Ladies and gentlemen, thank you for standing by and welcome to Expedia, Inc., second quarter 2006 conference call. (Operator Instructions) I would now like to turn the conference over to Stu Hass, Vice President of Investor Relations. Please go ahead, sir.

Good morning, and welcome to Expedia, Inc.'s financial results conference call for the second quarter ended June 30, 2006. Joining me on today’s call are Barry Diller, Expedia’s Chairman and Senior Executive; Dara Khosrowshahi, our CEO; and, Michael Adler, our CFO. The following discussion and responses to your questions reflects management views as of today, August 10, 2006 only. As always, some of the statements made on today’s call are forward-looking, including our comments on financial expectations, our operational performance and margins, planned investments and spending, platform improvements, systems upgrades, growth of business lines, financial performance and dilution. Actual results may differ materially. We do not undertake any obligation to update or revise this information to reflect future events or circumstances. Please refer to today’s press release and the Company’s filings with the SEC, including our Form 10-K for the year ended December 31, 2005, for additional information about factors that could potentially affect our financial and operational results. During this call, we will discuss certain non-GAAP financial measures, including OIBA, free cash flow, adjusted net income and adjusted EPS. In our press release, which is posted on the company's IR website at expediainc.com/ir, you will find additional disclosures regarding these non-GAAP measures, including reconciliations of these measures with the most comparable GAAP measures. We encourage you to review the section entitled “Basis of Presentation” in today’s earnings release for more details on how we are presenting results for some periods. Finally, unless otherwise stated, all comparisons in this call will be against our result for the comparable period of 2005. With that, let me turn the call over to Dara.

Thanks, Stu, and thank you to everyone for making time to join us on the call today. I am going to spend my time with some high level comments on the quarter, update you on some longer-term strategic developments and close with some recent innovation wins across our brand portfolio. Then, I will turn the call over to Mike Adler for a deeper discussion on our financials. Mike joined Expedia as CFO in May after many successful years at IAC as SVP on my finance team, and I am very happy to have him on board making an immediate contribution. We are certainly pleased with the progress we made this quarter as we delivered solid financial results. Our gross bookings of $4.6 billion were up 10% against last year, revenue of $598 million was up 8% and operating income before amortization grew 6% to $184 million. A real bright spot was our merchant hotel revenue growth of 17%, the highest growth rate we have seen since Q4 of 2004. We are especially pleased that we could deliver this OIBA growth in light of the significant investments we are making in our technology infrastructure and the costs of being a newly independent public company. Profit across our points of sale improved with great performance from Hotels.com which continued its acceleration, with worldwide gross bookings growth of 25% and much better bottom-line growth. Our European operations continue to execute and grow profitably and we are very pleased with the development of ECT which had a second $250 million plus gross bookings quarter at near breakeven and in our Asia Pacific operations with eLong closing its first profitable quarter. Our Q2 bookings growth, which was down against Q1, was affected by lower merchant air gross bookings particularly at Hotwire and some impact from…

Good morning. You heard from Dara and Mike about the details of the quarter, much better than the disappointments, but nevertheless, projecting negative growth for the year isn't anything to celebrate. Since you've also heard about the investments and progress we've been making, all geared toward reversing this year's tough results, I'd like to talk to you about the state of Expedia. What kind of company have we become? More pointedly, are we now a growth company or a value company? We've got lots of competitors, Expedia is a big enterprise, nearly twice the level of gross bookings a our nearest online competitor. And while our somber expectations for 2006 overall don't scream growth, there are significant parts of our business in high growth mode: our Hotels.com business continues its rebirth. Everyone thought had lost purpose along with the cheap hotel rooms of a few years ago. This includes the blossoming international business with an extremely modest cost base. Gross bookings growth in excess of 70%. Our corporate business, ECT given up for dead by some, but not by us, posted another near 50% growth rate quarter and our fledgling Asia Pacific business, the initial outpost in China and Australia also enjoyed healthy growth with a new sibling to come in short order in Japan. What do these seemingly disparate growth businesses have in common? They're all leveraging the technology and a brand base that has them at or close to breakeven. The giant machine no one else even comes close to being able to leverage as we are beginning to do. So growth ought to be in our stars. The truth is, I believe, we can be both a growth and a value company. That's what all this churn inside this Company and what all this investment is about.…

Okay, thanks Barry. Let's move on to the Q&A portion of the call with Barry, Dara, and Mike. As a reminder, please limit yourself to one or two questions so we can fit more questioners into the call today. Operator, will you please remind our listeners how to ask a question?

