SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

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

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

Commission file number: 000-50984

eLong, Inc.

Cayman Islands

Xingke Plaza, Tower B, Third Floor
10 Middle Jiuxianqiao Road, Chaoyang District
Beijing 100015, People’s Republic of China
(Address of principal executive offices)

Guangfu Cui, Chief Executive Officer
Telephone: +(8610) 5860-2288 / Facsimile: +(8610) 6436-6019
Xingke Plaza Building, Tower B, Third Floor
10 Middle Jiuxianqiao Road, Chaoyang District
Beijing 100015, People’s Republic of China
(Name, Telephone and Facsimile number and Address of Company Contact Person)

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

Title of Each Class		Name of Each Exchange on Which Registered
American Depositary Shares, each representing two		The Nasdaq Global Market
ordinary shares, par value $0.01 per ordinary share

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, 2010: 20,735,401 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 þ 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			5
Item 2: Offer Statistics and Expected Timetable			5
Item 3: Key Information			5
Item 4: Information on the Company			19
Item 4A: Unresolved Staff Comments			29
Item 5: Operating and Financial Review and Prospects			29
Item 6: Directors, Senior Management and Employees			44
Item 7: Major Shareholders and Related Party Transactions			55
Item 8: Financial Information			63
Item 9: The Offer and Listing			64
Item 10: Additional Information			65
Item 11: Quantitative and Qualitative Disclosure About Market Risk			69
Item 12: Description of Securities other than Equity Securities			70
PART II
Item 13: Defaults, Dividend Arrearages and Delinquencies			70
Item 14: Material Modifications to the Rights of Security Holders and Use of Proceeds			71
Item 15: Controls and Procedures			71
Item 16A: Audit Committee Financial Expert			72
Item 16B: Code of Ethics			72
Item 16C: Principal Accountant Fees and Services			72

		Page
Item 16D: Exemptions from the Listing Standards for Audit Committees			73
Item 16E: Purchases of Equity Securities by the Issuer and Affiliated Purchasers			73
Item 16F: Changes in Registrant’s Certifying Accountant			73
Item 16G: Corporate Governance			74
PART III
Item 17: Financial Statements			74
Item 18: Financial Statements			74
Item 19. Exhibits			75
Exhibit 3.2
Exhibit 4.20
Exhibit 4.21
Exhibit 4.25
Exhibit 4.26
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 4.37
Exhibit 4.38
Exhibit 8.1
Exhibit 12.1
Exhibit 12.2
Exhibit 13.1
Exhibit 13.2
Exhibit 15.1
Exhibit 15.2

In this annual report, references to “we,” “us,” “our,” “our company,” “the Company”, “the company” 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. References to “Tencent” are to Tencent Holdings Limited (SEHK: 00700) and references to “TCH Sapphire” are to TCH Sapphire Limited. References to “eLong Information” are to our subsidiary, eLongNet Information Technology (Beijing) Co., Ltd. With respect to our affiliated Chinese entities, “Beijing Information” refers to Beijing eLong Information Technology Co., Ltd.; “Beijing Air” refers to Beijing eLong Air Services Co., Ltd.; “Beijing Travel” refers to Beijing eLong International Travel Co., Ltd.; “Hangzhou Air” refers to Hangzhou eLong Air Service Co., Ltd.; “Beijing Xici” refers to Beijing Xici Interactive Information Technology Co. Ltd.; “Beijing Media” refers to Beijing Asiamedia Interactive Advertising Co., Ltd.; and “Beijing Jiuyou” refers to Beijing Jiuyou Technology Company.

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 as “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 Third Amended and Restated Articles of Association. References to “tickets” or “air tickets” are generally to air segments. An air segment is a one-way non-stop air ticket. Thus, a round-trip ticket may consist of two or more air segments.

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. 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 otherwise indicated, references to any year refer to the calendar year ended December 31 of such year.

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 other companies that are trademarks of their respective owners.

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

Statements in this annual report and any exhibits thereto concerning our future business, operating results and financial condition are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and as defined in the Private Securities Litigation Reform Act of 1995. Words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “predict,” “should” and “will” and similar expressions as they relate to our company are intended to identify such forward-looking statements, but are not the exclusive means of doing so. These forward-looking statements are based upon management’s current views and expectations with respect to future events and are not a guarantee of future performance. Furthermore, these statements are, by their nature, subject to a number of risks and uncertainties that could cause our actual performance and results to differ materially from those discussed in the forward-looking statements. Factors that could affect our actual results and cause our actual results to differ materially from those

referred in any forward-looking statements include, but are not limited to, eLong’s losses sustained in prior years, declines or disruptions in the travel industry, international financial crises, slowdown in the PRC economy, an outbreak of bird flu, H1N1 flu, SARS or other disease, eLong’s reliance on having good relationships with hotel suppliers and airline ticket suppliers, our reliance on the TravelSky GDS system for our air business and Baidu for our search engine marketing, the possibility that eLong will be unable to continue timely compliance with Section 404 or other requirements of the Sarbanes-Oxley Act, the risk that eLong will not be successful in competing against new or existing competitors, risks associated with Expedia’s majority ownership interest and Tencent’s strategic investment in eLong, fluctuations in the value of the Renminbi, changes in eLong’s management team and other personnel, risks relating to uncertainties in the PRC legal system, including but not limited to, risks relating to our variable-interest operating entities and risks relating to the application of preferential tax policies, and other risks mentioned in this annual report, including but not limited to risks and other factors mentioned in “Item 3: Key Information—Risk Factors,” “Item 4: Information on the Company—Business” and “Item 5: Operating and Financial Review and Prospects.”

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 included elsewhere in this annual report 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, 2008, 2009 and 2010, and the selected consolidated balance sheet data as of December 31, 2009 and 2010, are derived from our consolidated financial statements included elsewhere in this annual report and should be read in conjunction with those 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, 2006 and 2007 and the selected consolidated balance sheet data as of December 31, 2006, 2007 and 2008 are derived from our consolidated financial statements which are not included in this annual report.

Our consolidated financial statements are prepared in accordance with U.S. GAAP. Our consolidated financial statements are expressed in Renminbi, the legal currency of China. For information regarding exchange rates, see the section below entitled “Exchange Rate Information. ”

SELECTED CONSOLIDATED FINANCIAL DATA

		eLong, Inc.
		Year ended December 31,
		2006				2007				2008				2009				2010				2010
		RMB				RMB				RMB				RMB				RMB				US$
		(in thousands, except for per share data)
Selected Consolidated Statements of Operations Data
Net revenues			249,841				297,586				327,313				357,894				481,917				73,018
Gross profit			187,596				215,089				230,317				250,959				345,027				52,277
Total operating expenses			(203,608	)			(229,678	)			(271,999	)			(239,712	)			(297,956	)			(45,145	)
Income/(loss) from operations			(16,012	)			(14,589	)			(41,682	)			11,247				47,071				7,132
Income/(loss) from continuing operations			(444	)			(25,691	)			(76,593	)			19,903				20,628				3,126
Net income/(loss)			1,040				(25,588	)			(76,593	)			19,903				20,628				3,126
Income/(loss) per share from continuing operations			(0.01	)			(0.51	)			(1.54	)			0.42				0.43				0.07
Total basic net income/(loss) per share			0.02				(0.51	)			(1.54	)			0.42				0.43				0.07
Total diluted net income/(loss) per share			0.02				(0.51	)			(1.54	)			0.40				0.40				0.06
Income/(loss) per ADS from continuing operations			(0.02	)			(1.02	)			(3.08	)			0.84				0.86				0.14
Total basic net income/(loss) per ADS			0.04				(1.02	)			(3.08	)			0.84				0.86				0.14
Total diluted net income/(loss) per ADS			0.04				(1.02	)			(3.08	)			0.80				0.80				0.12

		eLong, Inc.
		As of December 31,
		2006				2007				2008				2009				2010				2010
		RMB				RMB				RMB				RMB				RMB				US$
		(in thousands)
Selected Consolidated Balance Sheet Data
Cash and cash equivalents			1,199,323				1,138,447				321,541				639,468				381,426				57,792
Short-term investments			—				19,120				635,810				313,467				580,005				87,880
Working capital(1)			1,106,345				1,079,590				898,693				938,834				944,903				143,167
Property and equipment, net			37,809				43,962				52,484				44,005				41,896				6,348
Total assets			1,334,908				1,331,668				1,137,964				1,183,950				1,269,197				192,303
Long-term obligations			980				—				477				1,186				499				76
Accumulated deficit			(102,056	)			(127,644	)			(204,237	)			(184,334	)			(165,760	)			(25,115	)
Shareholders’ equity			1,199,799				1,184,611				1,012,181				1,043,500				1,094,869				165,889

		eLong, Inc.
		Year ended December 31,
		2006				2007				2008				2009				2010				2010
		RMB				RMB				RMB				RMB				RMB				US$
		(in thousands)
Selected Consolidated Cash Flow Data
Net cash provided by (used in) operating activities			76,554				42,349				(14,076	)			69,014				85,387				12,937
Net cash provided by (used in) investing activities			72,985				(43,638	)			(641,501	)			248,306				(324,676	)			(49,193	)
Net cash provided by (used in) financing activities			95,140				7,355				(98,331	)			948				(5,446	)			(825	)

Exchange Rate Information

We conduct substantially all of our business in China and our revenues and expenses are primarily denominated in Renminbi. Solely for the convenience of the reader, this annual report contains translations of Renminbi amounts into U.S. dollar amounts at specified rates. The translations of Renminbi amounts into U.S. dollar amounts 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 RMB6.6000 to US$1.00, the rate in effect as of December 31, 2010. The rate as of May 31, 2011 was RMB6.4786 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 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 controls 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—Fluctuation in the value of the Renminbi may materially and adversely affect our financial results and the value of our company and ADSs” and “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 the value of our ADSs and our ability to pay dividends.”

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

Average Exchange Rates of Renminbi per U.S. Dollar

		Average
Year ended December 31, 2006			7.9579
Year ended December 31, 2007			7.5806
Year ended December 31, 2008			6.9193
Year ended December 31, 2009			6.8295
Year ended December 31, 2010			6.7603

The table below sets forth the high and low exchange rate between Renminbi and U.S. dollars for each of the six months from December 2010 through May 2011.

Recent Exchange Rates of Renminbi per U.S. Dollar

		High				Low
December 2010			6.6745				6.6000
January 2011			6.6364				6.5809
February 2011			6.5965				6.5520
March 2011			6.5743				6.5483
April 2011			6.5477				6.4900
May 2011			6.5073				6.4786

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 substantially all of our operations in China and are governed by a legal and regulatory environment that differs significantly from that of the United States. Additional risks referred to elsewhere in this annual report, and other risks which are not currently known to us or that we currently deem immaterial may also have an adverse impact on our business operations and financial condition.

Risks Related to Our Business

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

We sustained net losses in 2004, 2005, 2007 and 2008, and reported net income in 2006, 2009 and 2010. We cannot assure you that we will be profitable during 2011 or at any time in the future.

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 the travel industry in China. Travel expenditures are sensitive to business and personal discretionary spending levels and tend to decline during economic downturns. In recent years, the PRC economy has seen increased volatility, including a slowdown related to the international financial crisis during the fourth quarter 2008, recovery in 2009, strong growth in 2010, and growth with a higher rate of inflation to date in 2011. It is uncertain whether growth in the PRC economy will continue in 2011 or beyond, and whether such growth will be at rates comparable to that seen in recent years. We believe that demand for travel services in China will continue to be linked to the condition of the broader PRC economy in the future. A slow-down of, or increased volatility in, economic growth in China is likely to reduce expenditures for travel which would have a material adverse effect on our revenues and results of operations.

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

Our business is affected by the condition of the travel industry in China. Adverse trends or events that tend to reduce travel and are likely to reduce our revenues include:

•

outbreaks, or the fear of outbreaks, of H1N1 flu, severe acute respiratory syndrome, avian flu or other diseases;

	•		travel-related accidents;
	•		unseasonable or extreme weather;
	•		natural or man-made disasters;
	•		increased prices or fees in the hotel, airline or other travel-related sectors;
	•		threats of war or threats or incidents of terrorism; and
	•		general economic downturns.

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

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

We face numerous sources of competition in the PRC travel marketplace, including other providers of hotel and flight reservation services, such as Ctrip, online marketplaces such as Taobao, travel search services such as Qunar, and traditional travel agencies. We do not have exclusive arrangements with our suppliers and our business involves relatively low fixed costs; accordingly, we face the threat of new competitors and the barriers to entry in our industry are relatively low. We also face increasing competition from hotels and airlines as they increase their efforts to sell directly to consumers, from high-speed rail as a substitute for air tickets, and from travel services which are owned or operated by PRC state-owned companies. In addition, some of our competitors may enter into alliances, cross-shareholdings or other arrangements with one another or with travel suppliers or service providers which may limit our ability to reach commercial arrangements with such parties. Moreover, large state-owned companies, Internet search engines, e-commerce companies and/or international travel companies may choose to enter the PRC travel market, either as sole entrants or in cooperation with our current or future competitors. Some of our current and future competitors have competitive advantages over us, including more well-known brand names, larger customer bases and greater financial, marketing and other expertise and resources. Increased competition could reduce our revenue and profitability. We cannot assure you that we will be able to successfully compete against our current or future competitors. If we are unable to compete successfully with our current or future competitors, our business will be materially and adversely affected.

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

We are dependent on continued relationships on satisfactory commercial terms with air, hotel and other travel service providers, as well as with Internet search engines. For example, the ability to contract in advance for the guaranteed availability of hotel rooms is crucial to our business. However, we do not have exclusive arrangements with our travel suppliers, and we must renew our contracts on an ongoing basis. These third parties may impose new or greater requirements upon us to provide guaranteed deposits, escrow funds, prepaid commissions or other preferential terms. In addition, travel suppliers, Internet search engines or other partners may establish relationships on similar or more favorable commercial terms with our current or future competitors. 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 also rely on the ability to advertise on major Internet search engines in China, including Baidu and Google, as well as travel search providers such as Qunar, Kuxun and Daodao, which assist consumers to locate our services on the Internet. We believe Internet search engines will continue to be a significant channel for consumers to research travel services in the future. In 2010, Google announced that it would no longer maintain a web search platform in mainland China, and would instead redirect web traffic to its Hong Kong search platform. A suspension or reduction of the operations of Baidu or Google, or our inability to advertise on these or other Internet search engines in China on commercially acceptable terms, could have a material adverse affect on our growth and results of operations in the future.

