TABLE OF CONTENTS

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

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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 Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2004 (the "2004 Form 10-K/A"). 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.

Primarily due to record-high fuel prices and the continued weak domestic fare environment, the current U.S. domestic network carrier financial environment continues to be poor and could deteriorate further. During the third quarter of 2005, Hurricane Katrina and Hurricane Rita caused widespread disruption to oil production, refinery operations and pipeline capacity along certain portions of the U.S. Gulf Coast. As a result of these disruptions, the price of jet fuel increased significantly and the availability of jet fuel supplies was diminished. Additionally, Hurricane Rita forced us to suspend service for 36 hours at our largest hub, Houston's Bush Intercontinental Airport, costing us an estimated $25 million. Further increases in jet fuel prices or disruptions in fuel supplies, whether as a result of natural disasters or otherwise, could have a material adverse effect on our results of operations, financial position or liquidity.

Among the many factors that threaten us are the continued rapid growth of low-cost carriers and resulting downward pressure on domestic fares, high fuel costs, high labor costs for our flight attendants, excessive taxation, increased security costs 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 2004 Form 10-K/A. In addition to competition from low-cost carriers, we may face stronger competition from Delta Air Lines, Inc. and Northwest Airlines Corp. if those carriers, each of which filed for bankruptcy protection in September 2005, are able to achieve substantial cost reductions in bankruptcy through, among other things, reduction or discharge of debt, lease and pension obligations and wage and benefit reductions.

We have had substantial losses since September 11, 2001, the magnitude of which is not sustainable. We have attempted to return to profitability by implementing the majority of $1.1 billion of annual cost-cutting and revenue-generating measures since 2002, and we have also made significant progress toward our goal of achieving an additional annual $500 million reduction in pay and benefits costs. We finalized changes to wages, work rules and benefits for all employees except our flight attendants and certain employees of our wholly-owned subsidiary CMI who are subject to collective bargaining agreements. We began implementing these changes in early April 2005, which, when fully implemented, are expected to result in approximately $418 million of annual pay and benefits cost savings on a run-rate basis.

A significant portion of the cost savings from our work groups, both unionized and non-unionized, will be derived from changes to benefits and work rules. Our ability to achieve certain of the cost reductions will depend on effective implementation of new work rules, actual productivity improvements and implementation of changes in technology pertaining to employee work rules and benefits.

The current levels of pay and benefits for our flight attendants are not competitive. We have reengaged in negotiations with our flight attendants concerning pay and benefit reductions, and, at our request, on July 6, 2005, the National Mediation Board appointed a federal mediator to assist us in reaching an agreement for pay and benefit reductions with our flight attendants, who are represented by the IAM.

Although revenue trends have been improving, we still expect to incur a significant loss in the fourth quarter and full year 2005 due in large part to record high fuel prices. As a result of escalating prices, fuel expense is our single largest operating expense item for the first time in our history. We have been able to implement some fare increases on certain domestic and international routes in recent months, but these increases have not fully offset the substantial increase in fuel prices.

Taking into consideration our expected fourth quarter loss, $356 million of debt and capital lease principal payments due in the fourth quarter of 2005 and the $65 million cash pension contribution we made in October 2005, we currently expect that our unrestricted cash and short-term investments balance as of December 31, 2005 will be approximately $1.4 billion, not including any fourth quarter capital market transactions or other financings, except for previously announced aircraft financing transactions.

We also believe that under current conditions, absent adverse factors outside of our control, such as additional terrorist attacks, hostilities involving the United States, a further delay in the restart of the Gulf Coast refineries or further significant increases in crude oil prices, our existing liquidity and projected 2006 cash flows will be sufficient to fund current operations and other financial obligations through 2006. However, we have significant financial obligations due in 2007 and thereafter, and it is possible that we will have inadequate liquidity to meet those obligations if the current adverse domestic fare environment for network carriers does not improve materially, fuel prices remain high and we are unable to increase our revenue or decrease our costs considerably or raise additional liquidity through financing activities and/or by selling non-strategic assets. Our recent pay and benefit cost reductions are helping us reduce our overall costs, but we do not expect that these redu ctions in and of themselves will provide sufficient liquidity or restore our long-term profitability in the current environment.

Components. The following table sets forth the components of basic and diluted earnings (loss) per share (in millions):

Potential Common Shares. Weighted average options to purchase approximately 5.0 million, 6.2 million, 5.4 million and 6.3 million shares of our Class B common stock were not included in the computation of diluted earnings (loss) per share for each of the three months ended September 30, 2005 and 2004 and each of the nine months ended September 30, 2005 and 2004, respectively, because the options' exercise prices were greater than the average market price of the common shares during the relevant periods or the effect of including the options would have been antidilutive. In addition, 4.1 million potential common shares related to our 6% Convertible Junior Subordinated Debentures Held by Subsidiary Trust were excluded from the computation of earnings per share for the three months ended September 30, 2005 and 17.9 million potential common shares related to our 5% Convertible Notes, 4.5% Convertible Notes and 6% Convertible Junior Subordinated Debentures Held by Subsidiary Trust were excluded from the computation of diluted earnings per share for the three months ended September 30, 2004 and each of the nine months ended September 30, 2005 and 2004 because they were antidilutive.

