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1. September 30, 2003 amounts include the consolidation of ExpressJet Holdings, Inc. while September 30, 2004 and December 31, 2003 amounts do not. See Note 6 for further discussion.

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

In our opinion, the unaudited consolidated financial statements included herein contain all adjustments necessary to present fairly our financial position, results of operations and cash flows for the periods indicated. Such adjustments, other than nonrecurring adjustments that have been separately disclosed, are of a normal, recurring nature. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2003 (the "2003 10-K"). As used in these Notes to Consolidated Financial Statements, the terms "Continental", "we", "us", "our" and similar terms refer to Continental Airlines, Inc. and, unless the context indicates otherwise, its consolidated subsidiaries. ExpressJet Holdings, Inc. ("Holdings") is accounted for as an equity investment in our September 30, 2004 and December 31, 2003 balance sheets and statements of operations for the th ree and nine months ended September 30, 2004, and was consolidated in our financial statements prior to November 12, 2003 (see Note 6). We directly own a 30.8% interest in Holdings as of September 30, 2004. Holdings wholly owns ExpressJet Airlines, Inc. ("ExpressJet"), which operates regional jets. We purchase all the seat capacity of ExpressJet. See Note 6 for further discussion.

Certain reclassifications have been made in the prior period's financial statements to conform to the current year presentation.

The following table sets forth the computation of basic and diluted earnings per share for the period presented in which we reported net income (in millions):

Weighted average options to purchase approximately 6.2 million, 6.7 million, 6.3 million and 6.8 million shares of our Class B common stock were not included in the computation of diluted earnings (loss) per share for the three months ended September 30, 2004 and 2003 and the nine months ended September 30, 2004 and 2003, respectively, because the options' exercise prices were greater than the average market price of the common shares or the effect of including the options would have been antidilutive. Because we recorded net losses during the three and nine months ended September 30, 2004 and the nine months ended September 30, 2003, our Convertible Junior Subordinated Debentures Held by Subsidiary Trust and 4.5% Convertible Notes were also antidilutive. As a result, there was no difference between basic loss per share for the three and nine months ended September 30, 2004 and the nine months ended September 30, 2003 on the one hand, and diluted loss per share for the same periods, on the other han d.

On September 30, 2004, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 04-08, "The Effect of Contingently Convertible Debt on Diluted Earnings per Share," which changes the treatment of contingently convertible debt instruments in the calculation of diluted earnings per share. Contingently convertible debt instruments are financial instruments that include a contingent feature, such as a feature by which the debt becomes convertible into common shares of the issuer if the issuer's common stock price has exceeded a predetermined threshold for a specified time period. Prior to the new consensus, most issuers, including us, excluded the potential dilutive effect of the conversion feature from diluted earnings per share until the contingency threshold is met. EITF Issue No. 04-08 provides that these debt instruments should be included in the earnings per share computation (if dilutive) regardless of whether the contingent feature has been met. This change does not have any eff ect on net income (loss), but it will affect the related per share amounts. The new rules will be effective for reporting periods ending after December 15, 2004.

We will adopt EITF Issue No. 04-08 as of December 31, 2004 and will restate the computations of earnings (loss) per share for prior periods. We will include (if dilutive) the assumed conversion of our 5% Convertible Notes issued in June 2003 in our diluted earnings per share calculations. This will increase the denominator in our diluted earnings per share calculations by approximately 8.7 million shares, resulting in lower diluted earnings per share in periods in which we report net income. Additionally, we will adjust net income (loss) in our diluted earnings per share calculations to reflect the reduction of our proportionate equity in Holdings resulting from the assumed conversion of Holdings' contingently convertible debt securities. We expect this change to have an immaterial impact on our diluted earnings (loss) per share calculations.

We account for our stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". No stock-based employee compensation cost for our stock option plans is reflected in our consolidated statement of operations, as all options granted under our plans have an exercise price equal to the market value of the underlying common stock on the date of grant.

The following table illustrates the pro forma effect on net income (loss) and earnings (loss) per share if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards ("SFAS") 123, "Accounting for Stock-based Compensation" (in millions except per share amounts):

At September 30, 2004, our derivative financial instruments which qualified for hedge accounting consisted of petroleum call options contracts to provide short-term protection against a sharp increase in jet fuel prices and option and forward contracts to hedge foreign currency-denominated net cash flows.

As shown in the following table, our operating aircraft fleet consisted of 352 mainline jets and 240 regional jets at September 30, 2004, excluding aircraft out of service. The regional jets are leased by ExpressJet from us and are operated by ExpressJet. Our and ExpressJet's purchase commitments (firm orders) for aircraft, as well as options to purchase additional aircraft as of September 30, 2004 are also shown below.

As of September 30, 2004, we had 11 owned and 13 leased MD-80 aircraft and one leased DC-10-30 aircraft out of service.

The 11 owned out-of-service MD-80 aircraft are being carried at an aggregate fair value of $22 million, and the remaining rentals and obligations for return conditions on the 14 leased aircraft have been accrued. As of September 30, 2004, we subleased the one DC-10-30 aircraft and one leased MD-80 aircraft to third parties.