(Operator Instructions) Our first question comes from Imran Khan - JP Morgan.

Congratulations, good quarter. A couple of questions. Number one, last quarter you talked about the conversion rate decline and I was wondering if you can give us more color how the conversion rate was this quarter overall and maybe through different channels? Secondly, corporate travel had a very strong quarter, continued to have a strong quarter and I think you opened up a new office in Germany as well. I was try to get a sense, if I look at the customer base in the corporate travel and the revenue base, what percentage is coming from international versus U.S.? That's it, thanks.

Sure, Imran. On the conversion rate, in general, this quarter, the year-over-year conversion rate for Expedia and Hotels.com was flat. So it didn't go up or down significantly, Hotels.com was able to drive unique users and audience growth pretty effectively and with flat conversions, that translated into the good transaction growth, translated into good gross bookings growth and very, very good performance this quarter. Hotwire conversion I think was down a bit in air and I think they did a good job of conversion on the hotel side. But as Hotwire gets less availability to great air inventory, that becomes a less attractive product for consumers and they've been doing a great job changing their mix over from air to hotel products. I think on the corporate travel business, the international side of the business is performing very well. It is less than 50% of our gross bookings, but tends to have a higher percentage of revenue as a percentage of gross bookings. The international business and the domestic business at this point are slightly profitable or close to breakeven and we think Germany is obviously a big, attractive market. We've had some success there with Expedia.com and Hotels.com. Although it's certainly not an easy market to get into, but we think it's a very important market to have a presence in and we're committed to investing in that market.

Thank you, Dara.

Your next question comes from Chris Gutek - Morgan Stanley.

Thanks. A couple quick questions. First, big picture question on the economic model. Assuming the economy stays reasonably healthy and load factors and occupancy rates stay reasonably high, I'm curious if you guys have considered any meaningful change on the economic model, either to take on more risk with inventory and/or accepting lower margins or less attractive cash flow characteristics to free up some inventory and improve the growth rate?

As far as the economic model goes, I think that if we just execute better as far as our relationships with our supply partners, I think that we can just get better access to inventory. One of the particular changes in our economic model that we have made is that whereas we used to essentially have a flat rate at all times, we have signed, call it more sophisticated deals with certain suppliers where our take changes based on the needs of those specific suppliers. Is it a weekend day when you are getting a booking, a hotel booking, or is it a weekday, when do you need the traffic? or are you flying, call it from a home airport or are we giving you a connecting flight? So based on the kind of value that we are delivering to our supply partners, our economics may change. We found that kind of an economic change is something that our supply partners like and it will allow us then to turn around and eventually take more attractive travelers and deliver them to the supply partners who most want those travelers at that time. It lets us yield our demand coming in. That's been our first step, and we think it's a good step and we're certainly going to continue with that. As far as risk goes, we have not taken any significant amount of risk. It is something that we will probably test. To the extent that we test it, it will probably be in Europe having to do with the summer sun destinations at peak times there. We're going to be very, very careful in anything that we do and the benefit of this business is that you can test in limited markets, see what works, and then try to scale it. We do have some folks on the European team now who have had a significant amount of experience with this kind of activity and the most important part of taking on a new activity is to get great, smart people who have prior experience and then start working on them in a small way and then hopefully scale it. I will probably have more to tell you about this next year. As is, we're going to be careful and not take too much risk in that effort.

As a quick follow-up on the theme of economic model shifting here with the GDS opt-in programs, including Sabre's efficient access solution, you guys have said that you're supportive of this efficient access solution. Could you elaborate, certainly for mom and pop travel agencies, they would need to opt into these programs. But for a big agency like Expedia, it's not clear that you would need to do that. When you say supportive, what exactly does that mean and could you talk a little bit about the economics?