Operating Fleet. As shown in the following table, our operating aircraft fleet consisted of 350 mainline jets and 261 regional jets at September 30, 2005, excluding aircraft out of service. The regional jets are leased by ExpressJet Airlines, Inc. ("ExpressJet") from us and are operated by ExpressJet as Continental Express. Our purchase commitments (firm orders) for aircraft, as well as options to purchase or lease additional aircraft as of September 30, 2005 are also shown below.

1. Used aircraft to be leased, including two aircraft delivered but not yet placed into service.

During the first nine months of 2005, we placed into service five new 737-800 aircraft, one of which was delivered in late 2004 and the other four of which were delivered in the third quarter of 2005. In addition, we leased three used 757-300 aircraft in the third quarter of 2005, one of which was placed into service before quarter end. ExpressJet took delivery of and placed into service 16 ERJ-145XR aircraft during the first nine months of 2005, including five such aircraft in the third quarter.

Also during the first nine months of 2005, we removed three 737-300 aircraft and two MD-80 aircraft from service. The 737-300 aircraft were removed from service in conjunction with the expiration of their leases.

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

Firm Order and Option Aircraft. On March 30, 2005, we confirmed our previously announced agreement with Boeing for a firm order of ten new 787-800 aircraft, with the first 787 expected to be delivered in 2009. On July 28, 2005, we announced that we had ordered two additional 777-200ER from Boeing. These 777 aircraft are scheduled for delivery in the first quarter of 2007. On September 30, 2005, we reached an agreement with General Electric Company to provide the engines for the 787 aircraft. In addition to the ten firm aircraft on order, we have options to purchase five additional 787 aircraft. We also have an agreement to lease eight used 757-300 aircraft, three of which were delivered in the third quarter of 2005.

Taking these new agreements into consideration, as of September 30, 2005, we had firm purchase commitments for new aircraft and related spare engines with an estimated aggregate cost of approximately $2.7 billion. In addition, we have lease commitments for five used 757-300 aircraft not yet delivered and options to purchase an additional 30 Boeing aircraft. We are scheduled to take delivery of six Boeing aircraft over the remaining three months of 2005 (three new 737-800s and three used 757-300s) and eight in 2006 (six new 737-800s and two used 757-300s), with delivery of the remaining 46 Boeing aircraft occurring from 2007 through 2011. The recently resolved strike by Boeing's machinists has resulted in delays in scheduled deliveries of some aircraft, which we anticipate will not be significant and will not have a material adverse effect on our operations.

In May 2005, we obtained a lease financing commitment from a third party for the seven new Boeing 737-800 aircraft scheduled to be delivered in 2005. We also have backstop lease financing for the six 737-800 aircraft expected to be delivered in 2006 and the two 777-200ER aircraft expected to be delivered in 2007. By virtue of these agreements, we have secured financing for all Boeing aircraft scheduled to be delivered through 2007. However, we currently do not have backstop financing or any other financing in place for the remainder of the Boeing firm aircraft that are scheduled to be delivered between 2008 and 2011. Further financing will be needed to satisfy our capital commitments for our firm aircraft. We can provide no assurance that sufficient financing will be available for the aircraft on order or other related capital expenditures, or for our capital expenditures generally.

As of September 30, 2005, ExpressJet had firm commitments for 13 regional jets from Empresa Brasileira de Aeronautica S.A. ("Embraer"), with an estimated cost of approximately $300 million. ExpressJet currently anticipates taking delivery of five of these firm commitment regional jets during the fourth quarter of 2005, with the remainder being delivered in 2006. 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 these new aircraft as they are delivered to ExpressJet.

Out-of-Service Aircraft. In addition to the above operating aircraft, we had 15 MD-80 aircraft permanently removed from service as of September 30, 2005. The nine owned out-of-service MD-80 aircraft are being carried at an aggregate fair market value of $16 million, and the remaining rentals on the six leased out-of-service MD-80 aircraft have been accrued. We are currently exploring lease or sale opportunities for the out-of-service aircraft. We cannot predict when or if purchasers, lessees or sublessees can be found, and it is possible that our owned MD-80 aircraft could suffer additional impairment. In addition, three leased 737-300 aircraft were out of service at September 30, 2005 in preparation for their return to the lessors.

Additionally, we have 12 Embraer 120 turboprop aircraft and nine ATR 42 turboprop aircraft out-of-service. We own nine and lease 12 of these aircraft. The nine owned aircraft are being carried at an aggregate fair value of $8 million, and the remaining rentals on the leased aircraft have been accrued. We currently sublease three of the leased out-of-service turboprop aircraft to a third party and are exploring lease or sale opportunities for the remaining out-of-service aircraft, subject to the same uncertainties as the out-of-service mainline aircraft discussed above.

In the third quarter of 2005, we reduced our allowance for future lease payments and return conditions related to permanently grounded aircraft by $15 million following negotiated settlements with the aircraft lessors in an improving aircraft market.

NOTE 3 - LONG-TERM DEBT

Secured Loan Facility. In June 2005, we and our two wholly-owned subsidiaries, Air Micronesia, Inc. ("AMI") and Continental Micronesia, Inc. ("CMI"), closed on a $350 million secured loan facility. AMI and CMI have unconditionally guaranteed the loan made to us, and we and AMI have unconditionally guaranteed the loan made to CMI.

