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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|                               |  |                                                                                             
|------------------------------ |  | --------------------------------------------------------------------------------------------
|þ                              |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|                              
|                               |  | For the fiscal year ended December 31,
    2002                                             
|                              
|or                            
|                              
|o                              |  | 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 1-31300



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ExpressJet Holdings, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                                              |  |                                         
|--------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                      |  | 76-0517977                              
|(State or other jurisdiction
    of incorporation or organization)                            |  | (I.R.S. Employer
    Identification No.)
|                                                                                             
|1600 Smith Street, Dept. HQSCE
    Houston, Texas(Address of principal executive
    offices) |  | 77002(Zip Code)                         

713-324-2639

(Registrants telephone number, including
area code)


Securities registered pursuant to
Section 12(b) of the Act:

|                             |  |                                           
|---------------------------- |  | ------------------------------------------
|Title of each class:         |  | Name of each exchange on which registered:
|                             |  |                                           
|Common Stock, $.01 par value |  | New York Stock Exchange                   

Securities registered pursuant to
section 12(g) of the Act:

None


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

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
form 10-K.     þ

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act).     Yes o          No þ

The aggregate market value of the voting and
non-voting common equity stock held by non-affiliates of the
registrant was $835.2 million as of June 30, 2002.

As of February 14, 2003, 64,000,000 of
shares of common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The information called for by Part III of
this Form 10-K (other than Item 10 as to Executive
Officers and Item 14) is incorporated by reference from
ExpressJet Holdings, Incs Proxy Statement for the Annual
Meeting of Stockholders to be held on May 7, 2003 to be
filed with the Commission within 120 days after
December 31, 2002.



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TABLE OF CONTENTS



|                                                                                            |                                                                                                        |                                                                               |  |  |  |  |  | 
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I                                                                                     
|                                                                                            | Item 1. Business                                                                                      
|                                                                                            |                                                                                                        | Forward Looking Statements                                                   
|                                                                                            |                                                                                                        | Our Company                                                                  
|                                                                                            |                                                                                                        | Our Business Strategy                                                        
|                                                                                            |                                                                                                        | Our Capacity Purchase Agreement with Continental Airlines                    
|                                                                                            |                                                                                                        | Our Markets and Routes                                                       
|                                                                                            |                                                                                                        | Our Industry                                                                 
|                                                                                            |                                                                                                        | Our Competitors                                                              
|                                                                                            |                                                                                                        | Our Industry Regulation                                                      
|                                                                                            |                                                                                                        | Our Maintenance of Aircraft                                                  
|                                                                                            |                                                                                                        | Our Employees                                                                
|                                                                                            |                                                                                                        | Principal Risk Factors that May Affect Our Business and Results of Operations
|                                                                                            | Item 2. Properties                                                                                    
|                                                                                            |                                                                                                        | Flight Equipment                                                             
|                                                                                            |                                                                                                        | Facilities                                                                   
|                                                                                            | Item 3. Legal Proceedings                                                                             
|                                                                                            |                                                                                                        | Legal Proceedings                                                            
|                                                                                            |                                                                                                        | Environmental Proceedings                                                    
|                                                                                            | Item 4. Submission of Matters to a Vote of Security Holders                                           
|                                                                                            | Item 4A. Executive Officers of the Company                                                            
|PART II                                                                                    
|                                                                                            | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                         
|                                                                                            | Item 6. Selected Financial Data                                                                       
|                                                                                            | Item 7. Managements Discussion and Analysis of Financial Condition and
         Results of Operations
|                                                                                            |                                                                                                        | OVERVIEW                                                                     
|                                                                                            |                                                                                                        | RESULTS OF OPERATIONS                                                        
|                                                                                            |                                                                                                        | LIQUIDITY AND CAPITAL COMMITMENTS                                            
|                                                                                            | Item 7A. Quantitative and Qualitative Disclosure About Market Risk                                    
|                                                                                            |                                                                                                        | Aircraft Fuel                                                                
|                                                                                            |                                                                                                        | Interest Rates                                                               
|                                                                                            | Item 8. Financial Statements and Supplementary Data                                                   
|REPORT OF INDEPENDENT AUDITORS                                                             
|CONSOLIDATED STATEMENTS OF OPERATIONS                                                      
|EXPRESSJET HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except for share data)
|                                                                                            | CONSOLIDATED STATEMENTS OF CASH FLOWS                                                                 
|                                                                                            | CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)                                             
|                                                                                            | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                            
|                                                                                            | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure          
|PART III                                                                                   
|                                                                                            | Item 10. Directors and Executive Officers of the Registrant                                           
|                                                                                            | Item 11. Executive Compensation                                                                       
|                                                                                            | Item 12. Security Ownership of Certain Beneficial Owners and Management                               
|                                                                                            | Item 13. Certain Relationships and Related Transactions                                               
|                                                                                            | Item 14. Controls and Procedures                                                                      
|PART IV                                                                                    
|                                                                                            | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                              
|SIGNATURES                                                                                 
|CERTIFICATIONS                                                                             
|INDEX TO EXHIBITS OF EXPRESSJET HOLDINGS, INC.                                             



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TABLE OF CONTENTS

|         |  |                                                                                           |  |      |    | 
|-------- |  | ----------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                           |  | Page
|         |  |                                                                                           |  |     
|PART I  
|Item 1.  |  | Business                                                                                  |  |      | 1  | 
|         |  | Forward Looking Statements                                                                |  |      | 1  | 
|         |  | Our Company                                                                               |  |      | 1  | 
|         |  | Our Business Strategy                                                                     |  |      | 3  | 
|         |  | Our Capacity Purchase Agreement with Continental
    Airlines                             |  |      | 4  | 
|         |  | Our Markets and Routes                                                                    |  |      | 13 | 
|         |  | Our Industry                                                                              |  |      | 16 | 
|         |  | Our Competitors                                                                           |  |      | 18 | 
|         |  | Our Industry Regulation                                                                   |  |      | 19 | 
|         |  | Our Maintenance of Aircraft                                                               |  |      | 20 | 
|         |  | Our Employees                                                                             |  |      | 20 | 
|         |  | Principal Risk Factors that May Affect Our
    Business and Results of Operations         |  |      | 21 | 
|Item 2.  |  | Properties                                                                                |  |      | 25 | 
|         |  | Flight Equipment                                                                          |  |      | 25 | 
|         |  | Facilities                                                                                |  |      | 26 | 
|Item 3.  |  | Legal Proceedings                                                                         |  |      | 27 | 
|         |  | Legal Proceedings                                                                         |  |      | 27 | 
|         |  | Environmental Proceedings                                                                 |  |      | 27 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |      | 27 | 
|Item 4A. |  | Supplementary Item. Executive Officers of the
    Company                                 |  |      | 27 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                 |  |      | 30 | 
|Item 6.  |  | Selected Financial Data                                                                   |  |      | 30 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |  |      | 32 | 
|         |  | Overview                                                                                  |  |      | 32 | 
|         |  | Results of Operations                                                                     |  |      | 37 | 
|         |  | Liquidity and Capital Commitments                                                         |  |      | 42 | 
|Item 7A. |  | Quantitative and Qualitative Disclosure About
    Market Risk                             |  |      | 48 | 
|         |  | Aircraft Fuel                                                                             |  |      | 48 | 
|         |  | Interest Rates                                                                            |  |      | 48 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                               |  |      | 49 | 
|         |  | Report of Independent Auditors                                                            |  |      | 50 | 
|         |  | Consolidated Statements of Operations                                                     |  |      | 51 | 
|         |  | Consolidated Balance Sheets                                                              |  |      |    | 
|         |  | Assets                                                                                    |  |      | 52 | 
|         |  | Liabilities and Stockholders
    Equity (Deficit)                                        |  |      | 53 | 
|         |  | Consolidated Statements of Cash Flows                                                     |  |      | 54 | 
|         |  | Consolidated Statements of Stockholders
    Equity (Deficit)                             |  |      | 55 | 
|         |  | Notes to Consolidated Financial Statements                                                |  |      | 56 | 
|Item 9.  |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |  |      | 81 | 

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|         |  |                                                                     |  |      |    | 
|-------- |  | ------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                     |  | Page
|         |  |                                                                     |  |     
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                  |  |      | 81 | 
|Item 11. |  | Executive Compensation                                              |  |      | 81 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management  |  |      | 81 | 
|Item 13. |  | Certain Relationships and Related Transactions                      |  |      | 81 | 
|Item 14. |  | Controls and Procedures                                             |  |      | 81 | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K |  |      | 81 | 
|         |  | Signatures                                                          |  |      | 89 | 
|         |  | Certifications                                                      |  |      | 91 | 
|         |  | Index to Exhibits                                                   |  |      | 93 | 

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PART I




Item 1.     Business

Our website address is www.expressjet.com. All of
our filings with the U.S. Securities and Exchange
Commission (SEC) are available free of charge
through our website on the same day, or as soon as reasonably
practicable after we file them with, or furnish them to, the SEC.




Forward Looking Statements

This Annual Report on Form 10-K contains
forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995. ExpressJet Holdings, Inc. and its
wholly owned subsidiaries, XJT Holdings, Inc., and ExpressJet
Airlines, Inc., which operates as Continental Express (together
ExpressJet, we, us and
our), rely on the safe harbor of the act in making
such disclosures. Statements in the Business, Properties and
Managements Discussion and Analysis of Operations and
Financial Condition sections of this filing, together with other
statements beginning with words such as believes,
intends, plans, anticipates,
estimates and expects include
forward-looking statements that are based on managements
expectations given facts as currently known by management on the
date this Form 10-K was filed with the SEC. Specifically,
statements regarding our future operating costs, business
prospects, growth and capital expenditures, including plans with
respect to our fleet, are forward looking statements. These
statements reflect our plans and assumptions about future events
and are subject to uncertainties, many of which are outside our
control. Important factors that could cause actual results to
differ materially from the expectations expressed or implied in
the forward-looking statements include known and unknown risks.
Some of the known risks that could significantly impact our
revenues, operating results, and capacity include, but are not
limited to: our dependence on our capacity purchase agreement
with Continental Airlines, Inc. (Continental
Airlines); our dependence on Continental Airlines
financial and operational strength; the costs and other effects
of enhanced security measures and other possible FAA
requirements; labor costs and relations, including the results
of union contract negotiations; flight disruptions as a result
of operational matters; deliveries of additional aircraft; our
ability to implement our growth strategy; our high leverage;
certain tax matters; competition and industry conditions; and
the seasonal nature of the airline business. For further
discussions of these risks, please see  Risk
Factors Relating to Our Capacity Purchase Agreement with
Continental Airlines,  Risk Factors
Relating to Our Business and Operations and
 Risk Factors Relating to the Airline
Industry. The statements in this Annual Report on
Form 10-K are made as of February 14, 2003, and the
events described in the forward-looking statements might not
occur or might occur to a materially different extent than
described in this filing. We undertake no duty to update or
revise any of our forward-looking statements, whether as a
result of new information, future events or otherwise.




Our Company



| |        
| | -------
| | General

ExpressJet Holdings, Inc. was incorporated in
Delaware in August 1996. We are the largest operator of regional
jets in the world and the second-largest regional airline based
on available seat miles. We are engaged in the business of
transporting passengers, cargo and mail. Our sole asset is all
of the issued and outstanding shares of capital stock of XJT
Holdings, Inc., the sole owner of the issued and outstanding
shares of common stock of ExpressJet Airlines, Inc., which
operates as Continental Express. As of January 31, 2003, we
offered scheduled passenger service with approximately 1,000
average daily departures to 108 cities in 37 states, the
District of Columbia, Mexico and Canada, providing Continental
Airlines all of its regional airline capacity at its hub
airports in New York/ Newark, Houston and Cleveland. We believe
our operations complement Continental Airlines operations
by allowing more frequent service, including
off-peak-time-of-day departures, to smaller cities than could be
provided economically with conventional large jet aircraft and
by carrying traffic that connects with Continental
Airlines mainline jets. Our available seat miles have
grown at a compounded annual rate of 24.1% from 2.1 billion
in 1997 to 6.2 billion in 2002. We generated
$1.1 billion of revenue and $84.3 million of net
income applicable to common stockholders for the year ended
December 31, 2002.

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| |                    
| | -------------------
| | Recent Developments

We announced on February 12, 2003, that we
reached agreements in principle to amend our capacity purchase
agreement with Continental Airlines and our regional jet
aircraft purchase agreement with Empresa Brasileira de
Aeronáutica S.A. (Embraer). Under the terms of
the proposed amendments, we will modify our scheduled deliveries
of Embraer regional jets in 2003 to 36, from our original plan
for 48 deliveries, and will take 21 aircraft deliveries in 2004,
down from 36. Additionally, we will increase our aircraft
deliveries to 21 and eight for 2005 and 2006, up from two and
zero for these years, respectively. Continental Airlines
proposed the amendment to the capacity purchase agreement in
response to continuing weakness and uncertainty in the airline
industry. In return for the deferred deliveries, Continental
Airlines, among other items, extended ExpressJets
guarantee as the exclusive provider of regional jet service in
the hubs and Continental Airlines termination right
without cause by one year, to January 1, 2007. These
proposed amendments to the capacity purchase agreement and the
purchase agreement with Embraer are subject to the execution of
satisfactory definitive agreements and the approval by the Board
of Directors of Continental Airlines.



| |                            
| | ---------------------------
| | Our Initial Public Offering

We completed the initial public offering
(IPO) of our common stock, par value $.01 per
share, and the related Preferred Stock Purchase Rights
(collectively, the Common Stock), on April 23,
2002, issuing 10 million shares of our common stock for
$160.0 million, before underwriting discount and expenses.
On April 23, 2002, we applied $146.8 million of our
proceeds from our IPO to repay a portion of our note payable to
Continental Airlines. Continental Airlines also sold
20 million shares of our common stock in the offering. We
did not receive any of the proceeds from the sale of our stock
by Continental Airlines.

One share of a series of preferred stock called
special voting preferred stock is currently authorized,
designated and outstanding and is owned by Continental Airlines.
The special voting preferred stock can be owned only by
Continental Airlines (or its successor) and its controlled
affiliates. So long as the special voting preferred stock is
beneficially owned by one of these parties, its holder will be
entitled to elect to our board of directors:



| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | five directors, for so long as Continental
    Airlines and its controlled affiliates own shares representing
    50% or more of our outstanding shares of common stock;                           
|
| |  | four directors, for so long as Continental
    Airlines and its controlled affiliates own shares representing
    40% or more (but less than 50%) of our outstanding shares of
    common stock;   
|
| |  | three directors, for so long as Continental
    Airlines and its controlled affiliates own shares representing
    30% or more (but less than 40%) of our outstanding shares of
    common stock;  
|
| |  | two directors, for so long as Continental
    Airlines and its controlled affiliates own shares representing
    20% or more (but less than 30%) of our outstanding shares of
    common stock; and
|
| |  | one director, for so long as Continental Airlines
    and its controlled affiliates own shares representing 10% or
    more (but less than 20%) of our outstanding shares of common
    stock.     

