of confidential information (such as customer itineraries, hotel and other reservation information, personal information and billing information) is essential to maintain consumer and supplier confidence. Due to rapidly advancing technology and the growing sophistication and variety of data security threats, our current security measures may not be adequate to prevent all types of confidentiality and data breaches and to minimize any losses caused thereby. Security breaches on our own, public or third party systems, could expose us to significant losses, adverse publicity and litigation for leakage or disclosure of confidential customer or supplier information, which could harm our reputation and ability to attract customers.

We do not have comprehensive off-site backup systems or business insurance.

Our call center and substantially all of our computer and communications systems are located at our headquarters in Beijing and therefore vulnerable to damage or interruption from man-made or natural causes. Moreover, we do not have a comprehensive disaster recovery solution and do not carry business interruption insurance to compensate us for losses that may occur.

We depend on our systems and information infrastructure to support all aspects of our booking transactions. If we are unable to upgrade and maintain our systems, we may experience system outages, capacity constraints, system obsolescence or other unintended system disruptions which may result in slower response times, impaired customer service, delays in fulfilling customer orders and ticket deliveries, and inaccurate reporting or processing of travel information. Any of these factors or any business disruption or disaster may result in substantial costs and diversion of resources, which may adversely affect our operations and results.

Our commission revenues may decrease if our hotel suppliers fail to accurately report data concerning our customer hotel stays.

A substantial majority of our revenues is currently generated through commissions received from hotels for room nights booked through us. Generally, we do not receive direct payments for hotel bookings from our customers, instead, we receive commissions from the hotels after the completion of a customer’s stay. We maintain records of customer bookings and then verify these with each hotel, generally on a monthly basis, in order to determine the commission payable to us. In addition to our records, we rely on the hotel and customer to provide us accurate information regarding customer check-in and check-out dates. If our hotel suppliers provide us with inaccurate information with respect to number or length of stays of our customers, our revenues may be adversely affected.

We may become involved in litigation regarding our intellectual property rights or our website contents.

From time to time, we may have to resort to litigation to enforce our intellectual property rights, which could result in substantial costs and diversion of resources. In addition, third parties may initiate litigation against us for alleged infringement of their proprietary rights. In the event of a successful claim of infringement and our failure or inability to develop non-infringing technology or to obtain a license for the infringed or similar technology on a timely basis on commercially acceptable terms, our business could suffer.

Our websites contain information about hotels, flights and popular vacation destinations, and other travel-related topics. Third parties could take legal action against us for any alleged false or misleading information accessible on our websites. Any claims could be time consuming to defend, result in litigation and divert management’s attention and resources.

If our affiliated Chinese entities violate their contractual agreements with us, our business could be harmed, and we may have to resort to litigation to enforce our rights, which could be time-consuming and ineffective.

We depend substantially on our affiliated Chinese entities to conduct our operations. While we have no direct ownership interest in these entities, we have established effective economic control through a series of contracts with these affiliated Chinese entities and their shareholders. These agreements may not be as effective in providing control as would direct ownership of these businesses. In the event that there is a dispute with respect to our agreements with our affiliated Chinese entities or their shareholders, we would have to rely on the PRC legal system for remedies. Any legal proceeding relating to such dispute could result in a material disruption of our business and damage to our reputation, and the outcome of such litigation would be uncertain.

Risks Related to Doing Business in the People’s Republic of China

A slow-down of, or increased volatility in, economic growth in China may adversely affect our growth and profitability.

Our financial results have been, and are expected to continue to be, significantly affected by the condition of the economy and travel industry in China. In 2008, the economy of China experienced several adverse events, including unseasonably strong winter storms in the first quarter, the severe Sichuan earthquake in the second quarter, and the general slowing of the global and Chinese economy due to the international financial crisis during the fourth quarter. China’s economy slowed significantly in the second half of 2008 and this slowdown may continue into 2009 and beyond. We anticipate that demand for travel services in China will continue to be linked to the condition of the broader PRC economy for the foreseeable future. We cannot assure you that sustained or rapid economic growth will resume at any time in the future, or that the current or any future slow-down or increased economic volatility will not adversely affect our business. Any slow-down of, or increased volatility in, economic growth in China is likely to reduce expenditures for travel, which in turn would reduce our revenues.

We would be adversely affected by the discontinuation of any preferential tax treatments currently available to us.

Our subsidiary, eLong Information, and one of our affiliated Chinese entities, Beijing Information, each enjoy a 15% preferential enterprise income tax rate for the 2008 calendar year, as they qualified as “High New Technology Enterprises” under the PRC Corporate Income Tax Law (the “CIT Law”) and related regulations. The CIT Law, which became effective on January 1, 2008, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises, but a lower 15% tax rate for High New Technology Enterprises. We cannot assure you that eLong Information and Beijing Information will continue to qualify for the lower tax rate in future years.

The CIT Law also provides that enterprises established in foreign countries or regions for which the “de facto management bodies” are located within the PRC will be considered as PRC “resident enterprises” and will be subject to CIT at the rate of 25% on their global income. On April 22, 2009, the State Administration of Taxation issued the Notice on Issues Regarding Recognition of Overseas Incorporated Enterprises Controlled by PRC Domestic Enterprises as PRC Resident Enterprises Based on the De Facto Management Body Criteria (the “Tax Residency Notice”). Under the Tax Residency Notice, which was retroactively effective as of January 1, 2008, an overseas enterprise will be deemed to be a PRC tax resident — and thus subject to CIT of 25% on its global income if it satisfies certain specified conditions. Otherwise, a “non-resident enterprise” is subject to withholding tax at the rate of 10% with respect to its PRC-source dividend income distributed from earnings accumulated after January 1, 2008, subject to applicable tax agreements or treaties between the PRC and other tax jurisdictions. Although we are controlled by a company located outside of the PRC, Expedia, through Expedia Asia Pacific, we cannot assure you that the PRC tax authorities will not treat eLong, Inc. as a PRC tax resident, and if so, we would be subject to PRC CIT on our worldwide income, and such determination may have retroactive effect.

Uncertainties and restrictions in the PRC legal system may have a material and adverse impact on our business and limit the protections available to you.

There are substantial uncertainties regarding the interpretation of current and new PRC laws and regulations. It is possible that new laws and regulations will affect our existing and future businesses in ways which we cannot at this time predict, mitigate or prevent, and that any new laws and regulations may be applied retroactively. The PRC authorities retain broad discretion in the interpretation of, and determination of violations of, laws and regulations, including levying fines and penalties, revoking or narrowing the scope of business licenses and requiring other corrective actions. Any such action could have a material adverse effect on our business, results of operations and financial condition, and limit the legal protections available to you.

Fluctuation in the value of the Renminbi may materially and adversely affect our financial results and the value of our company and ADSs.

The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the China’s political and economic conditions. The conversion of RMB into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. Currently, the RMB is permitted to fluctuate within a narrow and managed band against a basket of certain foreign currencies. In the future, the PRC government may adopt a more flexible currency policy, which could result in increased exchange rate volatility and a significant appreciation of the RMB against the U.S. dollar.

Substantially all of our revenue-generating operations are transacted in Renminbi, and we have a significant portion of our financial assets denominated in U.S. dollars. In 2008, we recorded a foreign exchange loss of RMB61.1 million (US$9.0 million) resulting from the appreciation of the Renminbi during 2008. If the Renminbi continues to appreciate we will continue to record unrealized exchange losses on United States dollar-denominated assets and these losses could be material to our results of operations, which could adversely affect the market price for our ADSs.

Governmental control of currency conversion may affect our ability to pay dividends and the value of our ADSs.

We receive substantially all of our revenues in Renminbi, which is currently not a fully convertible currency. Under China’s existing foreign exchange regulations, payments of current account items, including profit distributions and interest payments, can be made in foreign currencies without prior approval from the State Administration of Foreign Exchange. The Chinese government, however, may restrict access in the future to foreign currencies for current account transactions. If this were to occur, we might not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs, which could adversely affect the value of our ADSs.

PRC regulations may limit our ability to transfer our funds held overseas into China.

On August 29, 2008, the PRC State Administration of Foreign Exchange (“SAFE”) promulgated a notice regulating the conversion by a foreign-invested company of foreign currency into Renminbi by restricting how the converted Renminbi may be used. The notice provides that the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies. The use of such Renminbi capital may not be changed without SAFE’s approval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. This notice may significantly limit our ability to transfer our existing cash to our PRC operating subsidiaries, which may adversely affect our business development, and we may not be able to convert our cash held overseas into Renminbi to invest in, or to acquire, assets or companies in the PRC.

Our subsidiaries and affiliated Chinese entities in China are subject to restrictions on paying dividends or making other payments to us, which may decrease our primary internal source of funds.

As a holding company incorporated in the Cayman Islands, we rely on dividends from our subsidiaries in China and consulting and other fees paid to us or our subsidiaries by our affiliated Chinese entities. Current PRC regulations permit our subsidiaries to pay dividends to us only out of their accumulated profits subject to a 10% withholding tax, if any, determined in accordance with Chinese accounting standards and regulations. Our wholly-owned foreign subsidiaries are required to provide for certain statutory reserves, namely a general reserve, an enterprise expansion fund and a staff welfare and bonus fund. These subsidiaries are required to allocate at least 10% of their after tax profits on an individual company basis as determined under PRC GAAP to the general reserve and have the right to discontinue allocations to the general reserve if such reserve has reached 50% of registered capital on an individual company basis. These reserves are not distributable as cash dividends. Further, if our subsidiaries and affiliated Chinese entities 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, which in turn would limit our ability to pay dividends on our ordinary shares.

Our online business relies on the telecommunications infrastructure of China’s Internet.

Most access to the Internet in China is maintained through a network owned by the local Chinese telecommunications carriers (e.g. China Unicom and China Telecom) under the regulatory supervision of China’s Ministry of Industry and Information Technology (the “MIIT,” formerly known as the Ministry of Information, or “MII”). In addition, networks in China connect to the Internet through a government-controlled international gateway, which is the only channel through which domestic Chinese users connect to the international Internet network. We rely on this infrastructure and China Unicom and China Telecom to provide data communications capacity, primarily through local telecommunications lines. We would have no access to alternative networks and services, on a timely basis, if at all, in the event of any infrastructure disruption or failure. Moreover, the Internet infrastructure in China may not support the demands associated with continued growth in Internet usage in China.

Risks Related to Ownership of Our ADSs or Ordinary Shares and Our Trading Market

Failure to maintain effective internal controls could have a material and adverse effect on the trading price of our ADSs.

Our management has concluded that our internal control over financial reporting is effective, as of December 31, 2008. See “Item 15. Control and Procedures.” Our independent registered public accounting firm, Ernst & Young Hua Ming (“Ernst & Young”) , has issued an attestation report on our internal control over financial reporting, which is included in this Form 20-F. Effective internal controls are necessary for us to produce reliable financial reports. Any failure to maintain the effectiveness of our internal controls over financial reporting, in addition to causing us to be unable to report in future annual reports on Form 20-F that such internal controls are effective, could result in the loss of investor confidence in the reliability of our financial statements, which in turn could adversely affect the trading price of our ADSs. Furthermore, we may need to incur additional costs and use additional management and other resources in an effort to maintain compliance with the Sarbanes-Oxley Act or other requirements of U.S. securities laws.

The market price for our ADSs may be volatile.

The market price of our ADSs has been volatile and is likely to continue to be so. Since our initial public offering, the trading price of our ADSs has ranged from a low of US$3.15 per ADS to a high of $25.99 per ADS. On April 30, 2009, the closing price of our ADSs was US$6.30 per ADS. Our trading price may continue to be subject to wide fluctuations in response to various factors including the following:

	•		actual or anticipated fluctuations in our quarterly operating results;
	•		changes in financial estimates and evaluations by securities analysts;
	•		general market and index trends in the NASDAQ stock market;
	•		changes in the economic performance or market valuations of other travel, Internet, online commerce or publicly listed companies with substantial operations in China;
	•		announcements by us or our competitors of new services, acquisitions, strategic partnerships, joint ventures or capital commitments;
	•		additions or departures of key personnel;
	•		sales or repurchases of additional ordinary shares or ADSs; and
	•		potential litigation.

Any of these factors may materially and adversely affect the market price of our ADSs.

Future sales by our existing shareholders of a substantial number of our ordinary shares or ADSs in the public market could adversely affect the price of our ADSs.

If our shareholders sell in the public market substantial amounts of our ordinary shares or ADSs, including those issued upon the exercise of outstanding options and settlement of performance units, the market price of our ADSs could fall. Such sales also might make it more difficult for us to sell securities in the future at a time and price that we deem appropriate.

We believe we are likely to be classified as a passive foreign investment company for the 2008 calendar year and may be classified as a passive foreign investment company for future years, which would result in adverse U.S. federal income tax consequences to U.S. holders of our ADSs.

A non-U.S. corporation will be considered a passive foreign investment company (“PFIC”) for U.S. income tax purposes, 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 annual PFIC determination to be made by a U.S. holder of our ordinary shares (including ADSs) is an inherently factual determination and there is limited guidance regarding the application of the PFIC rules to specific situations. We currently hold a substantial amount of cash and cash equivalents and short-term investments, and the value of our goodwill and other assets may be based in part on the market price of our ADSs, which has experienced significant fluctuations. Depending on the valuation of our ordinary shares (including ADSs) and high-vote ordinary shares, as well as our goodwill and other assets and income, we believe we are likely to be classified as a PFIC for 2008. In addition, as the determination of PFIC status is made on an annual basis and depends on variables over which we have limited control, there can be no assurance that we will not be classified as a PFIC for 2009 or any future calendar years. If we are classified as a PFIC in any year, U.S. Holders will be subject to certain adverse United States federal income tax consequences, as discussed in “Item 10: Additional Information—Taxation—United States Federal Income Taxation—Passive foreign investment company rules.”

You may not receive distributions on ordinary shares or any value for them if it is illegal or impractical to make them available to you.

The depositary of our ADSs has agreed to pay to you the cash dividends or other distributions it or the custodian receives on ordinary shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive the distribution we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may have a material adverse effect on the value of your ADSs.

You may be subject to limitations on transfer of your ADSs or the exercise of your voting rights as an ADS holder.

Your ADSs 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 thinks 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.

As an ADS holder, you may only exercise your voting rights with respect to the underlying ordinary shares in accordance with the deposit agreement. If you provide your voting instructions in the form specified by the depositary pursuant to the deposit agreement, the depositary will endeavor to vote the underlying ordinary shares in accordance with your instructions. However, the depositary may not be able to send voting instructions to you, carry out your voting instructions in a timely manner, and you may not receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. Furthermore, the depositary will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast or for the effect of any such vote.

In addition, we intend to rely on the “home country practice” exception available to foreign private issuers under the NASDAQ Listing Rules, and not present certain matters for a shareholder vote, where such shareholder vote would be otherwise be required under the NASDAQ Listing Rules. As a result, you may not be able to exercise your right to vote, and may lack recourse in the event your ordinary shares are not voted as you requested.

You may have fewer rights, and may have less protection for your interests as a shareholder, than you would if you were a shareholder of a U.S. company.

eLong is a Cayman Islands company and substantially all of our assets are located outside the United States. In addition, a majority of our directors and officers are nationals or residents of jurisdictions other than the United States and all or a substantial portion of their assets are located outside the United States. As a result, it may be difficult for investors to effect service of process within the United States upon our directors or officers, or enforce judgments obtained in the United States courts against our directors or officers.