The facility consists of two loans, both of which have a term of six years and are non-amortizing, except for certain mandatory prepayments described below. The loans accrue interest at a floating rate determined by reference to the three-month London Interbank Offered Rate, known as LIBOR, plus 5.375% per annum. The loans and guarantees are secured by certain of our U.S.-Asia routes and related assets, all of the outstanding common stock of AMI and CMI and substantially all of the other assets of AMI and CMI, including route authorities and related assets.

The loan documents require us to maintain a minimum balance of unrestricted cash and short-term investments of $1.0 billion dollars at the end of each month. The loans may become due and payable immediately if we fail to maintain the monthly minimum cash balance and upon the occurrence of other customary events of default under the loan documents. If we fail to maintain a minimum balance of unrestricted cash and short-term investments of $1.125 billion, we and CMI will be required to make a mandatory aggregate $50 million prepayment of the loans. In addition, if the ratio of the outstanding loan balance to the value of the collateral securing the loans, as determined by periodic appraisals, is greater than 48%, we and CMI will be required to post additional collateral or prepay the loans to reestablish a loan-to-collateral value ratio of not greater than 48%. We are currently in compliance with these covenants.

Credit Card Marketing Agreement. In March 2005, we extended our current agreement with Chase Manhattan Bank USA, N.A. ("Chase") to jointly market credit cards. In addition to reaching an agreement on advertising and other marketing commitments, Chase agreed to increase the rate it pays for mileage credits under our frequent flyer program. In April 2005, Chase purchased $75 million of mileage credits under the program which will be redeemed for mileage purchases in 2007 and 2008 and recognized as revenue consistent with other mileage sales in 2007 and 2008. In consideration for the advance purchase of mileage credits, we have provided a security interest to Chase in certain transatlantic routes. The $75 million purchase of mileage credits has been treated as a loan from Chase and is reported as long-term debt on our balance sheet and will be reduced ratably in 2007 and 2008 as the mileage credits are redeemed. The new agreement extends through the end of 2009.

Maturities. Maturities of long-term debt due through December 31, 2005 and over the next four years are as follows (in millions):

Pro Forma Information. 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 statements 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 Account Standards No. 123 ("SFAS 123"), "Accounting for Stock-based Compensation," for the three and nine months ended September 30, 2005 and 2004 (in millions except per share amounts):

Grants of Options to Employees. In connection with the pay and benefit cost reductions discussed herein, on March 30, 2005 we issued to substantially all employees, except flight attendants, officers, employees of CMI and certain international employees, stock options for approximately 8.5 million shares of our Class B common stock with an exercise price of $11.89 per share. The exercise price was the closing price of our common stock on the date of grant. The options represent approximately 12.7 percent of the currently outstanding shares of our common stock. The options become exercisable in three equal installments on the first, second and third anniversaries of the date of grant, and have terms of either six or eight years.

Employee Stock Purchase Plan. All of our employees (including CMI employees) are eligible to participate in the 2004 Employee Stock Purchase Plan. At the end of each fiscal quarter, participants may purchase shares of our Class B common stock at a discount of 15% off the fair market value of the stock on either the first day or the last day of the quarter (whichever is lower), subject to a minimum purchase price of $10 per share. This discount is reduced to zero as the fair market value approaches $10 per share. If the fair market value is below the $10 per share minimum price on the last day of a quarter, then the participants will not be permitted to purchase common stock for such quarterly purchase period and we will refund to those participants the amount of their unused payroll deductions. In the aggregate, 3,000,000 shares may be purchased under the plan. These shares may be newly issued or reacquired shares. During the first nine months of 2005, 573,848 shares of Class B common st ock were issued to participants at a weighted-average purchase price of $10.06 per share.

Pending Accounting Pronouncement. In December 2004, the Financial Accounting Standards Board ("FASB") issued a revision of SFAS 123, "Share Based Payment" ("SFAS 123R"), which requires companies to measure the cost of employee services received in exchange for an award of equity instruments (typically stock options) based on the grant-date fair value of the award. The fair value is to be estimated using an option-pricing model. The resulting cost will be recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. Under the original SFAS 123, this accounting treatment was optional with pro forma disclosures required.

We are required to adopt SFAS 123R no later than January 1, 2006. It will be effective for all awards granted after that date and for the unvested portion of awards granted prior to the adoption date. The expense that will be recognized with respect to such unvested awards will be based on the grant-date fair value and vesting schedule of those awards used in calculating the pro forma disclosures required under SFAS 123 and presented above. We anticipate that the impact of adopting SFAS 123R on our statement of operations will be similar to the pro forma impact of SFAS 123 presented above. Adoption of SFAS 123R will not affect our overall financial position or liquidity.

We include in other comprehensive income (loss) changes in minimum pension liabilities and changes in the fair value of derivative financial instruments which qualify for hedge accounting. For the third quarter of 2005 and 2004, total comprehensive income amounted to $60 million and $6 million, respectively. For the nine months ended September 30, 2005 and 2004, total comprehensive income (loss) amounted to $(30) million and $(160) million, respectively. Total comprehensive income (loss) for the nine months ended September 30, 2005 includes $20 million of loss adjustments to the minimum pension liability resulting from the curtailment charge recorded during the first quarter of 2005 and settlement charge recorded during the third quarter of 2005 discussed in Note 6. The remaining difference between net income (loss) and total comprehensive income (loss) for each period was attributable to changes in the fair value of derivative financial instruments.

