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

As of October 14, 2002, 65,763,337 shares of Class B common stock were outstanding.

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 the 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. All intercompany transactions have been eliminated in consolidation. 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, 2001 (the "2001 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 subsidiaries.

Certain reclassifications have been made in the prior year and the current year-to-date financial statements to conform to the presentation for the three months ended September 30, 2002.

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

We include in other comprehensive income (loss) changes in minimum pension liabilities and changes in the fair value of derivative financial instruments, which we use from time to time to reduce the risk in fluctuations of fuel prices and some foreign currencies, each of which qualify for hedge accounting. During the third quarter of 2002 and 2001, total comprehensive income (loss) amounted to $(38) million and $(14) million, respectively. For the nine months ended September 30, 2002 and 2001, total comprehensive income (loss) amounted to $(349) million and $37 million, respectively. For all periods presented, the significant differences between net income (loss) and total comprehensive income (loss) were attributable to changes in the fair value of derivative financial instruments.

In April 2002, ExpressJet Holdings, Inc. ("Holdings"), our then wholly owned subsidiary and the sole stockholder of ExpressJet Airlines, Inc. ("ExpressJet") which operates as "Continental Express", sold 10 million shares of its common stock in an initial public offering and used the net proceeds to repay $147 million of ExpressJet's indebtedness to us. In addition, we sold 20 million of our shares of Holdings common stock in the offering for net proceeds of $300 million. The sale of Holdings' shares and our shares in the offering was accounted for as a capital transaction resulting in a $291 million increase in additional paid-in capital and a $175 million increase in tax liabilities. We contributed $150 million of our proceeds to our defined benefit pension plan and used the remainder of our proceeds for general corporate purposes.

In connection with the offering, our ownership of Holdings fell to 53.1 percent. We do not currently intend to remain a stockholder of Holdings over the long term. Subject to market conditions, we may sell some or all of our shares of Holdings common stock in the future. When our ownership of Holdings falls below 50%, we will deconsolidate Holdings from our financial statements.

Prior to the offering and in connection with an internal reorganization by Holdings, a subsidiary of Holdings issued non-voting preferred stock which has a liquidation preference of $5 million, is mandatorily redeemable in 2012, and is callable beginning in 2005. The preferred stock was sold to a non-affiliated third party for a note in the original principal amount of $5 million and is included on our balance sheet as redeemable preferred stock of subsidiary.

Capacity Purchase Agreement with ExpressJet

General. Effective January 1, 2001, we implemented a capacity purchase agreement with ExpressJet. Under the capacity purchase agreement, ExpressJet currently flies all of its aircraft on our behalf, and we handle scheduling, ticket prices and seat inventories for these flights. In exchange for ExpressJet's operation of the flights and performance of other obligations under the agreement, we pay them for each scheduled block hour based on an agreed formula. ExpressJet recognizes revenue based on the compensation it earns from us for providing capacity. 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 passenger ticket processing expenses. The payments made to ExpressJet under the agreement are eliminated in our consolidated financial statements.

Compensation and Operational Responsibilities. Under the agreement, we pay ExpressJet a base fee for each scheduled block hour based on a formula that will remain in place through December 31, 2004. The formula is designed to provide ExpressJet with an operating margin of approximately 10% before taking into account variations in some costs and expenses that are generally controllable by them.

The initial block hour rates are based on estimates of future costs we developed jointly with ExpressJet. These estimates may differ from ExpressJet's actual costs. If they do, our costs will be adjusted for some of ExpressJet's costs under the capacity purchase agreement. The adjusted block hour rates provide ExpressJet with revenue from us that is based on the sum of the following three components, generally differentiated by the nature of the operating costs ExpressJet incurs:

1. Fully-reconciled costs. Actual costs incurred plus a 10% margin on fuel, aircraft rent, terminal facility rent, depreciation and amortization, on-time bonuses, 401(k) contributions, taxes other than income taxes, passenger liability insurance, hull and war risk insurance, landing fees, administrative and ground handling services provided by us, and regional jet engine maintenance expenses under long-term third party contracts.
2. Costs within the margin band. Forecasted costs plus a 10% margin on those costs implicit in the block hour rates (irrespective of actual costs incurred) on maintenance, materials, repairs, passenger facilities, other rentals, and other operating expenses not included in (i) above. However, if ExpressJet's actual expenses in this category are sufficiently different from the forecasts implicit in the block hour rates so that its total operating margin -- excluding the effects of the costs in category (iii) below as well as unanticipated changes in its depreciation expense, any performance incentive payments, controllable cancellations, litigation costs and other costs that are not included in the block hour rates and are not reasonable and customary in the industry -- is either below 8.5% or above 11.5% calculated on a quarterly basis, then the overall revenue will be adjusted upward or downward to result in an 8.5% or 11.5% margin as applicable.
3. Unreconciled costs. Forecasted costs plus a 10% margin on those costs implicit in the block hour rates (irrespective of actual costs incurred) on wages and salaries, and benefits not included in categories (i) and (ii).

Our payments to ExpressJet under the capacity purchase agreement totaled $980 million in 2001 and $805 million and $756 million in the first nine months of 2002 and 2001, respectively. Such amounts are eliminated in the accompanying consolidated financial statements because we consolidate ExpressJet. Our future payments under the capacity purchase agreement are dependent on numerous variables, and therefore difficult to predict. The most important of those variables is the number of scheduled block hours, which takes into account the number of ExpressJet aircraft and our utilization rates of such aircraft. However, if we changed our utilization of ExpressJet's aircraft, we would also change the number of available seat miles on ExpressJet's flights and the revenue that we generate by selling those seats. Any decision by us to change the utilization of ExpressJet's aircraft (or to remove aircraft from the capacity purchase agreement) would be made by determining the net effect of such change on ou r income and cash flow, taking into account not only our cash commitment to ExpressJet but also our expected revenue from ExpressJet's flights.

Set forth below are estimates of our future minimum noncancellable commitments under the capacity purchase agreement. These estimates of our future minimum noncancellable commitments under the capacity purchase agreement do not include the portion of the underlying obligations for aircraft and facility rent that are disclosed as part of our consolidated operating lease commitments. For purposes of calculating these estimates, we have assumed (i) that ExpressJet's aircraft deliveries continue as scheduled through July 2004, (ii) an annual inflation rate of 2% beginning in 2005 (contracted rates through 2004), (iii) a fuel rate of 66 cents per gallon, (iv) that we exercise our rights to terminate the capacity purchase agreement at the earliest possible date permitted under the contract, (v) that prior to termination we exercise our rights to remove as many aircraft as quickly as contractually permitted from the capacity purchase agreement, (vi) an average daily utilization rate of 7.6 hours for the fo urth quarter of 2002 and full year 2003, and 8.4 hours for 2004 through 2006, and (vii) controllable cancellations are at historical levels resulting in no incentive compensation payable to ExpressJet. Based on these assumptions, our future minimum noncancellable commitments under the capacity purchase agreement are estimated as follows (in millions):

It is important to note that in making the assumptions used to develop these estimates, we are attempting to estimate our minimum noncancellable commitments and not the amounts that we currently expect to pay to ExpressJet (which amounts are expected to be higher as we do not currently expect to reduce capacity under the agreement to the extent assumed above or terminate the agreement at the earliest possible date). In addition, our actual minimum noncancellable commitments to ExpressJet could differ materially from the estimates discussed above, because actual events could differ materially from the assumptions described above. For example, a 10% increase or decrease in scheduled block hours (whether a result of change in delivery dates of aircraft or average daily utilization) in 2003 would result in a corresponding increase or decrease in cash obligations under the capacity purchase agreement of approximately 7% or $70 million.

ExpressJet's base fee includes compensation for scheduled block hours associated with some cancelled flights, based on historical cancellation rates constituting rolling five-year monthly averages. To the extent that ExpressJet's rate of controllable cancellations, such as those due to maintenance or crew shortages, is less than its historical controllable cancellation rate, ExpressJet will be entitled to additional payments. ExpressJet is also entitled to receive a small per-passenger fee and incentive payments for first flights of a day departing on time and baggage handling performance.