Additionally, we have 12 Embraer 120 turboprop aircraft and 13 ATR 42 turboprop aircraft out of service. We lease 17 and own eight of these aircraft. The eight owned aircraft are being carried at an aggregate fair value of $11 million, and the remaining rentals and obligations for return conditions on those leased aircraft accounted for as operating leases have been accrued. We currently sublease seven of the leased out-of-service turboprop aircraft to third parties.

We are currently exploring lease or sale opportunities for the remaining out-of-service owned aircraft and sublease opportunities for the out-of-service leased aircraft that do not have near-term lease expirations. The timing of the disposition of these aircraft will depend upon the stabilization of the economic environment in the airline industry as well as our ability to find purchasers, lessees or sublessees for the aircraft. We cannot predict when or if such stabilization will occur or if purchasers, lessees or sublessees can be found, and it is possible that our assets (including aircraft currently in service) could suffer additional impairment.

During the first nine months of 2004, we removed from service one leased 737-300 aircraft in conjunction with its lease expiration, four owned MD-80 aircraft and 12 leased MD-80 aircraft with leases expiring between 2004 and 2007. We recorded charges of $70 million associated with future obligations for rent and return conditions, net of estimated sublease income, on the 12 leased MD-80 aircraft. Three of these removals occurred in the third quarter, resulting in a charge of $21 million. Continuing with our previously announced plans to remove all remaining MD-80 aircraft from service over the next three months, we will record a charge of approximately $17 million in the fourth quarter of 2004 as the five remaining leased MD-80 aircraft exit revenue service and are permanently grounded.

Also during the first nine months of 2004, we took delivery of five 757-300 aircraft and nine 737-800 aircraft, of which three 737-800s were delivered in the third quarter. As of September 30, 2004, we had firm purchase commitments for 49 aircraft from Boeing, with an estimated cost of approximately $1.9 billion, and options to purchase an additional 84 Boeing aircraft. We currently expect to take delivery of two 737-800 aircraft during the final three months of 2004, seven Boeing aircraft in the second half of 2005 and none in 2006 and 2007. Delivery of the remaining 40 firm order aircraft is expected to occur in 2008 and 2009.

We currently have agreements for the financing of the two Boeing aircraft scheduled for delivery during the final three months of 2004, subject to customary conditions. We do not have backstop financing or any other financing currently in place for the remainder of the Boeing aircraft on firm order. Further financing will be needed to satisfy our capital commitments for our firm aircraft scheduled for delivery beyond 2004. We can provide no assurance that sufficient financing will be available for the aircraft on order or other related capital expenditures.

ExpressJet took delivery of 16 ERJ-145XR aircraft during the first nine months of 2004, including five in the third quarter. As of September 30, 2004, ExpressJet had firm commitments for 34 regional jets from Empresa Brasileira de Aeronautica S.A. ("Embraer"), with an estimated cost of approximately $700 million, and options to purchase an additional 100 Embraer aircraft. ExpressJet currently anticipates taking delivery of an additional five regional jets during the remainder of 2004. ExpressJet does not have an obligation to take any of these firm Embraer aircraft that are not financed by a third party and leased to either ExpressJet or us. Under the capacity purchase agreement between us and ExpressJet, we have agreed to lease as lessee and sublease to ExpressJet the regional jets that are subject to ExpressJet's firm purchase commitments. In addition, under the capacity purchase agreement with ExpressJet, we generally are obligated to purchase all of the capacity provided by thes e new aircraft delivered to ExpressJet. We cannot predict whether passenger traffic levels will enable us to utilize fully regional jets scheduled for future delivery to ExpressJet.

Substantially all of the aircraft and engines we own are subject to mortgages. A significant portion of our spare parts inventory is also encumbered.

In the nine months ended September 30, 2004, we recorded special charges of $70 million associated with future obligations for rent and return conditions related to 12 leased MD-80 aircraft that were permanently grounded during the period. In the first quarter of 2004, we recorded a non-cash charge of $34 million related to the termination of a 1993 service agreement with United Micronesian Development Association. The remainder of the special charges in 2004 were related to the write-off of leasehold improvements and other items.

In the first quarter of 2003, we recorded special charges of $65 million. These charges consisted primarily of a $44 million additional impairment of our fleet of owned MD-80s, which was initially determined to be impaired and written down to fair value in 2002. The remainder of the charges consisted primarily of the write-down to fair value of spare parts inventory for permanently grounded fleets. These write-downs were necessary because the fair values of the MD-80 fleet and spare parts inventory had declined as a result of the difficult financial environment and further reductions in capacity by U.S. airlines.

During the second quarter of 2003, we agreed to defer firm deliveries of 36 Boeing 737 aircraft that were originally scheduled for delivery in 2005, 2006 and 2007. These aircraft will now be delivered in 2008 and beyond. In connection with the deferrals, we recorded a charge of $14 million.

