| **UNITED STATES**                      |
|----------------------------------------|
| **SECURITIES AND EXCHANGE COMMISSION** |
| **WASHINGTON, D.C. 20549**             |

Form 10-K

| **[X]**            |   | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934     |
|--------------------|--------|------------------------------------------------------------------------------------------|
|                    |        | For the fiscal year ended December 31, 2007                                              |
| or                 |
| **[  ]** |        | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
|                    |        | For the transition period from ___________ to ___________                                |

**Commission File Number 1-31300EXPRESSJET HOLDINGS, INC.***(Exact name of registrant as specified in its charter)*

| **Delaware** (*State or other jurisdiction of incorporation or organization)*                              |  | **76-0517977***(I.R.S. Employer Identification No.)* |
|------------------------------------------------------------------------------------------------------------|--|------------------------------------------------------|
|                                                                                                       |  |                                                      |
| **700 North Sam Houston Parkway West, Suite 200 Houston, Texas***(Address of principal executive offices)* |  | **77067***(Zip Code)*                                |
|                                                                                                            |  | **  **                                     |
| 832-353-1000*(Registrant's telephone number, including area code)*                                         |

| Securities registered pursuant to Section 12(b) of the Act:                                                                                                                                                                                                                                                                                                                                                   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Title of eachclass:                                                                | Name of each exchange on which registered: |
| Common Stock, $.01 par value                                                                                                                                                                                                                                                                                                                                                                                  | New York Stock Exchange |
| Preferred Stock Purchase Rights                                                                                                                                                                                                                                                                                                                                                                               | New York Stock Exchange |
| Securities registered pursuant to section 12(g) of the Act:  None                                                                                                                                                                                                                                                                                                                         |

            Indicate by check mark if theregistrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. **[  ]** Yes **[X]** No

            Indicate by check mark if theregistrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. **[  ]** Yes **[X]** No

            Indicate by check mark whetherregistrant (1) has filed all reports required to be filed by Section13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or by such shorter period that the registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.**[X]** Yes      **[  ]** No

            Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 or Regulation S-K (§ 229,405 of this chapter) is not contained herein,and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. **[X]**

            Indicate by check mark whetherthe registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reportingcompany.

**[  ]** Large accelerated filer     **[X]** Acceleratedfiler     **[  ]** Non-accelerated filer     **[  ]** Smallreporting company

            Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the Act).**[  ]** Yes **[X]** No

            The aggregate market value of thevoting and non-voting common equity held by non-affiliates of the registrant was $325.4 million as of June 29, 2007.

            As of March 10, 2008, 51,871,518shares of common stock were outstanding.

| **DOCUMENTS INCORPORATED BY REFERENCE** |
|-----------------------------------------|

            Information called for by PartIII of Form 10-K is incorporated by reference to the Proxy Statement for our 2008 Annual Meeting of Stockholders to be filed withthe Commission within 120 days after December 31, 2007.

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**TABLE OF CONTENTS**

|            |      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |        | Page |
|--------------------------------------------------------------|--------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------|
|                                                              |                          | Forward-LookingStatements                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 2    |
|                                                              |                          | PART I                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |        |      |
| Item 1.                                                      |                          | Business                                                                                                                              |   | 2    |
|                                                              |                          | General                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |        | 3    |
|                                                              |                          | Our Business Segments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |        | 3    |
|                                                              |                          | Our Products and Services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |        | 4    |
|                                                              |                          | Aircraft Fleet                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |        | 15   |
|                                                              |                          | Competitors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |        | 16   |
|                                                              |                          | Industry                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |        | 17   |
|                                                              |                          | Industry Regulation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |        | 18   |
|                                                              |                          | Employees                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |        | 19   |
|                                                              |                          | Securities Exchange Act Reports                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |        | 20   |
| Item 1A.                                                     |                          | Risk Factors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |        | 20   |
| Item 1B.                                                     |                          | Unresolved Staff Comments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |        | 26   |
| Item 2.                                                      |                          | Properties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |        | 26   |
|                                                              |                          | Flight Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |        | 27   |
|                                                              |                          | Facilities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |        | 27   |
| Item 3.                                                      |                          | Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |        | 28   |
| Item 4.                                                      |                          | Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |        | 29   |
|                                                              |                          | PART II                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |        |      |
| Item 5.                                                      |                          | Market for Registrant's Common Equity, Related Stockholder Matters and IssuerPurchases of Equity Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |        | 29   |
| Item 6.                                                      |                          | Selected Financial Data                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |        | 31   |
| Item 7.                                                      |                          | Management's Discussion and Analysis of Financial Condition and Results ofOperations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |        | 34   |
|                                                              |                          | Overview                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |        | 34   |
|                                                              |                          | Our Business                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |        | 46   |
|                                                              |                          | Critical Accounting Policies and Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |        | 46   |
|                                                              |                          | Operations Review                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |        | 46   |
|                                                              |                          | Liquidity, Capital Resources and Financial Position                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |        | 54   |
| Item 7A.                                                     |                          | Quantitative and Qualitative Disclosure About Market Risk                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |        | 63   |
|                                                              |                          | Aircraft Fuel                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |        | 63   |
|                                                              |                          | Interest Rates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |        | 64   |
| Item 8.                                                      |                          | Financial Statements and Supplementary Data                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |        | 64   |
|                                                              |                          | Report of Management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |        | 65   |
|                                                              |                          | Report of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |        | 66   |
|                                                              |                          | Report of Independent Registered Public Accounting Firm on Internal Controlover Financial Reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |        | 67   |
|                                                              |                          | Consolidated Statements of Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |        | 68   |
|                                                              |                          | Consolidated Balance Sheets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |        | 69   |
|                                                              |                          |   Assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |        | 69   |
|                                                              |                          |   Liabilities and Stockholders' Equity (Deficit)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |        | 70   |
|                                                              |                          | Consolidated Statements of Cash Flows                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |        | 71   |
|                                                              |                          | Consolidated Statements of Stockholders' Equity(Deficit)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |        | 73   |
|                                                              |                          | Notes to Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |        | 74   |
| Item 9.                                                      |                          | Changes in and Disagreements with Accountants on Accounting and FinancialDisclosure                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |        | 109  |
| Item 9A.                                                     |                          | Controls and Procedures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |        | 109  |
| Item 9B.                                                     |                          | Other Information                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |        | 109  |
|                                                              |                          | PART III                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |        |      |
| Item 10.                                                     |                          | Directors, Executive Officers and Corporate Governance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |        | 110  |
| Item 11.                                                     |                          | Executive Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |        | 110  |
| Item 12.                                                     |                          | Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |        | 110  |
| Item 13.                                                     |                          | Certain Relationships and Related Transactions, and DirectorIndependence                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |        | 110  |
| Item 14.                                                     |                          | Principal Accounting Fees and Services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |        | 110  |
|                                                              |                          | PART IV                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |        |      |
| Item 15.                                                     |                          | Exhibits, Financial Statements Schedules                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |        | 110  |
|                                                              |                          | Signatures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |        | 116  |
|                                                              |                          | Index to Exhibits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |        | 119  |

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****

***Forward-Looking Statements***

            This report containsforward-looking statements.  Statements in the "Business,” “Risk Factors,” "Properties" and "Management'sDiscussion and Analysis of Financial Condition and Results of Operation" sections of this report, together with other statementsincluding words such as "believes," "intends," "plans," "anticipates, “estimates," "projects," "expects" or similarexpressions represent forward-looking statements that are based on our expectations in light of facts known by management on thedate this report was filed with the Securities and Exchange Commission (“SEC”).  Specifically, statementsregarding our future results of operations, operating costs, business prospects, growth and capital expenditures, including planswith respect to our fleet, are forward-looking statements.  These statements reflect our plans and assumptions about futureevents and are subject to uncertainties, many of which are outside our control.  Important factors that could cause actualresults to differ materially from the expectations expressed or implied in the forward-looking statements include known and unknownrisks.  The four key areas of the known risks that could significantly impact our revenues, operating results and capacityinclude:

|           | •  | our ability to operate profitably outside of our contractual flying;                                   |
|--------------------------------------------------------|--------------|--------------------------------------------------------------------------------------------------------|
|                                                        | •  | our reliance on Continental Airlines, Inc. (“Continental”) for the majority of ourrevenue; |
|                                                        | •  | rising costs and the highly competitive nature of the airline industry; and                            |
|                                                        | •  | regulation and other factors.                                                                          |

            For further discussions of theserisks and others, please see "Item 1A - Risk Factors" beginning on page 20.  The statements in this report are made as ofMarch 19, 2008, and the events described in the forward-looking statements might not occur or might occur to a materially differentextent than described in this report.  We undertake no duty to update or revise any of forward-looking statements, whether asa result of new information, future events or otherwise.

**PART I**

**Item 1. Business**

**General**

            ExpressJet Holdings, Inc.(“Holdings”) has strategic investments in the air transportation industry.  Our principal asset is all of theissued and outstanding shares of stock of XJT Holdings, Inc., the sole stockholder of ExpressJet Airlines, Inc. (referred to inthis report as “Airlines” and, together with Holdings, as “ExpressJet”, “we” or“us”).  Airlines currently operates a fleet of 274 aircraft.  As of December 31, 2007, weprovided the following services:

            ContractFlying

|           | •  | 205 aircraft for Continental as Continental Express pursuant to a capacity purchaseagreement (the “Continental CPA”);                       |
|--------------------------------------------------------|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                        | •  | 10 aircraft for Delta Air Lines  (“Delta”) as Delta Connectionpursuant to a capacity purchase agreement (the “Delta CPA”); |
|                                                        | •  | 9 aircraft in our Corporate Aviation division dedicated to charter contracts or ad-hoccharter service.                                                  |

            BrandedFlying

|           | •  | 39 aircraft under our ExpressJet brand; and                                                                                                                                                  |
|--------------------------------------------------------|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                        | •  | 11 aircraft under a prorate revenue agreement with Delta, where we share passengerrevenue risk and incur pricing, scheduling and revenue management costs (the “Delta Prorate”). |

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Table of Contents

            We also provideaviation services, such as ground-handling at airport locations across the United States, as well as aircraft repair, overhaul,interior refurbishments and paint, through our wholly owned subsidiary, ExpressJet Services, LLC (“Services”), and amajority owned subsidiary, Saltillo Jet Center (“Saltillo”).

            Our primary business is flying274 aircraft.  During 2007, we diversified our operations from flying solely for one customer to operating aircraft in severalbusiness platforms.  Prior to 2007, we derived substantially all of our revenues from our Continental Express operation. In 2007, we continued developing our Services and Saltillo subsidiaries.  In each line of business, we believe that ouroperational excellence and commitment to customer service are our greatest strengths.

            Holdings was incorporated inDelaware in August 1996.  Airlines is one of the largest regional airlines in the world, based on 2007 available seat miles,number of regional jets and passengers transported.

            We compete with a number ofregional airlines for the service we provide to other airlines.  Additionally, we compete with low-cost and legacy airlines incertain markets of our Branded Flying operations and with a variety of charter contractors and commercial airlines in our charteroperation.

            We believe that our successdepends on our ability to provide our customers, including legacy carriers, outstanding operational performance and exceptionalcustomer service through our commitment to detail, quick responses and follow-through.  Our ability to do this depends on ourover 8,000 employees executing effectively, every day.

            Our goal is to use our assets,including our operational strength, growing brand awareness, financial strength and the strong commitment of management andemployees, to continuously improve our competitive position and to provide value to our stockholders.

**Our Business Segments**

            ExpressJethas three reportable segments which are the basis of our internal financial reporting: Contract Flying, Branded Flying and AviationServices.

            Contract Flyingincludes our Corporate Aviation (charter) division and our capacity purchase agreements with Continental and Delta.  UnderContract Flying, revenues are contractually determined, eliminating our exposure to fluctuations in fuel prices, fare competitionand passenger volumes.  Under these arrangements, our partners bear the revenue risk and cost of marketing, distributing andselling seats directly to passengers on our aircraft while we are responsible for the operation and maintenance of theaircraft.

            Branded Flyingincludes operations under the ExpressJet brand and the Delta Prorate.  Revenues for this flying are derived from passengersflying on scheduled air service.  We are responsible for local market pricing, scheduling and revenue management, and theoperation and maintenance of the aircraft.  Our flying under the Delta Prorate provides us with a prorated portion of theairfare plus an incentive for passengers connecting onto Delta's network. 

            Aviation Servicesincludes our ground-handling services pursuant to contracts with Continental and other airlines at airport locations across theUnited States, as well as those performed by Services.  During the first half of 2007, we rebranded American Composites, LLC(“American Composites”) and InTech Aerospace Services, LP (“InTech”), our wholly owned subsidiaries, andSaltillo under the ExpressJet Services name.  These entities provide composite, sheet metal, paint, interior (including seatrefurbishment) and thrust reverser repairs throughout our five facilities in the United States and Mexico.

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Table of Contents

**Our Products and Services**

            Prior to 2007, virtually all ofour revenue came from the Continental CPA and our entire fleet of 274 aircraft was flown in support of Continental’snetwork.  Continental advised us in December 2005 of its decision to reduce Airlines’ flying under the Continental CPAby 25% or 69 aircraft.  The first two aircraft came out of the Continental network in late December 2006, followed by 34aircraft during the first quarter of 2007, 30 aircraft in the second quarter and three aircraft in the third quarter.  As theyexited our Continental Express operation, the aircraft were rapidly repainted, retrofitted with upgraded seat cushions and othermodifications and placed into other business platforms.  The business platforms developed to employ these aircraft requiredconsiderable investment of capital to modify the aircraft, design and construct our facilities at over 25 airport locations, createa marketing and sales infrastructure and develop technology to support our own Branded, charter and Delta flying.  Theseefforts were in addition to recruiting, hiring, and training all disciplines across the various business platforms.  Theresult is an infrastructure that has afforded us the ability to:

|           | •  | continue our capacity flying withContinental;                                                                         |
|--------------------------------------------------------|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                        | •  | develop our own brand through scheduled flying as ExpressJet Airlines;                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                        | •  | commence capacity-purchase and prorate flying for Delta;                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                        | •  | establish a niche in the corporate and ad-hoc charter service market; and                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                                        | •  | broaden the scope of our maintenance and ground handling capabilities.                                                                                                                                                                                                                                                                                                                                                                                                                        |

            Our diversification continues in2008 as we seek additional opportunities to fly for legacy carriers and to further leverage our capabilities.  This is adynamic process and will remain so for the foreseeable future as we seek to optimize revenue generation from our assets.

            ***ContractFlying***

            As of December 31, 2007 weaveraged over 1,100 daily contract flying departures, offering passenger service to over 175 destinations in North America,including Mexico as well as the Caribbean, and some charter service into South America.  We generated $1.5 billion of revenue(87.3% of our total consolidated revenue) in this segment.

**           Continental Capacity Purchase and Other Agreements**

**

***           General.***  Prior to 2007, we derived substantially all of our revenue from the Continental CPA.  As wediversified to provide airline services to a broader range of customers during 2007, our dependence on Continental hasdecreased.  However, a significant portion of our revenue and cash flows is still attributable to the Continental CPA. Under the Continental CPA, Airlines operates flights on behalf of Continental as Continental Express.  Continental controlsand is responsible for scheduling, pricing and managing seat inventories and is entitled to all revenue associated with theoperation of the aircraft.  We also have various other agreements with Continental that govern our relationship.

            Under the Continental CPA, allmarketing-related costs normally associated with operating an airline are borne by Continental.  These costsinclude:

|           | •  | reservations andsales;                                                                                                            |
|--------------------------------------------------------|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                        | •  | commissions;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                        | •  | advertising;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                        | •  | revenue accounting;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                        | •  | fare and tariff filings; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                        | •  | food and beverage service.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

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            ***Payment.*** Under the Continental CPA, Airlines is entitled to payment for each block hour that Continental schedules it to fly.  Paymentis based on a formula designed to provide Airlines with a target operating margin of 10% before taking into account variations incertain costs and expenses that are generally within our control.  The agreement provides that the original cost componentsused in this formula would remain in place until December 31, 2004, after which, new rates were to be established annually usingthe same methodology.  We have exposure for most labor costs and some maintenance and general administrative expenses if theactual costs are higher than those reflected in Airlines’ estimated block hour rates.

            ***2001-2004. *** Aquarterly reconciliation payment was to be made by Continental to Airlines, or by Airlines to Continental, if the operating margincalculated, as described below (the "prevailing margin") was not between 8.5% and 11.5% in any fiscal quarter.  When theprevailing margin exceeded 11.5%, Airlines paid Continental an amount sufficient to reduce the margin to 11.5%.  Had theprevailing margin been less than 8.5%, Continental would have paid Airlines an amount sufficient to raise the margin to 8.5%. Certain items were excluded from the calculation of the prevailing margin, including:

|           | •  | actual labor costs that differed from those reflected in Airlines’ block hourrates;                                                                                    |
|--------------------------------------------------------|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                        | •  | performance incentive payments, including payments from controllable cancellation performance(cancellations other than weather or air traffic control caused cancellations); |
|                                                        | •  | litigation costs outside the normal course of business; and                                                                                                                  |
|                                                        | •  | other costs that were not included in Airlines’ block hour rates (or covered by anyadjustments to them) and were not reasonable and customary in the industry.         |

From 2001 to 2004, the quarterly prevailing margins, before any reconciliation payments, were alwaysabove 8.5%. 

            In addition, to the extent thatAirlines’ rate of controllable cancellations (such as those due to maintenance or crew availability) was lower than itshistorical benchmarks, Airlines was entitled to incentive payments; conversely, Airlines would have had to pay Continental if itscontrollable cancellations exceeded these benchmarks.  Because these incentive benchmarks were based on historical five-yearrolling averages of monthly controllable cancellations, lower controllable cancellations that resulted in higher incentive paymentsin the near term reduced Airlines’ opportunity to earn incentive payments in the future.  Also, because Airlines usedmonthly rolling averages, its opportunity to earn these payments in any particular fiscal quarter was affected by monthlyvariations in historical controllable cancellation rates.  Airlines was also entitled to receive a small per-passenger fee andincentive payments for on-time departure and baggage handling performance.

            ***2005 Rate Negotiation andAmendment.***  As part of the 2005 rate negotiation, we agreed to cap Airlines’ prevailing margin at 10.0% in anattempt to ensure the long-term stability of the Continental CPA.  Airlines also began including previously unreconciledcosts, as discussed above, within the margin band, although it is not reimbursed if these costs are higher and cause its prevailingmargin to fall below the 8.5% margin floor.  Airlines remained entitled to receive incentive payments from Continental if itsrate of controllable cancellations was lower than its historical benchmark, but was no longer required to pay Continental a penaltyfor controllable cancellations unless the rate rises above 0.5%.  Airlines continued to receive a small per-passenger fee andincentive payments for certain on-time departure and baggage handling performance.

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            The table below describes howvariations between Airlines’ actual costs and estimated costs, as determined in the block hour rates, have been treated underthe Continental CPA since January 1, 2005.

| ****

**Fully reconciled costs:** reconciliation payment, including 10% margin, to the fullextent actual costs differ from estimated costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  • Fuel and into-plane expenses(1)  • Aircraft rent  • Terminal facility rent  • On-time bonuses and 401(k) company     match under current plans  • Taxes (other than income taxes)  • Passenger liability insurance  • Hull insurance  • War risk insurance  • Landing fees  • Ground handling services                                                                                                                                            |  • Administrative services provided by     Continental  • Third-party security and screening    expenses  • Substantially all regional jet engine    expenses under current long-term    third-party contracts  • Depreciation and amortization(2)  • Glycol, de-icing, snow removal  • International navigational fees |
| **Costs within the margin band:** if actual expenses in this category are sufficiently different from estimates used in theblock hour rates so that the prevailing margin is less than 8.5% or greater than 10.0%, then a reconciliation payment is made byeither Continental or Airlines to the other so that this prevailing margin will be 8.5% or 10.0%, as applicable.  If theprevailing margin is less than 8.5% due to impact of certain costs, as described below, or if the prevailing margin is above 10.0%due to other items(3), no reconciliation payments would be made from either Continental or Airlines. |
|  • Maintenance, materials and repairs not     included above  • Passenger services                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | • Other rental expenses • Other operating expenses |

|        | (1)  | Under our fuel purchase agreement with Continental, fuel and fuel tax expense are reconciled tothe  lower of the actual costs or the agreed-upon caps of 66.0 cents per gallon and 5.2 cents per gallon, respectively. If the fuel purchase agreement with Continental were not in place, the fuel cost, including related taxes, would have been $2.43,$2.04 and $1.80 per gallon for the years ended December 31, 2007, 2006 and 2005 respectively. |
|--------------------------------------|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                      | (2)  | Depreciation is reconciled for assets and capital projects accounted for in the Continental CPA orthose approved by Continental outside of the agreement.                                                                                                                                                                                                                                                                                                       |
|                                      | (3)  | The prevailing margin used to calculate the reconciliation payment does not take into accountperformance incentive payments, including payments from controllable cancellation performance, litigation costs above a historicalbenchmark and other costs that are not included in the block hour rates (or covered by adjustments to them) or are not reasonableand customary in the industry.                                                                  |

            In 2007, the fully reconciledcosts and costs within the margin band under the Continental CPA represented approximately 59% and 40% of operating costsassociated with Continental CPA flying, respectively, in addition to 1% of costs related to the Continental CPA which could not beincluded in either reimbursable grouping such as certain labor and arbitration costs.  In 2006, the fully reconciled costs andcosts within the margin band under the Continental CPA represented approximately 63% and 35% of operating costs associated withContinental CPA flying, respectively.  The remaining 2% of operating costs in 2006 were incurred outside of the ContinentalCPA in order to support our diversification strategies for the 69 aircraft released from the Continental CPA as well as theadministrative operations we assumed from Continental in 2007.

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            Some costs that were unreconciledunder the Continental CPA prior to 2005 now require Airlines to make a reconciliation payment to Continental if the differencescause the prevailing margin to be greater than 10.0%.  However, if the differences cause the prevailing margin to be less than8.5%, they remain unreconciled.  These costs are:

|           | •  | wages and salaries;and                                                                                                       |
|--------------------------------------------------------|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                        | •  | benefits not included in the table above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

***            2006 RateSetting.***  In September 2005, Continental proposed a number of amendments to the Continental CPA, which wouldhave, among other things, significantly reduced the amount Continental pays us for the regional airline service we provide. We negotiated with Continental to try to reach an agreeable compromise.  Our board of directors, which typically meets fivetimes a year, held 12 meetings in 2005, six of which were special meetings to consider Continental’s proposals and toformulate counterproposals.  Based on its evaluations, including the analysis of independent financial advisers, the boarddetermined that the rates proposed by Continental would not be in the best interest of our stockholders and declinedContinental’s proposal.  We made counterproposals that we believed addressed Continental’s concerns, but were fairto our stockholders as well.  In December 2005, Continental announced that it believed the rates under the Continental CPA hadbecome too expensive and that it would terminate 25% of our flying under that agreement.  Although the Continental CPAcontemplates a November 1 deadline for setting the following year’s rates, the 2006 scheduled block hour rates were finalizedin April 2007 consistent with the methodology set forth in the agreement.

***            2007 RateSetting.***  In 2006, Continental challenged our interpretation of the Continental CPA and sought to impose ratesfor 2007 that we believed were inconsistent with the methodology established in the agreement.  We were unable to agree on the2007 rates and, in accordance with the terms of the Continental CPA, we submitted our dispute to binding arbitration.  Thearbitration panel determined that the annual 2007 budgeted rates originally presented by Airlines should be reduced in theaggregate by $14.2 million (or less than 1.0% of our total Continental CPA operating revenue), which included the 10% targetoperating margin.  Although we believe our original rates were appropriate, we were pleased with the panel’sdecision.  The 2007 scheduled block hour rates were finalized in October 2007, and we recorded ourpassenger revenue under the Continental CPA using the block hour rates determined by the panel for all of 2007.

**            *2008 RateSetting. *** We began 2008 rate discussions with Continental last September.  The Continental CPAcontemplates a November 1 deadline for setting the rates; however, the parties agreed to extend the deadline.  Although webelieved that we were nearing completion of the rate setting process, Continental advised us on February 28, that if we were unableto reach agreement by March 14, they might initiate arbitration proceedings again in accordance with the provisions of theContinental CPA.  We can also initiate arbitration if we think it necessary.  As of the date of this filing neither partyhas triggered arbitration and we remain hopeful that it will not be necessary.  Continental also advised us that it believesthat it overpaid Airlines by $6 million in 2007 and $2.1 million in 2006.  We believe that if we were required to arbitratethese matters we would prevail.  However, we may not be successful in resolving these disputes without reducing our 2008income.  We cannot currently predict the timing or the resolution of these matters.  Although we are hopeful that we canagree on rates and resolve Continental’s other claims without arbitration, there can be no assurance that we will besuccessful in doing so.

            If we are required to arbitrate,each party will select one arbitrator, and those two arbitrators will select the third arbitrator to complete the panel.  TheContinental CPA sets forth procedures and a schedule that will likely result in a hearing and the issuance of a final decision bylate in the second or early in the third quarter of 2008.  ExpressJet will continue to be paid under the 2007 block hour ratesduring the arbitration process and expects the decision setting the revised rates to be retroactive to January 1, 2008.

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***            Scope ofAgreement.*** At December 31, 2007, the Continental CPA covered 205 of Airlines’ existing fleet of 274aircraft.   The agreement permits us to fly under our own code or on behalf of other airlines but prohibits our flying incertain markets unless such flying is conducted on behalf of Continental.  The Continental CPA states that:

|           | •  | at Continental’s hubs, we may only fly for Continental;                                                                                                                                                                                                          |
|--------------------------------------------------------|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                        | •  | at any other airport where Continental, its subsidiaries and other regional jets operating underContinental’s code as their primary code operate an average of more than 50 flights daily (currently there are no suchairports), we may only fly for Continental; and |
|                                                        | •  | we cannot operate any of our aircraft subject to the agreement or use our passenger-related airportfacilities employed under the agreement for other carriers or for flights under our own code.                                                                            |

            Our license from Continental touse the Continental Express name and other trademarks is non-exclusive

            The Continental CPA also providesthat Continental has the right to withdraw a limited number of our regional jets covered by the agreement under certaincircumstances upon 12-months notice.  As discussed above, in late December 2005, Continental delivered a withdrawal noticewith respect to 69 aircraft, the maximum number that it could withdraw at that time.  Under the terms of the agreement,Continental cannot withdraw additional aircraft until December 28, 2009.  Continental can terminate the agreement at any timeupon 12-months notice, which would also terminate the scope limitations noted above.

            So long as scheduled flightsunder the Continental CPA represent at least 50% of all our scheduled flights, or at least 200 of our aircraft are covered by theagreement, we are required to allocate our crews, maintenance personnel, facilities and other resources on a priority basis toscheduled flights under the agreement above all of our other flights and aircraft.

**            *AircraftFinancing.***  Airlines currently leases or subleases all of its existing aircraft from Continental.  Underthe Continental CPA, Continental is required to purchase or lease from Empresa Brasileira de Aeronautica S.A.(“Embraer”) or its designee aircraft to be flown under the agreement, participate in the financing and to lease orsublease these aircraft to us.  Aircraft withdrawn from the Continental CPA become “Uncovered Aircraft” as definedin the agreement, and the agreement contains a provision for the interest rate implicit in calculating the scheduled lease paymentswe make to Continental under the relevant leases or subleases to automatically increase by 200 basis points.

            We have the option to purchase upto an additional 75 Embraer ERJ-145XR aircraft.  Our next option exercise date is August 1, 2008.  If we do not exerciseor extend our option as of this date, 25 options will expire.  These aircraft would be Uncovered Aircraft since Continentalhas declined to include them under the Continental CPA.  These options may be exercised for other types of aircraft within theERJ-145 line of aircraft, which include the ERJ-135, ERJ-145 and ERJ-145XR (“ERJ-145 Family”).  We would have tofinance our acquisition of these aircraft independently. 

            Continental has the right toterminate, at any time, any Uncovered Aircraft sublease and take possession of the aircraft so long as it provides us a replacementaircraft and we can obtain financing reasonably satisfactory to us.  If we cannot obtain such financing, we are not requiredto take the replacement aircraft.  Continental does not have any obligation to finance, arrange to finance or participate inthe financing of any aircraft acquired outside the Continental CPA.

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**            *Airport Facilities, Slotsand Route Authorities*.**  Most of the airport facilities that Airlines uses in its Continental Express operationare leased from airport authorities by Continental.  Under Airlines’ master facility and ground handling agreement withContinental, Airlines is entitled to use these facilities to fulfill its obligations under the Continental CPA.  However, itis not permitted to use airport terminal facilities leased by Continental to service other carriers or operate flights under itsown code without Continental’s approval.  Furthermore, we must use those facilities that are non-terminal facilities ona priority basis to support the scheduled flights that Airlines flies on behalf of Continental so long as those flights constituteat least 50% of our total scheduled flights or at least 200 of our aircraft are covered by the Continental CPA.

            All terminal facility rent atContinental’s hub airports are borne by Continental, and Airlines pays for incremental rent at other Continental-managedlocations.  Additional rent can be incurred at Continental-managed locations when Airlines operates all flights during aquarter.  At locations Airlines manages, rent is allocated between Continental and Airlines based on the number of eachcarrier’s respective passengers. 

            Continental is generallyresponsible for all capital and start-up costs for airport terminal facilities at its hub airports and at any other facilitieswhere it elects to provide ground handling services to Airlines.  If Continental elects to provide ground handling services atany facility where Airlines previously did so, Continental is required to reimburse Airlines at the net book value for all fixturesand other unremovable capitalized items Airlines funded at that facility.  We are generally responsible for capital andstart-up costs associated with airport terminal facilities where Airlines flies and any non-terminal facilities not regularly usedby Continental.  If Airlines exits a market at the direction of Continental (and we do not re-enter that market within sixmonths flying under our own code or that of an airline other than Continental), Continental will reimburse us for certain book andseverance losses incurred in connection with the closure of the related facility. If the Continental CPA is terminated, we may berequired to vacate the terminal facilities (or all facilities if the termination results from our material breach of the agreement)that are subleased to Airlines by Continental, and to use commercially reasonable efforts to assign to Continental or its designeeany of the facility leases in our name.

            In addition, there are provisionsin the Continental CPA that require us to use commercially reasonable efforts to transfer, subject to applicable laws, toContinental or its designee any of our airport take-off or landing slots, route authorities or other regulatory authorizations usedfor Airlines’ scheduled flights under the agreement.

**            *GroundHandling.*****  Airlines provides ground handling and other support services, including baggage handling,station operations, ticketing, gate access and other passenger, aircraft and traffic servicing functions for Continental at severalof our airport locations.  In exchange, Continental pays us an amount equal to Airlines’ incremental cost for providingthese services.  Continental provides the same services for Airlines at its stations, including its hub airports.  Thecost for these services is based on the number of scheduled aircraft and the rates stipulated in the Continental CPA. Effective January 1, 2007, we began providing ground handling and other support services at fixed rates for other ContinentalAirlines regional service providers including Republic and Colgan that operate under the Continental Express banner at 15Continental/Continental Express stations. 

**            *Most FavoredNations.***  So long as Continental is our largest customer, if we enter into a capacity purchase or economicallysimilar agreement with another major airline (defined as any airline with annual revenues greater than $500 million, prior toadjustment for inflation since 2000) to provide regional airline service for more than 10 aircraft on terms and conditions thatare, in the aggregate, less favorable to us than those in the Continental CPA, that agreement has a provision that may allowContinental to amend it to conform to the terms and conditions of our new agreement.

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            ***Change ofControl.***  So long as Continental is our largest customer, if we experience a change of control without its consent,there are provisions in the Continental CPA that may cause Airlines’ block hour rates to be reduced by an amountapproximately equal to the target operating margin built into those rates.  Under the agreement, a change of control of ourcompany is defined as:

|           | •  | our merger or consolidation with a major airline, i.e., an airline other than Continental or itssubsidiaries that had more than $500 million of revenue, adjusted for inflation since 2000, (or, if we are the surviving entity, $1billion of revenue) during the most recently completed fiscal year;                 |
|--------------------------------------------------------|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                        | •  | the acquisition by a major airline, or group of major airlines acting in concert, of more than 10%of our capital stock or voting rights;                                                                                                                                                                               |
|                                                        | •  | the acquisition by any other entity, or group of entities acting in concert, other than Continentaland its subsidiaries or passive investors, of more than 25% of our capital stock or voting rights, unless such entity or groupreduces its ownership to below this threshold within 30 days of the acquisition; |
|                                                        | •  | our acquisition of more than 10% of the capital stock of an airline (other than Continental or itssubsidiaries) that had more than $1 billion of revenue during the most recently completed fiscal year;                                                                                                               |
|                                                        | •  | our acquisition of airline assets that generated more than $500 million, prior to adjustment forinflation since 2000, of revenue during the most recently completed fiscal year;                                                                                                                                       |
|                                                        | •  | our merger or consolidation with another entity following which our stockholders own less than amajority of the voting securities of the surviving entity;                                                                                                                                                             |
|                                                        | •  | the sale or other disposition of all or substantially all of our airline assets to a majorairline;                                                                                                                                                                                                                     |
|                                                        | •  | our liquidation or dissolution, in connection with which we cease operations as an aircarrier;                                                                                                                                                                                                                         |
|                                                        | •  | a majority of our directors are neither our current directors or individuals nominated by a majorityof our board of directors; or                                                                                                                                                                                      |
|                                                        | •  | our entering into definitive agreements relating to the foregoing matters.                                                                                                                                                                                                                                             |

            ***LaborDisruption.***  Upon the occurrence of a union-authorized labor strike, the Continental CPA provides that:

|                                                        | •  | Airlines will be compensated only for the flights it completes, and will not be compensated for anycontrollable or uncontrollable cancellations regardless of its historical cancellation rates;                                                                                                                                                                                                                        |
|--------------------------------------------------------|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|           | •  | on each of the 2nd, 15th, 30th, 45th, 60th and 75th days of the strike, Continental will be entitledto terminate Airlines’ leases or subleases for, and take immediate possession of, up to 20 of Airlines’ aircraftcovered by the agreement, up to a maximum of 120 aircraft if the strike extends to the 75th day;                                                                                        |
|                               | •  | we will be required to provide to Continental or its designee, for the duration of the strike and180 days thereafter, at market rates, first-priority access to all of our flight simulators, hangars, training and otherfacilities and inventory to the extent necessary to enable Continental or their designee to operate any aircraft of whichContinental takes possession as a result of the strike; and |
|                                                        | •  | if the strike continues for 90 days or more, Continental is entitled to terminate the agreementfor cause, cancel Airlines’ leases or subleases and take immediate possession of all of the aircraft covered by theagreement.                                                                                                                                                                                 |

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**

            In addition, a labor disruptionother than a union-authorized strike may cause us to be in material breach of the Continental CPA.  Under the agreement,whenever Airlines fails to complete at least 90% of its aggregate scheduled flights (based on available seat miles) in threeconsecutive calendar months or at least 75% of its aggregate scheduled flights (based on available seat miles) in any 45-day period(in each case, excluding flights cancelled due to union-authorized labor strikes, weather, air traffic control or non-carrierspecific airworthiness directives or regulatory orders), we will be deemed to be in material breach of the agreement.  A labordisruption other than a union-authorized strike could cause Airlines to fail to meet these completion requirements and, as aresult, cause us to be in material breach of the agreement.  See further discussions below regarding remedies for breach ofthe agreement by either Continental or us.

            ***Term and Termination ofAgreement and Remedies for Breach*.**  The Continental CPA is scheduled to expire on December 31, 2010.  At itssole election, Continental can extend the term of the agreement for up to four additional five-year terms through December 31, 2030upon written notice delivered at least 24 months prior to the expiration of the initial term.  Continental’s firstoption to extend must be delivered to us by December 31, 2008.

            Continental may terminate theagreement at any time with 12-months notice, or for cause without notice.  “Cause” is defined as:

|          | •  | our bankruptcy;                                                                                                                                                                 |
|--------------------------------------------------|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                  | •  | suspension or revocation of Airlines’ authority to operate as a scheduled airline;                                                                                        |
|                                                  | •  | cessation of Airlines’ operations as a scheduled airline, other than as a result of aunion-authorized labor strike or any temporary cessation not to exceed 14 days; |
|                                                  | •  | a union-authorized labor strike that continues for 90 days; or                                                                                                                  |
|                                                  | •  | our intentional or willful material breach that substantially deprives Continental of the benefitsof the agreement, which is not cured within 90 days of notice of the breach.  |

            Continental may also terminatethe agreement at any time upon our material breach that does not constitute cause, but continues uncured for 90 days after wereceive notice of the breach.  If we materially breach the agreement (including for cause) and, for breaches other than cause,fail to cure the breach within 60 days after we receive notice of the breach, we will have to pay Continental an amount equalto the expected margin contained in the block hour rates for scheduled flights from the 60th day (or immediately, without receiptof any notice, if the breach is for cause) until the breach is cured.  In addition, Continental may terminate the agreementimmediately without notice or giving us an opportunity to cure if it makes a reasonable and good faith determination, usingrecognized standards of safety, that there is a material safety concern with our operation of any flights under the ContinentalCPA.

            If Continental materiallybreaches the agreement and fails to cure the breach within 60 days after we notify it of the breach, we will be entitled toobtain our payments directly from an airline clearing house from the 60th day for the duration of the default.  In addition,Continental and we are each entitled to seek damages in arbitration and to reach equitable remedies.

**            *Disposition of Aircraftupon Early Termination.***  If Continental terminates the Continental CPA for cause, it will also have the rightat that time to terminate Airlines’ leases or subleases for aircraft covered by the agreement and take possession of theseaircraft.  If Continental terminates the agreement for any reason other than for cause, we have the option to cancel all orany number of our leases or subleases with Continental for aircraft covered by the agreement at the time of termination. However, if Airlines terminates any of these subleases, it will lose access to the subject aircraft, which would reduce the size ofour fleet and affect our future ability to generate revenue.  If Airlines elects not to terminate these leases or subleases,the agreement contains a provision for the interest rate implicit in calculating the scheduled lease payments we make toContinental under the relevant leases or subleases to automatically increase by 200 basis points.

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**

**            *Amendment of Embraer andRolls Royce Contracts.***  We are prohibited, without Continental’s consent, from amending Airlines’aircraft purchase agreements with Embraer for the current 274 aircraft to change the pricing, financing or leasing arrangements,number or delivery schedule of firm order aircraft, or to make any other changes that may be expected to adversely affectContinental’s rights under the Continental CPA or our ability to perform our obligations under the agreement.  We havealso agreed to acquire Continental’s consent for any amendment of Airlines’ Embraer aircraft purchase agreements thatreduce the financing or other obligations of Continental, provided that the amendment does not increase Airlines’ obligationsunder these agreements.  We are also prohibited, without Continental’s consent, from amending our power-by-the-houragreement with Rolls Royce Corporation (“Rolls Royce”) in any manner that adversely affects Continental’s or ourengine maintenance costs for the aircraft subject to the Continental CPA. 

**           *Indemnification***.  In general, we have agreed to indemnify Continental and it has agreed to indemnify us forany damages caused by any breach of our respective obligations under the Continental CPA or caused by our respective actions orinactions under the agreement.

            ***Other Agreements withContinental.***  Prior to 2007, under an administrative services agreement, Continental provided us with services such asinformation technology support, transaction processing, insurance and risk management, treasury administrative services, corporatereal estate and environmental affairs.  In 2007, Continental stopped providing these services and, as a result, wetransitioned most information technology support, general ledger, accounts payable, payroll, and treasury administrative servicesaway from them to perform them independently.  Airlines also has a fuel purchasing agreement with Continental, under whichContinental manages all of Airlines’ fuel purchasing requirements under the Continental CPA.  Continental charges us forthese services and the cost is included in the block hour rate pricing arrangement in the agreement.  Currently, ouradministrative services agreement with Continental is limited to technology and other back-office infrastructure as necessary tosupport our Continental Express flying. 

            In addition, we have a taxagreement with Continental that provides, among other things, for our payment of all or a significant portion of the tax benefitswe realize as a result of an internal reorganization performed before our initial public offering in 2002.  Since our initialpublic offering, we have made net payments of approximately $123.4 million to Continental under the tax agreement and could payContinental as much as an additional $234.6 million through 2017.  See Item 8.  "Financial Statements and SupplementaryData – Notes to Consolidated Financial Statements – Note 8" for a detailed discussion of our income taxes and our taxagreement with Continental.

**            Delta Air Lines CapacityPurchase Agreement**

            We signed atwo-year capacity purchase agreement effective June 1, 2007, with up to two one-year extension options at Delta’s solediscretion.  The Delta CPA covers 10 Embraer ERJ-145XR aircraft that were placed into service during June 2007.  Delta isresponsible for scheduling, marketing, pricing and revenue management on the aircraft and collects all passenger revenues. Airlines' operates, maintains and finances the aircraft.

            Airlines receives abase rate for each completed block hour and departure and is reimbursed for certain pass-through costs which are primarily scheduledriven costs such as fuel and landing fees.  Airlines has the ability to earn incentives for meeting or exceeding completionbenchmarks and maintaining high Department of Transportation (“DOT”) rankings for on-time arrivals and other aspects ofcustomer satisfaction.  These incentives are settled on a monthly and semi-annual basis.  For the year ended December 31,2007, we met all of our monthly incentive metrics with the exception of the on-time benchmark in August and November.  Of thethree semi-annual incentive metrics for on-time, customer service and completion, two metrics were met in 2007. 