Under the agreement and a related fuel purchase agreement, ExpressJet's fuel costs are capped at 61.1 cents per gallon in 2002 and 66.0 cents per gallon thereafter. We will absorb any of ExpressJet's fuel costs in excess of these costs.

If a change of control (as defined in the agreement) of ExpressJet occurs without our consent, the block hour rates that we will pay under the agreement will be reduced by an amount approximately equal to the operating margin built into the rates.

Some marketing-related costs normally associated with operating an airline are borne directly by us, since we are responsible for marketing under the capacity purchase agreement. We will continue to provide operational support to ExpressJet under the capacity purchase agreement, such as ground handling, and will provide certain administrative services for a limited period of time.

ExpressJet has agreed to meet with us each year beginning in 2004 to review and set the block hour rates to be paid in the following year, in each case based on the formula used to set the original block hour rates (including a 10% targeted operating margin). If we and ExpressJet cannot come to an agreement on the annual adjustments, we have agreed to submit our disagreement to arbitration. In addition, the agreement gives each party the right to "meet and confer" with the other regarding any material change in the underlying assumptions regarding the cost of providing services under the agreement and whether the compensation provisions of the agreement should be changed as a result, but does not require any party to agree to any change in the compensation provisions.

Capacity and Fleet Matters. The agreement covers all of ExpressJet's existing fleet, as well as the 104 Embraer regional jets subject to firm orders at September 30, 2002. Under the capacity purchase agreement, beginning July 1, 2003, we have the right to reduce the number of ExpressJet's aircraft covered by the contract upon 12 months' notice, resulting in the earliest effective date for capacity reduction of July 1, 2004. Under the agreement, we are entitled to decline capacity with respect to (a) any regional jets subject to firm orders that have not been delivered before the effective date of the reduction in capacity and (b) up to 25% over any rolling three-year period of ExpressJet's delivered regional jets. If we remove aircraft from the terms of the agreement, ExpressJet will have the option to (i) fly the released aircraft for another airline (subject to its ability to obtain facilities, such as gates and slots, and subject to its exclusive arrangement with us that prohibits Expres sJet during the term of the agreement from flying under its or another carrier's code in or out of our hub airports), (ii) fly the aircraft under ExpressJet's own flight designator code subject to its ability to obtain facilities, such as gates and slots, and subject to ExpressJet's exclusive arrangement with us respecting our hubs or (iii) decline to fly the aircraft and cancel the related subleases with us. If ExpressJet does not cancel the aircraft subleases, the interest rate used to calculate the scheduled lease payments will automatically increase by 200 basis points to compensate us for our continued participation in ExpressJet's lease financing arrangements.

Term of Agreement. The agreement expires on December 31, 2010; however, we may terminate the agreement at any time after January 1, 2006 upon 12 months' notice, or at any time without notice for cause (as defined in the agreement). We may also terminate the agreement at any time upon a material breach by ExpressJet that does not constitute cause and continues for 90 days after notice of such breach, or without notice or opportunity to cure if we determine that there is a material safety concern with ExpressJet's flight operations. We have the option to extend the term of the agreement with 24 months' notice for up to four additional five-year terms through December 31, 2030.

Service Agreements. We provide various services to ExpressJet and charge them at rates in accordance with the capacity purchase agreement. The services provided to ExpressJet by us include certain customer services such as ground handling and centralized services and infrastructure costs, including insurance, technology, accounting, legal, treasury, human resources and risk management. For providing these services, we charged ExpressJet approximately $22 million, $17 million, $64 million and $51 million for the three months ended September 30, 2002 and 2001 and the nine months ended September 30, 2002 and 2001, respectively.

Note Receivable from ExpressJet. At September 30, 2002 we had a $376 million note receivable from ExpressJet. Accrued interest on the note is payable quarterly by ExpressJet until March 31, 2003, at which time principal and interest will be payable in quarterly installments of $27.9 million. We anticipate that the final payment will be made on September 30, 2006. The interest rate is fixed for each quarter at a rate equal to the three-month London interbank offered rate on the second business day prior to such quarter plus 1.25% per annum, subject to an aggregate cap of 3.50% in 2002, 5.35% in 2003 and 6.72% in 2004. There are no such caps after 2004. The note receivable is eliminated in the accompanying consolidated financial statements.