Defined Benefit Pension Plan. Net periodic defined benefit pension expense for the three and nine months ended September 30, 2005 and 2004 included the following components (in millions):

Under the new collective bargaining agreement with our pilots ratified on March 30, 2005, which we refer to as the "pilot agreement," future defined benefit accruals for pilots ceased and retirement benefits accruing in the future are provided through two new pilot-only defined contribution plans. As required by the pilot agreement, defined benefit pension assets and obligations related to pilots in our primary defined benefit pension plan (covering substantially all U.S. employees other than Chelsea Food Services ("Chelsea") and CMI employees) were spun out into a separate pilot-only defined benefit pension plan, which we refer to as the "pilot defined benefit pension plan." Subsequently, on May 31, 2005, future benefit accruals for pilots ceased and the pilot defined benefit pension plan was "frozen." As of that freeze date, all existing accrued benefits for pilots (including the right to receive a lump sum payment upon retirement) were preserved in the pilot defined benefit pension plan. Accruals for non-pilot employees under our primary defined benefit pension plan continue. Funding obligations for both defined benefit plans (the ongoing primary defined benefit pension plan and the pilot defined benefit pension plan) will continue to be determined under applicable law. However, the pilot agreement provides that we will not declare a cash dividend or repurchase our outstanding stock for cash until we have contributed at least $500 million (measured from March 30, 2005) to the pilot defined benefit pension plan. Through September 30, 2005, we have made $40 million of such contributions to this plan.

In March 2005, we recorded a $43 million non-cash curtailment charge in accordance with SFAS No. 88, "Employer's Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," ("SFAS 88") in connection with freezing the portion of our defined benefit pension plan related to our pilots, using actuarial assumptions consistent with those we used at December 31, 2004. SFAS 88 requires curtailment accounting if an event eliminates, for a significant number of employees, the accrual of defined benefits for some or all of their future services. In the event of a curtailment, a loss must be recognized for the unrecognized prior service cost associated with years of service no longer expected to be rendered.

During the third quarter of 2005, we recorded an $18 million non-cash settlement charge related to lump sum distributions from the pilot defined benefit pension plan to pilots who retired. SFAS 88 requires the use of settlement accounting if, for a given year, the cost of all settlements exceeds, or is expected to exceed, the sum of the service cost and interest cost components of net periodic pension expense for the plan. Under settlement accounting, unrecognized plan gains or losses must be recognized immediately in proportion to the percentage reduction of the plan's projected benefit obligation. We anticipate that we will have additional non-cash settlement charges in the future in conjunction with lump-sum distributions to retiring pilots.

We contributed $59 million cash to our defined benefit pension plans during the three months ended September 30, 2005. We also contributed $65 million cash to our defined benefit pension plans on October 6, 2005, bringing year-to-date contributions to $304 million and meeting our pension contribution requirement for 2005.

Defined Contribution Plans for Pilots. As required by the new pilot agreement, two new pilot-only defined contribution plans were established effective September 1, 2005. One of these plans is a money purchase pension plan -- a type of defined contribution plan subject to the minimum funding rules of the Internal Revenue Code. Contributions under that plan are generally expressed as a percentage of applicable pilot compensation, subject to limits under the Internal Revenue Code. The initial contribution to that plan was based on applicable compensation since July 1, 2005. The other new pilot-only defined contribution plan is a 401(k) plan that was established by spinning off the pilot accounts in our pre-existing primary 401(k) plan (covering substantially all of our U.S. employees other than CMI employees) to a separate pilot-only 401(k) plan. Pilots may make elective pre-tax and/or post-tax contributions to the pilot-only 401(k) plan. In addition, the pilot agreement calls for employer co ntributions to the pilot-only 401(k) plan based on pre-tax profits during a portion of the term of the pilot agreement. To the extent the Internal Revenue Code limits preclude employer contributions called for by the pilot agreement, the disallowed amount will be paid directly to the pilots as current wages under a corresponding nonqualified arrangement.

401(k) Plan. Our defined contribution 401(k) employee savings plans cover substantially all employees. During the second quarter of 2005, company matching contributions were terminated for substantially all employees other than flight attendants, mechanics and CMI employees subject to collective bargaining agreements.

Retiree Medical Benefits. Effective April 1, 2005, we made changes to certain retiree medical programs made available to eligible retirees. The retiree medical programs are self-insured arrangements that permit retirees who meet certain age and service requirements to continue medical coverage between retirement and Medicare eligibility. Previously, we offered these benefits on a workgroup-by-workgroup basis and had the periodic option of discontinuing the benefits. Eligible retirees are required to pay a portion of the costs of their retiree medical benefits to the extent they do not have sufficient accumulated unused sick time at the time of their retirement. Plan benefits are subject to co-payments, deductibles and other limits as described in the plans.

We account for the retiree medical benefits plan under SFAS No. 106, "Employers' Accounting for Postretirement Benefits other than Pensions," which requires recognition of the expected cost of benefits over the employee's service period. Following an amendment to the plan effective April 1, 2005, the accumulated postretirement benefit obligation under this plan was $240 million and our unrecognized prior service cost was also $240 million. The prior service cost will be recognized as expense over the remaining service period of currently active employees who will receive this benefit. The accumulated postretirement benefit obligation was calculated using a 5.75% discount rate and an assumed health care cost trend rate of 10% in 2005, declining to 5% in 2010 and thereafter. We recognized expense of $23 million related to this plan in the six months from April 1, 2005 through September 30, 2005. A one percent increase in the assumed health care cost trend rate would increase the accumulated postret irement benefit obligation as of April 1, 2005 by approximately $23 million and our run-rate annual expense by approximately $3 million. A one percent decrease in the assumed health care cost trend rate would decrease the accumulated postretirement benefit obligation as of April 1, 2005 by approximately $20 million and our run-rate annual expense by approximately $3 million.