We are also dependent on our relationships and agreements with the TravelSky GDS to which we pay fees for searches of air fares, as well as certain third-party distribution partners, such as state-owned telecommunications companies and other private label partners to which we pay a commission for hotel reservations they generate for us. We estimate that third-party distribution partners accounted for approximately one-fifth of our total revenue in 2010. Our relationships with these third parties are non-exclusive, and, as a result, they may choose to directly provide travel services or to cooperate with our current or future competitors. 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 in the future.

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, and ensure high levels of service in order for the eLong brand to be associated with selection, value and convenience. If we fail to ensure high quality service and strengthen our brand recognition among our current and potential customers and business partners, our growth and operating results may be adversely affected.

Substantial uncertainties exist with respect to the interpretation and application of PRC laws and regulations restricting foreign investment as well as other laws affecting our ownership structure and business operations.

eLong, Inc. is a Cayman Islands corporation, and is therefore treated as a foreign entity under applicable PRC laws and regulations. The PRC government extensively regulates Internet access, the distribution of online information, 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 information on the Internet 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 eLong Information and our affiliated Chinese entities, including Beijing Information, Beijing Air, Hangzhou Air, Beijing Travel and Beijing Xici, which hold licenses and approvals that 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 current or future 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, 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 and/or our affiliated Chinese entities 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 business operations and financial performance.

Our operations may be materially and adversely affected if we or any of our subsidiaries or affiliated Chinese entities fails to obtain or maintain all relevant permits and approvals, or if the PRC government imposes additional restrictions in, the air ticketing, travel agency or 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, our subsidiaries or our affiliated Chinese entities must possess and maintain valid permits or approvals from the relevant 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, could disrupt our business operations and have a material adverse effect on our financial performance.

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

Through its beneficial ownership of our ordinary shares and our high-vote ordinary shares, as of May 31, 2011, Expedia controls approximately 81% of our voting power and has the power to control the election and appointment of our board of directors, thus we are a “controlled company” as defined in the Nasdaq Listing Rules. As a result, 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 or its affiliates and us, including corporate opportunities, potential acquisitions or transactions as well as other matters. For example, Expedia could prevent a sale of our company or cause the removal or replacement of any or all of our board of directors or senior executive officers, even if such actions would not 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 specific areas 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. Historically, 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, relationships and suppliers. If any disputes arise between our senior executives and us, we cannot assure you that any of the current non-compete and confidentiality provisions in our employment agreements with these senior executives would be enforced in China due to uncertainties in the PRC legal system.

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

Cash, cash equivalents, restricted cash and short-term investments comprise a significant portion of our total assets. Our failure to make effective use of our cash, cash equivalents, restricted cash and short-term investments could have a material adverse effect on our financial results, operations and competitive position.

We may not be able to successfully execute future acquisitions, alliances or affiliations or to efficiently manage any acquired businesses.

A component of our business strategy is to consider acquisitions or affiliations with businesses in areas that may provide incremental revenue and support our development. Acquisitions or affiliations may subject us to risks and uncertainties. For example, acquisitions 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 commercially acceptable terms. In addition, any acquisitions that we complete may not be successfully integrated into our existing operations, or may not achieve our anticipated financial performance and thus may adversely affect our results of operations and financial condition.

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

The travel service industry in China is characterized by seasonal fluctuations, and accordingly our revenues may vary from quarter to quarter. Historically, the first quarter of each year generally contributes a smaller portion of our annual revenues, due to reduced business activity during the Chinese New Year holiday. The seasonality of the PRC travel market is affected by PRC national and provincial government regulation of the calendar of public holidays. In addition, during certain holiday periods, we may prepay for certain hotel inventory in order to provide additional supply to our customers, and we thereby may incur inventory risk. Our results in the future may be adversely affected by seasonal fluctuations in customer demand.

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, computer systems and software licensing, support and maintenance services and air ticket invoice 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 suspended, terminated, or no longer available on commercially acceptable terms we may not find an alternate source of support on a timely basis on satisfactory terms.

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

Substantially all of our travel revenue received from customers is paid by customers using credit cards, debit cards or online payment methods. There have been and likely will continue to be attempts to use fraudulently obtained credit card or other online payment information to pay for our products and services. As fraudulent credit card and payment schemes evolve and become more sophisticated, it may become increasingly difficult and costly for us to detect, minimize and prevent such fraud, which could cause us to incur significant and unforeseen financial losses.

Our transactions are conducted through our websites or through other network and telecommunications systems. In such transactions, the 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 variety and sophistication of data security threats, our current security measures may not be adequate to prevent data breaches or 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, which could harm our reputation and lessen our ability to attract and retain customers and suppliers.

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 human errors or other accidents including computer viruses, communications, Internet or power failures, sabotage, terrorism, vandalism, natural disasters or other man-made or natural causes. Moreover, we do not have a comprehensive disaster recovery system or plan and do not carry business interruption insurance and thus would have to bear any such losses that may occur as a result of such events or incidents.

In addition, 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 disruptions which may result in slower response times, impaired customer service, delays in fulfilling customer orders, and inaccurate reporting or processing of travel information. Any of these factors or any business disruption or disaster may result in substantial losses 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 are 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 hotels and customers 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, induce our customers to cancel their orders with us and rebook directly with the hotel suppliers, or otherwise reduce the number of room nights for which we are able to collect commissions, our revenues and financial results may be adversely affected.

We may become involved in costly and time-consuming litigation regarding our intellectual property rights or our website contents.

From time to time, we may initiate litigation to enforce our intellectual property rights, and third parties may initiate litigation against us for alleged infringement of their intellectual property or other proprietary rights. This litigation may be costly and time-consuming. In the event of a successful claim of infringement against us, or our failure or inability to develop non-infringing technology or to obtain a license for the technology on commercially acceptable terms, our business could be adversely affected.

Our websites contain information about hotels, flights, travel destinations, and other travel-related topics. Third parties may take legal action against us for making allegedly false, inaccurate, unauthorized or misleading information accessible on our websites. Any claims could be expensive and time consuming to defend and divert management’s attention and resources. Any successful claims against us may require us to pay damages or penalties, which could be significant.

Our contractual arrangements with our consolidated affiliated Chinese entities may result in adverse tax consequences to us.

As a result of our corporate structure and the contractual arrangements between eLong Information and our affiliated Chinese entities, we are subject to PRC business tax and surcharges of 5.5% on revenues derived from eLong Information’s contractual arrangements with our affiliated entities, although these revenues are eliminated upon consolidation. We would be subject to adverse tax consequences if the PRC tax authorities were to determine that the contracts between eLong Information and these consolidated affiliated entities were not on an arm’s-length basis. For example, the PRC tax authorities could request that our consolidated affiliated entities adjust their taxable income upward for PRC tax purposes. Such a pricing adjustment could adversely affect us by increasing the tax expenses of our consolidated affiliated entities, which could subject our consolidated affiliated entities to interest due on late payments and other penalties for under-payment of taxes.

If our affiliated Chinese entities violate their contractual agreements with us, our business could be harmed, and the outcome of any litigation to enforce our contractual rights would be uncertain.

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 establishing and maintaining control as direct ownership of these entities. In the event of any 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 or arbitral proceeding relating to such dispute could result in a material disruption of our business and operations, and the outcome of such litigation would be uncertain.

We may be unable to collect long-term loans to the shareholders of our consolidated affiliated entities in China.

As of May 31, 2011, we have made long-term loans in an aggregate principal amount of RMB16.5 million (US$2.5 million) to the individual shareholders of our consolidated affiliated entities. We extended these loans to enable the shareholders to fund the initial capitalization of these entities and subsequent increases in their registered capital. We may in the future provide additional loans to the individual shareholders of our consolidated affiliated entities in China in connection with any increase in their capitalization to the extent necessary and permissible under applicable law. Our ability to ultimately collect these loans, which we eliminated upon consolidation, is uncertain and will depend on the profitability of these consolidated affiliated entities and their operational needs as well as the enforceability of the loan agreements.

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

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

We currently benefit from a number of preferential tax treatments, any or all of which may be cancelled, modified or discontinued in the future, depending on future tax legislation, regulations and interpretations by the PRC tax authorities.

Our subsidiary, eLong Information, and one of our affiliated Chinese entities, Beijing Information, enjoyed a 15% preferential enterprise income tax rate in 2010 as each qualified as a “High New Technology Enterprise” under the PRC Corporate Income Tax Law (the “CIT Law”) and related regulations. The CIT Law, 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, or that we or any eLong subsidiary or affiliate will qualify for any other preferential tax rates, 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 corporate income tax at the rate of 25% on their global income. In 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 tax resident, and thus subject to corporate income tax of 25% on its global income, if it satisfies four specified conditions: (i) the company’s management responsible for daily operations is located in China, or the management team carries out its responsibilities 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. Although we are controlled by a company located outside of the PRC, Expedia, through Expedia Asia Pacific, and our subsidiary, eLong Information, has been designated as a Regional Headquarters for Transnational Corporation by the Beijing Municipal Commission of Commerce, we cannot assure you that the PRC tax authorities will not treat eLong, Inc. as a PRC resident enterprise, and if so, we would be subject to PRC corporate income tax on our worldwide income, and such determination may have retroactive effect.

In 2007, the PRC State Administration of Foreign Exchange, or SAFE, promulgated the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in an Employee Stock Holding Plan or Stock Option Plan of an Overseas-Listed Company, or the Stock Option Rule. Under the Stock Option Rule, PRC citizens who receive stock option grants from an overseas listed public company are required, through a PRC agent or PRC subsidiary of such public company, to register with SAFE and complete certain other procedures. If we or our PRC option recipients fail to comply with this regulation, we or our PRC option recipients may be subject to fines and legal sanctions.

In 2009, the State Administration of Tax issued a Notice on Questions Relating to Individual Income Tax on Equity Compensation. The notice clarifies circumstances in which equity compensation shall be taxable at the normal income tax rates for wage income, rather than a lower rate available through use of a preferential tax calculation method. We cannot assure you that the PRC tax authorities will not choose to apply this notice to our current or prior equity compensation grants and require payment of additional individual income tax, fines or penalties by our current or former employees, or by us.

The cancellation, modification or discontinuation of any of our current preferential tax benefits may have a material adverse effect on our financial results.

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 fluctuates and is affected by numerous factors, including among other things, changes in political and economic conditions in China and the U.S. 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 band managed by the PRC government. In the future, the PRC government may adopt a more flexible currency policy, which could result in increased exchange rate volatility and significant further appreciation of the RMB against the U.S. dollar.

Although substantially all of our revenue-generating operations are transacted in Renminbi, a significant portion of our financial assets are denominated in U.S. dollars. We recorded a foreign currency exchange loss of RMB25.9 million (US$3.9 million) in 2010, RMB0.4 million in 2009 and RMB60.9 million in 2008. As we do not hedge our U.S. dollar holdings, if the Renminbi appreciates further in the future, we may record significant foreign currency exchange losses on our U.S. dollar-denominated assets and these losses could materially and adversely affect our results of operations and financial condition.

Uncertainties and restrictions in the PRC legal system may have a material and adverse impact on our business and financial condition.

There are substantial uncertainties regarding the interpretation of current PRC laws and regulations, as well as with respect to the numerous new rules, regulations, notices and interpretations enacted by PRC government authorities each year. It is possible that new laws, regulations, notices and interpretations will affect our existing and future businesses in ways which we cannot predict, mitigate or prevent, and that any new laws, regulations, notices and interpretations 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.

Inflation in China may have an adverse effect on our financial condition and results of operations.

In 2010 and to date in 2011, the Chinese economy experienced rapid expansion together with rising consumer price inflation. Inflation may erode disposable incomes and consumer spending, which may have an adverse effect on the Chinese economy and lead to a reduction in business and leisure travel, as the travel industry is sensitive to business and personal discretionary spending levels. In addition, inflation may increase our costs by contributing to a higher rate of increase in employee compensation, and to lower margins on our revenue from certain supplier hotels which have fixed commission contracts. This in turn could adversely impact our financial condition and results of operations.

We may be required to withhold PRC income tax on any dividends we pay you (if any), and any gain you realize on the transfer of ADSs or ordinary shares may also be subject to PRC withholding tax.

We may be treated as a PRC resident enterprise for PRC tax purposes. If we are so treated by the PRC tax authorities and we pay dividends considered derived from sources within the PRC, we would be obligated to withhold PRC income tax of up to 10% on payments of dividends on our ordinary shares and/or ADSs to investors that are non-resident enterprises of the PRC (other than to Hong Kong investors for whom the rate of withholding would be 5%). In addition, any gain realized by investors who are non-resident enterprises of the PRC from the transfer of ADSs or ordinary shares could be regarded as being derived from sources within the PRC and be subject to a 10% PRC withholding tax. Such PRC withholding taxes would reduce your investment return on ADSs or ordinary shares and may also adversely affect the price of our ordinary shares or ADSs.

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

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 SAFE. 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.

In 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. This notice may significantly limit our ability to transfer our existing cash to our affiliated Chinese entities, which may adversely affect our business development, and we may not be able to convert our cash held overseas into Renminbi.

Our subsidiaries and affiliated 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 in the future, the instruments governing the debt may restrict their ability to pay dividends or make other payments to us, which 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 state-owned 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”) as well as government security agencies. 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 interruption, suspension or failure.

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, 2010. See “Item 15. Controls 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 annual report. 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 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 is volatile.

The market price of our ADSs has been volatile and is likely to continue to be so. Since our initial public offering in October 2004, the trading price of our ADSs has ranged from a low of US$3.15 per ADS to a high of $29.60 per ADS. On May 31, 2011, the closing price of our ADSs was US$23.26 per ADS. Our trading price may continue to be subject to wide fluctuations in response to various factors including, but not limited to, the following:

	•		actual or anticipated fluctuations in our quarterly or annual financial or operating results;
	•		changes in financial estimates, recommendations or evaluations by securities analysts;
	•		general market and index trends in the Nasdaq stock market;
	•		changes in the economic performance or market valuation of other travel, e-commerce or Internet companies;
	•		changes in the economic performance or market valuation of other publicly-listed companies with significant 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 by us, our major shareholders or our senior management; and
	•		potential or actual 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 could adversely affect the price of our ADSs.

If our major shareholders, including, among others Expedia, Tencent, Oak Pacific Interactive, Purple Mountain Holding, Lawrence Auriana or T. Rowe Price Associates, sell substantial amounts of our ordinary shares or ADSs, 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. For additional information on our major shareholders, see “Item 7: Major Shareholders and Related Party Transactions—Major Shareholders.”

We may be a passive foreign investment company in any year, 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, restricted cash and short-term investments, and the value of our goodwill and other assets may be based in part on the market price of our ordinary shares (including ADSs), which has experienced significant fluctuations. Although the determination of PFIC status is subject to factual uncertainties because it depends upon 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 were not a PFIC for 2010. 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 a PFIC for 2011 or any future years. If we are 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 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 exercise your voting rights with respect to the underlying ordinary shares only 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.