Leases. As of September 30, 2002, ExpressJet leased or subleased 179 of its aircraft under long-term operating leases from us. ExpressJet's sublease agreements with us have substantially the same terms as the lease agreements between us and the lessors, and expire between 2002 and 2019. ExpressJet leases or subleases, under various operating leases, ground equipment and substantially all of its ground facilities, including facilities at public airports, from us or the municipalities or agencies owning and controlling such airports. If ExpressJet defaults on its payment obligations under its aircraft subleases with us, we are entitled to reduce any payments required to be made by us to ExpressJet under the capacity purchase agreement by the amount of the defaulted payment. ExpressJet's total rental expense related to all leases with us was approximately $52 million, $45 million, $150 million and $126 million for the three months ended September 30, 2002 and 2001 and the nine months ended S eptember 30, 2002 and 2001, respectively. These amounts are eliminated in the accompanying consolidated financial statements.

Deferred Taxes. In conjunction with Holdings' offering, our tax basis in the stock of Holdings and the tax basis of ExpressJet's tangible and intangible assets were increased to fair value. This increase in basis has resulted in the utilization of a substantial amount of ExpressJet's state net operating loss carryovers and our federal and state net operating losses. The increased tax basis should result in additional tax deductions available to ExpressJet over a period of 15 years. To the extent ExpressJet generates taxable income sufficient to realize the additional tax deductions, it will be required to pay us a percentage of the amount of tax savings actually realized, excluding the effect of any loss carrybacks. ExpressJet will be required to pay us 100% of the first third of the anticipated tax benefit, 90% of the second third, and 80% of the last third. However, if the anticipated benefits are not realized by the end of 2018, ExpressJet will be obligated to pay us 100% of any benefit s realized after that date. We will not recognize for accounting purposes the benefit of the tax savings associated with ExpressJet's asset step-up until paid to us by ExpressJet due to the uncertainty of realization.

Other. So long as we are ExpressJet's largest customer, if it enters into an agreement with another major airline to provide regional airline services on a capacity purchase or other similar economic basis for 10 or more aircraft on terms and conditions that are in the aggregate less favorable to ExpressJet than the terms and conditions of the capacity purchase agreement, we will be entitled to amend our capacity purchase agreement to conform the terms and conditions of the capacity purchase agreement to the terms and conditions of the agreement with the other major airline.

As shown in the following table at September 30, 2002, our aircraft fleet consisted of 366 mainline jets, 170 regional jets and 12 turboprop aircraft. Our purchase commitments (orders) and aircraft options as of September 30, 2002 are also included in the table.

1. Excludes 78 aircraft removed from service during any time period prior to September 30, 2002, but that continue to be owned by or under lease to us. See Note 6.

In the first nine months of 2002, we took delivery of 20 Boeing jet aircraft, returned nine MD-80 aircraft and one 737-300 aircraft to service and removed 12 MD-80 aircraft, three 737-300 aircraft and one 737-500 aircraft from service. ExpressJet took delivery of 33 Embraer regional jet aircraft in the first nine months of 2002 and retired 21 turboprop aircraft. During the remainder of 2002, ExpressJet currently plans to take delivery of 18 additional Embraer regional jet aircraft (all of which will be the new Embraer ERJ-145XR long range aircraft) and retire from service its remaining 12 turboprop aircraft (six of which are subject to ongoing leases).

As of September 30, 2002, the estimated aggregate cost of our firm commitments for 67 Boeing aircraft was approximately $2.5 billion. No deliveries of Boeing aircraft are planned until the fourth quarter of 2003. We do not have financing currently in place for these 67 aircraft, which are scheduled for delivery through 2008. In addition, at September 30, 2002, we had firm commitments for 16 spare engines for these aircraft at an aggregate purchase price of approximately $109 million. We do not have financing currently in place for these spare engines, which are deliverable through March 2005.