Our board now consists of nine members, with a
non-executive chairman, five directors (four of whom are
officers of Continental Airlines) elected by Continental
Airlines pursuant to the terms of the special voting preferred
stock and three directors nominated and elected by our board.



| |                            
| | ---------------------------
| | Our Internal Reorganization

Prior to the completion of our IPO in April 2002,
our subsidiary, ExpressJet Airlines, Inc. transferred
substantially all of its assets and liabilities to a newly
formed entity, New ExpressJet Airlines, Inc., in return for
shares of its common stock and preferred stock. The preferred
stock of New ExpressJet Airlines, Inc. is non-voting, has a
liquidation preference of $5.0 million, is mandatorily
redeemable in April 2012 and is callable beginning in April
2005. Prior to the issuance of the preferred stock, ExpressJet
Airlines, Inc. entered into a binding contract to sell all of
the shares of preferred stock of New ExpressJet Airlines, Inc.
to a third-party not affiliated with us or the underwriters for
a note, with no rights of offset, in the original principal
amount of $5.0 million. The note is due in April 2012.
ExpressJet Airlines, Inc. retained the common stock of New
ExpressJet Airlines. We expect that this internal

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reorganization will reduce the amounts we must
pay in the future to various tax authorities as a result of
increasing the tax basis of our tangible and intangible assets
to fair value. In connection with the internal reorganization,
we entered into a tax agreement with Continental Airlines
providing for, among other things, the payment by us to
Continental Airlines of all or a significant portion of the tax
benefits we realize as a result of the increase in the tax basis
of our tangible and intangible assets, which payments could be
as much as $400 million over 15 years. See
Item 8. Financial Statements and Supplementary
Data  Notes to Consolidated Financial
Statements  Note 4  Income
Taxes for detailed discussion of our income taxes,
including the increase in the tax basis of our tangible and
intangible assets to fair value. In connection with this
internal reorganization, ExpressJet Airlines, Inc. was renamed
XJT Holdings, Inc. and New ExpressJet Airlines, Inc.
was renamed ExpressJet Airlines, Inc.





Our Business Strategy

Our goal is to strengthen our position as one of
the leading regional airlines and to grow our regional jet
fleet, revenue, earnings and cash flow by seeking to:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Operate a modern, efficient aircraft fleet,
    focusing on regional jets.We
    currently operate an all-jet fleet comprised of 50 and 37 seat
    Embraer regional jet aircraft. We believe that our new regional
    jets provide greater comfort and enjoy better customer
    acceptance than turboprop aircraft. Further, we believe the
    focus on a family of regional jet aircraft simplifies our
    operations and lowers our cost structure. We expect to gain
    efficiencies in training, maintenance and flight operations by
    maintaining our all-regional jet fleet. In addition, the
    regional jets allow us to serve routes that cannot be served by
    turboprop aircraft.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | Minimize operating costs.We strive to maintain low
    operating costs by operating modern and efficient aircraft and
    maintaining high completion factors. We seek to reduce aircraft
    maintenance costs by using a combination of certified
    maintenance vendors and our own personnel and facilities and by
    fixing costs for engine maintenance through
    power-by-the-hour agreements with manufacturers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Maintain our long established relationship
    with Continental Airlines.We
    believe our long established relationship with Continental
    Airlines has provided and will provide us with significant
    growth opportunities. Flying solely on behalf of Continental
    Airlines from January 1, 1997 to December 31, 2002,
    our available seat miles have grown at a compounded annual rate
    of 24.4%. Continental Airlines has agreed to purchase, subject
    to the terms of our capacity purchase agreement, all of our
    existing capacity and all capacity relating to the 86 Embraer
    regional jets for which we have firm orders as of
    December 31, 2002. As a result, from 2002 through 2006,
    based on the long-term scheduling plans for our aircraft (see
    also  Our Company  Recent
    Developments), which take into account current estimates
    of future aircraft utilization and the anticipated size and
    composition of our fleet, our available seat miles are expected
    to grow at a compounded annual rate of approximately 17%. We
    intend to work closely with Continental Airlines to expand
    service to existing markets, open new markets and schedule
    convenient and frequent flights.
|
| |  | Grow in the Newark/ New York, Houston and
    Cleveland markets.As of
    December 31, 2002, we held the largest market share of
    regional airline traffic at Newark Liberty International Airport
    (Newark Liberty International) (83% of regional
    flights), Houstons George Bush Intercontinental Airport
    (Bush Intercontinental) (92% of regional flights)
    and Clevelands Hopkins International Airport
    (Hopkins International) (74% of regional flights).
    We believe these markets, particularly the Houston market, offer
    attractive opportunities for long-term, profitable growth of
    regional jet operations for Continental Airlines. The Newark/
    New York area, Houston and Cleveland are each large business and
    population center that contribute to a high volume of traffic
    through their respective airports. Our operations out of the
    Newark/ New York area, Houston and Cleveland provide our
    passengers access to the entire East Coast, Midwest and southern
    United States as well as portions of Mexico and Canada.                                                                                                                                                             
|
| |  | Capitalize on capacity purchase
    arrangements.Our capacity
    purchase agreement requires Continental Airlines to pay us a
    block hour rate for our regional jet and turboprop flights. We
    believe that capacity purchase arrangements provide more
    predictable results by reducing our exposure to fuel prices,
    fare competition and passenger volumes. In the future, to the
    extent that we have available capacity, we intend to seek
    additional capacity purchase arrangements with Continental
    Airlines or other airlines.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Focus on customer service.Customer service is a principal
    focus of our company. We believe our operational reliability is
    crucial to our other operational objectives and, together with
    our initiatives to improve baggage handling and customer
    satisfaction, is critical to attracting travelers. In 2002, our
    regional jet maintenance completion factor, which is a
    measurement of the percentage of our regional jet flights that
    are not cancelled or delayed more than 15 minutes because of
    mechanical problems, was 99.9%, which was 0.7 points better than
    that of the next highest completion factor for
    U.S. airlines flying regional jet aircraft.
|
| |  | Promote employee participation and
    achievement.We believe that our
    employees are our greatest asset and the cornerstone of improved
    reliability and customer service. Our company has utilized a
    variety of programs, such as our profit sharing plan and on-time
    bonus program, to increase employee awareness and morale and
    foster a sense of shared community.                                                                                                                                                                                                                                                                                                              




Our Capacity Purchase Agreement with
Continental Airlines



| |        
| | -------
| | General

We currently derive substantially all of our
revenue under a capacity purchase agreement with Continental
Airlines. Under this agreement, we operate flights on behalf of
Continental Airlines, which controls and is responsible for
scheduling, pricing and managing seat inventories and is
entitled to all revenue associated with the operation of the
aircraft.

Continental Airlines has proposed and we have
agreed in principle, subject to the execution of satisfactory
definitive agreements and the approval by the Board of Directors
of Continental Airlines, to modify our future scheduled
deliveries of Embraer regional jets. This modification pushes
our future deliveries from years 2003 through beginning of 2005
to years 2003 through mid 2006. In return for this deferral of
deliveries, Continental Airlines, among other items, extended
ExpressJets guarantee as the exclusive provider of
regional jet service in the hubs and its termination right
without cause from January 1, 2006 to January 1, 2007.
See  Our Company  Recent
Developments for further discussion regarding the proposed
revision.



| |        
| | -------
| | Payment

Under the agreement, we are entitled to receive a
payment for each scheduled block hour calculated using a formula
that will remain in place through December 31, 2004. The
formula is designed to provide us with an operating margin of
approximately 10% before taking into account variations in some
costs and expenses that are generally controllable by us. Under
the formula, a substantial portion of our costs, including those
relating to fuel, aircraft ownership and financing,
substantially all routine or normal regional jet engine
maintenance, passenger-related facility rent, administrative
fees and ground handling expenses paid to Continental Airlines,
excluding most labor, other maintenance or general
administrative costs, are reconciled for differences between our
actual costs and the expected costs included in our block hour
rates. Our payments from Continental Airlines are adjusted to
reflect these actual costs plus a 10% margin. In addition, a
reconciliation payment is made by Continental Airlines to us or
by us to Continental Airlines, as applicable, if the operating
margin calculated, as described below, in any fiscal quarter is
not between 8.5% and 11.5%. As a result, if this operating
margin exceeds 11.5%, then a reconciliation payment will be made
by us to Continental Airlines in an amount sufficient to reduce
the margin to 11.5%. If the operating margin is less than 8.5%,
then a reconciliation payment will be made by Continental
Airlines to us in an amount sufficient to raise the margin to
8.5%. For purposes of calculating this operating margin, we do
not take into account unanticipated changes in most of our labor
costs, any performance incentive payments, including payments
from controllable cancellation performance (cancellations other
than weather or air traffic control cancellations), litigation
costs and other costs that are not included in our block hour
rates (or covered by any adjustments to them) and are not
reasonable and customary in the industry. If these excluded
costs are higher than those anticipated in our block hour rates,
then our operating margin, taking these costs into effect, could
be lower than 8.5% even after any reconciliation payment is
made. On the other hand, if these costs are lower than those
anticipated in our block hour rates, then our operating margin,
taking these costs into effect, could be higher than 11.5% even
after any reconciliation payment is made. During the fiscal year
ended December 31, 2002, our quarterly reconciliation
payments to Continental Airlines were $3.0 million,
$7.7 million and $4.0 million for the second, third
and fourth

4



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##### Table of Contents



quarter, respectively. For the first quarter, our
operating margin as calculated for purposes of applying the
operating margin band described above was 11.3%; therefore, no
reconciliation payment was required.


The table below further describes how variations
in our actual costs from our estimated costs, as determined in
the block hour rates, are treated under the capacity purchase
agreement.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Cost Category                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  | Reconciliation Payment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|Fully-reconciled costs: Fuel and intoplane
    expense(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
     Administrative services provided by Continental
    Airlines
     Ground Handling services
     Third party security and screening expenses
     Substantially all regional jet engine expenses under
    current long-term third-party contracts
     Depreciation and amortization(2)
     Pilot training volumes
     Glycol, de-icing, snow removal
     Mexican and Canadian navigational fees
     Prop maintenance(3)
     Captain/ First Officer mix(3)
     Pilot soft time (4) |  | Reconciliation payment, including 10% margin, to
    the full extent our actual costs differ from estimated costs.                                                                                                                                                                                                                                                                                                                                                                                      
|Costs within the margin band: Maintenance, materials and
    repairs not included above
     Passenger services
     Other rentals (excluding corporate headquarters
    rental costs)
     Other operating expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  | If actual expenses in this category are
    sufficiently different from estimates used in the block hour
    rates so that our operating margin (calculated to exclude the
    impact of unreconciled costs, to the extent they differ from our
    estimated costs, and other items (5)) is less than 8.5% or
    greater than 11.5%, then a reconciliation payment will be made
    by us or Continental Airlines to the other so that this
    operating margin will be 8.5% or 11.5%, as applicable.
|Unreconciled costs: Wages and salaries
     Benefits not included above
     Corporate headquarters rental costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | No reconciliation payment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              






|    |                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We incur fuel expense equal to the lower of the
    actual cost of fuel or an agreed-upon cap based on our fuel
    purchase agreement with Continental Airlines. For the year ended
    December 31, 2002, the actual average cost of fuel was 60.7
    cents per gallon, which was below our agreed-upon cap of 61.1
    cents per gallon. In 2003 and future years, the agreed-upon cap
    is 66.0 cents per gallon.
|   
|(2) | Depreciation is reconciled for assets and capital
    projects accounted for in the capacity purchase agreement.                                                                                                                                                                                                                                                                                                        
|   
|(3) | Reconciliation for turboprop maintenance and
    Captain/ First Officer mix ended December 31, 2002.                                                                                                                                                                                                                                                                                                                    
|   
|(4) | Pilot soft time reconciliation ends upon
    ExpressJets hiring a new pilot or recalling a furloughed
    pilot.                                                                                                                                                                                                                                                                                                       

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|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | In addition to our unreconciled costs, the
    operating margin used to calculate the reconciliation payment
    does not take into account any performance incentive payments,
    including payments from controllable cancellation performance
    (cancellations other than weather or air traffic control
    cancellations), litigation costs and other costs that are not
    included in our block hour rates (or covered by adjustments to
    them) and are not reasonable and customary in the industry.

Under the capacity purchase agreement, the
fully-reconciled costs, the costs within the margin band, and
the unreconciled costs represented approximately 63.9%, 12.3%
and 23.8%, respectively, for 2002. We believe that our costs in
2003 will reflect similar percentages in these three cost
categories.

Additionally, under the capacity purchase
agreement some marketing-related costs normally associated with
operating an airline are borne directly by Continental Airlines.
These costs include those associated with the following:



| |   |                        
| | - | -----------------------
| |  | Reservations and sales 
|
| |  | Commissions            
|
| |  | Advertising            
|
| |  | Revenue Accounting     
|
| |  | Fare and tariff filings
|
| |  | Food and beverage      

Our base rate per scheduled block hour includes
compensation for scheduled block hours associated with some
cancelled flights, based on historical cancellation rates
constituting rolling five-year monthly averages. To the extent
that our rate of controllable cancellations, such as those due
to maintenance or crew shortages, is lower than our historical
controllable cancellation rate, we will be entitled to
additional payments. On the other hand, we may make a payment to
Continental Airlines for controllable cancellations above
historical rates of controllable cancellations. Because these
incentive benchmarks are based on rolling average historical
rates of controllable cancellation, lower controllable
cancellation rates that result in higher incentive payments in
the near term will also reduce our opportunity to earn incentive
payments in the future, when the lower controllable cancellation
rates become part of the historical average. Also, because we
use monthly rolling averages, our opportunity to earn these
payments in any particular fiscal quarter is affected by
seasonal variations in historical controllable cancellation
rates. We are also entitled to receive a small per-passenger fee
and incentive payments for certain on-time departures and
baggage handling performance.