Well, we don't want to talk about specific economics that we have with supply partners or our GDSs, so I'm not going to talk about the particular economics. Our strategy in general as it relates to connectivity is one of flexibility. So we've made real technology investments and our tech teams have done a great job of getting us connectivity to three GDS providers; frankly, all of whom are offering different kinds of solutions to us. Both economic solutions and content solutions that we can either elect into or not. At the same time, we are also talking with our airline partners and in some cases, we're doing deals directly with them. We've always had economic relationships with our airline partners, but we are being much more flexible as to how we do business with them as well. So you put that all together and I would say two, three years from now, each and every deal that we have with our supply partners is going to be unique and different based on their needs, based on our needs and in particular as far as Sabre's EAS solution goes, we looked at it, we think it's a good approach for the industry as a whole, both for large and small travel agencies. We are sending segments over to Sabre as we speak and we expect to do business with them because we think they've taken a pretty good approach.

Thanks, Dara. You bet.

Our next question comes from Paul Keung - CIBC World Markets.

Good morning. You mentioned earlier in the call that you are shifting some marketing spend from the second or third quarter in Europe. I guess in spite of today's news, as things in Europe start to slow a bit, do you still have the ability to slow that marketing spend in Europe, or have you committed a lot of money already?

Paul, we're pretty careful about our marketing spend and in Europe, we have a very, very disciplined team there. A fair amount of the marketing spend is online partner-type marketing spend, which is variable in nature. So to the extent that we spend it and the returns are not there, we can act very, very quickly and I'd say that's the majority of the day-to-day spend that we spend in Europe. We do have some offline spend, TV spend, radio spend, and outdoor spend in various points of sales in Europe. So far -- again, taking the travel disturbances of last night --so far, we've been pleased with the results, but that doesn't speak to how the results are going to be going forward. So while we're being careful not to commit huge loads of marketing spend, but obviously if there's some kind of a disruption, we may suffer one way or the other. Right now, it's too soon to tell and we'll have more obviously as the weeks and the months go on. But we're pretty confident in our overall approach there.

The second question had to do with you mentioned senior notes offering today and a larger buyback. Do you think the covenants of the new -- I noticed a lot of buybacks with those proceeds, and I guess from a strategic level or a financial level, how do you feel about buying back stock with debt?

Sorry, but due to SEC regulations, we can't comment on that right now, but we can refer you to the 8-K that we filed this morning. Mike Adler: We're not trying to be cute, Paul, we just can't talk about it.

I understand, I should have thought about that it. I'll throw another question here then. Priceline reported earlier this week, I think you can see they've continued to put some good numbers in that second, third tier non-air market, and doing it essentially with partners. When I look at your European operations from your content, it is probably one area you are relatively underinvested in. Do you have any plans to address this hole in your distribution of content today?

I think the way that we're approaching those markets is with Hotels.com first. So our having multiple brands in Europe is a real advantage for us. So Expedia tends to be a brand that is more associated with major airline/airlift so to speak and going into primary and secondary markets. But we can kind of get to those secondary and tertiary markets very quickly with Hotels.com, we're more focused on those markets I'd say now, than we have been in the past. I think you'll see increasing focus on those markets going forward with Hotels.com. We then come in with Expedia sometimes to the extent that we can get airlift, and Expedia is also working pretty well in gaining airlift to second tier carriers in Europe as well. So we'll come in with Hotels and we'll follow-up with Expedia and we'll make the adequate investments there.

Great, thanks a lot.

Next question comes from Aaron Kessler - Piper Jaffray.

Great, thank you. A couple of questions. First, the international growth, it did slow and I think partly because of the reduced marketing, but also it looks like it's slower than the competitors. One of them said they benefited from the World Cup. I want to see why you didn't benefit. Maybe it was the airlines bookings that were reduced. Secondly, can you give us an update maybe where you're at in terms of the Japan expansion? Thanks.