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            The Delta CPA isscheduled to end at the second anniversary of each aircraft’s in-service date (June 2009).  At the end of the initialtwo-year service term, Delta will have the right to extend the term of the Delta CPA for up to two additional one year terms on thesame terms and conditions by providing Airlines with no less than 180 days prior written notice.

            **CorporateAviation**

******

***           *** Corporate Aviation, utilizing nineaircraft, provides reliable travel solutions to corporations, including other air carriers from time to time such as JetBlueAirways (“JetBlue”), United Air Lines (“United”) and Frontier Airlines (“Frontier”), collegiateathletic departments, sports franchises, government entities, hospitality companies and others.  The aircraft are flown underAirlines’ operating certificate issued by the Federal Aviation Administration (“the FAA”).  The aircraft areconfigured with 50 redesigned seats for enhanced passenger comfort, and each seat includes XM Satellite Radio with over 100channels of audio entertainment.  In addition to the basic service, customized flight service options give customers anopportunity to create a unique flight experience.  Our pricing structure is based on a contracted fee plus reconciliationpayments for uncontrollable costs (including items such as fuel and deicing) for the full amount from which actual costs differfrom estimates.

            We continue to make progress inour Corporate Aviation division due to its ability to provide economical and reliable travel to customers who require travelsolutions outside of traditional scheduled airline service and to provide a short-term solution to certain scheduled air carrierson an as-needed basis.  Offering complete travel solutions for collegiate athletic departments, sports franchises such asNASCAR racing teams and other customers have proven to be very successful.  We generated $17.7 million in revenue as ofDecember 31, 2007, and anticipate that we will continue to grow in this division as we establish longer-term relationships tocreate predictability in our charter operation and generate steady operating income.

***            BrandedFlying***

            As of December 31, 2007 underBranded flying, we averaged over 250 daily departures, offering scheduled passenger service to over 30 destinations in NorthAmerica.  We generated $180.5 million of revenue from April through December 2007.

**            ExpressJetBrand**

****

***            Route Structure andScheduling.***  As of December 31, 2007, we provided scheduled air service under our own brand to 25 cities in theUnited States with approximately 200 daily departures utilizing 39 of our aircraft.  Customers can access our reservationsystem through our consumer and corporate websites, www.xjet.com and www.expressjet.com, respectively, reservations call center andall four major global distribution systems.  Being a part of the global computer reservation systems allows travel agents andonline distributors, such as Expedia, Orbitz, Travelocity and Cheaptickets.com the visibility to see and sell our tickets.  Welaunched sales in the Worldspan global distribution system in February 2007, in the Sabre and Amadeus global distribution systemsin April 2007, and the Galileo global distribution system in July 2007.  We continue to make enhancements to our reservationssystem in order to fully interface with these global distribution systems and allow seamless and timely interchange of data fortravel agents to provide a full range of services to their customers without our intervention.  See our consumer website forthe up-to-date route network detailing all destinations currently served under our own brand. 

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******

***            ProductAmenities.***  We offer a distinct product to meet the needs of both business and leisure travelers. Our customersfly on newer aircraft with advanced seat assignments and no middle seats.  We also provide valet carry-on baggage service as aconvenience in order to save time the customers would otherwise spend loading bags in the overhead bin or waiting at baggageclaim.  Our leather seats were redesigned for additional passenger comfort including memory foam cushions and over 100channels of complimentary XM Satellite Radio.  We serve complimentary, recognized brand-name snacks, and full meal options forlonger haul flights.   

****

***           Marketing. *** We use the following methods for airline ticket distribution:  

|          | •  | Airlines’ websites, www.xjet.com and www.expressjet.com are our lowest cost distributionchannel and, as a result, we continue to promote and encourage the use of our online capabilities.  In 2007, we recordedapproximately $84.4 million in ticket sales through this channel which accounted for approximately 49.8% of our total passengerrevenue on our ExpressJet brand. |
|--------------------------------------------------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                  | •  | The four principal global distribution systems, Sabre, Worldspan, Galileo and Amadeus, allowing forsales through traditional travel agencies and online sites such as Orbitz, Travelocity and Expedia.                                                                                                                                                                                     |
|                                                  | •  | Telephone reservation call centers.                                                                                                                                                                                                                                                                                                                                                        |

            We provideelectronic tickets, or “E-Tickets”, which eliminates the need to print and process a paper ticket.  E-Ticketsprovide immediate customer and revenue information, which are a vital part of our distribution strategy.  E-Ticket passengershave the ability to check in at xjet.com and obtain boarding passes from their home, office or hotel up to 24 hours prior todeparture, enabling them to proceed directly to security at the airport, and bypass the ticket counter and save time.  We alsohave self-service kiosks at all airports throughout our system expediting the check-in process for our customers. 

****

**           ** We offer a range ofcompetitive fares that are distinguished by restrictions on use, such as time of day and day of week, length of stay and minimumadvance booking period.  Other ticketing or passenger service fees, such as ticketing change fees, unaccompanied minor andexcess baggage, continue to be consistent with or less than those charged by most United States carriers.

            We launched our frequent flyerprogram, JetSet, during 2007 to encourage repeat travel on our system.  Our frequent flyer program is based on trips flownrather than on mileage and JetSet customers earn at least one credit for each one-way trip flown or two credits for each roundtripflown.   The JetSet program provides an award ticket (“Award Ticket”) that permits one free roundtrip to anydestination available on our ExpressJet brand network after the accumulation of 16 credits in a 24 month period. Award Tickets areautomatically generated when earned by the customer rather than allowing the customer to bank credits indefinitely.  AwardTickets must be used to purchase a ticket within 12 months after their issuance.  Award Tickets are capacity controlled andmay not be available on peak travel dates.  At December 31, 2007, the outstanding balance associated with over 4800 travelawards earned to date, as well as the amounts associated with over 700 free travel awards claimed during 2007, was immaterial toour results of operations. 

**            Delta Air Lines ProrateAgreement**

            As of December 31, 2007, Airlinesprovided scheduled air service with 11 aircraft under the Delta Prorate.  At this time, we are responsible under thisarrangement for scheduling, pricing and revenue management, as well as the operation, fuel procurement and maintenance of theaircraft.  We earn a prorated portion of the fare for passengers connecting onto Delta's network or other airlines when we flythe passengers, which is billed through an airline clearinghouse on a weekly basis.  In addition, we earn an incentive fee ifthe passengers connect onto Delta’s network.  If a passenger is not connecting onto a flight, we earn the entire airfarefor the flight when the passenger has flown.  We began this operation on July 1, 2007 with eight aircraft and added threeadditional aircraft in December 2007.

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****

**           Fuel**

            We are fullyexposed to the availability of fuel and fuel price increases in our Branded Flying.  With the start of our Branded Flying, weentered into a fuel purchase agreement with a highly reliable third-party provider.  Additionally, our overall fuelpurchase strategy is to stabilize fuel expense in both the short and long term.  We have implemented this strategy by enteringinto fixed forward price contracts with our fuel provider using a systematic method for determining the volume and the price forwhich to enter into the contracts for a rolling 12-month period on a quarterly basis.   As of December 31,2007, we have a firm commitment to purchase approximately 70% of our forecasted fuel needs outside of our CPA’s withContinental and Delta at an average price of $2.42 per gallon in 2008.  For the year ended December 31, 2007, approximately34% of our fuel expense was associated with our Branded Flying. A substantial increase in the price of jet fuel, impacting theprice of fixed forward price contracts, or the lack of adequate fuel supplies in the future, could have a material adverse effecton our Branded Flying business, results of operations, consolidated financial condition and liquidity.

***            AviationServices***

****

            As of December 31, 2007, AviationServices provided services ranging from painting aircraft, refurbishing seats, and repairing airframes to providing ramp/baggageservice, ticket counter service, and other ground handling services for several airlines, including Continental, American Airlines,Inc. and Delta at locations across the United States.  We generated $41.0 million (before eliminating intercompanytransactions) from aviation services in 2007.

            In 2005, we announced thatServices and Airlines’ Training Services division received third-party repair and training certificates, respectively, fromthe FAA.  During the first half of 2007, we rebranded our Aviation Services segment, which includes American Composites,InTech and Saltillo as ExpressJet Services.  ExpressJet Services is the North American partner to three major Europeanoriginal equipment manufacturers and provides composite, sheet metal, paint, interior, including seat refurbishment, and thrustreverser repairs throughout our five facilities in the United States and Mexico.  We believe Services allows us to pursue astrategy that leverages our expertise in aircraft reliability. 

**Aircraft Fleet**

            ***OurFleet***

******

            We operate a fleet of 274aircraft which includes Embraer ERJ-135, ERJ-145 and ERJ-145XR aircraft.

            The Continental CPA provides forthe continued lease or sublease of our 274 Embraer regional jets.  As of December 31, 2007, 224 aircraft are operating underour Contract Flying and the remaining 50 aircraft are operating under our Branded Flying.

            In December 2005, Continentalnotified us of its intent to withdraw 69 aircraft from the Continental CPA.  Continental can also withdraw up to 51 additionalaircraft beginning December 28, 2009, with 12-months prior notice.  Under the terms of the Continental CPA, we would have ninemonths (from the date of Continental’s withdrawal notice) to decide if we would continue to lease or sublease any or all ofthese aircraft or return them to Continental.  In addition, Continental has the right to terminate the Continental CPA at anytime with 12-months notice; if they did so, the withdrawal of aircraft from our fleet would be limited to 15 per month. If wereturn the aircraft to Continental, they would incur costs associated with terminating the leases or subleases under the terms ofthe agreement. 

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            The operational capability ofboth the ERJ-135 and ERJ-145 is 1,100 miles.  The ERJ-145XR, with a 1,600 mile range, continues to create potential expansionopportunities for us whether under our network or other carriers’ networks to more economically serve cities that are theright size for our aircraft.  Each aircraft is equipped with advanced technology and certifications that aid our operation inchallenging weather conditions and flying efficiently at higher flight altitudes. 

            The aircraft dedicated toContinental and Delta offer a seamless jet service experience to Continental’s and Delta’s passengers.  The planesfeature overhead baggage compartments, under-seat baggage storage, leather seating, lavatories, in-flight meal and beverage servicecapabilities and jet-bridge loading in most locations. 

            Aircraft dedicated to BrandedFlying and corporate charters have redesigned seats for enhanced comfort and feature complimentary XM Satellite Radio with over 100channels of entertainment. 

            We have options for 75 ERJ-145XRaircraft that may be exercised for other types of aircraft within the ERJ-145 Family.  Our next option exercise date is August1, 2008.  If we do not exercise or extend our option as of this date, 25 options will expire.  In 2005, Continentaldeclined the right to include any of our option aircraft in the Continental CPA; consequently, Continental is not required toparticipate in the financing for any option aircraft that we acquire.  We currently have no firm orders for additionalaircraft.

            ***Maintenance of OurAircraft***

******

            We maintain our aircraftprimarily using our own trained and FAA-certified personnel and facilities.  We emphasize routine maintenance in addition toinspection of our aircraft engines and airframes at intervals required by the FAA.  We perform line and heavy maintenance atour facilities in Cleveland, Ohio; Houston, Texas; Knoxville, Tennessee; Ontario, California; Newark, New Jersey; Richmond,Virginia; and Shreveport, Louisiana.  We will continue to evaluate opening other maintenance bases, as appropriate, based onour operations outside of the Continental CPA.  We also perform line maintenance at our satellite maintenance stations. We maintain an inventory of aircraft spare parts to ensure the reliability of our operations and utilize a computerized trackingsystem to increase maintenance efficiency and avoid excess inventory of spare parts.

            We have a power-by-the-houragreement with Rolls Royce to maintain the engines on our aircraft through April 2015.  Under the agreement, we are charged afixed rate based on flight hours incurred during a month.  The rates are subject to annual revisions based on specific laborand materials indices.  We also have power-by-the-hour agreements with other key vendors to cover various high valuecomponents and systems on the aircraft, such as auxiliary power units, avionics, environmental controls, tires, wheels andbrakes.  For 2007, 75% of our maintenance, materials and repairs cost consisted of power-by-the-hour expenses.  Webelieve that these agreements, coupled with our ongoing maintenance program, reduce the likelihood of unexpected maintenanceexpense during the aircraft lease terms and greatly mitigate accelerating maintenance costs commonly associated with agingaircraft.

**

**Competitors**

            The airline industry is highlycompetitive.  ExpressJet competes principally with other regional airlines providing long-term service to legacy carriers, butalso with regional airlines operating independently, low-cost carriers, and major airlines. 

            The principal competitive factorsin the airline industry are location, fare pricing, frequent flyer loyalty programs, customer service, routes served, flightschedules, aircraft types and code-share relationships.  Certain of our competitors are larger and have significantly greaterfinancial and other resources than we do.  Moreover, federal deregulation of the industry allows competitors to rapidly enterour markets and to quickly discount and restructure fares.

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            Our company is one of severalcompetitors in the regional commercial airlines market.  Our competitors include Mesa Airlines, Mesaba Airlines, PinnacleAirlines, Republic Airways and SkyWest Airlines (including Atlantic Southeast Airlines).  We also compete with other airlines,such as American Eagle, Comair and Horizon Airlines, which are wholly owned subsidiaries of major airline holding companies. One of the principal challenges for airlines operating regional jets under either fixed-fee or revenue-sharing arrangements, inaddition to depending on the financial health of their partners, is the ability to maintain reliable and seamless operations with acompetitive cost structure.

            Due to variations among thecontracts under which regional airlines operate, cost comparisons between regional airlines are difficult.  We believe thatAirlines is one of the most cost-efficient providers of regional jet service due to the efficiencies it realizes by operating asingle fleet type, the economies of scale it achieves as one the world’s largest regional airlines, the technologies weemploy, and launch customer status for the Embraer ERJ-145 Family.

            We also believe that Airlinesprovides one of the highest levels of customer service in the regional industry as evidenced by its top-tier performance amongregional carriers in the DOT monthly reports on customer complaints and mishandled bags.  In terms of reliability, Airlinesaccomplished a total completion factor of 97.6% for the year ended December 31, 2007 for all of our flying.  Our strongoperational performance resulted in receipt of $2.1 million in incentive payments from our Contract flying for the year endedDecember 31, 2007.

            As we have expanded our businessplatforms beyond providing regional service for legacy airlines to flying under our own brand, our competitor base has grown toinclude competing service from other regional airlines offering independently branded service, low-cost carriers and, to a certainextent, the major airlines.  However, we believe that by providing point-to-point service for smaller underserved communities,in lieu of the traditional hub and spoke service of most domestic carriers, and our reliable operational performance and customerservice that we will continue to differentiate ourselves from our competitors.

****

**Industry**

            The United States airlineindustry has been very competitive since it was deregulated in 1978, and various business models have been developed to offercommercial air service.  The industry has traditionally been led by airlines, such as American Airlines, United Air Lines,Delta and Continental, which schedule flight service to most major U.S. cities, numerous smaller U.S. cities, and cities throughoutthe world via a hub-and-spoke model.  Other airlines, such as Southwest Airlines and JetBlue, offer scheduled flights to manyof the same domestic markets, but at lower prices and with fewer amenities to travelers; they have competed effectively in the U.S.market due to their lower cost structures.  Another group, including ExpressJet, Mesa Airlines, Republic Airways and SkyWestAirlines, has evolved to provide feeder service to the hub-and-spoke network or point-to-point service for smaller and medium-sizedairports through fixed-fee or revenue-sharing agreements.  The development of the regional jets operated by this group hasbeen enhanced during recent years, allowing them to connect markets in the United States, Mexico and Canada more economically thanwith larger aircraft.

            Commercial airline strategiestypically include:

|          | •  | minimizing operating costs;                                                                                               |
|--------------------------------------------------|--------------|---------------------------------------------------------------------------------------------------------------------------|
|                                                  | •  | broadening their networks to spread fixed costs over more flights;                                                        |
|                                                  | •  | emphasizing international expansion to seize opportunities in the more regulated capacity controlledinternational market; |
|                                                  | •  | focusing on business travelers, who historically have paid higher fares;                                                  |
|                                                  | •  | maintaining capacity and market share against other carriers;                                                             |
|                                                  | •  | bringing additional connecting traffic into their networks through new alliances; and                                     |
|                                                  | •  | adjusting fares to offset higher costs (such as fuel).                                                                    |

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**

            Commercial airlines have facedunprecedented challenges over the last few years including continuing security measures due to fears of terrorism, post 9/11traffic contraction, under-funded defined benefit pension plans and record high fuel prices.  Some airlines have been able touse the bankruptcy process to restructure and lower their operating costs, creating much more formidable competitors. Additional items that have added pressure to airlines include the potential consolidation among legacy carriers, the Internet as adistribution system and the growth of lower-cost carriers.  The Internet allows passengers to instantaneously compare all ofthe network and expansion of low-cost airlines’ pricing, largely eliminating lucrative travel agent and corporate contracts,which previously resulted in higher revenue premiums to larger airlines. 

**Industry Regulation**

            We operate under a certificate ofpublic convenience and necessity issued by the DOT.  This certificate may be altered, amended, modified or suspended by theDOT if public convenience and necessity so require.  The DOT has jurisdiction to prohibit certain unfair or anti-competitivepractices, determine carrier fitness to serve and mandate certain conditions of carriage.  The DOT can bring proceedings forthe enforcement of its regulations under applicable federal statutes, which proceedings may result in civil penalties, revocationof certificate authority or criminal sanctions.

            We also operate under an aircarrier operating certificate issued by the FAA which may be amended, modified, suspended or revoked if safety in air commerce orair transportation and the public interest so require.  The FAA regulates airlines, primarily in the areas of flightoperations, maintenance, ground facilities and other technical matters.  Under these regulations, we have established, and theFAA has approved, a maintenance program for the aircraft that Airlines operates, which provides for the ongoing maintenance ofthese aircraft, ranging from frequent routine inspections to major overhauls.

            Associated with the FAA’ssafety responsibility is its program to ensure compliance with rules regulating the transportation of hazardous materials to whichwe rigorously adhere.  Our employees are trained in the recognition of hazardous materials and dangerous goods through anFAA-approved training course.  Our employees who prepare our company aircraft parts for shipment are trained and certified asdangerous goods shippers.  In acting in the capacity of a shipper or carrier of hazardous materials,we must comply with applicable regulations.  The FAA enforces its hazardous material regulations by the imposition of civilpenalties, which can be substantial.

            Based on conditions in theindustry, or as a result of Congressional directives or statutes, the DOT and the FAA from time to time propose and adopt newregulations or amend existing regulations, such as the air service delivery regulation currently being discussed between U.S.Congress and the DOT, which may impose additional regulatory burdens and costs on us.  Imposition of new laws and regulationson air carriers could increase our cost of operation or limit our operating discretion.

            The Aviation and TransportationSecurity Act of 2001 (the “ATSA”) federalized substantially all aspects of civil aviation security and created theTransportation Security Administration (“TSA”) under the Department of Homeland Security.  The implementation ofthe requirements of the ATSA and other security laws and regulations has resulted in increased costs for airlines and passengers,as well as delays and disruptions in air travel.  The TSA has issued regulations implementing the ATSA, including arequirement that we adopt an air carrier security program.  Failure to comply with TSA rules or with our security program mayresult in the imposition of substantial civil penalties. All security screeners at airports are either federal employees orcontractors hired directly by the TSA, and other significant elements of airline and airport security are overseen by federalemployees, including federal security managers, federal law enforcement officers, federal air marshals and federal securityscreeners.  The law mandated improved flight deck security, deployment of federal air marshals onboard flights, improvedairport perimeter access security, airline crew security training, enhanced security screening of passengers, baggage, cargo, mail,employees and vendors, enhanced training and qualifications of security screening personnel, additional provision of passenger andcargo data to the U.S. Bureau of Customs and Border Protection and enhanced airline employee background checks.

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            The law also requires thatchecked baggage be screened by explosives detection systems, which has required significant equipment acquisition by the governmentand the implementation of facility and baggage process changes.  Further implementation of the requirements of the ATSA andother security laws and regulations have resulted in increased costs for airlines and passengers, delays and disruptions to airtravel and reduced demand.  The TSA has issued regulations implementing the ATSA, including requirement for air carriersecurity programs and substantial civil penalties for violations. Under The Arming Pilots Against Terrorism Act, the TSA hasestablished a program to arm volunteer pilots of air carriers to protect aircraft.  The TSA is currently testing a new“Secure Flight” passenger screening program with the assistance of U.S. airlines.

            In the maintenance of ouraircraft and ground equipment, we handle and use many materials that are classified as hazardous.  The EnvironmentalProtection Agency and similar local agencies have jurisdiction over the handling and processing of these materials.  We arealso subject to the oversight of the Occupational Safety and Health Administration concerning employee safety and healthmatters.  We are subject to the Federal Communications Commission’s jurisdiction regarding the use of radio frequencies.Federal law establishes maximum aircraft noise and emissions limits.  All of our aircraft comply with currently applicablefederal noise and emissions regulations.  Federal law generally preempts airports from imposing unreasonable local noise rulesthat restrict air carrier operations.  However, under certain circumstances, airport operators may implement reasonable andnondiscriminatory local noise abatement procedures, which could impact our ability to serve certain airports, particularly inoff-peak hours.

**Employees**

            Our past and continuing successdepends on the ability of our employees to execute effectively, every day. As of December 31, 2007, we had over 8,000 employees,comprised of approximately 2,900 pilots and instructor pilots, 1,400 flight attendants, 1,500 customer service personnel, 1,100mechanics and 200 other maintenance personnel, 100 dispatchers and 1,100 supervisors, management and support personnel.

            Labor costs are a significantcomponent of airline expenses and can substantially impact our results.  While there can be no assurance that our generallygood labor relations and high labor productivity will continue, a crucial component of our business strategy is the preservation ofgood relations with our employees, approximately 65% of whom are represented by unions.

            The following table reflects, asof December 31, 2007, our principal collective bargaining agreements and their respective amendable dates:

| **Employee Group**     |              | **Approximate Number of Employees** |              | **Representing Union**                                        |              | **Contract Amendable Date** |
|------------------------|--------------|-------------------------------------|--------------|---------------------------------------------------------------|--------------|-----------------------------|
|                        |    |                                     |    |                                                               |    |                             |
| Pilots and Instructors |              | 2,900                               |              | Air Line Pilots Association, International                    |              | December 2010               |
| Mechanics              |              | 1,000                               |              | International Brotherhood of Teamsters                        |              | August 2009                 |
| Flight Attendants      |              | 1,400                               |              | International Association of Machinists and Aerospace Workers |              | August 2010                 |
| Dispatchers            |              | 100                                 |              | Transport Workers Union of America                            |              | July 2009                   |
| Production Workers     |              | 100                                 |              | Union of Industrial Production Workers                        |              | N/A                         |

            Our other employees are notcovered by collective bargaining agreements.    

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****

**Securities Exchange Act Reports**

            Our corporate website address iswww.expressjet.com.  In addition to other information, the following materials on our website are free of charge:

|           | •  | our reports and other filings with the Securities and Exchange Commission ("SEC"), which areavailable as soon as reasonably practicable after we file them with, or furnish them to, the SEC; |
|--------------------------------------------------------|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                        | •  | the Corporate Governance Guidelines adopted by our board of directors establishing the generalpolicies by which the board operates;                                                           |
|                                                        | •  | the charters of the principal standing committees of our board:  Audit, Human Resources,and  Nominating and Corporate Governance; and                                               |
|                                                        | •  | the Principles of Conduct, which is our code of business conduct and ethics applicable to all of ourdirectors and employees.                                                                  |

            Stockholders can print a copy ofthe foregoing materials from our website or may request a copy from the Secretary of the company by writing to the address on thecover of this report.

            As described in the Principles ofConduct, we have established means for our employees to report concerns of questionable accounting, auditing and other businesspractices to our Director of Internal Audit and to our Corporate Compliance Officer.  Our employees may report concernsthrough an employee hotline and the following email address: xjtinternalaudit@expressjet.com*. * Persons desiring tocommunicate with the independent members of our board of directors may also do so through this email address.

            On May 23, 2007, our ChiefExecutive Officer certified to the New York Stock Exchange that he was not aware of any violation by the company of the Exchange'scorporate governance listing standards.  In addition, our Chief Executive Officer and Chief Financial Officer have made thecertifications required under Section 302 of the Sarbanes-Oxley Act, which are included as exhibits to this report.

****

**Item 1A.  Risk Factors**

**Factors that May Affect our Future Operating Results and FinancialCondition**

            Our results of operations andfinancial condition may vary materially from those we anticipate, estimate or project due to risks arising primarily in four keyareas:

|                                                  | •  | our ability to operate profitably outside of our contractual flying;        |
|--------------------------------------------------|--------------|-----------------------------------------------------------------------------|
|          | •  | our reliance on Continental for the majority of our revenue;                |
|                                                  | •  | rising costs and the highly competitive nature of the airline industry; and |
|                                                  | •  | regulation and other factors                                                |

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******

***            Our operations outsideof the Continental CPA may affect our ability to operate profitably***

******

            The aircraft transitioned lastyear from the Continental CPA to the Delta Prorate, ExpressJet branded flying and charter flying have been unprofitable todate.  Currently the aircraft deployed outside of capacity purchase agreements and the associated risks relate only to 22% ofour fleet; however, if the Continental CPA were terminated, our fleet could be significantly reduced or these risks could extendacross our entire fleet. The risks affecting our new operations include:

|          | •  | high fuel costs;                                                               |
|--------------------------------------------------|--------------|--------------------------------------------------------------------------------|
|                                                  | •  | our ability to obtain and finance any expansion at acceptable rates of return; |
|                                                  | •  | our ability to create a profitable recognized brand;                           |
|                                                  | •  | the condition of the U.S. economy; and                                         |
|                                                  | •  | competitive responses from other air carriers.                                 |

            As we continue ourdiversification, we need to successfully develop markets that are new for us.  The risks of entering new markets or ourinability to effectively manage our costs could lead to our decision to significantly reduce our aircraft utilization, includingthe removal of some aircraft from service, and negatively impact our results of operations and financial condition.

***      Additional competitive responses to ourBranded service may make that service even more unprofitable***

******

            The airlineindustry is fiercely competitive.  Barriers to entry are low, and a number of airlines have failed over the years. Subject to the availability of space, and in some cases the right to serve certain airports, we have the right to serve most U.S.airports.  However, most airports already have some combination of legacy, regional and low-cost carriers and we cannotpredict with certainty the competitive response we might face in a given market or future competitive response from current orfuture airlines where we currently operate.  Carriers with comparatively larger fleets and more capital have greaterflexibility to increase frequencies into a market or to reduce fares.  They also enjoy established brand recognition and mayhave marketing alliances that we do not, which enable them to compete more effectively.

            There have beennumerous mergers and acquisitions within the U.S airline industry since its deregulation in 1978, and there may be additionalmergers and acquisitions in the future.  Any airline industry consolidation could substantially alter the competitivelandscape and may result in changes in our business strategy.  Although the majority of our current flying is undercontractual obligations and, thus, is insulated somewhat from the immediate impact of any change of control, consolidationinvolving legacy carriers in our industry could, in the long run, result in the reduction of capacity for network-feed services tobe provided by the regional carriers, which could have a material adverse effect on us,

***            We remain dependent onContinental for the majority of our revenue and cash flows***

            We operate 75% of our fleet (205aircraft) under the Continental CPA and so rely heavily on the financial and operational stability of Continental.  AlthoughContinental has returned to profitability, the domestic airline environment in the United States continues to be extremelychallenging for all carriers. For the year ended December 31, 2007, Continental reported net income of $459 million and hasindicated that its own business and financial results are subject to a number of risk factors, many of which are uncontrollable,including low-cost competitors, higher fuel prices, pension liability, terrorist attacks and adverse regulatory rulings.

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            We cannot predict the futureimpact of these factors on Continental.  Moreover, record fuel prices, changes in fare structures (most importantly inrelation to business fares), booking patterns, low-cost competitor growth, customers’ direct booking on the internet,competitors emerging from bankruptcies that were able to reduce their cost structures, rumored industry consolidation and otherchanges in the industry cannot be predicted at this time, but could have a material adverse effect on both Continental’s andour financial condition, liquidity and results of operations.

            In the past, Airlines andContinental have been unable to agree on rates under the Continental CPA and have submitted our disagreements to bindingarbitration in accordance with the agreement’s terms.  We began 2008 rate discussions with Continental lastSeptember.  The Continental CPA contemplates a November 1 deadline for setting the rates; however, the parties agreed toextend the deadline.  Although we believed that we were nearing completion of the rate setting process, Continental advised uson February 28, that if we were unable to reach agreement by March 14, they might initiate arbitration proceedings again inaccordance with the provisions of the Continental CPA.  We can also initiate arbitration if we thought it necessary.  Asof the date of this filing neither party has triggered arbitration and we remain hopeful that it will not be necessary. Although we prevailed on a significant portion of our claims in 2007, we can provide no assurance that we would be as successful ina new arbitration.

            Airlines will continue to be paidunder the 2007 block hour rates until 2008 rates are finalized and expects the parties’ decision (or that of the arbitrationpanel, if necessary) setting the revised rates to be retroactive to January 1, 2008.  If the arbitration panel were to issue adecision that is wholly or partially adverse to Airlines, then Airlines could have a significant liability to Continental foroverpayments that Continental would have made since January 1, and Airlines could receive significantly smaller payments fromContinental for the remainder of 2008.   The final arbitration decision could also significantly affect future payments forthe remaining term of the Continental CPA.  In addition, another arbitration may be disruptive to our ongoing relationshipwith Continental and divert management’s attention and resources from our operations and other business activities.  Oneor more of these results could have a material adverse effect on our results of operations, liquidity and financialposition.

***            Our Continental CPAcould be terminated***

            Although Continental cannotreduce the aircraft we fly under the Continental CPA again prior to December 28, 2009, Continental can terminate the agreement atany time with 12-months notice.  If the agreement were terminated, our revenue from Continental would be effectivelyeliminated after the pertinent wind-down period and we would incur significant losses unless we were able to profitably redeploythe 205 aircraft currently being flown for Continental.  We cannot be certain that we would be able to do so or, if we did,that the alternative business would be as profitable as the Continental CPA.

            Although the Continental CPA isscheduled to terminate on December 31, 2010, in addition to its right to terminate the agreement at any time upon 12-months notice,Continental can also terminate the agreement:

|          | •  | for cause, as described in “—Continental Capacity Purchase and Other Agreements,”at any time without giving us notice or an opportunity to cure;                                                                                          |
|--------------------------------------------------|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                  | •  | at any time upon our material breach that does not constitute cause, including our failure tocomplete a specified percentage of our scheduled flights, if the breach continues for 90 days after we receive notice of thebreach; and                        |
|                                                  | •  | at any time, without giving us notice or an opportunity to cure, if Continental reasonably and ingood faith determines, using recognized standards of safety, that there is a material safety concern with our operation of anyflights under the agreement. |

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***            We could lose access toour aircraft, facilities and regulatory authorizations if the Continental CPA were terminated***

            We currently lease or subleaseall of our aircraft from Continental. If Continental terminated the Continental CPA for cause, it would have the right to terminateour leases and subleases for aircraft covered by the agreement at the time of termination.  Additionally, ifContinental’s financial condition deteriorated and it filed for bankruptcy protection, it would have the ability to rejectthe leases or subleases on our aircraft.  There can be no assurance that Continental will have sufficient liquidity to fundits future operations and other financial obligations, especially in the event additional adverse factors beyond its control occur,such as escalating fuel prices, terrorist attacks or adverse regulatory rulings.

            Additionally, if the ContinentalCPA were terminated for any reason, we could lose access to some or substantially all of our airport facilities and other servicesthat Continental currently provides to us, as well as our take-off and landing slots and route authorities.  Continentalleases most of the airport facilities that we use.  We could be required to vacate the terminal facilities (or all facilitiesif the termination results from our material breach of the Continental CPA) that are subleased to us by Continental, and to usecommercially reasonable efforts to assign to Continental or its designee any lease in our name where we fly for Continental. Consequently, to offer airline services in the same markets, we would have to arrange to use the same or other airport facilities,take-off or landing slots, route authorities and other regulatory authorizations used for scheduled flights at potentially higherrates.  We cannot provide any assurance that we would be able to gain appropriate access to airport facilities, slots or otherauthorizations, or would not incur a significant increase in our costs to do so.

***            Conversion of ourconvertible notes would dilute the ownership interest of existing stockholders***

******

            On August 1, 2008, holders of ouroutstanding $134.7 million aggregate principal amount 4.25% convertible notes due 2023 may require us to repurchase theirnotes.  We may pay the repurchase price in cash or in stock.  The conversion of some or all of our senior convertiblenotes would dilute the ownership interests of existing stockholders.  Any sales in the public market of the common stockissuable upon conversion of the notes could adversely affect prevailing market prices of our common stock.  In addition, theexistence of the notes may encourage short selling by market participants because the conversion of the notes could further depressthe price of our common stock.   

******

***            We may not be successfulin retaining qualified personnel to maintain the current level of customer service and reliability and to execute ourdiversification plans***

            Labor cost constitute asignificant percentage of our total operating costs and wage rates, in general, are increasing.  Because of this, ouremployees may elect to seek other employment opportunities, thereby increasing our recruiting and training costs.  We cannotguarantee that we will be able to continue to find qualified personnel to fill our vacancies.  As our workforce matures, wemay not be able to cover the resulting higher wage rates if competition or other conditions do not permit us to achieve sufficientrevenues.  Approximately 65% of our employees are covered by collective bargaining agreements.  Deterioration in ourlabor relationships could significantly impact our operations and results.

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**

***            We may be responsiblefor additional taxes as a result of our tax agreement with Continental***

            We have a tax agreement withContinental that provides, among other things, for our payment to Continental of all or a significant portion of the tax benefitswe realize as a result of an internal reorganization done prior to our initial public offering in 2002.  Since that time, wehave made net payments of approximately $123.4 million to Continental under the agreement and could pay Continental as much as anadditional $234.6 million through 2017.  See Item 8. “Financial Statements and Supplementary Data – Notes toConsolidated Financial Statements – Note 8” for a detailed discussion of our income taxes and the tax agreement. If it were determined, as a result of an income tax audit or examination, that a significant amount of these tax benefits shouldnot have been available, thus requiring us to pay additional taxes, interest and penalties to one or more tax authorities, and ifat that time Continental were unable to indemnify us for these amounts as contemplated in the tax agreement, then we could beresponsible for such tax payments, interest and penalties.

***            We may be unable toobtain all of the parts or related support services we expect from Embraer to operate our aircraft***

******

            We operate a single fleet typeproduced by a single manufacturer; consequently, our operations could be materially adversely affected by:

|          | •  | Embraer’s inability to provide sufficient parts or related support services on a timelybasis-- especially in light of its announcement to cease the production of our current fleet type; |
|--------------------------------------------------|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                  | •  | the issuance of FAA directives restricting or prohibiting the use of Embraer regional jets orparts;                                                                                             |
|                                                  | •  | unscheduled or unanticipated maintenance requirements; or                                                                                                                                       |
|                                                  | •  | force majeure events that prevent Embraer from performing under the lease agreement.                                                                                                            |

Conversely, if we choose to operate another aircraft type in the future, for a time we will not havethe maintenance expertise we have acquired with our current fleet, training costs would increase, and parts and inventory costswould rise.

***            Maintenance costs willlikely increase as the average age of our fleet increases***

            Similar to other air carriers inour industry, as the average age of our fleet increases, our aircraft maintenance costs will likely increase.  We emphasizeroutine maintenance in addition to the inspection of our aircraft engines and airframes at intervals required by the FAA.  Weperform line and heavy maintenance at our maintenance facilities and satellite stations located throughout the Midwest and Easternparts of the United States.

            Additionally, we have a“power-by-the-hour” agreement with Rolls Royce to maintain the engines on our aircraft through April 2015.  Underthe agreement, we are charged a fixed rate based on flight hours incurred during a month.  The rates are subject to annualrevisions based on specified labor and material indices.  We also have power-by-the-hour agreements with other vendors tocover various components and systems on our aircraft, and will continue to evaluate and implement similar agreements when the termsare favorable. 

            However, our average maintenancecosts could increase and adversely impact our results of operations in the event that we have to address any new FAA or Embraermaintenance directives.  We are not aware of any such directives at this time that will adversely affect our maintenancecosts.

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***            Reductionsin insurance coverage or increases in rates could adversely impact our operations and financial results***

            The terroristattacks of 2001 led to a significant increase in insurance premiums, as well as a decrease in the coverage available to commercialair carriers. We carry insurance for public liability, passenger liability, property damage and damage to our aircraft.  TheHomeland Security Act of 2002 currently requires the federal government to provide third party, passenger, and hull war-riskinsurance coverage to commercial air carriers through August 31, 2008.  If any of our insurance programs terminated, theCompany would likely face a material increase in the cost of war-risk insurance.

******

***            Our cost structure maynot be competitive with some of our competitors***

            Because we do not control our ownflight schedule under the Continental CPA, only 40% of these costs are controlled by us.  All other costs are driven by theflight schedule determined by Continental, Continental’s own cost structure or factors that are outside our control, or insome instances even Continental’s control (such as aircraft rent, fuel, insurance, property taxes, etc.).  As asignificant portion of our costs are allocated and/or inherited from Continental, we may not be able to restructure our costseffectively to compete with low-cost or other carriers.

***            Our business is subjectto extensive government regulation and we may incur additional costs to comply with such regulations***

            Our business is subject toextensive government regulation.  As evidenced by the enactment of the ATSA, airlines are subject to extensive regulatory andlegal compliance requirements that can or may result in significant costs.  The FAA and other governmental agencies such asthe EPA from time to time issue directives and other regulations relating to the maintenance and operation of aircraft that requiresignificant expenditures.  Some requirements cover, among other things, security measures, collision avoidance systems,potable water standards, noise abatement and other environmental matters, commuter aircraft safety and increased inspections andmaintenance procedures conducted on older aircraft.

            We expect to continue incurringexpenses to comply with these regulations.  In addition, if any of these regulations caused us to cancel flights, theresulting reduction in our revenue from performance penalties would not be taken into account in any reconciliation payment madeunder the Continental CPA to maintain our operating margin within a specified range.

            Additional laws, regulations,taxes and airport rates and charges are proposed from time to time that could significantly increase the cost of airline operationsor reduce revenue.  Such laws, taxes and regulations have affected all facets of our operations from security at airports,restrictions on landing, take-off, routes, restrictions on international routes (which can change suddenly depending on the currentarrangements between the United States and the foreign governments), and increases in landing fees and other airport facilitycharges.  We cannot be certain that current laws or regulations, or laws or regulations enacted in the future, will notadversely affect us.

******

***            We may be adverselyaffected by factors beyond our control, including weather conditions and the availability and cost of fuel***

            Generally, revenue for airlinesdepends on the number of passengers carried, the fare paid by each passenger and service factors, such as timeliness of departureand arrival.  During periods of fog, icy conditions, storms, hurricanes or other adverse weather conditions, flights may becancelled or significantly delayed.  Under the Continental CPA, we are substantially protected against cancellations due toweather or air traffic control restrictions.  However, when we operate our aircraft for other airlines, we may not be, andwhen operating under our own brand, we are not, protected against weather or air traffic control cancellations, which couldadversely affect our operating results and our financial condition.

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            Additionally, in operating ouraircraft for other airlines we may be, and in Branded Flying we are, exposed to the volatility of fuel prices.  Both the costand availability of fuel are subject to various economic and political factors and events occurring throughout the world. Significant changes or extended periods of high fuel cost or fuel supply disruptions would materially affect our operatingresults.  Our ability to pass on increased fuel costs through fare increases is limited by several factors, including economicand competitive conditions.  Additionally, under the Continental CPA, if the unavailability of fuel caused us to cancelflights, our incentive revenue would be reduced.  The cost and availability of adequate supplies of fuel could have a materialadverse effect on our operating results and our financial condition in the future.

***            Ourreliance on technology could be harmful in the event of system failure***

            Like other aircarriers, we rely heavily on automated systems and technology to operate our business, including computerized airline reservations,flight operations and telecommunications. Any disruptions in these systems due to internal failures of technology or externalinterruptions, such as power outages, could result in the loss of critical data and have an adverse effect on our results ofoperations. 

***            Our operations andfinancial condition could be adversely affected as a result of an aviation accident***

            An accident or incident involvingone of our aircraft could involve repair or replacement of a damaged aircraft and its consequential temporary or permanent lossfrom service, as well as significant potential claims of injured passengers and others.  We are required by the DOT to carryliability insurance.  In the event of an accident, our liability insurance may not be adequate and we may be forced to bearsubstantial losses from the accident.  Substantial claims resulting from an accident in excess of our related insurancecoverage would harm operational and financial results.  Moreover, any aircraft accident or incident, even if fully insured,could create a public perception that we are less safe or reliable than other airlines.

***            Our relianceon third-party service providers could adversely affect our operations if they failed to perform theirfunctions***

            Our reliance upon others toprovide essential services on behalf of our operations may limit our ability to control the efficiency and timeliness of contractservices. We have entered into agreements with contractors to provide various facilities and services required for our operations,including ticketing distribution, fuel supply and delivery, aircraft maintenance, services and ground facilities, and expect toenter into additional similar agreements in the future. These agreements are subject to termination for various reasons.  Anymaterial problems with the efficiency and timeliness of our automated or contract services could have a material adverse effect onour business, financial condition and results of operations.

 

**Item 1B.  Unresolved Staff Comments**

            We do not have any unresolvedcomments from the SEC’s staff as of the date of this filing.