We have agreed to meet with Continental Airlines
each year beginning in 2004 to review and set the block hour
rates to be paid in the following year, in each case based on
the methodology (including the 10% targeted operating margin)
used to set the original block hour rates. If we and Continental
Airlines cannot come to an agreement on the annual adjustments,
we have agreed to submit our disagreement to arbitration.



| |                   
| | ------------------
| | Scope of Agreement

The agreement, including the proposed amendment
(see  Our Company  Recent
Developments), covers all of our existing fleet, as well
as the 86 Embraer ERJ-145XR subject to firm orders at
December 31, 2002. However, beginning July 1, 2004,
Continental Airlines has the right to reduce the number of our
regional jets covered by the agreement, provided that we have
received at least 12 months notice. Under the agreement,
Continental Airlines is entitled to decline capacity with
respect to:



| |   |                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | any regional jets subject to our firm orders that
    Embraer has not delivered to us before the effective date of the
    reduction in capacity; and
|
| |  | up to 25%, over any rolling three-year period, of
    our regional jets that have been delivered.                                                    

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If Continental Airlines removes regional jet
aircraft from the terms of the agreement, we would have the
option to:



| |   |                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fly the released aircraft for another airline or
    ourselves, subject to our ability to obtain facilities, such as
    gates and slots, and our exclusive arrangement with Continental
    Airlines in its hub airports; or
|
| |  | decline to fly these aircraft and cancel the
    related subleases with Continental Airlines.                                                                                                                                

If we elect to fly one or more of the aircraft
released from the capacity purchase agreement either for another
party or for our own benefit, the interest rate implicit in
calculating the scheduled lease payments will increase by 200
basis points to compensate Continental Airlines for its
continued participation in our lease financing arrangements. See
 Aircraft Financing. If we elect not to
fly these aircraft, the sublease between us and Continental
Airlines for these aircraft will be canceled and Continental
Airlines will take possession of the aircraft. In that event,
Continental Airlines will be responsible for all direct
reasonable costs we incur associated with the removal of those
aircraft from our fleet.

In addition, upon a reduction in capacity, we
will be entitled to meet and confer with Continental Airlines
regarding the impact of the reduction on our cash flow and to
negotiate, in good faith, a credit facility with Continental
Airlines for up to $75 million in the aggregate for a term
of up to two years and at an interest rate equal to the London
interbank offered rate plus 200 basis points to help cover any
potential cash needs as a result of the reduction in capacity.
However, Continental Airlines has no obligation to provide this
facility.

Continental Airlines has the right to require us
to exercise any of the aircraft options we hold to
purchase 100 Embraer ERJ-145XR aircraft, and include these
aircraft under the capacity purchase agreement. If Continental
Airlines elects to do this, it may either lease or sublease the
aircraft to us, or substitute these aircraft for aircraft in our
possession that have been removed from the terms of the capacity
purchase agreement and that we sublease from Continental
Airlines, in which case we will be required to finance the
option aircraft ourselves. If Continental Airlines does not
require us to exercise these aircraft options, we will retain
the right to exercise the options and fly these aircraft for
other airlines or for other purposes, subject to some
restrictions; however, we will have to finance our acquisition
of these aircraft independently.

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



| |                           
| | --------------------------
| | Code-Sharing and Marketing

Our capacity purchase agreement with Continental
Airlines authorizes us to use its two-letter flight designator
code (CO*) to identify our flights in the central reservation
system, to paint our aircraft with its colors and/or logos and
to market and advertise our status as being a part of the
Continental Airlines route system. The agreement also gives us a
non-exclusive license to fly under the Continental Express name.
Passengers on our scheduled flights under the capacity purchase
agreement may earn awards under the frequent flyer program of
Continental Airlines (OnePass). We do not pay fees with respect
to these services.



| |              
| | -------------
| | Cancellations

Under the agreement, we are compensated for
scheduled block hours, including block hours associated with
some cancelled flights. If cancellations outside of our control,
such as those due to weather or air-traffic control, exceed the
historical average of cancellations for the applicable period,
we will be paid for the cancelled flight at a reduced rate,
calculated to cover our fixed costs. We will generally not be
entitled to any payment for controllable cancellations, which
include cancellations due to labor unrest, regulatory action,
fuel unavailability, crew shortages or maintenance, and all
other cancellations other than weather or air traffic control
cancellations, above historical rates of cancellations, and in
the event of a union-authorized labor strike we will not be
entitled to payment for any controllable or uncontrollable
cancellations.

7



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##### Table of Contents





| |                   
| | ------------------
| | Aircraft Financing

We currently lease or sublease all of our
existing regional jets from Continental Airlines. Under the
capacity purchase agreement, Continental Airlines is required to
lease from Embraer or its designee all of our 86 current firm
order aircraft and sublease these aircraft to us. However,
Continental Airlines is not required to provide any financing
for our Embraer option aircraft or any other aircraft that we
may acquire.

In addition, Continental Airlines may require us
to substitute aircraft subject to our existing Embraer options
for aircraft that have been removed from the terms of the
capacity purchase agreement and that we sublease from
Continental Airlines. If Continental Airlines elects to do this,
it will be entitled to terminate our sublease and take
possession of the replaced aircraft on the option
aircrafts scheduled delivery date. However, we will be
required to finance the option aircraft independent of
Continental Airlines, and even if we are unable to finance the
option aircraft or the option aircraft is not delivered for any
other reason, Continental Airlines will be entitled to cancel
the sublease and take possession of the replaced aircraft on the
option aircrafts scheduled delivery date. If we are unable
to obtain alternative financing on terms that we find acceptable
or at all, or the option aircraft is not delivered for any other
reason and Continental Airlines exercises its right to
consummate the exchange, the size of our fleet will be reduced.
Since we will be subject to a continuing risk of losing aircraft
removed from the terms of the capacity purchase agreement that
we sublease from Continental Airlines if we are not able to
finance a replacement option aircraft, we may be unable to enter
into contracts with other carriers to sell the capacity of those
aircraft.

Continental Airlines may also terminate the
sublease relating to, and take possession of, any of our
aircraft that have been removed from the terms of the capacity
purchase agreement to the extent that Continental Airlines
provides us with an equivalent replacement aircraft. We will be
required to use commercially reasonable efforts to finance the
replacement aircraft. We cannot provide any assurance that, if
Continental Airlines exercises its rights to replace an
aircraft, we will be able to obtain alternative financing or
that the terms of any alternative financing will be comparable
to those in the subleases with Continental Airlines. If we are
unable to obtain financing after using commercially reasonable
efforts, we will not be required to exchange our aircraft for
the replacement aircraft.



| |                                                    
| | ---------------------------------------------------
| | Airport Facilities, Slots and Route
    Authorities

Most of the airport facilities that we use are
leased from airport authorities by Continental Airlines. Under
our master facility agreement with Continental Airlines, we are
entitled to use these facilities to fulfill our obligations
under the capacity purchase agreement. However, we are generally
not entitled to use those facilities that are airport terminal
facilities to service other carriers or operate flights under
our own code without the approval of Continental Airlines.
Further, we must use those facilities that are non-terminal
facilities on a priority basis to support our scheduled flights
that we fly on behalf of Continental Airlines, for so long as
those flights constitute at least 50% of our total scheduled
flights. We are generally charged for our allocated portion of
airport rental expenses associated with our flight activity.
Continental Airlines is generally responsible for all capital
and start-up costs for airport terminal facilities at its hub
airports and at any other facilities where it elects to provide
baggage handling services to us. If Continental Airlines elects
to provide baggage handling services at any facility at which we
previously provided baggage handling services, Continental
Airlines will reimburse us for most of the capital and start-up
costs we incurred at that facility. We are generally responsible
for any capital and start-up costs associated with any airport
terminal facilities at other airports to which we fly and any
non-terminal facilities not also regularly used by Continental
Airlines. If we exit a market at the direction of Continental
Airlines (and we do not reenter that market within six months
flying for our own account or for the account of an airline
other than Continental Airlines), in most cases Continental
Airlines will reimburse us for certain losses incurred in
connection with the closure of the related facility. If the
capacity purchase agreement is terminated, we may be required by
Continental Airlines to vacate airport terminal space subleased
to us by Continental Airlines.

In addition, at any airport to which we fly
scheduled flights on behalf of Continental Airlines, subject to
some exceptions, Continental Airlines can require us at any
time, including upon cessation of these scheduled flights to the
airport, to use commercially reasonable efforts to assign any
lease for these airport terminal facilities that is in our name
to Continental Airlines or its designee (or to sublease the
space to it or its designee). In addition, if the capacity
purchase agreement is terminated after our material breach of
that agreement, we may be required by Continental Airlines to
vacate our non-terminal space (including our maintenance and
training facilities) that is subleased to us by

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Continental Airlines and used to support the
scheduled flights we fly on behalf of Continental Airlines, and
we may be required by Continental Airlines to use commercially
reasonable efforts to assign to Continental Airlines or its
designee any lease in our name for non-terminal space (including
our maintenance facilities) used to support the scheduled
flights we fly on behalf of Continental Airlines (or to sublease
the space to it or its designee). Also, for a period of five
years following the termination of the capacity purchase
agreement, if we wish to transfer our interests in any of our
facilities used to fulfill our obligations under the capacity
purchase agreement, Continental Airlines must consent to the
transfer (where Continental Airlines is the sublessor) and has a
right of first refusal to acquire our interests in those
facilities that we lease from parties other than Continental
Airlines.


In addition, Continental Airlines can require us,
at any time, to use commercially reasonable efforts to transfer,
subject to applicable laws, to Continental Airlines or its
designee any of our airport takeoff or landing slots, route
authorities or other regulatory authorizations used for our
scheduled flights under the capacity purchase agreement.



| |                         
| | ------------------------
| | Retirement of Turboprops

During 2002, we retired all of the 33 turboprop
aircraft in our fleet. In accordance with the capacity purchase
agreement, Continental Airlines covered all direct costs
associated with terminating our 29 turboprop aircraft leases.
Continental Airlines also purchased from us at net book value
our four turboprop aircraft, as well as the related spare
engines and spare parts inventory. During 2002, Continental
Airlines remitted to us approximately $21.3 million as a
result of this retirement.



| |                
| | ---------------
| | Ground Handling

We currently provide baggage handling and other
support services, including ground handling, station operations,
ticketing, gate access and other passenger, aircraft and traffic
servicing functions for Continental Airlines at approximately
twelve of the airports to which we fly. For providing these
services to Continental Airlines and, if requested, to its
codeshare partners, Continental Airlines pays us an amount for
each aircraft landing and takeoff equal to our cost for
providing such services. Continental Airlines provides these
same services to us at some of the other airports to which we
fly, including Continental Airlines existing hub airports.



| |               
| | --------------
| | Other Services

In connection with the capacity purchase
agreement, we also entered into an administrative support and
information services agreement, under which Continental Airlines
provides us with services such as information technology
support, corporate accounting, internal audit, corporate
communications, insurance, purchasing, payroll, human resources,
legal, tax and treasury administrative services, and a fuel
purchasing agreement, under which we purchase from Continental
Airlines all of our fuel requirements. Continental Airlines
reimburses us for the costs of all of these services through the
block hour rate pricing arrangement in the capacity purchase
agreement. We have the right to terminate the provision of
services to us under the administrative services agreement at
our election. Under the administrative services agreement, we
and Continental Airlines have negotiated in good faith to
transition some of the services with terms reasonably acceptable
to each party. We will continue to work with Continental
Airlines to transition the services and to provide for the
termination of all of the services provided to us under the
administrative services agreement over a period of time to be
mutually agreed upon.



| |                      
| | ---------------------
| | Exclusive Arrangement

The proposed amendment to the capacity purchase
agreement (see  Our Company  Recent
Developments) provides that we will be Continental
Airlines exclusive provider of regional jets flying in or
out of Bush Intercontinental, Hopkins International or Newark
Liberty International through January 1, 2007. However, the
agreement permits up to 10 regional jet flights per day from
each of Continental Airlines existing hub airports by
regional airlines that have arrangements with Continental
Airlines major airline code-share partners. This
exclusivity automatically and permanently terminates upon the
occurrence of a union-authorized strike. Otherwise, the
agreement does not prohibit Continental Airlines from competing,
or from entering into agreements with other airlines that would
compete, with routes we serve.

9



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The capacity purchase agreement provides that,
during its term, we will provide regional airline services only
for Continental Airlines at its existing hubs at Bush
Intercontinental, Hopkins International and Newark Liberty
International, and at any other airport from which it, together
with its subsidiaries and all other regional jets operating
under its code as their primary code, operates an average of
more than 50 flights per day (although currently there are no
such airports). This means that, without Continental
Airlines consent, we are prohibited from operating flights
under our own code or on behalf of any other carrier in or out
of these airports. In addition, during the term of the
agreement, we are prohibited from operating any of our aircraft
subject to the capacity purchase agreement or using our
passenger-related airport facilities to fulfill our obligations
under the capacity purchase agreement on behalf of any other
carrier or for flights under our own code. Otherwise, the
agreement does not prohibit us from flying aircraft on behalf of
other airlines or under our own code, or from utilizing the
airport facilities of those airlines or other airport facilities
that we may obtain in the future.

Continental Airlines currently has code-sharing
agreements with several regional airlines where Continental
Airlines acts as the primary code-share partner. These
relationships provided Continental Airlines approximately 7.5%
of its regional feed on an available seat miles basis in 2002.
In addition, some of Continental Airlines major airline
code-share partners have arrangements with regional airlines
that operate a few regional jet flights in and out of
Continental Airlines existing hub airports. We cannot
provide any assurance that Continental Airlines will not expand
these relationships in competition with us including through the
use of aircraft released from the capacity purchase agreement,
or that Continental Airlines will not add its own regional jet
capacity in competition with us, subject to our exclusive
arrangement at Continental Airlines three existing hubs.