Activity related to the accruals for future lease payments and return condition and closure/under-utilization of facilities for the nine months ended September 30, 2004 is as follows (in millions):

Capacity Purchase Agreement. Our capacity purchase agreement with Holdings and ExpressJet provides that we generally purchase all of ExpressJet's capacity for a negotiated price, and we are at risk for selling all of the seat inventory at market prices. The rates we pay ExpressJet for scheduled block hours are subject to adjustment effective January 1, 2005 and each year thereafter. On July 1, 2004, we began negotiating with ExpressJet to adjust the scheduled block hour rates for calendar year 2005 as required by the capacity purchase agreement. We have substantially completed the rate negotiations for 2005 and anticipate reducing our scheduled block hour rates for calendar year 2005 approximately two percent when compared to our cost in 2004. In addition, we have an agreement in principle with ExpressJet to amend the capacity purchase agreement with respect to certain other matters, including to cap ExpressJet's prevailing margin at 10%.

Our obligations under the capacity purchase agreement and ExpressJet's fuel expense in excess of the cap provided in the capacity purchase agreement and a related fuel purchase agreement (71.2 cents per gallon, including fuel taxes), less our rental income on aircraft we lease to ExpressJet, totaled $347 million and $992 million in the three and nine months ended September 30, 2004 and $288 million and $821 million in the three and nine months ended September 30, 2003. The 2004 amounts are reported as "ExpressJet capacity purchase, net" and the 2003 amounts were eliminated in our consolidated financial statements.

Tax Sharing Agreement. We recognized nonoperating income related to our tax sharing agreement with Holdings of $14 million and $37 million for the three and nine months ended September 30, 2004, respectively. There was no such income in the first nine months of 2003.

Note Receivable from ExpressJet. At December 31, 2003, we had a $193 million note receivable from ExpressJet. In accordance with our amended and restated promissory note agreement dated November 5, 2002 with ExpressJet, principal and accrued interest on the note are payable quarterly by ExpressJet. During the third quarter, ExpressJet paid in advance $54 million in lieu of principal payments that would have otherwise been scheduled to be made on December 31, 2004 and March 31, 2005. As a result of an agreement between us and ExpressJet regarding the application of this advance payment, no principal payments are scheduled to be made under the note on these dates. The remaining balance of the note at September 30, 2004 was $99 million.

Pension Plan. Net periodic defined benefit pension expense included the following components (in millions):

Due to record high fuel prices, the weak revenue environment and our desire to maintain adequate liquidity, we have elected to use deficit contribution relief under the Pension Funding Equity Act of 2004. As a result, we are not required to make any contributions to our pension plan in 2004 and thus do not intend to do so. Based on current legislation and current assumptions, we will be required to contribute in excess of $1.5 billion to our pension plan over the next five years, including approximately $300 million in 2005, to meet our minimum funding obligations. The primary assumptions relate to the rate of return on plan assets, the discount rate and our intention to use deficit contribution relief during calendar year 2005. If actual experience is different from our current assumptions, these estimates may change.

At September 30, 2004, our defined benefit pension plan held 1.2 million shares of Holdings common stock with a market value of $12 million.

Employee Stock Purchase Plan. On March 12, 2004, our stockholders voted to adopt the 2004 Employee Stock Purchase Plan. All of our employees (including Continental Micronesia, Inc. employees) are eligible to participate in this program beginning in the second quarter of 2004. Participants may purchase shares of our Class B common stock at 85% (or higher in certain circumstances) of the fair market value of the stock on either the first day or the last day of the option period (whichever is lower), limited to a minimum purchase price of $10 per share. In the aggregate, 3,000,000 shares may be purchased. These shares may be newly issued or reacquired shares. Through September 30, 2004, 249,160 shares were issued under this plan at a price of $10 per share. Because the price of our stock at September 30, 2004 was below the threshold level for the minimum purchase price permitted by the plan, no shares were issued under the plan for the third quarter of 2004.

NOTE 8 - PENDING SALE OF INVESTMENT IN ORBITZ

We own approximately 9% of the outstanding shares of Orbitz, an internet travel website. On September 29, 2004, Cendant Corp. announced a tender offer for all outstanding shares of Orbitz. The transaction, which has been approved by the boards of both companies but is subject to regulatory approvals and other customary conditions, is expected to close during the fourth quarter of 2004. The market value of our Orbitz shares at September 30, 2004 was $27.20 per share. Based on this market value, we recognized as nonoperating income a fair value adjustment of $15 million (net of related compensation expense) in the third quarter of 2004.

NOTE 9 - SECURITY FEE REIMBURSEMENT

In May 2003, we received and recognized in earnings $176 million in cash from the United States government pursuant to the Emergency Wartime Supplemental Appropriations Act enacted in April 2003. This amount is reimbursement for our proportional share of passenger security and air carrier security fees paid or collected by U.S. carriers as of the date of enactment of the legislation, together with other items.