We currently follow home country practice in lieu of complying with certain requirements of the Nasdaq Listing Rules. This may afford less protection to holders of our ordinary shares and ADSs.

We generally 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 otherwise be required under the Nasdaq Listing Rules, including but not limited to Rule 5635 which sets forth certain circumstances requiring shareholder approval. For example, our board of directors adopted the eLong, Inc. 2009 Share and Annual Incentive Plan in 2009 (the “2009 Plan”), amended the 2009 Plan on March 17, 2011, and approved the share issuances and sales to Expedia Asia Pacific and TCH Sapphire on May 16, 2011 without seeking prior shareholder approval, as permitted under our articles of association and applicable law of the Cayman Islands. In the future, we may choose to follow home country practice with respect to additional requirements of the Nasdaq Listing Rules, which may result in our ADS holders having fewer shareholder rights and protections than if we had not adopted home country practice.

You may not be able to participate in future securities or rights offerings, which may cause dilution to your holdings.

We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights or securities available to you in the United States unless we register the rights and the securities to which the rights relate under the Securities Act of 1933, as amended, or the Securities Act, or an exemption from the registration requirements is available. Also, under the deposit agreement, the depositary bank will not make those rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act, or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. In addition, our two largest shareholders, Expedia Asia Pacific and TCH Sapphire have pre-emptive rights with respect to certain types of future offerings of our securities. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.

You may not receive distributions on ordinary shares (if any) 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 (if any) which 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 any 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 face difficulties in protecting your interests, and your ability to protect your rights through courts in the U.S. may be limited, because we are incorporated under Cayman Islands law, conduct substantially all of our operations in China and all of our senior executive officers reside outside the United States.

We are incorporated in the Cayman Islands, and conduct our operations in China through our subsidiaries and affiliated Chinese entities. All of our senior executive officers and the majority of our directors reside outside the United States and all or a substantial portion of the assets of those persons are located outside of the United States. As a result, it may not be possible to effect service of process within the United States upon our senior executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws.

It may also be difficult or impossible for you to bring an action against us or against our directors and officers in the Cayman Islands or in China in the event that you believe that your rights have been infringed under the securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers. There is no statutory recognition in the Cayman Islands of judgments obtained in the United States, although the courts of the Cayman Islands will generally recognize and enforce a non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits. Moreover, the PRC does not have treaties with the United States or many other countries providing for the reciprocal recognition and enforcement of judgment of courts.

Our corporate affairs are governed by our articles of association and by the Companies Law, Cap 22 (Law 3 of 1961, as consolidated and amended) and common law of the Cayman Islands. The rights of shareholders to take legal action against our directors and us, actions by minority shareholders and the fiduciary responsibilities of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedents in the United States. In particular, the Cayman Islands has a less developed body of securities laws as compared to the United States, and provides significantly less protection to investors. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action before the federal courts of the United States.

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

Item 4: Information on the Company.

4A: History and Development of the Company

eLong, Inc. was incorporated in the British Virgin Islands on April 4, 2001. On May 19, 2004, eLong, Inc. discontinued in the British Virgin Islands and continued in the Cayman Islands as an exempt company with limited liability under the Cayman Islands Companies Law.

On November 2, 2004, we completed the initial public offering of our ADSs. Each ADS represents two of our ordinary shares. Our ADSs are quoted on the Nasdaq Global Market under the ticker symbol “LONG.” In 2004 and 2005, in a series of transactions, Expedia Asia Pacific acquired 28,550,704 of our high-vote ordinary shares, comprising approximately 52% of our then outstanding shares on a fully-diluted basis.

On May 16, 2011, the Company issued 5,400,500 ordinary shares to Expedia Asia Pacific for a total purchase price of US$41,169,361. As of May 31, 2011, through Expedia Asia Pacific, Expedia is the beneficial owner of 28,550,704 of our high-vote ordinary shares and 8,952,839 of our ordinary shares, together representing approximately 55.7% of our total outstanding shares (including both ordinary shares and high-vote ordinary shares). As a result of its shareholding, Expedia controls approximately 81.3% of the voting power of all outstanding shares of our stock. Accordingly, Expedia generally is able to exercise control over all matters requiring approval by our board of directors or our shareholders.

On May 16, 2011, the Company also issued 5,038,500 high-vote ordinary shares and 6,031,500 ordinary shares to TCH Sapphire, a subsidiary of Tencent, for a total purchase price of US$84,389,378. As of May 31, 2011, Tencent, through TCH Sapphire, is the beneficial owner of 5,038,500 of our high-vote ordinary shares and 6,031,500 of our ordinary shares, together representing approximately 16.4% of our total outstanding shares (including both ordinary shares and high-vote ordinary shares). As a result, Tencent controls approximately 15.2% of the voting power of all outstanding shares of our stock.

For additional information, see “Item 7: Major Shareholders and Related Party Transactions—Major Shareholders” and “—Related Party Transactions.”

Our principal executive office is located at Third Floor, Block B, Xingke Plaza, 10 Middle Jiuxianqiao Road, Chaoyang District, Beijing, 100015 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.

Acquisitions and Dispositions

A component of our business strategy is to acquire, or enter into affiliations with, businesses in areas that may support our growth and development. As part of this strategy, in 2009 and 2010 we acquired the air and hotel travel reservation businesses of a number of small travel service providers in China, including Heng Zhong Online Travel Information (Beijing) Co., Ltd., Beijing Yuanfang Wangjing Information Consulting Co., Ltd. (www.sinohotel.com) and Shanxi SunnyChina Network Co., Ltd., (www.sunnychina.com) as well as two train travel businesses, including the websites www.huoche.com and www.huoche.com.cn. In some instances the purchase price of the acquired businesses is contingent on financial performance during an agreed period after the closing of the acquisition. Some of the acquired businesses were previously our private label web affiliates. In December 2010, we also acquired a 20% equity interest in Beijing Jiuyou, the owner of www.zhuna.cn, with an option to purchase additional equity in the company for a three-year period pursuant to a predetermined valuation methodology. Our acquisition strategy is subject to certain risks and uncertainties. See “Item 3: Key Information—Risk Factors—We may not be able to successfully execute future acquisitions, alliances or affiliations or to efficiently manage any acquired businesses.”

Capital Expenditures

Our capital expenditures were RMB32.9 million in 2008, RMB12.0 million in 2009 and RMB17.6 million (US$2.7 million) in 2010. Principal areas of investment during 2010 related to purchases of hardware and development of computer systems and our technological infrastructure. Our capital expenditures were primarily spent in Beijing and were financed from our internal resources.

4B: Business Overview

We are a leading online travel service provider in China. We utilize a centralized modern call center and online technologies to provide our services. Through our nationwide 24-hour toll-free call center, our user-friendly Chinese and English language websites, our iPhone and Android mobile applications and our extensive reseller network, we provide our customers with travel information and the ability to book rooms at discounted rates at over 20,000 hotels in over 700 cities across China, and fulfill air ticket reservations in cities across China. Through Expedia and its affiliates, we also offer the ability to book rooms at approximately 135,000 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, photos (including, for many properties, rotating 360 degree photos of hotel rooms and facilities), and customer reviews and comments. In 2010, we facilitated the sales by our hotel suppliers through our booking services of 6.38 million room nights and sold 2.44 million air tickets.

Our Services

Our revenues are primarily derived from hotel reservations and air ticketing. In 2010, we derived 68% of our revenue before business tax and surcharges from our hotel reservation business and 24% of our revenues from our air ticketing business.

Hotel reservations. We seek to offer a comprehensive range of hotel options at a variety of prices, including budget, three-, four- and five-star hotels as well as short-stay apartments. For the years ended December 31, 2008, 2009 and 2010, we derived 73%, 68% and 68% of our total revenue before business tax and surcharges from our hotel reservation services. Our hotel reservation volume increased to 6.38 million room nights in 2010, compared to 4.32 million room nights in 2009 and 3.95 million room nights in 2008.

We act primarily as an agent in our hotel 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 percentage of the nightly hotel room rate or a fixed amount per room night, which the hotels pay 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 pre-purchase hotel rooms that we book for our customers, we generally do not carry inventory risk, other than for certain destinations during peak travel periods.

As many hotels in China are individually owned or operated, we typically enter into agreements with individual hotels or their owners or operating companies. 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” or “free sale” basis. For hotels with which we have guaranteed room allotments, the hotel makes available to us a specified number of guaranteed available rooms each day. A guaranteed allotment allows us to provide our customers with an instant confirmation of their reservations. We incur no obligation if the guaranteed allotment is not used.

Air ticketing. We provide 24-hour air ticketing services 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 certain airlines provide discretionary commissions if we achieve performance targets.

Our air ticketing process begins when a customer initiates an inquiry through either one of our websites, our call center or the website, call center or employees of one of our partners. The customer is informed of the available flights and we then confirm a booking for a seat on the selected flight. In order to streamline our air ticketing operations and focus on our customers who pay with credit cards or other electronic payment methods, since the fourth quarter of 2010, we have not accepted cash payment for air tickets. We generally do not pre-purchase air tickets for resale. In 2010, we sold approximately 2.44 million air tickets, compared to 2.2 million air tickets in 2009 and 1.79 million air tickets in 2008.

In connection with our air ticket service business, we are required by the Civil Aviation Administration of China and International Air Transport Association to provide guarantees for air tickets obtained from various airlines. As of December 31, 2010, the amount under these guarantee arrangements was approximately RMB107 million (US$16.2 million). Based on historical experience and information currently available, we do not believe that it is probable that we will be required to pay any amount under these guarantee arrangements. Therefore, we have not recorded any liability beyond what is required in connection with these guarantee arrangements.

Other. In 2010, we derived approximately 8% of our revenues from other services, comprised primarily of advertising revenues on our eLong and Xici websites.

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

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 provide our travel services primarily through the following channels:

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

Call center. We operate a 24-hour call center that 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 effective 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. In recent years, however, labor costs in China have risen significantly, due in part to rising salaries, inflation and legislation such as the PRC Employment Contract Law. We currently expect our call center to remain an important distribution channel going forward.

Mobile Applications. Recognizing that an increasing number of travelers use mobile phones to research and book travel, in May 2010, we launched our mobile-optimized version of our Chinese language website at m.eLong.com. In March 2011, we launched the eLong Mobile iPhone Application and in May 2011, we launched the eLong Mobile Android Application. Both the iPhone and Android applications use location-based service technology to allow users to quickly find nearby hotels based on their current location.

Affiliates. Under the terms of our annual service agreements with various subsidiaries of China Telecom and China Unicom (“China Telecom and China Unicom”), we provide users of China Telecom and China Unicom in some provinces and municipalities with hotel reservation and fulfillment services. When a customer in one of these provinces or municipalities calls China Telecom or China Unicom for information about hotel reservations, the China Telecom or China Unicom employee may transfer such calls to our call center or make the reservation through our application program interface. China Telecom and China Unicom 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. We have also developed a nationwide network of resellers, consisting of primarily smaller travel and air ticketing agencies. These agencies utilize our call center and web technology to distribute our travel services, and receive a commission from us based on the hotel reservations and air ticket bookings they generate for us.

Marketing

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 selection, value and convenience.

Online marketing. Our advertising efforts are focused on online marketing and are intended to promote awareness of the eLong brand among potential customers. In order to expand our online presence, we have entered into contracts with Baidu, Google and other search engines pursuant to which we have purchased travel-related keywords which direct users of the search engines to our websites. See “Item 3: Key Information—Risk Factors—We are dependent on our ability to establish and maintain favorable arrangements with our travel suppliers, Internet search engines and distribution partners.” We also conduct email, SMS and phone marketing to our current and 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.

eCoupon program. In September 2009, we launched our eCoupon program, through which we provide coupons and virtual cash accounts for our customers who book selected hotels online through our eLong.com website. Under the eCoupon program, our customers can receive virtual cash which can be paid as cash (less applicable tax) or credit to their mobile phone account.

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

Competition

We compete with other providers of online and offline travel services including Ctrip, travel search services such as Qunar, online marketplaces such as Taobao, traditional travel agencies and the direct sales channels of hotels and airlines. We compete on the basis of brand recognition, selection, price, ease of use, accessibility of information, breadth of services offered, convenience, and customer service. In the future, we may face further competition from other new or current competitors. 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 include provisions protecting our intellectual property rights.

Through our subsidiaries in China, we have registered various Internet domain names including www.eLong.com, www.eLong.net, www.eLong.cn, and www.xici.net 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” and “Item 3: Key Information—Risk Factors—Risks Relating to Our Business—Our results may fluctuate due to seasonality in the travel industry in China” for a description of seasonal factors influencing our business.

Governmental Regulation

Regulatory Authorities

The PRC government regulates numerous areas which relate to our business, including numerous aspects of the Internet, telecommunications, information security and censorship, as well as air ticketing, advertising and travel agencies. The relevant rules are contained in a number of laws and regulations issued by various governmental authorities in the PRC, including, but not limited to:

	•		the State Administration for Industry and Commerce (the “SAIC”);
	•		the Ministry of Commerce (the “MOFCOM”);
	•		the Ministry of Public Security (the “MPS”);

	•		the Ministry of Industry and Information Technology (the “MIIT”);
	•		the Civil Aviation Administration of China (the “CAAC”);
	•		the China National Aviation Transportation Association (the “CNATA”);
	•		the China National Tourism Administration (the “CNTA”); and
	•		the Beijing Communications Administration (the “BCA”).

Scope of Regulation

PRC laws and regulations impose substantial restrictions on foreign ownership of air ticketing, travel agency and advertising businesses in China. As a result, we conduct operations through a series of contractual arrangements between our subsidiaries and our affiliated Chinese entities. For additional information on our organizational structure, see section “4C: Organizational Structure” below.

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.

Internet and e-Commerce

Under the Measures for the Administration of Internet Information Services (2000) (the “ICP Measures”), any entity that provides information to, and accepts payments from, online users of the Internet in China is obliged to obtain an Internet content provision operating license (the “ICP License”) from the MIIT or its provincial or municipal branch, and to display the ICP License number on the home page of its website. ICP license holders are also obliged to monitor 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 an ICP License.

Pursuant to the Tentative Measures for Administration on Network Commodities Trading and Related Service Activities, issued by the SAIC and effective July 1, 2010, where an entity engages in trading of goods and/or related service activities through the Internet, it shall display the registered information of its business license or include a link to its business license on its home page or the page relating to its trading activities.

According to the Tentative Administrative Rules for Internet Culture, issued by the Ministry of Culture and effective on April 1, 2011, an applicant for establishing a commercial Internet-based cultural entity should obtain approval from the administrative department for culture (a “Culture Network License”). Beijing Xici holds a Culture Network License.