Because our license from Continental Airlines to
use the Continental Express name and other trademarks is
non-exclusive, Continental Airlines is not prohibited from
flying its own planes or permitting any of these other regional
airlines from operating under the Continental Express name.



| |                     
| | --------------------
| | Most Favored Nations

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



| |                  
| | -----------------
| | Change of Control

So long as Continental Airlines is our largest
customer, if a change of control of our company occurs without
Continental Airlines consent, our block hour rates under
the capacity purchase agreement will be reduced by an amount
approximately equal to the operating margin built into those
rates. Under the capacity purchase agreement, a change of
control of our company is defined as:



| |   |                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our merger or consolidation with a major airline,
    defined as an airline (other than Continental Airlines or its
    subsidiaries) that had more than $500 million of revenue
    (or, if we are the surviving entity in the transaction,
    $1 billion of revenue), adjusted for inflation, 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 Continental Airlines and
    its subsidiaries and passive investors, of more than 25% of our
    capital stock or voting rights, unless such entity or group
    reduces 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 Airlines or its
    subsidiaries) that had more than $1 billion of revenue,
    adjusted for inflation, during the most recently completed
    fiscal year, or airline assets that generated more than
    $1 billion of revenue during the most recently completed
    fiscal year;

10



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| |   |                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our merger or consolidation with another entity
    following which our stockholders own less than a majority of the
    voting securities of the surviving entity;
|
| |  | the sale or other disposition of all or
    substantially all of our airline assets to a major airline;                                                            
|
| |  | the liquidation or dissolution of our company in
    connection with which we cease operations as an air carrier;                                                  
|
| |  | a majority of our directors do not consist of
    either our current directors or individuals nominated by a
    majority of our board of directors; or            
|
| |  | our entering into definitive agreements relating
    to the foregoing matters.                                                                                     



| |                 
| | ----------------
| | Labor Disruption

Upon the occurrence of a union-authorized labor
strike, the capacity purchase agreement provides that:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we will no longer have the right to be
    Continental Airlines exclusive provider of regional jets
    in or out of its hubs in Houston, Cleveland and Newark through
    January 1, 2006, regardless of the length of the strike;                                                                                                                                                                                                                                    
|
| |  | we will be compensated only for the flights we
    complete, and will not be compensated for any controllable or
    uncontrollable cancellations regardless of our historical
    cancellation rates;                                                                                                                                                                                                                                                                  
|
| |  | on each of the 2nd, 15th, 30th, 45th, 60th and
    75th days of the strike, Continental Airlines will be entitled
    to terminate our subleases for, and take immediate possession
    of, up to 20 of our aircraft that are covered by the capacity
    purchase agreement, to a maximum of 120 aircraft if the strike
    extends to the 75th day;                                                                                                                   
|
| |  | we will be required to provide to Continental
    Airlines or its designee, for the duration of the strike and
    180 days thereafter and at market rates, first-priority
    access to all of our flight simulators, hangars, training and
    other facilities and inventory to the extent necessary to enable
    Continental Airlines or its designee to operate any aircraft of
    which Continental Airlines takes possession as a result of the
    strike; and
|
| |  | if the strike continues for 90 days or more,
    Continental Airlines is entitled to terminate the capacity
    purchase agreement for cause, cancel our subleases and take
    immediate possession of all of the aircraft covered by the
    capacity purchase agreement.                                                                                                                                                                                             

In addition, a labor disruption other than a
union-authorized strike may cause us to be in material breach of
the capacity purchase agreement. Under the capacity purchase
agreement, whenever we fail to complete at least 90% of our
aggregate scheduled flights (based on available seat miles) in
three consecutive calendar months or at least 75% of our
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-carrier specific airworthiness directives or regulatory
orders), we will be deemed to be in material breach of the
capacity purchase agreement. A labor disruption other than a
union-authorized strike could cause us to fail to meet these
completion requirements and, as a result, cause us to be in
material breach of the capacity purchase agreement. If
Continental Airlines gives us notice of a material breach and we
fail to cure the breach within 60 days, or if a
union-authorized labor strike continues for 60 days, we
will have to pay Continental Airlines an amount equal to the
expected margin contained in the block hour rates for scheduled
flights from the 60th day until the breach is cured. In
addition, if we fail to cure the breach within 90 days
after notice of the breach, Continental Airlines may terminate
the capacity purchase agreement.



| |                                                              
| | -------------------------------------------------------------
| | Term and Termination of Agreement and
    Remedies for Breach

The agreement expires on December 31, 2010.
Continental Airlines has the option to extend the term of the
agreement with 24 months notice for up to four
additional five-year terms through December 31, 2030.

11



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##### Table of Contents



Based on the current proposed amendment as
discussed in  Our Company  Recent
Developments, Continental Airlines may terminate the
agreement at any time after January 1, 2007 upon
12 months notice, or at any time without notice for
cause, which is defined as:



| |   |                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | bankruptcy of our company;                                                                                                                                                                                        
|
| |  | 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-authorized labor
    strike or any temporary cessation not to exceed 14 days;                                           
|
| |  | a union-authorized labor strike that continues
    for 90 days; or                                                                                                                                                
|
| |  | an intentional or willful material breach by our
    company that substantially deprives Continental Airlines of the
    benefits of the agreement, which is not cured within
    90 days of notice of the breach.

Continental Airlines may also terminate the
agreement at any time upon a material breach by us that does not
constitute cause and continues for 90 days after we receive
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 Airlines an
amount equal to the expected margin contained in the block hour
rates for scheduled flights from the 60th day (or immediately,
without receipt of any notice, if the breach is for cause) until
the breach is cured. In addition, Continental Airlines may
terminate the agreement 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 the capacity purchase agreement.

If Continental Airlines materially breaches the
agreement and fails to cure the breach within 60 days after
we notify it of the breach, we will be entitled to obtain our
payments directly from Airline Clearing House, Inc. from the
60th day for the duration of the default.

In addition, we and Continental Airlines are each
entitled to seek damages in arbitration and to all available
equitable remedies.



| |                                             
| | --------------------------------------------
| | Disposition of Aircraft upon
    Termination

If Continental Airlines terminates the capacity
purchase agreement for cause, it also will have the right at
that time to terminate our subleases with it for aircraft
covered by the agreement and take possession of these aircraft.
If Continental Airlines terminates the capacity purchase
agreement for any reason other than for cause, we have the
option to cancel all or any number of our subleases with it for
aircraft covered by the agreement at the time of termination.
However, if we terminate any of these subleases, we will lose
access to the subject aircraft, which would reduce the size of
our fleet and our future ability to generate revenue. If we
elect not to terminate these subleases, the interest rate
implicit in calculating the scheduled lease payments under the
relevant leases will automatically increase by 200 basis points
to compensate Continental Airlines for its continued
participation in our lease financing arrangements.



| |                                                   
| | --------------------------------------------------
| | Amendment to Embraer and Rolls-Royce
    Contracts

We are prohibited, without Continental
Airlines consent, from amending our aircraft purchase
agreements with Embraer to change the pricing, financing or
leasing arrangements, number or delivery schedule of firm order
or option aircraft subject to the agreements, or to make any
other changes that may be expected to adversely affect
Continental Airlines rights under the capacity purchase
agreement or our ability to perform our obligations under the
capacity purchase agreement. We are also prohibited, without
Continental Airlines consent, from amending our
power-by-the-hour agreement with Rolls-Royce
Corporation in any manner that adversely affects the engine
maintenance costs to us or Continental Airlines of our aircraft
subject to the capacity purchase agreement. We have also agreed
to consent to any amendment of our Embraer aircraft purchase
agreements that reduces the financing or other obligations of
Continental Airlines under these agreements, provided that such
amendment does not increase our obligations under these
agreements.

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| |                
| | ---------------
| | Indemnification

In general, we have agreed to indemnify
Continental Airlines and it has agreed to indemnify us for any
damages caused by any breaches of our respective obligations
under the agreement or caused by our respective actions or
inactions under the capacity purchase agreement.



| |               
| | --------------
| | Board Designee

Under the capacity purchase agreement, we have
agreed to endeavor to ensure that an individual designated from
time to time by Continental Airlines (who will not be a
director, officer or employee of Continental Airlines) will be a
member of the board of directors of our company and each of our
subsidiaries that operate as Continental Express, for the full
term of the capacity agreement. This provision is not
applicable, however, until after Continental Airlines is no
longer entitled to elect any directors to our board of directors
under the terms of our special voting preferred stock held by
Continental Airlines.



| |        
| | -------
| | Summary

We believe that our capacity purchase agreement
allows us to focus on our operations, flight completion rates,
cost-effective maintenance, employee training, labor costs and
employee relations.

We anticipate that substantially all of our
growth over the next several years will be attributable to our
capacity purchase agreement with Continental Airlines. However,
in the future, we also plan to seek opportunities to provide
regional airline service to other major carriers.




Our Markets and Routes

Operating in conjunction with Continental
Airlines principally out of its three main hubs in Newark/ New
York, Houston and Cleveland, we operate, on behalf of
Continental Airlines, a route network that spans the East Coast
and reaches as far north as Quebec City, Canada, as far south as
Villahermosa, Mexico, and as far west as California. We serve
108 cities in 37 states, the District of Columbia, Mexico
and Canada from Continental Airlines three main hubs, each
of which is located in a large business and population center,
which contributes to a high volume of local traffic. In November
2002, we began operating a longer-range version of the Embraer
ERJ-145 aircraft, the Embraer ERJ-145XR, which is able to fly
approximately 1,500 miles (approximately 40% farther than
the ERJ-145 aircraft) and gives us the ability to serve markets
that we were previously unable to serve with direct flights.



| |                                         
| | ----------------------------------------
| | Newark Liberty International
    Airport

As of December 31, 2002, we operated 120
average daily departures from Newark Liberty International
serving 46 cities in 23 states, the District of Columbia
and 5 cities in Canada. All of our departures were served by
regional jets. We operated approximately 83% of all daily
departures of regional jets and turboprops from Newark Liberty
International and approximately 30% of all daily departures of
regional jets and turboprops from New York Citys three
major airports (Newark Liberty, LaGuardia and John F. Kennedy).

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The following map illustrates our routes out of
Newark Liberty International:

(MAP OF ROUTES FROM NEWARK LIBERTY INTERNATIONAL)

Continental Airlines operates the largest hub in
the New York metropolitan area, which is the second largest
aviation market in the world based on weekly departures. As of
December 31, 2002, Continental Airlines operated 176
average daily departures from Newark Liberty International. We
and Continental Airlines together operated approximately 65% of
all daily departures from Newark Liberty International and
approximately 25% of all daily departures from New York
Citys three major airports. In addition to its 135 average
daily domestic departures, Continental Airlines also flies to
Europe, the Caribbean, Mexico, Canada, South America, Central
America, Tel Aviv, Tokyo and Hong Kong from Newark Liberty
International.



| |                                                   
| | --------------------------------------------------
| | Houstons George Bush Intercontinental
    Airport

Bush Intercontinental is the home of our
operations and the operations of Continental Airlines. As of
December 31, 2002, we operated 170 average daily departures
from Bush Intercontinental serving 56 cities in 22 states
and 11 cities in Mexico. We serve more destinations in Mexico
than any other regional U.S. carrier. During 2002, we
operated approximately 92% of all daily departures of regional
jets and turboprops from Bush Intercontinental and approximately
85% of all daily departures of regional jets and turboprops from
Houstons two major airports (Bush Intercontinental and
Houston Hobby).

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The following map illustrates our routes out of
Bush Intercontinental:

(MAP OF ROUTES FROM BUSH INTERCONTINENTAL)

As of December 31, 2002, Continental
Airlines operated 290 average daily departures from Bush
Intercontinental. We and Continental Airlines together operated
approximately 82% of all daily departures from Bush
Intercontinental and approximately 65% of all daily departures
from Houstons two major airports. Bush Intercontinental is
also the focus of Continental Airlines operations in
Mexico and Central America. In addition to its 241 average daily
domestic departures, Continental Airlines also flies to Mexico,
Central America, South America, the Caribbean, Canada, Europe
and Tokyo from Bush Intercontinental.



| |                                              
| | ---------------------------------------------
| | Clevelands Hopkins International
    Airport

As of December 31, 2002, we operated 117
average daily departures from Hopkins International serving 43
cities in 26 states, the District of Columbia and 2 cities
in Canada. All of our departures were served by regional jets.
We operated approximately 74% of all daily departures of
regional jets and turboprops from Hopkins International.

The following map illustrates our routes out of
Hopkins International:

(MAP OF ROUTES FROM HOPKINS INTERNATIONAL)

As of December 31, 2002, Continental
Airlines operated 49 average daily departures from Hopkins
International. We and Continental Airlines together operated
approximately 62% of all daily departures from Hopkins

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International. In addition to its 47 average
daily domestic departures, Continental Airlines also flies to
Nassau from Hopkins International.




| |                   
| | ------------------
| | Our Aircraft Fleet

Our focus on regional jet aircraft has been
instrumental in our long-term growth. Responding to our
customers preference for regional jets over turboprop
aircraft, we were one of the first airlines in the United States
to adopt an all-regional jet strategy. We were the worldwide
launch customer in 1996 for the highly successful line of
regional jets from Embraer. As of December 12, 2002, we
completed our transition to an all-jet air carrier by retiring
and selling all of our remaining turboprop aircraft to
Continental Airlines. Additionally, during the fourth quarter of
2002, we began to add the new Embraer extended range ERJ-145XR
aircraft (ERJ-145XR), a 50-seat regional jet capable
of 1,500-mile flights, to our fleet. At December 31, 2002,
we operated an all-jet fleet of 188 aircraft, including 18 of
the new Embraer ERJ-145XR. We currently expect to continue to
take our firm order delivery of approximately four new Embraer
ERJ-145XR aircraft per month during the first half of 2003, two
aircraft per month during the second half of 2003, 21 new
Embraer ERJ-145XR aircraft per year during 2004 and 2005 and
eight new aircraft in 2006. Our regional jets operational
capabilities have allowed us to successfully add service to new
markets that did not have enough passenger traffic to support
Continental Airlines mainline jet service, but were beyond
the range of turboprop aircraft. We plan to use these aircraft
to begin service to new markets, principally out of the Newark/
New York, Houston and Cleveland areas, and to expand service in
existing markets.

We also have options for an additional 100
ERJ-145XR aircraft. Continental Airlines has the ability to
include any or all of the aircraft subject to options in the
capacity purchase agreement. In addition, as described under
 Our Capacity Purchase Agreement with
Continental Airlines, Continental Airlines has the ability
to reduce the number of aircraft subject to the capacity
purchase agreement below the numbers described in the paragraph
above.

We will not have any obligation to take any of
the aircraft under firm commitments if they are not financed by
a third party and leased to us or Continental Airlines. The
capacity purchase agreement provides that all of the Embraer
regional jets subject to our existing firm orders will be leased
by Continental Airlines and then subleased to us. Under the
capacity purchase agreement, we are responsible for obtaining
financing for the aircraft subject to our options. We have no
orders for additional aircraft other than the Embraer regional
jets.

The Embraer regional jets are among the quietest
commercial jets currently available and offer many of the
amenities of larger commercial jet aircraft, including a
stand-up cabin, overhead and under-seat storage, lavatories,
in-flight meal and beverage service capabilities, and, in many
cases, more leg room than larger jets. The speed of Embraer
regional jets is comparable to that of larger aircraft operated
by the major airlines, and the ERJ-145 and ERJ-135 aircraft have
a range of approximately 1,100 miles, while the ERJ-145XR
has a range of approximately 1,500 miles.

In addition, the flight completion performance of
our regional jets has steadily improved since 1998 due to our
focus on reliability. Excluding cancellations caused by weather
and air traffic control, the completion rate for our regional
jets improved from 97.1% to 99.9% of scheduled flights from 1998
through 2002. During 2002, we also set a record of 100 days
with 100% completion.




Our Industry



| |                                          
| | -----------------------------------------
| | Major, Low-fare and Regional
    Airlines

The airline industry in the United States has
traditionally been led by major airlines, including
American Airlines, United Air Lines, Delta Air Lines, Northwest
Airlines, Continental Airlines and US Airways. The major
airlines offer scheduled flights to most major cities within the
United States and throughout all or part of the world and also
serve numerous smaller cities. The major airlines benefit from
wide name recognition and long operating histories.