Shareholder rights under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in the United States because the Cayman Islands has a less developed body of securities laws as compared to the United States. Shareholders in Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States. As a result, the ability of shareholders to protect their interests if they are harmed in a manner that would enable them to sue in a United States federal court may be limited.

Item 4: Information on the Company.

4A: Corporate History

eLong, Inc. was incorporated in the British Virgin Islands on April 4, 2001. On May 19, 2004, eLong, Inc. was re-incorporated in the Cayman Islands as an exempt company with limited liability under the Cayman Islands Companies Law (2004 Revision).

On November 2, 2004, we completed the initial public offering of our ADSs. Each ADS represents two of our ordinary shares.

On August 4, 2004, we sold 11,188,570 Series B preferred shares to Expedia Asia Pacific, which is an indirectly wholly-owned subsidiary of Expedia, for US$58.7 million. We used US$29.3 million of the proceeds to repurchase 1,581,874 Series A preferred shares and 4,012,411 ordinary shares from certain of our shareholders. In conjunction with the sale of Series B Preferred Shares to Expedia Asia Pacific, we also granted to Expedia Asia Pacific a warrant to purchase that number of our high-vote ordinary shares as would result in Expedia Asia Pacific holding approximately 52% of our outstanding shares on a fully-diluted basis and approximately 95% of our voting power. On December 17, 2004, Expedia’s Series B preferred shares automatically converted into high-vote ordinary shares, which are entitled to 15 votes per share. On January 7, 2005, Expedia Asia Pacific purchased 17,362,134 of our high-vote ordinary shares, pursuant to the exercise of the Expedia Asia Pacific warrant, for an aggregate purchase price of $107.8 million, or US$6.21 per share ($12.42 per ADS), giving Expedia Asia Pacific beneficial ownership of approximately 52% of our outstanding shares on a fully-diluted basis and approximately 95% of our voting power. We used US$53.9 million of the proceeds from Expedia Asia Pacific’s warrant exercise to purchase 8,681,067 ordinary shares at US$6.21 per share from certain of our shareholders. In April 2006, a post-closing adjustment was made such that the warrant exercise price and share repurchase price were each adjusted to $6.20434 per share ($12.40868 per ADS).

Our principal executive office is located at Block B, Xingke Plaza Building, 10 Middle Jiuxianqiao Road, Chaoyang District, Beijing, 100016 in the People’s Republic of China. Our telephone number is: +86 (10) 5860-2288. Our agent for service of process in the United States is CT Corporation System located at 111 Eighth Avenue, New York, NY 10011.

4B: Business

We are a leading online travel service provider in China. We utilize a centralized modern call center and web-based distribution technologies to provide our services. We seek to serve China’s emerging class of frequent independent travelers (“FITs”), who engage in business and leisure travel. We believe FITs are a growing segment of the travel market in China.

Since our inception in April 2001, we believe we have built one of the largest travel service distribution networks in China. Through our nationwide 24-hour toll-free call center, our user-friendly Chinese and English language websites and our extensive reseller network, we provide our customers with comprehensive travel information and the ability to book rooms at discounted rates at over 7,000 hotels in over 400 cities across China, and fulfill air ticket reservations in over 80 cities across China. Through Expedia and its affiliates, we also offer the ability to book rooms at 80,000 hotels outside of China. We offer customers informative content relevant to their hotel and air travel decisions, including tourist and event site destination information, hotel facility information, recent photos (including, for many properties, rotating 360 degree photos of hotel rooms and facilities), and customer reviews and comments. In 2008, we facilitated the sales by our hotel suppliers through our booking services of approximately 3.95 million room nights and sold approximately 1.79 million air tickets.

Our Services

Our revenues are primarily derived from hotel reservations and air ticketing. In 2008, we derived 73% of our revenue before business tax and surcharges from our hotel reservation business and 22% of our revenues from our air ticketing business.

Hotel reservations. As of December 31, 2008, we had supplier relationships with over 7,000 hotels in over 400 cities throughout China, as well as Hong Kong and Macau. We seek to offer a range of hotel options at a variety of prices, with the majority of our hotel suppliers being budget, three-, four- or five-star hotels. For the years ended December 31, 2006, 2007 and 2008, we derived 79%, 76% and 73% of our total revenue before business tax and surcharges from our hotel reservation services.

We act primarily as an agent in our hotel-related transactions. We make room reservations based on customer inquiries and, upon the completion of a customer’s stay, we calculate our commissions, which are generally a fixed percentage of the nightly hotel room rate which is paid by the hotels to us on a monthly basis. We also confirm with the hotel the length of the customer’s stay. We pay no penalty to the hotel for “no shows” on confirmed reservations, although we are not paid any commission in respect of such “no show” reservations. Because we generally do not make commitments regarding hotel rooms that we book for our customers, we do not carry significant inventory risk.

Our hotel reservation volume has increased since our inception and reached approximately 3.95 million room nights in 2008, compared to 3.71 million room nights in 2007. As our reservation volume increases, we are often able to secure more guaranteed room inventory from our hotel suppliers. Depending on our agreement with the individual hotel supplier, we either receive a guaranteed allotment of hotel room nights per month or operate on an “as-requested” basis.

Due to the fragmented nature of the hotel industry in China, where hotels are generally owned separately, we typically enter into agreements with individual hotels or their owners or operating companies. For hotels with which we have guaranteed room allotments, the hotel makes available to us a specified minimum number of guaranteed available rooms each day. Our guaranteed allotment allows us to provide more efficient customer service by enabling us to provide our customers with an instant confirmation of their reservations. We incur no obligation if the guaranteed allocation is not used. For hotels with which we do not have guaranteed room allotments, we confirm with the hotel the availability of rooms before providing a confirmation to the customer.

In late 2008, we launched our “eLong VIP Program,” pursuant to which we entered into strengthened supply arrangements with certain of our hotel suppliers. Under this program, we cooperate on marketing and other initiatives with certain of our supplier hotels to provide increased value to our customers. Individual participating hotels are designated with a “crown” or “diamond” logo on our website.

Air ticketing. We provide a 24-hour air ticketing service through our toll-free call center and websites. We act as an agent for all major airlines in China as well as many international airlines that operate flights originating in China. We make flight reservations through TravelSky, which is the operator of the only nationwide system for air ticket reservations in China, and issue and deliver air tickets using branch offices of our subsidiaries and a network of local agents throughout major cities in China. We receive a commission when we sell an airline ticket, and our contracts with certain airlines contain discretionary escalating commissions that are subject to achieving specific performance targets.

Our air ticketing process begins when a customer initiates an inquiry through our call center, websites or the call centers, employees or websites of one of our partners. The customer is informed of the available flights based on their schedule and desired air carrier and we then confirm a booking for a seat on the selected flight. In cases where the air ticket needs to be issued outside of Beijing or locations where we do not have staff, the booking information is sent to one of our local agents in the city where the ticket is to be issued. We also use local agents and other third party delivery companies to deliver tickets to our customers and collect payments for customers who have not prepaid with credit or debit cards. We then collect the airfare from the delivery company, pay the agent’s commission and the cost of the tickets, and retain the balance. We currently do not pre-purchase air tickets for resale. In 2008, we sold approximately 1.79 million air tickets compared to 1.01 million air tickets in 2006.

Non-travel services. We also derive a small portion of our revenues from non-travel services, comprised primarily of advertising on the websites of our Beijing Xici subsidiary.

For information on revenue attributable to different products, see “Item 5: Operating and Financial Review and Prospects—Principal Factors Affecting Our Results of Operations.”

Supplier Relationship Management and Distribution

We strive to maintain good relationships with our travel suppliers. We have a team of employees dedicated to enhancing our relationship with existing travel suppliers and developing new relationships with prospective travel suppliers. We have also developed an electronic confirmation system that enables participating hotel suppliers to receive customer reservation information and confirm reservations through our online interface with the hotel supplier. We believe electronic confirmation system is a cost-effective and convenient way for hotels to interface with us.

We provide our travel services primarily through the following channels:

Call center. We operate a 24-hour call center that, as of December 31, 2008, was staffed by approximately 870 employees. Our call center is accessible nationwide on a toll free basis for telephone calls in China, and we have customer service representatives who speak Chinese, English and Korean. Our call center has been an efficient distribution channel given the preference of many customers to book their travel arrangements by telephone as well as the relatively low cost of labor in China. However, labor costs in China have risen significantly in recent years, due in part to rising salaries as well as recent legislation such as the PRC Employment Contract Law. We currently expect our call center to remain an important distribution channel going forward.

Websites. We offer our travel services through our websites with the following addresses: http://www.eLong.com and http://www.eLong.net, as well as through other eLong-branded and private label websites offered by our web affiliates. Customers can browse travel service options, compare prices, book and confirm orders through our websites. Our websites provide customers with a quick, efficient and flexible service that facilitates comparison among a large number of travel suppliers.

Telephone booking services. Under the terms of our annual service agreements with various subsidiaries of China Telecom and China Netcom (“China Telecom and China Netcom”), we provide users of China Telecom and China Netcom directory assistance services in some provinces and municipalities with hotel reservation and fulfillment services. When a customer in one of the provinces or municipalities in which we have a cooperation with China Telecom or China Netcom, calls China Telecom or China Netcom for information about hotel reservations, the China Telecom or China Netcom employee will transfer such calls to our call center or make the reservation through our application program interface. China Telecom and China Netcom receive a commission from us, which is a percentage of the nightly room night rate, for the hotel reservations they generate through our booking services.

Reseller network. We have developed a nationwide network of over 2,500 resellers, consisting of primarily smaller travel and air ticketing agencies. These agencies utilize our call center and websites to distribute our travel services, and receive a commission from us, based on the number of hotel reservations and air ticket bookings they generate for us.

Marketing and Brand Promotion

We market our services through a combination of online marketing, traditional media advertising, co-marketing with established brands of other companies and direct marketing. We seek to build a brand identity that consumers associate with choice, convenience and value.

Online marketing. In order to expand our online presence, we have entered into contracts with Baidu China and Google China pursuant to which we have purchased travel-related keywords which will direct Baidu and Google users to our websites. We believe our online marketing effort is an important part of our marketing strategy.

Traditional media advertising. Our traditional media advertising efforts in 2008 included newspapers, bus and other outdoor advertisements, and radio advertisements. The focus of our media advertising efforts is to promote awareness of the eLong brand among potential customers.

Co-marketing relationships. We seek to expand our market reach and revenues by entering into co-marketing agreements with companies that have a large customer base and strong brand recognition. Through such efforts, we intend to reach more potential customers and capitalize on the brand recognition of other leading companies in China. Generally, both entities share the revenues generated in such co-marketing activities. We have entered into co-marketing agreements with telecommunications service providers, airlines, financial institutions and other companies in China.

eLong membership program. We promote our brand and encourage customer loyalty through our loyalty point membership program. Membership in our eLong membership program entitles our customers to accumulate loyalty points which can be exchanged for awards such as free travel services, gifts and amenities. Our membership program is designed to encourage repeat transactions in and is an important element of our customer retention program.

Direct marketing. We conduct direct marketing activities at selected major airports and transportation hubs in China. Our promotional efforts at these locations consist primarily of the distribution of complimentary eLong membership cards. We also conduct email, SMS and phone marketing to our current and potential customers.

Corporate social responsibility. We believe service to our community is an important part of corporate citizenship and also promotes and strengthens our eLong brand. In June 2008, we donated RMB 500,000 to the China Wildlife Conservation Association to support the reconstruction of a panda wildlife reserve which had been severely damaged by the Sichuan earthquake.

Technology

We believe that we have a leading technology platform and team in the travel service industry in China, and we continue to upgrade our platform to provide enhanced customer service and strengthen our competitive position in the PRC travel market. Our goal is to develop and maintain a high-performance, reliable, scalable and secure system which can support our current and future demands for new features and functionalities.

In April 2008, we upgraded our eLong.com website with a significantly improved user interface and booking experience. In 2008, we also implemented our new Oracle Enterprise Resource Planning (“ERP”) and Siebel Customer Relations Management (“CRM”) systems in order to upgrade our accounting, customer relationship management, and human resources functions. We also employ several systems and software packages to help with the development of our business, including, the Travel Industry Automation (the “TIA system”), which provides end-to-end technology support for our entire travel business; our E-Booking software which links hotels directly into TIA system; the Air Booking System which provides links to airline companies for our customers; the agent management module provides our agents with virtual reservation information; payment systems allowing credit and bank debit card payment; and security systems designed to prevent unauthorized access to our systems and to ensure that our users can only access and use our system according to pre-assigned authorization levels.

Competition

We compete with other providers of online and offline travel services including Ctrip.com, traditional travel agencies and hotel and airline suppliers. We compete on the basis of brand recognition, selection, price, ease of use, accessibility of information, breadth of services offered, convenience, and customer service. As China’s travel market continues to grow, we may face further competition from other new domestic hotel room and airline ticket consolidators or international players that may expand into China. We may also face increasing competition from hotels and airlines should they further expand into the direct selling market or engage in alliances with other travel service providers besides us. See “Item 3: Key Information—Risk Factors—Risks Related to Our Business—We may not be able to compete successfully against our current or future competitors.”

Intellectual Property

To protect our proprietary rights, we rely upon a combination of copyright and trademark laws, trade secrets, and confidentiality agreements with employees and third party service providers. Our standard form labor contracts include confidentiality and trade secret provisions. Moreover, we and our subsidiaries also enter into non-competition agreements with our senior executives. In addition, prior to discussing business and technologies with outside parties, we typically require that the parties enter into a non-disclosure agreement with us. If these discussions result in a license or other business relationship, we also require that the agreement setting forth the parties’ respective rights and obligations include provisions protecting our intellectual property rights.

Through our subsidiaries in China, we have registered various Internet domain names which we use in our business, including www.eLong.com, www.eLong.net, www.eLong.cn, www.xici.net, and www.lohoo.com with domain name registrars. We have also registered the “eLong” characters in Chinese, “eLong.com” in English, “Xici” in Chinese and various other trademarks in China with the PRC National Trademark Office.

Seasonality

See “Item 5: Operating and Financial Review and Prospects—Major Factors Affecting the Travel Industry—Seasonality in the travel service industry” and “Item 3: Key Information—Risk Factors—Risks Relating to Our Business—Our quarterly results are likely to fluctuate because of seasonality in the travel industry in China” for a description of seasonal factors influencing our business.

Capital Expenditures

Our capital expenditures for property and equipment were RMB 20.7 million in 2006, RMB 22.2 million in 2007 and RMB 32.9 million in 2008. Principal areas of investment during 2008 related to purchases of software and hardware and development of computer systems and our technological infrastructure, including our new CRM and ERP systems which were launched in 2008. Our capital expenditures were primarily spent in Beijing and were financed from our internal resources. See “Item 5: Operating and Financial Review and Prospects—Liquidity and Capital Resources” for further details regarding our capital expenditures.