Sure. As far as the international markets in Europe in particular, we were affected by World Cup. As to the specific effect, part of it depends on, I'd say the concentration in various marketplaces that we have versus one of our competitors. So, for example, in the German marketplaces, Germans weren't traveling a whole lot with World Cup, but bookings going into Germany and certainly hotel bookings going into Germany benefited. It's hard to tell because different competitor have different mixes and that certainly affected the growth rates. Also, if you take a look at the dollar growth, we're obviously growing off of a much larger base and would say that probably in Europe if you compare us for example, to Priceline, we have a much larger air segment in our business and the air segment in our business is not growing nearly as quickly as the hotel segment, so there's an additional kind of mix issue there.

The increase in the raw margins, was that due to the change in the mix from airlines to hotels as well?

That was largely responsible for it. That's exactly right. As far as Japan goes, we are working hard and our target launch date is towards the end of this year. So we've got a team in place, the management team is in place in Japan. We have a great APAC operation that has really executed very well in Australia and we're confident that we'll have a hotel-only site up in Japan later this year and we're confident that we'll grow it maybe slowly at first off of a small base, but certainly surely because we've done a pretty good job of being able to organically grow in these kinds of markets.

What is the competitive market like today in Japan?

Japan is a very different marketplace. It is dominated by very large package operators, the Japanese Tourist Board being the largest out there. Online penetration, it's actually very difficult to get data about the Japanese marketplace. Rakitan obviously is a big player in the online travel space there and it's a very different market than the markets that we see in the U.S., but our approach works pretty well in that the technology is essentially already paid for. The Asia Pacific marketing team can work on variable marketing, online marketing so that we don't have to put out a bunch of brand marketing out there. The number of people that we actually have to have on the ground is pretty modest. So if we pay for translation, work on the site itself, we've got the supply, so we're able to get in with pretty modest costs and then we'll start spending variable marketing, we'll see what the returns are and we'll go from there.

Great, thank you.

You bet.

Our next question comes form Marianne Wolk - Susquehanna.

Thanks. I had a couple of quick questions. First of all, can you give us a sense of the percentage of your mix now overseas coming from merchant bookings and to what extent it lags U.S. rates? The second question I have was whether or not you could provide some more clarity on the deals you struck with US Airways and the other airlines, how many deals have you struck? How do those economics work relative to the existing plans that you have?

Now, what do you mean by merchant bookings in Europe, can you elaborate on what you're looking for?

Yes. Internationally, Merchant bookings are 40% worldwide, what does that rate look like overseas?

I see. Do we have that number, guys? Mike Adler: We haven't discussed that publicly, Marianne, at this time.

Okay, so, Marianne, that's a no. Sorry.

How about the other question about the clarity on the US Airways deal and just in general, the kinds of deals you're striking with the airlines directly?

Again, I'm very hesitant to discuss specific deals with airlines. What we love about the U.S. Air deal is that it's a five-year deal, it's a long-term deal similar to the deal, for example, that we struck with Continental and it has certain variable characteristics in it. So that to the extent that we are helping out U.S. Air, what they pay us perhaps goes up and to the extent that we're getting them traffic where they don't need a lot of help, payments perhaps go down. That's the general idea of the variable structures that we have in place. But again, I don't want to get specific into US Air or Continental or some of the others that we have struck.

A final question then. Does the aggressive buyback say anything about your ability to find attractive M&A targets?

When we look at an M&A target, we take a look at that target and we say, well, how does that compare to our being able to allocate capital internally? Now, the benefit of an M&A target is that you're typically able to get some cost synergies out of it. The detriment of an M&A target is that it comes with real risks and it comes with real integration pain that I think you've seen in some of our competition as well. So I think that right now based on all of the activity that we have internal to the Company and we are undertaking a number of initiatives out there, and based on the relative value of our own equity, which we consider pretty attractive, we've decided to allocate capital internally. You can tell that we are being prudent, we are not spending all of our money, so to speak, and I think that the plan going forward is one of prudence and I would say opportunism based on what we see out there. Barry, I don't know if you want to add anything to that.

Well, I would just add that, you never know what opportunities are around the corner. Having the amount of cash that we have and resources to cash is a good, solid thing for us, particularly long-term. Certainly we're always in one or two acquisition, I wouldn't call them formal discussions or anything like that, but we always have something on the horizon. We’ll only act if we think that again there is opportunity there and not only worth it, but one that we can handle.