Most major airlines have adopted the hub
and spoke system. This system concentrates most of an
airlines operations at a limited number of hub cities,
serving most other destinations or spokes in the system with
one-stop or connecting service through the hub between
destinations on the spokes. Such an arrangement permits
travelers to fly from a point of origin to more destinations
without switching air carriers. Hub airports permit airlines to
transport passengers between large numbers of destinations with
substantially more frequent service than if each route were

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served directly. The hub and spoke system also
allows the carrier to add service to new destinations from a
large number of cities using only one or a limited number of
aircraft.


Low-fare airlines, such as Southwest
Airlines, AirTran Airways, Frontier Airlines and JetBlue,
generally offer fewer conveniences to travelers and have lower
cost structures than major airlines, which permits them to offer
flights to many of the same markets, but at lower prices. Some
low-fare airlines utilize a hub and spoke strategy, while
others, including Southwest Airlines, have offered predominately
point-to-point service between designated city pairs. The
reduction, withdrawal or historical absence of service on
shorter routes by both major and low-fare carriers has provided
increased opportunities for regional airlines to develop these
markets.

Regional airlines, including our company, SkyWest
Airlines, Atlantic Coast Airlines, American Eagle, Atlantic
Southeast Airlines, Comair, Mesa Airlines, Mesaba Airlines and
Horizon Airlines, typically operate smaller aircraft on
lower-volume routes than major airlines. Several regional
airlines, including American Eagle, Comair, Republic, Pinnacle,
Atlantic Southeast Airlines and Horizon Airlines, are wholly
owned subsidiaries of major airlines. In contrast to low-fare
airlines, regional airlines generally do not try to establish an
independent route system to compete with the major airlines.
Rather, regional airlines typically enter into relationships
with one or more major airlines, in which the regional airline
agrees to use its smaller aircraft to carry passengers booked
and ticketed by the major airline between a hub of the major
airline and a smaller outlying or spoke city. In exchange for
these services, the regional airline is paid either a fixed fee
by the major airline or a percentage of applicable ticket
revenue.



| |                                            
| | -------------------------------------------
| | Growth of the Regional Airline
    Industry

According to the Regional Airline Association,
the regional airline sector of the airline industry experienced
compounded annual growth in available seat miles of 9.5% between
1992 and 2001. We believe that the growth in the number of
passengers using regional airlines and the revenue of regional
airlines during the past decade is attributable to a number of
factors, including:



| |   |                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Regional airlines are replacing turboprop planes
    with regional jets, which passengers prefer.                                                                                                                                                                                                                                                 
|
| |  | Many major airlines have determined that an
    effective method for retaining customer loyalty and maximizing
    system revenue, while lowering costs, is to utilize more
    cost-efficient regional airlines flying under the major
    airlines flight designator code and name to serve a
    combination of shorter and low-volume routes.
|
| |  | Since many major airlines are increasingly using
    regional airlines as part of their growth strategies, many
    regional airlines have expanded, and may continue to expand,
    together with the major airlines they serve.                                                                                                                 
|
| |  | Regional airlines tend to have a more favorable
    cost structure and leaner corporate culture than many major
    airlines. Many regional airlines were founded in the midst of
    the highly competitive market that developed following
    deregulation of the airline industry in 1978.                                                    



| |                                       
| | --------------------------------------
| | Growth in the Use of Regional
    Jets

We believe that the emergence of the regional jet
in the mid-1990s was, and will continue to be, a
significant factor in the growth of the regional airline
industry. Part of the reason for the regional jets
importance to the growth of the regional airline industry stems
from the high level of customer preference for the aircraft.
Regional jets feature cabin class comfort and low noise levels,
and we believe they are perceived by customers to be a safer
means of transportation than turboprops. In addition, regional
jets travel at high speed and have a traveling range that is
similar to the 120-seat plus aircraft operated by major
airlines. Regional jets can be used effectively on routes of up
to approximately 1,500 miles, compared to approximately
400 miles for turboprops. The extended range, speed and
greater comfort of regional jets allow regional airlines to
operate on longer routes than they could with turboprops.

In addition, for many routes, regional jets are
more economical than larger jets. Regional jets are often used
to fly on what are called long and thin routes,
which are routes between cities that are too distant to use
turboprops (500 to 1,500 miles) but have too little
customer demand (either overall or during particular times of
the day) to justify flying larger jet aircraft. The ability of
regional jets to serve smaller markets has allowed the major
carriers, in conjunction with their regional partners, to
enhance greatly the utility of their hubs by adding spoke cities
and increasing the frequency of flights, especially in off-peak
periods.

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| |                                                
| | -----------------------------------------------
| | Relationship of Regional and Major
    Airlines

Regional airlines generally enter into
code-sharing agreements with major airlines, under which the
regional airline is authorized to use the major airlines
two-letter flight designator code to identify the regional
airlines flights and fares in the central reservation
systems, to paint its aircraft with the colors and/or logos of
its code-sharing partner and to market and advertise its status
as a carrier for the code-sharing partner. In addition, the
major airline generally provides reservation services, ticket
stock, some ticketing services, ground support services and gate
access to the regional airline, and both partners often
coordinate marketing, advertising and other promotional efforts.
In exchange, the regional airline provides a designated number
of low-capacity (usually between 30 and 80 seats) flights
between larger airports served by the major airline and
surrounding cities, usually in lower-volume markets.

The financial arrangements between the regional
airlines and their code-sharing partners usually involve either
a fixed-fee arrangement or a revenue-sharing arrangement. We
believe that, as a result of the differences between fixed-fee
arrangements and revenue-sharing arrangements, the trend in the
industry for publicly owned regional carriers is toward using
fixed-fee arrangements similar to the one that we have with
Continental Airlines.

Fixed-Fee Capacity Purchase Arrangements.Under a fixed-fee arrangement, the
major airline generally pays the regional airline a fixed rate
per flight, with additional incentives based on such factors as
completion of flights, on-time performance and satisfactory
baggage handling. In addition, the major and regional airlines
often enter into an arrangement under which the major airline
bears the risk of changes in the price of fuel. Under these
arrangements, the major airline is responsible for scheduling
and pricing the flights and controlling inventory. Regional
airlines can benefit from a fixed-fee capacity purchase
arrangement because they are sheltered to some degree from many
of the elements that cause volatility in airline
earnings  variations in ticket prices, passenger
loads and fuel prices. However, regional airlines in fixed-fee
capacity purchase arrangements generally do not benefit from a
positive trend in ticket prices, passenger loads or fuel prices
and, because the major airlines absorb most of the risks, the
margin between the per-block hour fixed rate and expected
per-block hour costs tends to be smaller than the margins that
can be achieved by revenue-sharing arrangements. The major
airline can benefit from fixed-fee capacity purchase
arrangements because under such arrangements it is better able
to control its entire network of flights and to serve strategic
routes that otherwise might be uneconomical to a regional
carrier under a revenue-sharing arrangement.

Revenue-Sharing Arrangements.Under a revenue-sharing arrangement,
the major airline and regional airline negotiate a proration
formula, under which the regional airline receives a percentage
of the ticket revenue for those passengers traveling for one
portion of their trip on the regional airline and the other
portion of their trip on the major airline. Substantially all
costs associated with the regional airline flight are borne by
the regional airline. In such a revenue-sharing arrangement, the
regional airline realizes increased profits as ticket prices and
passenger loads increase or fuel prices decrease and,
correspondingly, realizes decreased profits as ticket prices and
passenger loads decrease or fuel prices increase. Under this
arrangement, the regional airline typically has more control
over its flights and inventory.




Our Competitors

The airline industry is highly competitive. We
compete not only with other regional airlines, some of which are
owned by or are operated as code-sharing partners of major
airlines including Continental Airlines, but also with low-fare
airlines and major airlines on many of our routes. Some of these
airlines are larger and have significantly greater financial and
other resources than we do. The principal competitive factors in
the regional airline industry are fare pricing, customer
service, routes served, flight schedules, aircraft types and
code-sharing relationships. Competitors may rapidly enter
markets we serve for Continental Airlines and quickly discount
fares. The airline industry is particularly susceptible to price
discounting because airlines incur only nominal variable costs
to provide service to passengers occupying otherwise unsold
seats.

We are the leading regional airline operating out
of Newark Liberty International, Bush Intercontinental and
Hopkins International. We believe that our capacity purchase
agreement with Continental Airlines combined with Continental
Airlines significant market share at those airports
provides us with a significant competitive advantage at these
airports over other regional carriers. However, we face
substantial competition from a number of regional airlines,
including American Eagle and Atlantic Coast Airlines, which
serve the New York metropolitan area. We also face limited
competition from low-fare airlines, although they tend to serve
different city pairs than we do.

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Continental Airlines currently has code-sharing
agreements with several regional airlines where Continental
Airlines acts as the primary code-share partner. We believe
these relationships provided Continental Airlines approximately
7.5% of its regional feed on an available seat miles basis in
2002. In addition, some of Continental Airlines major
airline code-share partners have arrangements with regional
airlines that operate a few regional jet flights in and out of
Continental Airlines existing hub airports. We cannot
provide assurance that Continental Airlines will not expand
these relationships in competition with us, including through
the use of aircraft released from the capacity purchase
agreement, nor that Continental Airlines will not add regional
jet capacity in competition with us, subject to our exclusive
arrangement at Continental Airlines three existing hub
airports. Because our license from Continental Airlines to use
the Continental Express name and other trademarks is
non-exclusive, Continental Airlines is not prohibited from
flying its own planes or permitting any of these other regional
airlines from operating under the Continental Express name.




Our Industry Regulation

We operate under certificates of public
convenience and necessity issued by the Department of
Transportation (DOT). These certificates may be
altered, amended, modified or suspended by the DOT if public
convenience and necessity so require, or may be revoked for
intentional failure to comply with the terms and conditions of a
certificate.

The airlines are also regulated by the FAA,
primarily in the areas of flight operations, maintenance, ground
facilities and other technical matters. Under these regulations,
we have established, and the FAA has approved, a maintenance
program for each type of aircraft operated by us that provides
for the ongoing maintenance of these aircraft, ranging from
frequent routine inspections to major overhauls.

The DOT allows local airport authorities to
implement procedures designed to abate special noise problems,
provided such procedures do not unreasonably interfere with
interstate or foreign commerce or the national transportation
system. Some airports, including the major airports at Boston,
Washington, D.C., Chicago, Los Angeles, San Diego,
Orange County (California) and San Francisco, have
established airport restrictions to limit noise, including
restrictions on aircraft types to be used and limits on the
number of hourly or daily operations or the time of such
operations. In some instances, these restrictions have caused
curtailments in services or increases in operating costs, and
such restrictions could limit our ability to commence or expand
our operations at affected airports. Local authorities at other
airports are considering adopting similar noise regulations.

The FAA has designated John F. Kennedy
International Airport (JFK) and LaGuardia Airport
(LaGuardia) in New York and Ronald Reagan Washington
National Airport in Washington, D.C. as high density
traffic airports and has limited the number of departure
and arrival slots at those airports. In April 2000, legislation
was signed phasing out slot restrictions beginning in 2001 at
LaGuardia and Kennedy. All slot restrictions at LaGuardia and
Kennedy are scheduled to be eliminated by 2007. The elimination
of slots has not had any material impact on us.

In November 2001, the President signed into law
the Aviation Security Act. The law federalizes substantially all
aspects of civil aviation security, creating a new
Transportation Security Administration under the DOT. Under the
Aviation Security Act, all security screeners at airports will
be federal employees, and significant other elements of airline
and airport security will be overseen and performed by federal
employees, including federal security managers, federal law
enforcement officers, federal air marshals and federal security
screeners. Among other matters, the law mandates improved flight
deck security, deployment of federal air marshals onboard
flights, improved airport 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 data to
U.S. Customs, and enhanced background checks. Funding for
airline and airport security under the law is provided by a new
$2.50 per enplanement ticket tax (subject to a $5 per
one-way trip cap), and a new annual fee on air carriers in an
amount not to exceed the amounts paid in calendar year 2000 by
air carriers for screening passengers and property. Air carriers
began collecting the new ticket tax from passengers, and became
subject to the new fee on air carriers, on February 1,
2002. The law required that the Undersecretary of Transportation
for Security assume all the civil aviation security functions
and responsibilities related to passenger screening called for
under the law. The law also requires that all checked baggage be
screened by explosives detection systems, which will require
significant equipment acquisition by the government and may
require facility and baggage process

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changes to implement. Implementation of the
requirements of the Aviation Security Act may result in
increased costs for airlines and passengers and may result in
delays and disruptions to air travel.


Many aspects of operations are subject to
increasingly stringent federal, state and local laws protecting
the environment. Future regulatory developments could adversely
affect operations and increase operating costs in the airline
industry.




Our Maintenance of Aircraft

Using a combination of FAA certified maintenance
vendors and our own personnel and facilities, we maintain our
aircraft on a scheduled and as-needed basis. We
emphasize preventive maintenance and inspect our aircraft
engines and airframes as required. We have a
power-by-the-hour agreement with Rolls-Royce
Corporation to maintain the engines on our Embraer ERJ-145 and
ERJ-135 aircraft through April 2010. Under the agreement, we are
charged for covered services based on a fixed rate for each
flight hour accumulated during a month. The rates are subject to
annual revisions based on the Bureau of Labor Statistics labor
and material indices. In addition, the operating assumptions
used to determine the rates are currently under review, and will
be reviewed every other year beginning January 1, 2004,
based on our actual operation of the aircraft and engines and
projections for future operations. We believe this agreement,
coupled with our ongoing maintenance program, reduces the
likelihood of unexpected levels of engine maintenance expense
during its term. We continue to maintain an inventory of
aircraft spare parts and utilize a computerized tracking system
to increase maintenance efficiency and to avoid excess
inventories of spare parts.

We perform our line and heavy maintenance
projects at our facilities in Knoxville, Shreveport, Cleveland
and Houston as well as our satellite maintenance stations.

All mechanics and avionics specialists employed
by us have appropriate training and experience and hold required
licenses issued by the FAA. We provide periodic in-house and
outside training for our maintenance and flight personnel and
also take advantage of manufacturers training programs
that are offered when acquiring new aircraft.




Our Employees

As of December 31, 2002, we had
approximately 5,100 full-time equivalent employees,
including approximately 1,800 pilots, 800 flight attendants,
1,100 customer service personnel, 800 maintenance technicians
and 100 other maintenance personnel, 60 dispatchers and 500
management and support personnel. As is customary in the airline
industry, we also use third parties to provide ground handling
personnel in some stations. Currently, a majority of these
ground handling personnel are provided by Continental Airlines.

Labor costs are a significant component of
airline expenses and can substantially impact our results. While
there can be no assurance that what we regard as our generally
good labor relations and high labor productivity will continue,
an important component of our business strategy is the
preservation of good relations with our employees, approximately
70% of whom are represented by unions.