In 2004, the Beijing AIC promulgated the Administrative Rules on the Filing of Commercial Websites, which require commercial websites to register with the Beijing AIC and obtain electronic registration marks, place the registration marks on their websites’ homepages, and file 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.

In 2003, BCA issued a Value-Added Telecoms Services Operating License to Beijing Information, authorizing the provision of mobile-network value-added telecommunications services and call-center services in Beijing. In 2004, the BCA issued a Telecoms and Information Services Operating License to Beijing Information authorizing the provision of Internet information services. Both of these licenses have been renewed, remain valid and are subject to annual inspections.

Information Security and Censorship

The PRC has enacted legislation that prohibits use of the Internet in a manner that breaches public security, disseminates socially destabilizing content or leaks state secrets. Breach of public security includes breach of national security and infringement of the rights and interests of the state, society or citizens. Socially destabilizing content includes any content that incites defiance or violations of PRC laws or regulations or subversion of the PRC government or its political system, spreads socially disruptive rumors or involves cult activities, superstition, obscenity, pornography, gambling or violence. State secrets are defined broadly to include information concerning PRC national defense, state affairs and other matters as determined by the PRC authorities.

The Ministry of Public Security promulgated the Provisions on Technological Measures for Internet Security Protection, or Internet Protection Measures in 2005, and effective March 1, 2006. The Internet Protection Measures require all ICP operators to keep records of their users’ registration information and submit such information as required by law. We have taken measures to comply with the Internet Protection Measures.

The SAIC issued the Supervision and Disposal Measures for Contract-related Illegal Activities, the Contract Rules, in October 2010, and effective November 13, 2010. The Contract Rules are applicable to both Internet e-commerce and other commercial activities. Under the Contract Rules, no party may, among other things, falsify a contract, fabricate its status as a party to the contract, appropriate others’ names in the contract, publicize or use untrue information to seduce others into entering into a contract or commit other fraud. In addition, parties which enter into standard form contracts with consumers may not use contractual waivers to exempt themselves from liability for personal injury of consumers or for property losses due to willful misconduct or gross negligence.

Consumer Data Protection & Privacy

In 2008, the MIIT promulgated a Circular Regarding the Campaign against SMS Spam which requires telecom operators to strengthen supervision of SMS channels, including illegal spam SMS sending enterprises; short message advertisements, and the 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.

In 2009, the PRC National People’s Congress 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.

In 2010, MIIT issued the Measures for the Administration of Communication Network Security Protection, effective March 10, 2010, which requires entities operating communications networks to ensure the security of the communications networks, and sets forth standards of communications network security defense.

Air ticketing

The air ticketing business is subject to the supervision of the CAAC and its regional branches. The principal regulation governing air-ticketing in China is the Rules Concerning the Affirmation for the Qualification of Aviation Transportation Sales Agencies, or the Air Ticketing Rules, which took effect in 2006. Pursuant to the Air Ticketing Rules, any entity conducting an air-ticketing business must apply for a license from the CNATA. Under the Air Ticketing Rules and related foreign investment regulations, foreign-invested air-ticketing agencies are not permitted to sell airline tickets for domestic flights in China. In addition, a foreign investor, other than a registered air-ticket sales agency in Hong Kong or Macau, cannot own 100% of an air-ticketing agency in China. We have obtained a license, and as of May 31, 2011, we are conducting the annual renewal of our license.

Under the Circular on Change in the Management of Domestic Aviation Service Fares, issued by the CAAC, since October 1, 2008, air ticketing commissions have been based on negotiations between suppliers and agents, rather than direct regulation by the CAAC or other government 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, or the Travel Agency Regulations, issued by the State Council in 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 2009. Under these regulations, a travel agency must obtain a license from the CNTA to conduct cross-border travel business and a license from the provincial-level tourism administration to conduct domestic travel agency business.

The Travel Agency Regulations permit foreign investors to establish wholly foreign-owned travel agencies, as well as joint ventures and cooperative travel agencies. Foreign-owned travel agencies are allowed to open branches nationwide, but are 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 country and China, or the closer economic partnership agreements between China and Hong Kong and Macau. 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. The Travel Agency Implementing Rules also clarify certain aspects of legal liability for travel agencies as prescribed in the Travel Agency Regulations.

In 2010, CNTA released the Measures for Dealing with Tourism Complaints, which took effect as of July 1, 2010. Under these Measures, authorities which are responsible for dealing with tourist complaints shall render a decision on the complaints within 60 days after the date of receipt thereof.

In February 2011, CNTA and the China Insurance Regulatory Commission jointly promulgated the Administrative Measures for Liability Insurance of Travel Agencies, or the Liability Measures. Under the Liability Measures, travel agency liability insurance shall include compensation for personal injury and property loss of travelers and for the personal injury of people that provide service for travelers on behalf of travel agencies. The Liability Measures stipulate that insurance companies must inform travelers and travel service providers of the detailed compensation procedures and related issues.

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, as amended. 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 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 the value of our ADSs and our ability to pay dividends” 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.”

In 2008, SAFE promulgated a notice providing 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. 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 CIT Law provides that a maximum withholding 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 we may derive a substantial portion of our income 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. In 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 is 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, through Expedia Asia Pacific, which, as of May 31, 2011, controlled approximately 81% of the Company’s voting power and had the ability to control substantially all of the Company’s management and business operations. In August 2010, our subsidiary, eLong Information, was designated by the Beijing Municipal Commission of Commerce as a Regional Headquarters of Transnational Corporation of Expedia. Despite this designation, we cannot assure you that the PRC tax authorities will not deem eLong, Inc. a PRC resident enterprise, and if so, we would be subject to PRC corporate income tax on our worldwide income, and such determination may have retroactive effect.

In 2009, the State Administration of Tax issued a Notice on Questions Relating to Individual Income Tax on Equity Compensation. The notice clarifies circumstances in which equity compensation shall be taxable at the normal income tax rates for wage income, rather than at the lower rate available through use of a preferential tax calculation method. We cannot assure that the PRC tax authorities will not choose to apply this notice to our current or prior equity compensation grants and require payment of additional individual income tax by our current or former employees, or by us. See “Item 3: Key Information About the Company: Risk Factors—Risks Related to Doing Business in China—We would be adversely affected by the cancellation, modification or discontinuation of any preferential tax treatments currently available to us.”

Labor Law

In 2008, the Employment Contract Law of the PRC as well as implementing regulations came into effect. These laws and regulations expand the rights and protections of employees and increase human resources, litigation and severance costs for employers. For example, the 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.

Tort Law

In 2009, the National People’s Congress promulgated the Tort Liability Law of the People’s Republic of China (the “Tort Law”), which came into effect on July 1, 2010. The Tort Law expands the duties of manufacturers, sellers and other entities to provide greater protection to consumers, and adds new provisions on product recalls, warnings and punitive damages. In addition the Tort Law imposes joint and several liability on Internet service providers if the Internet service provider receives notice of infringing conduct and fails to take necessary measures in a timely manner, or the Internet service provider is otherwise aware that an Internet user is infringing the rights of another person through the Internet service provider and fails to take necessary measures.

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 they need to efficiently research, plan, book and experience travel. Through the ownership of high-vote ordinary shares and ordinary shares by an indirect subsidiary, Expedia Asia Pacific, as of May 31, 2011, Expedia controls approximately 81% of our voting power.

eLong, Inc. is incorporated in the Cayman Islands and has three wholly-owned direct subsidiaries: eLong Information, which is incorporated in the PRC, Bravado Investments Limited 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 and air ticketing businesses are 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. Important licenses for our businesses which are held by our affiliated Chinese entities, include, the ICP license and a license for call center services held by Beijing Information; the ICP license, broadcast television program production business certificate, Internet culture license and bulletin board system permit held by Beijing Xici; the domestic and international air ticketing licenses held by Beijing Air; the domestic and international air ticketing licenses held by Hangzhou Air; and the domestic and international (inbound/outbound) travel agency licenses held by Beijing Travel. Beijing Information and Beijing Xici are each holders of an ICP license and are each subject to annual inspections in order to maintain these licenses.

On June 11, 2010, Justin Tang, our former CEO and former member of our Board of Directors, transferred a 75% equity interest in Beijing Media and 75% equity interest in Beijing Information to Guangfu Cui, our CEO and member of our Board of Directors. As of May 31, 2011, Guangfu Cui and Jack Wang, our Vice President of Partner Service Group, own 87.5% and 12.5%, respectively, of Beijing Information as nominee shareholders; Mr. Cui owns 100% of Beijing Media, as our nominee; 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; Beijing Information owns 100% of Beijing Xici; and Beijing Information owns 20% of Beijing Jiuyou.

4D: Property and Equipment

We do not own any real estate, and lease all of our facilities. Our headquarters in Beijing, consisting of our call center, sales and marketing, information technology, web and other departments, is located in a leased space of approximately 10,000 square meters at Xingke Plaza, 10 Middle Jiuxianqiao Road, Chaoyang District, Beijing, 100015, China. We lease the premises for our headquarters under a number of leases, which will expire in 2015, unless we exercise our early termination rights. We also lease offices in major cities in China including Shanghai, Guangzhou, Shenzhen, Wuhan, Nanjing, Hangzhou, Chongqing, Dalian, Harbin, Xian and Chengdu, which have a total leased space of approximately 2,600 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 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 travel information and the ability to book hotel rooms, air tickets and other travel related services utilizing a modern call center and online web 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:

Condition of the overall economy. Our financial results are affected by the overall condition of the economy and demand for travel services in China. China’s economy slowed significantly in 2009, due in large part to the international financial crisis, followed by a recovery and strong growth in 2010. We anticipate that demand for travel services in China will continue to be linked to the condition of the economy in the future.

Seasonality. The travel industry in China is characterized by seasonal fluctuations and accordingly our revenues may vary from quarter to quarter. Historically, we have generated a larger portion of our revenues in the second half of the year. The first quarter of each year generally contributes the smaller portion of our annual revenues due to reduced business travel during the Chinese New Year holiday. In addition, the seasonality of the PRC travel market is affected by 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 from one week to three days. Our results in the future may continue to be affected by seasonality and regulatory adjustments to the calendar of public holidays in China.

Disruptions. Travelers tend to modify their travel plans based on the occurrence of events such as:

	•		outbreaks, or the fear of outbreaks, of H1N1 flu, severe acute respiratory syndrome, avian flu or other diseases;
	•		travel-related accidents;

	•		unseasonable or extreme weather;
	•		natural or man-made disasters;
	•		increased prices or fees in the hotel, airline or other travel-related sectors;
	•		threats of war or threats or incidents of terrorism; and
	•		general economic downturns.

Such events, depending on their intensity, duration, and scope, can reduce demand for travel services. Accordingly, our results may be affected by the occurrence and nature of such events and their effect on the Chinese market for travel services.

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 earn commissions for our services. We have experienced year-over-year increases in total revenue of 9% from 2008 to 2009 and 35% from 2009 to 2010. Our increase in revenues from 2009 to 2010 was due primarily to the increase in our hotel and air ticketing commissions accompanying the higher volume of hotel room nights we booked and air tickets we sold.

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

		Year ended December 31,
		2008								2009								2010
		RMB				%				RMB				%				RMB				US$				%
		(in thousands, except for percentage data)
Revenues
Hotel reservation(1)			253,458				73	%			256,830				68	%			346,449				52,493				68	%
Air ticketing(2)			77,205				22	%			96,036				25	%			123,092				18,650				24	%
Other(3)			17,763				5	%			26,666				7	%			42,478				6,436				8	%
Total revenues			348,426				100	%			379,532				100	%			512,019				77,579				100	%

As of December 31, 2010, our accounts receivable balance mainly represents amounts due from our travel suppliers 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.

We receive commissions from our suppliers based on the number of hotel room nights we book and air tickets that we sell. The increase in accounts receivable, to RMB58.9 million (US$8.9 million) as of December 31, 2010 from RMB45.4 million as of December 31, 2009, is mainly due to the growth of our hotel and advertising business. Under our accounts receivable collection policy, we typically require our hotel and air agent suppliers to pay balances due us within 30 to 60 days.

Cost of services. Cost of services consists primarily of employee compensation, service platform costs which are directly attributable to the provision of our travel and non travel services, telecommunications expenses, credit card handling fees, rent and related overhead expenses, air ticket delivery costs and share-based compensation. For the years ended December 31, 2008, 2009 and 2010, cost of services as a percentage of our total net revenues was 30%, 30% and 28%, respectively. Because these costs are largely volume-related, we expect that cost of services in future periods will generally fluctuate in line with the expansion or contraction of our business operations, the relative proportion of air and hotel revenues, and the relative proportion of online and call center revenues in our total business. Our air business generally has lower gross profit per transaction than our hotel business.

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 develop content for and to maintain our websites, employee compensation for our hotel and air product employees, and share-based compensation. We expect service development expenses to increase as we continue to upgrade our services and invest in technology, websites and staffing, including in our information technology, web, and supplier relations functions. Our service development expenses as a percentage of our total net revenues were 16%, 16%, and 17% for the years ended December 31, 2008, 2009 and 2010, respectively.

Sales and marketing expenses include online and offline advertising expenses, commissions to third party distribution partners and resellers, expenses associated with our loyalty points program, employee compensation for marketing personnel, and share-based compensation. Sales and marketing expenses as a percentage of our total net revenues were 50%, 37% and 35% for the years ended December 31, 2008, 2009 and 2010, respectively.

General and administrative expenses primarily include finance, legal, human resources, auditing and executive office expenses. General and administrative expenses decreased as a percentage of our total net revenues for the year ended December 31, 2010 to 10% from 14% for the year ended December 31, 2009, and 16% for the year ended December 31, 2008.

We participate in various PRC government-mandated social insurance and employee welfare plans. These government-mandated plans include unemployment insurance, medical insurance, work injury insurance, maternity 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 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 2008, 2009 and 2010, we contributed RMB23.5 million, RMB28.2 million and RMB33.4 million (US$5.1 million), respectively, to various government-mandated social insurance and welfare plans. The increase in 2010 was due primarily to increased mandatory social insurance contributions and increased headcount.

During the year ended December 31, 2010, we recorded foreign currency exchange losses of RMB25.9 million (US$3.9 million) as compared to foreign currency exchange losses of RMB0.4 million in 2009, and foreign currency exchange losses of RMB60.9 million in 2008. The large foreign currency exchange losses in 2008 and 2010 were the result of the Renminbi’s appreciation against the U.S. dollar and were derived from the remeasurement of our U.S. dollar-denominated cash deposits and short-term investments into Renminbi for financial reporting purposes. The exchange loss was partially offset by interest income of RMB6.8 million (US$1.0 million) in 2010, RMB12.9 million in 2009 and RMB29.0 million in 2008.