NOTE 10 - INCOME TAXES

Our effective tax rates differ from the federal statutory rate of 35% primarily due to increases in the valuation allowance, certain expenses that are not deductible for federal income tax purposes, state income taxes and the accrual in 2003 of income tax expense on our share of Holdings' net income. Due to our continued losses, we were required to provide a valuation allowance on the deferred tax assets recorded on losses beginning with the third quarter of 2004. As a result, our net loss for the third quarter of 2004 was not reduced by any tax benefit. The impact of the non-deductibility of certain expenses and state income taxes on our effective tax rate is generally greater in periods for which we report lower income (loss) before income taxes.

We have two reportable segments: mainline and regional. The mainline segment consists of flights to cities with jets with a capacity of greater than 100 seats while the regional segment consists of flights with jets with a capacity of 50 or fewer seats. The regional segment is operated by ExpressJet through a capacity purchase agreement. Under that agreement, we handle all of the scheduling and are responsible for setting prices and selling all the seat inventory. In exchange for ExpressJet's operation of the flights, we pay ExpressJet for each scheduled block hour based on an agreed formula. Under the agreement, we recognize all passenger, cargo and other revenue associated with each flight, and are responsible for all revenue-related expenses, including commissions, reservations, catering and rent at hub airports.

We evaluate segment performance based on several factors, of which the primary financial measure is operating income (loss). However, we do not manage our business or allocate resources based on segment operating income or loss because (1) our flight schedules are designed to maximize the passengers flying on both segments, (2) many operations of the two segments are substantially integrated (for example, airport operations, sales and marketing, scheduling and ticketing), and (3) management decisions are based on their anticipated impact on the overall network, not on one individual segment.

Financial information for the three and nine months ended September 30 by business segment is set forth below (in millions):

In August 2001, the City of Houston completed the offering of $324 million aggregate principal amount of tax-exempt special facilities revenue bonds to finance the construction of Terminal E and a new international ticketing hall facility at Bush Intercontinental Airport. In connection therewith, we entered into a long-term lease with the City of Houston requiring that upon completion of construction, with limited exceptions, we will make rental payments sufficient to service the related tax-exempt bonds through their maturity in 2029. We have also entered into a binding corporate guaranty with the bond trustee for the repayment of principal and interest on the bonds that becomes partially effective (based on a pro rata share of bond proceeds) upon completion of construction of the terminal or the international ticketing facility. The corporate guaranty could also become effective during construction in other limited circumstances. The guaranty became effective for the repayment of principal and i nterest with respect to $271 million of the bonds upon completion of the terminal during the first quarter of 2004. We expect completion of the international ticketing facility during the first quarter of 2005, at which time our corporate guaranty would become effective for the remaining portion of the bonds issued by the City of Houston in the amount of $53 million.

We also have letters of credit and performance bonds at September 30, 2004 in the amount of $50 million with expiration dates through June 2008.

General Guarantees and Indemnifications. We are the lessee under many real estate leases. It is common in such commercial lease transactions for us to agree to indemnify the lessor and other related third parties for tort liabilities that arise out of or relate to our use or occupancy of the leased premises. In some cases, this indemnity extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or willful misconduct. Additionally, we typically indemnify such parties for any environmental liability that arises out of or relates to our use of the leased premises.

In our aircraft financing agreements, we typically indemnify the financing parties, trustees acting on their behalf and other related parties against liabilities that arise from the manufacture, design, ownership, financing, use, operation and maintenance of the aircraft and for tort liability, whether or not these liabilities arise out of or relate to the negligence of these indemnified parties, except for their gross negligence or willful misconduct.

We expect that we would be covered by insurance (subject to deductibles) for most tort liabilities and related indemnities described above with respect to real estate we lease and aircraft we operate.

In our financing transactions that include loans from banks in which the interest rate is based on LIBOR, we typically agree to reimburse the lenders for certain increased costs that they incur in carrying these loans as a result of any change in law and for any reduced returns with respect to these loans due to any change in capital requirements. We had $1.5 billion of floating rate debt at September 30, 2004. In several financing transactions, with an aggregate carrying value of $1.1 billion, involving loans from non-U.S. banks, export-import banks and certain other lenders secured by aircraft, we bear the risk of any change in tax laws that would subject loan payments thereunder to non-U.S. lenders to withholding taxes. In addition, in cross-border aircraft lease agreements for two 757 aircraft, we bear the risk of any change in U.S. tax laws that would subject lease payments made by us to a resident of Japan to U.S. taxes. Our lease obligations for these two aircraft totaled $59 million at Sep tember 30, 2004.

We cannot estimate the potential amount of future payments under the foregoing indemnities and agreements.

Employees. Approximately 41% of our employees are covered by collective bargaining agreements. Of these, substantially all have contracts under negotiation or that become amendable in 2004. 

The collective bargaining agreement between us and our pilots, represented by the Air Line Pilots Association ("ALPA"), became amendable in October 2002.  After being deferred due to the economic uncertainty following the September 11, 2001 terrorist attacks, negotiations are continuing. 