Under the terms of a flow-through agreement with
ours and Continental Airlines pilots, furloughed
Continental Airlines pilots have the option to fly for our
company and replace our pilots. In addition, our furloughed
Continental Airlines pilots have recall rights to be rehired by
Continental Airlines. Since September 11, 2001, Continental
Airlines has furloughed a total of 439 pilots. Of this number,
233 pilots took positions at our company, contributing to the
furlough of 386 of our pilots. Should pilot positions become
available at Continental Airlines, our pilots who were
furloughed by Continental Airlines will likely elect to return
to Continental Airlines. We may have difficulty replacing these
pilots. In addition, some of our pilots and mechanics have
preferential rights to be hired by Continental Airlines when
positions become available. As a result, until the termination
of these flow-through arrangements (which terminate when
Continental Airlines ceases to own more than 50% of our
outstanding common stock) and recall rights, additional hiring
by Continental Airlines or additional furloughs by Continental
Airlines may cause additional turnover of our employees.

The flow of pilots from Continental Airlines to
us under the flow-through agreement and the potential recall of
some of these pilots to Continental Airlines in the future are
expected to result in higher pilot labor costs. These higher
costs are expected to result from reduced productivity,
additional training costs and the higher seniority level of

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the Continental Airlines pilots that have
taken positions with us. As a result, Continental Airlines has
agreed to increase payments to us under our capacity purchase
agreement to cover these increases in costs stemming from our
hiring of furloughed Continental Airlines pilots under the
flow-through arrangements.


The following table, as of December 31,
2002, reflects our principal collective bargaining agreements
and their respective amendable dates.

|                        |  |                      |       |                    |  |                                                                   |  |              
|----------------------- |  | -------------------- | ----- | ------------------ |  | ----------------------------------------------------------------- |  | -------------
|                        |  | Approximate Number   |       |                    |  |                                                                  
|                        |  | of Full-Time         |       |                    |  | Contract                                                         
|Employee Group          |  | Equivalent Employees |       | Representing Union |  | Amendable Date                                                   
|                        |  |                      |       |                    |  |                                                                  
|Pilots                  |  |                      | 1,800 |                    |  | Air Line Pilots Association, International                        |  | October 2002 
|Maintenance technicians |  |                      | 800   |                    |  | International Brotherhood of Teamsters                            |  | February 2004
|Flight Attendants       |  |                      | 800   |                    |  | International Association of Machinists and
    Aerospace Workers |  | December 2004
|Dispatchers             |  |                      | 60    |                    |  | Transport Workers Union of America                                |  | July 2004    

We are currently engaged in labor negotiations
with our pilots. At his time, we cannot predict the outcome of
these negotiations. Our other employees are not covered by
collective bargaining agreements.




Principal Risk Factors that May Affect Our
Business and Results of Operations

Risk Factors Relating to Our Capacity Purchase
Agreement with Continental Airlines



| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | We are dependent on the financial and
    operational strength of Continental Airlines.

Continental Airlines reported a net loss of
$451 million for the full year 2002. Although Continental
Airlines has been able to raise capital, downsize operations and
reduce expenses significantly, current trends in the airline
industry and the U.S. economy make it likely that they will
continue to post significant losses for the foreseeable future.
Although Continental Airlines believes that their liquidity will
be sufficient to fund current operations through 2003 or beyond
if they continue to be successful in implementing previously
announced cost cutting and revenue generating measures, together
with the capacity reductions announced by other carriers and
capacity reductions that could come from restructurings within
the industry, they believe that the economic and political
environment in which they operate must improve for them to
operate at their current size and expense level beyond that time.

Even absent such adverse factors as further
economic recession, additional terrorist attacks, a war
affecting the United States (if the war were prolonged),
decreased consumer demand, or increased fuel prices, Continental
Airlines may find it necessary to further downsize their
operations and further reduce expenses. Therefore, Continental
Airlines could reduce the level of their commitment or their
utilization of our aircraft under the capacity purchase
agreement, which could materially reduce our revenue and
earnings. For a detailed discussion of Continental
Airlines results of operations, please see their report on
Form 10-K for the year ended December 31, 2002 as
filed with the SEC. In addition, refer to Item 8.
Financial Statements and Supplementary Data 
Notes to Consolidated Financial Statements 
Note 3  ExpressJet Initial Public Offering
and Capacity Purchase Agreement. in such Form 10-K
that sets forth Continental Airlines disclosure of their future
minimum non-cancellable commitments under the capacity purchase
agreement.



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If Continental Airlines terminates our
    capacity purchase agreement, we may lose access to all, or
    substantially all, of our aircraft fleet, our airport facilities
    and regulatory authorizations relating to scheduled flights, as
    well as any services that Continental Airlines provides to
    us.

At December 31, 2002, we sublease all of our
aircraft from Continental Airlines. If Continental Airlines
terminates the capacity purchase agreement for cause, it will
have the right to terminate our subleases with it for aircraft
covered by the agreement at the time of termination and take
possession of these aircraft. If Continental

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Airlines terminates the capacity purchase
agreement for any reason other than cause, we have the option to
cancel all or any number of our subleases with Continental
Airlines for aircraft covered by the agreement at the time of
termination. If we cancel any of these subleases, we will lose
access to the subject aircraft, which would reduce the size of
our fleet and impair our ability to generate revenue and cash
flow. If we elect not to terminate these subleases, the interest
rate implicit in calculating the scheduled lease payments will
automatically increase by 200 basis points to compensate
Continental Airlines for its continued participation in our
lease financing arrangements, which would increase our expenses
and adversely affect our earnings.


Under the capacity purchase agreement, so long as
Continental Airlines is our largest customer, if a change of
control of our company occurs without the consent of Continental
Airlines, our block hour rates under the capacity purchase
agreement will be significantly reduced, which would have a
material adverse effect on our operating results and financial
condition. In addition, so long as Continental Airlines owns a
majority or significant portions of our common stock it will be
able to control or significantly influence the election of our
board of directors, the outcome of any stockholders vote and
other matters affecting our company.

Additionally, if the capacity purchase agreement
is terminated for any reason, we would likely lose access to all
or substantially all of our airport facilities and other
services that Continental Airlines provides to us. Most of the
airport facilities that we use are leased from airport
facilities by Continental Airlines. If the capacity purchase
agreement is terminated, we can be required by Continental
Airlines to vacate substantially all of the space subleased to
us. In addition, at any airport to which we fly scheduled
flights on behalf of Continental Airlines, subject to some
exceptions, Continental Airlines can require us, at any time
including upon cessation of these scheduled flights to this
airport, to use commercially reasonable efforts to assign any
lease for these facilities that is in our name to Continental
Airlines or its designee (or to sublease the space to it or its
designee). As a result, in order to offer airline service after
termination of our capacity purchase agreement, we may have to
arrange to use the same or other airport facilities, slots, and
authorizations at higher rates. Our inability to gain
appropriate access to airport facilities, slots or other
authorizations or a significant increase in our cost to do so
would have a material adverse effect on our operating results
and financial condition.

In connection with the capacity purchase
agreement, Continental Airlines provides a number of important
passenger, aircraft and traffic handling services to us. Upon
termination of the capacity purchase agreement, we would either
need to provide these services internally or contract with a
third party for them. We may not be able to replace these
services on a cost effective basis and as a result could cause a
material adverse effect on our operating results and financial
condition.

While we have no reason to believe, based on
information currently available, that Continental Airlines or us
will terminate the capacity purchase agreement in the
foreseeable future, there can be no assurance that such
circumstances will not occur causing Continental Airlines or us
to terminate the capacity purchase agreement.

Risks Factors Relating to Our Business and
Operations



| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have substantial debt obligations, and
    we may not be able to generate sufficient cash flow or otherwise
    raise funds to make required payments or pursue other business
    opportunities.

Our high leverage may affect our ability to
satisfy our significant financing needs or meet our obligations.
We currently have $325.5 million of outstanding
indebtedness attributable to our note payable to Continental
Airlines. Accrued interest is currently payable quarterly, and
installments of $27.9 million in principal and accrued
interest are due quarterly beginning June 30, 2003, with
the entire unpaid balance due on March 31, 2007. There can
be no assurance that we will generate sufficient cash or
otherwise raise funds to make these interest or principal
payments when due or that we will be able to refinance the note
at maturity. If we do not make these payments in a timely
manner, Continental Airlines can reduce its monthly payments to
us under the capacity purchase agreement to the extent necessary
to offset our defaulted payments. Even if we are able to timely
service our debt obligations, their size could negatively affect
our operations in various ways, including increasing the cost,
or limiting the availability, of additional financing for
working capital, capital acquisitions or other purposes and
limiting the ways in which we can use our cash flow. Under the
terms of our agreements with Continental Airlines,
(a) until April 23, 2003, we cannot issue any of our
or our subsidiaries capital stock (except in connection
with our employee benefit plans) and

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(b) between that date and April 23,
2004, if we or any of our subsidiaries issue or sell any capital
stock of our company or any of our subsidiaries, other than
issuances or sales in connection with our employee benefit
plans, we are required to use 75% of the net proceeds from that
sale to make a principal payment on the note, unless in either
case we receive Continental Airlines consent or at such
time Continental Airlines and its controlled affiliates own less
than 20% of our outstanding shares of common stock.


Our credit status could decline as a result of
our operating separately from Continental Airlines, and as a
result, we may face increased borrowing costs, more restrictive
covenants and reduced amounts of credit, which may result in a
reduction in the size of our fleet or impair our ability to fly
for other carriers. Our operation as a separate entity from
Continental Airlines may have a negative impact on our ability
to obtain credit on terms similar to those we were able to
obtain previously. Historically, Continental Airlines has
provided financing and credit support to us. We expect that,
except as required by the capacity purchase agreement,
Continental Airlines will not continue to provide us financing
and credit support. As a result, we may face increased borrowing
costs, more restrictive covenants and reduced credit from
lenders and suppliers, all of which would adversely affect our
operating results, financial condition and our ability to raise
capital to pursue other business opportunities.

Under the capacity purchase agreement and
agreements with Embraer, Continental Airlines will acquire or
lease from Embraer or its designee all of our current firm order
aircraft and sublease these aircraft to us, although neither we
nor Continental Airlines has any obligation to acquire or lease
any of these aircraft that are not financed by a third party and
leased to us or Continental Airlines. In addition, Continental
Airlines is not required to provide any financing for our
Embraer option aircraft or any other aircraft that we may
acquire.

In addition, Continental Airlines may require us
to substitute aircraft subject to our existing Embraer options
for aircraft that have been removed from the terms of the
capacity purchase agreement and that we sublease from
Continental Airlines. If Continental Airlines elects to do this,
it will be entitled to terminate our sublease and take
possession of the replaced aircraft on the option
aircrafts scheduled delivery date, regardless of whether
the option aircraft is actually delivered or we are able to
finance its acquisition. Continental Airlines may also terminate
the sublease relating to, and take possession of, any of our
aircraft that has been removed from the terms of the capacity
purchase agreement to the extent that Continental Airlines
provides us with an equivalent replacement aircraft. We will be
required to use commercially reasonable efforts to finance the
replacement aircraft. If we are unable to obtain financing after
using commercially reasonable efforts, we will not be required
to exchange our aircraft for the replacement aircraft. However,
we cannot assure you that, if Continental Airlines exercises its
rights to replace an aircraft and we are able to obtain
financing, the terms of any alternative financing will be
comparable to those in the subleases with Continental Airlines.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | Our tax agreement with Continental Airlines
    increases our exposure to Continental Airlines financial
    health.

Our internal reorganization should reduce the
amounts we must pay in the future to various tax authorities as
a result of increasing the tax basis of our tangible and
intangible assets to fair value. We have agreed in our tax
agreement with Continental Airlines to pay to Continental
Airlines substantially all of the amount by which our tax
payments to various tax authorities are reduced, which could be
as much as $400 million over 15 years or longer. See
Item 8. Financial Statements and Supplementary
Data  Notes to Consolidated Financial
Statements  Note 4  Income
Taxes for detailed discussion of our income taxes,
including the increase in the tax basis of our tangible and
intangible assets to fair value. After paying these reduced
amounts to tax authorities, if it is determined as a result of
an income tax audit or examination that any significant amount
of these tax benefits should not have been available, and, as a
result, we must pay additional taxes and/or penalties to one or
more tax authorities, and if at that time Continental Airlines
were insolvent or bankrupt or otherwise unable to pay us under
its indemnification of us for these amounts, then we could be
materially adversely affected.



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | Increases in our labor costs, which
    constitute a substantial portion of our total operating costs,
    may directly impact our earnings.

Labor costs impact our results of operations.
Labor costs constitute a significant percentage of our total
operating costs, and are considered unreconciled costs under the
capacity purchase agreement with Continental Airlines. The

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collective bargaining agreement between us and
our pilots (who are represented by the Air Line Pilots
Association, International (ALPA) was amendable in
October 2002. We began our negotiations with our pilots in July
2002 and had jointly applied for a federal mediator with ALPA on
December 20, 2002. Our negotiations are ongoing with the
mediator and ALPA and at this time we cannot predict the outcome
of these negotiations. We believe that we will incur increased
labor costs in connection with the negotiation of our collective
bargaining agreement with our pilots. If we are unable to reach
agreement with any of our unionized work groups on the terms of
their collective bargaining agreements, we may be subject to
work interruptions and/or stoppages. Any sustained work
stoppages could adversely affect our ability to conduct our
operations and fulfill our obligations under the capacity
purchase agreement. In addition, certain other U.S. air
carriers have experienced work slowdowns, strikes or other labor
disruptions in connection with contract negotiations. Although
we enjoy generally good relations with our pilots, there can be
no assurance that we will not experience labor disruptions in
the future.




| |                                                                 
| | ----------------------------------------------------------------
| | We May Not Be Successful in Implementing
    Our Growth Strategy

In order to meet our growth objectives, we have
contracted to add additional aircraft to our fleet over the next
several years. Substantial risks accompany our growth plans.
Some factors that may impact our growth plan include:
(i) demand for regional air transportation, principally in
Houston and Cleveland, and the actual physical availability for
growth at airports in Cleveland and Newark; (ii) the
general condition of the U.S. economy; (iii) our ability to
hire, train and retain enough pilots, flight crews and mechanics
for our aircraft; (iv) our ability to obtain and finance
enough new Embraer regional jets and other aircraft; and
(v) our ability to operate and manage a larger enterprise
cost-effectively. Many of these factors are beyond our control.
If we are incorrect in our assessment of the profitability and
feasibility of our growth plans, or if unforeseen circumstances
arise, we may not be able to grow as planned or our growth may
have an adverse effect on our operating results and our
financial condition.

Risks Factors Relating to the Airline
Industry



| |                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------
| | Our industry has incurred significant
    losses as a result of weakened economies and political
    uncertainties.