----

Table of Contents

****

**Item 2.  Properties**

**Flight Equipment**

            As shown in the following table,our operating fleet consisted of 274 regional jets at December 31, 2007. 

| **Type**                                                                                                                          |              | **Total Leased Aircraft** |              |              | **Options** |              | **Seats in Standard Configuration** |
|-----------------------------------------------------------------------------------------------------------------------------------|--------------|---------------------------|--------------|--------------|-------------|--------------|-------------------------------------|
|                                                                                                                                   |    |                           |    |    |             |    |                                     |
| ERJ-145XR                     |              | 104                       |              |              | 75          |              | 50                                  |
| ERJ-145                                                                                                                           |              | 140                       |              |              | —     |              | 50                                  |
| ERJ-135                                                                                                                           |              | 30                        |              |              | —     |              | 37                                  |
|                                                                                                                                   |              |                           |              |              |             |              |                                     |
| Total                                                                                                                             |              | 274                       |              |              | 75          |              |                                     |
|                                                                                                                                   |              |                           |              |              |             |              |                                     |

            All 274 aircraft were placed intoservice prior to 2007.  Our options for the 75 ERJ-145XR aircraft may be exercised for some other types of aircraft within theERJ-145 Family.  Our next option exercise date is August 1, 2008.  If we do not exercise or extend our option as of thisdate, 25 options will expire.  During 2005, Continental declined the right to include any of our option aircraft in theContinental CPA; consequently, Continental is not required to participate in the financing for any option aircraft that weacquire. 

**Facilities**

           ***Airports***

            We lease all of our airportfacilities either directly with the airport authorities or in some cases, through arrangements with Continental, on a net-rentalbasis.  Our largest operational centers are at Houston’s George Bush Intercontinental Airport, which is approximately155,000 square feet, with 31 gates in Terminal B, Cleveland’s Hopkins International Airport, of which we have approximately106,000 square feet and 12 gates in Terminal D as well as numerous jetways and gates at Continental’s Terminal C, and NewarkLiberty International Airport, where we operate out of Continental’s Terminal C2 with up to 24 passenger loadingbridges.  As of December 31, 2007, we have leased approximately 14,000 square feet of terminal space including three gates atLA/Ontario International airport as well as approximately 115,000 square feet of terminal space including approximately 25 gates atan additional 24 airports throughout our ExpressJet branded network. 

****

***            Corporate Offices andOther***

******

            Our Houston headquarters buildingis comprised of executive, administrative and operations control departments, occupying approximately 42,000 square feet. ExpressJet also occupies a second building that consists of 18,000 square feet for executive and administrative staff, as well as50,000 square feet of production and warehouse space for our InTech subsidiary for use in its aircraft refurbishmentbusiness.  The two facilities are leased directly by us.  Additionally, we lease a 57,000 square foot training centercontaining numerous simulators, training devices and corresponding training and administrative staff.

----

Table of Contents

***            MaintenanceFacilities***

******

            In addition to our airportpassenger facilities, ExpressJet currently maintains seven major maintenance facilities (hangars/shops) in Houston, Cleveland,Newark, Knoxville, Shreveport, Ontario and Richmond as well as ten satellite line maintenance facilities in other cities. Continental is the primary sublessor for these facilities with the exception of the Ontario hanger and shop and satellitemaintenance station facilities located in Austin, Los Angeles, San Diego, San Antonio, Sacramento and Lake Charles. ExpressJet has two other maintenance facilities, a Miami maintenance shop and the Saltillo aircraft painting facility, each ofwhich we own.  The facility in Miami consists of approximately 74,000 square feet which we lease to American Composites foruse in its aircraft repair and maintenance business.  The operation in Saltillo, Mexico is an aircraft painting facility thatconsists of approximately 96,000 square feet of hangar space and 3,000 square feet of administrative space.  We lease thisfacility to our partner Saltillo for use in its aircraft painting business.

            We are responsible formaintenance, taxes, insurance and other facility-related expenses and services at these facilities.  In addition, at each ofContinental's three domestic hubs and many other locations, our passenger and baggage handling space is provided by Continental onvarying terms dependent on the prevailing practice at each airport.  If the Continental CPA were terminated, we might berequired to vacate the terminal facilities (or all facilities if the termination resulted from our material breach of theagreement) that are subleased to us by Continental, and to use commercially reasonable efforts to transfer to Continental or itsdesignee any lease in our name.  See Item 1. "Business – Continental Capacity Purchase and Other Agreements - AirportFacilities, Slots and Route Authorities."  For a period of five years following the termination of the Continental CPA, if wewanted to transfer our interests in any of our facilities used to fulfill our obligations under the agreement, Continental wouldneed to consent to the transfer (where Continental is the sublessor) and has a right of first refusal to acquire our interests inthose facilities that we lease from parties other than Continental.

**Item 3.  Legal Proceedings**

            We are a defendant in variouslawsuits arising in the ordinary course of our business.  While the outcome of these lawsuits and proceedings cannot bepredicted with certainty and could have a material adverse effect on our financial position, results of operations or cash flows,we believe that the ultimate disposition of these suits will not have a material adverse effect on our financial position, resultsof operations or cash flows.

****

**Continental CPA Arbitration**

            We began 2008 rate discussionswith Continental last September.  The Continental CPA contemplates a November 1 deadline for setting the rates; however, theparties agreed to extend the deadline.  Although we believed that we were nearing completion of the rate setting process,Continental advised us on February 28, that if we were unable to reach agreement by March 14, they might initiate arbitrationproceedings again in accordance with the provisions of the Continental CPA.  We can also initiate arbitration if we think itnecessary.  As of the date of this filing neither party has triggered arbitration and we remain hopeful that it will not benecessary.  Continental also advised us that it believes that it overpaid Airlines by $6 million in 2007 and $2.1 million in2006.  We believe that if we were required to arbitrate these matters we would prevail.  However, we may not besuccessful in resolving these disputes without reducing our 2008 income.  We cannot currently predict the timing or theresolution of these matters.  Although we are hopeful that we can agree on rates and resolve Continental’s other claimswithout arbitration, there can be no assurance that we will be successful in doing so. 

----

Table of Contents

            If we are required to arbitrate,each party will select one arbitrator, and those two arbitrators will select the third arbitrator to complete the panel.  TheContinental CPA sets forth procedures and a schedule that will likely result in a hearing and the issuance of a final decision bylate in the second or early in the third quarter of 2008.  ExpressJet will continue to be paid under the 2007 block hour ratesduring the arbitration process and expects the decision setting the revised rates to be retroactive to January 1, 2008.  If weare required to arbitrate, we do not intend to issue any reports on the progress of the arbitration until the panel issues itsfinal decision.  We cannot predict the outcome of any arbitration.  If decided adversely to us, the arbitration couldhave a material adverse effect on our results of operations, liquidity and financial position.  See Item 1A. “RiskFactors.” 

****

**Environmental Proceedings**

            We are and may from time to timebecome involved in environmental matters, including the investigation and/or remediation of environmental conditions at propertieswe use or were previously used by us.  We are not, however, currently subject to any environmental cleanup orders imposed byregulatory authorities, nor do we have any active investigations or remediation at this time.

**Item 4.  Submission of Matters to a Vote of SecurityHolders**

            Not applicable.

**PART II**

**Item 5.  Market for Registrant's Common Equity, Related StockholderMatters and Issuer Purchases of Equity Securities**

            Our common stock trades on theNew York Stock Exchange under the symbol “XJT”.  The table below shows the high and low sales prices for ourcommon stock as reported on the Exchange’s composite tape for the periods indicated.

|                                       |        |   | **Common Stock** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---|------------------|
|                                                                                                                                                                                                                                |        |   | ****             |
|                                                                                                                                                                                                                                |        |   | **High**         |  |  | **Low** |
|                                                                                                                                                                                                                                |        |   | ****             |  |  | **** |
| **2007**                                                                                                                                                                                                                       |        |   |                  |  |  |  |
|   First Quarter                                                                                                                                                                                                      |        | $ | 9.61             |  | $ | 5.78 |
|   Second Quarter                                                                                                                                                                                                     |        | $ | 6.63             |  | $ | 5.61 |
|   Third Quarter                                                                                                                                                                                                      |        | $ | 6.45             |  | $ | 3.03 |
|   Fourth Quarter                                                                                                                                                                                                     |        | $ | 3.72             |  | $ | 2.30 |
| ** **                                                                                                                                                                                                                     |        |   |                  |  |  |  |
| **2006**                                                                                                                                                                                                                       |   |   |                  |   |  |  |
|   First Quarter                                                                                                                                                                                                      |        | $ | 8.52             |  | $ | 6.70 |
|   Second Quarter                                                                                                                                                                                                     |        | $ | 7.55             |  | $ | 5.01 |
|   Third Quarter                                                                                                                                                                                                      |        | $ | 7.40             |  | $ | 5.96 |
|   Fourth Quarter                                                                                                                                                                                                     |        | $ | 8.97             |  | $ | 6.36 |

            As of March 10, 2008, there wereapproximately 150 holders of record and approximately 5,000 beneficial holders of our common stock.

            We have not paid any cashdividends on our common stock and have no current intention of doing so.

----

Table of Contents

**Performance Graph**

            The following graph compares thecumulative total return on our common stock with the cumulative total returns (assuming reinvestment of dividends) of the AmericanStock Exchange Airline Industry Index, the Russell 2000 Index and the New York Stock Exchange Composite Index as if $100 wereinvested in our common stock and each of those indices on April 18, 2002. 

**12/31/02**

**12/31/03**

**12/31/04**

**12/30/05**

**12/29/06**

**12/31/07**

**                                                                              **
************************
ExpressJet Holdings, Inc.

 

$

100.00

 

$

146.34

 

$

125.66

 

$

78.93

 

$

79.02

 

$

24.20

American Stock Exchange Airline Industry Index

100.00

158.21

154.89

140.32

150.27

88.42

Russell 2000 Index

100.00

145.37

170.08

175.73

205.61

199.96

New York Stock Exchange Composite Index

100.00

128.81

145.00

155.08

182.78

194.81

            Our certificate of incorporationprovides that no shares of capital stock may be voted by or at the direction of persons who are not United States citizens unlessthey are registered on a separate stock record.  Our bylaws further provide that no shares will be registered on this foreignstock record if the amount to be registered would exceed United States foreign ownership restrictions.  United States lawcurrently limits the voting power in us (or any other U.S. airline) by persons who are not citizens of the United States to25%.

Table of Contents

**Issuer Purchases of Equity Securities**

**Period**

**(a) Total number of shares purchased(1)**

**(b) Average price paid per share**

**(c) Total number of shares purchased as part of publicly announced program(2)**

**(d) Maximum value of shares / notes that may yet be purchased under the program   (in millions)(3)**

 

October 1 to October 31, 2007        

 

—

 

$

—

 

400,000

 

$

23.0

November 1 to November 30, 2007

1,193

$

2.70

1,999,200

$

17.1

December 1 to December 31, 2007

238

$

2.60

305,315

$

16.3

Total

1,431

$

2.68

2,704,515

13.9

(4)

  

(1) 

Shares shown were withheld to satisfy individual employee tax obligations arising upon the vestingof restricted stock awards and do not count against our securities repurchase program.

  

(2) 

Amounts shown relate to shares of our common stock repurchased within our board approved securitiesrepurchase program.

  

(3) 

Amounts shown reflect the remaining balance available for repurchases of our common stock within ourboard approved securities repurchase program.

  

(4) 

Amounts shown reflect repurchases of our common stock and our 4.25% convertible notes includedwithin our board approved securities repurchase program.

****

            In February 2006, our board ofdirectors authorized the inclusion of our 4.25% convertible notes due 2023 within the $30 million securities repurchaseprogram.  We did not make any purchases of stock or notes under this program during 2006.  During 2007, we purchased 2.7million shares of our common stock and $2.5 million of our 4.25% convertible notes ending the year with $13.9 million within theprogram for additional purchases.  In January 2008, we purchased an additional 295,970 shares of our common stock and $3.5million of our 4.25% convertible notes leaving a current balance of $9.7 million within the program for additionalpurchases.

****

**Item 6.  Selected Financial Data**

            This selected financial datashould be read together with the consolidated financial statements and related notes and Item 7.  “Management’sDiscussions and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.

            Our primary business is flying274 aircraft for various customers.  During 2007, we diversified our business from flying solely for one corporate customer toflying for several, including the general public under our own brand.  Prior to 2007, we derived substantially all of ourrevenues from our Continental Express operations.

Table of Contents

            The following selected financialdata, excluding operating statistics, have been derived from our audited financial statements.  The financial informationincluded in this report is not necessarily indicative of our future results of operations, financial position and cash flows. For a discussion of some of the key factors that could have an adverse effect on our results of operations, financial position andcash flows, please refer to Item 1A. “Risk Factors" beginning on page 20 of this report.

**Year Ended December 31,**
****
**2007**

**2006**

**2005**

**2004**

**2003**
********************
**(In thousands, except per share data)**

Statement of Operations Data:

Operating revenue (2)

$

1,685,545

 

$

1,682,156

 

$

1,562,818

 

$

1,507,524

 

$

1,311,443

Operating expenses (2)

1,792,416

1,541,085

1,406,275

1,302,097

1,129,466

Operating income / (loss)

(106,871

)

141,071

156,543

205,427

181,977

Nonoperating income (expense), net

(1

)

5,385

(2,309

)

(7,423

)

(6,774

)

Net income / (loss)

(70,248

)

92,565

97,993

122,771

108,181

Basic earnings / (loss) per share (1)

(1.31

)

1.72

1.81

2.26

1.80

Diluted earnings / (loss) per share (1)

(1.31

)

1.56

1.65

2.04

1.74

Dividends

—

—

—

—

—

Weighted average number of shares used   in computations:

     Basic

53,693

53,864

54,117

54,220

60,026

     Diluted

53,693

61,529

61,722

61,779

63,062

(1) 

See Item 8.  “Financial Statements and Supplementary Data – Notes to ConsolidatedFinancial Statements – Note 1 – Summary of Significant Accounting Policies – (q) Earnings / (Loss) perShare” for the reconciliation of the numerator and denominator of basic earnings per share to the numerator and denominatorof diluted earnings per share for the years ended December 31, 2007, 2006 and 2005.  In addition, we adopted the EmergingIssues Task Force Issue No. 04-08 – “The Effect of Contingently Convertible Debt on Diluted Earnings per Share”(“EITF 04-08”) on December 15, 2004.  As a result, we restated our diluted earnings per share for all periods inwhich the convertible notes were outstanding (since August 2003).

(2) 

Our operating revenue and operating expenses for 2007 and 2006 include reclassifications betweenoperating expense line items and between operating revenue and operating expenses.  These reclassifications were not materialto previous years.

Table of Contents

**As of December 31,**
****
**2007**

**2006**

**2005**

**2004**

**2003**
********************
**(In thousands)**

Balance Sheet Data:

Cash, cash equivalents and short-term   investments (including restricted cash)

$

214,279

  

$

302,860

  

$

236,503

  

$

215,151

  

$

193,092

Amounts due from Continental, net

—

—

4,832

—

—

Total assets

597,608

637,029

560,270

543,244

510,171

Amounts due to Continental, net

4,726

3,522

—

11,239

5,588

Note payable to Continental

—

—

17,545

98,804

193,172

Other long-term debt and capital lease   obligations, including current maturities (1)

147,698

152,721

154,305

161,012

163,623

Stockholders' equity (deficit)

232,440

304,314

208,510

114,044

(10,287

)

(1) 

Beginning July 1, 2003, our Series A Cumulative Mandatorily Redeemable Preferred Stock(“Series A Preferred Stock”) was classified as long-term debt in accordance with Statement of Financial AccountingStandard No. 150 – “Accounting for Certain Financial Instruments with Characteristics of both Liabilities andEquity”.  Reclassification of the prior year financial statements was made to conform to this accounting standard. In April 2005, we redeemed this stock.

**                                                                             **

**Year Ended December 31,**
****
**2007**

**2006**

**2005**

**2004**

**2003**
********************
Operating Statistics:

 

 

 

 

Revenue passenger miles (millions) (1)

 

10,071

10,297

8,938

7,417

5,769

Available seat miles (millions) (2)

13,575

13,200

11,973

10,410

8,425

Passenger load factor (3)

74.2

%

78.0

%

74.7

%

71.3

%

68.5

%

Operating cost per available seat mile (cents) (4)

13.20

11.67

11.75

12.51

13.41

Block hours (5)

916,756

916,718

827,369

729,698

593,387

Operating cost per block hour (dollars) (6)

1,956

1,681

1,700

1,784

1,903

Departures

489,489

491,598

449,928

405,055

353,547

Average price per gallon of fuel, including fuel   taxes (cents) (7)

100.00

71.20

71.20

71.20

71.04

Fuel gallons consumed (millions)

323.2

319.1

295.5

262.8

215.8

Average length of aircraft flight (miles)

569

549

545

528

491

Average daily utilization of each aircraft (hours) (8)

9.17

9.24

8.87

8.51

7.79

Completion factor

97.6

%

97.9

%

97.7

%

98.4

%

98.2

%

Revenue passengers (thousands)

17,365

18,173

16,076

13,659

11,373

Actual aircraft in fleet at end of period

274

274

266

245

224

Table of Contents

(1) 

Revenue passenger miles are the number of scheduled miles flown by revenue passengers.

(2) 

Available seat miles are the number of passenger seats available multiplied by the number ofscheduled miles those seats are flown.

(3) 

Passenger load factor equals revenue passenger miles divided by available seat miles.

(4) 

Operating cost per available seat mile is operating costs divided by available seatmiles. 

(5) 

Block hours are the hours from gate departure to gate arrival.

(6) 

Operating cost per block hour is operating costs divided by block hours.

(7) 

Under our fuel purchase agreement with Continental, fuel and fuel tax expense were reconciled to thelower of the actual costs or the agreed-upon caps.  Since 2003, our caps on fuel and fuel taxes, for aircraft operating underthe Continental CPA, have been 66.0 cents and 5.2 cents per gallon, respectively.  In 2007, our fuel activity includedpurchases to support our various business platforms outside of the Continental CPA.  These purchases were executed through anagreement with an independent third party at an average price per gallon of $2.43, which represents 16.7% of our total fuelconsumption for 2007.

(8) 

Average daily utilization of each aircraft is the average number of block hours per day that anaircraft in revenue service is operated.

**Item 7.  Management's Discussion and Analysis of Financial Condition andResults of Operations**

            The information contained in thissection has been derived from, is provided as a supplement to, and should be read in conjunction with our consolidated financialstatements and the accompanying notes thereto contained in “Item 8. Financial Statements and Supplementary Data” ofthis report.  This section contains forward-looking statements that involve risks and uncertainties.  Our actual resultsmay differ materially from those expressed or implied in these forward-looking statements as a result of various factors, includingthose described in Item 1A.  “Risk Factors”.

**Overview**

            The following Management'sDiscussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand ouroperations and our current business environment. MD&A is provided as a supplement to—and should be read in conjunctionwith—our consolidated financial statements and the accompanying notes thereto contained in "Item 8. Financial Statementsand Supplementary Data" of this report. This overview summarizes MD&A, which includes the following sections:

         

• 

*Our Business —* a general description of our business, including our businesssegments; our objective; our areas of focus; and challenges and risks of our business.

• 

*Critical Accounting Policies and Estimates —* a discussion of accounting policiesthat require critical judgments and estimates.

• 

*Operations Review* — an analysis of our consolidated results of operations,including appropriate segment disclosures, for the three years presented in our consolidated financial statements.

• 

*Liquidity, Capital Resources and Financial Position —* an analysis of cash flows;off–balance sheet arrangements and aggregate contractual obligations; an overview of financial position; and the impact ofinflation and changing prices.

Table of Contents

**Our Business**

****

***           General***

****

            ExpressJet Holdings, Inc.(“Holdings”) has strategic investments in the air transportation industry.  Our principal asset is all of theissued and outstanding shares of stock of XJT Holdings, Inc., the sole stockholder of ExpressJet Airlines, Inc. (referred to belowas “Airlines” and, together with Holdings, as “ExpressJet”, “we” or “us”). Airlines currently operates a fleet of 274 aircraft.  As of December 31, 2007, we provided the followingservices:

            ContractFlying

**          **

**• **

205 aircraft for Continental Airlines (“Continental”) as ContinentalExpress pursuant to a capacity purchase agreement (the “Continental CPA”);

 

**• **

10 aircraft for Delta Air Lines (“Delta”) as Delta Connection pursuant toa capacity purchase agreement (the “Delta CPA”);

 

**• **

9 aircraft in our Corporate Aviation division, which is dedicated to charter contractsand ad-hoc charter arrangements.

            BrandedFlying

**         **

**• **

39 aircraft under our ExpressJet brand; and

 

**• **

11 aircraft for Delta pursuant to a prorate revenue agreement (the “DeltaProrate”), under which we share passenger revenue risk and incur pricing, scheduling and revenue management costs

           Aviation Services includes our ground-handling services pursuant to our contracts with Continental and other airlines atairport locations across the United States, as well as ExpressJet Services, LLC (“Services”), our wholly owned repairand overhaul subsidiary.  During the first half of 2007, we rebranded American Composites, LLC (“AmericanComposites”) and InTech Aerospace Services, LP (“InTech”), our wholly owned subsidiaries, and Saltillo Jet Center(“Saltillo”), a majority-owned subsidiary, under the name ExpressJet Services.  These entities provide composite,sheet metal, paint, interior (including seat refurbishment) and thrust reverser repairs throughout our five facilities in theUnited States and Mexico.  Revenues are earned and recognized when we complete various jobs and bill our customers for theproducts and/or services delivered. 

            Our primary business is flying274 aircraft for various customers.  During 2007, we diversified our business from flying solely for one corporate customer toflying for several, including the general public on our own brand.  Prior to 2007, we derived substantially all of ourrevenues from our Continental Express operations.  In 2007, we continued developing our Services subsidiary andSaltillo.  In each of these areas, we believe that our operational excellence and our commitment to customer service are ourgreatest strengths

****

***            OurObjective***

******

            Our goal is to use our assets andcapabilities, including reliable operation performance, brand, financial strength, distribution system, and a strong commitment byour management and employees to achieve long-term sustainable growth. Our plans for sustainable growth include thefollowing:

**         **

**• **

Being a great place to work where people are encouraged to achieve their bestperformance.

**         **

**• **

Delivering the best products and services to a diversified base of customers.

**         **

**• **

Establishing a winning network of partners and develop ways to expand theserelationships.

**         **

**• **

Maximizing the return to our stockholders while being mindful of our overall responsibilities to allstakeholders.

Table of Contents

            ***ContractFlying***

            **Continental**

****

            Our relationship with Continentalremains crucial to our success since 75% of our fleet continues to support Continental’s network.  We believe theservice we provide Continental has been effective in helping Continental to fully develop its route network and gain recognition asa premier service provider.  We provide Continental seamless service to approximately 150 markets in the U.S., Mexico, Canadaand the Caribbean.  We believe our operations will continue to meet all of Continental’s reliability measurements, andwe expect our results of operations to generate steady operating income, as long as the current Continental CPA remainsunchanged.

            The Continental CPA is scheduledto expire on December 31, 2010.  At its sole election, Continental can extend the term of our agreement for up to fouradditional five-year terms through December 31, 2030 upon written notice delivered at least 24 months prior to the expiration ofthe initial term.  Continental’s first option to extend must be delivered to us by December 31, 2008.  In addition,Continental can cancel the Continental CPA at any time, upon providing 12-months notice.  At this time, we have no indicationwhether Continental will elect to cancel or extend the agreement; consequently, we will continue to evaluate the alternativesprovided to us within the provisions of the Continental CPA.

            We began 2008 rate discussionswith Continental last September.  The Continental CPA contemplates a November 1 deadline for setting the rates; however, theparties agreed to extend the deadline.  Although we believed that we were nearing completion of the rate setting process,Continental advised us on February 28, that if we were unable to reach agreement by March 14, they might initiate arbitrationproceedings again in accordance with the provisions of the Continental CPA.  We can also initiate arbitration if we think itnecessary.  As of the date of this filing neither party has triggered arbitration and we remain hopeful that it will not benecessary.  Continental also advised us that it believes that it overpaid Airlines by $6 million in 2007 and $2.1 million in2006.  We believe that if we were required to arbitrate these matters we would prevail.  However, we may not besuccessful in resolving these disputes without reducing our 2008 income.  We cannot currently predict the timing or theresolution of these matters.  Although we are hopeful that we can agree on rates and resolve Continental’s other claimswithout arbitration, there can be no assurance that we will be successful in doing so.  

            If we are required to arbitrate,each party will select one arbitrator, and those two arbitrators will select the third arbitrator to complete the panel.  TheContinental CPA sets forth procedures and a schedule that will likely result in a hearing and the issuance of a final decision bylate in the second or early in the third quarter of 2008.  ExpressJet will continue to be paid under the 2007 block hour ratesduring the arbitration process and expects the decision setting the revised rates to be retroactive to January 1, 2008.

            **Delta**

****

            Airlines currently operates 10aircraft as Delta Connection pursuant to the Delta CPA, which began June 1, 2007.  The agreement has a two-year term and issubject to two one-year extensions at Delta’s option.  Delta is responsible for scheduling, marketing, pricing andrevenue management on the aircraft and collects all passenger revenue.  Airlines operates, maintains and finances theaircraft. 

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            Under the Delta CPA, Airlinesreceives a base rate for each completed block hour and departure and is reimbursed for certain pass-through costs, such as fuelexpenses and certain airport costs.  Airlines has the ability to earn monthly and semi-annual incentive payments for exceedingcompletion and on-time benchmarks (referred to as monthly incentives) and a high completion factor, high Department ofTransportation (“DOT”) rankings for on-time arrivals and customer satisfaction (referred to as semi-annualincentives).  For the year ended December 31, 2007, we met all of our monthly incentive metrics with theexception of the on-time benchmark in August and November.  Of the three semi-annual incentive metrics for on-time, customerservice, and completion, we met only two of these metrics in 2007.  We anticipate that we will continue to meet amajority of these incentives at the measurement dates, and we expect our results of operation under the Delta CPA to generatesteady operating income for the term of this agreement.

**            CorporateAviation**

****

            Our Corporate Aviation (charter)division currently operates nine aircraft, providing distinctive travel solutions for corporations, aircraft brokers, hospitalitycompanies, sports teams, schools and others, including short-term flying solutions for other carriers, such as JetBlue Airways(“JetBlue”) during March and April 2007 and Frontier Airlines (“Frontier”) during November and December2007.  As with our branded aircraft, our charter aircraft are configured with 50 redesigned seats for enhanced passengercomfort, and each seat includes complimentary XM Satellite Radio with over 100 channels of audio entertainment.  Customizedflight service options give customers an opportunity to create a unique flight experience.  Based on recent trends, weanticipate that contractual flying will be most consistent during the period from October through April.  For the summermonths, we experience more ad-hoc charter flying.  We continue to seek longer-term contracts instead of those lasting fromone-to-six months that we currently have in place and to generate steady operating income from these operations.

****

            ***BrandedFlying***

            **ExpressJet****Brand**

            We provide scheduled air serviceto 25 cities in the United States with approximately 200 daily departures, utilizing 39 of our aircraft, under our Branded Flyingoperation.  Customers can access our reservation system through our consumer website, www.xjet.com, reservations call centerand all four major global distribution systems.  Being a part of the global computer reservation systems allows travel agentsand online distributors, such as Expedia, Orbitz, Travelocity and Cheaptickets.com the visibility to see and sell ourtickets. 

            **Delta Prorate**

            On July 1, 2007, Airlines beganscheduled air service with eight aircraft under the Delta Prorate.  At this time, we are responsible under this arrangementfor scheduling, pricing, revenue management, as well as the operation and maintenance of the aircraft, and earn a prorated portionof the fare plus an incentive for passengers connecting onto Delta's network.  In December 2007, we transitioned threeadditional aircraft from our ExpressJet brand flying for a total of 11 aircraft under this arrangement.  As Airlines is partyto both the Delta CPA and the Delta Prorate, our relationship with Delta is important as we continue to establish our network ofcorporate customers.

            We have not yet been profitablein our Branded Flying operation and do not anticipate that we will be profitable in 2008 as we continue to establish our ExpressJetbrand.  We continue to evaluate and modify our schedules, promotions and marketing programs to establish our brand and shiftour traffic mix from heavily leisure to more business/corporate travel and minimize our exposure during seasonal peaks andvalleys.  We continue to enhance our infrastructure to facilitate timely information and permit us to make better tacticaldecisions and mitigate our losses in underperforming markets.

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***            AviationServices***

            Aviation Services includes ourground-handling services pursuant to our contracts with Continental and other airlines at airport locations across the UnitedStates, as well as Services, our wholly owned repair and overhaul subsidiary.  During the first half of 2007, we rebrandedAmerican Composites, InTech and Saltillo, under the Services name, which provides third-party maintenance for interior and exteriorwork on aircraft.  We will continue to leverage our operation expertise developed from this business segment tocost-effectively operate our 274 aircraft for our current customers and attract potential customers.

            ***Our 2008Outlook***

            **General**

            Many factors could materiallyaffect our results of operations; 2008 will be a challenging year for us.  Among the most significant factors outside ourcontrol are economic conditions, possible industry consolidation and, to some extent, fuel costs within our Branded Flyingsegment.

            Many economists believe the U.S.economy is in a recession.  The airline industry is highly cyclical, and the growth in demand for air travel is correlated tothe growth in the U.S. and global economies.  An economic recession could have an adverse effect on our results of operationsand financial condition.

            Recent media reports haveindicated that various U.S. legacy carriers are considering consolidation.  As a regional service provider for legacycarriers, our preference is to continue in long-term capacity arrangements, but the outcome of industry consolidations couldadversely affect our competitive position.

            In 2008, our focus is primarilyon factors within our control, including:

**         **

**• **

working with Continental to set the appropriate rates pursuant to the Continental CPA

**         **

**• **

discussing changes to the Continental CPA to enhance our long-term working relationship;

**         **

**• **

developing our relationship with Delta as we continue to expand both contract and prorateflying;

**         **

**• **

negotiating additional longer-term contracts for our corporate charters;

**         **

**• **

adjusting our Branded Flying as necessary to respond to external cost factors, such as fuel,economic downturns and distribution costs; and

**         **

**• **

controlling our internal costs, such as crew and outside services costs

            Our relationship with Continentalremains crucial to our success since 75% of our fleet continues to support Continental’s network.  We began 2008 ratediscussions with Continental last September, with no resolution.  Continental advised us on February 28, that if we wereunable to reach agreement by March 14, they may initiate arbitration proceedings again in accordance with the provisions of theContinental CPA.  We would also be able to initiate arbitration after March 14 if we thought it necessary.  As of thedate of this filing neither party has triggered arbitration and we remain hopeful that it will not be necessary.  TheContinental CPA sets forth procedures and a schedule that would likely result in a hearing and the issuance of a final decision bylate second or early third quarter of 2008 if we were required to arbitrate.  ExpressJet would continue to be paid under the2007 block hour rates during the arbitration and would expect the decision setting revised rates to be retroactive to January 1,2008.  The outcome of our 2008 rate setting process is uncertain and may adversely impact our results and cash flows fromoperations if we are unable to negotiate reasonable terms with Continental.

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            We expect our Branded Flying toincur a significant loss for the full year 2008 as we commence its second year of flying in April 2008 and continue to establishour brand, refine our reservations and marketing, adjust our schedule appropriately, seek to increase our market share (orstimulate demand) and manage our yields.  However, absent a combination of adverse factors outside of our control, such as asignificant further deterioration of the U.S. economy, Continental’s inability to pay us pursuant to the terms of theexisting capacity purchase agreement, further material increases in the cost of fuel, or industry consolidation, which could resultin the formation of one or more airlines with greater financial resources than ours to compete more fiercely in the markets weoperate, we believe that our Contract Flying will generate sufficient operating income to offset a significant portion of any loss,subject to the  considerations set forth below. 

            As of December 31, 2007, we held$189 million in unrestricted cash and cash equivalents.  In early 2008, we invested approximately $65 million in auction ratesecurities (“ARS”) which are primarily backed by student loans that are guaranteed by the U.S. government and have AAAlong-term ratings from Moody’s and Standard & Poor’s.  For a detailed list of our ARS, please see Exhibit10.19.  The securities are held at Citigroup Global Markets, Inc., Banc of America Securities, LLC and Royal Bank of CanadaCapital Markets.  While the contractual maturities of the underlying securities within these ARS fall in years maturing after2015, each security has a reset period of either seven or 28 days.  Beginning February 11, 2008, auctions for these securitieswere not successful, resulting in our continuing to hold them and the issuers paying interest at the maximum contractualrate.  At this time, we have ceased purchasing additional ARS and have a standing sell order for our current ARSportfolio.  However, continued unsuccessful auctions could result in our holding our current ARS beyond their next scheduledauction reset dates, thereby limiting their short-term liquidity.  Ifliquidating these investments becomes necessary, we have received a level of commitment to borrow against some of our current ARSportfolio. 

            We have significant financialobligations due in 2008.  We can satisfy the largest of these obligations, our convertible notes, with either cash, shares ofour common stock, or a combination thereof.  For risks associated with settling the obligation in common stock, please referto Item 1A, “Risk Factors”.  In addition, we are evaluating our options for meeting these obligations, includingthe possibility of a secured financing transaction permitting us to pay a substantial portion of the convertible notes in cashwhile maintaining a healthy cash balance and avoiding the dilution to equity that would result from a stock settlement of theconvertible notes.  However, as our options to satisfy the convertible notes, as described above, depend on several factorsoutside of our control, we are also continuing to evaluate additional steps within our control that we could take if our ability tomeet our obligations were limited.  These include, individually or in combination if required:

**         **

**• **

reducing capital expenditures to only those required by law or operational necessities;

**         **

**• **

borrowing against or liquidating our ARS holdings, including at a discount if necessary;

**         **

**• **

selling assets, tangible or intangible, or subleasing the aircraft we lease fromContinental;

**         **

**• **

transferring some or all of the aircraft currently dedicated to our ExpressJet brand flying to otheroperations, or grounding them entirely if circumstances so required.

            We believe that our existingliquidity, projected 2008 cash flows, including the incremental sources of liquidity described above, if needed, will be sufficientto fund current operations and our financial obligations through the year ending December 31, 2008. However, as noted above,factors outside our control may dictate that we alter our current plans and expectations.

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**            Contract Flying**

            ***Continental. ***Since 2005, Continental has proposed a number of amendments to the Continental CPA, which would have, among other things,significantly reduced the amount Continental pays us for the regional airline service we provide and would have dramaticallyreduced our rights to the aircraft.  We negotiated with Continental to try to reach an agreeable compromise.  Our boardof directors, which typically meets five times a year, held 12 meetings in 2005, six of which were special meetings to considerContinental’s proposals and to formulate counterproposals.  Based on their evaluations, including the analysis ofindependent financial advisers, the board determined that the rates proposed by Continental would not be in the best interest ofour stockholders and declined Continental’s proposals.  We made counterproposals that we believed addressedContinental’s concerns, but were fair to our stockholders as well.  However, to date, we have not been able to reach along-term agreement.  Additionally, we were unable to agree on the 2007 rates and, in accordance with the terms of theContinental CPA, submitted our dispute to binding arbitration.  The arbitration panel determined that the annual 2007 budgetedrates originally presented by Airlines should be reduced by only $14.2 million in the aggregate (or less than 1.0% of totalContinental CPA operating revenue), which included the 10% target operating margin.  We recorded our Continental CPA revenuebased on the final rates determined by the arbitration panel. 

            Further, the Continental CPA isscheduled to expire on December 31, 2010.  At its sole election, Continental can extend the term of our agreement for upto four additional five-year terms through December 31, 2030 upon written notice delivered at least 24 months prior to theexpiration of the initial term.  Continental’s first option to extend must be delivered to us by December 31,2008.  In addition, Continental can cancel the Continental CPA at any time, upon providing 12-months notice.  At thistime, we have no indication whether Continental will elect to cancel or extend the agreement; consequently, we will continue toevaluate the alternatives provided to us within the provisions of the Continental CPA.

            We began 2008 rate discussionswith Continental last September.  The Continental CPA contemplates a November 1 deadline for setting the rates; however, theparties agreed to extend the deadline.  Although we believed that we were nearing completion of the rate setting process,Continental advised us on February 28, that if we were unable to reach agreement by March 14, they might initiate arbitrationproceedings again in accordance with the provisions of the Continental CPA.  We can also initiate arbitration if we think itnecessary.  As of the date of this filing neither party has triggered arbitration and we remain hopeful that it will not benecessary.  Continental also advised us that it believes that it overpaid Airlines by $6 million in 2007 and $2.1 million in2006.  We believe that if we were required to arbitrate these matters we would prevail.  However, we may not besuccessful in resolving these disputes without reducing our 2008 income.  We cannot currently predict the timing or theresolution of these matters.  Although we are hopeful that we can agree on rates and resolve Continental’s other claimswithout arbitration, there can be no assurance that we will be successful in doing so.

            If we are required to arbitrate,each party will select one arbitrator, and those two arbitrators will select the third arbitrator to complete the panel.  TheContinental CPA sets forth procedures and a schedule that will likely result in a hearing and the issuance of a final decision bylate in the second or early in the third quarter of 2008.  ExpressJet will continue to be paid under the 2007 block hour ratesduring the arbitration process and expects the decision setting the revised rates to be retroactive to January 1, 2008.

            ***Delta*. **Airlines currently operates 10 aircraft as Delta Connection pursuant to the Delta CPA, which began June 1, 2007.  Theagreement has a two-year term and is subject to two one-year extensions at Delta’s option.  Delta is responsible forscheduling, marketing, pricing and revenue management on the aircraft and collects all passenger revenue.  Airlines operates,maintains and finances the aircraft.  Although we do not anticipate expanding our services to Delta under a capacity purchaseagreement at this time, our focus is for Delta to automatically renew its extensions as available and to expand with us through ourprorate flying or through other marketing alliances, such as sharing in frequent flyer programs.

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***            CorporateAviation.* ** Our goal for 2008 is to expand our Corporate Aviation (charter) division.  We will continue toevaluate various corporate shuttle opportunities, including seasonal flying for other air carriers during high-demand periods tocomplement our current contracts.  Our current contracts are the most consistent during the period from October through April,and generate steady operating income throughout the year.  Additionally, we continue to seek longer-term contracts instead ofthose lasting from one to six months that we currently have in place to enhance consistency in aircraft and crew planning and tomaximize our operational efficiency. 

****

            **Branded Flying**

***            ExpressJet******Brand****.*  We have not yet been profitable in our Branded Flying operation and do not anticipate that wewill be profitable in 2008 as we continue to establish our ExpressJet brand.  We continue to evaluate and modify ourschedules, promotions and marketing programs to establish our brand and shift our traffic mix from heavily leisure to morebusiness/corporate travel and minimize our exposure during seasonal peaks and valleys.  We continue to enhance ourinfrastructure to facilitate timely information and permit us to make better tactical decisions and mitigate our losses inunderperforming markets.

            We believe that the flexibilityof our business platforms will enable us to sustain our liquidity and meet our financial obligations through 2008.  However,if sufficient losses occurred in the Branded Flying segment we could remove from service a portion or all of the aircraft employedin this segment in 2008.  Our April 2008 schedule for ExpressJet Brand flying was adjusted in February 2008 in response toindustry challenges and high fuel costs.  In addition to eliminating routes with weak demand, we plan to decrease aircraftutilization from 11 hours per day to 9 hours per day.  Total daily departures will decrease from 200 to 172 and overallcapacity will be reduced approximately 11% from the capacity originally planned for 2008.  We believe these changes willincrease yields on the remaining capacity in the remaining markets such that it will exceed the impact of the planned capacityreductions.

            ***DeltaProrate***.  We have not yet been profitable in this operation and do not anticipate that we will be profitable in 2008;however, Delta is very important to us as we continue to establish our network of corporate customers and as we hope to becomeprofitable in the future.  We currently operate 11 aircraft under the Delta Prorate.  In 2008, we intend to expand ourpromotions and marketing programs for Delta Prorate flying in order to solidify Delta’s and our presence in Los Angeles,California and to potentially add services to markets that complement Delta’s network and enhance our future operatingincome.

***            FuelCosts. *** High fuel prices continue to increase our costs and diminish profitability.  Our results ofoperations for Branded Flying have been impacted by record high fuel prices, similar to the rest of the airline industry, and wehave implemented a strategy using fixed forward price contracts for fuel to reduce the volatility of changing fuel prices over arolling 12-month period on a quarterly basis.   Fixed-price arrangements consist of an agreement topurchase defined quantities of aviation fuel from a third party at a stated price.  As of December 31, 2007, we had committedto purchase 15.1 million gallons, or 85% of our anticipated Branded Flying fuel needs for the first quarter of 2008, at a weightedaverage price per gallon of $2.40, excluding taxes and into-plane fees.  Additionally, we have committed to purchase 11.9million gallons for the second quarter of 2008, 9.0****million gallons for the third quarter of 2008, and 6.0 million gallonsfor the fourth quarter of 2008.  For the first quarter of 2009, we have contracted to purchase 3.0 million gallons.  Thisrepresents approximately 70% and 22% of our anticipated Branded Flying fuel needs for 2008 and the first quarter of 2009,respectively.  Although, our forecasted fuel needs outside of our CPA’s with Continental and Deltaare covered under these fixed forward price contracts in 2008, a substantial increase in the price of jet fuel, to the extent ourprice contracts are impacted, or the lack of adequate fuel supplies in the future, could still have a material adverse effect onour Branded operation. 
******
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******

***           * AviationServices**

            Aviation Services includes ourground-handling services pursuant to our contracts with Continental and other airlines at airport locations across the UnitedStates, as well as Services, our wholly owned repair and overhaul subsidiary.  During 2008, we will continue to leverage ouroperational expertise developed from this business segment to cost-effectively operate our 274 aircraft for our current customersand attract potential customers.  We anticipate that this operation will either break even or contribute less than 2% to theconsolidated results of operations.