Thanks. Marianne, this is Stu. While we're not going to break out those specific numbers, I can tell you that the percentage mix for merchant hotel domestic/international is not greatly a different. Operator, can we take the next question.

Next question comes from Robert Peck - Bear Stearns.

Hey, guys, just two quick questions. One, Dara, could you update us on the rewards program, what the status of that is, maybe try to give us a little bit of color exactly how that will look? Two, on the ETC side, can you talk about the number of clients you have right now and what percent are in the Fortune 1000? Thanks.

Sure. On the loyalty program, we are hard at work developing the technology and are on track to launch it later this year, although I think that it is going to be a soft launch. Again, we are going to be in test and learn mode. We'll do a soft launch. Obviously you launch a loyalty program in order to effect traveler behavior and part of it is to increase the loyalty of our travelers as far as having them come back. Part of that may be to get them to transact more frequently with us, and part of it may be to shift the kind of transactions that they transact with us from, call it lower-margin product to higher-margin product. That's the goal of the loyalty program and we believe that during the soft launch, testing and learning will then enable us to go wide, much, much more effectively and get the kind of return that we want out of this kind of loyalty program. The ECT, I don't have the ECT numbers, guys, do you--.

For ECT, the clients are approximately 3,000 and Fortune 1000 is less than 20%, 10% to 20%.

I think historically, the sweet spot for ECT has been, call it the mid-sized corporation. But as we have built up the tool base at ECT and increased the feature sets that we have and also now introduced a real business intelligence function, which is automated great, great reporting capabilities that are totally automated; and a business intelligence function we will be adding to, we think that we become a whole lot more attractive to larger clients. So I think on a go-forward basis, I'm hoping that you'll see more of a mix of larger travel clients as well although we will always get our share of small, medium enterprises because of the combination of great technology and costs that we have out there. What I'm really happy to report on ECT is that the metrics as far as our customer service metrics are radically improved, they are excellent. We are holding ourselves to a bar that I think is above the bar than a lot of other corporate travel providers and we are hitting those bars and I'm just ecstatic about the service levels. It can always get better, but we've done a lot better.

A quick follow-up if I might, On the loyalty program, it seems like there's several different aspects to it. Is one aspect of it anything like an Expedia points, where it would be transferable against various suppliers?

I don't want to go into detail there, I'm sorry.

Also, I'd like to clarify my response to the question on the ETC clients and the Fortune 1000 the number is 20 in the Fortune 500.

Our next question comes from Mark Mahaney - Citigroup.

Two questions. First, Michael, just to get very specific about your September quarter revenue guidance, are you saying that we should expect revenue to decline sequentially given the Easter bump in June 2, and given the cutback in marketing spend in the June quarter? Mike Adler: No, I didn't. First of all, we don't give quarterly revenue expectations, but typically we do expect Q3 revenue to exceed Q2 revenue and I don't think there's anything different.

Great. Then just to follow-up on one of the earlier questions about the loyalty program, a soft launch: does that mean just in the U.S. and the idea would be to roll that out internationally in '07? Or would it be a soft launch worldwide and whatever that would mean? Thank you. Mike Adler: It will be a U.S. launch. We don't have plans yet as far as what we do worldwide. So right now it's a U.S. initiative.

One final question. Is there a way that you would quantify the GDS impact or how much revenue OIBA could be at risk with the GDS negotiations going on, or maybe answer the question by talking about the extent of the contribution to OIBA you've had in the past from GDS incentive fees?

We don't want to talk about the specifics regarding GDS incentives. I think that Travelocity in their call said that the Q2 revenues were $28 million or so from GDS incentives. Is that right, Stu?

I think it's 16% in North American revenues.

So you can assume that the dollar amount that we make is higher, so the 16% is $28 million, the dollar amount that we have at Expedia is higher than the $28 million, but the percentage of our total revenue is lower than Travelocity's because obviously we do a whole lot more hotel business than they do. Is that clear, Mark? So the dollar number is bigger than Travelocity's, the percentage would be lower. So that's all we'll say.