The industry in which we compete is highly
sensitive to the economy. As we continue to operate in an
uncertain global and domestic economy, overall revenue for the
airline industry is depressed. Corporate profitability has
declined, resulting in reduced business travel, typically the
most profitable source of revenue for mainline carriers. In
addition, we believe that reduced demand persists not only
because of the weak economy, but also due to some
customers concerns about a war by United States forces
against Iraq, future terrorist attacks and reprisals. Demand is
further weakened by customer dissatisfaction with the hassle and
delay of heightened airport security. Under our capacity
purchase agreement, Continental Airlines assumes the risk of
revenue volatility associated with fares and passenger traffic.
Therefore, although we are not directly affected by the decline
in demand, so long as Continental Airlines is our largest
customer, this factor could influence their commitments to us
under the capacity purchase agreement and lead to a reduction in
our revenue.

Our business is subject to extensive government
regulation. As evidenced by the enactment of the Aviation
Security Act, airlines are subject to extensive regulatory and
legal compliance requirements that result in significant costs.
The FAA from time to time issues directives and other
regulations relating to the maintenance and operation of
aircraft that require significant expenditures. Some FAA
requirements cover, among other things, retirement of older
aircraft, security measures, collision avoidance systems,
airborne windshear avoidance systems, noise abatement and other
environmental concerns, commuter aircraft safety and increased
inspections and maintenance procedures to be conducted on older
aircraft. We expect to continue incurring expenses to comply
with the FAAs regulations. In addition, if any of these
actions by the FAA causes us to cancel flights, the resulting
reduction in our revenue is not taken into account in the
reconciliation payment made under the capacity purchase
agreement to maintain our operating margin within a specified
range.

Additional laws, regulations, taxes and airport
rates and charges have been proposed from time to time that
could significantly increase the cost of airline operations or
reduce revenue. Additionally, because of significantly higher
security and other costs incurred by airports after
September 11, 2001 and because reduced landing weights
since September 11, 2001 have reduced the fees airlines pay
to airports, many airports are significantly increasing their

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rates and charges to air carriers. Restrictions
on the ownership and transfer of airline routes and takeoff and
landing slots have also been proposed. The ability of
U.S. carriers to operate international routes is subject to
change because the applicable arrangements between the United
States and foreign governments may be amended from time to time,
or because appropriate slots or facilities are not made
available. We cannot assure you that laws or regulations enacted
in the future will not adversely affect us.




| |                                                                                                 
| | ------------------------------------------------------------------------------------------------
| | Substantial consolidation and competition
    in the airline industry could adversely affect us.

Since its deregulation in 1978, the
U.S. airline industry has undergone substantial
consolidation, and it may in the future experience additional
consolidation. Continental Airlines routinely monitors changes
in the competitive landscape and engages in analysis and
discussions regarding strategic position, including potential
alliances and business combination transactions. Any additional
consolidation or significant alliance activity within the
airline industry could adversely affect our operations, our
business prospects and our relationship with Continental
Airlines. While we have no reason to believe, based on
information currently available, that Continental Airlines
implementation of its marketing alliance with Delta Air Lines,
Inc. and Northwest Airlines, Inc. will have an adverse effect on
our capacity purchase agreement with Continental Airlines, there
can be no assurance that such circumstances will not occur in
the future.

The airline industry is highly competitive. We
compete not only with other regional airlines, some of which are
owned by or operate as code-sharing partners of major airlines
including Continental Airlines, but also with low-fare airlines
and major airlines on many of our routes. Some of these airlines
are larger and have significantly greater financial and other
resources than we do. Moreover, competitors could rapidly enter
markets we serve for Continental Airlines and quickly discount
fares, which could lessen the economic benefit.



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | We may be affected by factors beyond our
    control, including weather conditions and the availability and
    cost of fuel.

Generally, revenue for airlines depends on the
number of passengers carried, the fare paid by each passenger
and service factors, such as timeliness of departure and
arrival. During periods of fog, icy conditions, storms or other
adverse weather conditions, flights may be cancelled or
significantly delayed. Under our capacity purchase agreement
with Continental Airlines, we are substantially protected
against cancellations due to weather or air traffic control.
However, if we decide in the future to operate our aircraft for
another airline or under our own flight designator code, we may
not be protected against weather or air traffic control
cancellations, which could adversely affect our operating
results and financial condition.

In addition, if we operate our aircraft for
another airline or under our own flight designator code, we
could be exposed to risk of increased fuel prices. Both the cost
and availability of fuel are subject to many economic and
political factors and events occurring throughout the world. Our
ability to pass on increased fuel costs through fare increases
would be limited by several factors, including economic and
competitive conditions. In addition, if the unavailability of
fuel causes us to cancel flights, the resulting reduction in our
revenue is not taken into account in the reconciliation payment
made under the capacity purchase agreement to maintain our
operating margin within a specified range. The cost and
availability of adequate supplies of fuel could have a material
effect on our operating results and our financial condition in
the future.






Item 2.     Properties







Flight Equipment


As shown in the following table, our operating
aircraft fleet consisted of 188 regional jets at
December 31, 2002. Our purchase commitments
(orders) and aircraft options as of December 31, 2002
are also shown below.

|               |       |          |     |        |  |        |     |         |  |               |    |    |  |  |     |     |  |  |    |  | 
|-------------- | ----- | -------- | --- | ------ |  | ------ | --- | ------- |  | ------------- | -- | -- |  |  | --- | --- |  |  | -- |  | 
|               |       |          |     |        |  |        |     |         |  | Seats in     
|               |       | Total    |     |        |  | Firm   |     |         |  | Standard     
|Type           |       | Aircraft |     | Leased |  | Orders |     | Options |  | Configuration
|               |       |          |     |        |  |        |     |         |  |              
|Regional Jets: |       |          |     |        |  |        |     |         |  |               |    |    |  |  |     |     |  |  |    | 
|ERJ-145XR      |       |          | 18  |        |  |        | 18  |         |  |               | 86 |    |  |  | 100 |     |  |  | 50 | 
|ERJ-145        |       |          | 140 |        |  |        | 140 |         |  |               |   |    |  |  |    |     |  |  | 50 | 
|ERJ-135        |       |          | 30  |        |  |        | 30  |         |  |               |   |    |  |  |    |     |  |  | 37 | 
|               |       |          |     |        |  |        |     |         |  |               |    |    |  |  |     |     |  |  |    | 
|               | Total |          |     | 188    |  |        |     | 188     |  |               |    | 86 |  |  |     | 100 |  |  |    |  | 
|               |       |          |     |        |  |        |     |         |  |               |    |    |  |  |     |     |  |  |    | 

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During 2002, we put into service a total of 51
new aircraft which consisted of 33 ERJ-145 aircraft and
18 ERJ-145XR aircraft. We removed from service 25 ATR-42
aircraft and 8 EMB-120 aircraft.

We have entered into discussions and believe we
have agreements in principle to take delivery of 36 ERJ-145XR
aircraft in 2003, 21 ERJ-145XR aircraft in 2004 and 2005 and the
remainder of our firm orders through 2006.

See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital Commitments
for a discussion of our order for new firm commitment aircraft
and related financing arrangements.




Facilities

We use the following principal facilities:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Bush Intercontinental  Terminal B has
    approximately 155,000 square feet with 31 regional jet
    gates. Subject to obtaining applicable approvals, we have the
    ability to add one additional regional jet gate to the existing
    terminal. Additionally, we have remote parking positions for an
    additional 12 regional jets served by a bus facility as well as
    access to an additional nine remote parking positions near
    Terminal Ds international facility.                                      
|
| |  | Houston Maintenance Hangar  We have
    four maintenance bays occupying approximately 70,000 square
    feet and approximately 45,000 square feet of administrative
    space.                                                                                                                                                                                                                                                                                                                                              
|
| |  | Houston Training Center  We have a
    33,000 square foot facility containing regional jet
    simulators and corresponding training and administrative space.
    Construction began in late January 2003 to add nearly
    25,000 square feet of additional space, which includes one
    additional full motion flight simulator, additional classrooms
    and administrative space.                                                                                                                                    
|
| |  | Hopkins International  Terminal D has
    approximately 104,000 square feet with 12 regional jet
    passenger loading bridge gates. We also utilize numerous jetways
    and gates on Continental Airlines Terminal C. Subject to
    obtaining applicable approvals, we have the ability to add 12 to
    16 regional jet gates if the existing 24 turboprop gates
    are eliminated. We currently have the ability to park up to 20
    regional jets on the turboprop remote parking piers adjacent to
    Terminal D.
|
| |  | Cleveland Maintenance Hangar  We
    utilize approximately 98,000 square feet of the facility
    for eight lines of maintenance.                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | Newark Liberty International  We
    operate out of Continental Airlines Terminal C with 18
    regional jet gates and six remote parking positions.                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | Knoxville Hangar  We have a four-bay
    heavy maintenance facility of approximately 82,000 square
    feet located in Knoxville, Tennessee.                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Knoxville Maintenance Shops  We
    operate a maintenance shop with approximately 11,000 square
    feet composed of a composite, engine build-up (EBU)
    and thrust reverser shop.                                                                                                                                                                                                                                                                                                                                     
|
| |  | Shreveport Hangar  We have a five-bay
    heavy maintenance facility of approximately 121,000 square
    feet located in Shreveport, Louisiana.                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Satellite Maintenance Stations  We
    have line maintenance facilities in Burlington, Vermont;
    Richmond, Virginia; Hartford, Connecticut; Charlotte, North
    Carolina; Dayton, Ohio; Louisville, Kentucky; St. Louis,
    Missouri; Nashville, Tennessee; Washington-Dulles, District of
    Columbia; and Lafayette, Louisiana.                                                                                                                                                                                     

All of these facilities are leased on a
net-rental basis, and we are responsible for maintenance, taxes,
insurance and other facility-related expenses and services.
Continental Airlines is the primary sublessor for these
facilities, except for the Houston maintenance hangar, the
Knoxville hangar and Shops facilities, the Shreveport hangar and
the Richmond, Louisville, and Dayton satellite maintenance
stations, which we lease directly. In addition, at each of
Continental Airlines three domestic hub cities and many
other locations, our passenger and baggage handling space is
provided by Continental Airlines on varying terms dependent on
the prevailing practice at each airport. If the capacity
purchase agreement is terminated after our material breach of
that agreement, we may be required to vacate these

26



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##### Table of Contents



facilities that are subleased to us by
Continental Airlines, and we may be required to use commercially
reasonable efforts to assign to Continental Airlines or its
designee any lease in our name for these facilities. See
 Our Capacity Purchase Agreement with
Continental Airlines  Airport Facilities, Slots and
Route Authorities. For a period of five years following
the termination of the capacity purchase agreement, if we wish
to transfer our interests in any of our facilities used to
fulfill our obligations under the capacity purchase agreement,
Continental Airlines must consent to the transfer (where
Continental Airlines is the sublessor) and has a right of first
refusal to acquire our interests in those facilities that we
lease from parties other than Continental Airlines.





Item 3.     Legal
Proceedings




Legal Proceedings

We are a defendant in various lawsuits arising in
the ordinary course of our business. While the outcome of these
lawsuits and proceedings cannot be predicted with certainty and
could have a material adverse effect on our financial position,
results of operations or cash flows, it is our opinion that the
ultimate disposition of such suits will not have a material
adverse effect on our financial position, results of operations
or cash flows.




Environmental Proceedings

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




Item 4.     Submission
of Matters to a Vote of Security Holders

Not applicable.




Item
4A.     Executive Officers of the
Company

The following table provides information
regarding our directors, executive officers and key employees:

|                      |  |     |    |             |  |                                                        
|--------------------- |  | --- | -- | ----------- |  | -------------------------------------------------------
|Name                  |  | Age |    | Position(s)
|                      |  |     |    |            
|James B. Ream         |  |     | 47 |             |  | President, Chief Executive Officer and Director        
|Frederick S. Cromer   |  |     | 38 |             |  | Vice President and Chief Financial Officer             
|Jerry E. Losness      |  |     | 63 |             |  | Vice President and Chief Operating Officer             
|John F. Wombwell      |  |     | 41 |             |  | Vice President, General Counsel and Secretary          
|Charles R. Coble(1)   |  |     | 49 |             |  | Vice President  Field Services                        
|Fred H. Junek, Jr.(1) |  |     | 54 |             |  | Vice President  Safety and Regulatory
    Compliance  
|Karen P. Miles(1)     |  |     | 46 |             |  | Vice President  Human Resources and
    Administration
|James E. Nides(1)     |  |     | 52 |             |  | Vice President  Flight Operations and
    Maintenance 
|Thomas E. Schick      |  |     | 61 |             |  | Chairman of the Board                                  
|Gordon M. Bethune     |  |     | 61 |             |  | Director                                               
|Janet M. Clarke       |  |     | 50 |             |  | Director                                               
|Kim A. Fadel          |  |     | 50 |             |  | Director                                               
|Lawrence W. Kellner   |  |     | 44 |             |  | Director                                               
|C.D. McLean           |  |     | 61 |             |  | Director                                               
|L. E. Simmons         |  |     | 56 |             |  | Director                                               
|Jeffery A. Smisek     |  |     | 48 |             |  | Director                                               






|    |                                                                              
|--- | -----------------------------------------------------------------------------
|(1) | These individuals are key employees employed by
    our operating subsidiary.

We describe briefly below the business experience
of our directors, executive officers and key employees.

James B. Reamhas been Chief Executive Officer of our company since July 2001
and has been President and a director since October 1999.
Mr. Ream joined Continental Airlines in 1994 as Vice
President  Finance, responsible

27



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for accounting, financial planning and analysis.
Since that time, Mr. Ream relocated to Continental
Airlines hub in Guam where he was Executive Vice President
and Chief Operating Officer in 1996 and President and Chief
Operating Officer from October 1996 to April 1998 of Continental
Micronesia, Inc. Prior to joining our company, he was Senior
Vice President  Asia for Continental Airlines from
April 1998 to October 1999, based in Houston. Prior to joining
Continental Airlines, Mr. Ream held various positions
within the finance department of American Airlines, Inc.,
including Managing Director  Financial Planning.


Frederick S.
Cromerhas been Vice President and
Chief Financial Officer of our company since July 1997.
Mr. Cromer was Staff Vice President-Fleet Planning for
Continental Airlines from 1995 to 1997. Prior to joining
Continental Airlines, Mr. Cromer held various finance and
fleet planning positions within Northwest Airlines.

Jerry E.
Losnesshas been Vice President
and Chief Operating Officer of our company since February 1996.
Previously, Mr. Losness was Senior Vice President and
General Manager from 1993 to 1995, Regional Vice President of
the Houston hub from 1992 to 1993 and Chief Financial Officer
from October 1990 to 1992. Prior to joining our company,
Mr. Losness held various financial and operations positions
within Eastern Airlines, including Vice President of Financial
Planning and Analysis and Executive Assistant to the Chairman.