Profit Sharing Plan. In January 2005, we announced that in connection with the pay and benefit reductions, we would be implementing an enhanced profit sharing program. The new program, which became effective April 1, 2005 and will be in place through 2009, creates an award pool of 30% of the first $250 million of annual pre-tax net income (as defined in the plan), 25% of the next $250 million and 20% of amounts over $500 million, subject to certain adjustments. Half of the profit-sharing pool will be allocated based on the relative share of the recently-agreed upon pay and benefit reductions and the other half will be allocated based on the relative wages of those work groups. Substantially all Continental employees will participate in the plan other than flight attendants, employees who participate in our management or officer bonus programs and certain non-U.S. employees.

In the first quarter of 2005, we recorded a $43 million non-cash curtailment charge relating to the freezing of the portion of our defined benefit pension plan attributable to pilots. In the third quarter of 2005, we recorded an $18 million non-cash settlement charge related to lump sum distributions from our pilot defined benefit pension plan to pilots who retired. These charges are discussed in Note 6. Also in the third quarter of 2005, we reduced our allowance for future lease payments and return conditions related to permanently grounded aircraft by $15 million following negotiated settlements with the aircraft lessors in an improving aircraft market.

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 Micronesia Development Association. The remaining $3 million of special charges in 2004 were related to the write-off of leasehold improvements and other items.

Activity related to the accruals for future lease payments and closure/under-utilization of facilities for the nine months ended September 30, 2005 is as follows (in millions):

On January 6, 2005, we contributed 6.0 million shares of Holdings common stock to our primary defined benefit pension plan. We recognized a gain of $51 million in the first quarter of 2005 related to this transaction. On April 7, 2005, we contributed an additional 6.1 million shares of Holdings common stock to our primary defined benefit pension plan. We recognized a gain of $47 million in the second quarter of 2005 related to this transaction. Our ownership of Holdings common stock following these transactions was 4.7 million shares, or an 8.6% interest in Holdings. These 4.7 million shares had a market value of $42 million at September 30, 2005. We do not currently intend to remain a stockholder of Holdings over the long term.  Subject to market conditions, we intend to sell or otherwise dispose of all of our shares of Holdings common stock in the future.

In addition to the Holdings shares we own, our primary defined benefit pension plan held 6.9 million shares of Holdings common stock at September 30, 2005. These shares represented a 12.7% interest in Holdings. The independent fiduciary that manages the Holdings shares in our primary defined benefit pension plan sold 5.2 million shares to third parties during the nine months ended September 30, 2005. The combined interest in Holdings of our direct ownership and our pension plan at September 30, 2005 was 11.5 million shares, or 21.3% of Holdings' outstanding shares.

Capacity Purchase Agreement. Our capacity purchase agreement with Holdings and ExpressJet provides that we purchase in advance all of ExpressJet's capacity for a negotiated price, and we are at risk for reselling the capacity at market prices. Payments made under our capacity purchase agreement are reported as ExpressJet capacity purchase, net. ExpressJet capacity purchase, net includes all of ExpressJet's fuel expense plus a margin on ExpressJet's fuel expense up to a cap provided in the capacity purchase agreement and a related fuel purchase agreement (which margin applies only to the first 71.2 cents per gallon, including fuel taxes) and is net of our rental income on aircraft we lease to ExpressJet. Such capacity purchase, net payments totaled $406 million and $1.1 billion in the three and nine months ended September 30, 2005 and $347 million and $992 million in the three and nine months ended September 30, 2004, respectively.

Tax Sharing Agreement. We recognized nonoperating income related to our tax sharing agreement with Holdings of $7 million and $21 million for the three and nine months ended September 30, 2005, respectively, and $14 million and $37 million in the three and nine months ended September 30, 2004, respectively.

We have two reportable segments: mainline and regional. 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.

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

Purchase Commitments. See Note 2 for a discussion of our aircraft purchase commitments.

Financings and Guarantees. We are the guarantor of approximately $1.7 billion in aggregate principal amount of tax-exempt special facilities revenue bonds and interest thereon, excluding the US Airways contingent liability described below. These bonds, issued by various airport municipalities, are payable solely from our rentals paid under long-term agreements with the respective governing bodies. The leasing arrangements associated with approximately $1.5 billion of these obligations are accounted for as operating leases, and the leasing arrangements associated with approximately $200 million of these obligations are accounted for as capital leases in our financial statements.

We are contingently liable for US Airways' obligations under a lease agreement between US Airways and the Port Authority of New York and New Jersey related to the East End Terminal at LaGuardia airport. These obligations include the payment of ground rentals to the Port Authority and the payment of other rentals in respect of the full amounts owed on special facilities revenue bonds issued by the Port Authority having an outstanding par amount of $166 million at September 30, 2005 and having a final scheduled maturity in 2015. If US Airways defaults on these obligations, we would be obligated to cure the default and we would have the right to occupy the terminal after US Airways' interest in the lease had been terminated. Pursuant to US Airways' plan of reorganization under Chapter 11 of the United States Bankruptcy Code, which became effective on September 27, 2005, US Airways has assumed the lease agreement.