Governmental Regulation

Regulatory Authorities

The PRC government regulates numerous areas which relate to our business, including the Internet, telecommunications, Internet information services, international connections to computer information networks, information security and censorship, as well as online air ticketing, online advertising and travel agencies, and air ticketing. The relevant rules are contained in a number of existing laws and regulations issued by various governmental authorities in the PRC, including:

	•		the MIIT(formerly known as the Ministry of Information, or “MII”);
	•		the State Council Information Office (the “SCIO”);

	•		the State Administration for Industry and Commerce (the “SAIC”);
	•		the Ministry of Commerce (the “MOFCOM”);
	•		the Ministry of Public Security (the “MPS”) ;
	•		the Civil Aviation Administration of China (the “CAAC”); and
	•		the China National Tourism Administration (the “CNTA”).

Scope of Regulation

We are structured as an online company engaged in the businesses of travel agency, air ticketing and advertising. Current PRC laws and regulations impose substantial restrictions on foreign ownership in these businesses in China. As a result, we have subsidiaries in China that conduct operations through a series of contractual arrangements with our affiliated Chinese entities. See Section “4C. Organizational Structure” for a detailed description.

In the opinion of our PRC counsel, TransAsia Lawyers, the ownership structure, businesses and operations of our subsidiaries and affiliated Chinese entities in China comply with all existing PRC laws, regulations and rules. In addition, no consent, approval or license, other than those already obtained, is currently required under existing PRC laws, regulations and rules for such ownership structure, businesses and operations.

Telecommunications Laws and Regulations

The Telecommunications Regulations of the People’s Republic of China (2000) (the “Telecoms Regulations”), require that telecommunications service providers procure operating licenses as a precondition for the commencement of operations. A distinction is drawn between “basic telecoms services” and “value-added telecoms services.” “Value-added telecoms services” are defined as telecommunications and information services provided through public networks.

The Catalogue of Telecommunications Services by Category, which is attached to the Telecoms Regulations, as amended, categorizes services as basic or value-added. The Catalogue’s list of value-added services includes online data and transaction processing, on-demand voice and image communications, domestic Internet virtual private networks, Internet data centers, message storage and forwarding (including voice mailbox, e-mail and online fax services), call centers, Internet access, and online information and data search. We are engaged in various types of value-added services that are subject to the Telecoms Regulations.

Foreign direct investment in telecommunications companies in China is regulated by the Regulations on the Administration of Foreign-Invested Telecommunications Enterprises (the “FITE Regulations”)(2002) issued by the PRC State Council. The FITE Regulations stipulate that foreign-invested telecommunications enterprises, or FITEs, must be established as Sino-foreign equity joint ventures. FITEs can undertake operations in basic and value-added telecommunications services. The foreign party to a value-added FITE may currently hold up to 50% equity, with no geographic restrictions on its operations. On September 10, 2008, the State Council issued the Amended Regulations for the Administration of Foreign-Invested Telecommunications Enterprises (the “Amended FITE Regulations”), with immediate effect. Among other things, the Amended FITE Regulations reduced the minimum registered capital for a FITE offering basic telecommunications services by 50%, from RMB2 billion to RMB1 billion, for those operating nationwide or inter-provincial services; and from RMB200 million to RMB100 million for intra-provincial service providers. There was no change in the capitalization requirements for value-added telecoms service operators, and the cap on equity ownership of a foreign party in a FITE remains at 50%.

The Administrative Measures for Telecommunications Business Operating Licenses (the “Telecoms License Measures”), issued by the MII, supplement the FITE Regulations. The Telecoms License Measures confirm that there are two types of telecommunications operating licenses for operators in China (including FITEs), namely, licenses for basic services and licenses for value-added services. With respect to the latter, a distinction is made as to whether a license is granted for intra-provincial or “trans-regional” (inter-provincial) activities, and the permitted activities of the enterprise are noted in an appendix to the license. An approved telecommunications service operator must conduct its business (whether basic or value-added) in accordance with the specifications recorded on its telecommunications operating license. The Telecoms License Measures also confirm that the MII is the competent approval authority for foreign-invested telecommunications enterprises.

In 2006, the MII promulgated the Notice of the Ministry of Information Industry on Intensifying the Administration of Foreign Investment in Value-added Telecommunications Services (the “MII VAT Notice”). The Notice is designed to strengthen the administration of foreign investment in PRC telecommunications businesses, particularly those involving value-added telecommunications services. The Notice requires telecom companies (or their shareholders) to hold the domain names and trademarks that used in their provision of value-added telecommunication services, and to hold the necessary business premises and facilities (including servers) within the geographic region covered by their ICP licenses and corresponding to their permitted ICP services. Under the MII VAT Notice, an enterprise holding an ICP permit must be the entity in possession of relevant key intellectual property rights, e.g., domain names and trademarks, used by the enterprise. Such intellectual property rights can also be held by the direct shareholders of the enterprise holding the ICP permit.

In 2000, the MII issued a Value-Added Telecoms Services Operating License to Beijing Information, authorizing the provision of mobile-network value-added telecommunications services nationwide. In 2004, the Beijing Telecommunications Administration (the “BTA”), issued a Telecoms and Information Services Operating License to our subsidiary, Beijing Information, authorizing the provision of Internet information services. Both of these permits have been renewed, remain valid and are subject to annual inspections.

Internet Information Services

Under the Measures for the Administration of Internet Information Services (2000)( the “ICP Measures”), any entity that provides information to online users of the Internet in China is obliged to obtain an operating license from the MIIT or its provincial or municipal branch in accordance with the Telecoms Regulations. The ICP Measures require that ICP license holders to display their operating license numbers in a conspicuous location on the home page of their website. ICP license holders are also obliged to police their websites in order to remove certain broadly defined categories of harmful content. The ICP Measures also mandate that an ICP license holder must obtain the prior consent of the MIIT prior to establishing an equity or cooperative joint venture with a foreign partner.

Beijing Information and Beijing Xici each holds a license for Internet content provision services, having received their ICP licenses in 2001 and 2008, respectively.

Information Security and Censorship

The principal pieces of PRC legislation concerning information security and censorship include:

	•		The Law of the People’s Republic of China on the Preservation of State Secrets (1988) and its Implementing Rules (1990);
	•		The Law of the People’s Republic of China Regarding State Security (1993) and its Implementing Rules (1994);
	•		Rules of the People’s Republic of China for Protecting the Security of Computer Information Systems (1994);
	•		Notice Concerning Work Relating to the Filing of Computer Information Systems with International Connections (1996);
	•		Administrative Regulations for the Protection of Secrecy on Computer Information Systems Connected to International Networks (1999);
	•		Regulations for the Protection of State Secrets for Computer Information Systems on the Internet (2000);
	•		Notice issued by the Ministry of Public Security of the People’s Republic of China Regarding Issues Relating to the Implementation of the Administrative Measure for the Security Protection of International Connections to Computer Information Networks (2000);
	•		The Decision of the Standing Committee of the National People’s Congress Regarding the Safeguarding of Internet Security (2000); and
	•		Measures for the Administration of Commercial Website Filings for the Record (2002) and their Implementing Rules (2002).

The above legislation specifically prohibit the use of Internet infrastructure where it results in a breach of public security, the provision of socially destabilizing content or the divulgence of State secrets, as follows:

	•		“A breach of public security” includes breach of national security or disclosure of state secrets; infringement on state, social or collective interests or the legal rights and interests of citizens; or illegal or criminal activities.
	•		“Socially destabilizing content” includes any action that incites defiance or violation of Chinese laws; incites subversion of state power and the overturning of the socialist system; fabricates or distorts the truth, spreads rumors or disrupts social order; advocates cult activities; or spreads feudal superstition, involves obscenities, pornography, gambling, violence, murder, or horrific acts or instigates criminal acts.
	•		“State secrets” are defined as “matters that affect the security and interest of the state.” This broad term covers such as national defense, diplomatic affairs, policy decisions on state affairs, national economic and social development, political parties and “other State secrets that the State Secrecy Bureau has determined should be safeguarded.”

According to the aforementioned legislation, it is mandatory for Internet companies in the PRC to complete security filing procedures with the local public security bureau and for them to regularly update the local public security bureau regarding information security and censorship systems of their websites. In this regard, the Administrative Rules on the Filing of Commercial Websites was promulgated by the Beijing AIC in 2004, replaced the prior Detailed Implementing Rules for the Measures for the Administration of Commercial Website Filings for the Record (2000), and requires websites to:

	•		register with the Beijing AIC and obtain electronic registration marks;
	•		place the registration marks on their websites’ homepages; and
	•		register their website names with the Beijing AIC.

We have registered our websites with the Beijing AIC and display our electronic registration mark on our homepage.

Consumer Data Protection & Privacy

In 2004, the MII issued a notice setting forth various requirements for the protection of the rights of consumers in the telecoms sector, including with respect to ambiguity in billing practices for telecoms services, poor quality of connections and unsolicited SMS messages.

In 2006, the MII promulgated the Measures for the Administration of Internet E-mail Services. Under these regulations, an “Opt-in” System is expected to be introduced into the area of e-mail services, whereby e-mails containing commercial advertisements are not delivered unless specifically requested by users. Furthermore, the subject line of all e-mails containing advertisements will be required to be labeled with “advertisement” or “AD”. In addition, the IP address of each server that supports e-mail will be registered in order to facilitate the tracing and identification of spam sources.

On June 11, 2008, the MII promulgated a Circular Regarding the Campaign against SMS Spam which requires telecom operators to strengthen supervision of SMS channels, including (i) illegal spam SMS sending enterprises; (ii) short message advertisements, and (iii) manufacture and sale of illegal SMS broadcasting equipment. The Circular also requires telecom operators to close down illegal spam message sending terminals and set up a blacklist of illegal operators.

On February 28, 2009, the NPC adopted the Seventh Amendment of the PRC Criminal Law, which added an offense for the “sale or unlawful provision of personal information” by individuals or enterprises. The new provision makes it unlawful for any employee of a government institution or a financial, telecommunication, transportation, education or medical organization to illegally sell (or by other illegal means provide others with) any other PRC citizen’s personal information obtained by such employee during the performance of his or her duties or services, and provides for penalties, which may include monetary fines, criminal detention or imprisonment for up to three years, depending on the severity of the violation.

Air ticketing. The air ticketing business is subject to the supervision of the CAAC and its regional branches. The principal regulations governing air ticketing business in China are the Regulations on the Administration of Civil Aviation Transportation Sales Agencies (1993). Under these regulations, an air ticketing agency must obtain a permit from the CAAC or its regional branch in every city in which the agency proposes to conduct business. Effective as of March 31, 2006, the CAAC promulgated the Rules Concerning the Affirmation for the Qualification of Aviation Transportation Sales Agencies. The air ticketing agency sector is currently regulated by an industrial association, rather than a government-based administration as it was previously. In 2008, we completed the air ticketing agency qualification certificate renewal procedure.

The principal regulation governing foreign ownership in the air ticketing business in China is the Foreign Investment Industrial Guidance Catalogue (2004). In the past, this regulation prevented foreign investors (including investors from Hong Kong and Macau) from owning 100% of air ticketing agencies in China. However, in accordance with the Second Supplementary Regulations regarding Foreign Investment in Civil Aviation Transportation Industry (effective from January 4, 2007), qualified service providers from Hong Kong or Macau are allowed to own 100% of aviation transportation sale agencies in China with the only restriction that they are still prohibited from selling tickets to passengers for domestic PRC air travel.

Historically, the CAAC and the National Development and Reform Commission (“NDRC”) jointly regulated the pricing of airline tickets as well as commissions payable to air ticketing agencies. However, in May 2008, the CAAC issued the Circular on Change in the Management of Domestic Aviation Service Fares, pursuant to which, after October 1, 2008, air ticketing commissions are subject to negotiations between suppliers and agents, rather than direct regulation by the CAAC and NDRC.

Travel Agency

Travel agency. The travel agency industry is subject to the supervision of the CNTA and local tourism administrations. The principal regulations governing travel agencies in China include: (i) the Regulation on Travel Agencies (the “Travel Agency Regulations”), issued by the State Council in February 2009 and effective May 1, 2009, which replaced the Administration of Travel Agencies Regulations (1996), and (ii) the Implementing Rules for the Regulation on Travel Agencies (the “Travel Agency Implementing Rules”), promulgated by the CNTA in March 2009.

The Travel Agency Regulations permit foreign investors to establish wholly foreign-owned travel agencies, as well as Sino-foreign joint ventures and cooperative travel agencies. Any investor (including foreign investors) intending to establish a travel agency or engage in the domestic tourism and inbound tourism business must have a fixed place of business and necessary business facilities, and have registered capital of at least RMB 300,000. A travel agency that has obtained its business permit for two or more years may apply to engage in the operation of the outbound tourism business, provided that it has not been subject to any administrative penalties by the relevant administrative body arising from the infringement of the rights and interests of tourists.

Foreign-owned travel agencies are allowed to open branches nationwide. However, foreign-owned travel agencies are still restricted from engaging in the outbound tourism business in China, unless otherwise determined by the State Council, or provided under any bilateral free trade agreements between the home country and China, or the closer economic partnership agreements between China and Hong Kong and Macau.

The Travel Agency Implementing Rules became effective May 3, 2009 and replaced the former Implementing Rules for Regulation on the Administration of Travel Agencies (2001). The Travel Agency Implementing Rules define certain terms used in the Travel Agency Regulations (e.g. the definition of “domestic tourism business,” “inbound tourism business” and “outbound tourism business”), and set out detailed application requirements to establish a travel agency, such as equipment requirements. The Travel Agency Implementing Rules also clarify certain aspects of legal liability for travel agencies as prescribed in the Travel Agency Regulations. For example, according to the Travel Agency Regulations, travel agencies that change an itinerary stipulated in a travel contract shall be fined up to RMB 500,000. The Travel Agency Implementing Rules provide that any of the following situations shall be treated as a “change of itinerary”: decrease in the number of tour items; reduction of tour time; increase in the number of changes to tour destinations; increase in shopping time or the extension of shopping time; and changes to the arrangements stipulated in the travel contract between the travel agency and the tourist.

Regulation of Foreign Currency Exchange and Dividend Distribution

Foreign currency exchange. The principal regulation governing foreign currency exchange in China is the Foreign Currency Administration Rules (1996), as amended in August 2008. Under these rules, the Renminbi is freely convertible for trade and service-related foreign exchange transactions, but not for direct investment, loans or investments in securities outside China without the prior approval of the State Administration of Foreign Exchange of the People’s Republic of China or its local branches ( “SAFE”).

Pursuant to the Foreign Currency Administration Rules, foreign-invested enterprises in China may purchase foreign exchange without SAFE approval for trade and service-related foreign exchange transactions by providing commercial documents evidencing these transactions. They may also retain foreign exchange, subject to a cap approved by SAFE, to satisfy foreign exchange liabilities or to pay dividends. Foreign exchange transactions for direct investment, loan and investment in securities outside China are still subject to limitations and require approvals from SAFE. See “Item 3: Key Information—Risk Factors—Risks Related to Doing Business in China—Governmental control of currency conversion may affect our ability to pay dividends and the value of our ADSs” and “Item 3: Key Information—Risk Factors—Risks Related to Doing Business in China—PRC regulations may limit our ability to transfer our funds held overseas into China.”

On August 29, 2008, SAFE promulgated a notice regulating the conversion by a foreign-invested company of foreign currency into Renminbi by restricting how the converted Renminbi may be used. The notice provides that the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies may only be used for purposes within the business scope approved by the applicable governmental authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the registered capital of a foreign-invested company settled in Renminbi converted from foreign currencies. The use of such Renminbi capital may not be changed without SAFE’s approval, and may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used.