****

**            Future Costs**

****

            We remain committed to providingcompetitively priced services by controlling our costs; however, we believe that our costs are likely to increase in the future dueto:

• 

fuel costs for aircraft not flying under the Continental CPA;

• 

distribution costs that include schedule planning, marketing and sales related to our Branded Flyingand charter operations;

       

• 

changes in wages, salaries and related fringe benefit costs, including changes to our self-insuredmedical and workers compensation costs;

• 

aging of our fleet, resulting in higher aircraft maintenance costs;

• 

changes in the costs of materials and outside services, including our information technologycosts;

• 

changes in governmental regulations, insurance and taxes affecting air transportation and the costscharged for airport access, including new security requirements;

• 

higher aircraft ownership costs should Continental release and we retain additional aircraft fromthe Continental CPA, beginning in 2009, or if Continental were to declare bankruptcy or otherwise default under the currentfinancing arrangements; and

• 

financing costs in order to satisfy any operating and/or financial obligations.

            In the long term, failure tocontrol our costs would prevent us from remaining competitive and reduce our ability to limit losses including the opportunities toattract additional corporate customers or to survive economic downturns.

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**Critical Accounting Policies and Estimates**

            Our consolidated financialstatements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”).  Thepreparation of these financial statements requires us to make estimates and judgments that affect reported amounts and relateddisclosures.  We have identified the accounting policies and estimates below as critical to our business operations andunderstanding of our results of operations.  The SEC has defined critical accounting policies and estimates as the ones thatare most important to the presentation of a company’s financial condition and results and require the company to make itsmost difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherentlyuncertain.  For all of these estimates, we caution that future events rarely develop exactly as forecasted, and the bestestimates routinely require judgment.  The discussion below is not intended to be a comprehensive list of our accountingestimates and policies.  For a detailed discussion on the application of our accounting policies, see Item 8. “Financial Statements and Supplementary Data – Notes to Consolidated Financial Statements – Note1.”

****

**Description**

****

**Judgments and Uncertainties**

**Effect if Actual Results Differ from Assumptions**

**Revenue Recognition**

***Contract Revenues. *** We recognize our operating revenue under contractualarrangements, such as the Continental CPA and Delta CPA, pursuant to the terms of the contracts.  Operating revenues fromthese contracts have been reclassified as passenger revenue.  Certain amounts billed by us to our customers under contractualagreements are subject to our interpretation of the agreement.  Pursuant to the terms of the Continental CPA, Continental maydispute the amount billed and pay less than the amount invoiced if it interprets the agreement differently than we do.  Newrates are to be determined annually, and the rates charged in 2008 are still under discussion as of the date of this filing. Until the 2008 rates are finalized, we will continue to be paid under the 2007 block hour rates, and we expect the decision settingthe revised rates to be retroactive to January 1, 2008.

***Contract Revenues.***  Our passenger revenue is calculated based on our interpretation of the ContinentalCPA.

***Contract Revenues.***  If our interpretation differs materially from Continental’s, our revenue could bematerially understated or overstated.  Under the Continental CPA, a substantial portion of Airlines’ costs arereconciled for differences between Airlines’ actual costs and estimated costs included in its block hour rates at a 10.0%operating margin.  Under Airlines’ 2007 rates, certain costs generally controllable by Airlines are reconciled to allowit to operate within its operating margin, as defined in the agreement (“prevailing margin”) of 8.5% to 10.0%. During the fourth quarter of 2007, no reconciliation payments were made by either Continental or Airlines to the other becauseAirlines’ final prevailing margin before any reconciliation payments was within the margin band of 8.5% and 10%. Continental is currently disputing payments made to Airlines of $6 million in 2007 and $2.1 million in 2006.  We believe wewill prevail in these matters and therefore we do not believe a loss is probable at this time.  However, we may not besuccessful in resolving these disputes without reducing our income going forward, or without paying Continental for some or all ofthe claimed amount.  We cannot currently predict the timing or the resolution of these matters.

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***Branded Flying***.  Tickets are sold and processed internally, with amountsdue settled on a monthly basis through an airline clearing house, pursuant to the established airlines industry billing standards,as appropriate, or pursuant to the terms of our agreements with various credit card service vendors or other agreements, such asthe Delta Prorate.  We recognize passenger revenue when transportation is provided or when a ticketexpires unused.  Nonrefundable tickets expire on the date of the intended flight, unless the date is extended by notificationfrom the customer in advance of the intended flight. The amount of passenger ticket sales not yet recognized as revenue is includedin our consolidated balance sheets as air traffic liability

***Branded Flying.***  For tickets that are sold on other carriers and are flownon our aircraft, except for those sold by Delta, under the Delta Prorate, we bill for the transportation provided through anairline clearinghouse pursuant to the established airlines’ industry standards.  A provision is made for rejections ofthese billings, should the other airlines interpret the industry standards with their sales information differently than ours,based on the flight coupons.

***Branded Flying. *** We have billed other carriers through an airlineclearinghouse pursuant to the established airlines’ industry standards.  However, these billings are based on the bestinformation available to us through the flight coupons.  Therefore, as allowed by the industry, these airlines can reject ourbillings and produce supporting documentation disputing our charges.  Due to the rejection period averaging over 3 months fromdate of billings, we have made our provisions based on best data currently available.  The total amount at December 31, 2007that is billed to other airlines, except for Delta, is $3.9 million, of which we reserved $0.5 million for potentialrejections.

**Spare Parts and Supplies**

****

Inventories, expendable parts and supplies relating to flight equipment are carried at averageacquisition cost and are expensed when used.  Inventories are carried at the lower of amortized cost or net realizablevalue.  The adequacy of our allowance for obsolescence requires a high degree of judgment.

 Our allowance for obsolescence related to inventory is provided over the remaining useful life of the related aircraft, plusallowance for spare parts currently identified as excess.  Part of the calculation for this reserve is based on historicalexperience.  In addition, we may reserve for additional obsolescence when current available market data indicate a decline inthe fair value of parts or if we deem parts as excess inventory.

 As of December 31, 2007, our allowance for obsolescence related to our spare parts and supplies was approximately $10.4million.  If we increase the reserve by 10%, due to the mechanics of the Continental CPA, the impact on pre-tax loss isimmaterial. 

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**Goodwill and Intangible Assets**

****

Under Statement of Financial Accounting Standard No. 142–“Goodwill and Other IntangibleAssets” (“SFAS 142”), intangible assets can have either finite or indefinite useful lives.  As of December31, 2007, we had intangible assets with both definite and indefinite lives.  Our critical accounting estimate is related toour “Reorganization Value in Excess of Amounts Allocable to Identifiable Assets,” which has indefinite usefullife.  Under SFAS 142, goodwill and intangible assets with indefinite useful lives should be tested at least annually forimpairment.  Factors considered important when determining the impairment of reporting segments under SFAS 142 include itemsaffecting the cash flows of the reporting segments; the reporting segments’ operational performance versus marketexpectations; the reporting segments’ performance compared to peers within the industry; the marketplace for andidentification of the intangible asset of the reporting segments; significant changes in the underlying business strategy oroperational environment; material ongoing industry or economic trends; or other factors specific to the asset or reporting segmentsbeing evaluated.  Any changes in the key assumptions about the business and its prospects, or changes in market conditions orother externalities could result in an impairment charge.

 For our SFAS 142 analysis, we have identified that our “Reorganization Value in Excess of Amounts Allocable to IdentifiableAssets” is associated with our Contract flying business segment.  Additionally, we employed a discounted cash flowapproach, a market multiple approach and an acquisition approach for Contract flying.  The discounted cash flow approachconsiders our expected cash generation capabilities, and the market–multiple approach and the acquisition approach analyzessimilar companies or transactions within the industry to derive multiples for the company.

 Reorganization Value in Excess of Amounts Allocable to Identifiable Assets represents primarily the amount that arose fromContinental’s emergence from bankruptcy reorganization in 1993. We completed our annual SFAS 142 analysis at June 30. In accordance with our policy, we performed a SFAS 142 impairment analysis using the latest data available.  No impairment wasidentified.  If assumptions used in our analysis were changed materially, our intangible assets could be materiallyoverstated.  However, based on our most current impairment test, there would have to be a significant change in assumptionsused in the calculation for an impairment to occur as of December 31, 2007.

            In addition to our criticalaccounting estimates and policies described above, we made other estimates that, while not involving the same degree of judgment,are important to understanding our financial statements.  In general, we base our estimates on historical experience,information from third-party professionals and various other assumptions that we believe are reasonable under thecircumstances.  We continually evaluate our accounting policies and the estimates used to prepare our consolidated financialstatements.   Our estimates as of the date of the financial statements reflect our best judgment after giving consideration toall currently available facts and circumstances.  As such, actual results may differ significantly from these estimates andmay require adjustment in the future as additional facts become known or as circumstances change.

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            We have discussed the developmentand selection of these critical accounting policies and estimates with the Audit Committee of our board of directors, and theCommittee has reviewed the disclosures presented above.

***            Recently IssuedAccounting Standards***

            In September 2006, the FinancialAccounting Standards Board (“FASB”) issued FASB Statement No. 157, *Fair Value Measurements* (“Statement157”), which is effective for fiscal years beginning after November 15, 2007.  Statement 157 defines fair value,establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. Thenew standard provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement offair value, the use of market-based inputs over entity-specific inputs. The standard also establishes a three-level hierarchy forfair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurementdate.On February 12, 2008, FASB issued FASB Staff Position FAS 157-b which allowspartial deferral of the effective date of Statement 157 for all nonfinancial assets and liabilities except for those that arerecognized or disclosed in the financials at fair value on a recurring basis (at least annually).  We are currently evaluating the requirements of Statement 157 for all financial assets and liabilities(excluding those included in the deferral listed above) including confirming that our valuation policies are consistent with exitprice as prescribed by Statement 157; however, we do not believe that it will have a material impact on our consolidated financialposition or results of operations.  We currently expect the adoption of Statement 157 to have an impact on the valuation anddisclosure of our investment in ARS that were entered into subsequent to December 31, 2007.

**Operations Review**

****

***            Selected FinancialInformation***

**                               **

**Year Ended December 31,**
****
**2007**

**Increase/ (Decrease) 2007-2006**

**2006**

**Increase/ (Decrease) 2006-2005**

**2005**
********************
**(In thousands, except per share data and increase/decrease%’s)**

Statement of Operations Data:

Operating revenue

$

1,685,545

0.2

%

$

1,682,156

7.6

%

$

1,562,818

Operating expenses

1,792,416

16.3

%

1,541,085

9.6

%

1,406,275

Operating income / (loss)

(106,871

)

(175.8

)%

141,071

(9.9

)%

156,543

Nonoperating expense, net

(1

)

(100.0

)%

5,385

333.2

%

(2,309

)

Net Income / (loss)

(70,248

)

(175.9

)%

92,565

(5.5

)%

97,933

Basic earnings / (loss) per share

(1.31

)

(176.2

)%

1.72

(5.0

)%

1.81

Diluted earnings / (loss) per share

(1.31

)

(184.0

)%

1.56

(5.5

)%

1.65

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******

***            StatisticalInformation***

**                                                                      **

**Year Ended December 31,**
****
**2007**

**Increase/ (Decrease) 2007-2006**

**2006**

**Increase/ (Decrease) 2006-2005**

**2005**
********************
Operating Statistics:

 

 

Revenue passenger miles (millions) (1)

10,071

(2.2

)%

 

10,297

 

15.2

%

 

8,938

Available seat miles (millions) (2)

13,575

2.8

%

13,200

10.2

%

11,973

Passenger load factor (3)

74.2

%

(3.8

)pts

78.0

%

3.3

pts

74.7

%

Operating cost per available seat mile (cents) (4)

13.20

13.1

%

11.67

(0.7

%)

11.75

Block hours (5)

916,756

n/m

916,718

10.8

%

827,369

Operating cost per block hour (dollars) (6)

1,956

16.4

%

1,681

(1.1

%)

1,700

Departures

489,489

(0.4

)%

491,598

9.3

%

449,928

Average price per gallon of fuel, including fuel   taxes (cents) (7)

100.00

40.4

%

71.20

—

71.20

Fuel gallons consumed (millions)

323.2

1.3

%

319.1

8.0

%

295.5

Average length of aircraft flight (miles)

569

3.6

%

549

0.7

%

545

Average daily utilization of each aircraft (hours) (8)

9.17

(0.8

)%

9.24

4.2

%

8.87

Completion factor

97.6

%

(0.3

)pts

97.9

%

0.2

pts

97.7

%

Actual aircraft in fleet at end of period

274

—

274

3.0

%

266

Revenue passengers (thousands)

17,365

(4.4

)%

18,173

13.0

%

16,076

(1) 

Revenue passenger miles are the number of scheduled miles flown by revenue passengers.

(2) 

Available seat miles are the number of passenger seats available multiplied by the number ofscheduled miles those seats are flown.

(3) 

Passenger load factor equals revenue passenger miles divided by available seat miles.

(4) 

Operating cost per available seat mile is operating costs divided by available seatmiles. 

(5) 

Block hours are the hours from gate departure to gate arrival.

(6) 

Operating cost per block hour is operating costs divided by block hours. 

(7) 

Fuel cost used in calculations includes cost of fuel and related fuel tax.  Airlines incur fuelexpense and fuel tax equal to the lower of the actual cost or the agreed-upon caps of 66.0 cents and 5.2 cents per gallon,respectively, based on our fuel purchase agreement with Continental.  In 2007, our fuel activity included purchases to supportour various business platforms outside of the Continental CPA.  These purchases were executed through an agreement with anindependent third party at an average price per gallon of $2.43, which represents 16.7% of our total fuel consumption for2007.

(8) 

Average daily utilization of each aircraft is the average number of block hours per day that anaircraft is operated.

            We monitor the statisticalinformation above closely to ensure that we are continually focused on our operational efficiencies and cost control.

            The following discussion providesan analysis of our results of operations and reasons for any material changes for the periods indicated.

Table of Contents

            ***Comparison of 2007 to2006***

**

**            Operating Revenue and SegmentProfit / (Loss)**

**

            The table below (in millions,except percentage data) sets forth the changes in revenue, direct segment costs and segment profit (loss) from 2007 to 2006. Before 2007 we did not have any segments that were deemed material.  As such, revenues and costs are shown in Contract Flyingonly.  A significant portion of our operating expenses and infrastructure is integrated across segments (e.g., formaintenance, non-airport facility rentals, outside services, general and administrative expenses) in order to support our entirefleet of 274 aircraft; therefore, we do not allocate these costs to the individual segments identified above, but evaluate them forour consolidated operation.  Additionally, due to the transition of our 69 aircraft released from the Continental CPA in 2007,we incurred approximately $13.5 million in transition expenses associated with painting, maintenance modifications and training toready our operation for flying outside of the Continental CPA.  These costs were not included in our measurement of segmentprofitability as they are expected to be nonrecurring.  We believe that the presentation of our consolidated shared costs andtransition costs is consistent with the manner in which these expenses are reviewed by our chief operating decision makers. These costs are included as a part of the analysis of our operating expenses below. 

**Fiscal Year**
****
**2007**

**Total Revenue %**

**2006**

**Total Revenue %**

**Increase/ (Decrease)**

**Change %**

**                                                      **
************************
Revenue from customers:

   Contract Flying

$  1,471.5

87.3

$  1,686.4

100.2

$  (214.9

)

(12.7

)

   Branded Flying

180.5

10.7

—

—

180.5

n/m

   Aviation Services

41.0

2.4

—

—

41.0

n/m

   Eliminations

(7.5

)

(0.4

)

(4.2

)

(0.2

)

3.3

78.6

Total Revenue from customers

1,685.5

100.0

1,682.2

100.0

3.3

0.2

Direct segment costs:

   Contract Flying

1,128.5

67.0

1,245.0

74.0

(116.5

)

(9.4

)

   Branded Flying

295.1

17.5

—

—

295.1

n/m

   Aviation Services

25.4

1.4

—

—

25.4

n/m

   Eliminations

(7.5

)

(0.4

)

(4.2

)

(0.2

)

3.3

78.6

Total Direct segment costs

1,441.5

85.5

1,240.8

73.8

200.7

16.2

Segment profit / (loss)

244.0

14.5

441.4

26.2

(197.4

)

(44.7

)

Shared expenses, including     transition costs

(350.9

)

(300.3

)

Interest expense

(8.5

)

(7.3

)

Interest income

17.1

15.0

Other

(8.6

)

(2.3

)

Consolidated income/loss before     income taxes

(106.9

)

146.5

Table of Contents

            The table below (in millions,except percentage data) sets forth the segment profit (loss) in 2007 for each segment.  Before2007 we did not have segments that were deemed material.  As such, a similar table for 2006 is not presented.

**Contract Flying**

**Branded Flying**

**Aviation Services**
****
**2007**

**Total Revenue %**

**2007**

**Total Revenue %**

**2007**

**Total Revenue %**

                                               

Revenue from customers:

$  1,471.5

 

100.0

$  180.5

 

100.0

$  41.0

 

100.0

Direct segment costs:

1,128.5

76.7

295.1

n/m

25.4

62.0

Segment profit / (loss)

343.0

23.3

(114.6

)

n/m

15.6

38.0

**            *ContractFlying.***   Our decrease in operating revenue for contract flying is primarily due to the withdrawal of 69aircraft from the Continental CPA.  This decrease was partially offset by commencing contract flying under the Delta CPA andcharter flying in 2007.

            Since a substantial portion ofAirlines’ costs under the Continental CPA are reconciled for differences between actual costs and estimated costs included inblock hour rates at a 10.0% operating margin (see Item 1. Business – Continental Capacity Purchase and Other Agreements forfurther discussion of the details related to this cost reconciliation), if Airlines’ prevailing margin (before anyreconciliation payments) fell outside its margin band of 8.5% to 10.0% for 2007 and 2006, Airlines’ revenue would have beenadjusted to bring it back to its floor or cap.  Reconciliation payments from Continental in 2007 netted $4.2 million tous.  The 2007 reconciliation payment was primarily caused by the lower rates resulting from arbitration with Continental in2007.  Reconciliation payments to Continental totaled $7.3 million for 2006.  The 2006 reconciliation payment wasprimarily driven by lower actual wages, salaries and related costs and maintenance, materials and repair expenses as compared tothe estimated costs in the agreements block hour rates. 

            On July 27, 2007, thethree-member arbitration panel issued its decision relating to the 2007 block hour rates that Continental paid Airlines forregional jet service in 2007.  The panel considered various components related to the proposed rates that we chargeContinental in connection with regional jet service, including the costs that formed the basis for our 2007 rate proposal and theallocation of certain costs between the parties.  The panel did not make any changes to the costs included in our 2007budgeted rates except as those costs related to allocation.  The panel determined that the annual 2007 budgeted ratesoriginally presented by Airlines should be reduced in the aggregate by $14.2 million, which includes the 10% operatingmargin.  As a result of the panel’s decision, we recorded our passenger revenue pursuant to the terms of the ContinentalCPA using the block hour rates determined by the panel for the year ended December 31, 2007.

****

**            *BrandedFlying.* ** We began Branded Flying on April 2, 2007.  Although passenger revenue from such flying was lessthan 11% of our total operating revenue for 2007, we believe that our passenger revenue will continue to grow contingent upon ourability to use marketing and promotion programs to shift our traffic mix from heavily leisure travel to more business/corporatetravel.  This shift will reduce our exposure during the seasonal peaks and valleys experienced by the airline industry.

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**           ** We were notprofitable in this operation in 2007.  Our results of operations have been impacted by record high fuel prices, similar to therest of the airline industry and an average load factor for 2007 being 55.7%.  Therefore for fuel, we implemented a strategyby entering into fixed forward price contracts with our fuel provider using a systematic method for determining the volume and theprice for which to enter into the contracts for a rolling 12-month period on a quarterly basis.  Our average load factorprimarily resulted from several factors including a lack of brand awareness and a very aggressive redeployment of aircraft toBranded driven by the pace of the aircraft coming out of the Continental CPA.  As outlined above, to increase our load factorwe are trying to shift our traffic mix from heavily leisure to more business/corporate travel.  Although our fixed forwardprice fuel contracts partially mitigate our exposure to fuel price fluctuation, fuel still continues to be a driving force indetermining Branded Flying’s profitability along with our ability to shift our traffic mix from leisure to more businesstravel.  Additionally, we incurred marketing and distribution costs related to supporting the revenues for this segment. Under the terms of our contractual flying, these costs are incurred by the major airline with which we contract.

******

**            *AviationServices. *** Aviation Services was included in Contract Flying in 2006 as it was not deemed material for segmentreporting purposes.  In 2007, Aviation Services had a segment profit margin of 38.0%.  This segment profit margin andincreases in operations for aviation services was related to additional fixed-rate contracts for ground handling which began in2007.******

******

            **OperatingExpenses**

**

            The table below (in millions,except percentage data) sets forth the changes in operating expenses from 2007 to 2006.

**Fiscal Year**
****
**2007**

**Total Revenue %**

**2006**

**Total Revenue %**

**Increase / (Decrease)**

**Change %**

**                                                       **
************************
Wages, salaries, and related costs

$    437.6

  

26.0

$    386.7

 

23.0

$    50.9

13.2

Aircraft rentals

344.2

20.4

332.4

19.8

11.8

3.5

Aircraft fuel and related taxes

323.2

19.2

227.2

13.5

96.0

42.3

Maintenance, materials and repairs

202.5

12.0

191.4

11.4

11.1

5.8

Ground handling

97.2

5.8

99.9

5.9

(2.7

) 

(2.7)

Other rentals and landing fees

119.2

7.1

115.6

6.9

3.6

3.1

Outside services

58.3

3.5

51.3

3.0

7.0

13.6

Marketing and distribution

31.4

1.9

0.1

0.0

31.3

n/m

Depreciation and amortization

30.0

1.8

25.8

1.5

4.2

16.3

Other operating expenses

148.8

8.8

110.7

6.6

38.1

34.4

Total Operating Expenses

1,792.4

n/m

1,541.1

91.6

251.3

16.3

**            *Wages, salaries &related costs*** increased 13.2% from 2006 to 2007 due to our growth in our work force to support changes in our flightoperations and our corporate infrastructure and increases in wage rates under some of Airlines’ collective bargainingagreements.  In conjunction with the increases in base wages, we incurred approximately $13.3 million higher employee benefitcosts, such as medical coverage, workers’ compensation costs and 401(k) expenses in 2007.  In addition, we experiencedan increase in overtime pay for our pilots as a result of our training backlog in the early part of the year and for ourmaintenance workers due to the transition to our new maintenance bases.

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            In the future, we anticipate thatour wages, salaries and related costs may be affected by the following factors:

         

• 

wage increases to incent key personnel to remain with us as we continue implementing ourdiversification strategy including our long-term incentive plans;

• 

wage rate increases in accordance with our collective bargaining agreements as a result of higherseniority of our work force; and

• 

projected increases in health and medical benefit costs.

**            Aircraft fuel and relatedtaxes** increased 42.3% from 2006 to 2007.  This increase is primarily due to the diversification of our operationsinto other business platforms.  Our fuel price, including related fuel taxes, is capped at 71.20 cents per gallon by theContinental CPA while the average price of our fuel, included related fuel taxes, for our operations outside of the Continental CPAwas $2.43 per gallon.

**            *Outsideservices*** increased 13.6% from 2006 to 2007 primarily due to increased weather events resulting in higher deicingexpenses and increased expenses to support our diversification strategy.

**            *Marketing anddistribution*** increased 100.0% to $31.4 million during 2007. This increase resulted from the need to re-brand ourcompany and diversify our customer base to support and promote our diversification into other lines of business through advertisingand promotion, loyalty programs, global distribution systems and reservation call centers.  During 2006, our sole operationwas providing regional service for Continental Airlines through the Continental CPA.  Within that arrangement, all marketingand distribution costs were incurred by Continental.

**            *Depreciation andamortization*** increased 16.3% from 2006 to 2007.  This increase is primarily due to capital additions andimprovements necessary to run our new operations. 

**            *Other operatingexpenses*** increased 34.4% from 2006 and 2007 primarily cause by passenger services and catering-related expensesincurred to support our operations outside of the Continental CPA.  Additionally, crew related charges, such as per diem,hotel cost and relocation expenses, increased due to higher rates and increased flight operations partially resulting from ourtransition activities.

**

**            Non-OperatingExpenses**

******

            The table below (in millions,except percentage data) sets forth the changes in non-operating expenses from 2007 to 2006.

**Fiscal Year**
****
**                                                      **

**2007**

**Total Revenue %**

**2006**

**Total Revenue %**

**Increase / (Decrease)**

**Change %**
************************
Interest Expense

$    (8.5

) 

0.5

$    (7.3

) 

0.4

$    1.2

 

16.4

Interest Income

15.7

0.9

14.7

0.9

1.0

6.8

Capitalized Interest

1.3

0.1

0.3

—

1.0

n/m

Equity Investment loss

(8.3

)

0.5

(2.0

)

0.1

6.3

n/m

Other, net

(0.3

)

—

(0.2

)

—

0.1

(50.0)

Table of Contents

**            *Interestexpense*** was primarily related to our senior convertible notes and a loan agreement with Export Development Canada(“EDC”).  Interest expense related to these long-term debts increased in 2007 by approximately $1.3 million as aresult of increased amortization of the financing fees related to our convertible note**. **

****

**            *Equity Investmentlosses*** of $8.3 million and $2.0 million were recognized during 2007 and 2006, respectively.  We review ourinvestments in unconsolidated affiliates for impairment whenever events or changes in business circumstances indicate that thecarrying amount of the investments may not be fully recoverable.  During fourth quarter 2007, as one of our equity investmentscontinued to experience significant net loss we evaluated and determined that the carrying value of such investment wasother-than-temporarily impaired and, therefore, recognized an impairment charge of $7.0 million.  The extent of the impairmentwas determined based on the difference between our estimated fair value and the underlying carrying value of the investment. See Item 8.  “Financial Statements and Supplementary Data – Note 4 – Investments in Other Entities”for further discussion of this impairment.  The remaining $1.3 million in 2007 is our proportionate share of the earnings andlosses of all equity investments we currently hold.

******

***            Comparison of 2006 to2005***

******

**            Operating Revenue andOperating Income**

**

            The table below (in millions,except percentage data) sets forth the changes in revenue, operating expenses, and operating income/(loss) from 2006 to 2005. As we did not have reportable segments in 2005 or 2006, revenues and operating income is analyzed in total. 

**Fiscal Year**
****
**2006**

**  **

**Total Revenue****%**

  

**2005**

** **

**Total Revenue****%**

**  **

**Increase / (Decrease)**

**  **

**Change****%**

                             
************************
Operating Revenues

$1,682.2

 

100.0

$ 1,562.8

 

100.0

$  119.4

7.6

Operating Expenses

1,541.1

91.6

1,406.3

90.0

134.8

9.6

Operating Income (Loss)

141.1

8.4

156.5

10.0

(15.4

) 

(9.8)

**            Operating revenues**grew 7.6% from 2005 to 2006 due to our growth in block hours of 10.8% for flying under the Continental CPA.  The incentivepayments are primarily based on the current controllable completion factor compared to a historical controllable completion factorbenchmark.  Because the historical rates are measured on a rolling monthly average, higher controllable completion factorsresult in higher incentive payments in the near term but reduce Airlines’ opportunity to earn incentive payments in thefuture.  Airlines’ controllable completion factor in 2006 was 99.8% and its historical benchmark completion factor was99.7% for the same period.  Beginning with the 2005 rates, Airlines is only required to pay Continental a penalty forcontrollable completion factors below 99.5% instead of using its rising historical benchmark.

**            Operating income** in2006 reflected an 8.4% operating margin, compared with an operating margin of 10.0% in 2005.  Included in the operating incomeis approximately $3.5 million of net loss related to the results of operations from subsidiaries that are consolidated into ourfinancial statements. 

            Since a substantial portion ofAirlines’ costs under the Continental CPA are reconciled for differences between its actual costs and the estimated costsincluded in its block hour rates at a 10.0% operating margin, if Airlines’ prevailing margin (before any reconciliationpayments) fell outside its margin band of 8.5% to 10.0% for 2006 and 2005, Airlines’ revenue would have been adjusted tobring it back to its floor or cap.  Reconciliation payments to Continental totaled $7.3 million and $23.4 million for 2006 and2005, respectively.  The 2006 reconciliation payment was primarily driven by lower actual wages, salaries and related costsand maintenance, materials and repair expenses as compared to the estimated costs in the agreement block hour rates.  The 2005reconciliation payment was primarily driven by lower actual maintenance, materials and repair and passenger servicing expenses ascompared to the estimated costs in the block hour rates. 

Table of Contents

            **OperatingExpenses**

**

            The table below (in millions,except percentage data) sets forth the changes in operating expenses from 2006 to 2005.

**Fiscal Year**
****
**2006**

**  **

**Total Revenue %**

**  **

**2005**

**  **

**Total Revenue %**

**  **

**Increase / (Decrease)**

**  **

**Change %**

                                                 
************************
Wages, salaries, and related costs

$    386.7

 

23.0

$    349.4

22.4

$    37.3

10.7

Aircraft rentals

332.4

19.8

309.0

19.8

23.4

7.6

Aircraft fuel and related taxes

227.2

13.5

210.4

13.5

16.8

8.0

Maintenance, materials and repairs

191.4

11.4

181.4

11.6

10.0

5.5

Ground handling

99.9

5.9

95.4

6.1

4.5

4.7

Other rentals and landing fees

115.6

6.9

104.0

6.7

11.6

11.2

Outside services

51.3

3.0

28.7

1.8

22.6

78.7

Marketing and distribution

0.1

—

—

—

0.1

n/m

Depreciation and amortization

25.8

1.5

27.0

1.7

(1.2

)

(4.4)

Other operating expenses

110.7

6.6

101.0

6.4

9.7

9.6

Total Operating Expenses

1,541.1

91.6

1,406.3

90.0

134.8

9.6

**            Wages, salaries & relatedcosts** increased 10.7% in 2006 over 2005 consistent with our growth in block hours of 10.8% for the year ended December31, 2007.  In addition, we incurred approximately $2.0 million higher employee benefit costs, such as medical coverage,workers’ compensation costs, profit sharing and 401(k) expenses in 2006. 

            Effective January 1, 2006, weadopted FASB Statement No. 123(R) using the modified-prospective transition method.  Prior to 2006, we accounted for ourstock-based compensation arrangements using the intrinsic value method in accordance with Accounting Principles Board Opinion No.25 — “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations.  OnNovember 4, 2005, our board of directors approved accelerating the vesting of 669,750 unvested options then held by employees,including executive officers, with exercise prices greater than $11.00 per share and extended the term of 868,500 employee optionsthat had a five-year term to seven years.  These options were and remain out of the money, and the acceleration and extensionwere effective immediately.  The acceleration of vesting reduces compensation expense upon the adoption of SFAS 123R.  The reduction in compensation expense in the future, based on our implementation date of January 1, 2006, was approximately $3.1million.  The adoption of Statement 123(R) did not have a material impact on wages, salaries and related costs during 2006 nordo we believe that it will have a material effect on future periods.

**            Aircraft fuel and relatedtaxes** increased in 2006 when compared to 2005 due to an 8.0% increase in fuel consumption.  Consumption roseprimarily in 2006 due to a 10.8% increase in block hours over 2005. Under the Continental CPA and the related fuel purchaseagreement, we incur a fuel price and fuel tax equal to the lower of the actual cost of fuel and fuel tax or the agreed-uponcaps.   Our actual price of fuel, including taxes, in 2006 and 2005 was consistently capped at 71.2 cents per gallonunder this arrangement.

****

**            Maintenance, materials andrepairs** increased approximately 5.5%. For 2006, approximately****70.4% of total maintenance, materials and repairscost consisted of power-by-the-hour expense.  Approximately $16.3 million of the increase for 2006, when compared to 2005, wasdue to a 10.3% increase in flight hours and increases in rate-per-flight-hour related to our power-by-the-hour contracts.  Inaddition, new power-by-the-hour contracts resulted in increased cost of $3.0 million for 2006.

Table of Contents

**            Other operatingexpenses** increased 9.6% in 2006 when compared to 2005.  Approximately $4.6 million of the increase related to crewrelated charges, such as per diem and hotel cost, as a result of increased flight operations.  Additional transition costswere incurred to support the 69 aircraft retained to operate under our diversification strategies such as Branded Flying andcorporate aviation. 

**            Non-OperatingExpenses**

**

            The table below (in millions,except percentage data) sets forth the changes in nonoperating expenses from 2006 to 2005.

**Fiscal Year**
****
**2006**

**  **

**Total Revenue %**

 

**2005**

** **

**Total Revenue %**

**  **

**Increase / (Decrease)**

**  **

**Change %**

                                         
************************
Interest Expense

$  (7.3

)

0.4

$  (10.7

)

0.7

$  (3.4)

(31.8)

Interest Income

14.7

0.9

8.3

0.5

6.4

77.1

Capitalized Interest

0.3

—

0.5

—

(0.2

)

(40.0)

Equity Investment loss

(2.0

)

0.1

(0.6

)

—

1.4

n/m

Other, net

(0.2

)

—

0.2

—

(0.4

)

n/m

***            Interestexpense*** was primarily related to our senior convertible notes, a note payable to Continental and a loan agreementwith EDC.  Interest expense related to these long-term obligations decreased in 2006 by approximately $3.4 million as a resultof paying off the note payable to Continental and a $0.9 million reduction in our loan agreement with EDC due to the reduction ofprincipal.  In addition, we retired Airlines’ Series A Preferred Stock in April 2005.

****

**            *Interestincome*** increased by approximately $6.4 million as a result of an approximate two-point increase in our averagereturns from investments and a higher average cash and short-term investment balance. 

**Liquidity, Capital Resources and Financial Position**

            ***Sources and Uses ofCash***

            Our primary source of liquidityis cash flow provided from our operations.  For the years ended December 31, 2007 and 2006, our operations used $39.9 millionand provided $118.7 million, respectively, in cash flow.  As of December 31, 2007 and 2006, we also had $24.8 million and$10.9 million of restricted cash, respectively, which is comprised of collateral for our workers’ compensation coverage,customer deposits for future charter flights, letters of credit, and holdbacks required under our credit card processingagreements.

            In 2007 and 2006, we spent $48.9million and $27.5 million, respectively, on capital expenditures.  A majority of the expenditures for 2007 and 2006 were spenton flight and ground equipment to support our fleet deliveries and the increase in our flight schedules under the ContinentalCPA.  Of the $48.9 million spent in 2007, approximately $27 million was spent on capital expenditures for our strategicbusiness ventures which are outside of the Continental CPA.

            We have significant financialobligations due in 2008.  We can satisfy the largest of these obligations, our convertible notes, with either cash, shares ofour common stock, or a combination thereof.  For risks associated with settling the obligation in common stock, please referto Item 1A, “Risk Factors”.  In addition, we are evaluating our options for meeting these obligations, includingthe possibility of a secured financing transaction permitting us to pay a substantial portion of the convertible notes in cashwhile maintaining a healthy cash balance and avoiding the dilution to equity that would result from a stock settlement of theconvertible notes.  However, as our options to satisfy the convertible notes, as described above, depend on several factorsoutside of our control, we are also continuing to evaluate additional steps within our control that we could take if our ability tomeet our obligations were limited.  These include, individually or in combination if required:

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**         **

**• **

reducing capital expenditures to only those required by law or operational necessities;

**         **

**• **

borrowing against or liquidating our ARS holdings, including at a discount if necessary;

**         **

**• **

selling assets, tangible or intangible, or subleasing the aircraft we lease fromContinental;

**         **

**• **

transferring some or all of the aircraft currently dedicated to our ExpressJet brand flying to otheroperations, or grounding them entirely if circumstances so required.

            We believe that our existingliquidity, projected 2008 cash flows, including the incremental sources of liquidity described above, if needed, will be sufficientto fund current operations and our financial obligations through the year ending December 31, 2008.  However, as noted above,factors outside our control may dictate that we alter our current plans and expectations.

***            CapitalExpenditures***

******

            Our capital expenditures in 2007(in millions) related to the following items:

******

**2007**

**  **

                                                        
****
Flight Equipment

$     18.8

Ground Equipment

20.3

Technology

8.5

Other

1.3
****
$     48.9

******

            These capital expendituresrelated primarily to our new lines of business.  The expenditures include items such as renovations of our planes, stationstart-up costs, technology needed to support the administrative operations we assumed from Continental in 2007, as well as systemsneeded for our new lines of business and other infrastructure costs.  Capital expenditures for 2008 are expected to decreasesince our new lines of business are operational and we have minimal additional infrastructure needed for our new operations. In 2008, we anticipate approximately $18 million in capital expenditures of which approximately $5 million relate to the rolloverof 2007 capital projects.

***            Long-termDebt***

****

            We did not enter into any newfinancing transactions in 2007.  As of December 31, 2007, long-term debt, including current maturities, totaled $147.5million, which consisted of the 4.25% senior convertible notes and the secured debt owed to EDC. 

            In July 2003, we completed anoffering of $137.2 million aggregate principal amount of 4.25% convertible notes due 2023 with interest payablesemi-annually.  Holders of this debt have the right to require that we repurchase their notes on August 1, 2008, 2013 and 2018(“Repurchase Dates”) at a repurchase price equal to 100% of the principal amount of the notes to be repurchased plusaccrued and unpaid interest, if any.  As one of the Repurchase Dates is within a year of December 31, 2007, we have reclassedthese notes, with outstanding principal amounts of $134.7 million, net of our 2007 repurchases under our securities repurchaseprogram as described below, from long-term debt to current liabilities.  At our option, we may pay the repurchase price forany such notes in cash, shares of our common stock, or any combination thereof.  As the company’s options to satisfy theconvertible notes are dependent on several factors outside of our control, we have not determined our specific course of action atthis time.  Although we cannot provide assurance that sufficient financing will be available for us to satisfy the convertiblenotes in cash, we believe that our existing liquidity and projected 2008 cash flows, including our incremental steps within ourcontrol, as described above, will be sufficient to fund current operations and other financial obligations through the year endingDecember 31, 2008.

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            The notes are our generalunsubordinated, unsecured obligations and are guaranteed by Airlines.  Except as otherwise specified in the indenture pursuantto which the notes were issued, there are no restrictions on Airlines’ ability to transfer funds to Holdings in the form ofcash dividends, loans or advances.  General provisions of applicable state law, however, may limit the ability of anysubsidiary to pay dividends or make distributions to its parent in certain circumstances. 

            Additionally, we have the rightto redeem the notes for cash, as a whole at any time or from time to time in part, beginning on August 4, 2008, for a price equalto 100% of the principal amount plus accrued and unpaid interest, if any.  If we elect to use shares of common stock torepurchase any notes, the number of shares will be equal to the repurchase price divided by 97.5% of the average closing salesprice of our common stock for the five consecutive trading days ending on the third business day prior to the applicable RepurchaseDate (adjusted to take into account the occurrence of certain events that would require adjustment of the conversion rate).Incertain circumstances, the notes are convertible into our common stock, at a ratio of 54.9451 shares of common stock per $1,000principal amount of notes, which is equivalent to an initial conversion price of approximately $18.20 per common share.  Theratio is subject to adjustments if certain events take place, and holders may convert only if the closing sale price per commonshare exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading day period ending on the lasttrading day of the preceding calendar quarter.

            As of December 31, 2007 andDecember 31, 2006, we estimated the fair value of our $134.7 million and $137.2 million (carrying value) fixed-rate debt to be$130.7 million and $127.9 million, respectively, based upon quoted market prices.  In addition, we made principal and requiredinterest payments in 2007 in the amount of $8.4 million on our 4.25% senior convertible notes due 2023, of which $2.5 millionrelated to principal.   

            EDC loaned us $10.7 million inMay 2003 and $6.6 million in September 2003.  The loans are secured by certain of our flight simulators, flight data softwareand other equipment related to the simulators.  We used all the proceeds from the loans to reduce the principal under a notewe had issued to Continental.  The amount due to EDC accrues interest at the six-month LIBOR plus 1.75% per annum.  Theterm of each advance to us is 96 months.  The loan agreement has customary representations, warranties and covenants. Additionally, Continental is the guarantor of this loan, and a default under the guarantee would cause an acceleration of theloan.  In 2007, we made principal and interest payments in the amount of $2.7 million on our loan agreement with EDC, of which$1.7 million related to principal.  As of December 31, 2007, the balance on this loan agreement was $12.8 million.  As ofDecember 31, 2007 and 2006, the fair value of our long-term secured debt to EDC was approximately $12.4 million and $14.7 million,respectively. 

            ***CapitalLeases***

            As of December 31, 2007, we had$0.2 million (including current maturities) of capital lease obligations.  In 2007, we made $0.9 million total paymentsrelated to our capital lease, of which $0.8 million related to principal.  The term of the lease ends on March 31, 2008. At this time, we anticipate purchasing the equipment under the capital lease for approximately $1.0 million.