As of September 30, 2002, the estimated aggregate cost of ExpressJet's firm commitments for 104 Embraer regional jets was approximately $2.1 billion. In addition, as of September 30, 2002, ExpressJet expected to purchase 21 spare engines for approximately $62 million. These spare engines are deliverable through the first quarter of 2005. Neither we nor ExpressJet have any obligation to take any of these firm Embraer aircraft that are not financed by a third party and leased to us. Neither we nor ExpressJet have any financing currently in place for the 21 spare engines.

Maturities of long-term debt due before December 31, 2002 and over the next four years are as follows (in millions):

During the nine months ended September 30, 2002, we recorded special charges totaling $242 million ($153 million after income taxes) primarily related to the impairment of owned aircraft and the future obligations for leased aircraft which have been permanently grounded or were to be permanently grounded within 12 months following the charge. Details of the pretax charges are as follows (in millions):

Cash payments related to accruals established for this special charge were $13 million and $28 million for the three and nine months ended September 30, 2002, respectively.

During the nine months ended September 30, 2001, we recorded special charges totaling $85 million ($54 million after income taxes) primarily related to severance, impairment of investments and receivables and other special charges, some of which were associated with the terrorist attacks of September 11, 2001. Details of the pretax charges are as follows (in millions):

Total charges of $85 million consist of $56 million of cash charges and $29 million of non-cash charges. The remaining accrual for cash items was $27 million at September 30, 2002.

As of September 30, 2002, we had the following aircraft out of service:

The 30 owned out-of-service aircraft are being carried at an aggregate fair market value of $97 million. We currently sublease two of the leased out-of-service aircraft and plan to explore sublease opportunities for certain of the 46 other leased out-of-service aircraft. The timing of the disposition of these aircraft is dependent upon the stabilization of the economic environment in the airline industry as well as our ability to find purchasers or sublessees for the aircraft. We cannot predict when such stabilization will occur or if purchasers or sublessees can be found, and it is possible that our assets could suffer additional impairment.

In July 2001, the Financial Accounting Standards Board issued Financial Accounting Standard No. 142 - "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 includes requirements to test goodwill and indefinite-lived intangible assets for impairment rather than amortize them. Effective January 1, 2002, we adopted SFAS 142 and discontinued amortization of our goodwill recorded on investments in unconsolidated subsidiaries and routes, which are indefinite-lived intangible assets. This change resulted in reduced expense of approximately $23 million on an annualized basis. SFAS 142 requires us to test routes for impairment annually, beginning in the first quarter of 2002. We performed the first of these impairment tests as of January 1, 2002 and determined that we did not have any impairment of our routes upon adoption based on our assessment of fair values.

Pro forma results for the three and nine months ended September 30, 2001, assuming the discontinuation of amortization of routes and goodwill amortization on investments in unconsolidated subsidiaries, are shown below (in millions, except per share data).

In August 2001, the Financial Accounting Standards Board issued Financial Accounting Standard No. 144 - "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 supersedes SFAS 121 and the portion of the Accounting Principle Board Opinion No. 30 that deals with disposal of a business segment. Effective January 1, 2002, we adopted SFAS 144, which had no effect on our results of operations.

In June 2002, the Financial Accounting Standards Board issued Financial Accounting Standard No. 146 - "Accounting for Costs Associated with Disposal or Exit Activities" ("SFAS 146"). SFAS 146 requires that liabilities for the costs associated with exit or disposal activities be recognized when the liabilities are incurred, rather than when an entity commits to an exit plan. We plan to adopt SFAS 146 on January 1, 2003. The new rules will change the timing of liability and expense recognition related to exit or disposal activities, but not the ultimate amount of such expenses.

In the third quarter of 2002, we received our final payment of $21 million in cash under the Air Transportation Safety and System Stabilization Act (the "Stabilization Act"). Total receipts under the Stabilization Act during 2002 were $51 million. We recorded a charge of $12 million ($8 million after income taxes) in the second quarter of 2002 to write down our receivable from the U.S. government based on our final application.