Our mechanics, represented by the International Brotherhood of Teamsters ("Teamsters"), ratified a new four-year collective bargaining agreement in December 2002 that made an adjustment to pay and recognized industry conditions.  The agreement became amendable with respect to wages, pension and health insurance provisions on December 31, 2003.  Negotiations commenced with the Teamsters regarding these subjects in December 2003 and are continuing.  Work rules and other contractual items are established through 2006. 

The collective bargaining agreement between us and our dispatchers, represented by the Transport Workers Union ("TWU"), became amendable in October 2003.  Negotiations commenced with the TWU in September 2003 and are continuing. 

The collective bargaining agreement between us and our flight attendants, represented by the International Association of Machinists and Aerospace Workers ("IAM"), became amendable on October 1, 2004. Negotiations commenced with the IAM in September 2004 and are continuing.

We continue to believe that mutually acceptable agreements can be reached with all of these employee groups, although the ultimate outcome of the negotiations is unknown at this time. 

In September 2004, we announced a cost-savings initiative of $200 million in pre-tax cost-savings measures that included the elimination of approximately 425 positions through layoffs, attrition and the elimination of unfilled positions. We also eliminated approximately 250 reservation agent positions during the third quarter of 2004. Given the current adverse environment in which we operate, we may be required to seek material wage and benefit reductions and workrule changes in the near future. Such action could lead to labor disruptions, which could have a material adverse impact on our results of operations and financial condition.

           ExpressJet and its pilot union have reached a tentative agreement for a new collective bargaining agreement. The agreement is subject to ratification by the ExpressJet pilots.  A labor disruption at ExpressJet resulting in a prolonged significant reduction in their flights would have a material adverse impact on our results of operations and financial condition.

            Environmental Matters.  We could potentially be responsible for environmental remediation costs primarily related to jet fuel and solvent contamination surrounding our aircraft maintenance hangar in Los Angeles.  In 2001, the California Regional Water Quality Control Board mandated a field study of the site and it was completed in September 2001.  We have established a reserve for estimated costs of environmental remediation at Los Angeles and elsewhere in our system, based primarily on third party environmental studies and estimates as to the extent of the contamination and nature of the required remedial actions.  We have evaluated and recorded this accrual for environmental remediation costs separately from any related insurance recovery.  We have not recognized any receivables related to insurance recoveries at September 30, 2004.

            We expect our total losses from all environmental matters to be $51 million, for which we were fully accrued at September 30, 2004.  Although we believe, based on currently available information, that our reserves for potential environmental remediation costs are adequate, reserves could be adjusted as further information develops or circumstances change.  However, we do not expect these items to materially impact our financial condition, liquidity or our results of operations.

IRS Examinations. The IRS is in the process of examining our income tax returns for years through 2001 and has indicated that it may disallow certain deductions we claimed. We believe the ultimate resolution of these audits will not have a material adverse effect on our financial condition, liquidity or results of operations.

Legal Proceedings.  During the period between 1997 and 2001, we reduced or capped the base commissions that we paid to travel agents, and in 2002 we eliminated such base commissions.  This was similar to actions also taken by other air carriers.  We are now a defendant, along with several other air carriers, in a number of lawsuits brought by travel agencies relating to these base commission reductions and eliminations.

            Sarah Futch Hall d/b/a/ Travel Specialists v. United Air Lines, et al. (U.S.D.C. Eastern District of North Carolina). This class action was filed in federal court on June 21, 2000 by a travel agent, on behalf of herself and other similarly situated U.S. travel agents, challenging the reduction and subsequent elimination of travel agent base commissions.  The amended complaint alleged an unlawful agreement among the airline defendants to reduce, cap or eliminate commissions in violation of federal antitrust laws during the years 1997 to 2002.  The plaintiffs sought compensatory and treble damages, injunctive relief and their attorneys' fees. The class was certified on September 18, 2002.  On October 30, 2003, a summary judgment and order was granted in favor of all of the defendants.  Plaintiffs filed their appeal to this judgment and order on November 5, 2003.  Plaintiffs' appeal of this judgment is pending oral argument on October 27, 2004 before the Fourth Circuit Court of Appeals.

            Several travel agents who purportedly opted out of the Hall class action filed similar suits against Continental and other major carriers alleging violations of antitrust laws in eliminating the base commission:  Tam Travel, Inc. v. Delta Airlines, Inc., et al. (U.S.D.C., Northern District of California), filed on April 9, 2003; Paula Fausky, et al. v. American Airlines, et al. (U.S.D.C., Northern District of Ohio), filed on May 8, 2003; and Swope Travel Agency, et al. v. Orbitz LLC, et al. (U.S.D.C., Eastern District of Texas), filed on June 5, 2003.  By order dated November 12, 2003, these actions were transferred and consolidated for pretrial purposes by the Judicial Panel on Multidistrict Litigation to the Northern District of Ohio. Discovery has not yet commenced involving Continental.