In 2010, we did not recognize any charges related to property and equipment and intangible assets. During 2009, we recognized a write-off and impairment of property and equipment of RMB0.5 million, which was mainly related to computer equipment. During 2008, we recognized a charge of RMB1.0 million, which was a write-off of legacy software systems after new systems and operations procedures were implemented, and an impairment of intangible assets of RMB0.4 million for the Fortune Trip trade name, which we do not intend to actively use.

Under PRC law, our services related revenues are subject to a 5.5% business tax and surcharges. In addition, our advertising service revenues are subject to a cultural development surcharge of 3%.

Income tax. Because we, our subsidiaries and our affiliated Chinese entities are incorporated in different jurisdictions, we file separate income tax returns. Under the current laws of the Cayman Islands, eLong, Inc. is not subject to income tax and there are no withholding taxes upon any payments of dividends.

The CIT Law imposes a unified income tax rate of 25%, effective January 1, 2008, 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 CIT Law for the period from 2008 to 2010, and were thus subject to a preferential income tax rate of 15% in 2008, 2009 and 2010.

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 other assumptions that we believe to be reasonable. 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 our 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 regarding 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 present value of future cash flows. If different judgments or assumptions had been utilized, material differences could have resulted in the amount or timing of the impairment charges.

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 flow analyses of the reporting unit. Such analyses are based on cash flow assumptions that are consistent with the plans and estimates being used to manage the business. Cash flow assumptions include estimating future cash flows, determining appropriate discount rates and making other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value for 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. The facts and circumstances may require us to use substantial judgment in assessing the collectability. 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 year ended December 31, 2009, we wrote off provisions for accounts receivables of RMB3.2 million which were aged one year or longer and 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 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.

In accordance with ASC subtopic 805-10 (“ASC 805-10”), Business Combinations: Overall, 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 an adjustment to income tax expense. As of December 31, 2009 and 2010, we recorded net deferred tax assets of RMB1.1 million and RMB8.4 million (US$1.3 million) after valuation allowance provisions, respectively. If unexpected events occur in the future that would prevent us from realizing all or a portion of our net deferred tax assets, an adjustment would result in a charge to earnings in the period in which such determination was made.

Provision for loyalty points. Cardholders of our eLong membership program can earn loyalty points based on their purchase of our hotel and air products. We award non-cash gifts and travel services to our customers upon the redemption of loyalty points that are accumulated based on the customer’s transactions. We recognize estimated costs to provide non-cash gifts and free travel 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.

eCoupons. In September 2009, we launched our eCoupon program. Customers who receive our eCoupons register them on-line, and then may use the eCoupons by making an on-line hotel booking with a hotel designated on our eLong.com Chinese language site with the Chinese coupon icon. After completing a hotel stay, the customer will receive a credit in his eLong virtual cash on-line account equal to the amount of eCoupons used. eLong customers then choose to request mobile phone credit or to have the funds (less applicable taxes) transferred to their bank account. Other than the actual redeemed cost of eCoupons, the cost of the eCoupons is allocated to the underlying revenue transactions which earn the discount. The eCoupons granted to customers expire after a set date in accordance with the terms of the particular eCoupon issuance. If actual usage of eCoupons differs significantly from our expectation, it will result in an adjustment to our deferred revenue and the corresponding revenue.

Share-based compensation. We have adopted ASC subtopic 718-10 (“ASC 718-10”), Compensation-Stock Compensation: Overall. 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 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 decreased the estimated forfeiture rate in 2009 due to lower 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.

Business combinations. In accordance with ASC 805-10, we measure the cost of each acquisition as the aggregate of the fair value as of the date of exchange of the assets given, liabilities incurred, and equity instruments issued. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any noncontrolling interests. The excess of (i) the total of cost of the acquisition, fair value of the noncontrolling interests and acquisition date fair value of any previously held equity interest in the acquiree minus (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of the acquisition is less than the fair value of the identifiable net assets of the acquiree, the difference is recognized directly in earnings.

The determination and allocation of fair values to the identifiable net assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. We determine discount rates to be used based on the risks inherent in the acquiree’s current business model and industry comparisons. Terminal values are based on the expected life of services and forecasted life cycle and forecasted cash flows over that period. In some instances, a portion of the cost of the acquisition is contingent on the performances of the acquiree or the continued employment with us of certain former acquiree employees. The initial fair value of contingent consideration is subject to our estimates and assumptions on the acquisition day. Although we believe that the assumptions applied in the determination are reasonable based on information available at the date of acquisition, actual results may differ from the forecasted amounts and the difference could be material. If actual performance differs significantly from our estimates and assumptions, it will result in any change of contingent consideration fair value being recognized in earnings.

Revenue recognition. Our revenues are principally derived from the provision of travel services, including hotel reservation, air ticketing and other services.

Revenues from our hotel reservation services are determined by the number of room nights we book and the commissions we earn. Generally, our customers pay the hotels directly, and we collect our commissions based on the number of room nights our customers stay. Our commission from hotel reservation services is recognized after hotel customers have completed their hotel stay, based on our confirmation with the hotel of the customer’s stay. Because we act as an agent in transactions with no risk of loss due to obligations for cancelled visits, we recognize our revenues from hotel transactions on a net basis in our statements of operations.

Revenues derived from our air ticketing service represent the second largest component of our travel-related revenues. Commissions from air ticketing services are recognized upon the issuance of the ticket, net of estimated cancellations. Estimated cancellations were insignificant for the years ended December 31, 2008, 2009 and 2010. In some instances, airlines provide discretionary commissions if we achieve performance targets. Such commissions are recognized on a cash basis because we cannot reasonably estimate them.

Other revenue consists primarily of advertising revenue from Beijing Information and Beijing Xici and commission revenue from the sale of travel insurance sold with our air tickets. We recognize the revenue from the sale of travel insurance when the travel insurance is issued to the customer, net of cancellations.

We believe our revenue recognition policies are consistent with ASC subtopic 605-10 (“ASC 605-10”), Revenue Recognition: Overall and ASC subtopic 605-45, Revenue Recognition: Principal Agent Considerations. As we generally operate as an agent of our travel suppliers, we generally 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. For additional information on our revenue recognition policies, see the notes to our consolidated financial statements included with this annual report.

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,
		2008				2009				2010				2010
		RMB				RMB				RMB				US$
Revenues:
Hotel reservation			253,457,540				256,830,079				346,448,668				52,492,253
Air ticketing			77,205,429				96,035,495				123,092,052				18,650,310
Other			17,762,577				26,666,458				42,477,663				6,436,010
Total revenues			348,425,546				379,532,032				512,018,583				77,578,573
Business tax and surcharges			21,112,717				21,638,510				30,101,947				4,560,901
Net revenues			327,312,829				357,893,522				481,916,636				73,017,672
Cost of services			96,996,309				106,934,784				136,889,793				20,740,878
Gross profit			230,316,520				250,958,738				345,026,843				52,276,794
Operating expenses:
Service development			52,584,041				58,121,508				80,045,838				12,128,157
Sales and marketing			163,528,250				133,195,446				167,322,622				25,351,912
General and administrative			53,652,427				47,670,045				49,944,996				7,567,424
Amortization of intangible assets			848,906				653,439				642,453				97,341
Charges related to property and equipment and intangible assets			1,384,814				71,635				—				—
(Loss)/ income from operations			(41,681,918	)			11,246,665				47,070,934				7,131,960
Other income (expenses):
Interest income			29,020,353				12,880,473				6,791,885				1,029,073
Foreign exchange loss			(60,937,889	)			(431,856	)			(25,933,051	)			(3,929,250	)
Other expenses, net			—				(11,608	)			(409,195	)			(61,999	)
Total other (expenses)/income, net			(31,917,536	)			12,437,009				(19,550,361	)			(2,962,176	)
(Loss)/income before income tax expense			(73,599,454	)			23,683,674				27,520,573				4,169,784
Income tax expense			2,993,678				3,780,585				6,892,165				1,044,268
Net (loss)/income			(76,593,132	)			19,903,089				20,628,408				3,125,516

2010 Compared to 2009

Revenues. The following table sets forth certain information relating to our revenues for the years ended December 31, 2009 and 2010.

		Year ended December 31,
		2009				% of				2010								% of				%
		RMB				revenues				RMB				US$				revenues				growth
		(in thousands, except percentage data)
Revenues
Hotel reservation			256,830				68	%			346,449				52,493				68	%			35	%
Air ticketing			96,036				25	%			123,092				18,650				24	%			28	%
Other			26,666				7	%			42,478				6,436				8	%			59	%
Total revenues			379,532				100	%			512,019				77,579				100	%			35	%

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, 2009 and 2010.

		Year ended December 31,
										%
		2009				2010				growth
Number of room nights booked (000s)			4,316				6,378				48	%
Average commission per room night (RMB)			60				54				(10	%)
Number of air tickets sold (000s)			2,205				2,441				11	%
Average commission per air ticket (RMB)			44				50				14	%

For the year ended December 31, 2010, we generated gross revenues of RMB512.0 million (US$77.6 million), an increase of 35% over RMB379.5 million in gross revenues generated in the year ended December 31, 2009. Our travel revenue consists primarily of hotel and air ticketing, and the changes in each category in 2010 are discussed below.

Hotel Reservations. The increase in our hotel reservation revenues from RMB256.8 million in 2009 to RMB346.4 million (US$52.5 million) in 2010, a year on year growth of 35%, reflected an increase in the number of hotel room nights we booked from 4.32 million in 2009 to 6.38 million in 2010 and a decrease in commission per room night to RMB54 (US$8.2), down RMB6 from 2009. The increase in the number of hotel room nights was due to our increased customer base, which includes both old and new customers. We also increased our hotel product offerings from approximately 9,800 hotels as of December 31, 2009 to over 17,000 hotels as of December 31, 2010. The decrease in commission per room night was due to a decline in average room rate per room night, our eCoupon program and the growth in the proportion of room nights from budget hotels which have lower average room rates and commission per room night than other hotels.

Air ticketing. The increase in our air ticketing commission revenues from RMB96.0 million in 2009 to RMB123.1 million (US$18.7 million) in 2010, a year on year growth of 28%, was mainly attributable to an increase in the number of air tickets booked from 2.21 million in 2009 to 2.44 million in 2010, and an increase in revenue per air ticket from RMB44 in 2009 to RMB50 (US$7.6) in 2010. The 2010 growth was the result of continuing investment in our website, call center and customer service, partially offset by our elimination of air ticketing cash transaction business in the fourth quarter of 2010.

Other revenues. Our other revenues increased from RMB26.7 million in 2009 to RMB42.5 million (US$6.4 million) in 2010 mainly due to growth in revenue due to increased Xici.net advertising revenue and increased sales of travel insurance.

Business tax and surcharges. We recorded increased business taxes and surcharges in 2010 compared to 2009 due to the increase in our revenues. Business tax and surcharges was 5.7% of total revenue in 2009 and increased to 5.9% in 2010, primarily due to an increase in our advertising revenue and inter-company transaction amounts.

Cost of services and gross profit. For the year ended December 31, 2010, our cost of services decreased to 28% of our total net revenues from 30% in 2009, mainly due to the faster rate of growth of our hotel business as compared to our air business, an increased proportion of online bookings and increased air commission per ticket.

Operating expenses. The following table sets forth a breakdown of our operating expenses for the years ended December 31, 2009 and 2010.

		Year ended December 31,
		2009								2010
						% of net												% of net				%
		RMB				revenues				RMB				US$				revenues				growth
		(in thousands, except for percentage data)
Operating expenses
Service development			58,122				16	%			80,046				12,128				17	%			38	%
Sales and marketing			133,195				37	%			167,323				25,353				35	%			26	%
General and administrative			47,670				14	%			49,945				7,567				10	%			5	%
Amortization of intangible assets			653				—				642				97				—				(2	%)
Changes related to property and equipment and intangible assets			72				—				—				—				—				(100	%)
Total operating expenses			239,712				67	%			297,956				45,145				62	%			24	%

Our operating expenses in 2010 increased by 24% to RMB298.0 million (US$45.1 million) from RMB239.7 million in 2009.

Service development. Our service development expenses increased 38% to RMB80.0 million (US$12.1 million) in 2010 from RMB58.1 million in 2009 primarily due to an increase in headcount and higher employee wages in our information technology, web and supplier relations functions. Our service development expenses increased to 17% of net revenues in 2010 from 16% of net revenues in 2009.

Sales and marketing. In 2010, our sales and marketing expenses increased 26% to RMB167.3 million (US$25.4 million) from RMB133.2 million in 2009, which was mainly due to increased online marketing expenses, hotel commission payments to third-party distribution partners and loyalty point expenses, partially offset by reduced headcount. Our sales and marketing expenses were 35% of net revenues in 2010 as compared to 37% in 2009.

General and administrative. Our general and administrative expenses increased 5% to RMB49.9 million (US$7.6 million) in 2010 from RMB47.7 million in 2009 which was primarily due to higher employee wages. Our general and administrative expenses as a percentage of net revenues for 2010 decreased to 10% compared to 14% in 2009.

Other income (expenses), net. We recorded net other expense of RMB19.6 million (US$3.0 million) in 2010 compared to net other income of RMB12.4 million in 2009. The net other expense in 2010 was primarily due to foreign exchange loss of RMB25.9 million (US$3.9 million) resulting from the appreciation of the Renminbi in 2010, partially offset by interest income of RMB6.8 million (US$1.0 million). In 2009, we recorded a much smaller foreign exchange loss of RMB0.4 million, and interest income of RMB12.9 million.

Income tax expense. We incurred an income tax expense of RMB6.9 million (US$1.0 million) in 2010, compared to a tax expense of RMB3.8 million in 2009. The increase in income tax expense in 2010 compared to 2009 was primarily due to the growth in income of, and thus taxes payable by, our PRC subsidiary, eLong Information.

Net income. Net income was RMB20.6 million (US$3.1 million) in 2010 and income from operations was RMB47.1 million (US$7.1 million) in 2010, as a result of the factors discussed above. We recorded net income of RMB20.6 million (US$3.1 million) for the year ended December 31, 2010 and net income of RMB19.9 million for the year ended December 31, 2009.

2009 Compared to 2008

Revenues. The following table sets forth certain information relating to our revenues for the years ended December 31, 2008 and 2009.

		Year ended December 31,
		2008								2009
						% of								% of				%
		RMB				revenues				RMB				revenues				growth
		(in thousands, except percentage data)
Revenues
Hotel reservation			253,458				73	%			256,830				68	%			1	%
Air ticketing			77,205				22	%			96,036				25	%			24	%
Other			17,763				5	%			26,666				7	%			50	%
Total revenues			348,426				100	%			379,532				100	%			9	%

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, 2008 and 2009.