Dividend distribution. The principal regulations governing distribution of dividends by foreign-invested companies include:

	•		the Sino-foreign Equity Joint Venture Law (2001);
	•		the Regulations of Implementation of the Sino-foreign Equity Joint Venture Law (2001);
	•		the Foreign Investment Enterprise Law (2000); and
	•		the Regulations of Implementation of the Foreign Investment Enterprise Law (2001).

Our wholly-owned foreign subsidiaries are required to provide for certain statutory reserves, namely a general reserve, an enterprise expansion fund and a staff welfare and bonus fund. These subsidiaries are required to allocate at least 10% of their after tax profits on an individual company basis as determined under PRC GAAP to the general reserve and have the right to discontinue allocations to the general reserve if such reserve has reached 50% of registered capital on an individual company basis. Appropriations to the enterprise expansion fund and staff welfare and bonus fund are at the discretion of the Board of Directors of these subsidiaries.

In addition, our affiliated entities in China are required to allocate 10% of their respective after-tax profits to their respective statutory general reserve, unless such statutory general reserve amounts to over 50% of the entity’s registered capital. After the entities have allocated to their statutory general reserve from their after-tax profits, they may, upon a resolution adopted at shareholders’ meeting, allocate to a discretionary general reserve from their after-tax profits.

The PRC Corporate Income Tax Law, (the “CIT Law”), which became effective on January 1, 2008, provides that a maximum income tax rate of 20% may be applicable to dividends payable to non-PRC investors that are “non-resident enterprises”, to the extent such dividends are derived from sources within the PRC. The State Council’s Implementation Rules for the CIT Law reduced the rate to 10%. We are a Cayman Islands holding company and substantially all of our income may be derived from dividends we receive from our affiliated Chinese entities. Thus, dividends paid to us by our affiliated Chinese entities in the PRC may be subject to the 10% income tax if we are considered as a “non-resident enterprise” under the CIT Law.

The CIT Law also provides that enterprises established in foreign countries or regions for which the “de facto management bodies” are located within the PRC will be considered as PRC “resident enterprises” and will be subject to CIT at the rate of 25% on their global income. On April 22, 2009, the State Administration of Taxation issued a Notice on Issues Regarding Recognition of Overseas Incorporated Enterprises Controlled by PRC Domestic Enterprises as PRC Resident Enterprises Based on the De Facto Management Body Criteria (the “Tax Residency Notice”). Under the Tax Residency Notice, which was retroactively effective as of January 1, 2008, an overseas enterprise will be deemed to be a PRC resident enterprise — and thus subject to CIT

of 25% on its global income if it satisfies four conditions: (i) the company’s management team responsible for daily operations are located in China, or the location where the management team carries out their responsibilities is in China; (ii) finance and personnel decisions are made or need approval by institutions or people in China; (iii) the company’s major property, accounting ledger, company seal and minutes of board meetings and shareholder meetings are kept in China; and (iv) at least half of the members of the board of directors with voting rights or the management team habitually live in China. Otherwise, a “non-resident enterprise” is subject to withholding tax at the rate of 10% with respect to its PRC-sourced dividend income distributed from earnings accumulated after January 1, 2008, subject to applicable tax agreements or treaties between the PRC and other tax jurisdictions. We are controlled by Expedia, Inc., through Expedia Asia Pacific-Alpha Limited, which, as of December 31, 2008, was our controlling shareholder with 96% of the Company’s voting power and had the ability to control substantially all of the Company’s management and business operations. However, we cannot assure you that the PRC tax authorities will not deem eLong, Inc. to be a PRC resident enterprise. See “Item 3: Key Information About the Company: Risk Factors—Risks Related to Doing Business in China—We would be adversely affected by the discontinuation of any preferential tax treatments currently available to us in the PRC.”

Employment Law

In 2008, a new Employment Contract Law of the PRC as well as detailed implementing regulations came into effect. These new laws and regulations expand the rights and protections of employees and increase human resources, litigation and severance costs for employers. For example, the new law requires written employment contracts for all employees, restricts conditions under which an employer can terminate an employee’s employment contract and requires severance payments to be paid to employees upon termination of the employment relationship, unless specified exceptions apply.

4C: Organizational Structure

eLong, Inc. is an indirect subsidiary of Expedia, Inc. (NASDAQ: EXPE), which is an online travel company, empowering business and leisure travelers with the tools and information to efficiently research, plan, book and experience travel. Through the ownership of our high-vote ordinary shares by its indirect subsidiary, Expedia Asia Pacific-Alpha Limited, as of April 30, 2009, Expedia, Inc. controls approximately 96% of our voting power.

eLong, Inc. is incorporated in the Cayman Islands and has three wholly-owned direct subsidiaries: eLongNet Information Technology (Beijing) Co., Ltd. ( “eLong Information”), which is incorporated in the PRC, Bravado Investments Limited (“Bravado”) which is incorporated in the British Virgin Islands, and Shanghai Xinwang Computer Technology Co., Ltd., which is incorporated in the PRC.

Foreign ownership of Internet content provision, call center, air ticketing and travel agency businesses is subject to significant restrictions under current PRC laws and regulations. As a result, we conduct operations in China through a series of contractual arrangements with our affiliated Chinese entities, which hold the licenses and permits required to conduct our business. These affiliated Chinese entities include:

•

Beijing eLong Information Technology Co., Ltd., or Beijing Information, which holds a license for Internet content provision services (“ICP license”), a license for call center services, and a license for value added telecommunications services (“SP license”) which provides us the right to conduct wireless services including but not limited to short messaging services and multimedia messaging services.

	•		Beijing eLong Air Services Co., Ltd. (“Beijing Air”), which holds domestic and international air ticketing licenses.
	•		Beijing eLong International Travel Co., Ltd. (“Beijing Travel”), which holds domestic and international (inbound/outbound) travel agency licenses.
	•		Hangzhou eLong Air Service Co., Ltd. (“Hangzhou Air”), which holds domestic and international air ticketing licenses.
	•		Beijing Xici Interactive Information Technology Co. Ltd. (“Beijing Xici”), which holds an ICP license and a special Bulletin Board System (BBS) permit.

Beijing Information as holder of an ICP and SP license and Beijing Xici are each subject to separate annual inspections in order to maintain these licenses.

As of April 30, 2009, Justin Tang, a member of our board of directors, Guangfu Cui, our CEO, and Jack Wang, our Vice President of Partner Service Group, own 75%, 12.5% and 12.5%, respectively, of Beijing Information as nominee shareholders; Mr. Tang and Mr. Cui, own 75% and 25% respectively, of Beijing Media as our nominees; Beijing Information and Beijing Media own 93% and 7%, respectively, of Beijing Air; Beijing Information and Beijing Air own 70% and 30%, respectively, of Beijing Travel; Beijing Air owns 100% of Hangzhou Air; and Beijing Information owns 100% of Beijing Xici.

4D: Property and Equipment

We do not own any real estate, and lease all of our facilities. Our headquarters in Beijing, consisting of our administrative center, sales and marketing division, technical services department and call center, is located in a leased space of approximately 10,000 square meters at Xingke Plaza, 10 Middle Jiuxianqiao Road, Chaoyang District, Beijing, 100016, PRC. We lease the premises for our headquarters under a number of leases, which were renewed in 2008 and, unless we exercise our early termination rights, will expire in November 2012. We also lease branch and sales offices in major cities in China including Shanghai, Guangzhou, Shenzhen, Wuhan, Nanjing, Hangzhou and Chengdu, which have a total leased space of approximately 3,400 square meters. We believe that our existing facilities are adequate for our current needs and that additional space will be available to accommodate any future expansion.

Item 4A: Unresolved Staff Comments.

None.

Item 5: Operating and Financial Review and Prospects.

You should read the following discussion of our financial condition and results of operations in conjunction with our audited consolidated financial statements and the related notes and other financial information included elsewhere in this annual report. This discussion contains forward-looking statements. See “Special Note Regarding Forward Looking Statements” at the beginning of this annual report. We caution you that our business and financial performance are subject to substantial risks and uncertainties. In evaluating our business, you should carefully consider the information provided under “Item 3. Key Information—Risk Factors” in this annual report.

OVERVIEW

We are a leading online travel service provider in China. We provide our customers with consolidated travel information and the ability to book rooms, air tickets and other travel related services utilizing a centralized modern call center and web-based distribution technologies.

Major Factors Affecting the Travel Industry

A variety of factors affect the travel industry in China, and hence our results of operations and financial condition, including:

Growth in the overall economy and demand for travel services in China. We expect that our financial results will continue to be affected by the overall growth of the economy and demand for travel services in China. In 2008, the PRC economy experienced several adverse events, including unseasonably strong winter storms in the first quarter, the severe Sichuan earthquake in the second quarter, and the general slowing of the global and PRC economy due to the international financial crisis occurring during the fourth quarter. We anticipate that demand for travel services in China will continue to be linked to the condition of the broader economy for the foreseeable future.

Seasonality in the travel service industry. The travel service industry in China is characterized by seasonal fluctuations and accordingly our revenues may vary from quarter to quarter. We typically generate a larger portion of our revenues in the second half of the year. The first quarter of each year generally contributes the smallest portion of our annual revenues due to reduced business activity during the Chinese New Year holiday. In addition, seasonality of the PRC travel market is affected by PRC national and provincial government regulation of the calendar of public holidays, including for example, the decision by the State Council in 2008 to restructure the annual calendar of public holidays by adding a few shorter holidays and reducing the May 1st holiday period from one week to three days. Our results in the future may be affected by seasonal fluctuations in the use of our services by our customers.

Disruptions in the travel industry. Individual travelers tend to modify their travel plans based on the occurrence of events such as:

	•		outbreaks, or the fear of outbreaks, of H1N1 flu (swine flu), severe acute respiratory syndrome, avian flu or other diseases;
	•		travel-related accidents;
	•		unseasonable or extreme weather, such as the severe snow and ice storms which hit south China in the first quarter of 2008;
	•		natural disasters, such as the severe earthquake and aftershocks hitting Sichuan Province in May 2008;
	•		major events, such as the Summer Olympic Games held in Beijing in August 2008;

	•		threats of war or incidents of terrorism;
	•		general economic downturns, such as the current global financial crisis; and
	•		increased prices in the hotel, airline or other travel-related industries.

OPERATING RESULTS

Principal Factors Affecting Our Results of Operations

Revenues. Our revenues are generated predominantly through our hotel reservation and, to a lesser extent, air ticketing businesses. We act as agents for the travel services that we provide, and recognize the commissions that we earn. We have experienced year-over-year increases in total revenue of 19% from 2006 to 2007 and 10% from 2007 to 2008. Our increase in revenues from 2007 to 2008 was due to the increase in both our hotel and air ticketing commissions accompanying the higher volume of hotel room nights we booked and air tickets we sold. As we do not pre-purchase the travel services that we book for our customers, we do not carry inventory risk.

The table below sets forth the revenues from our principal lines of business for the periods indicated.

		Year ended December 31,
		2006								2007								2008
		RMB				%				RMB				%				RMB				US$				%
		(in thousands, except for percentage data)
Revenues
Hotel reservation commissions(1)			209,275				79	%			240,803				76	%			253,458				37,150				73	%
Air ticketing commissions(2)			38,288				15	%			57,456				18	%			77,205				11,316				22	%
Other travel revenue(3)			8,398				3	%			5,588				2	%			1,284				189				0	%
Total travel revenue			255,961				97	%			303,847				96	%			331,947				48,655				95	%
Non travel(4)			8,583				3	%			11,550				4	%			16,479				2,415				5	%
			264,544				100	%			315,397				100	%			348,426				51,070				100	%

As of December 31, 2008, our accounts receivable balance mainly represents amounts from our travel suppliers, delivery companies and credit card companies. We perform periodic credit evaluations of the financial condition of our suppliers. We make provisions for doubtful accounts, individually and collectively, based on an assessment of the recoverability of individual accounts by considering the age of the receivable, our historical write-off experience and the general credit history of the supplier. The increase in accounts receivable, to RMB42.5 million (US$6.2 million) as of December 31, 2008 from RMB41.1 million as of December 31, 2007 was due mainly to increases in our hotel and air ticketing business.

We receive commissions from our suppliers based on the number of hotel room nights and air tickets that we book. As we increase our revenues and the number of hotel and air suppliers with whom we have relationships, we expect our accounts receivable from our suppliers to increase. We have taken steps to enforce an accounts receivable collection policy and typically require our hotel and air agent suppliers to pay the balances due to us within 30 to 60 days.

Cost of services. Cost of services consists primarily of payroll compensation, share-based compensation, telecommunications expenses, rent and related overhead expenses, credit card handling fees, air ticket delivery costs incurred by call centers, and service platform costs which are directly attributable to the provision of our travel services and non travel services. For the years ended December 31, 2006, 2007 and 2008, cost of services as a percentage of our total net revenues was 25%, 28% and 30%, respectively. Because these costs are largely variable in nature, we expect that cost of services in future periods will generally fluctuate in line with any expansion or contraction of our business operations.

Operating expenses. Operating expenses primarily consist of service development, sales and marketing, and general and administrative expenses.

Service development expenses primarily consist of expenses we incur to develop our transaction and service platform, expenses to maintain, monitor and manage websites and hotel and air product employees. We expect service development expenses to increase as we continue to upgrade our services and invest in technology, websites and air and hotel products. Our service development expenses as a percentage of our total net revenues were 17%, 16%, and 16% for the years ended December 31, 2006, 2007 and 2008, respectively.

Sales and marketing expenses include online and offline advertising expenses, commissions to third party distribution partners and resellers, expenses associated with our loyalty program, and human resources expenses for marketing personnel. Sales and marketing expenses as a percentage of our total net revenues were 40%, 43% and 50% for the years ended December 31, 2006, 2007 and 2008, respectively. The increase in 2008 was largely a result of increased sales commissions paid to third party distribution partners, such as China Telecom and China Netcom, in line with increased transaction volumes in these distribution channels, and increased online marketing spending.

General and administrative expenses primarily include finance, legal, human resources, auditing and executive office expenses. General and administrative expenses decreased slightly as a percentage of our total net revenues for the year ended December 31, 2008 to 16% from 17% for the year ended December 31, 2007, primarily due to a reduction of external consulting fees and an increase in our revenues.

We participate in various PRC government-mandated social insurance and employee welfare plans. These government-mandated plans include unemployment insurance, medical insurance, pension benefits and housing funds. We are required to make monthly contributions to these plans at rates which are a fixed percentage of the salary of each of employee. We are not obligated to provide retirement benefits beyond the monthly contributions we make during the period of an employee’s employment with us. Contributions to these plans are expensed as incurred. In 2006, 2007 and 2008, we contributed RMB16.2 million, RMB17.8 million and RMB23.5 million (US$3.4 million), respectively, to various government-mandated social insurance and welfare plans. The increase in 2008 was due primarily to increased headcount and increased mandatory social insurance contributions rates.

During 2008, we recognized a charge of RMB1.0 million (US$0.1 million), which was the write-off of legacy software systems after new systems and operations procedures were implemented, and an impairment of intangible assets of RMB0.4 million (US$0.1 million) for the Fortune Trip trade name, which we do not intend to actively use. During 2007, we recognized an impairment of property and equipment of RMB0.5 million (US$0.1 million), which related to vacation package business that we suspended in July 2007 and a one-time impairment of intangible assets of RMB0.5 million (US$0.1million) which related to the customer list of Fortune Trip.