Always Travel, et. al. v. Air Canada, et al. On December 6, 2002, the named plaintiffs in this case, pending in the Federal Court of Canada, Trial Division, filed an amended statement of claim alleging that between 1995 and the present, Continental, the other defendant airlines, and the International Air Transport Association conspired to reduce commissions paid to Canada-based travel agents in violation of the Competition Act of Canada.  Plaintiffs' motion for class certification is pending.

           In addition to the lawsuits brought by travel agencies discussed above, Continental was a defendant in an alleged securities fraud class action filed in federal court in Phoenix, Arizona relating to the sale of certain America West stock in 1998 brought against America West Airlines, America West Holdings Corporation and various other defendants, entitled Employer-Teamsters Joint Council No. 84 Pension Trust Fund v. America West Holdings Corp., et al. This action was first filed in March of 1999, but was dismissed. Plaintiffs then filed a Second Amended Consolidated Complaint in January 2001, which was dismissed with prejudice in June of 2001. Plaintiffs appealed that dismissal and in 2003 the Ninth Circuit Court of Appeals reversed and remanded the lower court's dismissal. In January 2004 the class was certified and was set for trial in November 2004. On September 27, 2004, the Court granted full summary judgment in favor of Co ntinental. We are uncertain whether plaintiffs will appeal this ruling.

            In each of the foregoing cases, we believe the plaintiffs' claims are without merit and are vigorously defending the lawsuits.  Nevertheless, a final adverse court decision awarding substantial money damages could have a material adverse impact on our financial condition, liquidity and results of operations.

            We and/or certain of our subsidiaries are defendants in various other lawsuits, including suits relating to certain environmental claims, and proceedings arising in the normal course of business.  While the outcome of these lawsuits and proceedings cannot be predicted with certainty and could have a material adverse effect on our financial position, liquidity or results of operations, it is our opinion, after consulting with outside counsel, that the ultimate disposition of such suits will not have a material adverse effect on our financial position, liquidity or results of operations.

The following discussion contains forward-looking statements that are not limited to historical facts, but reflect our current beliefs, expectations or intentions regarding future events. In connection therewith, please see the risk factors set forth in our 2003 10-K, which identify important factors such as terrorist attacks and international hostilities, our recent losses, our high leverage and significant financing needs, the significant cost of aircraft fuel, labor costs, competition and industry conditions including the growth of low cost carriers, demand for airline travel, airline pricing environment and industry capacity decisions, security requirements, regulatory matters, the seasonal nature of the airline business (the second and third quarters are generally stronger than the first and fourth quarters), certain tax matters and the Japanese economy and currency risk, that could cause actual results to differ materially from those in the forward-looking state ments. In addition to the foregoing risks, there can be no assurance that we will be able to achieve the pre-tax contributions from the revenue-generating and cost-reducing initiatives discussed below, or even if achieved, that these initiatives will be sufficient to allow us to operate profitably in the current environment. We undertake no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances that may arise after the date of this report.

General information about us can be found at www.continental.com/company/investor. Our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments to those reports, are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the SEC.

The current U.S. domestic network carrier financial environment continues to be the worst in history and could deteriorate further. We have had substantial losses since September 11, 2001 and expect to incur a substantial loss in 2004. If the current adverse environment does not improve, we expect to incur a significant loss in 2005 as well. Losses of the magnitude incurred by us since September 11, 2001 are not sustainable over the long term. With the current weak domestic yield environment caused in large part by the growth of low cost competitors and fuel prices at twenty-year highs, our cost structure is not competitive. Additionally, many of our network competitors have used bankruptcy or the threat of bankruptcy to reduce their costs significantly, and may continue to restructure their costs downward.

The $1.1 billion of cost-cutting and revenue-generating measures (including the $200 million cost-cutting program described below) that we have implemented in recent years have proven insufficient to return us to profitability in the current environment. In such an environment, we must achieve significant further cost reductions, which may require us to furlough additional employees and may require us to seek material wage and benefit reductions and workrule changes in the near future. Other network carriers, such as American Airlines, United Airlines and US Airways, were able to achieve such reductions and changes only through bankruptcy or the threat of bankruptcy. US Airways sought and obtained further wage reductions in its second bankruptcy case, which commenced in September 2004. Delta Air Lines has threatened bankruptcy unless it achieves significant wage and benefit concessions from its pilot group.

Absent additional adverse factors outside our control such as additional terrorist attacks, hostilities involving the United States or further significant increases in fuel prices, we currently believe that our liquidity will be sufficient to fund our current operations and other financial obligations through 2005. However, we have significant financial obligations due in 2006 and thereafter, and we may have inadequate liquidity to meet those obligations if the current financial environment for network carriers continues and we are unable to decrease our costs considerably. In addition, it has become increasingly difficult for us to obtain financing in the face of significant losses and the current revenue and cost outlook. As a result, we may not be able to complete future financings that we may need to maintain adequate liquidity.