            Other than the financingactivities described above, we do not have any other sources of long-term borrowings or lines of credit.  Additionally, thereis no covenant under any of our long-term debt agreements that restricts our ability to undertake additional debt or equityfinancing.  If we default on our payment obligations under our aircraft subleases with Continental, in addition to any otherremedies it may have, Continental can elect to reduce its payments to us under the Continental CPA by the amount of the defaultedpayment.  In addition, Continental or we can reduce any payments to the other party under the agreement in an amountcorresponding to any defaulted payments by the other party under the foregoing obligations.

            See Item 8. “Financial Statements and Supplementary Data –Notes to Consolidated Financial Statements –Note 6,” and“–Note 7” for detailed descriptions of these long-term debts and obligations.

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***            Securities RepurchaseProgram***

            In July 2005, our board ofdirectors authorized the expenditure of up to $30 million to repurchase shares of our common stock.  Purchases have been madefrom time to time in the open market; the timing of any share repurchases under the program depends on a variety of factors,including market conditions, and may be suspended or discontinued at any time.  Common stock acquired through the program isavailable for general corporate purposes.  The following table details annual activity under the share repurchaseprogram.

**Shares Repurchased(in thousands)**

**Average Cost per Share**

**                         **
********
2007

2,705

  

$

2.96

2006

—

$

—

2005

591

$

9.55

            In February 2006, the boardauthorized the inclusion of our 4.25% convertible notes due 2023 within the previously announced $30 million program.  During2007, we purchased $2.5 million of our 4.25% convertible notes.  We did not make any purchases under this program during2006. 

            ***Collective BargainingAgreements***

            The following table providesinformation related to our principal collective bargaining agreements and their respective amendable dates as of December 31,2007:

**Employee Group**

**     **

**Approximate Number of Employees**

**      **

**Representing Union**

**      **

**Contract Amendable Date**

  

  

  

Pilots and Instructors

2,900

Air Line Pilots Association, International

December 2010

Mechanics

1,000

International Brotherhood of Teamsters

August 2009

Flight Attendants

1,400

International Association of Machinists and Aerospace Workers

August 2010

Dispatchers

100

Transport Workers Union of America

July 2009

Production Workers

100

Union of Industrial Production Workers

N/A

            Our other employees are notcovered by collective bargaining agreements.

            ***IncomeTaxes***

           As ofDecember 31, 2007, we had an income tax receivable for $37.1 million.  This receivable primarily represents income tax refundsfrom prior years resulting from the carryback and application of 2007 operating losses against past years’ income.  Weanticipate receiving this amount during our 2008 fiscal year.  All other potential income tax benefits are recorded asdeferred tax assets as our ability to receive additional income tax benefits is dependent on our ability to generate taxable incomein the future.

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            As described above due to theportion of our operating losses that we cannot carryback and apply to past years’ income, we now have $4.6 million of federalnet operating loss carryforwards, $14.0 federal minimum tax credit carryforwards, $1.2 million of international loss carryforwardsand an additional $10.9 million of state loss carryforwards as of December 31, 2007.  The realization of these potentialbenefits is dependent on our ability to generate future taxable income.

            In October 2006, Continentalentered into a final settlement agreement with the IRS that included periods during which we were included in its consolidatedfederal income tax return.  Our taxable income was not adjusted, but the amount of net operating losses allocated to usincreased by approximately $31.2 million.  In accordance with our tax agreement with Continental, we paid Continentalapproximately $10.9 million for the increase of our federal net operating loss carryforwards.  In addition, we adjusted ourtax accounts for the increase in our federal net operating loss which was fully utilized in our 2005 tax year.

            In conjunction with our initialpublic offering in April 2002, the tax basis of our tangible and intangible assets was adjusted to fair value.  Thisadjustment to tax basis should result in additional tax deductions being available to us through 2017.  In accordance with ourtax agreement with Continental, to the extent we generate taxable income sufficient to realize the additional tax deductions, weare required to pay Continental a percentage of the amount of tax savings actually realized, excluding the effect of any losscarrybacks.  We are required to pay Continental 100% of the first third of the anticipated tax benefit, 90% of the secondthird and 80% of the last third.  However, if the tax benefits are not realized by the end of 2018, we will be obligated topay Continental 100% of any benefit realized after that date.  Since these payments are solely dependent on our ability togenerate sufficient taxable income to realize these deferred tax assets, they are recorded as an obligation to Continental withinthe deferred tax asset accounts, and the portion we may retain in the future is offset by a valuation allowance.  At the timeof the initial public offering, the valuation allowance and the obligation to Continental offset the step-up in basis of assets inour long-term deferred tax asset account.  We made approximately $24.8 million of net payments to Continental under the taxagreement related to the additional tax deductions during 2006.  There were no payments made in 2007 to Continental under thetax agreement.

            The tax agreement requiresContinental to reimburse us for any net increase in our cash tax payments resulting from any decreased availability of netoperating loss carryovers related to the basis increase at the time our payment occurs.  The resulting receivable and/orpayable is recorded within the deferred tax asset account since its performance is dependent on our ability to generate taxableincome.

            Our tax agreement increases ourdependence on Continental’s financial condition.  If it is determined that any of the tax benefits related to the basisincrease should not have been available at the time of utilization and, as a result, we are required to pay additional taxes,interest and penalties, then we could be adversely affected if Continental were unable to indemnify us under theagreement.

***            PurchaseCommitments***

            As of December 31, 2007, we haveoptions for 75 ERJ-145XR aircraft that may be exercised for other types of aircraft within the ERJ-145 Family.  Our nextoption exercise date is August 1, 2008.  If we do not exercise or extend our option as of this date, 25 options willexpire.  During 2005, Continental declined the right to include any of the option aircraft under the Continental CPA.  Weretain the right to exercise the option and fly these aircraft for other airlines or under our own code, subject to somerestrictions; however, we will have to finance our acquisition of these aircraft independently.  Currently, we do not have anyfirm commitments for aircraft purchases.

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            Prior to December 2005, under ourpower-by-the-hour agreement with Rolls Royce, we were obligated to acquire up to three spare engines to support our existingaircraft and the remaining eight aircraft then on firm order.  In December 2005, we negotiated the sale of eight engines toRolls Royce and, in exchange, entered into seven new engine leases with a Rolls Royce subsidiary.  The engines leased havegreater interchangeability than the engines sold. As a result, we have satisfied our engine obligations and are no longer obligatedto purchase the three engines.  These leases are classified as operating leases; hence they are not reflected as assets andliabilities on our balance sheet. 

            We also have other contractualobligations of approximately $1.4 billion under our power-by-the-hour contracts with various service providers.  Thepower-by-the-hour contracts dictate the method by which we pay a vendor based on our actual level of operations in exchange forvendor coverage on specific parts and equipment on our aircraft when those parts and equipment are in need of repair orreplacement.  Each contract varies in term and payment procedure.  The estimated amount of our future commitment is basedon assumptions related to future level of operations and forecasted payment rates.  Our level of operations is determinedbased on Continental’s most recent operating plan for us, which can be altered at Continental’s sole discretion, andour estimates for the 69 aircraft we have re-deployed.  Forecasted payment rates are based on actual rates as of January 1,2008 and increased annually according to the particular inflation indices detailed in each contract.  Contractual rateincreases at actual time of occurrence may be different than the forecasted rates.

           For theyear ended December 31, 2007, we spent $48.9 million on capital expenditures.  We anticipate cash outlays for 2008fleet-related capital expenditures will be approximately $1 million.  Other 2008 cash outlays, exclusive of fleet planrequirements, relating to facility improvements or construction in conjunction with Branded Flying operations, back officeinfrastructure, tooling and ground equipment are expected to total approximately $17 million.  We expect to fund our futurecapital commitments substantially through internally generated funds.  However, there can be no assurance that sufficientfinancing will be available for all aircraft and other capital expenditures not covered by firm financing commitments. As ofDecember 31, 2007, we had committed to purchase 15.1 milliongallons, or 85% of our anticipated Branded Flying fuel needs for the first quarter of 2008, with World Fuel Services. Additionally, we have committed to purchase 11.9 million gallons for the second quarter of 2008, 9.0****million gallons for thethird quarter of 2008, and 6.0 million gallons for the fourth quarter of 2008.  For the first quarter of 2009, we havecontracted to purchase 3.0 million gallons.  This represents approximately 70% and 22% of our anticipated Branded Flying fuelneeds for 2008 and the first quarter of 2009, respectively.

            **Credit CardHoldbacks**

****

**           **Under our American Express credit card processing agreement, certain proceeds from advance ticket sales are held back to serveas collateral to cover any possible chargebacks or other disputed charges that may occur. These holdbacks, which are included inrestricted cash in our consolidated balance sheets, totaled approximately $3.6 million as of December 31, 2007.  The fundsheld back by American Express are interest-bearing and are subsequently made available to us as air travel is completed.

            The agreement with our Visa andMasterCard processor also contains financial triggers that require, among other things, that we maintain certain financial ratiosand levels of operating income and unrestricted cash. The level of credit card holdback is subject to adjustments based on specificfinancial triggers as discussed in the preceding sentence.  As of December 31, 2007, we did not meet some of the financialratios set forth in the agreement.  As a result, we were subject at that time to a 50% holdback of our Visa and MasterCardadvance ticket sales.  This holdback, which is included in restricted cash in our consolidated balance sheet, totaledapproximately $4.9 million as of December 31, 2007.  Upon re-measurement in March 2008, our holdback requirement increased to100%.  We anticipate this could increase our holdback amount to approximately $18 million in 2008 initially.  The fundsheld back are interest-bearing and will be made available to us as air travel is completed.
****
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****

***           * Off-BalanceSheet Arrangements**

**

*           * In the ordinarycourse of business, we enter into operating leases related to our aircraft, spare engines and facilities.  In accordance withU.S. generally accepted accounting principles, these arrangements are not reflected on our balance sheet; however, they arereasonably likely to have a material effect on our future financial statements and financial outlook.

            We enter into these arrangementsto gain access to aircraft, equipment and facilities without requiring significant capital up front.  Since these assets areused in connection with our consolidated operations, these assets are required to generate substantially all of our passengerrevenue.

            If Continental terminated theContinental CPA for cause, it would have the right to terminate our leases or subleases for aircraft covered by the agreement andtake possession of them.  In addition, Continental would have the ability to reject the leases and subleases on our aircraftif it filed for bankruptcy protection.  Moreover, with the reduction notice and Continental’s ability to terminate theContinental CPA, we could lose access to some or substantially all of our airport facilities. See Item 1A. “RiskFactors” for additional information.

            ***AircraftLeases.***  Our aircraft leases and subleases expire between 2013 and 2022.  As of December 31, 2007, our expectedtotal minimum annual rental payments for 2008 under current and future non-cancelable aircraft operating leases are approximately$347.9 million.  Over 90% of our aircraft are leased directly by Continental from third parties and subleased by Continentalto us.  If Continental were to default under these leases, our ability to retain access to the aircraft could be adverselyaffected.  See more detailed description of our risks related to our aircraft leases under Item 1A. "Risk Factors."

            ***Other Leases.*** Other leases and subleases are primarily related to ground facilities (airport and maintenance) spare engines, and a flighttraining device.  These leases have greatly varying terms, which we expect, in most cases, to be renewed or replaced.  Asof December 31, 2007, our expected total minimum annual, non-aircraft rental payments for 2008 under current and futurenon-cancelable operating leases are approximately $28.0 million. The expected total minimum rental payments for 2008, by category,are as follows (in millions):

                                                                    

                           

Airportfacilities                                      

$

19.2

Maintenance facilities

3.9

Flight equipment

4.0

Other

0.9

$

28.0

            We are responsible for allairport facility rent, except for that under the Continental CPA, which is considered a fully reconciled cost.  Maintenancefacilities and flight equipment rentals related to the agreement are costs within the margin band which could impact our quarterlyreconciliation payment if these costs drive the prevailing margin to be less than 8.5% or higher than 10.0%.

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            **Contractual Obligations andCommercial Commitments**

            The following table summarizesthe expected effect our material debt, capital leases, operating leases and other contractual obligations have on our future cashflows as of December 31, 2007 (in millions):

**                                                                  **

**Total**

**2008**

**2009**

**2010**

**2011**

**2012**

**Over 5 Years**
****************************
4.25% senior convertible notes due 2023 (1)

$

138.1

 

$

138.1

 

$

—

 

$

—

 

$

—

 

$

—

 

$

—

Other long-term debt (2)

14.7

4.3

4.1

3.8

2.5

—

 

—

Capital lease (3)

0.2

0.2

—

—

—

—

—

Aircraft operating leases (4)

3,715.7

347.9

347.9

347.9

347.9

347.9

1,976.2

Other operating leases (5)

402.6

57.6

59.1

60.7

62.3

63.9

99.0

Obligations under capacity purchase and   other agreements with Continental (6)

48.2

16.1

16.1

16.0

—

—

—

Other contractual obligations (7)

1,560.2

271.5

182.6

178.6

179.0

174.1

574.4

Total expected cash obligations

$

5,879.7

$

835.7

$

609.8

$

607.0

$

591.7

$

585.9

$

2,649.6

(1) 

The expected impact of our 4.25% senior convertible notes due 2023 on our future cash flows assumesthe current principal balance of the notes will be redeemed on August 1, 2008, the earliest date the holders of the notes mayrequire us to repurchase the notes.  If the notes are held until August 1, 2023, the maturity date, our obligations outlinedabove would increase by $83.6 million as a result of additional interest expense related to these notes.  See Item 8. “Financial Statements and Supplementary Data – Note to Consolidated Financial Statements – Note 7” for adetailed description of these notes.

(2) 

Other long-term debt represents our obligation for the advances received under our loan agreementwith EDC.  See detailed discussion of our financing arrangement with EDC in Item 8. ”Financial Statement andSupplementary Data – Notes to Consolidated Financial Statements – Note 7.”  The expected effect of ourfinancing arrangement with EDC on our future cash flows is calculated based on the six-month LIBOR plus 1.75% per annum andincludes principal payments of $12.8 million and estimated interest payments of $1.9 million. 

(3) 

Capital lease obligation represents the minimum lease payments, including interest expense, for someof our ground service equipment that are under a capital lease agreement.  See Item 8 “Financial Statements andSupplementary Data – Notes to the Consolidated Financial Statements – Note 6”.

(4) 

Aircraft operating lease obligations are the estimated lease payments for all of our aircraft underlong-term operating leases and subleases from Continental at December 31, 2007. These agreements with Continental havesubstantially the same terms as the lease agreements between Continental and the third-party lessors, and expire between 2013 and2022.  The table above reflects aircraft operating lease obligations beyond 2010; however, we cannot anticipateContinental’s election to extend the capacity purchase agreement nor our intent to retain the aircraft, as we have the firstright of refusal, beyond that time.  See Item 8. “Financial Statements and Supplementary Date – Notes to theConsolidated Financial Statements – Note 6.”  The aircraft lease payments in the table above include the adjustedlease payments for the 69 aircraft being utilized in other business segments.  The agreement contains a provision for theinterest rate implicit in calculating the scheduled lease payments for these aircraft to increase by 200 basis points.

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(5) 

Other operating lease obligations represent the estimated lease payments for our ground serviceequipment, spare engines and substantially all of our ground facilities, including facilities at public airports, from Continentalor the municipalities or agencies owning and controlling such airports that are under operating leases.  Other operating leaseobligations also include the lease payments related to a flight training device.  Continued operations are assumed throughnormal lease renewals.

(6) 

Obligations under the Continental CPA and other agreements with Continental represent fixed chargesfor ground handling costs at Continental stations and charges for administrative services provided by Continental, such astechnology, fuel management and insurance services.  The amounts disclosed above are based on our best estimates as ofDecember 31, 2007 under the terms of our contracts currently in place.

(7) 

Other contractual obligations primarily include our power-by-the-hour agreement with Rolls Royce andour fixed forward contract with World Fuel Services.  We expect to fund these commitments with cash generated fromoperations.  The estimated amount of future commitments for Rolls Royce is based on assumptions related to anticipated futurelevels of operations and forecasted payment rates.  The level of operations inherent in the estimated amounts for Rolls Royceis based on Continental’s most recent operating plan for Airlines, which can be altered at Continental’s solediscretion and includes our 69 aircraft that are operating in our other business segments.  Contractual rate increases atactual time of occurrence may be different than the forecasted rate inherent in the amounts for Rolls Royce.  The estimatedamount of future commitments for World Fuel Services is based on gallons contracted to be purchased at December 31, 2007 at thecurrent contract price per month.  As we continue to evaluate the market and our fuel needs, we may enter into additional fuelcontracts with World Fuel Services.

            The actual effects that thelisted obligations above may have on our future cash flow may differ materially from our estimates.

***           * Other ContingentLiabilities or Commitments**

            We are a party to many contractsin which it is common for us to agree to indemnify third parties for tort liabilities that arise out of or relate to the subjectmatter of the contract.  In some cases, this indemnity extends to related liabilities arising from the negligence of theindemnified parties, but usually excludes any liabilities caused by gross negligence or willful misconduct.  We cannotestimate the potential amount of future payments under these indemnities until events arise that would trigger a liability underthe indemnities.  However, we expect that we would be covered by insurance for any such liabilities, subject todeductibles.

            We are a defendant in variouslawsuits and proceedings arising in the ordinary course of our business.  While the outcome of these lawsuits and proceedingscannot be predicted with certainty, we do not believe that the ultimate disposition of these proceedings will have a materialadverse effect on our financial position, results of operations or cash flows.

            We began 2008 rate discussionswith Continental last September.  The Continental CPA contemplates a November 1 deadline for setting the rates; however, theparties agreed to extend the deadline.  Although we believed that we were nearing completion of the rate setting process,Continental advised us on February 28, that if we were unable to reach agreement by March 14, they might initiate arbitrationproceedings again in accordance with the provisions of the Continental CPA.  We can also initiate arbitration if we think itnecessary.  As of the date of this filing neither party has triggered arbitration and we remain hopeful that it will not benecessary.  Continental also advised us that it believes that it overpaid Airlines by $6 million in 2007 and $2.1 million in2006.  We believe that if we were required to arbitrate these matters we would prevail.  However, we may not besuccessful in resolving these disputes without reducing our 2008 income.  We cannot currently predict the timing or theresolution of these matters.  Although we are hopeful that we can agree on rates and resolve Continental’s other claimswithout arbitration, there can be no assurance that we will be successful in doing so.   

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            If we are required to arbitrate,each party will select one arbitrator, and those two arbitrators will select the third arbitrator to complete the panel.  TheContinental CPA sets forth procedures and a schedule that will likely result in a hearing and the issuance of a final decision bylate in the second or early in the third quarter of 2008.  ExpressJet will continue to be paid under the 2007 block hour ratesduring the arbitration process and expects the decision setting the revised rates to be retroactive to January 1, 2008.

           In January2006, we purchased a 44% interest in Flight Services and Systems, Inc. (“FSS”) for $3 million.  At the same time,we loaned the company $1 million which was originally classified in Other Assets, net, on the consolidated balance sheet.  Thenote was due and payable in full on September 30, 2007, and provided that interest was due and payable quarterly on the 15th dayfollowing the close of each calendar quarter.  The note provided that if International Total Services,Inc. (“ITS”) (also owned by the non-ExpressJet owners of FSS) emerged from bankruptcy and FSS could utilize ITS’sfederal income tax attributes through a transaction or series of transactions, then any unpaid balance of the note would be deemedpaid in full as a contribution by us to the capital of FSS.  The loan interest rate was equal to the lesser of 7% perannum or the three-month LIBOR plus 150 basis points.  We have not received any additional interest payments since the onemade on April 15, 2007, despite the fact that FSS did not satisfy all of the requirements under the note to convert the unpaidbalance to equity.  We have accrued and reserved fully the interest payments that were due.  Additionally, in accordancewith our rights under the note, we issued a default notice to FSS seeking payment of the past due interest plus the entireprincipal amount of the note.  FSS failed to make the payment of principal and interest in accordance with the terms of thedefault notice and we filed suit to collect the outstanding interest and principal due under the note.  As of December 31,2007, we have verbally agreed on a resolution with FSS and the lawsuit is stayed pending execution of the final documents. Weanticipate a successful outcome and believe the receivable is realizable.

****

**Item 7A.  Quantitative and Qualitative Disclosure About MarketRisk**

            We have been and are subject tomarket risks, including commodity price risk (such as, to a limited extent, aircraft fuel prices) and interest raterisk.

**Aircraft Fuel**

           EffectiveJanuary 1, 2001, we entered into the Continental CPA, which is scheduled to expire December 31, 2010 (subject to extensions byContinental through 2030, or its right to terminate the agreement based on 12-months notice at any time), and a related fuelpurchase agreement with Continental, which terminates when the Continental CPA terminates.  Under these agreements,Continental provides all of our aircraft fuel needs for the aircraft covered by the Continental CPA, and we incur fuel expense andfuel tax equal to the lower of the actual cost of the fuel and the related taxes or agreed-upon caps of 66.0 cents and 5.2 centsper gallon, respectively.  In addition, under the Continental CPA, we recover our fuel expense from Continental with a 10%margin.  For theyear ending December 31, 2007 and 2006,our cost of fuel was 71.2cents per gallon, including fuel tax within this operation.

            Our Branded Flying operations canbe significantly impacted by changes in the price and availability of aircraft fuel.  Efforts to reduce our exposure toincreases in the price and availability of aviation fuel consist of the utilization of forward-purchase contracts at fixed pricesand fuel tankering, where feasible.  Fixed-price arrangements consist of an agreement to purchase defined quantities ofaviation fuel from a third party at a stated price, limiting our exposure to market volatility.  As ofDecember 31, 2007, we had committed to purchase 15.1 million gallons, or 85% of our anticipated BrandedFlying fuel needs for the first quarter of 2008, at a weighted average price per gallon of $2.40, excluding taxes and into-planefees.  Additionally, we have committed to purchase 11.9 million gallons for the second quarter of 2008, 9.0****milliongallons for the third quarter of 2008, and 6.0 million gallons for the fourth quarter of 2008.  For the first quarter of 2009,we have contracted to purchase 3.0 million gallons.  This represents approximately 70% and 22% of our anticipated BrandedFlying fuel needs for 2008 and the first quarter of 2009, respectively.

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            For theyearendedDecember31, 2007, Airlines’ consolidated fuel cost, including related fuel taxes, was $1.00 per gallon.  This is due toover 80% of our fuel consumption being capped at a lower rate per gallon within our capacity purchase agreement withContinental.

**Interest Rates**

           At the endof 2006, we began transitioning 69 aircraft from the Continental CPA to our other flying.  Our aircraft lease agreements withContinental contain a provision for the long-term interest rate implicit in calculating the scheduled lease payments we make tothem for these aircraft to increase by 200 basis points when the aircraft are removed from the flying for Continental, however, theagreement provides that our block hour rates for the 205 aircraft remaining in the agreement will be adjusted higher or lower toreflect any changes in the average rental rates.

            We also have potential interestrate exposure with respect to our loan agreement with Export Development Canada, which bears interest at the six-month LIBOR plus1.75% per annum.  The interest rate applicable to this variable rate note may rise, increasing our interest expense.  Theimpact of market risk is estimated using a hypothetical increase in interest rates by 100 basis points for our variable ratelong-term debt.  Based on this hypothetical assumption, we would have incurred an additional $0.2 million and $0.1 million ininterest expense for the 2006 and 2007, respectively. 

            As of December 31, 2007 and 2006,we estimated the fair value of our $134.7 million and $137.2 million (carrying values) convertible notes to be $130.7 million and$127.9 million, respectively, based upon quoted market prices.  Changes in the fair market value of our fixed-rate debt couldbe affected by a variety of factors including, but not limited to, general investor behavior, industry specific risks and interestrate risks.  Holders of this debt have the right to require that we repurchase their notes on August 1, 2008.  If theholders required us to repurchase this debt, we would have potential interest rate exposure related to the possible refinancing ofthe debt.  We are evaluating our available options in satisfying the holders should they require us to repurchase the notes in2008.  At our option, we may pay the repurchase price for any such notes in cash, shares of our common stock, or anycombination thereof; however, currently we cannot anticipate our sensitivity to interest rate fluctuations resulting from externalfinancing for all or part of the debt obligation.

**Item 8.  Financial Statements and Supplementary Data**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

                                                                                                                                           

   

**Page**

Report of Management

65

Report of Independent Registered Public Accounting Firm

66

Report of Independent Registered Public Accounting Firm on Internal Control over     Financial Reporting

67

Consolidated Statements of Operations for each of the Three Years Ended     December 31, 2007

68

Consolidated Balance Sheets as of December 31, 2007 and 2006

69 - 70

Consolidated Statements of Cash Flows for each of the Three Years Ended     December 31, 2007

71

Consolidated Statements of Stockholders' Equity (Deficit) for each of the Three     Years Ended December 31, 2007

73

Notes to Consolidated Financial Statements

74

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**REPORT OF MANAGEMENT**

The Board of Directors and Stockholders ofExpressJet Holdings, Inc.

****

            Management is responsible for thepreparation and fair presentation of the financial statements included in this report.  The financial statements have beenprepared in conformity with U.S. generally accepted accounting principles and reflect management’s judgments and estimatesconcerning effects of events and transactions that are accounted for and disclosed.

            Management is also responsiblefor establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a -15(f) and 15d - 15(f)under the Securities Exchange Act of 1934.  The internal control over financial reporting of ExpressJet Holdings, Inc. (the“Company”) is designed to provide reasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

         

(i)  

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of assets of the Company; 

(ii)  

provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of theCompany are being made only in accordance with authorizations of management and directors of the Company; and

(iii)  

Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,use or disposition of the Company’s assets that could have a material effect on the financial statements.

            Management recognizes that thereare inherent limitations in the effectiveness of any internal control over financial reporting, including the possibility of humanerror and the circumvention or overriding of internal control.  Accordingly, even effective internal control over financialreporting can provide only reasonable assurance with respect to financial statement preparations and may not prevent or detectmisstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controlsmay become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures maydeteriorate.

            Under the supervision and withthe participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluationof the effectiveness of our internal control over financial reporting as of December 31, 2007 based on the framework in InternalControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based onthat evaluation, our management concluded that our internal control over financial reporting was effective as of December 31,2007.

            Management’s assessment ofthe effectiveness of our internal control over financial reporting as of December 31, 2007 has been audited by Ernst & Young,LLP, an independent registered public accounting firm, as stated in their report which is included elsewhere herein.

/s/JAMES B.REAM                               James B. Ream President and Chief Executive Officer

             

/s/FREDERICK S.CROMER                  Frederick S. Cromer Vice President and Chief Financial Officer

/s/LAMPHUNGNGO-BURNS                  Phung Ngo-Burns Staff Vice President and Controller

                                                                         

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

The Board of Directors and Stockholders ofExpressJet Holdings, Inc.

            We have audited the accompanyingconsolidated balance sheets of ExpressJet Holdings, Inc. (the “Company”) as of December 31, 2007 and 2006, and therelated consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the periodended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility isto express an opinion on these financial statements based on our audits.

            We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.An audit includes assessing the accounting principles used and significant estimates made by management, as well as evaluating theoverall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

            In our opinion, the consolidatedfinancial statements referred to above, present fairly, in all material respects, the consolidated financial position of theCompany as of December 31, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the threeyears in the period ended December 31, 2007, in conformity with U.S. generally accepted accounting principles**.**

            As discussed in Note 10 to theconsolidated financial statements, in 2006 the Company changed its method of accounting for share-based compensation as required byStatement of Financial Accounting Standards No. 123(R), “Share-Based Payments.”

            We have also audited, inaccordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of theCompany’s internal control over financial reporting as of December 31, 2007, based on criteria established in InternalControl – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our reportdated March 19, 2008 expressed an unqualified opinion thereon.

        

ERNST & YOUNG LLP

Houston, Texas March 19, 2008

Table of Contents

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Directors and Shareholders of ExpressJet Holdings, Inc.

We have audited ExpressJet Holdings, Inc.’s internal control over financial reporting as ofDecember 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (the COSO criteria). ExpressJet Holdings Inc.’s management is responsiblefor maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Report of Management. Our responsibility is to express an opinion onthe company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whethereffective internal control over financial reporting was maintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing andevaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for ouropinion.

A company’s internal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately andfairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being made only in accordance with authorizations of managementand directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have a material effect on the financialstatements.

Because of its inherent limitations, internal control over financial reporting may not prevent ordetect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that the degree of compliance with the policies or proceduresmay deteriorate.

In our opinion, ExpressJet Holdings, Inc. maintained, in all material respects, effective internalcontrol over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting OversightBoard (United States), the consolidated balance sheets of ExpressJet Holdings, Inc. as of December 31, 2007 and 2006, and therelated consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the periodended December 31, 2007 of ExpressJet Holdings, Inc. and our report dated March 19, 2008 expressed an unqualified opinionthereon.

                                                           

        

ERNST & YOUNG LLP

Houston, Texas March 19, 2008

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**EXPRESSJET HOLDINGS, INC.CONSOLIDATED STATEMENTS OF OPERATIONS(In thousands, except per share data)**

**                                                                                            **

**Year Ended December 31,**
****
**2007**

**2006**

**2005**
************
Operating Revenue

      Passenger

$

1,647,999

$

1,670,544

$

1,556,834

     Ground handling and other

37,546

11,612

5,984

1,685,545

1,682,156

1,562,818

Operating Expenses:

     Wages, salaries and related costs

437,568

386,678

349,390

     Aircraft rentals

344,166

332,441

309,018

     Aircraft fuel and related taxes

323,218

227,164

210,412

     Maintenance, materials and repairs

202,513

191,399

181,355

     Other rentals and landing fees

119,165

115,620

104,043

     Ground handling

97,157

99,876

95,423

     Outside services

58,320

51,266

28,663

     Marketing and distribution

31,391

119

—

     Depreciation and amortization

29,963

25,770

26,992

     Other operating expenses

148,955

110,752

100,979

 

 

1,792,416

1,541,085

1,406,275

 

Operating Income / (Loss)

(106,871

)

141,071

156,543

 

Nonoperating Income (Expense):

     Interest expense

(8,496

)

(7,335

)

(10,745

)

     Interest income

15,744

14,665

8,295

     Capitalized interest

1,330

294

506

     Equity investments loss, net

(8,304

)

(2,036

)

(606

)

     Other, net

(275

)

(203

)

241

 

(1

)

5,385

(2,309

)

Income / (Loss) before Income Taxes

(106,872

)

146,456

154,234

Income Tax Benefit (Expense)

36,624

(53,891

)

(56,241

)

 

Net Income / (Loss)

$

(70,248

)

$

92,565

$

97,993

 

Basic Earnings / (Loss) per Common Share

$

(1.31

)

$

1.72

$

1.81

 

Diluted Earnings / (Loss) per Common Share

$

(1.31

)

$

1.56

$

1.65

 

Shares Used in Computing Basic Earnings / (Loss) per     Common Share

53,693

53,864

54,117

Shares Used in Computing Diluted Earnings / (Loss) per     Common Share

53,693

61,529

61,722

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

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****

**EXPRESSJET HOLDINGS, INC.CONSOLIDATED BALANCE SHEETS(In thousands)**

**ASSETS**

**December 31,**

**                                                                                                       **

**2007**

**2006**

** **
********
Current Assets:

     Cash and cash equivalents

$

189,259

 

$

291,633

     Restricted cash

24,756

10,920

     Accounts receivable, net

15,677

7,603

     Spare parts and supplies, net

26,598

23,717

     Income tax receivable

37,081

8,863

     Prepayments and other

9,013

6,058

        Total Current Assets

302,384

348,794

Property and Equipment:

     Owned property and equipment:

        Flight equipment

233,237

215,958

        Other

169,386

141,539

 

402,623

357,497

        Less:  Accumulated depreciation

(139,044

)

(113,195

)

263,579

244,302

     Capital Leases:

 

        Ground service equipment

4,338

4,338

        Less:  Accumulated amortization

(4,219

)

(3,557

)

119

781

        Total Property and Equipment

263,698

245,083

Investments in Other Entities

9,713

18,017

Reorganization Value in Excess of Amounts Allocable to   Identifiable Assets, net

12,789

12,789

Airport Operating Rights, net

3,440

3,691

Debt Issuance Cost, net

1,970

3,497

Other Assets, net

3,614

5,158

 

        Total Assets

$

597,608

$

637,029

 

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

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****

**EXPRESSJET HOLDINGS, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In thousands, except for share data)**

**LIABILITIES AND**

**December 31,**

**STOCKHOLDERS' EQUITY**

**2007**

**2006**

**                                                                                                                        **
********
Current Liabilities:

 

     Current maturities of long-term debt

$

138,159

$

1,668

     Current maturities of capital lease obligations

217

821

     Accounts payable

4,036

3,596

     Accrued payroll and related costs

47,985

48,988

     Accrued airport service costs

22,875

18,565

     Accrued maintenance, materials and repair costs

19,406

17,701

     Accrued tax costs (other than income tax)

11,434

8,917

     Air traffic liability

18,213

—

     Amounts due to Continental Airlines, net

4,726

3,522

     Deferred income taxes

—

14,785

     Accrued other liabilities

29,633

16,529

        Total Current Liabilities

296,684

135,092

Long-term Debt

9,308

12,818

4.25% Senior Convertible Notes due 2023

—

137,200

Capital Lease Obligations

14

214

Deferred Income Taxes

49,662

38,030

Other Long-term Liabilities

9,500

9,361

Commitments and Contingencies – See Note 12

Stockholders’ Equity:

     Preferred stock - $.01 par, 10,000,000 shares authorized, no         shares issued or outstanding, respectively

—

—

     Common stock - $.01 par, 200,000,000 shares authorized, and         55,138,692 and 54,653,942 shares issued, respectively

551

547

     Additional paid-in capital

171,260

165,658

     Accumulated earnings

71,786

142,349

     Accumulated other comprehensive income

540

364

     Common stock held in treasury, at cost 3,104,497 and 487,261          shares, respectively

(11,697

)

(4,604

)

        Total Stockholders’ Equity

232,440

304,314

        Total Liabilities and Stockholders’Equity

$

597,608

$

637,029

 

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

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**EXPRESSJET HOLDINGS, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands)**

**                                                                                                   **

**Year Ended December 31,**
****
**2007**

**2006**

**2005**
************
Cash Flows from Operating Activities:

  Income before dividends

  

$

(70,248

)

  

$

92,565

  

$

97,993

  Adjustments to reconcile net income to net cash provided by     operating activities

      Deferred income taxes

(3,242

)

3,961

2,018

      Depreciation and amortization

29,251

25,771

26,992

      Equity loss from investments in other entities

8,304

2,036

606

      Stock based compensation

5,318

2,491

—

      Other, Net

5,357

751

3,240

  Changes in operating assets and liabilities:

      Increase in restricted cash

(9,487

)

—

(2,906

)

      (Increase) decrease in accounts receivable, net

(8,858

)

(3,003

)

1,732

      (Increase) decrease in amounts due Continental Airlines,net

1,205

8,353

(16,071

)

      (Increase) decrease in spare parts and supplies, net

(4,630

)

894

(944

)

      (Increase) decrease in income tax receivable

(28,219

)

(8,863

)

—

      (Increase) decrease in prepayments and other assets

(602

)

1,660

(696

)

      Increase (decrease) in accounts payable

440

(224

)

321

      Increase (decrease) in air traffic liability

18,213

—

—

      Increase (decrease) in other liabilities

17,268

(7,680

)

18,305

      Net Cash Flows provided by (used in) OperatingActivities

(39,930

)

118,712

130,590

Cash Flows from Investing Activities:

  Capital expenditures

(48,934

)

(27,542

)

(21,147

)

  Proceeds from the sale of property and equipment to     Continental Airlines

—

397

901

  Proceeds from disposition of equipment

—

—

1,826

  Proceeds from the sale of short-term investments

—

—

18,650

  Investments in and advances to equity ownerships

—

(6,414

)

(20,984

)

  Investments in restricted cash

(4,349

)

(2,009

)

—

  Net cash used in investing activities

(53,283

)

(35,568

)

(20,754

)

Cash Flows from Financing Activities:

  Repurchase of common stock

(8,013

)

—

(5,643

)

  Payments on note payable to Continental Airlines

—

(17,545

)

(81,259

)

  Payments on long-term debt and capital lease obligations

(5,023

)

(1,642

)

(6,708

)

  Redemption of note related to Series A Preferred Stock

—

—

5,000

  Proceeds from issuance of common stock related to Employee      Stock Purchase Plan

416

391

602

  Proceeds from sale-leaseback transactions

—

—

15,268

  Other

3,459

—

—

    Net cash used in financing activities

(9,161

)

(18,796

)

(72,740

)

  Net Increase (Decrease) in Cash and Cash Equivalents

(102,374

)

64,348

37,096

Cash and Cash Equivalents - Beginning of Year

291,633

227,285

190,189

  

Cash and Cash Equivalents - End of Year

$

189,259

$

291,633

$

227,285

Supplemental Cash Flow Information:

  Interest paid, net

$

6,935

$

7,186

$

9,900

  Income taxes paid (refunded) – including payments         (refunds) under tax agreement with Continental Airlines

$

(5,028

)

$

65,783

$

51,751

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

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**EXPRESSJET HOLDINGS, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)(In thousands)**

**Common Stock**

**Treasury Stock**

**Share**

**Amount**

** **

**Share**

** **

**Amount**

** **

**Additional Paid-in Capital**

** **

**Unearned Compensation on Restricted Stock**

** **

**Accumulated Other Comprehensive Income/(Loss)**

**Accumulated Earnings (Deficit)**

** **

**Total**
************************************
Balance at December 31, 2004

54,375

544

2

(22

)

162,418

(996

)

—

(47,900

)

114,044

Net Income / (Loss)

—

—

—

—

—

—

—

97,993

97,993

Issuance of common stock   pursuant to stock plans

279

3

(8

)

99

2,637

(2,126

)

—

(11

)

602

Cancellation of previously   issued equity awards

—

—

10

(109

)

—

36

—

—

(73

)

Amortization of deferred   compensation

—

—

—

—

—

1,568

—

—

1,568

Deferred compensation income   tax effect

—

—

—

—

19

—

—

—

19

Stock repurchases

—

—

591

(5,643

)

—

—

—

—

(5,643

)

Balance at December 31, 2005

54,654

547

595

(5,675

)

165,074

(1,518

)

—

50,082

208,510

Net Income / (Loss)

—

—

—

—

—

—

—

92,565

92,565

Other Postretirement Employee Benefits,  net of tax

—

—

—

—

—

—

364

—

364

Total Comprehensive Income

—

—

—

—

—

—

—

—

92,929

Issuance of common stock   pursuant to stock plans

—

—

(126

)

1,184

(631

)

—

—

—

553

Cancellation of previously   issued equity awards

—

—

18

(113

)

12

—

—

—

(101

)

Amortization of deferred   compensation

—

—

—

—

(1,518

)

1,518

—

—

—

Stock based compensation

—

—

—

—

2,707

—

—

(298

)

2,409

Deferred compensation income   tax effect

—

—

—

—

14

—

—

—

14

Balance at December 31, 2006

54,654

547

487

(4,604

)

165,658

—

364

142,349

304,314

Net Income / (Loss)

—

—

—

—

—

—

—

(70,248

)

(70,248

)

Other Postretirement Employee Benefits,  net of tax

—

—

—

—

—

—

176

—

176

Total Comprehensive Loss

—

—

—

—

—

—

—

—

(70,072

)

Issuance of common stock   pursuant to stock plans

485

4

(110

)

1,074

(66

)

—

—

—

1,012

Cancellation of previously   issued equity awards

—

—

23

(154

)

—

—

—

—

(154

)

Stock based compensation

—

—

—

—

5,668

—

—

(315

)

5,353

Stock repurchases

—

—

2,704

(8,013

)

—

—

—

—

(8,013

)

Balance at December 31, 2007

55,139

$

551

3,104

$

(11,697

)

$

171,260

$

—

$

540

71,786

$

232,440

 

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

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****

**EXPRESSJET HOLDINGS, INCNOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

            ExpressJet Holdings, Inc.(“Holdings”) has strategic investments in the air transportation industry.  Our principal asset is all of theissued and outstanding shares of stock of XJT Holdings, Inc., the sole stockholder of ExpressJet Airlines, Inc. (referred to inthis report as “Airlines” and, together with Holdings, as ExpressJet, , “we” or “us”). Airlines currently operates a fleet of 274 aircraft.  As of December 31, 2007, we provided the followingservices:

            ContractFlying

         

• 

205 aircraft for Continental Airlines (“Continental”) as ContinentalExpress pursuant to a capacity purchase agreement (the “Continental CPA”);

• 

10 aircraft for Delta Air Lines (“Delta”) as Delta Connection pursuant toa capacity purchase agreement (the “Delta CPA”);

• 

9 aircraft in our Corporate Aviation division, which is dedicated to charter contractsand ad-hoc charter service.

            BrandedFlying

         

• 

39 aircraft under our own ExpressJet brand; and

• 

11 aircraft for Delta pursuant to a prorate revenue agreement (the “DeltaProrate”) under which we share passenger revenue risk and incur pricing, scheduling and revenue management costs.

            AviationServices includes our ground-handling services pursuant to our contracts with Continental and other airlines at airport locationsacross the United States, as well as ExpressJet Services, LLC (“Services”), our wholly owned repair and overhaulsubsidiary.   During the first half of 2007, we rebranded American Composites, LLC (“American Composites”)and InTech Aerospace Services, LP (“InTech”), our wholly owned subsidiaries, and Saltillo Jet Center(“Saltillo”), a majority-owned subsidiary, under the name ExpressJet Services.  These entities provide composite,sheet metal, paint, interior (including seat refurbishment) and thrust reverser repairs throughout our five facilities in theUnited States and Mexico.  Revenues are earned and recognized when we complete various jobs and bill our customers for theproducts and/or services delivered.