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. All forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. For examples of such risks and uncertainties, please read the risk factors set forth in our 2001 10-K and our other securities filings, which identify important risks and uncertainties such as 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, airline pricing environment and industry capacity decisions, regulatory matters and the seasonal nature of the airline business.

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 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, 2002 as compared to the corresponding periods ended September 30, 2001.

We incurred a consolidated net loss of $37 million for the three months ended September 30, 2002 as compared to producing consolidated net income of $3 million for the three months ended September 30, 2001. Revenue passenger miles and available seat miles were down quarter over quarter due to traffic declines resulting from the weakened economy and our reduced flight schedule since the events of September 11, 2001. Despite improving load factors, industry fare discounting has negatively impacted both yield and breakeven load factor quarter over quarter.

Passenger revenue decreased 3.0%, $64 million, during the quarter ended September 30, 2002 as compared to the same period in 2001, which was principally due to continued traffic and capacity declines and fare discounting following the September 11, 2001 terrorist attacks and the continuing weak economy. Yield was 3.4% lower in the third quarter of 2002 than in the third quarter of 2001.

While revenue in the domestic market remains depressed, our trans-Atlantic routes have improved. Comparisons of passenger revenue, passenger revenue per available seat mile ("RASM") and available seat miles ("ASMs") by geographic region for Continental's mainline jet and Continental Express operations are shown below:

Cargo, mail and other revenue increased 15.4%, $19 million, in the third quarter of 2002 compared to the third quarter of 2001 primarily due to higher freight volumes and yield and higher contract revenue from charter flights, partially offset by continued security restrictions that reduced mail volumes.

Wages, salaries and related costs decreased 4.6%, $36 million, during the quarter ended September 30, 2002 as compared to the same period in 2001 primarily due to a reduction in the number of employees as a result of reduced flying and lower employee incentives, partially offset by higher wage rates.

Aircraft fuel expense decreased 14.3%, $46 million, in the three months ended September 30, 2002 as compared to the same period in the prior year. The average jet fuel price per gallon decreased 8.2% from 78.46 cents in the third quarter of 2001 to 72.01 cents in the third quarter of 2002. Jet fuel consumption decreased 8.8% principally reflecting reduced flight operations and the fuel efficiency of our younger fleet. During the third quarter of 2002, we also recognized gains of approximately $9 million, relating to our fuel hedging program, which is reflected in fuel expense.

Landing fees and other rentals increased 17.3%, $24 million, in the three months ended September 30, 2002 as compared to the same period in the prior year primarily due to higher landing fees resulting from rate increases and higher facilities rent (partially attributable to the completion of a portion of the Global Gateway project at Newark Liberty International Airport).

Maintenance, materials and repairs decreased 16.2%, $23 million, during the quarter ended September 30, 2002 as compared to the same period in 2001 primarily due to the replacement of older aircraft with new aircraft.

Depreciation and amortization expense decreased 6.7%, $8 million, in the third quarter of 2002 compared to the third quarter of 2001 due principally to lower depreciation expense on grounded aircraft which have been written down to fair market value and the discontinuation of amortization of routes and goodwill following the adoption of SFAS 142, partially offset by the addition of new owned aircraft and related spare parts.

Reservations and sales expense decreased 15.0%, $16 million, in the three months ended September 30, 2002 as compared to the same period in 2001 primarily due to lower computer reservation system booking fees and credit card discount fees as a result of fewer passengers and lower revenue. Computer reservation system booking fees were also lower due to passengers booking closer to their travel date, resulting in fewer re-bookings.

Passenger services expense decreased 12.4%, $11 million, in the third quarter of 2002 compared to the third quarter of 2001 primarily due to a decrease in food costs and aircraft supplies resulting from fewer passengers.

Commission expense decreased 46.0%, $40 million in the third quarter of 2002 compared to the third quarter of 2001 due to the elimination of domestic base commissions and lower revenue.

Other operating expense decreased 8.3%, $25 million, in the three months ended September 30, 2002 as compared to the same period in the prior year, primarily as a result of decreases in outsourced services and other miscellaneous expenses resulting from reduced capacity, partially offset by increased insurance and security costs.