During the year ended December 31, 2008, we recorded other income (expense) exchange losses of RMB60.9 million (US$8.93 million) as compared to RMB65.8 million in 2007. The exchange loss was a result of the Renminbi appreciation against the U.S. dollar and was derived from the translation of our U.S. dollar-denominated cash deposits and short-term investments into Renminbi for financial reporting purposes. This exchange loss was partially offset by 2008 interest income of RMB29.0 million (US$4.3 million).

Under PRC law, our services related revenues are subject to a 5% business tax. In addition, our advertising service revenues are subject to a cultural development surcharge of 3%. Both of these items are captured in “Business tax and surcharges” in the table below under “Results of Operations.”

Income tax. Because we, our subsidiaries and our affiliated Chinese entities are incorporated in different jurisdictions, we file separate income tax returns. Under the laws of the Cayman Islands, eLong, Inc. is exempt from income tax and there are no withholding taxes.

Prior to January 1, 2008, in accordance with prior legislation, all of our subsidiaries and affiliated Chinese entities, except for eLong Information and Beijing Information, were subject to corporate income tax, or CIT, at a rate of 33%. However, enterprises deemed to be High New Technology Enterprises were eligible for a favorable tax rate of 15% (with a tax exemption for the first three years of operation and a 7.5% for the following three years). eLong Information obtained High New Technology Enterprise status, and thus was entitled to an income tax rate of 15% from January 1, 2006. Beijing Information was deemed a High New Technology Enterprise and enjoyed a reduced income tax rate of 7.5% for 2004 through 2006, and 15% rate in 2007 and 2008.

In 2007, the Chinese government enacted the CIT Law. The CIT Law, imposes a unified income tax rate of 25% for both domestic and foreign invested enterprises, and provides that High New Technology Enterprises can enjoy a favorable tax rate of 15%. eLong Information and Beijing Information have both been certified as High New Technology Enterprises under the new Corporate Income Tax Law, and are thus subject to a preferential income tax rate of 15%.

In assessing the realization of deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible or utilized. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

Acquisitions and Disposals

In November 2004, we completed the purchase of 80% of the outstanding equity interest of Raytime Consultants Limited (Raytime), for a total purchase price of up to RMB27.8 million, subject to the satisfaction of certain post-closing financial milestones. In 2005, we recorded impairment losses of approximately RMB17 million on goodwill and intangible assets related to Raytime, and in 2006, we sold all of our outstanding equity interest of Raytime back to the original sellers. The payment of such purchase price was made as an offset against the amounts we owed to the original sellers in connection with our acquisition of Raytime. We recognized a gain of RMB2,649,682 in 2006 as a result of such sale, which was reported as income from discontinued operations.

In 2005, we completed the purchase of all outstanding equity of Fortune Trip and Bravado, which were providers of hotel reservation and air ticketing services in the PRC. The total purchase price for Fortune Trip and Bravado was US$2,567,637, plus capitalized acquisition costs of RMB1,394,134. The total purchase price excluded (i) consideration of $375,000 that was contingent upon certain employment conditions, and (ii) a contingent adjustment to the net asset value according to the finalization of certain assumed liabilities. During 2006 the employment condition was not met, and as a result we were not required to pay the US$375,000. The adjustment to the net asset value was RMB563,786, and was recorded as additional purchase consideration upon its payment in December 2006.

In September 2006, we entered into an asset purchase agreement and a cooperation agreement with Match.com and two Match subsidiaries, (collectively, “Match”), for disposition of our online dating business operated under the name “eDodo” at a total purchase price of US$14,625,000. The disposition was effective in October 2006 at which time the purchased assets and employees were transferred to Match and Match paid us 90% of the purchase price. The remaining 10% of the purchase price was placed in escrow and released to us in April 2008.

We and Match are both under the common control of Barry Diller. Match.com is a wholly owned subsidiary of IAC/InterActiveCorp (“IAC”). Expedia is the indirect owner of approximately 61% of our outstanding shares and holds approximately 96% of our voting power. Barry Diller is the Chairman and chief executive officer of IAC and the Chairman and Senior Executive of Expedia, Inc. Under the terms of stockholders agreements between Mr. Diller and Liberty Media Corporation, Mr. Diller holds irrevocable proxies to vote the shares of each of IAC and Expedia beneficially owned by Liberty Media. By virtue of the proxies, as well as through shares owned by Mr. Diller directly, Mr. Diller generally has the ability to control the outcome of all matters submitted to a vote of IAC’s or Expedia’s stockholders (except certain specified matters). The buyer (Match) and seller (eLong) in the transaction therefore are considered entities under common control for US GAAP purposes, and the asset transfer is thus accounted for as a transfer of assets to a company under common control. Accordingly, no gain was recognized as a result of the transfer and the excess of net sale proceeds over the carrying value of the net assets sold RMB94.17 million is recorded as an increase to additional paid-in capital. The results of operations of the eDodo business have been presented as discontinued operations for all periods presented.

Critical Accounting Policies

The discussion and analysis of our operating results and financial condition are based on our audited consolidated financial statements, which have been prepared in accordance with U.S. GAAP. Our operating results and financial condition are sensitive to assumptions and estimates that underlie the preparation of our consolidated financial statements. We base our assumptions and estimates on historical experience and on various other assumptions that we believe to be reasonable and which form the basis for making judgments about matters that are not readily apparent from other sources. Our management evaluates these estimates on an ongoing basis. Actual results may differ from these estimates as facts, circumstances and conditions change or as a result of different assumptions.

Our management considers the following factors in reviewing our financial statements:

	•		the selection of critical accounting policies; and
	•		the judgments and other uncertainties affecting the application of those critical accounting policies.

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 to be considered when reviewing our consolidated financial statements. Our principal accounting policies are set forth in additional detail in Note (2) to our audited consolidated financial statements included in this annual report. We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements.

Depreciation. Our property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets, after taking into account their estimated residual value. We review periodically our policies with regard to the estimated useful lives of the assets The useful lives are based on our historical experience with similar assets and taking into account anticipated technological changes.

Impairment of long-lived assets. We periodically review the carrying amounts of long-lived assets, including property, equipment and definitive lived intangible assets, to assess whether they are impaired. We test these assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable. When such a decline has occurred, we adjust the carrying amount to the recoverable amount. We measure the recoverability of assets by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. In determining estimates of future cash flows, significant judgment in terms of projection of future cash flows and other assumptions is required. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. The fair value is determined based upon a combination of multiple of earnings and future cash flows.

Impairment of goodwill and certain intangible assets. We annually test whether goodwill and intangible assets, which are not subject to amortization, have been impaired. Such tests are performed more frequently if events and circumstances indicate that the assets might be impaired. We evaluate the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. In the first step, the fair value of the reporting unit is compared to its carrying value including goodwill. The fair value of the reporting unit is determined based upon the present value of estimated future cash flows of the reporting unit. If the fair value of the reporting unit is less than the carrying value, a second step is performed which compares the implied fair value of the reporting unit’s goodwill to the carrying value of the goodwill. In determining the implied fair value of the reporting unit goodwill, the fair values of the tangible net assets and recognized and unrecognized intangible assets are deducted from the fair value of the reporting unit. If the implied fair value of the reporting unit goodwill is lower than its carrying amount, goodwill is impaired and is written down to its implied fair value. Where quoted market prices are not available, fair value is determined using valuation techniques such as discounted cash flows. The impairment test on an intangible asset that is not subject to amortization consists of a comparison of the fair value of an intangible asset with its carrying amount. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

Provision for doubtful accounts. We maintain an allowance for doubtful accounts for estimated probable losses resulting from the inability of our customers to make required payments. We base our estimates on the aging of our accounts receivable balance, customer credit-worthiness, and historical write-off experience. If the financial condition of our customers were to deteriorate, actual write-offs might be higher than expected, which could adversely affect our operating results and financial condition through the recording of a higher level of provisions. During the years ended December 31, 2007 and December 31, 2008, the Company wrote off provisions for accounts receivables of RMB4.0 million and RMB0.1 million, respectively, which were aged one year or longer which were deemed to be uncollectable after all means of collection have been exhausted and the potential for recovery is considered remote.

Deferred income tax. Deferred income taxes are provided using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted 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 tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion, or all, of the deferred tax assets will not be realized.

In accordance with SFAS No. 109 “Accounting for Income Taxes” , the tax benefits associated with the utilization of pre-acquisition net operating loss carryforwards for which a valuation allowance was established at the date of the acquisition are recognized in the consolidated financial statements after the acquisition date as follows: (i) first to reduce to zero any goodwill related to the acquisition; (ii) second to reduce to zero other non-current intangible assets related to the acquisition; and (iii) third to reduce income tax expense. We reduced goodwill by RMB4,083,112, nil and nil in the years ended December 2006, 2007 and 2008, respectively, for the utilization of acquired tax benefits for which a valuation allowance had been previously established.

Provision for loyalty points. Cardholders of our eLong membership program can earn loyalty points based on their usage of the cards. We award travel services and other non-cash gifts to the cardholders upon the redemption of loyalty points that are accumulated based on the cardholders’ transactions. We recognize estimated costs to provide free travel and other non-cash gifts based on historical redemption rates and recognize such costs as sales and marketing expenses in the statements of operations. The liabilities for loyalty points are reduced upon the redemption or expiration of the loyalty points. If actual redemption rates differ significantly from our estimates, it will result in an adjustment to our liabilities and the corresponding expenses.

Share-based compensation. We have adopted SFAS No. 123R. Under the fair value based method, compensation cost related to employee stock options and similar equity instruments is measured at the grant date based on the value of the award and is recognized over the requisite service period, which is usually the vesting period. We determine fair value using the Black-Scholes model. Under this model, certain assumptions, including the risk-free interest rate, the expected life of the options and the estimated fair value of our ordinary shares and the expected volatility, are required to determine the fair value of the options. Forfeitures are estimated at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. If different assumptions had been used, the fair value of the options, net of estimated forfeitures, would have been different from the amount we computed and recorded, which would have resulted in either an increase or decrease in the compensation cost. We increased the estimated forfeiture rate in 2008 due to high rate of turnover among employees who had been granted options and/or performance units. Stock-based compensation awards which are settled in cash upon vesting are classified as liabilities and included in accrued expenses and other current liabilities in the consolidated balance sheet. Compensation cost related to liability-classified awards, is determined based on the current share price and other pertinent factors at grant date, and the proportionate amount of the requisite service that has been rendered to date.

We account for equity instruments issued to non-employee vendors in accordance with the provisions of SFAS No. 123R and Emerging Issues Task Force ( “EITF”) Issue No. 96-18, “Accounting for Equity Instruments That are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the date on which the counterparty’s performance is complete. We believe that our assumptions, including the risk-free interest rate and expected life used to determine fair value, are appropriate. However, if different assumptions had been used, the fair value of the equity instruments issued to non-employee vendors would have been different from the amount we computed and recorded, which would have resulted in either an increase or decrease in the associated compensation cost.

Revenue recognition. Our revenues are principally derived from the provision of travel services, including hotel reservation, air ticketing and other related travel services. Commissions from air ticketing services rendered are recognized upon the delivery of the ticket to the customer, net of estimated cancellations. Estimated cancellations were insignificant for the years ended December 31, 2006, 2007 and 2008. We describe our revenue recognition policies in our consolidated financial statements. We believe our revenue recognition policies are consistent with Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” and EITF 99-19 “Reporting Revenue Gross as a Principal Versus Net as an Agent.” As we operate as an agent of our travel suppliers, we have no risk of loss due to obligations for cancelled services. As such, we are not the primary obligor in the travel reservation services and we therefore recognize commissions on a net basis.

Results of Operations

The following table sets forth certain information relating to our results of operations as of the dates and for the periods indicated:

		Year ended December 31,
		2006				2007				2008				2008
		RMB				RMB				RMB				US$
Revenues:
Travel			255,960,988				303,846,548				331,947,035				48,654,750
Other			8,582,692				11,550,123				16,478,511				2,415,319
Total revenues			264,543,680				315,396,671				348,425,546				51,070,069
Business tax and surcharges			14,702,612				17,810,292				21,112,717				3,094,572
Net revenues			249,841,068				297,586,379				327,312,829				47,975,497
Cost of services			62,245,355				82,497,585				96,996,309				14,217,121
Gross profit			187,595,713				215,088,794				230,316,520				33,758,376
Operating expenses:
Service development			41,921,653				48,602,279				52,584,041				7,707,445
Sales and marketing			99,091,184				126,971,094				163,528,250				23,968,963
General and administrative			61,534,710				52,005,466				53,652,427				7,864,042
Amortization of intangible assets			1,060,000				1,060,000				848,906				124,427
Charges related to property and equipment and intangible assets			—				1,038,896				1,384,814				202,977
Loss from operations			(16,011,834	)			(14,588,941	)			(41,681,918	)			(6,109,478	)
Other income (expenses):
Interest income			51,429,793				55,470,781				29,020,353				4,253,624
Foreign exchange loss			(33,016,052	)			(65,819,578	)			(60,937,889	)			(8,931,900	)
Other			(10,775	)			131,630				—				—
Total other income (expenses), net			18,402,966				(10,217,167	)			(31,917,536	)			(4,678,276	)
Income/(loss) from continuing operations before income tax expense			2,391,132				(24,806,108	)			(73,599,454	)			(10,787,754	)
Income tax expense			2,835,259				885,343				2,993,678				438,795

		Year ended December 31,
		2006				2007				2008				2008
		RMB				RMB				RMB				US$
Loss from continuing operations			(444,127	)			(25,691,451	)			(76,593,132	)			(11,226,549	)
Income from discontinued operations before income tax expense (including gain on disposal of RMB 2,649,682 in 2006)			1,226,768				112,260				—				—
Income tax expense of discontinued operations			24,302				8,420				—				—
Total income from discontinued operations, net of tax			1,202,466				103,840				—				—
Net income/(loss) before cumulative effect of change in accounting principle			758,339				(25,587,611	)			(76,593,132	)			(11,226,549	)
Cumulative effect of change in accounting principle			282,072				—				—				—
Net income/(loss)			1,040,411				(25,587,611	)			(76,593,132	)			(11,226,549	)

2008 Compared to 2007

Revenues. The following table sets forth certain information relating to our revenues for the years ended December 31, 2007 and 2008.

		Year ended December 31,
		2007								2008
						% of												% of				%
		RMB				revenues				RMB				US$				revenues				growth
		(in thousands, except percentage data)
Revenues
Hotel commissions			240,803				76	%			253,458				37,150				73	%			5	%
Air ticketing commissions			57,456				18	%			77,205				11,316				22	%			34	%
Other travel revenue			5,588				2	%			1,284				189				0	%			-77	%
Total travel revenue			303,847				96	%			331,947				48,655				95	%			9	%
Non travel			11,550				4	%			16,479				2,415				5	%			43	%
Total revenues			315,397				100	%			348,426				51,070				100	%			10	%

The following table sets forth the number of room nights booked and the average commission per room night, as well as the number of air tickets sold, for the years ended December 31, 2007 and 2008.