            Our primary business is flying274 aircraft for various customers.  During 2007, we diversified our operations from flying solely for one customer tooperating aircraft for multiple customers.  Prior to 2007, we derived substantially all of our revenues from our ContinentalExpress operations.  In 2007, we continued developing our Services subsidiary and the Saltillo Jet Center.  In each ofthese areas, we believe that our operational excellence and our commitment to customer service are our greateststrengths.

            The airline industry is verycompetitive and has faced unprecedented challenges over the last few years; including enhanced security measures due to fear ofterrorism, reduced traffic following the 2001 terrorist attacks involving commercial aircraft, a weak U.S. economy and record highfuel prices.  Some airlines have been able to use the bankruptcy process to restructure and lower their operating costs. Additional pressures on airlines have come from potential consolidation among legacy carriers, the Internet as a distributionsystem and the growth of lower-cost carriers.

Table of Contents

            Our relationship with Continentalremains crucial to our success since 75% of our fleet continues to support Continental’s network.  We began 2008 ratediscussions with Continental last September, with no resolution.  Continental advised us on February 28, that if we wereunable to reach agreement by March 14, they may initiate arbitration proceedings again in accordance with the provisions of theContinental CPA.  We would also be able to initiate arbitration after March 14 if we thought it necessary.  As of thedate of this filing neither party has triggered arbitration and we remain hopeful that it will not be necessary.  TheContinental CPA sets forth procedures and a schedule that would likely result in a hearing and the issuance of a final decision bylate second or early third quarter of 2008 if we were required to arbitrate.  ExpressJet would continue to be paid under the2007 block hour rates during the arbitration and would expect the decision setting revised rates to be retroactive to January 1,2008.  The outcome of our 2008 rate setting process is uncertain and may adversely impact our results and cash flows fromoperations if we are unable to negotiate reasonable terms with Continental.  See “Note 2 – Capacity PurchaseAgreement with Continental” below for further discussion of 2008 rate discussions with Continental.

            We expect our Branded Flying toincur a significant loss for the full year 2008 as we commence its second year of flying in April 2008 and continue to establishour brand, refine our reservations and marketing, adjust our schedule appropriately, seek to increase our market share (orstimulate demand), manage our yields and minimize our exposure during seasonal peaks and valleys.  We continue to enhance ourinfrastructure to facilitate timely information and permit us to make better tactical decisions and mitigate our losses inunderperforming markets. However, absent a combination of adverse factors outside of our control, such as a significant furtherdeterioration of the U.S. economy, Continental’s inability to pay us pursuant to the terms of the existing capacity purchaseagreement, further material increases in the cost of fuel, or industry consolidation, which could result in the formation of one ormore airlines with greater financial resources than ours to compete more fiercely in the markets we operate, we believe that ourContract Flying will generate sufficient operating income to offset a significant portion of any loss from Branded Flying, subjectto the considerations set forth below. 

            We believe that the flexibilityof our business platforms will enable us to sustain our liquidity and meet our financial obligations through 2008.  However,if sufficient losses in the Branded Flying segment continue we could remove from service a portion or all of the aircraft employedin this segment in 2008.  Our April 2008 schedule for ExpressJet Brand flying was adjusted in February 2008 in response toindustry challenges and high fuel costs.  In addition to eliminating routes with weak demand, we plan to decrease aircraftutilization from 11 hours per day to 9 hours per day.  Total daily departures will decrease from 200 to 172 and overallcapacity will be reduced approximately 11% from the capacity originally planned for 2008.   We believe these changes willincrease yields on the remaining capacity in the remaining markets such that it will exceed the impact of the planned capacityreductions. 

            As of December 31, 2007, we held$189 million in unrestricted cash and cash equivalents.  In early 2008, we invested approximately $65 million in auction ratesecurities (“ARS”) which are primarily backed by student loans that are guaranteed by the U.S. government and have AAAlong-term ratings from Moody’s and Standard & Poor’s.  For a detailed list of our ARS, please see Exhibit10.19.  The securities are held at Citigroup Global Markets, Inc., Banc of America Securities, LLC and Royal Bank of CanadaCapital Markets.  While the contractual maturities of the underlying securities within these ARS fall in years maturing after2015, each security has a reset period of either seven or 28 days.  Beginning February 11, 2008, auctions for these securitieswere not successful, resulting in our continuing to hold them and the issuers paying interest at the maximum contractualrate.  At this time, we have ceased purchasing additional ARS and have a standing sell order for our current ARSportfolio.  However, continued unsuccessful auctions could result in our holding our current ARS beyond their next scheduledauction reset dates, thereby limiting their short-term liquidity of these investments.  If liquidating these investmentsbecomes necessary, we have received a level of commitment to borrow against some of our current ARSportfolio.  

Table of Contents

            We have significant financialobligations due in 2008.  We can satisfy the largest of these obligations, our convertible notes, with either cash, shares ofour common stock, or a combination thereof.  For risks associated with settling the obligation in common stock, please referto Item 1A, “Risk Factors”.  In addition, we are evaluating our options for meeting these obligations, includingthe possibility of a secured financing transaction permitting us to pay a substantial portion of the convertible notes in cashwhile maintaining a healthy cash balance and avoiding the dilution to equity that would result from a stock settlement of theconvertible notes.  However, as our options to satisfy the convertible notes, as described above, depend on several factorsoutside of our control, we are also continuing to evaluate additional steps within our control that we could take if our ability tomeet our obligations were impaired.  These include, individually or in combination if required:

**         **

**• **

reducing capital expenditures to only those required by law or operational necessities;

**         **

**• **

borrowing against or liquidating our ARS holdings, including at a discount if necessary;

**         **

**• **

selling assets, tangible or intangible, or subleasing the aircraft we lease fromContinental;

**         **

**• **

transferring some or all of the aircraft currently dedicated to our ExpressJet brand flying to otheroperations, or grounding them entirely if circumstances so required.

            We believe that our existingliquidity, projected 2008 cash flows, including the incremental sources of liquidity described above, if needed, will be sufficientto fund current operations and our financial obligations through the year ending December 31, 2008. However, as noted above,factors outside our control may dictate that we alter our current plans and expectations and could have a material adverse impacton us and our ability to sustain operations over the long term.

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****

**Note 1 – Summary of Significant Accounting Policies**

**            *  (a) Principles ofConsolidation* –**

            The accompanying consolidatedfinancial statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accountsof Holdings and its subsidiaries.  All material intercompany transactions have been eliminated in consolidation.

            On August 31, 2006, ExpressJetpurchased the remaining 51% interest in American Composites, an aviation maintenance business in Miami, Florida, for $0.8 millionin cash and the results of operations were consolidated in our financial statements beginning on September 1, 2006.  Prior tothis date, we accounted for this investment under the equity method of accounting as prescribed by Accounting Principles BoardOpinion No. 18 – “The Equity Method of Accounting for Investments in Common Stock.” 

            During 2006, we invested $1.5million for an 80% interest in Saltillo, an aircraft paint facility located in Saltillo, Mexico.  We invested $9.2 million forthe construction of the hangar and office facilities from which the company conducts its operations.  As a result, weconsolidated Saltillo beginning on August 1, 2006.

            In addition, we purchased InTech,an aircraft interior refurbishment company for $3.0 million in November 2005.

**            *(b) Use of Estimates*–**

            The preparation of financialstatements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions thataffect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from thoseestimates. 

**            *(c) Cash and CashEquivalents* –**

            Cash and cash equivalents consistof cash and short-term, highly liquid investments that are readily convertible into cash and have maturities of three months orless when purchased.  Restricted cash is our collateral for estimated future workers’ compensation claims, letters ofcredit, charter deposits and holdbacks with our credit card processors.

***            (d) Accounts Receivables,net –***

**

            Accounts receivable are stated atthe historical carrying amount net of write-offs and allowance for uncollectible accounts.  Our allowance for uncollectibleaccounts at the end of 2007 and 2006 was $0.4 million and $0.1 million

**            *(e) Spare Parts andSupplies, net –***

**

*           * Inventories,expendable parts and supplies relating to flight equipment are carried at average acquisition cost and are expensed whenused.  An allowance for obsolescence is provided over the remaining estimated useful life of the related aircraft, plusallowances for spare parts currently identified as excess to reduce the carrying costs to the lower of amortized cost or netrealizable value.  These allowances are based on our estimates, which are subject to change.  Our allowance forobsolescence at December 31, 2007 and 2006 was $10.4 million and $9.8 million, respectively.

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**            *(f) Property and Equipment–***

**

*           * Property andequipment are recorded at cost and are depreciated to estimated residual values over their estimated useful lives using thestraight-line method.  Property and equipment acquired under capital leases are recorded at the lower of the present value ofthe future minimum lease payments or the fair value of the asset at the inception of the lease.  The estimated useful livesand residual values for our property and equipment are as follows:

**Estimated Useful Life**

**Estimated Residual Value**

**                                                                           **

    

    

Flight Equipment

5 to 25 years

0% to 15%

Ground property and equipment

2 to 30 years

0%

Capital lease - flight and ground

3 to 8 years

0%

Software

5 years

0%

Leasehold Improvements

Lease Term

0%

                                   

            Amortization related to assetsunder capital leases and operating leasehold improvements is included in our depreciation and amortization expense on the incomestatement.  We amortize assets under capital leases and operating leasehold improvements over the shorter of the asset life orlease term.

            The carrying amount of computersoftware was $21.9 million and $14.3 million at December 31, 2007 and 2006, respectively.  Depreciation expense related tocomputer software was $2.5 million, $2.1 million and $1.5 million for the years ending December 31, 2007, 2006 and 2005,respectively.

            In accordance with Statement ofFinancial Accounting Standards No. 144 – “Accounting for the Impairment or Disposal of Long-Lived Assets,” werecord impairment losses on long–lived assets used in operations when events and circumstances indicate that the assets mightbe impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of thoseassets.   The net carrying value of assets not recoverable is reduced to fair value.

            As shown in the following table,our aircraft fleet consisted of 274 regional jets at December 31, 2007.  We currently lease or sublease all of our existingregional jet aircraft from Continental.  See “—Note 6.”  Our aircraft options as of December 31, 2007are also shown below.  See Item 7.  “Management’s Discussion and Analysis of Financial Condition and Resultsof Operation – Liquidity and Capital Commitments – Purchase Commitments.”

**Type**

**Total Leased Aircraft**

**Options**

**Seats in Standard Configuration**

 

  

  

  

ERJ-145XR                    

104

75

50

ERJ-145

140

—

50

ERJ-135

30

—

37

Total

274

75

Our next option exercise date is August 1, 2008.  If we do not exercise or extend our option asof this date, 25 options will expire.  Pursuant to our agreement with Embraer, the 75 options may be exercised for any type ofaircraft within the ERJ-145 line of aircraft, which include the ERJ-135, ERJ-145 and the ERJ-145XR (“ERJ-145 Family”)at our discretion.

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**            *(g) Intangible Assets–***

**

*           * ReorganizationValue in Excess of Amounts Allocable to Identifiable Assets represents primarily the amount that arose from Continental’semergence from bankruptcy reorganization in 1993.  Effective January 1, 2002, we adopted and began to account for this assetin accordance with Statement of Financial Accounting Standard No. 142–“Goodwill and Other Intangible Assets”(“SFAS 142”).  SFAS 142 requires testing of goodwill and intangible assets with indefinite lives for impairmentrather than amortizing them.  Our goodwill is related to our Contract Flying segment.

            We evaluate the carrying value ofthis asset each reporting period to determine whether events and circumstances continue to support an indefinite useful life. We perform an impairment review on an annual basis, or more frequently if events or changes in circumstances indicate that theasset may be impaired.  Our review includes the acquisition, market-multiple and income approaches to valuation.  If thisreview indicates that our Reorganization Value in Excess of Amounts Allocable to Identifiable Assets will not be recoverable, thecarrying value is reduced to the fair value.  We performed this review during 2007, 2006 and 2005 and determined that we didnot have any impairment of our Reorganization Value in Excess of Amounts Allocable to Identifiable Assets.  Our annualimpairment test is performed as of June 30 of each year.

            Airport operating rights, therights to use certain take-off and landing slots and gates, are amortized on a straight-line basis over the life of the relatedairport facility lease, which approximates 20 years, with no residual value.  Debt issuance cost and capitalized costs relatedto our senior convertible notes is amortized on a straight-line basis over 20 years, the term of the notes, and with no residualvalue.

**            *(h) Investments in OtherEntities –***

**

            Investments in unconsolidatedcompanies are accounted for by the equity method of accounting when we have significant influence over the operation of thecompanies as prescribed by Accounting Principles Board Opinion No. 18 – “The Equity Method of Accounting forInvestments in Common Stock” (“ABP 18”). 

**            *(i) Deferred Credits–***

            Our spare part and flighttraining credits are primarily derived from our purchase agreement with Embraer.  All spare part credits are used to offsetthe purchase price of initial spare parts provisioning for our newly delivered aircraft.  Similarly, the flight trainingcredits are used to pay for the initial simulator rent costs for our pilots.  These credits are recorded in long-termliabilities, with an offsetting entry to prepayments and other current assets or current accrued liabilities if we used morecredits than the amount we are entitled to at year-end.  The deferred credits are amortized as a reduction to our aircraftrent expense over the life of the associated aircraft lease.  Amortization totaled $0.9 million for each 2007 and 2006. The prepayments and other current assets or current accrued liabilities are reduced as the credits are used or as the remainingfirm order aircraft are delivered.

**            *(j) Operating Revenue–***

**

*            **Passenger Revenue.** * We recognized our passenger revenue under the Continental CPA based on negotiated rates for each scheduled blockhour Airlines flies for Continental.  The rates were designed to provide Airlines with a target operating margin of 10% beforetaking into account variations in some costs and expenses that are generally controllable by Airlines.  We also record otherpassenger revenues earned under the Continental CPA, such as percentage of completed flights, certain on-time departures andbaggage handling.  See “– Note 2” for details of the block hour rates and the performance incentivepayments.  Our passenger revenue is reconciled and settled with Continental on a monthly basis, except for the quarterlyreconciliation of Airlines’ costs within the margin band as defined in the Continental CPA.  The rates we use tocalculate our passenger revenue are based on our interpretation of the agreement. 

            All fully reconciled costsincurred in connection with the Continental CPA are recorded as expense and revenue on a gross basis except for certain costs suchas fuel costs above our fuel and related tax cap and facility rent at Continental’s hubs.  These costs are absorbed byContinental under the terms of the Continental CPA.  Consequently, we are not the primary obligor for these costs andaccordingly, these costs are not recorded as either revenue or expense by us.

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            For the Delta CPA, we receive a base rate for each completed block hour and departure and are reimbursed for certain pass-through costs. We record the base rate and the reimbursements for pass-through costs as passenger revenue.

            For Branded Flying, tickets aresold and processed internally, with amounts due settled either by cash payments up front or pursuant to the terms of our agreementswith various credit card service vendors.  Additionally, we accept flight coupons to carry passengers on our aircraft fromother air carriers, which are then processed internally and settled on a monthly basis through an airline clearing house, asappropriate, or pursuant to the terms of various industry or codeshare agreements, such as the Delta Prorate.  We recognize passenger revenue when transportation is provided or when an unused ticket expires.  Nonrefundabletickets expire on the date of the intended flight, unless the date is extended by notification from the customer in advance of theintended flight. The amount of passenger ticket sales not yet recognized as revenue is included in our consolidated balance sheetsas air traffic liability.

            We are also required to collectcertain taxes and fees from the passengers on behalf of government agencies and remit these back to the applicable agency on aperiodic basis.  These taxes and fees include U.S. federal transportation taxes, federal security charges, and airportpassenger facility charges.  These items are collected from our customers at the time they purchase their tickets, but are notincluded in passenger revenue.  We record a liability upon collection from the customer and release the liability whenpayments are remitted to the applicable governmental agency.

***            Ground Handling andOther.***  We recognize our non-passenger revenue, ground handling and other revenues as services areprovided. 

***            (k) Frequent FlyerAwards* –  **

****

            We launched our frequent flyerprogram, JetSet, during 2007 to encourage repeat travel over our system.  Our frequent flyer program is based on trips flownrather than on mileage and JetSet customers earn a minimum of one credit for each one-way trip flown or two credits for eachroundtrip flown.  The JetSet award ticket (“Award Ticket”) offers one free roundtrip award valid to anydestination available on ExpressJet brand flying after the accumulation of 16 credits.

            Award Tickets are automaticallygenerated when earned by the customer rather than allowing the customer to bank credits indefinitely.  Award Tickets must beused to purchase a ticket within 12-months after their issuance.  Award Tickets are capacity controlled and may not beavailable on peak travel dates. At December 31, 2007, the number of Award Tickets fully earned since April 1was approximately 5,600 of which over 700 had been flown.  The liability at year end associated with the outstandingtravel awards that are expected to be redeemed for free travel on ExpressJet as well as the expense associated with the awardsclaimed during 2007 was immaterial to our results of operations.  At this time, we recognize the liability as a component ofother accrued liabilities in our consolidated balance sheet. 

            **(*l) Segment Reporting*–**

*           * Statement ofFinancial Accounting Standard No. 131, “Disclosures about Segments of an Enterprise and Related Information,”(“Statement 131”) requires disclosures related to components of a company for which separate financial information isavailable if that segregated information is evaluated regularly by the company’s chief operating decision makers in decidingthe allocation of resources and assessing performance.  ExpressJet has three major reportable segments: Contract Flying,Branded Flying and Aviation Services.

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            ***(m) Wages, Salaries andRelated Expenses –***

**

*           * As our collectivebargaining agreements become amendable, we accrue for anticipated retroactive pay that we estimate will be due under the newcontract.  We have three stock-based compensation plans: the ExpressJet Holdings, Inc. 2002 and 2007 Stock Incentive Plans andthe ExpressJet Holdings, Inc. 2003 Employee Stock Purchase Plan. The Company accounts for stock-based compensation utilizing thefair value recognition provisions of SFAS No. 123R, “Share-Based Payment”. See “–Note 10” for further details.

*           * We are currentlyself-insured for a portion of our healthcare costs and have a large deductible for our workers compensation liability. Consequently, reserves for the cost of claims that have not been paid or benefit costs that have been incurred but not yet reported(“IBNR”) as of a given date are estimated.  In addition, as our collective bargaining agreements become amendable,we accrue for anticipated retroactive pay that we estimate will be due under the new contract.  However, actual costs maydiffer materially from our estimates.

****

***            (n) Aircraft &Facilities Leases –***

            All of our aircraft are eitherleased or sub-leased from Continental.  We also have airport and maintenance facility leases that are leased from airportauthorities or other municipal authorities.  In order to determine the proper classification of a lease as either an operatinglease or a capital lease, we must make certain estimates at the inception of the lease relating to the economic useful life and thefair value of an asset, as well as select an appropriate discount rate to be used in discounting future lease payments. Theassumptions used in our lease classification analyses are based on our interpretation of available market data and specificcontract terms.

******

***            (o) Maintenance and RepairCosts –***

*           * Maintenance andrepair costs for owned and leased flight equipment, including the overhaul of aircraft components, are charged to operating expenseas incurred, except for those maintenance costs covered by power-by-the-hour agreements, which are expensed based on contractualterms.  In 2007 and 2006, power-by-the-hour arrangements represented approximately 75% and 70%, respectively, of ourmaintenance, materials and repairs costs.

**            *(p) Income Taxes–***

**

*           * Deferred incometaxes, which are provided under the liability method, are determined based on differences between the financial reporting andincome tax basis of assets and liabilities and are measured using enacted tax rates and laws.  Operating losses for 2007recorded as a receivable represent the amount which can be carried back and applied against previous years’ income.  Theremaining operating losses which cannot be carried back and are dependent on the generation of future taxable income are recordedas a deferred tax asset.  A valuation allowance is provided on deferred tax assets if, based on available evidence, it is morelikely than not that future tax benefits will not be realized.  See “– Note 7” for further information onincome taxes.

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**            *(q) Earnings / (Loss) perShare –***

            We account for earnings per sharein accordance with Statement of Financial Accounting Standard No. 128 — “Earnings perShare.” Basic earnings per common share (“Basic EPS”) excludes dilution and is computed by dividing net incomeavailable to common stockholders by the weighted average number of common shares outstanding during the periods presented. Diluted EPS reflects the potential dilution that could occur if securities or other obligations to issue common stock wereexercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of thecompany.  The following table sets forth the reconciliation of the numerator and denominator of Basic EPS to the numerator anddenominator of Diluted EPS for the years ended December 31, 2007, 2006, and 2005 (in thousands, except per shareamounts):

**                                                                                          **

**Year ended December 31,**

**2007**

**2006**

**2005**

**Numerator:**

Net income / (loss)

$

(70,248

)  

$

92,565

  

$

97,993

  

Income impact of assumed conversion of convertible debt

—

3,662

3,656

$

(70,248

)

$

96,227

$

101,649

 

 

**Denominator:**

Weighted average common shares outstanding

53,693

53,864

54,117

Effect of stock options

—

2

11

Effect of restricted stock

—

125

56

Assumed conversion of convertible debt

—

7,538

7,538

53,693

61,529

61,722

Basic earnings / (loss) per share

$

(1.31

)

$

1.72

$

1.81

Diluted earnings / (loss) per share

$

(1.31

)

$

1.56

$

1.65

            We excluded 608,489 and 239,078shares of restricted stock from the weighted average shares used in computing Basic EPS for the year ended December 31, 2007 and2006, respectively, as these shares were not vested as of these dates.

            We adopted the Emerging IssuesTask Force Issue No 04-08 – “The Effect of Contingently Convertible Debt on Diluted Earnings per Share” onDecember 15, 2004.  As a result, we included the potential common stock equivalents related to our senior convertible notes inour computation of Diluted EPS and restated all prior periods in which the convertible notes were outstanding, as shown in thetable above.

            Weighted average common sharesoutstanding for the Diluted EPS calculation also include the incremental effect of shares issuable upon the exercise of stockoptions and restricted stock not yet vested.  We excluded the following common stock equivalents from our Diluted EPScalculations, because their inclusion would have been anti-dilutive:

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• 

options to purchase 4.0 million, 2.3 million and 1.6 million shares of our common stock for theyears ended December 31, 2007, 2006 and 2005, respectively, these options’ exercise prices were greater than the averagemarket price of the common shares for the respective periods; and

• 

0.2 million shares of restricted stock for the year ended December 31, 2005.

• 

7.4 million shares of common stock equivalents for the assumed conversion of convertible debt forthe year ended December 31, 2007.

**            *(r) Financial Instrumentsand Risk Management –***

            ***FinancialInstruments.*** Our financial instruments consist of cash and cash equivalents, short-term investments, accounts receivable,accounts payable, long-term secured debt to Export Development Canada (“EDC”), note payable to Continental (which hasbeen repaid in full) and 4.25% senior convertible notes due 2023.  The carrying amount of cash and cash equivalents,short-term investments, accounts receivable and accounts payable approximate fair value due to the highly liquid nature of theseshort-term instruments.  As of December 31, 2007 and 2006, the fair value of our long-term secured debt to EDC wasapproximately $12.4 million and $14.7 million, respectively.  The fair value of our 4.25% senior convertible notes due 2023was approximately $130.7 million and $127.9 million based on the quoted market price as of December 31, 2007 and 2006,respectively. 

            ***Credit Risk Due to CertainConcentrations.*** We provide Continental the majority of its regional jet capacity at its hub airports, as well as additionalnon–hub service.  We are economically dependent upon Continental as most of our revenue and cash flows are received fromContinental.  See Item 1A. “Risk Factors” for A detailed discussion of this and other risks.  If Continentaldefaults on the payment obligations it has to us under the Continental CPA or other agreements, then in addition to any otherremedies we may have, we can offset the amount of the defaulted payments against the amounts we owe to Continental under anyagreements in an amount corresponding to its defaulted payments. 

            ***(s) Recently IssuedAccounting Standards* –**

            In September 2006, the FinancialAccounting Standards Board (“FASB”) issued FASB Statement No. 157, *Fair Value Measurements* (“Statement157”), which is effective for fiscal years beginning after November 15, 2007.  Statement 157 defines fair value,establishes a framework for measuring fair value and expands disclosures about assets and liabilities measured at fair value. Thenew standard provides a consistent definition of fair value which focuses on exit price and prioritizes, within a measurement offair value, the use of market-based inputs over entity-specific inputs. The standard also establishes a three-level hierarchy forfair value measurements based on the transparency of inputs to the valuation of an asset or liability as of the measurementdate.On February 7, 2008, FASB decided to issue FASB Staff Position FAS 157-b whichallows partial deferral of the effective date of Statement 157 for all nonfinancial assets and liabilities except for those thatare recognized or disclosed in the financials at fair value on a recurring basis (at least annually).  We are currently evaluating the requirements of Statement 157 for all financial assets and liabilities(excluding those included in the deferral listed above) including confirming that our valuation policies are consistent with exitprice as prescribed by Statement 157; however, we do not believe that it will have a material impact on our consolidated financialposition or results of operations.  We currently expect the adoption of Statement 157 to have an impact on the valuation anddisclosure of our investment in ARS that were entered into subsequent to December 31, 2007.

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            ***(t) Reclassifications–***

            Certain reclassifications havebeen made in prior years’ financial statements to conform to the current year presentation, including $2.5 million ofoperating revenue as of December 31, 2006 which was reclassed to other operating expenses on the consolidated statement ofoperations and a $2.0 million increase in restricted cash from net cash provided by operating activities to net cash used ininvesting activities on the consolidated statement of cash flows for the period ended December 31, 2006.

****

**Note 2 – Capacity Purchase Agreement with Continental**

            ***General.***  Wecurrently derive the majority of our revenue from the Continental CPA.  Under this agreement, Airlines operates flights onbehalf of Continental as Continental Express.  Continental controls and is responsible for scheduling, pricing and managingseat inventories and is entitled to all revenue associated with the operation of the aircraft.  We also have various otheragreements with Continental that govern our relationship.

            Under the Continental CPA, somemarketing-related costs normally associated with operating an airline are borne by Continental.  These costsinclude:

        

• 

reservations andsales;                                                                                                          

• 

commissions;

• 

advertising;

• 

revenue accounting;

• 

fare and tariff filings; and

• 

food and beverage service.

            On December 28, 2005, Continentalgave us notice of its intention to withdraw 69 aircraft from the agreement beginning in December 2006 and ending in June2007.  We subsequently decided to retain all 69 aircraft.  As of December 31, 2007, we had transitioned 69 aircraft fromContinental.

            ***Compensation andOperational Responsibilities.*****  Under the agreement, Airlines is entitled to payment for each block hour thatContinental schedules it to fly.  Payment is based on a formula designed to provide Airlines with a target operating margin of10% before taking into account variations in certain costs and expenses that are generally within our control.  In accordancewith the agreement, the original cost components used in this formula remained in place until December 31, 2004, after which newrates were to be established annually with the same methodology.  We have exposure for most labor costs and some maintenanceand general administrative expenses, if the actual costs are higher than those reflected in our block hour rates.

            Beginning in the fall of 2004, webegan annual negotiations with Continental to adjust the scheduled block hour rates as required under the Continental CPA. The agreement calls for rates to be set by November 1 of each year.  See the detailed discussion of the 2008 rate settingprocess below.

            ***Capacity and FleetMatters.***  Except for the withdrawal of two aircraft in late December 2006, the Continental CPA covered all ofAirlines’ 274 aircraft during 2006.  As of December 31, 2007, 205 aircraft remain covered under our agreement withContinental. 

            The Continental CPA also allowedus to be Continental’s exclusive regional jet service provider at Newark’s Liberty International, Houston’s BushIntercontinental and Cleveland’s Hopkins International airports through December 31, 2006.  The Continental CPA alsoprovides that Continental has the right to withdraw a limited number of our regional jets covered by the agreement under certaincircumstances upon 12-months notice.  On December 28, 2005, Continental gave us a withdrawal notice with respect to 69aircraft, the maximum number that it could withdraw at that time.  Under the terms of the agreement, Continental cannotwithdraw additional aircraft until December 28, 2009 unless the agreement is terminated early, which Continental can do at any timeupon 12-months notice.

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            The Continental CPA has aprovision for the interest rate implicit in calculating the scheduled lease payments we make to Continental to increase by 200basis points if we retain aircraft released from the agreement.  See Item 1. “Business–Capacity Purchase and OtherAgreements with Continental Airlines – Aircraft Financing.” 

            We have options for 75 ERJ-145XRaircraft that may be exercised for other types of aircraft within the ERJ-145 Family.  Our next option exercise date is August1, 2008.  If we do not exercise or extend our option as of this date, 25 options will expire.  During 2005, Continentaldeclined the right to include any of these option aircraft under the Continental CPA.  We retain the right to exercise themand fly these aircraft for other airlines or under our own code, subject to some restrictions; however, we will have to finance ouracquisition of these aircraft independently. 

            So long as scheduled flightsunder the Continental CPA represent either at least 50% of all our scheduled flights or at least 200 of our aircraft are covered bythe Continental CPA, we are required to allocate our crews, maintenance personnel, facilities and other resources on a prioritybasis to scheduled flights under the Continental CPA above all of our other flights and aircraft.

            ***Term and Termination ofAgreement and Remedies for Breach*.**  The Continental CPA is scheduled to expire on December 31, 2010.  At itssole election, Continental can extend the term of the agreement for up to four additional five-year terms through December 31, 2030upon written notice delivered at least 24 months prior to the expiration of the initial term.  Continental’s firstoption to extend must be delivered to us by December 31, 2008.

            Continental may terminate theagreement at any time with 12-months notice, or for cause without notice.  “Cause” is defined as:

        

• 

our bankruptcy;

• 

suspension or revocation of our authority to operate as a scheduled airline;

• 

cessation of our operations as a scheduled airline, other than as a result of a union-authorizedlabor strike or any temporary cessation not to exceed 14 days;

• 

a union-authorized labor strike that continues for 90 days; or

• 

our intentional or willful material breach that substantially deprives Continental of the benefitsof the agreement and is not cured within 90 days of notice of the breach.

            Continental may also terminatethe agreement at any time upon our material breach that does not constitute cause and continues for 90 days after we receivenotice of the breach.  If we materially breach the agreement (including for cause) and, for breaches other than cause, fail tocure the breach within 60 days after we receive notice of the breach, we will have to pay Continental an amount equal to theexpected margin contained in the block hour rates for scheduled flights from the 60th day (or immediately, withoutreceipt of any notice, if the breach is for cause) until the breach is cured.  In addition, Continental may terminate theagreement immediately without notice or giving us an opportunity to cure if it makes a reasonable and good faith determination,using recognized standards of safety, that there is a material safety concern with our operation of any flight under theContinental CPA.

            If Continental materiallybreaches the agreement and fails to cure the breach within 60 days after we notify it of the breach, we will be entitled toobtain our payments directly from an airline clearing house from the 60th day until the duration of the default. In addition, Continental and we are each entitled to seek damages and equitable remedies in arbitration.

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            As discussed above, Continentalhas reduced the level of its commitment for our aircraft under the Continental CPA, which has reduced our revenue andearnings.  Furthermore, Continental leases from third parties a substantial portion of the aircraft and airport facilitiesthat it subleases to us.  If Continental declared bankruptcy or otherwise defaulted under these leases, we would have norights to these aircraft or facilities.  Our access to our aircraft and airport facilities would depend on negotiationsbetween the lessors and us. 

***            Most FavoredNations.***  So long as Continental is our largest customer, if we enter into a capacity purchase or economicallysimilar agreement with another major airline (defined as any airline with annual revenues greater than $500 million, prior toadjustment for inflation since 2000) to provide regional airline service for more than 10 aircraft on terms and conditions thatare, in the aggregate, less favorable to us than those in the Continental CPA, the agreement has a provision that may allowContinental to amend its agreement with us to conform to the terms and conditions of our new agreement.

            ***2005 Rate Negotiation andAmendment*.**  As part of the 2005 rate negotiation, we agreed to cap Airlines’ prevailing margin at 10.0% toensure the long-term stability of the Continental CPA.  Airlines also began including previously unreconciled costs, asdiscussed above, within the margin band, although it is not reimbursed if these costs are higher and cause its prevailing margin tofall below the 8.5% margin floor.  Airlines remained entitled to receive incentive payments from Continental if its rate ofcontrollable cancellations was lower than its historical benchmark, but was no longer required to pay Continental a penalty forcontrollable cancellations unless the rate rises above 0.5%.  Airlines continued to receive a small per-passenger fee andincentive payments for certain on-time departure and baggage handling performance.

            During 2005, Airlines’quarterly reconciliation payments to Continental totaled $23.4 million, based on the terms of this agreement.  The table belowdescribes how variations between Airlines’ actual costs and estimated costs, as determined in the block hour rates, have beentreated under the Continental CPA since January 1, 2005:

Fully reconciled costs: reconciliation payment, including 10% margin, to the full extent actualcosts differ from estimated costs.

  • Fuel and into-plane expenses(1)  • Aircraft rent  • Terminal facility rent  • On-time bonuses and 401(k) company match under     current plans  • Taxes (other than income taxes)  • Passenger liability insurance  • Hull insurance  • War risk insurance  • Landing fees

  • Ground handling services  • Administrative services provided by Continental  • Third-party security and screening expenses  • Substantially all regional jet engine expenses under     current long-term third-party contracts  • Depreciation and amortization(2)  • Glycol, de-icing, snow removal  • International navigational fees

Costs within the margin band: if actual expenses in this category are sufficiently different fromestimates used in the block hour rates so that the prevailing margin is less than 8.5% or greater than 10.0%, then a reconciliationpayment will be made by either Continental or Airlines to the other so that this prevailing margin will be 8.5% or 10.0%, asapplicable.  If the prevailing margin were less than 8.5% due to the impact of certain costs, as described below, or if theprevailing margin were above 10.0% due to other items(3), no reconciliation payments would be made from eitherContinental or Airlines.

  • Maintenance, materials and repairs not included     above  • Passenger services

  • Other rental expenses  • Other operating expenses

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(1)  

Under our fuel purchase agreement with Continental, fuel and fuel tax expense are reconciled to thelower of the actual costs or the agreed-upon caps of 66.0 cents per gallon and 5.2 cents per gallon, respectively.  If thefuel purchase agreement with Continental were not in place, the fuel cost, including related taxes, would have been $2.43, $2.04and $1.80 per gallon for the years ended December 31, 2007, 2006 and 2005 respectively.

(2)  

Depreciation is reconciled for assets and capital projects accounted for in the Continental CPA orthose approved by Continental outside of the Continental CPA.

(3)  

The prevailing margin used to calculate the reconciliation payment does not take into accountperformance incentive payments, including payments from controllable cancellation performance, litigation costs above a historicalbenchmark and other costs that are not included in the block hour rates (or covered by adjustments to them) or are not reasonableand customary in the industry.

            In 2005, the fully reconciledcosts and costs within the margin band under the Continental CPA represented approximately 64% and 36% of total operating costs,respectively.

            Certain costs that wereunreconciled under the Continental CPA prior to 2005 now require Airlines to make a reconciliation payment to Continental if thedifferences cause the prevailing margin to be greater than 10.0%.  However, if the differences cause the prevailing margin tobe less than 8.5%, they remain unreconciled.  These costs are:

      

• 

wages and salaries;and                                                                                                   

• 

benefits not included in the table above.

            ***2006 RateSetting.***  Since 2005, Continental has proposed a number of amendments to the Continental CPA, which would have, amongother things, significantly reduced the amount Continental pays us for the regional airline service we provide and would havedramatically reduced our rights to the aircraft.  We negotiated with Continental to try to reach an agreeablecompromise.  Our board of directors, which typically meets five times a year, held 12 meetings in 2005, six of which werespecial meetings to consider Continental’s proposals and to formulate counterproposals.  Based on their evaluations,including the analysis of independent financial advisers, the board determined that the rates proposed by Continental would not bein the best interest of our stockholders and declined Continental’s proposal.  We made counterproposals that we believedaddressed Continental’s concerns, but were fair to our stockholders as well.  However, to date, we have not been able toreach a long-term agreement.  In December 2005, Continental announced that it believed the rates under the Continental CPA hadbecome too expensive and that it would terminate 25% of our flying under that agreement.  Although the Continental CPAcontemplates a November 1 deadline for setting the following year’s rates, the 2006 scheduled block hour rates were finalizedin April 2007 consistent with the methodology set forth in the agreements.

***            2007 RateSetting.***  In 2006, Continental challenged our interpretation of the Continental CPA and sought to impose ratesfor 2007 that we believed were inconsistent with the methodology established in the agreement.  We were unable to agree on the2007 rates and, in accordance with the terms of the Continental CPA, we submitted our dispute to binding arbitration.  Thearbitration panel determined that the annual 2007 budgeted rates originally presented by Airlines should be reduced in theaggregate by $14.2 million (or less than 1.0% of our total Continental CPA operating revenue), which included the 10% targetoperating margin.  Although we believe our original rates were appropriate, we were pleased with the panel’sdecision.  The 2007 scheduled block hour rates were finalized in October 2007, and we recorded ourpassenger revenue under the Continental CPA using the block hour rates determined by the panel for all of 2007.

Table of Contents

***            2008 RateSetting. *** We began 2008 rate discussions with Continental last September.  The Continental CPAcontemplates a November 1 deadline for setting the rates; however, the parties agreed to extend the deadline.  Although webelieved that we were nearing completion of the rate setting process, Continental advised us on February 28, that if we were unableto reach agreement by March 14, they might initiate arbitration proceedings again in accordance with the provisions of theContinental CPA.  We can also initiate arbitration if we think it necessary.  As of the date of this filing neither partyhas triggered arbitration and we remain hopeful that it will not be necessary.  Continental also advised us that it believesthat it overpaid Airlines by $6 million in 2007 and $2.1 million in 2006.  We believe that if we were required to arbitratethese matters we would prevail.  However, we may not be successful in resolving these disputes without reducing our 2008income.  We cannot currently predict the timing or the resolution of these matters.  Although we are hopeful that we canagree on rates and resolve Continental’s other claims without arbitration, there can be no assurance that we will besuccessful in doing so.   

            If we are required to arbitrate,each party will select one arbitrator, and those two arbitrators will select the third arbitrator to complete the panel.  TheContinental CPA sets forth procedures and a schedule that will likely result in a hearing and the issuance of a final decision bylate in the second or early in the third quarter of 2008.  ExpressJet will continue to be paid under the 2007 block hour ratesduring the arbitration process and expects the decision setting the revised rates to be retroactive to January 1, 2008.

**Note 3 *–* Segment Reporting**

           Statementof Financial Accounting Standard No. 131, “Disclosures about Segments of an Enterprise and Related Information,”(“Statement 131”) requires disclosures related to components of a company for which separate financial information isavailable if that segregated information is evaluated regularly by the company’s chief operating decision makers in decidingthe allocation of resources and assessing performance.  ExpressJet has three major reportable segments: Contract Flying,Branded Flying and Aviation Services.

            Contract Flying includes ourCorporate Aviation (charter) division and our capacity purchase agreements with Continental and Delta.  Under Contract Flying,revenues are contractually determined with Continental, Delta and other parties, which helps insulate some of the underlyingoperating expenses, such as fuel.  Additionally, under these arrangements, we do not have the obligation to market, distributeor sell seats directly to passengers on our aircraft.

            Branded Flying consists ofoperating under our own brand and under the Delta Prorate.  Revenues for this flying are derived from our scheduled airservices sold directly to passengers.  We are responsible for local market pricing, scheduling and revenue management, and theoperation and maintenance of the aircraft.  Under the Delta Prorate, we earn a prorated portion of the fare plus an incentivefor passengers connecting onto Delta’s network. 

            Aviation Services include ourground-handling services pursuant to our contracts with Continental and other airlines at airport locations across the UnitedStates, as well as Services, our wholly owned repair and overhaul subsidiary.  During the first half of 2007, we rebrandedAmerican Composites, InTech and Saltillo under the name ExpressJet Services.  These entities provide composite, sheet metal,paint, interior (including seat refurbishment) and thrust reverser repairs throughout our five facilities in the United States andMexico.  Revenues are earned and recognized when we complete various jobs and bill our customers for the products and/orservices delivered.

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            A significant portion of ouroperating expenses and infrastructure is integrated across segments (e.g., for maintenance, non-airport facility rentals, outsideservices, general and administrative expenses) in order to support our entire fleet of 274 aircraft; therefore, we do not allocatethese costs to the individual segments identified above, but evaluate them for our consolidated operation.  Additionally, dueto the transition of our 69 aircraft released from the Continental CPA in 2007, we incurred approximately $13.5 million intransition expenses associated with painting, maintenance modifications and training to ready our operation for flying outside ofthe Continental CPA.  These costs were not included in our measurement of segment profitability as they are expected to benonrecurring.  We believe that the presentation of our consolidated shared costs and transition costs is consistent with themanner in which these expenses are reviewed by our chief operating decision makers.  Consequently, the table below presentsour operating revenues, including inter-segment revenues, and segment profits/(loss) generated per reportable segment for the yearended December 31, 2007.  We also included our reconciliation of the consolidated operating revenue to consolidated net lossbefore taxes and of our total assets at December 31, 2007.