Special charges in the three months ended September 30, 2001 include costs associated with furloughs and Company-offered leaves, a charge for environmental remediation and costs associated with the closure and nonutilization of certain facilities and for certain uncollectible receivables. See Note 6.

Stabilization Act compensation in the third quarter of 2001 included $243 million of compensation from the U.S. Government for direct losses incurred beginning on September 11, 2001 through September 30, 2001 as a result of the September 11, 2001 terrorist attacks.

Interest expense increased 21.3%, $16 million, in the third quarter of 2002 compared to the third quarter of 2001 due to an increase in long-term debt primarily resulting from the purchase of new aircraft.

Interest income decreased 40.0%, $4 million, in the third quarter of 2002 compared to the third quarter of 2001 due to lower interest rates.

Other nonoperating income (expense) in the three months ended September 30, 2001 included approximately $22 million of special charges related to the impairment of investments in certain affiliates and the uncollectibility of the related notes receivable as a consequence of the events of September 11, 2001. See Note 6.

Our effective tax rates differ from the federal statutory rate of 35% primarily due to certain expenses that are not deductible for federal income tax purposes and due to state income taxes and the accrual of income tax expense of approximately $4 million on our share of ExpressJet's net income for the quarter ended September 30, 2002.

Minority interest of $10 million in the third quarter of 2002 represents the portion of Holdings' net income attributable to the 46.9% of Holdings that we do not own.

We incurred a consolidated net loss of $342 million and produced consolidated net income of $54 million for the nine months ended September 30, 2002 and 2001, respectively. Revenue passenger miles and available seat miles were down year over year due to continued traffic declines and our reduced flight schedule since the events of September 11, 2001. Despite improving load factors, industry fare discounting has negatively impacted both yield and breakeven load factor year over year.

Included in the net loss is a fleet charge of $242 million ($153 million after income taxes) primarily related to the impairment (owned aircraft) and accrual of lease exit costs (leased aircraft) of our DC10-30, MD-80 and turboprop fleets, and a $12 million charge ($8 million after income taxes) related to the write down of our receivable from the U.S. government related to the finalization of the Stabilization Act grant. See Note 6.

Passenger revenue decreased 12.5%, $856 million, during the nine months ended September 30, 2002 as compared to the same period in 2001. The decrease was principally due to traffic and capacity declines and fare discounting following the September 11, 2001 terrorist attacks and the continuing weak economy. Yield was 8.9% lower during the nine months ended September 30, 2002 than in the comparable 2001 period.

Comparisons of passenger revenue, RASM and ASMs by geographic region for Continental's mainline jet and Continental Express operations are shown below:

Cargo, mail and other revenue decreased 2.7%, $11 million, during the nine months ended September 30, 2002 as compared to the same period in 2001 primarily due to new security restrictions that reduced mail volumes, partially offset by higher charter revenue.

Wages, salaries and related costs decreased 5.0%, $117 million, during the nine months ended September 30, 2002 as compared to the same period in 2001, primarily due to a reduction in the number of employees as a result of reduced flying and lower employee incentives, partially offset by higher wage rates.

Aircraft fuel expense decreased 27.4%, $278 million, in the nine months ended September 30, 2002 as compared to the same period in the prior year. The average price per gallon decreased 18.1% from 81.80 cents in the first nine months of 2001 to 67.02 cents in the first nine months of 2002. Jet fuel consumption decreased 13.4%, principally reflecting reduced flight operations and the fuel efficiency of our younger fleet. During the first nine months of 2002 and 2001, we also recognized gains of approximately $15 million and $2 million, respectively, related to our fuel hedging program, which is reflected in fuel expense.

Aircraft rentals increased 3.0%, $20 million, during the nine months ended September 30, 2002 as compared to the same period in 2001 primarily due to the delivery of new aircraft.

Landing fees and other rentals increased 11.8%, $51 million, in the nine months ended September 30, 2002 as compared to the same period in the prior year primarily due to higher landing fees resulting from rate increases and higher facilities rent (partially attributable to the completion of a portion of the Global Gateway project at Newark Liberty International Airport).