		Year ended December 31,
										%
		2008				2009				growth
Number of room nights booked (000s)			3,945				4,316				9	%
Average commission per room night (RMB)			64				60				(6	%)
Number of air tickets sold (000s)			1,788				2,205				23	%
Average commission per air ticket (RMB)			43				44				2	%

For the year ended December 31, 2009, we generated gross revenues of RMB379.5 million, an increase of 9% over RMB348.4 million in revenues generated in the year ended December 31, 2008. Our travel revenue consists primarily of hotel and air ticketing, and the changes in each category in 2009 are discussed below.

Hotel Reservations. The increase in our hotel reservation revenues from RMB253.5 million in 2008 to RMB256.8 million in 2009, a year on year growth of 1%, reflected an increase in the number of hotel room nights we booked from 3.95 million in 2008 to 4.32 million in 2009 and a decrease in commission per room night to RMB60, down RMB4 from 2008. The increase in the number of hotel room nights was due to our increased customer base, which includes both old and new customers. We also increased our hotel product offerings from approximately 7,000 hotels as of December 31, 2008 to over 9,800 hotels as of December 31, 2009. The decrease in commission per room night was due to a decline in average room rate per room night, a growth in the proportion of room nights from budget hotels and our eCoupon program.

Air ticketing. The increase in our air ticketing commission revenues from RMB77.2 million in 2008 to RMB96.0 million in 2009, a year on year growth of 24%, was mainly attributable to an increase in the number of air tickets booked which increased from 1.79 million in 2008 to 2.21 million in 2009, and an increase in revenue per air ticket from RMB43 in 2008 to RMB44 in 2009. The 2009 growth was the result of continuing investment in our website, call center and customer service.

Other revenues. Our other revenues increased from RMB17.8 million in 2008 to RMB26.7 million in 2009 mainly due to an increase in advertising revenue and commission revenue due to the volume growth of travel insurance sold with our air tickets.

Business tax and surcharges. We recorded increased business taxes and surcharges in 2009 compared to 2008 due to increases in our revenues. Business tax was 6.1% of total revenue in 2008 and decreased to 5.7% in 2009, primarily due to a decrease in the number of our inter-company transactions.

Cost of services and gross profit. For the year ended December 31, 2009, our cost of services was 30% of our total net revenues, which was the same as 2008.

Operating expenses. The following table sets forth a breakdown of our operating expenses for the years ended December 31, 2008 and 2009.

		Year ended December 31,
		2008								2009
						% of net								% of net				%
		RMB				revenues				RMB				revenues				growth
		(in thousands, except for percentage data)
Operating expenses
Service development			52,584				16	%			58,122				16	%			11	%
Sales and marketing			163,528				50	%			133,195				37	%			(19	%)
General and administrative			53,653				16	%			47,670				14	%			(11	%)
Amortization of intangible assets			849				—				653				—				(23	%)
Changes related to property and equipment and intangible assets			1,385				1	%			72				—				(95	%)
Total operating expenses			271,999				83	%			239,712				67	%			(12	%)

Our operating expenses in 2009 decreased by 12% to RMB239.7 million from RMB272.0 million in 2008.

Service development. Our service development expenses increased 11% to RMB58.1 million in 2009 from RMB52.6 million in 2008 primarily due to an increase in headcount, partially offset by a decrease in professional fees. Our service development expenses were 16% of net revenues in both 2008 and 2009.

Sales and marketing. In 2009, our sales and marketing expenses decreased 19% to RMB133.2 million from RMB163.5 million in 2008, which was mainly due to decreased marketing promotion expenses, labor costs and sales commissions. Our sales and marketing expenses were 37% of net revenues in 2009 as compared to 50% in 2008.

General and administrative. Our general and administrative expenses decreased 11% to RMB47.7 million in 2009 from RMB53.7 million in 2008 which was primarily due to a decrease in professional fees and lower bad debt provisions, partially offset by an increase in labor costs. Our general and administrative expenses as a percentage of net revenues for 2009 decreased to 14% compared to 16% in 2008.

Other income (expenses), net. We recorded net other income of RMB12.4 million in 2009 compared to net other expenses of RMB31.9 million in 2008. The net other income in 2009 was primarily due to interest income of RMB12.9 million in 2009, partially offset by a foreign exchange loss of RMB0.4 million resulting from the appreciation of the Renminbi during 2009. In 2008, we recorded a much larger foreign exchange loss of RMB60.9 million due to the significant appreciation of the Renminbi, partially offset by interest income of RMB29.0 million.

Income tax expense. We incurred a tax expense of RMB3.8 million in 2009, compared to a tax expense of RMB3.0 million in 2008. The increase in income tax expense in 2009 compared to 2008 is mainly due to current tax payable for eLong Information.

Net income. Net income was RMB19.9 million in 2009 from income from operations of RMB11.2 million in 2009, as a result of the factors discussed above. We recorded a net income of RMB19.9 million for the year ended December 31, 2009 and a net loss of RMB76.6 million for the year ended December 31, 2008.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

As of December 31, 2010, we had approximately RMB381.4 million (US$57.8 million) in cash and cash equivalents and RMB580.0 million (US$87.9 million) of short-term investments. Our cash and cash equivalents consist of cash on hand and time deposits placed with banks or other financial institutions. Our short-term investments are time deposits of six, nine or twelve months duration in commercial banks. As of December 31, 2010, we also held RMB60.6 million (US$9.2 million) of restricted cash, which mainly consists of time deposits in an escrow account in China required to support our air ticket business.

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

		Year ended December 31,
		2008				2009				2010				2010
		RMB				RMB				RMB				US$
		(in thousands)
Net cash provided by (used in) operating activities			(14,076	)			69,014				85,387				12,937
Net cash provided by (used in) investing activities			(641,501	)			248,306				(324,676	)			(49,193	)
Net cash provided by (used in) financing activities			(98,331	)			948				(5,446	)			(825	)
Effect of foreign exchange rate changes on cash			(62,997	)			(341	)			(13,307	)			(2,016	)
Net increase (decrease) in cash and cash equivalents			(816,905	)			317,927				(258,042	)			(39,097	)
Cash and cash equivalents at beginning of year			1,138,446				321,541				639,468				96,889
Cash and cash equivalents at end of year			321,541				639,468				381,426				57,792
Short-term investments at end of year			635,810				313,467				580,005				87,880
Total cash and equivalents and short-term investments at end of year			957,351				952,935				961,431				145,672

Operating activities. Net cash provided by operating activities in 2010 was RMB85.4 million (US$12.9 million), compared to net cash provided by operating activities in 2009 of RMB69.0 million and net cash used in operating activities in 2008 of RMB14.1 million. The increase in cash inflow in 2010 compared to 2009 was mainly due to net income of RMB20.6 million (US$3.1 million) in 2010 compared with net income of RMB19.9 million in 2009, and an increase in foreign exchange loss from RMB0.7 million in 2009 to RMB17.4 million (US$2.6 million) in 2010. The change from cash outflow in 2008 to cash inflow in 2009 was mainly due to net income of RMB19.9 million in 2009 compared with net loss of RMB76.6 million in 2008, and a decrease in foreign exchange loss from RMB61.1 million in 2008 to RMB0.7 million in 2009.

Investing activities. Our net cash used in investing activities was RMB324.7 million (US$49.2 million) in 2010, compared to net cash provided by investing activities of RMB248.3 million in 2009 and net cash used in investing activities of RMB641.5 million in 2008. The change from cash inflow in 2009 to cash outflow in 2010 was mainly due to RMB864.7 million (US$131.0 million) cash payment for purchase of short-term investments, partially offset by RMB593.9 million (US$90.0 million) cash received in proceeds from short-term investments as well as RMB28.5 million (US$4.3 million) cash payment for business acquisitions. The change from cash outflow in 2008 to cash inflow in 2009 was mainly due to RMB 635.6 million cash received from short-term investments, partially offset by RMB313.6 million cash payment in purchase of short-term investments.

Financing activities. Our net cash used in financing activities was RMB5.4 million (US$0.8 million) in 2010, compared to net cash provided by financing activities of RMB0.9 million and net cash used in financing activities of RMB98.3 million in 2009 and 2008, respectively. The net cash used in financing activities in 2010 was mainly from the settlement of the payable to former shareholders of RMB18.9 million (US$2.9 million), partially offset by the exercise of stock options and stock warrants of RMB13.3 million (US$2.0 million). The net cash provided by financing activities in 2009 was mainly from the exercise of stock options and stock warrants of RMB1.2 million. The net cash used in financing activities in 2008 was mainly from our repurchase of ordinary shares of RMB103.4 million.

Our capital expenditures totaled RMB32.9 million, RMB12.0 million and RMB17.6 million (US$2.7 million) in 2008, 2009, and 2010, respectively. Our capital expenditures in 2010 related primarily to purchases of software, computer equipment, servers and computer software to support the development of our business. Capital expenditures in 2011 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, 2010, our primary sources of liquidity were RMB381.4 million (US$57.8 million) in cash and cash equivalents, RMB60.6 million (US$9.2 million) in restricted cash and RMB580.0 million (US$87.9 million) of short-term investments. We have no outstanding bank loans or other 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 PRC economy and travel industry 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 May 31, 2011, 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 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, 2010 with payments due in the periods indicated:

Total

More

Payments

Less than

1-3

3-5

than

(in RMB millions)

due

1 year

Years

Years

5 years

Operating Lease Obligations(1)

47.3

9.8

29.6

7.9

—

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 5.9%, -0.7% and 3.3% in 2008, 2009 and 2010, respectively. 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” and “Inflation in China may have an adverse effect on our financial condition and results of operations.”

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest rate risk. Our exposure to changes in interest rates relates primarily to the interest income generated by our cash and cash equivalents, restricted cash and short-term investments deposited in banks. Cash and cash equivalents consist of cash on hand and time deposits placed with banks or other financial institutions. Restricted cash mainly consists of time deposits in an escrow account in China required to support our air ticket business. Short-term investments are time deposits of six, nine or twelve months in commercial banks.

The carrying amounts of cash and cash equivalents, restricted cash, short-term investments, accounts receivable and other receivables represents our principal exposure to credit risk in relation to our financial assets. As of December 31, 2010, substantially all of our cash and cash equivalents, restricted cash and short-term investments were held in large PRC or international banks.

We have not used any derivative financial instruments to hedge interest rate risk; however, 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, restricted cash and short-term investments which are deposited in banks.

During 2010, we recorded interest income of RMB6.8 million (US$1.0 million) based on an interest yield of 0.7% on our cash and cash equivalents, restricted cash and short-term investments. The following table sets forth a sensitivity analysis suggesting how this interest income would have been impacted if interest rates were: (i) 30% lower, (ii) 15% lower, (iii) actual, (iv) 15% higher and (v) 30% higher.

		2010				2010				2010				2010				2010
		(-30%)				(-15%)				Actual				(+15%)				(+30%)
		RMB‘000				RMB‘000				RMB‘000				RMB‘000				RMB‘000
Interest income			4,754				5,773				6,792				7,811				8,830

Foreign exchange risk. Substantially all of our revenue-generating operations are transacted in Renminbi, which currently is not fully convertible into foreign currency. In addition, a substantial portion of our cash and cash equivalents, restricted cash and short-term investments are held in U.S. dollars. Accordingly, fluctuation in the U.S. dollar to Renminbi exchange rate may have a significant on our financial results. As of December 31, 2010, we had approximately RMB381.4 million (US$57.8 million) in cash and cash equivalents, RMB60.6 million (US$9.2 million) of restricted cash and RMB580.0 million (US$87.9 million) of short-term investments. As of December 31, 2010, approximately 23%, of our cash and cash equivalents and 42% of our short term investments were denominated in U.S. dollars. As of December 31, 2010, 77% of our cash and cash equivalents, 58% of our short-term investments and 100% of our restricted cash 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, 2010, we recorded RMB25.9 million (US$3.9 million) in foreign exchange loss due to the appreciation of the Renminbi against the United States dollar. During 2010, the value of the Renminbi appreciated 3.0% 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 10%, (ii) appreciated by 5%, (iii) actual, (iv) depreciated by 5% and (v) depreciated by 10%.

		2010				2010				2010				2010				2010
		(-10%)				(-5%)				Actual				(+5%)				(+10%)
		RMB‘000				RMB‘000				RMB‘000				RMB‘000				RMB‘000
Foreign exchange gain/(loss)			(86,444	)			(43,222	)			(25,933	)			43,222				86,444

If the Renminbi continues to appreciate we will continue to record foreign exchange loss 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 in the value of the Renminbi may materially and adversely affect our financial results and the value of our company and ADSs” and “Item 3: Key Information—Risk Factors—Risks Related to Our Business—We may not use our cash, cash equivalents, restricted cash and short-term investments effectively.”

On May 16, 2011, we received net proceeds of approximately US$125.6 million from the issuance and sale of our ordinary shares and high-vote ordinary shares to TCH Sapphire and the issuance and sale of our ordinary shares to Expedia Asia Pacific. Accordingly, as of May 31, 2011, we held total cash and cash equivalents of RMB1,086.0 million (US$167.6 million), restricted cash of RMB61.4 million (US$9.5 million) and short-term investments of RMB691.6 million (US$106.8 million). The increase in our total cash may lead to larger fluctuations in our interest income and exchange rate risk in future years, than the discussion above which is with respect to our cash balance as of December 31, 2010. For additional information on the May 16, 2011 transactions, see “Item 7: Major Shareholders and Related Party Transactions—Related Party Transactions—May 2011 Share Issuance and Sale to TCH Sapphire and Expedia Asia Pacific.”

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

For a discussion of recently issued accounting pronouncements, see “Note (2) Summary of Significant Accounting Policies—(aa) Recently issued accounting pronouncements” in the Notes to the Consolidated Financial Statements contained in this annual report.

Item 6:		Directors, Senior Management and Employees.

Directors and Senior Management

Our board of directors currently consists of eleven 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 our board of directors. Each ordinary share is entitled to one vote, and each high-vote ordinary share is entitled to 15 votes.

As of May 31, 2011, Expedia, through its indirect subsidiary, Expedia Asia Pacific, is the beneficial owner of 28,550,704 high-vote ordinary shares and 8,952,839 ordinary shares, and thus controls approximately 81% of the voting power of all shares of our voting stock. 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, and to remove members of our board of directors. See “Item 7: Major Shareholders and Related Party Transactions—Major Shareholders.”