In September 2004, we announced an initiative to achieve $200 million in pre-tax cost savings that included the elimination of approximately 425 positions through layoffs, attrition and the elimination of unfilled positions. The cost-savings measures are expected to provide approximately $125 million of pre-tax benefits in 2005 and will be fully implemented by 2007. We also eliminated approximately 250 reservation agent positions during the third quarter of 2004. We will need to continue to implement additional revenue-generating, cost-cutting and other cash-generating measures beyond those previously announced in order to maintain adequate liquidity for our operations and other financial obligations beyond 2005. Given the current adverse environment in which we operate, we may be required to seek material wage and benefit reductions and workrule changes in the near future.

Among the many factors that threaten us and the network airline industry generally are the continued rapid growth of low-cost carriers and resulting downward pressure on domestic yields, high fuel costs, increased security costs, high labor costs, unpredictable labor negotiations and significant pension liabilities. These factors are discussed in the "Overview" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2003 10-K.

The following discussion provides an analysis of our results of operations and reasons for material changes therein for the three and nine months ended September 30, 2004 as compared to the corresponding periods ended September 30, 2003.

Consolidated Results of Operations

We recorded a consolidated net loss of $16 million for the third quarter of 2004 as compared to consolidated net income of $133 million for the three months ended September 30, 2003. The primary reasons for the change were increased fuel costs in 2004 and a $173 million gain on the disposition of Holdings shares in third quarter 2003. We consider the key measure of our performance to be consolidated operating income, which was $24 million for the third quarter of 2004, as compared to $174 million for the third quarter of 2003. As discussed in Note 6 to our consolidated financial statements, except for passenger revenue, the deconsolidation of ExpressJet in 2003 affected the comparability of our quarter-to-quarter financial results. Accordingly, the expense variance explanations discussed below exclude the effect of ExpressJet in 2003 unless the context indicates otherwise. Significant components of our operating results attributable to the deconsolidation of ExpressJet and attributable to our bus iness generally are as follows (in millions, except percentage changes):

Explanations for significant variances, after taking into account changes associated with the ExpressJet deconsolidation, are as follows:

Operating Revenue. Total passenger revenue increased 8.7% during the third quarter of 2004 due to higher traffic and capacity on international destinations and an increase in regional flights. The higher revenue from international flights was primarily the result of new destinations and depressed activity in 2003 due to the hostilities in Iraq and SARS. Mainline passenger revenue increased 7.3% and regional passenger revenue increased 16.4%. Passenger revenue for the third quarter of 2004 and period to period comparisons of passenger revenue, revenue per available seat mile (RASM) and available seat miles (ASMs) by geographic region for our mainline and regional operations are shown below:

The U.S. airline industry is one of the most heavily taxed of all industries. These fees and taxes have grown significantly in the past decade and currently include (a) a federal excise tax of 7.5% of the value of the ticket; (b) a federal segment tax of $3.10 per domestic flight segment of a passenger's itinerary; (c) up to $18 per round trip in local airport charges; and (d) up to $10 per round trip in airport security fees. Various U.S. fees and taxes are also assessed on international flights that can result in additional fees and taxes of up to $43 per international round trip, not counting fees and taxes imposed by foreign governments. Certain of these assessments must be included in the fares we advertise or quote to our customers. In many instances, increases in these fees and taxes have been absorbed by the airline industry rather than being passed on to the passenger. As a result, passenger revenue can decrease when these fees and taxes increase. These fees and taxes, which are not include d in our reported passenger revenue, increased to $280 million for the three months ended September 30, 2004, compared to $228 million for the same period in 2003, and to $787 million for the nine months ended September 30, 2004, compared to $677 million for the same period in 2003. As a percentage of passenger revenues, these fees and taxes increased from 10.4% to 11.8% for the three months ended September 30, 2004 compared to the same period in 2003 mainly as the result of the temporary suspension of the $10 per round trip security fee from June 1, 2003 to September 30, 2003.

Cargo, mail and other revenue increased slightly primarily due to higher freight volumes and revenue-generating initiatives offset by decreased military charter flights.

Operating Expenses. Wages, salaries and related costs increased primarily due to increased flight activity which resulted in a slight increase in the average number of employees and higher wage rates. Aircraft fuel and related taxes increased due to a significant rise in fuel prices, combined with an increase in flight activity. The average jet fuel price per gallon including related taxes increased 39.9% from 85.65 cents in the third quarter of 2003 to 119.85 cents in the third quarter of 2004. Based on our expected fuel volume for 2004, for every one dollar increase in the price of a barrel of crude oil, our fuel expense increases by approximately $38 million on an annual basis.

In 2004, obligations under our capacity purchase agreement are reported as ExpressJet capacity purchase, net. In addition to the obligations for the purchased capacity, ExpressJet capacity purchase, net, also includes ExpressJet's fuel expense in excess of the cap provided in the capacity purchase agreement and a related fuel purchase agreement (71.2 cents per gallon, including fuel taxes) and is net of our rental income on aircraft we lease to ExpressJet. In 2003, intercompany transactions between us and Holdings or ExpressJet under the capacity purchase agreement were eliminated in the consolidated financial statements. The actual obligations under the capacity purchase agreement were higher in the third quarter of 2004 than in the corresponding quarter of 2003 due to ExpressJet's larger fleet and increased regional flights.