		Year ended December 31,
										%
		2007				2008				growth
Number of room nights booked			3,711,000				3,945,000				6	%
Average commission per room night (RMB)			65				64				-1	%
Number of air tickets sold			1,416,000				1,788,000				26	%
Average commission per air ticket (RMB)			41				43				5	%

For the year ended December 31, 2008, we generated gross revenues of RMB348.4 million (US$51.1 million), an increase of 10% over RMB315.4 million in revenues generated in the year ended December 31, 2007. The increase was primarily attributable to a 9% year on year increase in our travel revenue. Our travel revenue consists of hotel, air and other travel, and the changes in each category in 2008 are discussed below.

Hotel. The increase in our hotel reservations revenues from RMB240.8 million in 2007 to RMB253.5 million (US$37.2 million) in 2008, a year on year growth of 5% reflects an increase in the number of hotel room nights we booked from 3,711,000 in 2007 to 3,945,000 in 2008 and a decrease in commission per room night to RMB64, down RMB1 from 2007. The increase in the number of hotel room nights was due to our increased customer base, which includes both old and new customers as well as increases in revenue from our third party distribution channels including China Telecom and China Netcom. We also increased our hotel product offerings from approximately 4,800 hotels as of December 31, 2007 to over 7,000 hotels as of December 31, 2008.

Air ticketing. The increase in our air ticketing commission revenues from RMB57.5 million in 2007 to RMB77.2 million (US$11.3 million) in 2008, a year on year growth of 34%, was mainly attributable to an increase in the number of air tickets booked which increased from 1,416,000 in 2007 to more than 1,788,000 in 2008, and an increase in revenue per ticket from RMB41 in 2007 to RMB43 (US$6.3) in 2008. The 2008 growth was the result of continuing investment in technology to improve our call center and customer service.

Other revenues. Our other travel revenues decreased from RMB5.6 million in 2007 to RMB1.3 million in 2008 (US$0.19 million) mainly due to the suspension of our vacation package business in July 2007 and the termination of our contract with Travelscape in March 2008. Our non travel service revenues increased from RMB11.6 million in 2007 to RMB16.5 million (US$2.4 million) in 2008 mainly due to an increase in internet advertising revenue of our subsidiary, Beijing Xici.

Business tax and surcharges. We recorded more business taxes and surcharges in 2008 compared to 2007 due to increases in our revenues. Business tax was 5.6% of total revenue in 2007 and increased to 6.1% in 2008, primarily due to the increase of internal revenues arising from transfer pricing between eLong Information and Beijing Air.

Cost of services and gross profit. For the years ended December 31, 2007 and 2008, our cost of services was 28% and 30% of our total net revenues, respectively. The two percent reduction in our gross margin from 72% in 2007 to 70% in 2008 was primarily due to our air ticketing business, which has a lower gross margin than our hotel business, accounting for a larger percentage of our revenue in 2008 as compared to 2007.

Operating expenses. The following table sets forth a breakdown of our operating expenses for the years ended December 31, 2007 and 2008.

		Year ended December 31,
		2007								2008
						% of net												% of net				%
		RMB				revenues				RMB				US$				revenues				growth
		(in thousands, except for percentage data)
Operating expenses
Service development			48,602				16	%			52,584				7,707				16	%			8	%
Sales and marketing			126,971				43	%			163,528				23,969				50	%			29	%
General and administrative			52,006				18	%			53,653				7,864				16	%			3	%
Amortization of intangible assets			1,060				—				849				124				—				-20	%
Write-down of property and equipment and intangible assets			1,039				—				1,385				203				1	%			33	%
Total operating expenses			229,678				77	%			271,999				39,867				83	%			18	%

Our operating expenses in 2008 increased by 18% to RMB272.0 million (US$39.9 million) from RMB229.7 million in 2007 primarily for the reasons discussed below.

Service development. Our service development expenses primarily consist of expenses we incur to develop our transaction and service platform, to maintain, monitor and manage our websites and payroll and other expenses for our hotel and air product employees. Our service development expenses increased 8% to RMB52.6 million (US$7.7 million) in 2008 from RMB48.6 million in 2007 primarily due to additional amounts we invested in our technology, website, hotel, and air product offerings. Our service development expenses were 16% of net revenues in both 2007 and 2008.

Sales and marketing. Our sales and marketing expenses include online and offline advertising expenses, commissions payable to our third party distribution channels and resellers, expenses associated with our loyalty program, and payroll and other expenses for our marketing employees. In 2008, our sales and marketing expenses increased 29% to RMB163.5 million (US$24.0 million) from RMB127.0 million in 2007, which was mainly due to the increased sales commissions in line with growth in third party distribution channels including China Telecom and China Netcom and increased online marketing efforts as compared to 2007. Our sales and marketing expenses were 50% of net revenues in 2008 as compared to 43% in 2007.

General and administrative. Our general and administrative expenses primarily include finance, legal, human resources, auditing and executive office expenses. Our general and administrative expenses increased 3% to RMB53.7 million (US$7.9 million) in 2008 from RMB52.0 million in 2007 which was primarily due to increased employee compensation and system development costs, partially offset by decreased external consulting fees. Our general and administrative expenses as a percentage of net revenues for the year ended December 31, 2008 decreased to 16% compared to 18% for the year ended December 31, 2007, primarily due to increased revenues.

Other income (loss), net. We recorded net other loss of RMB31.9 million (US$4.7 million) in 2008 compared to net other loss of RMB10.2 million in 2007. The net other loss in 2008 was primarily due to a foreign exchange loss of RMB60.9 million (US$8.9 million) resulting from the appreciation of the Renminbi during 2008, partially offset by interest income of RMB29.0 million (US$4.3 million) in 2008.

Income tax expense. We incurred a tax expense of RMB3.0 million (US$0.4 million) in 2008, compared to a tax expense of RMB0.9 million in 2007. The increase in income tax expense in 2008 compared to 2007 is mainly due to provision of a valuation allowance for eLong Information.

Net loss. Net loss increased to RMB76.6 million (US$11.2 million) in 2008 from a net loss of RMB25.6 million in 2007, as a result of the factors discussed above. We recorded a net loss applicable to ordinary shareholders of RMB76.6 million (US$11.2 million) for the year ended December 31, 2008 and a net loss applicable to ordinary shareholders of RMB25.6 million for the year ended December 31, 2007.

2007 Compared to 2006

Revenues. The following table sets forth certain information relating to our revenues for the years ended December 31, 2006 and 2007.

		Year ended December 31,
		2006								2007
						% of												% of				%
		RMB				revenues				RMB				US$				revenues				growth
		(in thousands, except percentage data)
Revenues
Hotel commissions			209,275				79	%			240,803				33,011				76	%			15	%
Air ticketing commissions			38,288				15	%			57,456				7,877				18	%			50	%
Other travel revenue			8,398				3	%			5,588				766				2	%			-33	%
Total travel revenue			255,961				97	%			303,847				41,654				96	%			19	%
Non travel			8,583				3	%			11,550				1,583				4	%			35	%
Total revenues			264,544				100	%			315,397				43,237				100	%			19	%

The following table sets forth the number of room nights booked and the average commission per room night, as well as the number of air tickets sold, for the years ended December 31, 2006 and 2007.

		Year ended December 31,
										%
		2006				2007				growth
Number of room nights booked			3,251,000				3,711,000				14	%
Average commission per room night (RMB)			64				65				2	%
Number of air tickets sold			1,006,000				1,416,000				41	%
Average commission per air ticket (RMB)			38				41				8	%

For the year ended December 31, 2007, we generated revenues of RMB315.4 million (US$43.2 million), an increase of 19% over RMB264.5 million in revenues generated in the year ended December 31, 2006. The increase was attributable to a 19% year on year increase in our travel revenue and 35% year on year increase in our non travel revenue.

The 2006 to 2007 year on year changes in our travel revenue which consists of hotel, air and other travel are explained below.

The increase in our hotel reservations revenues from RMB209.3 million in 2006 to RMB240.8 million (US$33.0 million) in 2007, a year on year growth of 15% reflects an increase in the number of hotel room nights we booked from 3,251,000 in 2006 to 3,711,000 in 2007 and an improvement in the revenue per room from RMB64 in 2006 to RMB65 (US$8.9) in 2007. The increase in the number of hotel room nights was due to eLong’s enlarged customer base, which includes both old and new customers, increases in revenue from our co-marketing partners including China Telecom and China Netcom. We also increased our product offerings from approximately 3,505 hotels at December 31, 2006 to over 4,800 hotels at December 31, 2007. Our revenue per room increased from RMB64 in 2006 to RMB65 (US$8.9) in 2007, a year on year growth of 2%.

Air ticketing. The increases in our air ticketing commission revenues from RMB38.3 million in 2006 to RMB57.5 million (US$7.9 million) in 2007, a year on year growth of 50%, was mainly attributable to an increase in the number of air tickets booked which increased from 1,006,000 in 2006 to more than 1,416,000 in 2007, and an increase in revenue per ticket from RMB38 in 2006 to RMB41 (US$5.6) in 2007. Air ticketing continued to be an important focus for eLong in 2007 and the 2007 growth was the result of continuing investment in technology and improvement in call center and customer service including the launch of a 24-hour air ticket booking service during 2007.

Other revenues. Our other travel revenues decreased from RMB8.4 million in 2006 to RMB5.6 million in 2007 (US$0.8 million) mainly due to our suspension of the vacation package business in July 2007. Our non travel services revenues increased from RMB8.6 million in 2006 to RMB11.6 million (US$1.6 million) in 2007 mainly due to an increase in the internet advertising revenue.

Business tax and surcharges. We recorded more business taxes and surcharges in 2007 compared to 2006 due to increases in our revenues. Business tax was 5.6% of total revenue in both years of 2006 and 2007.

Cost of services and gross profit. For the years ended December 31, 2006 and 2007, our cost of services as a percentage of revenue was 25% and 28% of our total net revenues respectively. The three percent reduction in our gross margin from 75% in 2006 to 72% in 2007 was primarily due to increased investments in our hotel and air call center to improve our service level and because our air ticketing services, which have a lower gross margin than our hotel business, accounted for a larger percentage of our revenue in 2007 as compared to 2006.

Operating expenses. The following table sets forth a breakdown of our operating expenses for the years ended December 31, 2006 and 2007.

		Year ended December 31,
		2006								2007
						% of net												% of net				%
		RMB				revenues				RMB				US$				revenues				growth
		(in thousands, except for percentage data)
Operating expenses
Service development			41,922				17	%			48,602				6,663				16	%			16	%
Sales and marketing			99,091				40	%			126,971				17,406				43	%			28	%
General and administrative			61,535				25	%			52,006				7,130				18	%			-15	%
Amortization of intangible assets			1,060				—				1,060				145				—				—
Write-down of property and equipment and intangible assets			—				—				1,039				142				—				N/A
Total operating expenses			203,608				82	%			229,678				31,486				77	%			13	%

Our operating expenses in 2007 increased by 13% to RMB229.7 million (US$31.5 million) from RMB203.6 million in 2006 for the reasons explained below.

Service development. Our service development expenses primarily consist of expenses we incur to develop our transaction and service platform, expenses to maintain, monitor and manage our websites and our hotel, vacation package and air product teams. Our service development expenses increased 16% to RMB48.6 million (US$6.7 million) in 2007 from RMB41.9 million in 2006 primarily due to additional amounts we invested in our technology, website, hotel, and air product offerings. Our service development expenses were 16% of net revenues in 2007 as compared to 17% in 2006.

Sales and marketing. Our sales and marketing expenses include advertising expenses, commissions payable to our co-marketers and resellers, expenses associated with the production of marketing materials and our loyalty program, and the payroll and other expenses for our marketing personnel. In 2007, our sales and marketing expenses increased 28% to RMB 127.0 million (US$17.4 million) from RMB99.1 million in 2006 which was mainly due to the increase in our business volume, as our 2007 revenue increased 19% from 2006. Our sales and marketing expenses increased for the year ended 2007 because of increased sales commission in line with revenue growth, and increased online marketing efforts as compared to previous years. Our sales and marketing expenses were 43% of net revenues in 2007 as compared to 40% in 2006.

General and administrative. Our general and administrative expenses primarily include finance, legal, human resources, auditing and executive office expenses. Our general and administrative expenses decreased 15% to RMB52.0 million (US$7.1 million) in 2007 from RMB61.5 million in 2006 primarily because of decrease in incentive and share-based compensation. Our general and administrative expenses as a percentage of net revenues for the year ended December 31, 2007 decreased to 18% compared to 25% for the year ended December 31, 2006, primarily because of increased revenues and decreased share-based compensation expense.

Other income (expense), net. We recorded net other expense of RMB10.2 million (US$1.4 million) in 2007 compared to net other income of RMB18.4 million in 2006. The net other expense in 2007 was primarily due to a foreign exchange loss of RMB65.8 million (US$9.0 million) resulting from the appreciation of the Renminbi during the year. This exchange loss was partially offset by interest income of RMB55.5 million (US$7.6 million) for fiscal 2007.

Income tax expense. We incurred a tax expense of RMB0.9 million (US$0.1 million) in 2007, compared to a tax expense of RMB2.8 million in 2006. The fluctuation in income tax expense from 2006 to 2007 is mainly because during 2006, the utilization of pre-acquisition net operation loss resulted in more income tax expenses while during 2007 a significant portion of our net loss is related to foreign exchange loss which is recorded in eLong, Inc., which is exempted from income tax.

Net loss. Net loss increased to RMB25.6 million (US$3.5 million) in 2007 from RMB1.0 million net earnings in 2006, as a result of the factors discussed above. We recorded a net loss applicable to ordinary shareholders of RMB25.6 million (US$3.5 million) for the year ended December 31, 2007 and a net profit applicable to ordinary shareholders of RMB1.0 million for the year ended December 31, 2006.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

As of December 31, 2008, we had approximately RMB321.5 million (US$47.1 million) in cash and cash equivalents and RMB635.8 million (US$93.2 million) of short-term investments. Our cash and cash equivalents consist of cash on hand and demand deposits placed with banks or other financial institutions. Our short-term investments are time deposits of six or nine months in commercial banks located outside of China.

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

		Year ended December 31,
		2006				2007				2008				2008
		RMB				RMB				RMB				US$
		(in thousands)
Net cash provided by (used in)operating activities			76,554				42,349				(14,076	)			(2,063	)
Net cash provided by (used in) investing activities			72,985				(43,638	)			(641,501	)			(94,027	)
Net cash provided by (used in) financing activities			95,140				7,355				(98,331	)			(14,413	)
Effect of foreign exchange rate changes on cash			(33,917	)			(66,943	)			(62,997	)			(9,234	)
Net increase (decrease) in cash and cash equivalents			210,763				(60,876	)			(816,905	)			(119,737	)
Cash and cash equivalents at beginning of year			988,560				1,199,323				1,138,446				166,867
Cash and cash equivalents at end of year			1,199,323				1,138,447				321,541				47,130

Operating activities. Net cash used in operating activities in 2008 was RMB14.1 million (US$2.1 million), compared to net cash provided by operating activities in 2007 and 2006 of RMB42.3 million and RMB76.6 million, respectively. The change from cash inflow in 2007 to cash outflow in 2008 was mainly due to increased spending on personnel due to increased headcount and labor costs of RMB128.9 million (US$18.9 million) in 2008 compared to RMB116.7 million in 2007, as well as higher advertising and promotion expenses of RMB125.4 million (US$18.4 million) in 2008 compared to RMB89.0 million in 2007. The level of cash generated by operating activities was lower in 2007 than in 2006 mainly due to increased spending on personnel due to increased headcount and higher labor costs and consulting services of RMB136 million in 2007 compared to RMB108.7 million in 2006 and income tax payments of RMB14.2 million mainly for income tax imposed on gain from disposal of a business in 2007.