That's clear, thank you very much.

You bet.

Your next question comes from Doug Anmuth - Lehman Brothers.

I wanted to ask about your packaging business. It looks like it's held actually over the last few years in the low 20s as a percentage of revenue. Looks like it's a pretty important piece of the story in the back half of this year. I'm just curious what initiatives you're taking, what else you can do to improve the packaging business or if it's strictly just pretty much based on price right now in the market. Thanks.

Well, Doug, I think one of the issues on packaging is that the relative attractiveness of packaged products increases to the extent that we're able to secure bulk fares from our airline partners. As load factors have increased in the industry, especially as you get into summer travel, the percentage of bulk fares that we get from our airline partners decreases, which then make the discounts that we can offer for our packaged products relative to let’s say if you bought the components separately, it reduces those discounts. So packages as an overall choice for consumers, becomes relatively less attractive. That's just a fact of life, I think you heard it with some of our competitors as well. Which is, if there are less bulk fares packages again become a bit less attractive. That said, we are very actively look at how we can push package revenue growth and I do think that we are going to be more aggressive going forward on promoting our packages and also pricing our packages as well, because we think it's a terrific product and we think it's a good traveler kind of experience and it's something that we do want to get in front of our travelers.

Great, thank you.

Your next question comes from Justin Post - Merrill Lynch.

Thank you. Dara, it looks like 2Q may have beat your expectations coming out of 1Q, but your year is unchanged. Were you able to step up your investments in the second half on the back of some pretty good 2Q results?

Justin, we try not to run the business on a quarterly basis. So we're happy with Q2 results. They certainly beat Street expectations. Q2 came in stronger than we expected as well. We're certainly happy with those results. As far as, has it changed the way that we invest? I don't think so. We knew that going into this year was going to be a heavy investment year and the investments that we are making tend to be multi-quarter investments and in some cases, even multi-year investments. One good quarter isn't really going to help you speed one up or slow one down.

On the gross margin, the results look pretty good to us. Was that due to the mix, or were you seeing real cost improvements already in that line?

I would say primarily, it is mix at this time. We do expect to see improvements start to filter into the business by Q4 and then more impactfully next year.

Last question, on the advertising revenues, I believe Dara at a conference you might have said that advertising was up to 5% of revenues. If you want to just update us on that, I know some of that is inter-company, but with the TripAdvisor traffic looking really good, could you talk about what the contribution is and how that's affecting net revenue rates?

TripAdvisor revenue growth continues to grow with the traffic growth as well so we're very, very happy about that. But to some extent the growth that you see in that revenue is also eliminated inside our numbers as well. So if you look at advertising as a percentage of our overall revenue, I do think that going forward it will be a higher percentage of our revenue over some long-term period. And obviously that will be a help as far as our raw margins go. I think that was the question you were asking, Justin, is that right?

Yes. Did it have a material affect net of elimination on raw margins? Or was it still pretty small at this point?

It did not have a material impact on our revenue margins.

Great, thank you. That answers the question.

We have time for one final question and our final question comes from Heath Terry - Credit Suisse.

Great, thank you. When you look at your international revenue growth that you saw this quarter, is there a way that you can give us an idea of whether there was any significant change in the breakdown? What percentage of that originated or was purchased in the U.S. versus Europe to help give us an idea of the impact of World Cup?

When we give you international revenue, that's revenue that's originating from Europe. Mike Adler: Point of sale.

Yes. So it's based on the point of sale. It's not based on what we call point of supply. So it would be affected by the World Cup. It is very, very difficult to truly identify the World Cup event, but we would guess that it's under $20 million in gross bookings.

Great. Thank you, that's very helpful.

Thank you. At this time, I'll turn it back to Stu Haas for closing comments.

Thank you for joining us on the call today and for your questions. A replay will be available on the Investor Relations website shortly after the completion of this call. We appreciate your interest in Expedia Inc. and look forward to speaking with you again next quarter. Thanks for your time.

Thank you.

Thank you, ladies and gentlemen. That concludes the Expedia second quarter 2006 conference call. We thank you again and at this time you may disconnect.