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 bankruptcy, incapacity, resignation or removal. There are no family relationships among any of our directors or executive officers. Our 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 principal positions with eLong are as follows:

Name		Age		Position
Guangfu Cui		42		Chief Executive Officer & Director
Mike Doyle		41		Chief Financial Officer
Jason Xie		34		Chief Operating Officer
Gary Ding		37		Vice President of Operations
Sami Farhad		38		Vice President & General Counsel
James Li		37		Vice President of Sales
Jack Wang		37		Vice President of Partner Service Group
Wei Xue		48		Vice President of Air Business
Hongyong Zhan		40		Vice President & Chief Technology Officer
Henrik Kjellberg(1)(3)		40		Chairman of the Board of Directors
Fernando Gil de Bernabé(2)		46		Director
Thomas Gurnee(2)(3)		60		Director
Dara Khosrowshahi(1)		42		Director
Dan Lynn(1)		30		Director
Jens Parkitny(1) (3)		45		Director
Cyril Ranque(1)		41		Director
Michael Scown(2)		52		Director
Johan Svanstrom(1)		39		Director
Xiaoguang Wu(4)		35		Director

Biographical Information

Executive Officers

Guangfu Cui, Chief Executive Officer and Director

Guangfu Cui has served as our Chief Executive Officer (“CEO”) since October 8, 2007, and as a member of our Board of Directors since February 15, 2011. 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.

Jason Xie, Chief Operating Officer

Jason Xie has served as our Chief Operating Officer since May 15, 2011, and prior to this was our Vice President of Web & 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 a MBA from China Europe International Business School and a BA in Economics from Nanjing University.

Gary Ding, Vice President of Operations

Gary Ding has served as our Vice President of Operations since May 1, 2011. Since joining eLong in April 2008, Mr. Ding has held a number of leadership positions, including Senior Director of Operations Support and Air Operations, and Director of After Sales and Support. Prior to joining eLong, Mr. Ding was Director of FedEx Kinko’s (China) and has experience in operation and supply chain management. Mr. Ding holds a Bachelor’s Degree in Engineering from Inner Mongolia University of Technology, and is currently completing an EMBA at Peking University.

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, and previously was our Senior Director of Sales. 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.

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.

Wei Xue, Vice President of Air Business

Wei Xue has served as Vice President of our Air Business since January 1, 2010. Mr. Xue joined eLong as Senior Director of our Air Partner Service Group in September 2006 and manages our air systems, Air Partner Service Group and international air department. Mr. Xue has substantial experience in the air and travel industries where he has worked since 1987. Prior to joining eLong, Mr. Xue managed the air departments of companies including Mangocity, China Travel Service (Hong Kong) and Beijing Merchant’s International Transportation. Mr. Xue holds a MBA from Fordham University, an EMBA from Peking University and a Bachelor’s Degree in Foreign Languages from Peking University.

Hongyong Zhan, Vice President & Chief Technology Officer.

Hongyong Zhan has served as our CTO since January 1, 2011. Since joining eLong in November 2005, Mr. Zhan has held a number of senior IT leadership positions, including Senior Director of Hotel Platform, Senior Architect, and Director of Data Management Office. Prior to joining eLong, Mr. Zhan was CTO of PriceSmart China and formerly worked as IT Vice-General Manager of Yunan Huitong Information Technology and as a Lecturer at the Computer Science Center of Yunan Agricultural University. He holds a Master’s Degree in Computer Science from Fudan University and a Bachelor’s Degree in Computer Science from Southwest China Normal University.

Directors

Henrik Kjellberg, Chairman of the Board of Directors

Henrik Kjellberg has been Chairman of the Board of Directors since March 10, 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.

Fernando Gil de Bernabé, Director

Fernando Gil de Bernabé has been a member of our Board of Directors and our Audit Committee since December 30, 2009. Mr. Gil de Bernabé was previously the Managing Director of the Internet Business Solutions Group for the telecom business of Cisco in Europe, and joined the company in 1999. Prior to Cisco, Mr. Gil de Bernabé was an equity partner for the TME and Strategy practices of Arthur D. Little, a management consultancy, and in 1994 was a founding member of its Global Technology Ventures office in Palo Alto. Before that he worked in two software startups in Barcelona, Spain. Mr. Gil de Bernabé holds an MBA and a certificate in Management of Technology from the Haas School of Business and the College of Engineering at the University of California Berkeley, and a Higher Telecom Engineering degree from the Polytechnic University of Catalonia, Spain.

Thomas Gurnee, Director

Thomas Gurnee has served as a member of our Board of Directors and our Audit Committee 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.

Dara Khosrowshahi, Director

Dara Khosrowshahi has served as a member of our Board of Directors since June 10, 2011, and has served as a director and the Chief Executive Officer of Expedia, Inc., the world’s largest online travel company, since Expedia’s spin-off from IAC/InterActiveCorp in August 2005. Prior to the spin-off, Mr. Khosrowshahi served in a number of leadership capacities at IAC, including as Chief Executive Officer of IAC Travel, Executive Vice President and Chief Financial Officer of IAC, Executive Vice President of Operations and Strategic Planning of IAC, and President of USA Networks Interactive, a division of IAC. Mr. Khosrowshahi joined IAC in 1998 as Vice President of Strategic Planning. Prior to joining IAC, Mr. Khosrowshahi served as Vice President at Allen & Company LLC. Mr. Khosrowshahi holds a Bachelor of Arts degree in Engineering from Brown University.

Dan Lynn, Director

Dan Lynn has served as a member of our Board of Directors since February 15, 2011, and is the Managing Director and Vice President APAC of Expedia. Mr. Lynn leads Expedia’s business in the Asia Pacific, including current business and expansion into new markets. Prior to his current role, Mr. Lynn held a variety of positions at Expedia, including Vice Present of Global Paid Search Marketing, Director of Strategy and Consumer Insights, and Business Development Manager. Before joining Expedia, Mr. Lynn worked in London as an Investment Analyst for Smedvig Capital, and also previously as an analyst for McKinsey & Company. He holds a BA in Economics and Management from Oxford University.

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 Senior Vice President, Global Lodging of Expedia, overseeing Expedia’s relationships with hotel supply partners across the Americas and the EMEA regions. Previously, he managed Expedia’s relationships with airlines, lodging and rental car partners in the Asia Pacific as Vice President, Partner Services Group Asia Pacific. 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 as an associate and partner with Russin & Vecchi in the firm’s San Francisco and Ho Chi Minh City, Vietnam offices and 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.

Xiaoguang Wu, Director

Xiaoguang Wu has served as a member of our Board of Directors since June 10, 2011. Mr. Wu is Senior Executive Vice President and President of Internet Services of Tencent. Mr. Wu joined Tencent in 1998, led the development and product planning for Tencent’s core product, the QQ IM client software and has served as the Project Manager for the research and development team of QQ, the General Manager for IM product and the General Manager for the Internet business division. Currently, Mr. Wu is in charge of the Company’s various Internet services including community, community value-added services and e-commerce. Mr. Wu has accumulated rich experience in Internet product research and development, design planning, operations and marketing. He received his Bachelor of Science Degree in Weather Dynamics from Nanjing University in 1996 and an EMBA from the China Europe International Business School (CEIBS) in 2008.

Board Practices

Between January 1, 2010 and May 31, 2011, 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 Mr. Gil de Bernabé, Mr. Gurnee or Mr. Scown (our current directors who are not employees of eLong, Expedia or Tencent, “non-employee 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 non-employee directors incur a termination other than by reason of death, disability or cause, the non-employee directors are entitled to an additional 12 months of vesting on their unvested options. In addition, we have entered into certain related party agreements with our former director, Justin Tang, which are described in “Item 7: Major Shareholders—Related Party Transactions—Agreements with Justin Tang.”

Committees of the Board of Directors

Audit Committee

Thomas Gurnee (who serves as chairman), Fernando Gil de Bernabé and Michael Scown are currently the members 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. Audit committee pre-approval is required for all non-audit services to be performed by our independent auditors. For additional information on our Audit Committee, see “Item 16A: Audit Committee Financial Expert,” and “Item 16C: Principal Accountant Fees and Services.”

Compensation Committee

The compensation committee of our board of directors reviews and makes recommendations to our full board of directors regarding compensation policies and compensation to be provided to our executive officers and directors. In addition, the compensation committee approves bonus and stock compensation arrangements for all of our employees.

Henrik Kjellberg (who serves as chairman), Thomas Gurnee and Jens Parkitny are currently the members of our compensation committee. 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 and for a proper purpose. 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 to our company 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 settled in cash) during 2010 to our current non-employee directors equal to US$0.2 million. Our non-employee directors are reimbursed for travel and related expenses incurred in connection with each board of directors or board committee meeting. We do not compensate directors who are employees of Expedia (or its affiliates) for service on our board of directors or committees of our board of directors. Our CEO, Mr. Guangfu Cui, became a member of our board of directors in February 2011, and his compensation is discussed below under the heading “Compensation Arrangements with Senior Executive Officers.”

Pursuant to our non-employee director compensation policy, a recurring annual grant will be made annually on December 1st to each of our non-employee directors. On December 1, 2010, we granted Fernando Gil de Bernabé, Tom Gurnee and Michael Scown 5,224 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 bonus, (ii) equity compensation in the form of stock options and performance units, and/or (iii) other benefits in the form of vacation days and premiums paid for health insurance.

We paid aggregate cash compensation in 2010 to our current senior executive officers equal to RMB11.4 million (US$1.7 million). In 2010 and 2011, we granted equity compensation in the form of stock options to each of our current senior executive officers. Information on our equity grants to our senior executive officers is contained in the section below entitled “Share Ownership.”

Employment Agreements with Executive Officers

Employment agreement with Guangfu Cui. We entered into an employment agreement with Guangfu Cui, our Chief Executive Officer, effective October 8, 2007. The employment agreement, as amended, provides an annual base salary of RMB1.7 million (US$0.3 million), and an annual discretionary bonus of up to RMB1.9 million (US$0.3 million). Pursuant to the agreement, Mr. Cui was granted 111,112 performance units under our 2004 Plan, 20% of which vest on each of the first, second, third, fourth and fifth year anniversaries of Mr. Cui’s employment start date. In addition, Mr. Cui was granted an option to purchase 111,112 of our ordinary shares, with an exercise price of US$4.50 per share, and the same vesting schedule as the performance units. Mr. Cui also entered into non-competition, non-solicitation, confidential information and work product assignment agreements with us and with our subsidiary eLong Information. The terms of such agreements are set forth below under “Non-Competition Agreements with Our Senior Executive Officers.” For information on subsequent stock option grants made to Mr. Cui in May 2009, March 2010 and December 2010, see the section below entitled “Equity Compensation Plan and Grants.”

Employment agreements with other senior executive officers. We have entered into our standard form English or Chinese language employment agreements with our other senior executive officers. As discussed below, each of the agreements requires that the relevant employee enter into non-competition agreements with us and/or with our subsidiary eLong Information.

In addition to the standard arrangements for our senior executive officers, our agreement with Mike Doyle, as amended, is for a term of four years and two months expiring on May 31, 2013, provides for use of a company van, and contains severance provisions whereby Mr. Doyle will be entitled to a payment of one half of his annual base salary if he is terminated by eLong without cause during the term of his contract, or his annual base salary if such termination occurs within 90 days after the completion of a transaction which results in Expedia (or any affiliate or party acting in concert with Expedia) no longer possessing or otherwise able to direct or control the majority of our voting power.

Non-competition agreements with our senior executive officers. We and/or our subsidiary eLong Information are parties to non-competition agreements with each of our current senior executive officers. These agreements generally provide that during each executive’s employment and for one year after the termination of such executive’s employment, the executive will not compete with us or our subsidiaries or affiliates. The non-competition period of the agreement with Mr. Doyle extends until the earlier of (1) 12 months after the termination of his employment and (2) three years after the effective date of his employment agreement.

Share Ownership

Please refer to “Item 7: Major Shareholders and Related Party Transactions” and to “Equity Compensation Plans and Grants” below for a description of the share ownership of our directors and senior executive officers.

Equity Compensation Plans and Grants

We have adopted three equity compensation plans: the eLong, Inc. Stock Option Plan, adopted in April 2001 (the “2001 Plan”), the eLong, Inc. Stock and Annual Incentive Plan, adopted in July 2004 (the “2004 Plan”), and the eLong, Inc. 2009 Share and Annual Incentive Plan (the “2009 Plan”). Each equity compensation plan is discussed in additional detail below.

2001 Plan

Under the 2001 Plan, we have granted options to purchase our ordinary shares, of which 24,852 options granted to our current employees are outstanding, and have not been exercised, as of May 31, 2011. These options were granted on January 1, 2004, have an exercise price of $1.53 per ordinary share option and expire on December 31, 2013. All options outstanding under the 2001 Plan are fully vested and exercisable. We currently do not intend to issue any additional options under the 2001 Plan.

In addition, Purple Mountain Holding, Ltd. (“Purple Mountain”) and certain former employees hold a total of 161,350 options to purchase our ordinary shares under the 2001 Plan. Purple Mountain holds 156,250 options which were granted to Justin Tang, our former CEO and former Board Member in 2003 and subsequently transferred to Purple Mountain. The options are fully vested, have an exercise price of $1.53 per ordinary share option and, in the case of Purple Mountain, expire on August 10, 2011, which is 60 days after the date on which Mr. Tang ceased to be a member of our Board of Directors. The 5,100 other options held by former employees expire 60 days after the date of each employee’s termination of employment with us.

2004 Plan

We have reserved an aggregate of 4,000,000 of our ordinary shares for issuance under the 2004 Plan. Under the 2004 Plan, we have granted stock options and performance units to our officers, key employees, directors and non-employee consultants, as discussed below.

Stock Options Granted under the 2004 Plan

As of May 31, 2011, 950,864 stock options were granted, outstanding, and have not been exercised under the 2004 Plan. The following table summarizes, as of May 31, 2011, the outstanding options granted under the 2004 Plan to our current employees and directors. Unless otherwise noted below, grants under the 2004 Plan expire ten years after the grant date.

		Ordinary
		shares
		underlying
		outstanding
		options				Exercise Price
Option Holder		granted				(US$)				Date of grant
Thomas Gurnee			30,000	(1)			6.75			November 2, 2004
Guangfu Cui			91,112	(2)			4.50			September 4, 2007
			400,000	(3)			8.82			December 6, 2010
Michael Scown			30,000	(1)			3.935			January 9, 2008
Mike Doyle			125,984	(4)			3.175			May 29, 2009
Other employees			273,768			From 4.95 to 10.46				From July 23, 2004 to April 12, 2011
Total			950,864

In addition, Justin Tang, our former CEO and former Board Member, holds 306,250 options to purchase our ordinary shares under the 2004 Plan. These options were granted to Mr. Tang on July 23, 2004, are fully-vested, have an exercise price of $5.25 per ordinary share option and expire on August 10, 2011, which is 60 days after the date on which Mr. Tang ceased to be a member of our Board of Directors.