We also have letters of credit and performance bonds at September 30, 2005 in the amount of $55 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 and other customary exclusions.

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, subject in most cases to certain mitigation obligations of the lenders. We had $1.7 billion of floating rate debt at September 30, 2005.

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, subject to customary exclusions. 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, subject to customary exclusions. Our lease obligations for these two aircraft totaled $49 million at September 30, 2005.

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

Credit Card Processing Agreement. Our bank-issued credit card processing agreement contains certain financial covenants which require, among other things, that we maintain a minimum EBITDAR (generally, earnings before interest, taxes, depreciation, amortization and aircraft rentals, adjusted for special charges) to fixed charges (generally, interest and aircraft rentals) ratio of 0.9 to 1.0 through June 30, 2006 and 1.1 to 1.0 thereafter. The liquidity covenant requires us to maintain a minimum level of $1.0 billion of unrestricted cash and short-term investments. The agreement also requires that we must maintain a debt rating of at least Caa3 as rated by Moody's or CCC- as rated by Standard & Poor's. We are currently in compliance with all of the covenants. Failure to maintain compliance would result in our being required to post up to an additional $360 million of cash collateral, which would adversely affect our liquidity. Depending on our unrestricted cash and short-term investm ents balance at the time, the posting of a significant amount of cash collateral could cause our unrestricted cash and short-term investments balance to fall below the $1.0 billion minimum balance requirement under our $350 million secured loan facility, resulting in a default under such facility.

Employees. On February 28, 2005, we announced that we had reached tentative agreements on new contracts covering our pilots, flight attendants, mechanics, dispatchers and simulator engineers following negotiations with the Air Line Pilots Association International ("ALPA"), the IAM, the International Brotherhood of Teamsters ("Teamsters") and the Transport Workers Union ("TWU") (representing both dispatchers and simulator engineers). Each of these agreements was ratified on March 30, 2005 by the members of the covered work groups with the exception of the agreement with our flight attendants, which was not ratified. The unions with ratified agreements chose to go forward and implement their contracts despite the fact that the flight attendants did not ratify their agreement. All of these agreements will become amendable on December 31, 2008.

The National Mediation Board appointed a federal mediator to assist us in reaching an agreement for pay and benefit reductions with our flight attendants, who are represented by the IAM.

Environmental Matters.  We could 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 ("CRWQCB") mandated a field study of the site, which was completed in September 2001.  In April 2005, under the threat of a CRWQCB enforcement action, we began environmental remediation of jet fuel contamination surrounding our aircraft maintenance hangar pursuant to a work plan submitted to (and approved by) the CRWQCB and our landlord, the Los Angeles World Airports.

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 expect our total losses from all environmental matters to be $47 million, for which we were fully accrued at September 30, 2005.  We have evaluated and recorded this accrual for environmental remediation costs separately from any related insurance recovery.  We have not recognized any material receivables related to insurance recoveries at September 30, 2005.

Based on currently available information, we believe that our reserves for potential environmental remediation costs are adequate, although reserves could be adjusted as further information develops or circumstances change.  However, we do not expect these items to materially affect our financial position, liquidity or results of operations.

IRS Examinations. During the quarter ended September 30, 2005, we entered into a final settlement agreement with the Internal Revenue Service ("IRS") resolving all matters raised by the IRS during its examination of our federal income tax returns through the year ended December 31, 1999. As a result of the settlement with the IRS and the associated deferred tax account reconciliation, deferred tax liabilities and long-term assets (primarily routes and airport operating rights) were reduced by $211 million to reflect the ultimate resolution of tax uncertainties existing at the point we emerged from bankruptcy in April 1993. The composition of the individual elements of deferred taxes recorded on the balance sheet was also adjusted; however, the net effect of these changes was entirely offset by an increase in the deferred tax valuation allowance due to our prior determination that it is more likely than not that our net deferred tax assets will ultimately not be realized. The settlement did not have a material impact on our results of operations, financial position or liquidity.

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 the 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 two remaining lawsuits brought by travel agencies that purportedly opted out of a prior class action entitled Sarah Futch Hall d/b/a/ Travel Specialists v. United Air Lines, et al. (U.S.D.C., Eastern District of North Carolina), in which the defendant airlines prevailed on summary judgment that was upheld on appeal. These similar suits against Continental and other major carriers allege violations of antitrust laws in reducing and ultimately eliminating the base commission formerly paid to travel agents. The pending cases are Tam Travel, Inc. v. Delta Air Lines, Inc., et al. (U.S.D.C., Northern District of California), filed on April 9, 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. Another such similar lawsuit, styled Paula Fausky, et al. v. American Airlines, et al. (U.S.D.C., Northern District of Ohio) and filed on May 8, 2003, was dismissed without prejudice in July 2005. By order dated November 10, 2003, the remaining actions were transferred and consolidated for pretrial purposes by the Judicial Panel on Multidistrict Litigation to the Northern District of Ohio. Discovery has commenced.

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 effect on our financial position, liquidity and results of operations.