**Contract Flying**

**Branded Flying**

**Aviation Services**

**Eliminations**

**Consolidated**

**                                                                         **

** **

**Year ended December 31, 2007:**

 

 

 

 

 

Revenue from customers

$

1,471.5

 

$

180.5

 

$

41.0

$

(7.5

)

$

1,685.5

Direct segment expenses

1,128.5

295.1

25.4

(7.5

)

1,441.5

    Segment profit / (loss)

$

343.0

$

(114.6

)

$

15.6

$

—

$

244.0

Shared expenses, including transition costs (1)

(350.9

)

Interest expense

(8.5

)

Interest Income

17.1

Other

 

(8.6

)

Consolidated loss before income taxes

 

$

(106.9

)

    
****
**Assets at December 31, 2007**

Segment assets

$

179.3

$

36.5

$

15.5

$

—

$

231.3

Other shared assets (2)

366.3

    Total consolidated assets

$

597.6

(1) Some of the major components of shared expenses aremaintenance labor – $76.9 million; general and administrative labor and related expenses – $95.8 million; other generaland administrative expenses – $105.6 million; outside services – $44.5 million; and non-airport rentals – $14.6million.  Transition costs incurred were approximately $13.5 million.

(2) Other shared assets include assets that are used acrosssegments.

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**Note 4 –– Investments in Other Entities**

****

            Investments in unconsolidatedcompanies are accounted for by the equity method of accounting when we have significant influence over the operation of thecompanies as prescribed by Accounting Principles Board Opinion No. 18 – “The Equity Method of Accounting forInvestments in Common Stock” (“ABP 18”).  The following table details our current non-controlling intereststhat are accounted for under the equity method of accounting:

**Carrying Amount of Investment at December 31, (in millions)**

**Company**

**2007**

**2006**

    

 

Wing Holdings, LLC

$

6.5

$

14.8

Flight Services and Systems, Inc.

3.3

3.2

            We purchased a 49% interest inWing Holdings, LLC (“Wing”) for $16.0 million in June 2005.  The carrying amount of our investment exceeded theamount of the company’s underlying equity by approximately $8.5 million at the time of our investment.  We evaluated thenet book value of the company’s fixed assets as of June 30, 2005 and identified approximately a $1.9 million differencebetween net book value and fair value.  The majority of the difference is being amortized over the remaining average life ofthe assets identified.  As of December 31, 2007, the balance of the fair value difference, net of amortization, wasapproximately $0.9 million.  The remaining $6.6 million of our difference in the underlying investment is considered goodwilland thus is not amortized. We review our investments in unconsolidated affiliates for impairment whenever events or changes inbusiness circumstances indicate that the carrying amount of the investments may not be fully recoverable. Evidence of a loss invalue that is other than temporary might include the length of time and extent to which the fair value of the investment has beenless than the carrying amount of the equity investment, the near and longer-term operating and financial prospects of the entityand our longer-term intent of retaining the investment in the entity. Management’s assessment as to whether any decline invalue is other than temporary is based on our ability and intent to hold the investment and whether evidence indicating thecarrying value of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary.  If thefair value of the investment is determined to be less than the carrying value and the decline in value is considered to be otherthan temporary, an appropriate write-down is recorded based on the excess of the carrying value over the best estimate of fairvalue of the investment.  During fourth quarter 2007, we evaluated and determined that the carrying value of our investment inWing was other-than-temporarily impaired due to continuing net losses through 2007 and the projections of growth were no longer asaggressive as anticipated when we purchased this entity.  Therefore, we recognized an impairment charge of $7.0 millioncomprised primarily of the inherent goodwill.  These impairment charges were recognized as a decrease to our investmentbalance and corresponding equity loss. 

            In January 2006, we purchased a44% interest in Flight Services and Systems, Inc. (“FSS”) for $3 million.  At the same time, we loaned the company$1 million which was originally classified in Other Assets, net, on the consolidated balance sheet.  The note was due andpayable in full on September 30, 2007, and provided that interest was due and payable quarterly on the 15th day following the closeof each calendar quarter.  The note provided that if International Total Services, Inc.(“ITS”) (also owned by the non-ExpressJet owners of FSS) emerged from bankruptcy and FSS could utilize ITS’sfederal income tax attributes through a transaction or series of transactions, then any unpaid balance of the note would be deemedpaid in full as a contribution by us to the capital of FSS.  The loan interest rate was equal to the lesser of 7% perannum or the three-month LIBOR plus 150 basis points.  We have not received any additional interest payments since the onemade on April 15, 2007, despite the fact that FSS did not satisfy all of the requirements under the note to convert the unpaidbalance to equity.  We have accrued and reserved fully the interest payments that were due.  Additionally, in accordancewith our rights under the note, we issued a default notice to FSS seeking payment of the past due interest plus the entireprincipal amount of the note.  FSS failed to make the payment of principal and interest in accordance with the terms of thedefault notice and we filed suit to collect the outstanding interest and principal due under the note.  As of December 31,2007, we have verbally agreed on a resolution with FSS and the lawsuit is stayed pending execution of the final documents.  Weanticipate a successful outcome and believe the receivable is realizable.

Table of Contents

            Our proportionate shares of theresults of operations from these entities are included in the line “Equity investment income (loss), net” on ourconsolidated statements of operations. 

****

**Note 5 –– Details of Certain Accounts**

Accrued other liabilities consist of the following (in thousands):

**As of December 31,**

**2007**

**2006**

**                                              **
****
**  **
****
Flight operation related expenses

$

10,396

$

6,965

Marketing

10,000

—

Interest

2,530

2,586

Other

6,707

6,978

$

29,633

$

16,529

Other long-term liabilities consist of the following (in thousands):

**As of December 31,**

**2007**

**2006**

**                                            **
********
Spare parts credit

$

2,852

  

$

3,116

Flight training credits

4,946

5,354

Other

1,702

891

$

9,500

$

9,361

**Note 6 –– Leases**

           We lease orsublease all 274 of our aircraft under operating leases with lease terms ranging from 16 to 16.5 years from Continental. Oursublease agreements with Continental for the 205 aircraft remaining under the Continental CPA have substantially the same terms asthe lease agreements between Continental and the third-party lessors, and expire between 2013 and 2022.  For the 205 aircraftoperating under the Continental CPA, the table below reflects aircraft operating lease obligations beyond 2010; however, we cannotanticipate Continental’s election to extend the capacity purchase agreement nor our intent to retain the aircraft, as we havethe first right of refusal beyond that time.  The agreements relating to the 69 aircraft removed from the Continental CPA havea provision for the interest rate implicit in calculating the scheduled lease payments we make to Continental to increase by 200basis points.  This increase is included in the tables below.  Rental payments for each aircraft are fixed upon leaseexecution with no escalation clauses.  We also lease or sublease, under various operating leases, ground equipment andsubstantially all of our ground facilities, including facilities at public airports from Continental or the municipalities oragencies owning and controlling such airports.  Though the duration and terms of these leases vary greatly, we expect, in mostcases, leases to be renewed or replaced by new leases as required in the normal course of business.  Our leases do not includeresidual value guarantees.

Table of Contents

            At December 31, 2007, thescheduled future minimum lease payments under capital leases due to third-party lessors and the scheduled future minimum leasepayments under operating leases that have initial or remaining non-cancelable lease terms in excess of one year are as follows (inmillions):

**Operating Leases**
****
**Capital Leases**

**205 Aircraft**

**69 Aircraft**

**Non- Aircraft**

**Totals**

**                                         **
********************
Year ending December 31, 2008

$

0.2

 

$

243.2

 

$

104.8

$

28.0

$

376.2

2009

—

243.2

104.8

28.5

376.5

2010

—

243.2

104.8

28.8

376.8

2011

—

243.2

104.8

28.9

376.9

2012

—

243.2

104.8

28.2

376.2

Later years

—

1,144.9

830.8

61.7

2,037.4

Total minimum lease payments

$

0.2

$

2,360.9

 

$

1,354.8

 

$

204.1

 

$

3,920.0

Less:  amount representing interest

0.0

 

Present value of capital leases

0.2

Less:  current maturities of capital   leases

0.2

Long-term capital leases

$

0.0

            Amortization of capital leases isincluded with depreciation expense as disclosed in the financial statements.

            Total rent expense wasapproximately $400.4 million, $377.4 million and $348.3 million for the years ended December 31, 2007, 2006 and 2005, respectively,which includes non-aircraft rent expense of approximately $56.2 million, $45.0 million and $39.3 million.   Undersubleases or leases within the Continental CPA, total rent expense was $277.2 million, $349.5 million and $323.3 million in 2007,2006 and 2005, respectively.  Under subleases with Continental, total rental expense was $326.6 million, $315.1 million and$290.4 million for 2007, 2006 and 2005, respectively. 

            If we defaulted on our paymentobligations under our aircraft and facility leases or subleases with Continental, Continental would be entitled to reduce futurepayments to us under the Continental CPA by the amount of the defaulted payment. 

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**Note 7 –– Long-term Debt**

            As of December 31, 2007,long-term debt, including current maturities, totaled $147.5 million, which consisted of the 4.25% senior convertible notes and thesecured debt owed to EDC. 

            In July 2003, we completed anoffering of $137.2 million aggregate principal amount of 4.25% convertible notes due 2023 with interest payablesemi-annually.  Each holder has the right to require that we repurchase their notes on August 1, 2008, 2013 and 2018(“Repurchase Dates”) at a repurchase price equal to 100% of the principal amount of the notes to be repurchased plusaccrued and unpaid interest, if any.  As one of the Repurchase Dates is within a year of December 31, 2007, we havereclassified these notes, with outstanding principal amounts of $134.7 million, net of our 2007 repurchases under our securitiesrepurchase program as described below, from long-term debt to current liabilities.  We are evaluating our options to satisfythese notes should the holders require us to repurchase the notes in 2008, including the possibility of a secured financingtransaction to raise the cash necessary to purchase the notes for cash.  At our option, we may pay the repurchase price incash, shares of our common stock, or any combination thereof; however, we cannot provide assurance that sufficient financing can beobtained to satisfy the notes in cash. 

            The notes are our generalunsubordinated, unsecured obligations and are jointly and severally guaranteed on an unconditional basis by Airlines.  Exceptas otherwise specified in the indenture pursuant to which the notes were issued, there are no restrictions on Airlines’ability to transfer funds to Holdings in the form of cash dividends, loans or advances.  General provisions of applicablestate law, however, may limit the ability of any subsidiary to pay dividends or make distributions to its parent in certaincircumstances. 

            The notes are convertible intoshares of our common stock at a conversion rate of 54.9451 shares per $1,000 in principal amount at maturity of the notes. This conversion rate is subject to adjustment in certain circumstances.  Holders of the notes may convert all or a portion oftheir notes into shares of our common stock under the following circumstances: (i) at any time during or after any fiscal quartercommencing after September 30, 2003 if the closing sale price of our common stock for at least 20 trading days in a period of 30consecutive trading days ending on the last trading day of the fiscal quarter prior to such quarter is greater than 120% of theconversion price per share of common stock on such last day; (ii) subject to certain exceptions, during the five business dayperiod after any five consecutive trading day period in which the trading price per $1,000 principal amount of the notes for eachof the five trading days was less than 98% of the product of the closing sales price of our common stock and the number of sharesissuable upon conversion of $1,000 principal amount of the notes; (iii) if the notes have been called for redemption; or (iv) uponthe occurrence of specified corporate transactions.  We have registered sufficient shares of our common stock to be issuedupon conversion of these notes.  Additionally, we have the right to redeem the notes for cash, as a whole at any time or fromtime to time in part, beginning on August 4, 2008, for a price equal to 100% of the principal amount plus accrued and unpaidinterest, if any.  If we elect to use shares of common stock to repurchase any notes, the number of shares will be equal tothe repurchase price divided by 97.5% of the average closing sales price of our common stock for the five consecutive trading daysending on the third business day prior to the applicable Repurchase Date (adjusted to take into account the occurrence of certainevents that would require adjustment of the conversion rate).  If the market value of our common stock deterioratedsignificantly at the time the convertible notes could be put to us, we might not have sufficient shares to fully settle the notesin stock and therefore, would settle the notes in a combination of stock and cash, which could require additionalfinancing.

            As of December 31, 2007 andDecember 31, 2006, we estimated the fair value of our $134.7 million and $137.2 million (carrying value) fixed-rate debt to be$130.7 million and $127.9 million, respectively, based upon quoted market prices.  In addition, we made principal and requiredinterest payments in 2007 in the amount of 8.4 million on our 4.25% senior convertible notes due 2023, of which 2.5 million relatedto principal.

Table of Contents

            EDC loaned us $10.7 million inMay 2003 and $6.6 million in September 2003.  The loan is secured by certain of our flight simulators, flight data softwareand other equipment related to the simulators.  We used all of the proceeds from the loans to reduce the principal under ournote payable to Continental.  The amount due to EDC accrues interest at the six-month LIBOR plus 1.75% per annum.  Theterm of each advance to us is 96 months.  The loan agreement has customary representations, warranties and covenants. Additionally, Continental is the guarantor of this loan, and a default under the guarantee would cause an acceleration of theloan.

            The amount of all scheduled debtmaturities, due over the next five years and thereafter is as follows (in millions):

**Year ending December31,                 **

**                 **

    2008

$

138.2

    2009

$

3.5

    2010

$

3.5

    2011

$

2.4

    2012

$

—

            The table above assumes thesenior convertible notes will be due on August 1, 2008, the earliest date that the holders of the notes may require us torepurchase the notes.

            Other than the debt obligationsdescribed above, we do not have any other source of long-term borrowings or available lines of credit.  There is no covenantunder any of our current long-term debt agreements that restricts our ability to undertake additional debt or equityfinancing.

            The following condensedconsolidating balance sheets, results of operations and cash flows present separately the financial position of the parent issuer,Holdings, the subsidiary guarantor, Airlines, and all other non-guarantor subsidiaries of Holdings on a combined basis.

 

 

 

**Condensed Consolidating Balance Sheet December 31, 2007 (In thousands)**

 

 

 

**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**

                                                         

 

 

 

 

Current assets

 

$

—

$

296,348

$

6,036

$

—

$

302,384

Property and equipment, net

 

112

248,720

14,866

—

263,698

Investments in other entities

 

3,254

—

6,459

—

9,713

Other assets

 

15,760

5,907

146

 

—

21,813

Total assets

$

19,126

$

550,975

$

27,507

$

—

$

597,608

Current liabilities

137,122

158,557

1,005

—

296,684

Intercompany payables (receivables)

(332,112

)

326,233

5,879

—

—

Long-term debt

—

9,308

14

—

9,322

Other liabilities

(5,838

)

66,992

(1,992

)

—

59,162

Stockholders’ equity

219,954

(10,115

)

22,601

—

232,440

Total liabilities and stockholders’ equity

$

19,126

$

550,975

$

27,507

$

—

$

597,608

Table of Contents

 

 

 

**Condensed Consolidating Balance Sheet December 31, 2006 (In thousands)**

 

 

 

**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**

                                                          

 

 

 

 

Current assets

 

$

37

$

341,990

$

6,902

$

(135

)

$

348,794

Property and equipment, net

 

—

229,377

15,706

—

245,083

Investments in other entities

 

3,194

—

14,823

—

18,017

Other assets

 

22,737

7,285

473

 

(5,360

)

25,135

Total assets

$

25,968

$

578,652

$

37,904

$

(5,495

)

$

637,029

Current liabilities

9,418

125,699

110

(135

)

135,092

Intercompany payables (receivables)

(336,128

)

330,838

5,290

—

—

Long-term debt

137,200

12,981

51

—

150,232

Other liabilities

—

52,412

339

(5,360

)

47,391

Stockholders’ equity

215,478

56,722

32,114

—

304,314

Total liabilities and stockholders’ equity

$

25,968

$

578,652

$

37,904

$

(5,495

)

$

637,029

 

 

 

**Condensed Consolidating Results of Operations Year Ended December 31, 2007 (In thousands)**

 

 

 

**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**

                                                          

 

 

 

 

Operating revenue

 

$

—

$

1,676,905

$

16,164

$

(7,524

)

$

1,685,545

Operating expenses

 

1,121

1,777,668

21,192

(7,565

)

1,792,416

 

Operating income / (loss)

 

(1,121

)

(100,763

)

(5,028

)

 

41

(106,871

)

Interest expense

(7,358

)

(18,944

)

(2

)

17,808

(8,496)

Interest income

17,934

15,659

—

(17,849

)

15,744

Capitalized interest

—

1,330

—

—

1,330

Equity investment income / (loss)

61

—

(8,365

)

—

(8,304

)

Other, net

83

(146

)

(212

)

—

(275

)

Income / (loss) before income taxes

9,599

(102,864

)

(13,607

)

(106,872

)

Income tax benefit / (expense)

(3,352

)

35,887

4,089

—

36,624

Net income / (loss)

$

6,247

$

(66,977

)

$

(9,518

)

$

—

$

(70,248

)

Table of Contents

 

 

 

**Condensed Consolidating Results of Operations Year Ended December 31, 2006 (In thousands)**

 

 

 

**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**

                                                          

 

 

 

 

Operating revenue

 

$

—

$

1,676,846

$

9,542

$

(4,232

)

$

1,682,156

Operating expenses

 

1,985

1,532,360

10,972

(4,232

)

1,541,085

 

Operating income / (loss)

 

(1,985

)

144,486

(1,430

)

 

—

141,071

Interest expense

(5,913

)

(19,225

)

(5

)

17,808

(7,335

)

Interest income

18,029

14,444

—

(17,808

)

14,665

Capitalized interest

—

294

—

—

294

Equity investment income / (loss)

194

—

(2,230

)

—

(2,036

)

Other, net

—

153

(356

)

—

(203

)

Income / (loss) before income taxes

10,325

140,152

(4,021

)

—

146,456

Income tax benefit / (expense)

(3,675

)

(50,764

)

548

—

(53,891

)

Net income / (loss)

$

6,650

$

89,388

$

(3,473

)

$

—

$

92,565

 

 

 

**Condensed Consolidating Results of Operations Year Ended December 31, 2005 (In thousands)**

 

 

 

**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**

                                                            

 

 

 

 

Operating revenue

 

$

—

$

1,562,746

$

455

$

(383

)

$

1,562,818

Operating expenses

 

2,255

1,403,700

703

(383

)

1,406,275

 

Operating income / (loss)

 

(2,255

)

159,046

(248

)

—

156,543

Interest expense

(6,033

)

(22,533

)

13

17,808

(10,745

)

Interest income

18,495

7,608

—

(17,808

)

8,295

Capitalized interest

—

493

13

—

506

Equity investment income / (loss)

—

—

(606

)

—

(606

)

Other, net

—

241

—

—

241

Income  / (loss) before income taxes

10,207

144,855

(828

)

—

154,234

Income tax benefit / (expense)

(3,572

)

(52,853

)

184

—

(56,241

)

Net income / (loss)

$

6,635

$

92,002

$

(644

)

$

—

$

97,993

Table of Contents

 

 

 

**Condensed Consolidating Cash Flows Year Ended December 31, 2007 (In thousands)**

                                             

 

 

**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**

 

 

 

 

  Operating activities

 

$

—

$

(38,912

)

$

(1,018

)

$

—

$

(39,930

)

  Investing activities

 

—

(54,275

)

(29

)

1,021

(53,283

)

  Financing activities

 

—

(9,126

)

986

(1,021

)

(9,161

)

 

 

Net increase / (decrease) in cash

 

—

(102,313

)

(61

)

—

(102,374

)

Cash at the beginning of the   period

 

—

291,148

485

—

291,633

 

Cash at the end of the period

 

$

—

$

188,835

$

424

$

—

$

189,259

**Condensed Consolidating Cash Flows Year Ended December 31, 2006 (In thousands)**

                                                     

**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**

  Operating activities

 

$

—

$

117,258

$

(232

)

$

1,686

$

118,712

  Investing activities

 

(4,500

)

(24,355

)

(4,679

)

(2,034

)

(35,568

)

  Financing activities

 

(4,992

)

(19,424

)

5,272

348

(18,796

)

 

 

Net increase / (decrease) in cash

 

(9,492

)

73,479

361

—

64,348

Cash at the beginning of the period

 

9,492

217,669

124

—

227,285

 

Cash at the end of the period

 

$

—

$

291,148

$

485

$

—

$

291,633

 

 

 

**Condensed Consolidating Cash Flows Year Ended December 31, 2005 (In thousands)**

                                                   

 

 

**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**

 

 

 

 

  Operating activities

 

$

—

$

112,395

$

(2,442

)

$

20,637

$

130,590

  Investing activities

 

—

9,276

(27,030

)

(3,000

)

(20,754

)

  Financing activities

 

(11,999

)

(72,699

)

29,595

(17,637

)

(72,740

)

 

 

Net increase / (decrease) in cash

 

(11,999

)

48,972

123

—

37,096

Cash at the beginning of the period

 

21,491

168,698

—

—

190,189

 

Cash at the end of the period

 

$

9,492

$

217,670

$

123

$

—

$

227,285

Table of Contents

**Note 8 –– Income Taxes**

            Income tax benefit / (expense)for the year ended December 2007, 2006 and 2005 consisted of the following (in millions):

**2007**

**2006**

**2005**

**                                                        **

**  **
************
Federal

   

   

    Current

$

33.0

$

(50.1

)

$

(51.7

)

    Deferred

(0.8

)

(2.2

)

(1.5

)

State:

    Current

0.4

0.2

(2.5

)

    Deferred

4.0

(1.8

)

(0.5

)

Income Tax Benefit / (Expense)

$

36.6

$

(53.9

)

$

(56.2

)

            The reconciliations of income taxcomputed at the United States federal statutory tax rates to income tax expense for the years ended December 31, 2007, 2006 and2005 are as follows:

**Amount**

**Percentage**
********
**2007**

**2006**

**2005**

**     **

**2007**

**2006**

**2005**

**                                                            **
************************
(in millions)

Income tax benefit / (expense) at United States statutory rates

 

$

37.4

$

(51.3

)

$

(53.9

)

35.0

%

35.0

%

35.0

%

State income tax benefit / (expense) (net of federal benefit)

2.0

(1.2

)

(2.3

)

1.9

0.8

1.5

Meals and entertainment disallowance

(1.9

)

(1.6

)

(1.7

)

(1.8

)

1.1

1.1

Other

(0.9

)

0.2

1.7

(0.9

)

(0.1

)

(1.1

)

Income tax benefit / (expense), net

$

36.6

$

(53.9

)

$

(56.2

)

34.2

%

36.8

%

36.5

%

Table of Contents

            Deferred income taxes reflect thenet tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposesand the related amounts used for income tax purposes.  Significant components of our deferred tax liabilities and assets as ofDecember 31, 2007 and 2006 are as follows (in millions):

**2007**

**2006**

**                                                                                         **
********
Deferred Tax Liabilities:

 

 

 

  Fixed assets

$

46.9

$

46.1

  Other

2.7

1.8

Gross deferred tax liabilities

$

49.6

$

47.9

Deferred Tax Assets:

  International loss carryforwards

$

1.2

$

—

  Federal loss carryforwards

4.6

—

  Federal minimum tax credit carryforward

14.0

—

  State loss carryforwards

10.9

5.3

  Intangible assets

267.0

292.0

  Other

15.3

9.6

Gross deferred tax assets

$

313.0

$

306.9

Valuation allowance / net tax agreement obligation   to Continental

313.1

311.8

Net deferred tax liabilities

$

(49.7

)

$

(52.8

)

           As ofDecember 31, 2007, we had an income tax receivable for $37.1 million.  This receivable primarily represents income tax refundsfrom prior years resulting from the carryback and application of 2007 operating losses against past years’ income.  Weanticipate receiving this amount during 2008. 

           All otherpotential income tax benefits from our 2007 operating losses are recorded as deferred tax assets as our ability to receiveadditional income tax benefits is dependent on our ability to generate taxable income in the future.  The amount of thesedeferred tax assets as of December 31, 2007 was $4.6 million of federal operating loss carryforwards,$14.0 federal minimum tax credit carryforwards, $1.2 million of international loss carryforwards and anadditional $10.9 million of state loss carryforwards.  As of December 31, 2006, we had $5.3 million of state losscarryforwards.  See the table below for expiration dates of our net operating loss carryforwards (in millions):

**December 31, 2007**

**Statutory Carryforward Period**

**Expiration Year(s)**

**                                                        **

**  **
************
Net Operating Carryforwards

   

   

    Federal Loss

$

4.6

20

2027

    Federal Credit

$

14.0

No expiration

N/A

    State Loss

$

10.9

5 to 20

2009 to 2027

    International Loss

$

1.2

10

2016 to 2017

Table of Contents

            In October 2006, Continentalentered into a final settlement agreement with the IRS that included periods during which we were included in its consolidatedfederal income tax return.  Our taxable income was not adjusted, but the amount of net operating losses allocated to us wasincreased by approximately $31.2 million.  In accordance with our tax agreement with Continental, we paid Continentalapproximately $10.9 million for the increase of our federal net operating loss carryforwards.  In addition, we adjusted ourtax accounts for the increase in our federal net operating loss which was fully utilized in our 2005 tax year.

            In conjunction with our initialpublic offering in April 2002, the tax basis of our tangible and intangible assets was adjusted to fair value.  Thisadjustment to tax basis should result in additional tax deductions being available to us through 2017.  In accordance with ourtax agreement with Continental, to the extent we generate taxable income sufficient to realize the additional tax deductions, weare required to pay Continental a percentage of the amount of tax savings actually realized, excluding the effect of any losscarrybacks.  We are required to pay Continental 100% of the first third of the anticipated tax benefit, 90% of the secondthird and 80% of the last third.  However, if the tax benefits are not realized by the end of 2018, we will be obligated topay Continental 100% of any benefit realized after that date.  Since these payments are solely dependent on our ability togenerate sufficient taxable income to realize these deferred tax assets, they are recorded as an obligation to Continental withinthe deferred tax asset accounts, and the portion we may retain in the future is offset by a valuation allowance.  At the timeof the initial public offering, the valuation allowance and the obligation to Continental offset the step-up in basis of assets inour long-term deferred tax asset account.  We made approximately $24.8 million of net payments to Continental under the taxagreement related to the additional tax deductions during 2006.  There were no payments made to Continental under the taxagreement during 2007.

            The tax agreement requiresContinental to reimburse us for any net increase in our cash tax payments resulting from any decreased availability of netoperating loss carryovers related to the basis increase at the time our payment occurs.  The resulting receivable and/orpayable is recorded within the deferred tax asset account since its performance is dependent on our ability to generate taxableincome.

            Our tax agreement increases ourdependence on Continental’s financial condition.  If it is determined that any of the tax benefits related to the basisincrease should not have been available at the time of utilization and, as a result, we are required to pay additional taxes,interest and penalties, then we could be adversely affected if Continental were unable to indemnify us under theagreement.

            Effective January 1, 2007, weadopted the provisions of Financial Accounting Standards Board issued Interpretation No. 48, “Accounting for Uncertainty inIncome Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting foruncertainty in income taxes recognized in financial statements if a position is more likely than not of being sustained by a taxingauthority.  As of December 31, 2007, there were no material unrecognized tax benefits or associated accrued interest andpenalties under FIN 48.  The calendar tax years 2003 through 2006 remain subject to examination by the Internal RevenueService.

**Note 9 –– Preferred, Common and Treasury Stock**

            ***PreferredStock.***  We have 10 million shares of authorized preferred stock, par value $0.1 per share. 

            ***Common Stock.*** We currently have one class of common stock, par value $.01 per share, with 55.1 million shares issued and 52.0 million sharesoutstanding.  Each share of common stock is entitled to one vote.  Common stockholders would participate ratably in anydividends or distributions on the common stock. 

Table of Contents

            ***TreasuryStock.***  In July 2005, our board of directors authorized the expenditure of up to $30 million to repurchase shares ofour common stock.  Purchases have been made from time to time in the open market; the timing of any share repurchases underthe program depends on a variety of factors, including market conditions, and may be suspended or discontinued at any time. Common stock acquired through the program is available for general corporate purposes.  The following table details annualactivity under the share repurchase program.

**Shares Repurchased(in thousands)**

**Average Cost per Share**

**  **
****
**  **
****
2007

2,705

$

2.96

2006

—

$

—

2005

591

$

9.55

            Shares forfeited under our stockbased compensation plans are held as treasury stock, which can be used to issue new restricted stock and to satisfy any exercisesof stock options. 

**Note 10 –– Stock-Based Compensation Plans**

           As ofDecember 31, 2007, we had three stock-based compensation plans: the ExpressJet Holdings, Inc. 2002 and 2007 Stock Incentive Plans(the “Incentive Plans”) and the ExpressJet Holdings, Inc. 2003 Employee Stock Purchase Plan (the“ESPP”).  These Incentive Plans provide that we may grant awards in the form of stock options or restricted stockto our non-employee directors, our employees or employees of our subsidiaries. The 2007 Incentive Plan also provides that we maygrant awards in the form of performance units, stock appreciation rights, or any other right, interest or option related to sharesor other property, including cash. The aggregate number of shares of our common stock that may be issued under the Incentive Plansmay not exceed 3.2 million shares, subject to adjustments as provided in these Incentive Plans.  We have reserved 3.2 millionshares of our common stock for issuance under this plan.  Options granted under these Incentive Plans have been awarded withexercise prices equaling the fair market value of the stock on the date of grant, vest over a four-year period for employees or asix-month period for non-employee directors and expire seven years after the date of grant in the case of employees and ten yearsafter the date of grant in the case of directors.

            Prior to 2006, we accounted forour stock-based compensation arrangements using the intrinsic value method in accordance with Accounting Principles Board OpinionNo. 25 — “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. Under APB 25, if the exercise price of our stock options equaled the fair market value of the underlying stock on the date ofgrant, no compensation expense was recognized.  Since our stock options have all been granted with exercise prices that equalfair market value on the grant date, no compensation expense was recognized under APB 25.  We also recognized compensationexpense for our restricted stock in accordance with APB 25.  The total compensation expense incurred for each restricted stockgrant equaled the product of the number of shares issued and the closing price of our common stock on the issuance date; theexpense was recognized over the vesting period of each grant in accordance with the method specified in Financial AccountingStandards Board Interpretation No 28 — “Accounting for Stock Appreciation Rights and Other Variable Stock Option orAward Plans” (“FIN 28”).  Under APB 25, we did not recognize compensation expense related to theESPP.

            Effective January 1, 2006, weadopted the fair value recognition provisions of Financial Accounting Standards Board Statement No. 123(R), *Share-BasedPayments* (“Statement 123(R)”) using the modified-prospective transition method.  Under that transition method,compensation cost recognized during the twelve months ended December 31, 2007 includes: (a) compensation cost for all share-basedpayments granted prior to, but not vested at January 1, 2006, based on the grant date fair value estimated in accordance with theoriginal provisions of Statement 123, and (b) compensation cost for share-based payments granted subsequent to January 1, 2006,based on the grant date fair value estimated in accordance with the provisions of Statement 123(R).  Results for prior periodshave not been restated, which is consistent with the transition method selected.

Table of Contents

           The fairvalue of Holdings’ options granted during 2007, 2006 and 2005 was estimated at the date of grant using the Black-Scholesoption-pricing model, which requires us to make several assumptions.  The table below summarizes the weighted-average of theseassumptions for the year ended December 31, 2007, 2006 and 2005:

                                             

**2007**

**2006**

**2005**
****
**   **
********
Risk-free interest rate

 

4.7

%

 

4.9

%

3.9

%

Dividend yield

—

—

—

Expected market price volatility of our common stock

49.3

%

50.5

%

55.0

%

Expected life of options (years)

7.0

7.0

4.8

            The risk-free interest rate isbased on the U.S. Treasury yield curve in effect for the expected term of the option at the time of grant.  The dividend yieldon our common stock is assumed to be zero since we do not pay dividends and have no current plans to pay them in the future. The market price volatility of our common stock was based on historical volatility since April 23, 2002, the date of our initialpublic offering.  Our methodology is consistent with prior period volatility assumptions. The expected life of the options isbased upon our anticipated expectations of exercise behavior since no options have been exercised since our initial public offeringto provide relevant historical data.  

            Based upon the assumptions above,the weighted-average fair value of the options granted during 2007, 2006 and 2005 was determined to be $3.48, $3.23 and$5.02.  

**Options                                             **

**Shares (in thousands)**

**Weighted Average Exercise Price**

**Weighted Average Remaining Contractual Term (in years)**

**Aggregate Intrinsic Value (in thousands)**
****
   
****
   
****
   
****
   
****
Outstanding at January 1, 2007

 

2,702

 

$

10.91

 

—

$ 

—

Granted

2,128

6.12

—

—

Exercised

(5

)

5.40

—

—

Forfeited or Expired

(73

)

7.86

—

—

Outstanding at December 31, 2007

4,752

$

8.82

7.70

$

0.00

Exercisable at December 31, 2007

2,036

$

12.39

5.89

$

0.00

            A summary of the status of ourunvested shares of restricted stock as of December 31, 2007, and changes during the 12-months ended December 31, 2007, is presentedbelow:

**UnvestedShares                              **

**Shares (in thousands)**

**Weighted Average Grant Date Fair Value**

**Aggregate Intrinsic Value (in thousands)**
****
   
****
   
****
   

 
****
Unvested at January 1, 2007

237

$

9.86

$

1,923

Granted

508

6.06

Vested

(162

)

8.75

856

Forfeited

(18

)

6.63

    

Unvested at December 31, 2007

565

$

6.86

$

1,402

Table of Contents

           As ofDecember 31, 2007, there was $7.7 million of total unrecognized compensation cost related to unvested share-based compensationarrangements granted under the Plans.  That cost is expected to be recognized over a weighted average period of 2.1years.

            On May 7, 2003, our stockholdersapproved the ESPP, which authorized the sale of up to one million shares of our common stock.  We have reserved one millionshares of our common stock for issuance under the ESPP.  Under the plan, all of our employees are eligible to purchase sharesof our common stock at 85% of the lower of the fair market value on the first or last day of the semi-annual purchase period. Our first purchase period began on July 1, 2003.  Employees may sell shares obtained under the ESPP six months after the endof the plan period in which the shares were purchased.  During 2007 and 2006, 83,492 and 75,081 shares, respectively, of ourcommon stock were issued to our employees at prices ranging from $5.13 to $6.02 in 2007 and prices ranging from $5.87 to $6.88 in2006.  In January 2008, we issued 126,502 shares of our common stock to our employees at $2.11 per share.

            The fair value of the purchaserights under the ESPP was also estimated using the Black-Scholes model with the following assumptions for 2007, 2006 and 2005,respectively: risk-free interest rate of 5.1%, 4.7% and 3.8%, dividend yield of 0%, expected volatility of Holdings’ stock of50.8%, 53.2% and 60.8% and an expected life of six months.  The weighted-average fair value of each purchase right granted in2007, 2006 and 2005 was $1.17, $2.31 and $2.51, respectively.

            Prior to the adoption ofStatement 123(R), we presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flowsin the Statement of Cash Flows.  Statement 123(R) requires the cash flows resulting from tax benefits from tax deductions inexcess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. During the twelve months ended December 31, 2007, no significant stock options were exercised thus having no material effect on thecash flow statement.

            The following table illustratesthe effect on net income and earnings per share assuming the compensation cost for our stock option, restricted stock and employeestock purchase plans were determined using the fair value method, prorated over the vesting periods in accordance with FIN 28, atthe grant dates as required under SFAS 123R for the year ended December 31, 2005:

**(in thousands, except for per share data)**

**2005**

**                                                                                              **

**    **
****
Net Income as Reported

$

97,993

Add:  Total stock-based compensation expense included     in reported net income, net of taxes

973

Deduct:  Total stock-based employee compensation     expense determined under fair value

(4,635

)

Pro forma

$

94,331

Basic Earnings per Share:

  As reported

$

1.81

  Pro forma

$

1.74

Diluted Earnings per Share:

  As reported

$

1.65

  Pro forma

$

1.59

Table of Contents

            On November 4, 2005, our board ofdirectors approved accelerating the vesting of 669,750 unvested options currently held by employees, including executive officers,with exercise prices greater than $11.00 per share and extended the term of 868,500 employee options that had five-year terms toseven years.  These options were and remain out of the money, and the acceleration and extension were effectiveimmediately.  No options held by non-employee directors were subject to acceleration or extension.  The acceleration ofvesting reduces compensation expense upon the adoption of SFAS 123R.

**Note 11 –– Employee Benefit Plans**

            Effective December 31, 2002, theExpressJet Airlines, Inc. 401(k) Savings Plan (“401(k) Plan”) was adopted.  Substantially all our domesticemployees are covered by this plan.  Under the plan, we offered the following benefits:

         

• 

a retirement match up to 5.0% of pay per person (which vests over five years); and

• 

a service-based match (which vested immediately), depending on years of service and the terms of thecollective bargaining agreements, as applicable.

            Effective October 1, 2004 forAirlines’ mechanics, who are represented by the International Brotherhood of Teamsters, and January 1, 2005 for all otheremployees, the 401(k) Plan was amended.  Under the amended plan, we offer the following benefits:

         

• 

a service-based retirement match depending on the years of service from 4.0% up to 6.0% of pay perperson, which vests over five years; and 

• 

a service-based retirement contribution depending on years of service and the terms of thecollective bargaining agreements, as applicable.  Effective January 1, 2007, the retirement contribution vesting terms changedfrom a five-year cliff vesting schedule to a 5-year graded vesting schedule. 

            For the years ended December 31,2007, 2006 and 2005, our total expense for the defined contribution plan was $21.5 million, $19.5 million and $18.2 million,respectively.

            The ExpressJet Airlines, Inc.Profit Sharing Plan (the “Profit Sharing Plan”) was adopted effective January 1, 2002 and amended on February 17,2005.  Under this plan, if Airlines achieves a 10% operating margin, the Profit Sharing Plan will pay out 5% of eligible basepay received during the year to our eligible employees, which excludes employees whose collective bargaining agreements provideotherwise and employees who participate in our management bonus program or any other bonus program designated by the HumanResources Committee of our Board.  Profit sharing expense for the years ended December 31, 2006 and 2005 was $9.2 million and$11.0 million, respectively.  Due to our consolidated net operating loss in 2007, no profit sharing expense wasrecognized.

            We also provide medical bridgecoverage for employees between the ages of 60 to 65, with at least 10 years of service who have retired from the company.  OnDecember 31, 2006 we adopted the recognition and disclosure provisions of Statement 158.  Statement 158 required therecognition of fund status (i.e., the difference between the fair value of plan assets and projected benefit obligations) of itspension plan in the December 31, 2006 statement of financial position, with a corresponding adjustment to accumulated othercomprehensive income, net of tax.  The adjustment to accumulated other comprehensive income at adoption represents the newunrecognized actuarial gain and unrecognized prior service costs.  

            In December 2007 President Bushsigned the Fair Treatment for Experienced Pilots Act (H.R. 4343) into law.  This law increases the mandatory retirement age ofcommercial pilots from 60 to 65.  As a result of this legislation we no longer are required to provide medical bridge coverageto our pilots between the ages of 60 to 65 and therefore, we have recorded a reduction in our liability and correspondingcurtailment gain of $0.8 million.  Our liability for medical bridge coverage for employees at December 31, 2007 and 2006 was$2.5 million and $2.8 million, respectively.

Table of Contents

**Note 12 –– Commitments and Contingencies**

            ***Capacity PurchaseAgreement.***  So long as Continental is our largest customer, if we enter into a capacity purchase or economicallysimilar agreement with another major airline (defined as any airline with annual revenues greater than $500 million, prior toadjustment for inflation since 2000) to provide regional airline service for more than 10 aircraft on terms and conditions thatare, in the aggregate, less favorable to us than those in the Continental CPA, the Continental CPA has a provision that may allowContinental to amend its agreement with us to conform to the terms and conditions of our new agreement.

            In addition, there are provisionsin the Continental CPA that require us to use commercially reasonable efforts to transfer, subject to applicable laws, toContinental or its designee any of our airport take-off or landing slots, route authorities or other regulatory authorizations usedfor Airlines’ scheduled flights under the agreement.

            Continental is generallyresponsible for all capital and start-up costs for airport terminal facilities at its hub airports and at any other facilitieswhere it elects to provide baggage handling services to us.  If Continental elects to provide baggage handling services at anyfacility where we previously provided baggage handling services, Continental will reimburse us for most of the capital and start-upcosts we incurred at that facility.  We are generally responsible for any capital and start-up costs associated with anyairport terminal facilities at other airports where we fly and any non-terminal facilities not regularly used by Continental. If we exit a market at the direction of Continental (and we do not re-enter that market under our own code or that of an airlineother than Continental within six months), Continental will reimburse us for certain losses incurred in connection with the closureof the related facility.  If the Continental CPA is terminated, we may be required to vacate the terminal facilities (or allfacilities if the termination results from our material breach of the agreement) that are subleased to us by Continental, and touse commercially reasonable efforts to assign to Continental or designee any lease in our name for these facilities.

            We began 2008 rate discussionswith Continental last September.  The Continental CPA contemplates a November 1 deadline for setting the rates; however, theparties agreed to extend the deadline.  Although we believed that we were nearing completion of the rate setting process,Continental advised us on February 28, that if we were unable to reach agreement by March 14, they might initiate arbitrationproceedings again in accordance with the provisions of the Continental CPA.  We can also initiate arbitration if we think itnecessary.  As of the date of this filing neither party has triggered arbitration and we remain hopeful that it will not benecessary. Continental also advised us that it believes that it overpaid Airlines by $6 million in 2007 and $2.1 million in2006.  We believe that if we were required to arbitrate these matters we would prevail.  However, we may not besuccessful in resolving these disputes without reducing our 2008 income.  We cannot currently predict the timing or theresolution of these matters.  Although we are hopeful that we can agree on rates and resolve Continental’s other claimswithout arbitration, there can be no assurance that we will be successful in doing so.   