Performance Units Granted under the 2004 Plan

Performance units are awards in the form of units that are denominated in a hypothetical equivalent number of our ordinary shares, which number of units are determined based on the fair market value of our ordinary shares which, when vested, are settled, in either ordinary shares or cash. At the time of grant, our board of directors or the compensation committee determines if we will settle the performance units in cash, stock or both. Settlement terms of performance units, once established, may only be changed by approval of our board of directors or the compensation committee. Except for the performance units granted to our non-employee directors which are to be settled in cash (and are not reflected in the table below), performance units granted to our employees are settled in ordinary shares. The performance units granted during 2010 to our non-employee directors are to be settled upon vesting in cash in an amount equal to the number of the vested performance units multiplied by the fair market value of our ordinary shares on the applicable vesting date. The fair market value of the performance units is determined based upon the fair value of the underlying ordinary shares on the date immediately preceding the grant date. Our performance units are subject to service-based vesting where a specific period of continued employment must pass before an award vests. Typically, a portion of the performance units granted vest periodically over the term of the grant. In addition, pursuant to the terms of the 2004 Plan, unless otherwise determined by our board of directors, if, during the one-year period following a change in control, the performance unit holder incurs a termination of employment by us other than by reason of death, disability or cause or the performance unit holder resigns for good reason, such holder shall be entitled as of the termination of employment to an additional 12 months of vesting of the performance unit to the extent unvested as of the termination of employment.

The following table summarizes, as of May 31, 2011, the unvested and outstanding performance units granted to our current employees and directors under the 2004 Plan.

		Ordinary Shares
		underlying
		Outstanding
Performance Unit Holder		Performance Units				Date of grant
Thomas Gurnee			4,612	(1)		December 1, 2008
			5,650	(1)		December 1, 2009
			5,224	(1)		December 1, 2010
Michael Scown			4,612	(1)		December 1, 2008
			5,650	(1)		December 1, 2009
			5,224	(1)		December 1, 2010
Fernando Gil de Bernabé			5,224	(1)		December 1, 2010
Guangfu Cui			44,444	(2)		September 4, 2007
Mike Doyle			78,949	(2)		May 29, 2009
Sami Farhad			44,500	(2)		May 22, 2008
Jason Xie			28,986	(2)		January 9, 2008
Other employees			327,113			from October 2, 2006 to May 9, 2011
Total			560,188

2009 Plan

We have reserved an aggregate of 6,000,000 of our ordinary shares for issuance under the 2009 Plan. The 2009 Plan was adopted by our Board of Directors on May 13, 2009, was amended to allow grants to our Directors and adopted by our shareholders on December 30, 2009, and was amended by our Board of Directors on March 17, 2011 to increase the total number of authorized shares from 3,000,000 to 6,000,000. Under the 2009 Plan, as amended, the Compensation Committee or Board of Directors may grant stock options, share appreciation rights, restricted shares or performance units to our employees, directors, officers or consultants. The terms of the 2009 Plan differ from those of the 2004 Plan in some respects, including but not limited to, the following:

	•		Upon the occurrence of a “change in control,” the 2009 Plan provides for immediate vesting of the then outstanding options or other equity grants under the 2009 Plan to employees with the rank of Vice President or above; and
	•		Within two years following the date of a change of control, if the employment of a recipient of an award under the 2009 Plan is terminated or resigns for “good reason” (as defined under the 2009 Plan), such employee’s options and other equity grants would vest.

Change of control is defined in the 2009 Plan to include (i) the acquisition or control of the majority of our voting power by a person or group other than Barry Diller, Liberty Media, Expedia and their respective affiliates; (ii) announcement by a person of a going private transaction or other transaction which will result in our ordinary shares or ADSs no longer being publicly listed; and (iii) certain other types of business combinations or sales or dispositions of the majority of our assets.

Our board of directors adopted the 2009 Plan on May 13, 2009 and amended the 2009 Plan on March 17, 2011 without seeking prior shareholder approval, as permitted under our articles of association and the law of the Cayman Islands. We have notified the Nasdaq stock market of the Company’s decision to use home country practice with respect to the adoption of employee equity incentive plans such as the 2009 Plan. See “Item 16G: Corporate Governance.” On December 30, 2009, at our annual general meeting of shareholders, our shareholders amended the 2009 Plan to allow grants to members of our Board of Directors and approved the 2009 Plan as so amended.

The specific terms of each grant made to an employee are contained in a stock option agreement which we enter into with the employee. Under the terms of the relevant stock option agreements, the grants we made to our employees on March 9, 2010 and March 7, 2011 do not immediately vest upon the announcement by a person of a going private transaction or other transaction which will result in our ordinary shares or ADSs no longer being publicly listed.

As of May 31, 2011, we had granted 3,984,210 stock options to our current employees which were outstanding and have not been exercised under the 2009 Plan. The following table provides additional information on grants made under the 2009 Plan to our current employees which were outstanding and unexercised as of May 31, 2011. The grants made in 2009 and 2010 under the 2009 Plan vest over three years, with 30% of the option vesting on each of the first and second anniversaries of the grant date, and 40% vesting on the third anniversary of the grant date. The grants made in March 2011 under the 2009 Plan vest over four years, with 25% of the option vesting on each of the first, second, third and fourth anniversaries of the grant date. All grants which have been made under the 2009 Plan expire on the fifth anniversary of the grant date.

		Ordinary Shares
		Underlying Outstanding				Exercise Price
Option Holder		Options Granted				(US$)				Date of grant
Guangfu Cui			83,779				3.175			May 29 2009
			110,000				5.695			March 9, 2010
Mike Doyle			80,000				5.695			March 9, 2010
			288,000				6.815			March 7, 2011
Sami Farhad			47,439				3.175			May 29 2009
			55,000				5.695			March 9, 2010
			120,000				6.815			March 7, 2011
Jason Xie			53,543				3.175			May 29, 2009
			53,000				5.695			March 9, 2010
			130,000				6.815			March 7, 2011
Other employees			2,963,449			3.175 to 6.815				May 29, 2009 to March 7, 2011
Total			3,984,210

In addition, certain former employees hold a total of 73,940 options to purchase our ordinary shares under the 2009 Plan. The options held by each former employee are fully-vested and expire 90 days after the date of such employee’s termination of employment with us.

Options Granted to Expedia Asia Pacific

In August 2004, we granted to Expedia Asia Pacific an option to purchase 711,429 ordinary shares at an exercise price of US$5.25 per share. The option mirrors the terms and conditions of the 1.66 million options granted to certain of our employees and officers on July 23, 2004 under our 2004 Plan. The option becomes exercisable by Expedia Asia Pacific each time any such officer or employee exercises any of such 1.66 million options. In connection with each exercise by an employee or officer, Expedia Asia Pacific is entitled to exercise a portion of its option such that Expedia Asia Pacific would receive (if Expedia Asia Pacific exercises to the fullest extent in connection with such employee or officer exercise) 30% of the aggregate ordinary shares issued to such employee or officer and Expedia Asia Pacific in connection with such employee or officer exercise. To the extent that any such officer’s or employee’s options terminate or expire without being exercised, an amount of Expedia Asia Pacific’s option equal to 30% of (i) such officer’s or employee’s terminated or expired options divided by (ii) 0.70, will likewise terminate or expire. As of May 31, 2011, 575,893 options granted to Expedia Asia Pacific had been exercised, forfeited or expired as a result of the exercise, forfeiture or expiration of the options of the relevant eLong employees. As of May 31, 2011, Expedia Asia Pacific held an option to purchase up to 135,536 ordinary shares, of which 131,250 are exercisable upon the exercise by Justin Tang of 306,250 options granted to him under the 2004 Plan. Mr. Tang’s options are fully-vested and expire on August 10, 2011.

Employees

As of December 31, 2010, we employed approximately 1,860 employees. We believe we have good relationships with our employees, including any represented by works councils or other organizations. The following table sets forth the number of our employees categorized by function as of the dates indicated.

		As of December 31,
		2008				2009				2010
General and administrative			198				176				164
Cost of services			1,030				905				1,024
Sales and marketing			365				248				171
Service development			328				436				501
Total			1,921				1,765				1,860

The data above includes part time workers and student interns, but excludes staffing personnel who are employed by outsourcing firms. In 2010, the number of employees in our general and administrative, sales and marketing decreased as we made efficiency gains and focused our business online. At the same time, our cost of services and service development employees increased as our business volumes and technology investments grew. A substantial majority of our employees are based at our headquarters office in Beijing, China.

Item 7:		Major Shareholders and Related Party Transactions

Major Shareholders

Our shareholding structure consists of ordinary shares, each of which is entitled to one vote, and high-vote ordinary shares, each of which is entitled to fifteen votes. Our high-vote ordinary shares and our ordinary shares vote together as a single class on all matters submitted to a shareholder vote, including the election of the members of our board of directors. Unless otherwise noted, the information below with respect to our major shareholders is as of May 31, 2011.

As of May 31, 2011, 33,982,882 of our ordinary shares and 33,589,204 of our high-vote ordinary shares were outstanding, excluding shares issuable upon exercise of outstanding options and shares issuable upon the settlement of performance units. On that date, a total of 9,890,307 of our ADSs (equivalent to 19,780,614 of our ordinary shares) were outstanding. We are not aware of any arrangement that may, at a subsequent date, result in a change in control of our company.

Expedia, through Expedia Asia Pacific, is the beneficial owner of 28,550,704 of our high-vote ordinary shares and 8,952,839 of our ordinary shares, together representing approximately 55.7% of our total outstanding shares (including both ordinary shares and high-vote ordinary shares). As a result of the shareholding of Expedia Asia Pacific, Expedia controls approximately 81% of the voting power of all outstanding shares of our stock. Accordingly, Expedia generally is able to exercise control over all matters requiring approval by our board of directors or our shareholders.

Tencent, through TCH Sapphire, is the beneficial owner of 5,038,500 of our high-vote ordinary shares and 6,031,500 of our ordinary shares, together representing approximately 16.4% of our total outstanding shares (including both ordinary shares and high-vote ordinary shares). As a result of the shareholding of TCH Sapphire, Tencent controls approximately 15.2% of the voting power of all outstanding shares of our voting stock.

Oak Pacific Interactive (“OPI”), a Cayman Islands corporation, stated in a Schedule 13D (Amendment No. 4) filed with the SEC on June 24, 2009, that OPI had purchased an aggregate of 6,257,382 of our ordinary shares for an aggregate purchase price of approximately US$21.4 million. Based on this filing, we understand that OPI holds approximately 18.4% of our ordinary shares, representing 9.3% of our total outstanding shares (including both ordinary shares and high-vote ordinary shares), and approximately 1.2% of our total voting power.

Lawrence Auriana stated in a Schedule 13G, filed with the SEC on February 14, 2011, that Mr. Auriana was the beneficial owner of 2,911,111 of our ordinary shares. Based on this filing, we understand that Mr. Auriana holds approximately 8.6% of our ordinary shares, representing 4.3% of our outstanding shares (including both ordinary shares and high-vote ordinary shares), and less than 1% of our total voting power.

T. Rowe Price Associates, Inc. (“T. Rowe Price”), stated in a Schedule 13G (Amendment No. 3) filed with the SEC on March 10, 2011, that it was the beneficial owner of 953,900 of our ordinary shares. Based on this filing, we understand that T. Rowe Price holds approximately 2.8% of our ordinary shares, 1.4% of our outstanding shares (including both ordinary shares and high-vote ordinary shares) and less than 1% of our total voting power.

The following tables set forth information with respect to beneficial ownership, within the meaning of Rule 13d-3 under the U.S. Securities Exchange Act of 1934, of our ordinary shares and high-vote ordinary shares by each person known to us who beneficially owns more than 5% of our ordinary shares. As of May 31, 2011, taking into account stock options and performance units which will vest within 60 days, none of our current senior executive officers or directors owns more than 1% of our ordinary shares.

		High-vote Ordinary Shares Beneficially Owned
		Amount				%
Principal Shareholders
Expedia Asia Pacific			28,550,704				85.0	%
TCH Sapphire			5,038,500				15.0	%

		Ordinary Shares Beneficially Owned(1)
		Amount				%
Principal Shareholders
Expedia Asia Pacific			8,952,839				26.3	%
Oak Pacific Interactive(2)			6,257,382				18.4	%
TCH Sapphire Limited			6,031,500				17.8	%
Lawrence Auriana(3)*			2,911,111				8.6	%

Related Party Transactions

We have entered into a number of related-party agreements, with Expedia (and its affiliates) and Tencent (and its affiliates), as well as with our former CEO and former Board Member, Justin Tang and an entity he controls, Purple Mountain Holding, Ltd. Each of these related party agreements has been approved by the Audit Committee of our Board of Directors.

Share Issuance and Sale to TCH Sapphire and Expedia Asia Pacific. On May 16, 2011, the Company issued 5,038,500 high-vote ordinary shares and 6,031,500 ordinary shares to TCH Sapphire, a subsidiary of Tencent, for a total purchase price of US$84,389,378. On the same date, the Company issued 5,400,500 ordinary shares to Expedia Asia Pacific for a total purchase price of US$41,169,361. The purchase price was calculated based on one-half of the average closing price of our ADSs on the Nasdaq Global Market during the 20 trading day period immediate preceding the date of these transactions. In addition to entering into separate Share Purchase Agreements with Expedia Asia Pacific and TCH Sapphire, the Company, Expedia Asia Pacific and TCH Sapphire also entered into an Investor Rights Agreement.

Pursuant to the Investor Rights Agreement, TCH Sapphire has the right to nominate one member of our Board of Directors, and Expedia Asia Pacific has agreed to vote in favor of such nominee for so long as TCH Sapphire continues to hold not less than 10% of our outstanding shares, subject to certain exceptions. The Investor Rights Agreement also sets forth certain other rights and obligations, including:

•

a three-year lock up period for the newly-issued shares acquired by TCH Sapphire (the “Tencent Shares”), other than certain permitted transfers by TCH Sapphire to its affiliates;

•

a right of first offer in favor of Expedia Asia Pacific for transfers by TCH Sapphire of the Tencent Shares;

•

the redesignation of the TCH Sapphire high-vote ordinary shares as ordinary shares prior to any transfer to a third party;

•

restrictions on transfers of the Tencent Shares to certain parties deemed to be competitors of eLong;

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preemptive rights in favor Expedia Asia Pacific and TCH Sapphire with respect to future issuances of equity; and

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consent rights in favor of TCH Sapphire with respect to actions by eLong to alter the rights of the ordinary or high-vote shares in a manner adverse to TCH Sapphire or to dissolve, liquidate or windup the company.

Each of these rights and obligations is subject to certain exceptions.