We and/or certain of our subsidiaries are defendants in various other lawsuits, including one suit relating to certain environmental claims, and proceedings arising in the normal course of business.  Although 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 2004 Form 10-K/A, which identify important factors such as the consequences of our significant financial losses and high leverage, terrorist attacks, domestic and international economic conditions, the significant cost of aircraft fuel, labor costs, competition and industry conditions including the demand for air travel, the airline pricing environment and industry capacity decisions, regulatory matters and the seasonal nature of the airline business (the second and third quarters are generally stronger than the first and fourth quarters). In addition to the foregoing risks, there can be no assurance that we will be able to obtain the needed pay and benefit reductions from our flight attendants and CMI employees or that the ratified agree ments and the pay and benefit reductions and work rule changes from other work groups will enable the company to achieve the cost reductions expected, which will depend, upon other matters, on timely and effective implementation of new work rules, actual productivity improvement, employee attrition, technology implementation, our level of business activity, relations with employees generally and the ultimate accuracy of certain assumptions on which our cost savings are based. 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 http://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 Securities and Exchange Commission ("SEC").

Primarily due to record-high fuel prices and the continued weak domestic fare environment, the current U.S. domestic network carrier financial environment continues to be poor and could deteriorate further. During the third quarter of 2005, Hurricane Katrina and Hurricane Rita caused widespread disruption to oil production, refinery operations and pipeline capacity along certain portions of the U.S. Gulf Coast. As a result of these disruptions, the price of jet fuel increased significantly and the availability of jet fuel supplies was diminished. Additionally, Hurricane Rita forced us to suspend service for 36 hours at our largest hub, Houston's Bush Intercontinental Airport, costing us an estimated $25 million. Further increases in jet fuel prices or disruptions in fuel supplies, whether as a result of natural disasters or otherwise, could have a material adverse effect on our results of operations, financial position or liquidity.

Among the many factors that threaten us are the continued rapid growth of low-cost carriers and resulting downward pressure on domestic fares, high fuel costs, high labor costs for our flight attendants, excessive taxation, increased security costs 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 2004 Form 10-K/A. In addition to competition from low-cost carriers, we may face stronger competition from Delta Air Lines, Inc. and Northwest Airlines Corp. if those carriers, each of which filed for bankruptcy protection in September 2005, are able to achieve substantial cost reductions in bankruptcy through, among other things, reduction or discharge of debt, lease and pension obligations and wage and benefit reductions.

We have had substantial losses since September 11, 2001, the magnitude of which is not sustainable. We have attempted to return to profitability by implementing the majority of $1.1 billion of annual cost-cutting and revenue-generating measures since 2002, and we have also made significant progress toward our goal of achieving an additional annual $500 million reduction in pay and benefits costs. We finalized changes to wages, work rules and benefits for all employees except our flight attendants and certain employees of our wholly-owned subsidiary CMI who are subject to collective bargaining agreements. We began implementing these changes in early April 2005, which, when fully implemented, are expected to result in approximately $418 million of annual pay and benefits cost savings on a run-rate basis.

A significant portion of the cost savings from our work groups, both unionized and non-unionized, will be derived from changes to benefits and work rules. Our ability to achieve certain of the cost reductions will depend on effective implementation of new work rules, actual productivity improvements and implementation of changes in technology pertaining to employee work rules and benefits.

The current levels of pay and benefits for our flight attendants are not competitive. We have reengaged in negotiations with our flight attendants concerning pay and benefit reductions, and, at our request, on July 6, 2005, the National Mediation Board appointed a federal mediator to assist us in reaching an agreement for pay and benefit reductions with our flight attendants, who are represented by the IAM.

Although revenue trends have been improving, we still expect to incur a significant loss in the fourth quarter and full year 2005 due in large part to record high fuel prices. As a result of escalating prices, fuel expense is our single largest operating expense item for the first time in our history. We have been able to implement some fare increases on certain domestic and international routes in recent months, but these increases have not fully offset the substantial increase in fuel prices.

Taking into consideration our expected fourth quarter loss, $356 million of debt and capital lease principal payments due in the fourth quarter of 2005 and the $65 million cash pension contribution we made in October 2005, we currently expect that our unrestricted cash and short-term investments balance as of December 31, 2005 will be approximately $1.4 billion, not including any fourth quarter capital market transactions or other financings, except for previously announced aircraft financing transactions.

We also believe that under current conditions, absent adverse factors outside of our control, such as additional terrorist attacks, hostilities involving the United States, a further delay in the restart of the Gulf Coast refineries or further significant increases in crude oil prices, our existing liquidity and projected 2006 cash flows will be sufficient to fund current operations and other financial obligations through 2006. However, we have significant financial obligations due in 2007 and thereafter, and it is possible that we will have inadequate liquidity to meet those obligations if the current adverse domestic fare environment for network carriers does not improve materially, fuel prices remain high and we are unable to increase our revenue or decrease our costs considerably or raise additional liquidity through financing activities and/or by selling non-strategic assets. Our recent pay and benefit cost reductions are helping us reduce our overall costs, but we do not expect that these redu ctions in and of themselves will provide sufficient liquidity or restore our long-term profitability in the current environment.

RESULTS OF OPERATIONS

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, 2005 as compared to the corresponding periods ended September 30, 2004.