Maintenance, materials and repairs decreased 24.4%, $113 million, during the nine months ended September 30, 2002 as compared to the same period in the prior year primarily due to the replacement of older aircraft with new aircraft.

Depreciation and amortization expense decreased 2.1%, $7 million, in the first nine months of 2002 compared to the same period in 2001 primarily due to lower depreciation expense on grounded aircraft which have been written down to fair market value and the discontinuation of amortization of routes and goodwill following the adoption of SFAS 142, partially offset by the addition of new owned aircraft and related spare parts.

Reservations and sales expense decreased 18.1%, $65 million, in the first nine months of 2002 compared to the same period in 2001 primarily due to lower computer reservation system booking fees and credit card discount fees as a result of fewer passengers and lower revenue. Computer reservation system booking fees were also lower due to passengers booking closer to their travel date, resulting in fewer re-bookings.

Passenger services expense decreased 17.4%, $48 million, during the nine months ended September 30, 2002 as compared to the same period in 2001 primarily due to a decrease in food costs and aircraft supplies resulting from fewer passengers.

Commission expense decreased 43.3%, $133 million, during the nine months ended September 30, 2002 as compared to the same period in 2001 due to the elimination of domestic base commissions and lower revenue.

Other operating expense decreased 6.1%, $56 million, in the nine months ended September 30, 2002 as compared to the same period in the prior year, primarily as a result of decreases in outsourced services and other miscellaneous expenses resulting from reduced capacity, which was partially offset by increased insurance and security costs.

Special charges in the nine months ended September 30, 2001 include costs associated with furloughs and Company-offered leaves, a charge for environmental remediation and costs associated with the closure and nonutilization of certain facilities and for certain uncollectible receivables. See Note 6.

Stabilization Act compensation in the nine months ended September 30, 2001 includes $243 million of compensation from the U.S. Government for direct losses incurred beginning on September 11, 2001 through September 30, 2001 as a result of the September 11, 2001 terrorist attacks.

Interest expense increased 21.0%, $46 million, in the nine months ended September 30, 2002 compared to the same period in the prior year due to an increase in long-term debt primarily resulting from the purchase of new aircraft.

Interest income decreased 52.6%, $20 million, in the first nine months of 2002 compared to the first nine months of 2001 due to lower interest rates.

The Company's other nonoperating income (expense) in the nine months ended September 30, 2001 included $22 million related to the impairment of investments in certain affiliates and the uncollectibility of the related notes receivable, losses on marketable securities of $12 million, the Company's equity in the net losses of certain investments of $7 million, foreign currency losses of $5 million and net losses of $9 million related to the portion of fuel hedges excluded from the assessment of hedge effectiveness (primarily option time value).

Our effective tax rates differ from the federal statutory rate of 35% primarily due to certain expenses that are not deductible for federal income tax purposes and due to state income taxes and the accrual of income tax expense of approximately $7 million on our share of ExpressJet's net income for the period after the initial public offering in 2002.

Minority interest of $18 million in the nine months ended September 30, 2002 represents the portion of Holdings' net income attributable to the 46.9% of Holdings that we do not own.

An analysis of statistical information for Continental's systemwide jet operations, excluding regional jet operations except as otherwise noted, for the periods indicated is as follows:

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As of September 30, 2002, we had $1.3 billion in cash, cash equivalents and short-term investments, including $147 million of cash at ExpressJet. Cash flows used in operations for the nine months ended September 30, 2002 were $13 million, including $51 million we received under the Stabilization Act. Cash flows from operations decreased significantly from the comparable period in the prior year due to the weakened economy, reduced flight schedules, fare discounting and the receipt of $213 million of cash in September 2001 under the Stabilization Act. Cash flows used in investing activities, primarily capital expenditures and purchase of short-term investments, offset by net purchase deposits refunded, were $483 million for the nine months ended September 30, 2002. Cash flows provided by financing activities, primarily from the sale of Holdings stock and the issuance of long-term debt, partially offset by the payment of debt, were $558 million for the nine months ended September 30, 2002.