Landing fees and other rentals were higher due to increased flights at certain airports and fixed rent increases combined with Continental no longer charging ExpressJet rent at certain airports. The most significant increases were at Liberty International Airport in Newark and Bush Intercontinental Airport in Houston, where Terminal E was completed. Maintenance, materials and repair expenses increased primarily due to increases in the engine cost per hour contract rates associated with a maturing fleet. Other operating expenses increased primarily due to higher air navigation fees, lodging costs associated with an increase in international flights and the temporary suspension of security costs from June 1, 2003 to September 30, 2003.

In the third quarter of 2004, we recorded a special charge of $22 million, primarily associated with future obligations for rent and return conditions related to three leased MD-80 aircraft which were permanently grounded.

Nonoperating Income (Expense). Equity in the income of affiliates included our equity in the earnings of Holdings and Copa Airlines in 2004 and Orbitz and Copa Airlines in 2003. Other nonoperating income (expense) in the three months ended September 30, 2004 included a gain of $15 million related to the adjustment to fair value of our investment in Orbitz, after associated compensation expense, and income of $14 million related to our tax sharing agreement with Holdings. Nonoperating income for the third quarter of 2003 included a $173 million gain on the dispositions of Holdings shares.

Income Tax Benefit (Expense).  Our effective tax rates differ from the federal statutory rate of 35% primarily due to increases in the valuation allowance, certain expenses that are not deductible for federal income tax purposes, state income taxes and the accrual in 2003 of income tax expense on our share of Holdings' net income. Due to our continued losses, we were required to provide a valuation allowance on the deferred tax assets recorded on losses beginning with the third quarter of 2004. As a result, our net loss for the third quarter of 2004 was not reduced by any tax benefit. The impact of the non-deductibility of certain expenses and state income taxes on our effective tax rate is generally greater in periods for which we report lower income (loss) before income taxes.

Minority Interest.  In 2003, minority interest represented the portion of Holdings' net income attributable to the equity of Holdings that we did not own.

Segment Results of Operations

We have two reportable segments: mainline and regional. The mainline segment consists of flights to cities with jets with a capacity of greater than 100 seats while the regional segment consists of flights with jets with a capacity of 50 or fewer seats. The regional segment is operated by ExpressJet through a capacity purchase agreement. Under that agreement, we handle all of the scheduling and are responsible for setting prices and selling all of the seat inventory. In exchange for ExpressJet's operation of the flights, we pay ExpressJet for each scheduled block hour based on an agreed formula. Under the agreement, we recognize all passenger, cargo and other revenue associated with each flight, and are responsible for all revenue-related expenses, including commissions, reservations, catering and terminal rent at hub airports. The rates we pay ExpressJet for scheduled block hours are subject to adjustment effective January 1, 2005 and each year thereafter. On July 1, 2004, we began negotiatin g with ExpressJet to adjust the scheduled block hour rates for calendar year 2005 as required by the capacity purchase agreement. We have substantially completed the rate negotiations for 2005 and anticipate reducing our scheduled block hour rates for calendar year 2005 approximately two percent when compared to our cost in 2004. In addition, we have an agreement in principle with ExpressJet to amend the capacity purchase agreement with respect to certain other matters, including to cap ExpressJet's prevailing margin at 10%.

We evaluate segment performance based on several factors, of which the primary financial measure is operating income (loss). However, we do not manage our business or allocate resources based on segment operating profit or loss because (1) our flight schedules are designed to maximize the passengers flying on both segments, (2) many operations of the two segments are substantially integrated (for example, airport operations, sales and marketing, scheduling and ticketing), and (3) management decisions are based on their anticipated impact on the overall network, not on one individual segment.

Mainline. Significant components of our mainline segment's operating results are as follows (in millions, except percentage changes):

The variances in specific line items for the mainline segment are due to the same factors discussed under consolidated results of operations, with the exception of aircraft rentals. Mainline aircraft rental expense decreased primarily due to lease expirations, lower rates on renewal leases and aircraft rent on permanently grounded leased MD-80 aircraft no longer requiring accrual since such amounts have been previously recognized, partially offset by new aircraft deliveries.

Regional. The deconsolidation of ExpressJet in 2003 affected the comparability of our regional segment's quarter-to-quarter financial results. Significant components of our regional segment's operating results attributable to the deconsolidation of ExpressJet and attributable to the segment's business generally are as follows (in millions, except percentage changes):

The variances in specific line items for the regional segment are due to the same factors discussed under consolidated results of operations, with the exception of aircraft rentals. Regional aircraft rental expense increased due to the higher number of regional jets in ExpressJet's fleet.

ExpressJet capacity purchase, net increased due to increased flight activity at ExpressJet and the higher number of regional jets leased from us by ExpressJet. The net amounts consist of the following (in millions, except percentage changes):