We recorded consolidated net income of $61 million for the third quarter of 2005 as compared to a consolidated net loss of $18 million for the three months ended September 30, 2004. We consider the key measure of our performance to be operating income, which was $109 million for the third quarter of 2005, as compared to $22 million for the third quarter of 2004. Significant components of our consolidated operating results are as follows (in millions, except percentage changes):

Operating Revenue. Passenger revenue increased 15.3%, primarily due to increased traffic and fares on international flights and more regional flying. Consolidated revenue passenger miles for the quarter increased 9.2% year-over-year on a capacity increase of 8.8%, which produced a consolidated load factor for the third quarter of 2005 of 81.1%, up 0.4 points over the same period in 2004. Consolidated yield increased 5.6% year-over-year. Consolidated passenger revenue per available seat mile ("RASM") for the quarter increased 6.0% year-over-year, primarily due to higher yield. The improved RASM reflects recent fare increases and our efforts to manage the revenue associated with the emerging trend of customers booking closer to flight dates and an improved mix of local versus flow traffic.

The table below shows passenger revenue for the quarter ended September 30, 2005 and period to period comparisons for passenger revenue, RASM and available seat miles ("ASMs") by geographic region for our mainline and regional operations:

Cargo, mail and other revenue increased 15.3% primarily due to increases in revenue associated with sales of mileage credits in our OnePass frequent flyer program and increases in freight fuel surcharges, partially offset by lower mail yields.

Operating Expenses. Aircraft fuel and related taxes increased 65.2% 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 56.9% from $1.20 in the third quarter of 2004 to $1.88 in the third quarter of 2005. Fuel expense is our single largest operating expense item for the first time in our history. Wages, salaries and related costs decreased 8.1% primarily due to wage concessions, partially offset by a slight increase in the average number of employees.

Payments made under our capacity purchase agreement are reported in ExpressJet capacity purchase, net. ExpressJet capacity purchase, net includes all of ExpressJet's fuel expense plus a margin on ExpressJet's fuel expense up to a cap provided in the capacity purchase agreement and a related fuel purchase agreement (which margin applies only to the first 71.2 cents per gallon, including fuel taxes) and is net of our rental income on aircraft we lease to ExpressJet. The net expense was higher in the third quarter of 2005 than in the corresponding quarter of 2004 due to increased flight activity at ExpressJet and increased fuel prices, offset in part by lower renegotiated rates effective January 1, 2005 under the capacity purchase agreement.

Aircraft rentals increased due to new mainline and regional aircraft delivered in 2005. Landing fees and other rentals were higher due to fixed rent increases, mainly from the completion of Terminal E at Bush Intercontinental Airport in Houston. Distribution costs increased primarily due to higher credit card fees and reservation costs related to the increase in revenue. Other operating expenses increased primarily due to the higher number of international flights, which resulted in increased air navigation, ground handling and related expenses.

During the third quarter of 2005, we recorded an $18 million non-cash settlement charge related to lump sum distributions from the pilot defined benefit pension plan to pilots who retired. SFAS No. 88 requires the use of settlement accounting if, for a given year, the cost of all settlements exceeds, or is expected to exceed, the sum of the service cost and interest cost components of net periodic pension expense for the plan. Under settlement accounting, unrecognized plan gains or losses must be recognized immediately in proportion to the percentage reduction of the plan's projected benefit obligation. Also in the third quarter of 2005, we reduced our allowance for future lease payments and return conditions related to permanently grounded aircraft by $15 million following negotiated settlements with the aircraft lessors in an improving aircraft market. In the third quarter of 2004, we recorded a special charge of $22 million associated with future obligations for rent and return conditions relat ed to three leased MD-80 aircraft which were permanently grounded.

Nonoperating Income (Expense). Income from affiliates includes income related to our tax sharing agreement with Holdings and our equity in the earnings of Holdings and Copa Holdings, S.A. ("Copa"). Income related to our tax sharing agreement with Holdings was $7 million in the third quarter of 2005 as compared to $14 million in the third quarter of 2004. Our equity in the earnings of Copa for the third quarter of 2005 includes income of $10 million related primarily to a change in Copa's accounting for maintenance expense. Nonoperating income for the third quarter 2004 also included a gain of $15 million related to the adjustment to fair value of our investment in Orbitz, after associated compensation expense.

Income Tax Benefit (Expense).   During the first quarter of 2004, due to our continued losses, we concluded that we were required to provide a valuation allowance for deferred tax assets because we had determined that it was more likely than not that such deferred tax assets would ultimately not be realized. As a result, our net income for the third quarter of 2005 and net loss for the third quarter of 2004 were not reduced by any tax expense (benefit).

Segment Results of Operations

We have two reportable segments: mainline and regional. The mainline segment consists of flights with jets that have a capacity of greater than 100 seats while the regional segment consists of flights with jets that have 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.

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.

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

The reported results of our regional segment do not reflect the total contribution of the regional segment to our system-wide operations. The regional segment generates additional revenues for the mainline segment as it feeds traffic between smaller cities and our mainline hubs.

The variances in specific line items for the regional segment are due to the same factors discussed under consolidated results of operations. ExpressJet capacity purchase, net increased due to increased flight activity at ExpressJet, higher fuel costs and the higher number of regional jets leased from us by ExpressJet. The net amounts consist of the following (in millions, except percentage changes):

We recorded a consolidated net loss of $25 million for the nine months ended September 30, 2005 as compared to a consolidated net loss of $201 million for the nine months ended September 30, 2004. We consider the key measure of our performance to be operating income (loss). Operating income was $55 million for the nine months ended September 30, 2005, as compared to a loss of $75 million for the nine months ended September 30, 2004. Significant components of our consolidated operating results are as follows (in millions, except percentage changes):