            If we are required to arbitrate,each party will select one arbitrator, and those two arbitrators will select the third arbitrator to complete the panel.  TheContinental CPA sets forth procedures and a schedule that will likely result in a hearing and the issuance of a final decision bylate in the second or early in the third quarter of 2008.  ExpressJet will continue to be paid under the 2007 block hour ratesduring the arbitration process and expects the decision setting the revised rates to be retroactive to January 1, 2008.

            ***PurchaseCommitments.***  As of December 31, 2007, we had options for 75 ERJ-145XR aircraft that may be exercised for other typesof aircraft within the ERJ-145 Family.  Our next option exercise date is August 1, 2008.  If we do not exercise or extendour option as of this date, 25 options will expire.  During 2005, Continental declined the right to include any of theseoption aircraft in the Continental CPA.  We retain the right to exercise them and fly these aircraft for other airlines orunder our own code, subject to some restrictions; however, we will have to finance our acquisition of these aircraftindependently.  Currently, we do not have any firm commitments for aircraft purchases. 

Table of Contents

            Prior to December 2005, under ourpower-by-the-hour agreement with Rolls Royce, we were obligated to acquire up to three spare engines to support our existingaircraft and the remaining eight aircraft on firm order.  In December 2005, we negotiated the sale of eight engines to RollsRoyce and, in exchange, entered into seven new engine leases with a Rolls Royce subsidiary.  The engines leased have greaterinterchangeability than the engines sold. As a result, we have satisfied our engine obligations and are no longer obligated topurchase the three engines.  These leases are classified as operating leases; hence they are not reflected as assets andliabilities on our balance sheet. 

            We also have other contractualobligations of approximately $1.4 billion under our power-by-the-hour contracts with various service providers.  Thepower-by-the-hour contracts dictate the method by which we pay a vendor based on our actual level of operations in exchange forvendor coverage on specific parts and equipment on our aircraft when those parts and equipment are in need of repair orreplacement.  Each contract varies in term and payment procedure.  The estimated amount of our future commitment is basedon assumptions related to future level of operations and forecasted payment rates.  Our level of operations, under theContinental CPA, is determined by Continental, which has exclusive scheduling authority over our fleet under the ContinentalCPA.  The level of operations inherent in the estimate is based on Continental’s most recent operating plan for us,which can be altered at Continental’s sole discretion and included operations for the 69 aircraft exiting the ContinentalCPA.  Forecasted payment rates are based on actual rates as of December 31, 2007 and increased annually according to theparticular inflation indices detailed in each contract.  Contractual rate increases at actual time of occurrence may bedifferent than the forecasted rates.

            See a summary of all ourcontractual obligations in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results ofOperations – Liquidity and Capital Commitments – Contractual Obligations and Commercial Commitments.”

            ***General Guarantees andIndemnifications.***  Pursuant to the Continental CPA, we indemnify Continental for certain of our actions and itindemnifies us for some of its actions. 

            Additionally, we are party tomany contracts, in which it is common for us to agree to indemnify third parties for tort liabilities that arise out of or relateto the subject matter of the contract.  In some cases, this indemnity extends to related liabilities arising from thenegligence of the indemnified parties, but typically excludes liabilities caused by gross negligence or willful misconduct. We cannot estimate the potential amount of future payments under these indemnities until events arise that would trigger aliability under the indemnities.  However, we expect to be covered by insurance for a material portion of these liabilities,subject to deductibles, policy terms and condition.

           ***Employees.*****  As of December 31, 2007, approximately 65% of our employees were covered by collectivebargaining agreements.  Our contracts with our pilots, dispatchers, flight attendants, and mechanics will be amendable inDecember 2010, July 2009, August 2010 and August 2009, respectively.  Our contract with our production workers does not have aterm but salaries are typically renegotiated each year.  Our other employees are not covered by collective bargainingagreements.

***            Credit CardHoldback. *** Under our American Express credit card processing agreement, certain proceeds from advance ticketsales are held back to serve as collateral to cover any possible chargebacks or other disputed charges that may occur. Theseholdbacks, which are included in restricted cash in our consolidated balance sheet, totaled approximately $3.6 million as ofDecember 31, 2007.  The funds held back by American Express are interest-bearing and are subsequently made available to us asair travel is completed.

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            The agreement with our Visa andMasterCard processor also contains financial triggers that require, among other things, that we maintain certain financial ratiosand levels of operating income and unrestricted cash.  The level of credit card holdback is subject to adjustments based onspecific financial triggers as discussed in the preceding sentence.  As of December 31, 2007, we did not meet some of thefinancial ratios set forth in the agreement.  As a result, we were subject at that time to a 50% holdback of our Visa andMasterCard advance ticket sales.   This holdback, which is included in restricted cash in our consolidated balance sheet,totaled approximately $4.9 million as of December 31, 2007.  Upon re-measurement in March 2008, our holdback requirementincreased to 100%.  We anticipate this could increase our holdback amount to approximately $18 million in 2008initially.  The funds held back are interest-bearing and will be made available to us as air travel is completed.

            ***LegalProceedings.***  We are a defendant in various lawsuits and proceedings arising in the ordinary course of ourbusiness.  While the outcome of these lawsuits and proceedings cannot be predicted with certainty and could have a materialadverse effect on our financial position, results of operations or cash flows, we do not believe that the ultimate disposition ofthese proceedings will have a material adverse effect on our financial position, results of operations or cash flows.

**Note 13 – Related Party Transactions**

            The following is a summary ofsignificant related party transactions that occurred during the three years ended December 31, 2007, other than those discussedelsewhere in the Notes to Consolidated Financial Statements.

            Continental controls thescheduling, ticket prices and seat inventories with respect to Airlines’ operations under the Continental CPA.  Inconnection with this activity, Continental performs all sales and ticketing functions for Airlines on Continental ticket stock andreceives cash directly from the sale of Airlines’ tickets.  Continental purchases or provides payment of certain itemson our behalf, including fuel, certain payroll expenditures (including related benefits) and insurance, and charges us amounts asstipulated in the agreement.  In general, transfers or sales of assets between us and Continental are recorded at net bookvalue.

            Continental provides variousservices to us and charges us amounts at rates in accordance with the Continental CPA and other agreements.  The servicesprovided to us by Continental are as follows.

         

• 

Certain customer services such as ground handling.  Charges related to these services wereapproximately $67.6 million, $78.7 million and $75.3 million for the years ended December 31, 2007, 2006 and 2005,respectively.

• 

Centralized services and infrastructure costs, such as technology and some transactionprocessing.  Charges related to these services were approximately $5.1 million, $8.1 million and $8.7 million for the yearsended December 31, 2007, 2006, and 2005, respectively.

            Under our amended master facilityand ground handling agreement with Continental, rent expenses are allocated to us at the airport locations where Airlinesoperates.  Additionally, all terminal facility rents at the hub airports are now borne by Continental and Airlines pays forincremental rent at other Continental–managed locations unless Continental does not operate any aircraft there.  Inthese situations, Airlines is responsible for the rent expense.  At locations Airlines manages, rent is allocated betweenContinental and Airlines based on the number of respective passengers.  At common locations for Branded Flying andContinental, Airlines has agreed to allocate the cost of common items based on monthly departures.

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            Revenue earned from Continental,including both the Continental CPA and our fixed rate ground handling revenue, was $1.4 billion, $1.7 billion and $1.6 billion forthe years ended December 31, 2007, 2006, and 2005, respectively.

            We also have related-partytransactions between us (including our subsidiaries) and our equity investees or Continental.  The following quantifies suchactivities:

        

• 

During 2007 and 2006, InTech, a wholly owned subsidiary of Holdings, reported sales to Continentaltotaling $1.3 million and $1.1 million, respectively.

• 

During 2007 and 2006, Wing Holdings, in which Holdings owns a non-controlling interest, providedapproximately $1.9 million and $0.9 million, respectively, worth of services to Airlines.

• 

During 2007 and 2006, Flight Services & Systems, in which Holdings owns a non-controllinginterest, provided approximately $1.9 million and $1.4 million worth of services to Airlines.

            We had approximately $1.2 millionand $1.0 million of receivables from our employees as of December 31, 2007 and 2006, respectively.  These receivables arerelated to uniforms, flight benefit charges and membership fees that are paid back to us through payroll deductions and do notinclude any of our officers. 

**Note 14 – Subsequent Event**

****

            We have no other materialsubsequent events, other than those disclosed elsewhere in our footnotes above.

**Note 15 – Selected Quarterly Financial Data (Unaudited)**

            Unaudited summarized financialdata by quarter for 2007 and 2006 is as follows (in millions, except per share data):

**March 31,**

**June 30,**

**September 30,**

**December 31,**

**                                                        **
****************
**2007**

Operating revenue

$

412.6

 

$

395.6

 

$

441.3

 

$

436.0

Operating income

14.3

(42.7

)

(36.7

)

(41.8

)

Non-operating income, net

2.1

3.0

1.5

(6.6

)

Net income

10.2

(26.4

)

(22.3

)

(31.7

)

Basic earnings per share(1)

$

0.19

$

(0.49

)

$

(0.41

)

$

(0.60

)

Diluted earnings per share(2)

$

0.18

$

(0.49

)

$

(0.41

)

$

(0.60

)

  

**2006**

Operating revenue

$

406.5

 

$

420.1

 

$

429.2

 

$

426.4

Operating income

37.3

35.6

34.6

33.6

Non-operating expense, net

0.7

1.6

1.8

1.3

Net income

23.8

23.3

22.7

22.8

Basic earnings per share(1)

$

0.44

$

0.43

$

0.42

$

0.42

Diluted earnings per share(2)

$

0.40

$

0.39

$

0.38

$

0.39

(1)  

The sum of the individual quarterly earnings per share does not agree with year-to-date net incomeper share as each quarterly computation is based on the weighted average number of shares outstanding during thatperiod.

(2)  

See detailed reconciliation of the numerator and denominator of Basic EPS to the numerator anddenominator of Diluted EPS at - Note 1 - Summary of Significant Accounting Policies - (q) Earnings / (Loss) per Share."

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**Item 9. Changes in and Disagreement with Accountants on Accounting andFinancial Disclosure**

            There were no changes in ordisagreements on any matters of accounting principles of financial statement disclosure between us and our independentauditors.

**Item 9A. Controls and Procedures**

*           **(a) Evaluationof disclosure controls and procedures*.  Based on their evaluation of our disclosure controls and procedures as of the endof the period covered by this report, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosurecontrols and procedures are effective.

           *(b)Changes in internal control over financial reporting.*  We have not identified any material weaknessin our internal control over financial reporting as of December 31, 2007. 

            *(c)**The Board ofDirectors, acting through its Audit Committee, is responsible for the oversight of our accounting policies, financial reporting andinternal control*.  The Audit Committee is comprised entirely of outside directors who are independent and approvesdecisions regarding the appointment or removal of the Director of Internal Audit.  It meets periodically with management, theindependent auditors and the internal auditors to ensure that they are carrying out their responsibilities.  The AuditCommittee is also responsible for performing an oversight role by reviewing the Company’s financial reports.  Theindependent auditors and the internal auditors have full and unlimited access to the Audit Committee, with or without management,to discuss the adequacy of internal control over financial reporting, and any other matters which they believe should be brought tothe attention of the Audit Committee.

**Item 9B. Other Information**

****

None

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**PART III**

****

**Item 10. Directors, Executive Officers and CorporateGovernance**

            The information required by Item10 is incorporated herein by reference to the information set forth in the definitive proxy statement for our 2008 annualstockholders meeting.

**Item 11. Executive Compensation**

            The information required by Item11 is incorporated herein by reference to the information set forth in the definitive proxy statement for our 2008 annualstockholders meeting.

**Item 12. Security Ownership of Certain Beneficial Owners and Management andRelated Stockholder Matters**

            The information required by Item12 is incorporated herein by reference to the information set forth in the definitive proxy statement for our 2008 annualstockholders meeting.

**Item 13. Certain Relationships and Related Transactions, and DirectorIndependence**

            The information required by Item13 is incorporated herein by reference to the information set forth in the definitive proxy statement for our 2008 annualstockholders meeting.

**Item 14. Principal Accounting Fees and Services**

            The information required by Item14 is incorporated herein by reference to the information set forth in the definitive proxy statement for our 2008 annualstockholders meeting.

**PART IV**

**Item 15. Exhibits, Financial Statement Schedules **

The following financial statements are included in Part II, Item 8. "Financial Statements andSupplementary Data":

(a)

  

(1)

  

Financial Statements

 

• 

Report of Management

• 

Report of Independent Registered Public Accounting Firm

• 

Report of Independent Registered Public Accounting Firm on Internal Control over FinancialReporting

• 

Consolidated Statements of Operations for each of the Three Years in the Period Ended December 31,2007

• 

Consolidated Balance Sheets as of December 31, 2007 and 2006

• 

Consolidated Statements of Cash Flows for each of the Three Years in the Period Ended December 31,2007

• 

Consolidated Statements of Common Stockholders' Equity for each of the Three Years in the PeriodEnded December 31, 2007

• 

Notes to Consolidated Financial Statements

 

(2)

Financial Statement Schedules:

  

• 

Report of Independent Registered Public Accounting Firm

• 

Schedule II - Valuation and Qualifying Accounts

            All other schedules have beenomitted because they are inapplicable, not required or the information is included elsewhere in the consolidated financialstatements or notes thereto.

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**Exhibit Number**

**Description**

                   

  

3.1

 

—

 

Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company'sreport on Form 10-Q for the quarter ended March 31, 2005, File No. 1-31300).

 3.2

 —

 

 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company's report on Form 8-K dated May 24, 2007, FileNo. 1-31300).

 4.1

 —

 

 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement onForm S-1, Reg. No. 333-64808, the “S-1”).

 4.2

 —

 

 Rights Agreement among the Company, Continental Airlines, Inc. ("Continental") and Mellon Investor Services LLC, as Rights Agent,including form of Rights Certificate, dated April 1, 2002 (incorporated by reference to Exhibit 4.2 to the Company's report on Form10-Q for the quarter ended March 31, 2002, File No. 1-31300, the "Q102 10-Q").

 4.2

 (a)

 —

 

 First Amendment to Rights Agreement, dated December 13, 2006 (incorporated by reference to Exhibit 4.2 (a) to the Company’sreport on Form 10-K for the year ended December 31, 2006, File No. 1-31300, the “2006 10-K”).

 4.3

 —

 

 Indenture among the Company, ExpressJet Airlines, Inc., ("Airlines") and Bank One, N.A., dated August 5, 2003, relating to theCompany's 4.25% Convertible Notes due 2023 (incorporated by reference to Exhibit 10.1 to the Company's report on Form 8-K datedSeptember 2, 2003, File No. 1-31300).

 4.3

 (a)

 —

 

 Form of 4.25% Convertible Note due 2023 (included with Exhibit 4.3).

 4.3

 (b)

 —

 

 Form of Notation of Guarantee (included with Exhibit 4.3).

 10.1

 —

 

 Amended and Restated Capacity Purchase Agreement (the "CPA") among the Company, XJT Holdings, Inc. ("XJT"), Airlines andContinental (incorporated by reference to Exhibit 10.1 to the S-1).(1)

 10.1

 (a) 

 —

 

 First Amendment to the CPA dated March 27, 2003 (incorporated by reference to Exhibit 10.1 to the Company's report on Form 10-Qfor the quarter ended March 31, 2003, File No. 1-31300, the "Q103 10-Q").

 10.1

 (b)

 —

 

 Second Amendment to the CPA dated December 9, 2003 (incorporated by reference to Exhibit 10.1(b) to the Company's report on Form10-K for the year ended December 31, 2003, File No. 1-31300, the "2003 10-K").

 10.1

 (c)

 —

 

 Third Amendment to the CPA dated September 28, 2004 (incorporated by reference to Exhibit 10.2 to the Company’s report onForm 10-Q for the quarter ended September 30, 2004, File No. 1-31300).

 10.1

 (d)

 —

 Fourth Amendment to the CPA dated March 11, 2005 (incorporated by reference to Exhibit 10.1(d) to the Company’s Report onForm 10-K for the year ended December 31, 2004, File No. 1-31300, the “2004 10-K”).(1)

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10.1

(e)

—

 

Fifth Amendment to the CPA dated April 14, 2006 (incorporated by reference to Exhibit 10.1 to theCompany’s Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-31300).

 10.2

 —

 

 Master Facility and Ground Handling Agreement (the "Facility Agreement") among the Company, Airlines and Continental dated January1, 2001 (incorporated by reference to Exhibit 10.2 to the S-1).

 10.2

 (a)

 —

 

 First Amendment to the Facility Agreement dated November 1, 2003 (incorporated by reference to Exhibit 10.2(a) to the 200310-K).

 10.2

 (b)

 —

 

 Revised Exhibit D to Master Facility and Ground Handling Agreement dated December 1, 2006 (incorporated by reference to Exhibit10.2(b) to the 2006 10-K).

 10.3

 —

 

 Amended and Restated Administrative Support and Information Services Provisioning Agreement dated March 11, 2005(incorporated by reference to Exhibit 10.1(d) to the 2004 10-K).

 10.4

 —

 

 Initial Public Offering Agreement between the Company and Continental dated April 17, 2002 (incorporated by reference to Exhibit10.4 to the Q102 10-Q).

 10.5

 —

 

 Employee Benefits Separation Agreement (the "Separation Agreement") among the Company, XJT, Airlines and Continental dated April17, 2002 (incorporated by reference to Exhibit 10.6 to the Q102 10-Q).

 10.5

 (a)

 —

 

 First Amendment to the Separation Agreement dated March 27, 2003 (incorporated by reference to Exhibit 10.5 to the Q10310-Q).

 10.5

 (b)

 —

 

 Second Amendment to the Separation Agreement dated December 9, 2003 (incorporated by reference to Exhibit 10.6(b) to the 200310-K).

 10.5

 (c)

 —

 

 Third Amendment to the Separation Agreement dated June 24, 2005 (incorporated by reference to Exhibit 10.1 to the Company’sreport on Form 10-Q for the quarter ended June 30, 2005, File No. 1-31300).

 10.5

 (d)

 —

 

 Fourth Amendment to the Separation Agreement dated June 18, 2007 (incorporated by reference to Exhibit 10.1 to the Company’sreport on Form 10-Q for the quarter ended June 30, 2007, File No. 1-31300).

 10.6

 —

 

 Amended and Restated Tax Agreement among the Company, Airlines and Continental dated April 17, 2002 (incorporated by reference toExhibit 10.6 to the Company’s report on Form 10-Q for the quarter ended June 30, 2002, File No. 1-31300).

 10.7

 —

 

 2002 Stock Incentive Plan (the "2002 SIP") (incorporated by reference to Exhibit 10.8 to the Q102 10-Q). (2)

 10.7

 (a)

 —

 

 Form of Employee Stock Option Agreement pursuant to the 2002 SIP (incorporated by reference to Exhibit 10.8(a) to the S-1).(2)

 10.7

 (b)

 —

 

 Form of Outside Director Stock Option Agreement pursuant to the 2002 SIP (incorporated by reference to Exhibit 10.8(b) to theS-1). (2)

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 10.7

 (c)

 —

 

 Form of Employee Restricted Stock Option Agreement pursuant to the 2002 SIP (incorporated by reference to Exhibit 10.1 to theCompany’s report on Form 10-Q for the quarter ended June 30, 2004, File No. 1-31300, the “Q204 10-Q”).(2)

 10.7

 (d)

 —

 

 Form of Outside Director Restricted Stock Agreement pursuant to the 2002 SIP (incorporated by reference to Exhibit 10.2 to theQ204 10-Q). (2)

 10.8

 —

 

 ExpressJet Holdings, Inc. 2007 Stock Incentive Plan (the "2007 SIP") (incorporated by reference to Exhibit 10.1 to the Company'sreport on Form 8-K dated May 23, 2007, File No. 1-31300). (2)

 10.8

 (a)

 —

 

 Form of Employee Stock Option Agreement pursuant to the 2007 SIP (incorporated by reference to Exhibit 4.4(a) to theCompany’s Registration Statement on Form S-8, Reg. No. 333-143249, the “S-8”). (2)

 10.8

 (b)

—

 Form of Outside Director Stock Option Agreement pursuant to the 2007 SIP (incorporated by reference to Exhibit 4.4(b) to the S-8).(2)

 10.8

 (c)

 —

 Form of Employee Restricted Stock Option Agreement pursuant to the 2007 SIP (incorporated by reference to Exhibit 4.4(c) to theS-8. (2)

 10.8

 (d)

 —

 Form of Outside Director Restricted Stock Agreement pursuant to the 2007 SIP (incorporated by reference to Exhibit 4.4(d) to theS-8). (2)

 10.8

 (e)

 —

 ExpressJet Holdings, Inc. 2007 Long Term Incentive Program adopted under the 2007 SIP. (2) (3)

 10.8

 (f)

 Form of award under the 2007 Long Term Incentive Program. (2) (3)

 10.9

 —

 

 Management Bonus Plan as amended and restated through May 23, 2007 (incorporated by reference to Exhibit 10.2 to the Company'sreport on Form 8-K dated May 23, 2007, File No. 1-31300). (2)

 10.10

 —

 

 Supplemental Retirement Plan as amended and restated effective May 5, 2004 (incorporated by reference to Exhibit 10.3 to the Q20410-Q). (2)

 10.11

 —

 ExpressJet Holdings, Inc. Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s report onForm 8-K dated January 31, 2006, File No. 1-31300). (2)

 10.11

 (a)

 —

 Form of Participation Agreement under the ExpressJet Holdings, Inc. Long Term Incentive Plan (included with Exhibit 10.11).(2)

 10.11

 (b)

 —

 First Amendment to Long Term Incentive Plan dated as of September 12, 2007 (incorporated by reference to Exhibit 10.1 to the Q30710-Q). (2) 

 10.12

 —

 

 Employment Agreement among the Company, Continental and James B. Ream (incorporated by reference to Exhibit 10.9 to the S-1).(2)

 10.12

 (a)

 —

 

 Letter Agreement among the Company, Continental and Mr. Ream dated April 24, 2002 (incorporated by reference to Exhibit 10.9(a) tothe Q102 10-Q). (2)

 10.12

 (b)

 —

 

 Amendment to Mr. Ream's Employment Agreement dated March 14, 2005 (incorporated by reference to Exhibit 10.12(b) to the 200410-K). (2)

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10.13

—

 

Employment Agreement among the Company, Continental and Frederick S. Cromer (incorporated byreference to Exhibit 10.10 to the S-1). (2)

 10.13

 (a)

 —

 

 Letter Agreement among the Company, Continental and Mr. Cromer dated April 24, 2002 (incorporated by reference to Exhibit 10.10(a)to the Q102 10-Q). (2)

 10.13

 (b)

 —

 

 Amendment to Mr. Cromer's Employment Agreement dated March 14, 2005 (incorporated by reference to Exhibit 10.13(b) to the 200410-K). (2)

 10.14

 —

 

 Employment Agreement among the Company, Continental and Charles R. Coble. (2) (3)

 10.14

 (a)

 —

 

 Letter Agreement among the Company, Continental and Mr. Coble dated April 24, 2002. (2) (3)

 10.14

 (b)

 —

 

 Amendment to Mr. Coble's Employment Agreement dated March 14, 2005. (2) (3)

 10.15

 —

 

 Employment Agreement among the Company, Continental and James E Nides. (2) (3)

 10.15

 (a)

 —

 

 Letter Agreement among the Company, Continental and Mr. Nides dated April 24, 2002. (2) (3)

 10.15

 (b)

 —

 

 Amendment to Mr. Nides’s Employment Agreement dated March 14, 2005. (2) (3)

 10.16

 —

 

 Employment Agreement between the Company and Scott R. Peterson as amended and restated through March 14, 2005 (incorporated byreference to Exhibit 10.15 to the 2004 10-K). (2)

 10.17

 —

 Form of Amended and Restated Letter Agreement relating to certain flight benefits between the Company and its non-employeedirectors (incorporated by reference to Exhibit 10.1 to the Company’s report of Form 10-Q for the quarter ended September 30,2004, File No. 1-31300). (2)

 10.18

 —

 Schedule of compensation payable to the Company’s non-employee directors. (2) (3)

 10.19

 —

 Schedule of auction-rate securities held. (3)

 10.20

 —

 Agreement by and among the Company, Hayman Investments, L.L.C., Hayman Advisors, L.P., Hayman Capital Master Fund, L.P. and J.Kyle Bass, dated March 17, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s report on Form 8-K dated March17, 2008, File No. 1-31300).

 10.21

 —

 Consulting Agreement by and among the Company and William F. Loftus dated March 17, 2008 (incorporated by reference to Exhibit10.2 to the Company’s report on Form 8-K dated March 17, 2008, File No. 1-31300).

 21.1

 —

 

 Subsidiaries of the Company. (3)

 23.1

 —

 Consent of Independent Registered Public Accounting Firm. (3)

 24.1

 —

 Powers of Attorney. (3)

 31.1

 —

 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer. (3)

 31.2

 —

 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer. (3)

 32.1

 —

 Section 1350 Certification by Chief Executive Officer. (4)

 32.2

 —

 Section 1350 Certification by Chief Financial Officer. (4)

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(1) 

The SEC has granted confidential treatment for portions of these exhibits.  Omitted materialfor which confidential treatment has been granted has been filed separately with the SEC.

(2) 

Management contract or compensatory plan or arrangement in which a director or executive officerparticipates.

(3) 

Filed herewith.

(4) 

Furnished herewith.

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SIGNATURES

            Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, ExpressJet Holdings, Inc. has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.

 

 

EXPRESSJET HOLDINGS, INC. (Registrant)

 Date:  March 19,2008            

         

 By:

 /s/ Frederick S.Cromer                                         

Frederick S. Cromer Vice President and Chief Financial Officer

            Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and inthe capacities indicated on March 19, 2008.

Signatures                                                    

Capacity

   /s/ JAMES B.REAM                              James B. Ream

      

 President, Chief Executive Officer and Director (Principal Executive Officer)

   /s/ FREDERICK S.CROMER                 Frederick S. Cromer

 Vice President and Chief Financial Officer (Principal Financial Officer)

   /s/ LAMPHUNGNGO-BURNS                 LamPhung Ngo-Burns

 Staff Vice President and Controller (Principal Accounting Officer)

   /s/ SALVATORE J. BADALAMENTI *      Salvatore J. Badalamenti

 Director

   /s/ GEORGE R. BRAVANTE, JR. *         George R. Bravante, Jr.

 Director

   /s/ JANET M.CLARKE*                         Janet M. Clarke

 Director

   /s/ KIM A.FADEL*                                 Kim A. Fadel

 Director

   /s/ JUDITH R.HABERKORN*                  Judith R. Haberkorn

 Director

   /s/ T. PATRICKKELLY*                         T. Patrick Kelly

 Director

   /s/ BONNIE S.REITZ*                            Bonnie S. Reitz

 Director

                                                          

  

* By:

 /s/ SCOTT R.PETERSON                 

Scott R. Peterson Attorney in Fact March 19, 2008

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

            We have audited the consolidatedfinancial statements of ExpressJet Holdings, Inc. (the “Company”) as of December 31, 2007 and 2006, and for each of thethree years in the period ended December 31, 2007, and have issued our report thereon dated March 19, 2008 (included elsewhere inthis Form 10-K).  Our audits also included the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. This schedule is the responsibility of the Company’s management.  Our responsibility is to express an opinion based onour audits.

            In our opinion, the financialstatement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presentsfairly in all material respects the information set forth therein.

                                                                                   

                                                                                                           ERNST & YOUNG LLP

Houston, Texas

March 19, 2008

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**EXPRESSJET HOLDINGS, INC.SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTSFor the Years Ended December 31, 2005, 2006, and 2007(In thousands)**

**Allowance for Doubtful Receivables**

**Allowance for Obsolescence**

**Deferred Tax Asset Valuation Allowance (1)**

                                                                      

Balance, December 31, 2004

$

99

$

8,458

$

362,038

   Additions charged to expense

7

  

1,840

  

—

   Deductions from reserve (2)

(7

)

(1,350

)

(25,266

)

   Other (3)

—

153

(1,966

)

Balance, December 31, 2005

99

9,101

334,806

   Additions charged to expense

24

1,496

—

   Deductions from reserve (2)

—

(837

)

(23,853

)

   Other

—

—

826

Balance, December 31, 2006

123

9,760

311,779

   Additions charged to expense

414

1,675

1,031

   Deductions from reserve (2)

(178

)

(989

)

—

   Other

—

—

243

Balance, December 31, 2007

$

359

$

10,446

$

313,053

 

(1) 

The deferred tax asset valuation allowance includes the net tax agreement obligation toContinental.

(2) 

“Deductions from reserve” related to the allowance for obsolescence consists of entriesmade to remove spare parts with zero net book value from our general ledger.  “Deductions from reserve” related tothe deferred tax asset valuation allowance are related to payments made to Continental under the tax agreement.

(3) 

“Other” related to the deferred tax asset valuation allowance for 2005 is related to theadjustment of the fair value of the tax basis of our tangible and intangible assets as described in Item 8. “FinancialStatements and Supplementary Data – Notes to Consolidated Financial Statements – Note 8.”

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**INDEX TO EXHIBITSOF EXPRESSJET HOLDINGS, INC.**

**Exhibit Number**

**Description**

                   

  

3.1

 

—

 

Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company'sreport on Form 10-Q for the quarter ended March 31, 2005, File No. 1-31300).

 3.2

 —

 

 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company's report on Form 8-K dated May 24, 2007, FileNo. 1-31300).

 4.1

 —

 

 Specimen Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement onForm S-1, Reg. No. 333-64808, the “S-1”).

 4.2

 —

 

 Rights Agreement among the Company, Continental Airlines, Inc. ("Continental") and Mellon Investor Services LLC, as Rights Agent,including form of Rights Certificate, dated April 1, 2002 (incorporated by reference to Exhibit 4.2 to the Company's report on Form10-Q for the quarter ended March 31, 2002, File No. 1-31300, the "Q102 10-Q").

 4.2

 (a)

 —

 

 First Amendment to Rights Agreement, dated December 13, 2006 (incorporated by reference to Exhibit 4.2 (a) to the Company’sreport on Form 10-K for the year ended December 31, 2006, File No. 1-31300, the “2006 10-K”).

 4.3

 —

 

 Indenture among the Company, ExpressJet Airlines, Inc., ("Airlines") and Bank One, N.A., dated August 5, 2003, relating to theCompany's 4.25% Convertible Notes due 2023 (incorporated by reference to Exhibit 10.1 to the Company's report on Form 8-K datedSeptember 2, 2003, File No. 1-31300).

 4.3

 (a)

 —

 

 Form of 4.25% Convertible Note due 2023 (included with Exhibit 4.3).

 4.3

 (b)

 —

 

 Form of Notation of Guarantee (included with Exhibit 4.3).

 10.1

 —

 

 Amended and Restated Capacity Purchase Agreement (the "CPA") among the Company, XJT Holdings, Inc. ("XJT"), Airlines andContinental (incorporated by reference to Exhibit 10.1 to the S-1).(1)

 10.1

 (a) 

 —

 

 First Amendment to the CPA dated March 27, 2003 (incorporated by reference to Exhibit 10.1 to the Company's report on Form 10-Qfor the quarter ended March 31, 2003, File No. 1-31300, the "Q103 10-Q").

 10.1

 (b)

 —

 

 Second Amendment to the CPA dated December 9, 2003 (incorporated by reference to Exhibit 10.1(b) to the Company's report on Form10-K for the year ended December 31, 2003, File No. 1-31300, the "2003 10-K").

 10.1

 (c)

 —

 

 Third Amendment to the CPA dated September 28, 2004 (incorporated by reference to Exhibit 10.2 to the Company’s report onForm 10-Q for the quarter ended September 30, 2004, File No. 1-31300).

 10.1

 (d)

 —

 Fourth Amendment to the CPA dated March 11, 2005 (incorporated by reference to Exhibit 10.1(d) to the Company’s Report onForm 10-K for the year ended December 31, 2004, File No. 1-31300, the “2004 10-K”).(1)

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10.1

(e)

—

 

Fifth Amendment to the CPA dated April 14, 2006 (incorporated by reference to Exhibit 10.1 to theCompany’s Report on Form 10-Q for the quarter ended March 31, 2006, File No. 1-31300).

 10.2

 —

 

 Master Facility and Ground Handling Agreement (the "Facility Agreement") among the Company, Airlines and Continental dated January1, 2001 (incorporated by reference to Exhibit 10.2 to the S-1).

 10.2

 (a)

 —

 

 First Amendment to the Facility Agreement dated November 1, 2003 (incorporated by reference to Exhibit 10.2(a) to the 200310-K).

 10.2

 (b)

 —

 

 Revised Exhibit D to Master Facility and Ground Handling Agreement dated December 1, 2006 (incorporated by reference to Exhibit10.2(b) to the 2006 10-K).

 10.3

 —

 

 Amended and Restated Administrative Support and Information Services Provisioning Agreement dated March 11, 2005(incorporated by reference to Exhibit 10.1(d) to the 2004 10-K).

 10.4

 —

 

 Initial Public Offering Agreement between the Company and Continental dated April 17, 2002 (incorporated by reference to Exhibit10.4 to the Q102 10-Q).

 10.5

 —

 

 Employee Benefits Separation Agreement (the "Separation Agreement") among the Company, XJT, Airlines and Continental dated April17, 2002 (incorporated by reference to Exhibit 10.6 to the Q102 10-Q).

 10.5

 (a)

 —

 

 First Amendment to the Separation Agreement dated March 27, 2003 (incorporated by reference to Exhibit 10.5 to the Q10310-Q).

 10.5

 (b)

 —

 

 Second Amendment to the Separation Agreement dated December 9, 2003 (incorporated by reference to Exhibit 10.6(b) to the 200310-K).

 10.5

 (c)

 —

 

 Third Amendment to the Separation Agreement dated June 24, 2005 (incorporated by reference to Exhibit 10.1 to the Company’sreport on Form 10-Q for the quarter ended June 30, 2005, File No. 1-31300).

 10.5

 (d)

 —

 

 Fourth Amendment to the Separation Agreement dated June 18, 2007 (incorporated by reference to Exhibit 10.1 to the Company’sreport on Form 10-Q for the quarter ended June 30, 2007, File No. 1-31300).

 10.6

 —

 

 Amended and Restated Tax Agreement among the Company, Airlines and Continental dated April 17, 2002 (incorporated by reference toExhibit 10.6 to the Company’s report on Form 10-Q for the quarter ended June 30, 2002, File No. 1-31300).

 10.7

 —

 

 2002 Stock Incentive Plan (the "2002 SIP") (incorporated by reference to Exhibit 10.8 to the Q102 10-Q). (2)

 10.7

 (a)

 —

 

 Form of Employee Stock Option Agreement pursuant to the 2002 SIP (incorporated by reference to Exhibit 10.8(a) to the S-1).(2)

 10.7

 (b)

 —

 

 Form of Outside Director Stock Option Agreement pursuant to the 2002 SIP (incorporated by reference to Exhibit 10.8(b) to theS-1). (2)

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 10.7

 (c)

 —

 

 Form of Employee Restricted Stock Option Agreement pursuant to the 2002 SIP (incorporated by reference to Exhibit 10.1 to theCompany’s report on Form 10-Q for the quarter ended June 30, 2004, File No. 1-31300, the “Q204 10-Q”).(2)

 10.7

 (d)

 —

 

 Form of Outside Director Restricted Stock Agreement pursuant to the 2002 SIP (incorporated by reference to Exhibit 10.2 to theQ204 10-Q). (2)

 10.8

 —

 

 ExpressJet Holdings, Inc. 2007 Stock Incentive Plan (the "2007 SIP") (incorporated by reference to Exhibit 10.1 to the Company'sreport on Form 8-K dated May 23, 2007, File No. 1-31300). (2)

 10.8

 (a)

 —

 

 Form of Employee Stock Option Agreement pursuant to the 2007 SIP (incorporated by reference to Exhibit 4.4(a) to theCompany’s Registration Statement on Form S-8, Reg. No. 333-143249, the “S-8”). (2)

 10.8

 (b)

—

 Form of Outside Director Stock Option Agreement pursuant to the 2007 SIP (incorporated by reference to Exhibit 4.4(b) to the S-8).(2)

 10.8

 (c)

 —

 Form of Employee Restricted Stock Option Agreement pursuant to the 2007 SIP (incorporated by reference to Exhibit 4.4(c) to theS-8. (2)

 10.8

 (d)

 —

 Form of Outside Director Restricted Stock Agreement pursuant to the 2007 SIP (incorporated by reference to Exhibit 4.4(d) to theS-8). (2)

 10.8

 (e)

 —

 ExpressJet Holdings, Inc. 2007 Long Term Incentive Program adopted under the 2007 SIP. (2) (3)

 10.8

 (f)

 Form of award under the 2007 Long Term Incentive Program. (2) (3)

 10.9

 —

 

 Management Bonus Plan as amended and restated through May 23, 2007 (incorporated by reference to Exhibit 10.2 to the Company'sreport on Form 8-K dated May 23, 2007, File No. 1-31300). (2)

 10.10

 —

 

 Supplemental Retirement Plan as amended and restated effective May 5, 2004 (incorporated by reference to Exhibit 10.3 to the Q20410-Q). (2)

 10.11

 —

 ExpressJet Holdings, Inc. Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s report onForm 8-K dated January 31, 2006, File No. 1-31300). (2)

 10.11

 (a)

 —

 Form of Participation Agreement under the ExpressJet Holdings, Inc. Long Term Incentive Plan (included with Exhibit 10.11).(2)

 10.11

 (b)

 —

 First Amendment to Long Term Incentive Plan dated as of September 12, 2007 (incorporated by reference to Exhibit 10.1 to the Q30710-Q). (2) 

 10.12

 —

 

 Employment Agreement among the Company, Continental and James B. Ream (incorporated by reference to Exhibit 10.9 to the S-1).(2)

 10.12

 (a)

 —

 

 Letter Agreement among the Company, Continental and Mr. Ream dated April 24, 2002 (incorporated by reference to Exhibit 10.9(a) tothe Q102 10-Q). (2)

 10.12

 (b)

 —

 

 Amendment to Mr. Ream's Employment Agreement dated March 14, 2005 (incorporated by reference to Exhibit 10.12(b) to the 200410-K). (2)

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10.13

—

 

Employment Agreement among the Company, Continental and Frederick S. Cromer (incorporated byreference to Exhibit 10.10 to the S-1). (2)

 10.13

 (a)

 —

 

 Letter Agreement among the Company, Continental and Mr. Cromer dated April 24, 2002 (incorporated by reference to Exhibit 10.10(a)to the Q102 10-Q). (2)

 10.13

 (b)

 —

 

 Amendment to Mr. Cromer's Employment Agreement dated March 14, 2005 (incorporated by reference to Exhibit 10.13(b) to the 200410-K). (2)

 10.14

 —

 

 Employment Agreement among the Company, Continental and Charles R. Coble. (2) (3)

 10.14

 (a)

 —

 

 Letter Agreement among the Company, Continental and Mr. Coble dated April 24, 2002. (2) (3)

 10.14

 (b)

 —

 

 Amendment to Mr. Coble's Employment Agreement dated March 14, 2005. (2) (3)

 10.15

 —

 

 Employment Agreement among the Company, Continental and James E Nides. (2) (3)

 10.15

 (a)

 —

 

 Letter Agreement among the Company, Continental and Mr. Nides dated April 24, 2002. (2) (3)

 10.15

 (b)

 —

 

 Amendment to Mr. Nides’s Employment Agreement dated March 14, 2005. (2) (3)

 10.16

 —

 

 Employment Agreement between the Company and Scott R. Peterson as amended and restated through March 14, 2005 (incorporated byreference to Exhibit 10.15 to the 2004 10-K). (2)

 10.17

 —

 Form of Amended and Restated Letter Agreement relating to certain flight benefits between the Company and its non-employeedirectors (incorporated by reference to Exhibit 10.1 to the Company’s report of Form 10-Q for the quarter ended September 30,2004, File No. 1-31300). (2)

 10.18

 —

 Schedule of compensation payable to the Company’s non-employee directors. (2) (3)

 10.19

 —

 Schedule of auction-rate securities held. (3)

 10.20

 —

 Agreement by and among the Company, Hayman Investments, L.L.C., Hayman Advisors, L.P., Hayman Capital Master Fund, L.P. and J.Kyle Bass, dated March 17, 2008 (incorporated by reference to Exhibit 10.1 to the Company’s report on Form 8-K dated March17, 2008, File No. 1-31300).

 10.21

 —

 Consulting Agreement by and among the Company and William F. Loftus dated March 17, 2008 (incorporated by reference to Exhibit10.2 to the Company’s report on Form 8-K dated March 17, 2008, File No. 1-31300).

 21.1

 —

 

 Subsidiaries of the Company. (3)

 23.1

 —

 Consent of Independent Registered Public Accounting Firm. (3)

 24.1

 —

 Powers of Attorney. (3)

 31.1

 —

 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer. (3)

 31.2

 —

 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer. (3)

 32.1

 —

 Section 1350 Certification by Chief Executive Officer. (4)

 32.2

 —

 Section 1350 Certification by Chief Financial Officer. (4)

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(1) 

The SEC has granted confidential treatment for portions of these exhibits.  Omitted materialfor which confidential treatment has been granted has been filed separately with the SEC.

(2) 

Management contract or compensatory plan or arrangement in which a director or executive officerparticipates.

(3) 

Filed herewith.

(4) 

Furnished herewith.