Investing activities. Our net cash used in investing activities was RMB641.5 million (US$94.0 million) in 2008, compared to RMB43.6 million in 2007 and RMB73.0 million in 2006. The level of cash used in investing activities was significantly higher in 2008 than in 2007 primarily due to short-term investments of RMB655.0 million (US$96.0 million) and capital expenditures of RMB32.9 million (US$4.8 million). The change from cash inflow in 2006 to cash outflow in 2007 was mainly due to RMB102.6 million cash received in proceeds from disposal of business in 2006 and the cash used in 2007 was mainly for short-term investment of RMB19.1 million and capital expenditure of RMB22.2 million.

Financing activities. Our net cash used in financing activities was RMB98.3million (US$14.4 million) in 2008, compared to net cash provided by financing activities of RMB7.4 million and RMB95.1 million in 2007 and 2006, respectively. The net cash used in financing activities in 2008 was mainly from our repurchase of ordinary shares of US$15.0 million. The net cash from financing activities in 2007 was mainly from the exercise of stock options of RMB3.1 million and the proceeds received on behalf of related parties of RMB4.8 million (US$0.7 million). The higher amount of restricted cash from financing activities in 2006 was due to cash released from escrow of RMB75.7 million (including RMB25.9 million received on behalf of selling shareholders). In 2006, we also received RMB26.7 million in share disposal proceeds on behalf of former shareholders, which were associated with the sale of ordinary shares by the selling shareholders to the public in our initial public offering.

Our capital expenditures totaled RMB20.7 million, RMB22.2 million and RMB32.9 million (US$4.8 million) in 2006, 2007, and 2008, respectively. Our capital expenditures in 2008 related primarily to purchases of software, computer equipment, servers and computer software to support the development of our business. Capital expenditures in 2009 have been, and are expected to continue to be, funded through operating cash flows and through our existing capital resources.

Capital Resources

As of December 31, 2008, our primary sources of liquidity were RMB321.5 million (US$47.1 million) in cash and cash equivalents and RMB635.8 million (US$93.2 million) of short-term investments. We have no outstanding bank loans or financial guarantees or similar commitments to guarantee the payment obligations of third parties. We believe that our available cash and anticipated future operating cash flows will be sufficient to fund currently anticipated liquidity needs in the near term. However, any projections of future cash inflows and outflows and any projections of the future state of the economy and PRC travel industry conditions are subject to substantial uncertainty. See “Item 3: Key Information—Risk Factors.”

TREND INFORMATION

Other than as disclosed elsewhere in this annual report, as of April 30, 2009, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material adverse effect on our net revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause the disclosed financial information to be not necessarily indicative of future operating results or financial condition.

OFF-BALANCE SHEET ARRANGEMENTS

We have not entered into any off-balance sheet arrangements, transactions or other relationships with unconsolidated entities. We do not have any outstanding derivative financial instruments, off-balance sheet guarantees or arrangements, interest rate swap transactions or foreign currency forward contracts. We do not engage in trading activities involving non-exchange traded contracts.

CONTRACTUAL OBLIGATIONS

The following table presents our aggregate contractual obligations as of December 31, 2008 with payments due in the periods indicated and in the currency indicated:

More than

Total Payments due

Less than 1 year

1-3 Years

3-5 Years

5 years

Operating Lease Obligations(1)

RMB41.7 million

RMB11.7 million

RMB30.0 million

—

—

Purchase Obligations(2)

RMB1.5 million

RMB1.2 million

RMB0.3 million

—

—

Total

RMB43.2 million

RMB12.9 million

RMB30.3 million

—

—

INFLATION AND MONETARY RISK

Inflation in China has not had a material impact on our results of operations in recent years. According to the National Bureau of Statistics of China, the change in Consumer Price Index in China was 1.5%, 4.8 % and 5.9% in 2006, 2007 and 2008, respectively. The rate of inflation in China was markedly higher in late 2007 and the first two quarters of 2008 than in recent preceding years, but then declined in the latter half of 2008 and early 2009. The scope and extent of inflation could adversely affect the Chinese economy, business and personal travel and our results of operations. See “Item 3. Key information on the Company—Risk Factors—Risk related to Doing Business in the People’s Republic of China—A slow-down of, or increased volatility in, economic growth in China may adversely affect our growth and profitability.”

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Due to our U.S. dollar and Renminbi cash and cash equivalents and short-term investments, we face interest rate risk and foreign exchange rate risk.

Interest rate risk. Our exposure to interest rate risk for changes in interest rates relates primarily to the interest income generated by our cash and cash equivalents and short-term investments deposited in banks. Cash and cash equivalents consist of cash on hand and demand deposits placed with banks or other financial institutions. Short-term investments are time deposits of six or nine months in commercial banks located outside of China.

The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable and other receivables represent our principal exposure to credit risk in relation to our financial assets. As of December 31, 2008, substantially all of our cash and cash equivalents and short-term investments were held with major international banks which we believe are of acceptable credit quality.

We have not used any derivative financial instruments to hedge interest rate risk. We have not been exposed nor do we anticipate being exposed to material risks due to changes in interest rates, although our future interest income may fluctuate in line with changes in interest rates. The risk associated with fluctuating interest rates is principally confined to our cash and cash equivalents and short-term investments which are deposited in banks.

During 2008, we recorded interest income of RMB29.0 million (US$4.3 million). The following table sets forth a sensitivity analysis suggesting how this interest income would have been impacted if interest rates were: (i) 10% lower, (ii) 5% lower, (iii) actual, (iv) 5% higher and (v)10% higher.

		2008				2008				2008				2008				2008
		(-10%)				(-5%)				Actual				(5%)				(10%)
		RMB				RMB				RMB				RMB				RMB
		(in ‘000)				(in ‘000)				(in ‘000)				(in ‘000)				(in ‘000)
Interest Income In 2008 Full Year			26,118				27,569				29,020				30,471				31,922

Foreign exchange risk. Substantially all of our revenue-generating operations are transacted in Renminbi, which is not fully convertible into foreign currencies. In addition, a substantial majority of our cash and cash equivalents and short-term investments are held in U.S. dollars outside of China. Accordingly, fluctuation in the U.S. dollar / Renminbi exchange rate may have a significant on our financial results. As of December 31, 2008, we had approximately RMB321.5 million (US$47.1 million) in cash and cash equivalents and RMB635.8 million (US$93.2 million) of short-term investments. As of December 31, 2008, approximately 53%, of our cash and cash equivalents were denominated in U.S. dollars, and 47% were denominated in Renminbi. As of December 31, 2008, approximately 97%, of our short-term investments were denominated in U.S. dollars, and 3% were denominated in Renminbi.

We have not used any forward contracts or currency borrowings to hedge our exposure to foreign currency risk. During the year ended December 31, 2008, we recorded RMB61.1 million (US$9.0 million) in foreign exchange losses due to the appreciation of the Renminbi against the United States dollar. During 2008, the value of the Renminbi appreciated 6.47% against the U.S. dollar. The following table sets forth a sensitivity analysis suggesting how this gain/loss would have been impacted if the exchange rate of the Renminbi against the U.S. dollar had (i) appreciated by 5%, (ii) appreciated by 10%, (iii) remained unchanged, (iv) depreciated by 5% and (v) depreciated by 10%.

		2008				2008 Actual				2008				2008				2008				2008
		(-10%)				(-6.47%)				(-5%)				0%				5%				10%
		RMB				RMB				RMB				RMB				RMB				RMB
		(in ‘000)				(in ‘000)				(in ‘000)				(in ‘000)				(in ‘000)				(in ‘000)
Foreign Exchange Gain/(Loss) In 2008 Full Year			(94,185	)			(60,938	)			(47,093	)			0				47,093				94,185

If the Renminbi continues to appreciate we will continue to record foreign exchange losses on United States dollar denominated assets and these losses are likely to be material. See “Item 3. Key Information—Risk Factors—Risks Related to Doing Business in the People’s Republic of China—Fluctuation of the Renminbi may materially and adversely affect our financial results and the value of our company and ADSs.”

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141R (Revised), Business Combinations (“SFAS No. 141R”). SFAS No. 141R establishes requirements for the recognition and measurement of acquired assets, liabilities, goodwill, and non-controlling interests (formerly minority interests). SFAS No. 141R also provides disclosure requirements related to business combinations. SFAS No. 141R is effective for fiscal years beginning after December 15, 2008. SFAS No. 141R will be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period on or after December 15, 2008. We are in the process of evaluating the impact of the adoption of SFAS 141R on our consolidated financial statements.

In December 2007, the FASB issued FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements— an amendment of ARB No. 51 (“SFAS No. 160”). SFAS No. 160 amends ARB No. 51 to establish accounting and reporting standards for a non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary. This Statement is effective for fiscal years and interim periods, beginning on or after December 15, 2008. We believe there will be no material impact on our consolidated financial statements upon the adoption of SFAS No. 160.

In December 2007, the SEC issued Staff Accounting Bulletin 110 (“SAB 110”). SAB 110 states that the staff will continue to accept, under certain circumstances, the use of the simplified method for estimating the expected term of “plain vanilla” share options in accordance with SFAS No. 123(R) beyond December 31, 2007. Therefore, we continue to use the simplified method for estimating the expected term.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”), which is effective for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 requires enhanced disclosures about an entity’s derivative and hedging activities, including how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. We do not expect the adoption of SFAS No. 161 to have a material impact on our consolidated financial statements.

In April 2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”). The intent of FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R) and other applicable accounting literature. FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008. We do not expect the adoption of SFAS No. 142-3 to have a material impact on our consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles. SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. We do not expect the adoption of SFAS No. 162 to have a material impact on our consolidated financial statements.

Item 6: Directors, Senior Management and Employees.

Directors and Senior Management

Our board of directors currently consists of nine directors. Pursuant to our articles of association, the members of our board of directors were elected by our shareholders or appointed by our board of directors. Our shareholders, including holders of ordinary shares and high-vote ordinary shares, are entitled to vote together as a single class on all matters submitted to shareholder vote, including the election of the members of our board of directors. Each ordinary share is entitled to one vote, and each high-vote ordinary share is entitled to 15 votes.

Expedia, through its indirect subsidiary, Expedia Asia Pacific, holds all 28,550,704 high-vote ordinary shares, and thus controls approximately 96% of the voting power of all shares of our voting stock. In addition, certain other shareholders are parties to an investors agreement with Expedia Asia Pacific under which they have agreed to vote their ordinary shares in the election of directors designated by Expedia Asia Pacific. Thus, Expedia has the ability to control the composition of our board of directors, including the ability to nominate new or replacement directors, to vote the Expedia Asia Pacific shares to elect such nominees, as well as the right to vote the Expedia Asia Pacific shares to remove members of our board of directors. See “Item 7: Major Shareholders and Related Party Transactions.”

Each member of our board of directors is elected or appointed by our board of directors to hold office until the next annual general meeting of shareholders, until such director’s successor is elected and duly qualified, or until such director’s earlier death, bankruptcy, insanity, resignation or removal. There are no family relationships among any of our directors or executive officers named below. Our senior executive officers report to our CEO and serve at the discretion of our board of directors.

The names of our directors and executive officers, their ages and the principal positions with eLong held by each of them are as follows:

Name		Age				Position
Guangfu Cui			40			Chief Executive Officer
Mike Doyle			39			Chief Financial Officer
Sami Farhad			36			Vice President & General Counsel
James Li			36			Vice President of Sales
Kenneth Liao			47			Vice President & Chief Technology Officer
Jack Wang			36			Vice President of Partner Service Group
Jason Xie			33			Vice President of Business Development
Yu Zheng			35			Vice President of Marketing & Operations

Name		Age				Position
Henrik Kjellberg(1)(3)			38			Chairman of the Board of Directors
Leo Austin(2)			37			Director
Thomas Gurnee(2)(3)			58			Director
Arthur Hoffman(1)			40			Director
Jens Parkitny(1) (3)			43			Director
Cyril Ranque(1)			40			Director
Michael Scown(2)			50			Director
Johan Svanstrom(1)			37			Director
Justin Tang			38			Director

Biographical Information

Executive Officers and Directors

Guangfu Cui, Chief Executive Officer

Guangfu Cui has served as our Chief Executive Officer (“CEO”) since October 8, 2007. Prior to joining eLong, Mr. Cui was the Managing Director for FedEx Kinko’s China. During his four years at FedEx Kinko’s, Mr. Cui positioned the company as a market leader in the digital printing industry in China, with 16 centers and 300 employees. Prior to FedEx Kinko’s, Mr. Cui worked for Procter & Gamble for over 12 years, including two and half years working in the United States. He was instrumental in building Procter & Gamble’s China distribution network and retail coverage systems. Mr. Cui holds an MBA from Kellogg School of Management at Northwestern University in Evanston, Illinois, and a BA in Law from Peking University.

Mike Doyle, Chief Financial Officer

Mike Doyle has served as our Chief Financial Officer (“CFO”) since April 1, 2009, and was a member of our board of directors from December 2004 to May 2009. Prior to becoming our CFO, Mr. Doyle was the Chief Financial Officer of Expedia Asia Pacific, a division of Expedia, based in Hong Kong. Previously, Mr. Doyle also served as corporate development director responsible for Expedia’s investment activities in Asia. Prior to Expedia, Mr. Doyle worked as Chief Financial Officer of Teledesic, a Seattle-based broadband communications company founded by Craig McCaw and Bill Gates. Mr. Doyle started his career as an investment banker at Morgan Stanley & Company in New York and Singapore. While in Singapore, he also worked for the Government of Singapore Investment Corporation, making private equity investments in Southeast Asia. Mr. Doyle holds a BA in Finance from Southern Methodist University and an MBA from Harvard Business School.

Sami Farhad, Vice President & General Counsel

Sami Farhad has served as our Vice President and General Counsel since June 1, 2008, and was appointed to the additional role of Vice President of Human Resources on October 20, 2008. Prior to joining eLong, Mr. Farhad was legal counsel to GE Healthcare China. Before joining GE, Mr. Farhad was an associate in the New York, Beijing and Hong Kong offices of Sullivan & Cromwell LLP. He was also previously a law clerk to Judge Jerry Buchmeyer of the United States District Court for the Northern District of Texas. Mr. Farhad holds a JD from Columbia University School of Law and a BA from Harvard University. He is a member of the State Bar of New York.

James Li, Vice President of Sales

James Li has served as our Vice President of Sales since January 1, 2008. Mr. Li joined eLong as Senior Sales Director for the North Division in March 2007 and was later promoted to Vice President of Sales due to his leadership and contributions to eLong. Prior to joining eLong, Mr. Li served as a sales leader in multinational companies including Procter & Gamble, Motorola and PepsiCo, and has significant sales management experience. Mr. Li graduated from Harbin Institute of Technology with a BA in Marketing.

Kenneth Liao, Vice President & Chief Technology Officer

Kenneth Liao has served as our Chief Technology Officer (“CTO”) since October 7, 2007. Mr. Liao has held technology management positions in several leading U.S. technology companies. He came to eLong from Cisco Systems, Inc., where he served in various technology leadership roles for 10 years, including as the Director of Engineering for the Security Technology Group. In this role he oversaw a global team of more than 120 employees. Prior to Cisco, Mr. Liao managed technology teams at Bay Networks, IBM, and Digital Transparencies. Mr. Liao holds a Master’s degree in Electrical Engineering from Rice University, a Master’s degree in Mathematics from the University of Houston and a BS degree in Computer Science from Zhongshan University.

Jack Wang, Vice President of Partner Service Group

Jack Wang has served as Vice President of our Partner Service Group since December 2007. Prior to joining eLong, Mr. Wang worked for Proctor & Gamble for almost 10 years. Mr. Wang has significant experience in customer business development and trade marketing. Mr. Wang holds a dual-concentration BA in fluid mechanics and journalism from Tsinghua University.

Jason Xie, Vice President of Business Development

Jason Xie has served as our Vice President of Sales & Business Development since January 1, 2008. Prior to joining eLong, Mr. Xie had several years of sales and management experience in multinational companies including Procter & Gamble, Citibank and FedEx. Mr. Xie received his MBA from China Europe International Business School and a BA in Economics from Nanjing University.

Yu Zheng, Vice President of Marketing & Operations

Yu Zheng has served as Vice President of Marketing since February 25, 2008 and was appointed to the additional role of Vice President of Operations on March 1, 2009. Prior to joining eLong, Mr. Zheng was the Acting Vice President of Marketing of Nippon Paint (China) Co. Ltd. Prior to that, he worked with Coca-cola as Beverage Partner Worldwide China Director, and with Proctor & Gamble as Associate Marketing Director for Greater China Oral Care. Mr. Zheng has more than 10 years of experience in marketing, brand management and general management. He successfully launched and built the Pampers disposable diaper brand to be a market leader in China. He also led Crest to become the No.1 toothpaste brand in China. Mr. Zheng Yu holds a Master’s Degree in Biochemical Engineering from Zhejiang University.

Henrik Kjellberg, Chairman of the Board of Directors

Henrik Kjellberg has been Chairman of the board of directors since March 2007, a member of our board of directors since October 2005, and was our Interim CEO for a portion of 2007. Mr. Kjellberg is also President of Expedia Affiliate Network (“EAN”), a division of Expedia. Prior to assuming his responsibilities at EAN, Mr. Kjellberg was President of Expedia Asia Pacific, and was also formerly Expedia’s Senior Vice President of international lodging and destination services as well as Vice President and Managing Director, Supply Europe. Prior to joining Expedia, Mr. Kjellberg worked for Procter & Gamble and Scandinavian Internet portal Spray. Mr. Kjellberg holds a Master’s of Science in economics from the Stockholm School of Economics.

Leo Austin, Director

Leo Austin has been a member of our board of directors and our Audit Committee since December 2007. Mr. Austin is a Partner with Augus Partners, a Beijing-based corporate advisory firm, and focuses on the mainland China travel, consumer goods and infrastructure industries. He has lived and worked in China for twelve years. Prior to consulting, Mr. Austin was a Principal with Incubasia Inc, a venture capital firm based in Hong Kong and also served as COO of enAbilis, a travel industry wholesale platform. Mr. Austin started his China career as Senior Product Manager with Bass PLC in Beijing and Jilin. Prior to coming to China, he was an Associate Consultant with LEK Consulting in London. He speaks, reads and writes Mandarin Chinese and has a Master’s degree in Modern History and Economics from Oxford University.

Thomas Gurnee, Director

Thomas Gurnee has served as a member of our board of directors since November 2, 2004. Mr. Gurnee is Chief Financial Officer of Xinyuan Real Estate (NYSE: Xin), a US-listed real estate company. Previously he was Chief Financial Officer of GEM Services, Inc., a privately held semiconductor manufacturer. His other prior positions include President and Chief Operating Officer of GlobiTech Inc. and Chief Financial Officer of Sohu.com Inc. Prior to joining Sohu, Mr. Gurnee held a number of senior positions with Chartered Semiconductor Manufacturing Ltd., including Vice President for Business Development, President (North America), Chief Operating Officer (Singapore) and Chief Financial Officer (Singapore). Previously, Mr. Gurnee spent 13 years at Schlumberger Ltd. as finance director of various divisions in France, Singapore and the United States. From November 2000 until June 2006, Mr. Gurnee was a member of the Sohu Board of Directors. He is currently a member of the Board of Directors of Longtop Financial Technologies (NYSE: LFT) and Xinyuan Real Estate. Mr. Gurnee received a BA degree from Stanford University and an MBA degree from the University of Santa Clara.

Arthur Hoffman, Director

Arthur Hoffman has served as a member of our board of directors since December 2004. Mr. Hoffman is Managing Director of Expedia Asia Pacific and joined Expedia in December 2004 with responsibility to expand Expedia’s international presence. Prior to joining Expedia, Mr. Hoffman worked for Qantas Airways for three years as the General Manager for Strategy, e-Commerce and Technology for Qantas Holidays. Previously, Mr. Hoffman worked for six years as a strategy consultant for Booz Allen & Hamilton and Arthur Andersen in the APAC region and Europe. Mr. Hoffman also served as a conscript officer in the Royal Dutch Navy and worked for one year for the Dutch Ministry of Economic Affairs. Mr. Hoffman holds an MA in Science from the University of Utrecht (Netherlands) and an MBA from INSEAD.

Jens Parkitny, Director

Jens Parkitny has been a member of our board of directors since May 13, 2009. Mr. Parkitny is Managing Director (Asia Pacific) of the Expedia Affiliate Network, responsible for all white label and co-branded affiliate partnerships in the Asia Pacific region. Prior to this role, Mr. Parkitny was Vice President & Managing Director of Expedia.com for Germany and Austria for two years, and previously held other senior roles at Expedia in Germany, including Manager of Product & Business Development, Site & Content Manager and Senior Producer (Travel). He also previously worked in journalism and publishing, among others as a deputy editor for the German publishing group Jaeger Verlag. Mr. Parkitny holds a degree in Business Administration, Travel and Transport Management from the Technical University of Rhineland-Palatinate.

Cyril Ranque, Director

Cyril Ranque has been a member of our board of directors since December 22, 2008. Mr. Ranque is Vice President, Partner Services Group Asia Pacific of Expedia. In this position, Mr. Ranque oversees Expedia’s relationships with airline, lodging and rental car supply partners across the Asia Pacific region. Prior to joining Expedia in 2006, Mr. Ranque was Vice President of Marketing & Distribution for Louvre Hotels, a leading European hotel group. He was also previously a Director in charge of the French Customer Relationship Management (CRM) Practice at AT Kearney, and a CRM consultant at Accenture. Prior to Accenture, Mr. Ranque was a financial analyst with Morgan Stanley in London, and also worked at LVMH in Tokyo. Mr. Ranque holds a Master’s degree from Essec Graduate School of Business in Paris.

Michael Scown, Director

Michael Scown has been a member of our board of directors and our Audit Committee since December 2007. Mr. Scown is the Asia Managing Director, Treasury, for Intel Capital. From 1999 to 2006 he served as Intel Capital’s Asia Regional Counsel. Before joining Intel he practiced law for 10 years as an associate and partner with Russin & Vecchi in the firm’s San Francisco and Ho Chi Minh City, Vietnam offices where he was a founder and Chairman of the Board of Governors of the American Chamber of Commerce and also worked in hotel development as Asia Assistant Regional Counsel for Marriott International, Inc. Prior to commencing his legal practice, Mr. Scown served as a Foreign Service Officer with the U.S. Department of State. He holds a BA from U.C. Berkeley, a JD from the University of San Francisco School of Law and is a member of the State Bar of California.

Johan Svanstrom, Director

Johan Svanstrom has served as a member of our board of directors since February 2006. Mr. Svanstrom is Managing Director (Asia Pacific) of Hotels.com, a division of Expedia, in which role he is responsible for building the Hotels.com business across the Asia Pacific region. Prior to joining Expedia, Mr. Svanstrom was in charge of the Digital Innovations Group at McDonald’s Corporation for three years. Prior to that, Mr. Svanstrom was CEO of Freefund NV, a company providing online grant search capabilities for university students in four different European countries. From 1999 to 2002 Mr. Svanstrom served as Vice President of Business Development at Glocalnet AB, a voice-over-IP telecom company, which he helped take public and which is listed on the Stockholm Stock Exchange. Mr. Svanstrom holds a Master’s of Science in economics from the Stockholm School of Economics.

Justin Tang, Director

Justin Tang is a co-founder of eLong, and, from 2001 to 2006, served as our Chairman and CEO as well as in similar key executive positions at eLong’s predecessor company from 1999 to 2001. Mr. Tang is also a co-founder of Blue Ridge China, a private equity fund formed in 2006 that invests in companies in China. Prior to founding eLong, Mr. Tang held various positions in the financial services industry in the United States from 1993 to 1999. Mr. Tang studied at Nanjing University in China and holds a Bachelors’s degree from Concordia College in the United States.

Board Practices

For information regarding the terms of our current directors and the period during which our officers and directors have served in their respective positions please see “Directors, Executive Officers and Senior Management” above.

Between January 1, 2008 and April 30, 2009, other than as discussed below with respect to our former director, Mr. Barney Harford, (see “Compensation of Executive Officers and Directors”) and the employment agreement we entered into with Mike Doyle when he became our CFO (see “Employment Agreements with Executive Officers”), we have not entered into any service contracts or other arrangements providing for benefits upon termination with our directors, provided, however, that generally any non-vested options or performance units granted to our directors shall vest in full in the event that Expedia effects a going private transaction of us and, provided further, that upon a termination during the one-year period following a change in control, such directors incur a termination other than by reason of death, disability or cause, the directors are entitled to an additional 12 months of vesting on their unvested options.

Committees of the Board of Directors

Audit Committee

The audit committee of our board of directors currently consists of Thomas Gurnee (who serves as chairman), Leo Austin and Michael Scown. Mr. Austin and Mr. Scown joined the audit committee on December 18, 2007. Our board of directors has determined that all of our audit committee members are “independent” under NASDAQ’s Listing Rules and Section 10A(m) of the U.S. Securities Exchange Act of 1934. In addition, our board of directors has determined that Mr. Gurnee is an “audit committee financial expert” as defined in Item 16A of the Instructions to Form 20-F and that Mr. Austin and Mr. Scown each has the requisite financial knowledge and experience to be qualified to serve as a member of our audit committee.

Our board of directors has adopted a written audit committee charter pursuant to which the audit committee is responsible for the appointment of our independent public accountants and reports to our board of directors regarding the scope and results of our annual audits, compliance with our accounting and financial policies and management’s procedures and policies concerning the adequacy of our internal accounting controls.

Compensation Committee

The compensation committee of our board of directors reviews and makes recommendations to our full board of directors regarding compensation policies and all forms of compensation to be provided to our executive officers and directors. In addition, the compensation committee approves bonus and, subject to the requirement that there be at least two Expedia designees on the compensation committee, stock compensation arrangements for all of our employees.

The compensation committee currently consists of Henrik Kjellberg (who serves as chairman), Thomas Gurnee and Jens Parkitny. Mr. Kjellberg and Mr. Parkitny were appointed by Expedia under an investors agreement with Expedia Asia Pacific and certain other shareholders dated July 23, 2004. Under the investors agreement, Expedia has the right to appoint two directors to the compensation committee, and the compensation committee does not have the authority to approve the issuance of stock options unless two directors nominated by Expedia are on the compensation committee.

Duties of Directors

Under Cayman Islands law, each of our directors has a duty of loyalty to act honestly, in good faith and with a view to the best interests of our company. Our directors also have a duty to exercise the skills that they actually possess and such care and diligence that a reasonably prudent person would exercise in comparable circumstances. Our directors must ensure compliance with our company’s memorandum of association and articles of association. A shareholder may have the right to seek damages on behalf of our company if a duty owed by our directors is breached.

Limitation on Liability and Other Indemnification Matters

Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our articles of association provide for indemnification of officers and directors for losses, damages, costs and expenses incurred in their capacities as such, but the indemnity does not extend to any matter in respect of any willful neglect or intentional malfeasance which may be attached to such person.

Compensation of Senior Management and Directors

Compensation Arrangements with Directors. We paid aggregate cash compensation (including directors’ fees, meeting fees, travel expenses and stock-based compensation which was settled in cash) during 2008 to our directors as a group equal to US$286,005. Our directors are reimbursed for travel and related expenses incurred in connection with each board of directors or board committee meeting.

On January 9, 2008, we granted to each of Leo Austin and Michael Scown (i) an option to purchase 30,000 of our ordinary shares, with an exercise price of US$3.935 one-sixth of which vest on the last day of every six month period after December 18, 2007, the date Mr. Austin and Mr. Scown became members of our board of directors, and (ii) 10,000 performance units one-third of which vest on the first, second and third anniversary of December 18, 2007, and which upon vesting may be settled only in cash.

On November 20, 2008 the board of directors approved the acceleration of the vesting date of 3,334 performance units awarded to Barney Harford by the Compensation Committee on March 6, 2007, which would otherwise have vested on January 1, 2009.

Pursuant to our non-employee director compensation policy, a recurring annual grant will be made on December 1st of each year to each member of our board of directors who is not our employee or an employee of Expedia (or an Expedia affiliate). On December 1, 2008, we granted to each of Leo Austin, Tom Gurnee, Michael Scown and Justin Tang 13,832 performance units which will vest annually over a 3-year period and which upon vesting will be settled in cash.

Compensation Arrangements with Senior Executive Officers. Compensation arrangements with our senior executive officers consist of (i) cash compensation, which includes an annual salary and the opportunity to earn an annual performance-based cash bonus, (ii) stock-based compensation in the form of stock options and performance units, and/or (iii) other benefits in the form of vacation days, allowances, and premiums paid for health insurance.

Cash Compensation.

We paid aggregate cash compensation in 2008 to our senior executive officers who were employed by us for all or a portion of 2008 equal to RMB11,315,402 (US$1,658,542). Frank Zheng resigned as our Vice President of Operations, effective January 31, 2008; Thomas Chen resigned as our Vice President of Marketing, effective February 29, 2008; and Chen Qi resigned as our Vice President of Human Resources, effective October 31, 2008. The term of a consultant seconded to us by Expedia ended on February 28, 2009.

Stock-based Compensation.

We granted the following stock-based compensation in the form of performance units to our senior executive officers who were employed by us during the year ended December 31, 2008. The performance units are payable upon vesting by our delivery to the holder a number of ordinary shares equal to the number of performance units which are then vested.

		Ordinary Shares underlying
Performance Unit Holder		Performance Units				Date of grant
Chris Chan			25,414	(2)		January 9, 2008
Qi Chen			74,626	(1)(3)		January 9, 2008
James Li			50,826	(2)		January 9, 2008
Kenneth Liao			5,084	(2)		January 9, 2008
Jack Wang			53,334	(1)		January 9, 2008
Jason Xie			72,464	(1)		January 9, 2008
Yu Zheng			73,440	(1)		January 9, 2008
Sami Farhad			74,166	(1)		May 22, 2008
Total			429,354