John F.
Wombwellhas been Vice President,
General Counsel and Secretary of our company since April 2002.
Prior to joining our company, Mr. Wombwell was Executive
Vice President, General Counsel and Secretary of the New York
Stock Exchange traded company, Integrated Electrical Services,
Inc., from November 1999 to April 2002 and Senior Vice
President, General Counsel and Secretary of that company from
January 1998 to November 1999. Prior to that time,
Mr. Wombwell was a partner at the national law firm of
Andrews & Kurth L.L.P with a practice focused on
representing public companies with respect to corporate and
securities matters.

Charles R.
Coblehas been Vice
President  Field Services of our company since
November 1996. Mr. Coble joined Continental Airlines in
June 1975 and held Director level positions within the Field
Services Division in Denver, San Francisco and, most
recently, Newark/ New York.

Fred H. Junek,
Jr.has been Vice
President  Safety and Regulatory Compliance of our
company since January 1998. Previously, Mr. Junek served as
Manager of Flight Safety and Quality Assurance for Northwest
Airlines from 1995 to December 1997.

Karen P.
Mileshas been Vice
President  Human Resources and Administration of our
company since August 2001, and was Senior Director of Inflight
Operations from January 1999 to July 2001 and Director of
Airport Services from January 1997 to December 1998.
Ms. Miles joined Continental Airlines in 1987 where she
held various positions, most recently as its Assistant Director
of the Houston hub, which position she held beginning in 1995.

James E.
Nideshas been Vice
President  Flight Operations and Maintenance since
August 2002, was Vice President  Flight Operations of
our company since July 2001 and was Senior Director of Flight
Operations from July 1998 to June 2001. Prior to joining our
company, Mr. Nides was Vice President of Flight Operations
for Express Airlines I, Inc. d.b.a. Northwest Airlink in
Memphis, Tennessee from May 1995 to June 1998. Previously,
Mr. Nides also held various positions in flight operations
and maintenance at Comair, Inc. beginning in 1978, including
Chief Pilot, Director of Technical Services and Director of
Operations.

Thomas E.
Schickhas been the Chairman of
the Board of our company since September 5, 2002 and a
director since May 31, 2002. Previously, Mr. Schick
held various positions with Boeing Commercial Airplanes Group
from March 1992 through June 2001, including Executive Vice
President and Deputy to the President and Executive Vice
President of Commercial Aviation Services. Mr. Schick was
also President and Chief Operating Officer of Midway Airlines,
Senior Vice President  Technical Operations for USAir
Inc., and President and Chief Operating Officer for Piedmont
Aviation, Inc.

Gordon M.
Bethunewas the Chairman of the
Board of our company from October 1994 to September 2002 and was
also Chief Executive Officer until July 2001. Mr. Bethune
has been the Chairman of the Board and Chief Executive Officer
of Continental Airlines since September 1996. Mr. Bethune
was President and Chief Executive Officer of Continental
Airlines from November 1994 to September 1996, and President and
Chief Operating Officer of Continental Airlines from February
1994 to November 1994. Previously, Mr. Bethune held various
positions with The Boeing Company commencing in 1988, including
Vice President and General Manager of the Commercial

28



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Airplane Group Renton Division, Vice President
and General Manager of the Customer Services Division and Vice
President of Airline Logistics Support. Mr. Bethune is also
a director of Continental Airlines, Honeywell International,
Inc. and ANC Rental Corporation.


Janet M.
Clarkehas been a director since
May 31, 2002. Ms. Clarke has been with DealerTrack,
Inc. since September 2002, currently as Chief Operating Officer
and previously as Chief Marketing Officer. She was the President
and Founder of Clarke Littlefield LLC from 2001 to 2002,
Executive Vice President of Young & Rubicam Inc and
Chairman and CEO of its KnowledgeBase Marketing subsidiary from
2000 to 2001. Prior to that, she served as Managing Director,
Global Database Marketing at Citibank. Ms. Clarke is also a
director of Cox Communications Inc. and eFunds Corporation.

Kim A. Fadelhas been a director since May 31, 2002. He is currently the
Chief Counsel  Small Business Services for BellSouth
Corporation, having held that position since 2000. Prior to then
he was Vice President, General Counsel and Secretary at
BellSouth Communications Systems, Inc., a subsidiary of
BellSouth Corporation, from 1994 to 2000, and held various other
positions with BellSouth entities since 1986. Mr. Fadel was
previously an attorney with Wishart, Norris, Henninger and
Pitman, P.A. and a Naval Flight Officer in the United States
Navy.

Lawrence W.
Kellnerhas been a director of our
company since July 1995. Mr. Kellner was named President of
Continental Airlines in May 2001. Mr. Kellner was Executive
Vice President and Chief Financial Officer of Continental
Airlines from November 1996 to May 2001. Mr. Kellner is
also a director of Continental Airlines, Marriott International,
Inc. and Belden & Blake Corporation.

C.D. McLeanhas been a director of our company since May 1995.
Mr. McLean was named Executive Vice President and Chief
Operating Officer of Continental Airlines in May 2001.
Mr. McLean was Executive Vice President-Operations of
Continental Airlines from November 1996 to May 2001.

L. E.
Simmonshas been a director since
May 31, 2002. He is the President and Founder of SCF
Partners. He is the Chairman of Oil States International and a
director of Varco International, Inc., Simmons Media Group and
Zions Bancorporation.

Jeffery A.
Smisekhas been a director of our
company since April 1995. Mr. Smisek was named Executive
Vice President  Corporate and Secretary of
Continental Airlines in May 2001. Mr. Smisek was Executive
Vice President, General Counsel and Secretary of Continental
Airlines from November 1996 to May 2001. Mr. Smisek is also
a director of Varco International, Inc.

29



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##### Table of Contents






PART II






Item 5.     Market
for Registrants Common Equity and Related Stockholder
Matters


Our common stock trades on the New York Stock
Exchange. The table below shows the high and low sales prices
for our common stock as reported on the New York Stock Exchange
beginning April 18, 2002, the date following the pricing
date of our initial public offering on which trading of our
common stock on the New York Stock Exchange commenced.

|     |                                           |              |   |       |  |  |   |       | 
|---- | ----------------------------------------- | ------------ | - | ----- |  |  | - | ----- | 
|     |                                           |             
|     |                                           | Common Stock
|     |                                           |             
|     |                                           | High         |   | Low  
|     |                                           |              |   |      
|2002 |                                           |              |   |       |  |  |   |      
|     | Second Quarter (beginning April 18, 2002) |              | $ | 17.40 |  |  | $ | 11.60 | 
|     | Third Quarter                             |              | $ | 13.90 |  |  | $ | 8.87  | 
|     | Fourth Quarter                            |              | $ | 13.05 |  |  | $ | 7.15  | 

As of February 5, 2003, there were
approximately 9 holders of record of our common stock.

We have paid no cash dividends on our common
stock and have no current intention of doing so.

Our Certificate of Incorporation provides that no
shares of capital stock may be voted by or at the direction of
persons who are not United States citizens unless such shares
are registered on a separate stock record. Our Bylaws further
provide that no shares will be registered on such separate stock
record if the amount so registered would exceed United States
foreign ownership restrictions. United States law currently
limits to 25% the voting power in us (or any other
U.S. airline) of persons who are not citizens of the United
States.




Item 6.     Selected
Financial Data

You should read this selected financial data
together with the consolidated financial statements and related
notes and Managements Discussions and Analysis of
Financial Condition and Results of Operations included
elsewhere in this annual report on Form 10-K.

The following selected financial data for each of
the five years ended December 31, 2002 and as of
December 31, 2002, 2001, 2000 and 1999 have been derived
from our audited financial statements. The selected financial
data as of December 31, 1998 has been derived from
unaudited financial statements. The financial information
included in this Form 10-K is not necessarily indicative of
our future results of operations, financial position and cash
flows, or reflective of what our results of operations,
financial position and cash flows would have been had we been a
stand-alone entity during the periods presented.

We were operated essentially as a division of
Continental Airlines until January 1, 2001, providing
passengers to its mainline jet operations. Our scheduling,
pricing and revenue management were designed and operated to
increase Continental Airlines overall system revenue
rather than to maximize the profitability on flight segments we
operated. In addition, our historical financial statements for
periods prior to January 1, 2001 reflect a revenue-sharing
arrangement between us and Continental Airlines that is
different from our current capacity purchase agreement, which
became effective on January 1, 2001. Under our former
revenue-sharing arrangement, we received a prorated percentage
of the ticket revenue for passengers traveling one portion of
their trip on our aircraft and the other portion of their trip
on Continental Airlines aircraft, and all of the ticket
revenue for passengers traveling their entire trip solely on our
aircraft. All of the costs associated with our flights were
either borne directly by us or otherwise allocated to us by
Continental Airlines. Under our former revenue-sharing
arrangement, we realized increased revenue as ticket prices and
passenger loads increased and decreased costs as fuel and other
costs decreased. Conversely, we realized decreased revenue as
ticket prices and passenger loads decreased and increased costs
as fuel and other costs increased. Under our current capacity
purchase agreement, Continental Airlines pays us a rate
calculated using a formula for each scheduled block hour of
flight by aircraft operated by us. Under the formula, our rates
vary depending on the

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average length of our scheduled flights, our
aggregate number of flights and the type of aircraft provided,
and are otherwise subject to specified adjustments.


|                                                            |         |                                       |           |        |  |      |         |        |  |             |         |   |  |   |         |   |  |   |         |   | 
|----------------------------------------------------------- | ------- | ------------------------------------- | --------- | ------ |  | ---- | ------- | ------ |  | ----------- | ------- | - |  | - | ------- | - |  | - | ------- | - | 
|                                                            |         |                                      
|                                                            |         | Year Ended December 31,              
|                                                            |         |                                      
|                                                            |         | 2002                                  |           | 2001   |  | 2000 |         | 1999   |  | 1998       
|                                                            |         |                                       |           |        |  |      |         |        |  |            
|                                                            |         |                                       |           |        |  |      |         |        |  | (Unaudited)
|                                                            |         |                                      
|                                                            |         | (In thousands, except per share data)
|Statement of Operations Data:                               |         |                                       |           |        |  |      |         |        |  |             |         |   |  |   |         |   |  |   |         |  
|Operating revenue                                           |         | $                                     | 1,089,099 |        |  | $    | 980,473 |        |  | $           | 843,773 |   |  | $ | 649,575 |   |  | $ | 527,651 |  
|Operating expenses                                          |         |                                       | 941,319   |        |  |      | 879,493 |        |  |             | 878,955 |   |  |   | 644,580 |   |  |   | 526,245 |  
|Operating income                                            |         |                                       | 147,780   |        |  |      | 100,980 |        |  |             | (35,182 | ) |  |   | 4,995   |   |  |   | 1,406   |  
|Non-operating income/(expense), net                         |         |                                       | (9,174    | )      |  |      | (21,275 | )      |  |             | (23,856 | ) |  |   | (23,414 | ) |  |   | (24,304 | )
|Net income/(loss)                                           |         |                                       | 84,280    |        |  |      | 48,074  |        |  |             | (38,752 | ) |  |   | (13,046 | ) |  |   | (15,576 | )
|Basic and diluted earnings/(loss) per share(1)              |         |                                       | 1.38      |        |  |      | 0.89    |        |  |             |         |   |  |   |         |   |  |   |         |  
|Weighted average number of shares used in
    computations: |         |                                       |           |        |  |      |         |        |  |             |         |   |  |   |         |   |  |   |         |  
|                                                            | Basic   |                                       |           | 61,068 |  |      |         | 54,000 |  |             |         |   |  |   |         |   |  |   |         |   | 
|                                                            | Diluted |                                       |           | 61,069 |  |      |         | 54,000 |  |             |         |   |  |   |         |   |  |   |         |   | 

|                                                                               |  |                    |         |      |  |      |          |      |  |             |          |   |  |   |          |   |  |   |          |  
|------------------------------------------------------------------------------ |  | ------------------ | ------- | ---- |  | ---- | -------- | ---- |  | ----------- | -------- | - |  | - | -------- | - |  | - | -------- | -
|                                                                               |  |                   
|                                                                               |  | As of December 31,
|                                                                               |  |                   
|                                                                               |  | 2002               |         | 2001 |  | 2000 |          | 1999 |  | 1998       
|                                                                               |  |                    |         |      |  |      |          |      |  |            
|                                                                               |  |                    |         |      |  |      |          |      |  | (Unaudited)
|                                                                               |  |                   
|                                                                               |  | (In thousands)    
|Balance Sheet Data:                                                            |  |                    |         |      |  |      |          |      |  |             |          |   |  |   |          |   |  |   |          |  
|Cash, cash equivalents and short-term investments                              |  | $                  | 120,930 |      |  | $    | 71,877   |      |  | $           | 13       |   |  | $ | 13       |   |  | $ |         |  
|Amounts due from Continental Airlines, net                                     |  |                    | 17,419  |      |  |      | 14,235   |      |  |             |         |   |  |   |         |   |  |   |         |  
|Total assets                                                                   |  |                    | 434,148 |      |  |      | 429,751  |      |  |             | 302,520  |   |  |   | 264,352  |   |  |   | 297,906  |  
|Amounts due to Continental Airlines, net(2)                                    |  |                    |        |      |  |      |         |      |  |             | 481,312  |   |  |   | 406,575  |   |  |   | 334,562  |  
|Note payable to Continental Airlines(2)                                        |  |                    | 325,512 |      |  |      | 552,312  |      |  |             |         |   |  |   |         |   |  |   |         |  
|Long-term debt and capital lease obligations,
    including current maturities |  |                    | 6,568   |      |  |      | 8,594    |      |  |             | 6,015    |   |  |   | 25,554   |   |  |   | 114,479  |  
|Mandatorily redeemable preferred stock of
    Subsidiary                       |  |                    | 5,000   |      |  |      |         |      |  |             |         |   |  |   |         |   |  |   |         |  
|Stockholders equity/(deficit)                                                 |  |                    | 15,302  |      |  |      | (214,361 | )    |  |             | (262,435 | ) |  |   | (223,683 | ) |  |   | (210,637 | )

|                                                                   |  |                         |       |      |  |      |       |      |  |      |       |   |  |  |       |   |  |  |       |  
|------------------------------------------------------------------ |  | ----------------------- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | - |  |  | ----- | -
|                                                                   |  |                        
|                                                                   |  | Year Ended December 31,
|                                                                   |  |                        
|                                                                   |  | 2002                    |       | 2001 |  | 2000 |       | 1999 |  | 1998
|                                                                   |  |                         |       |      |  |      |       |      |  |     
|Operating Statistics:                                              |  |                         |       |      |  |      |       |      |  |      |       |   |  |  |       |   |  |  |       |  
|Revenue passengers (thousands)                                     |  |                         | 9,214 |      |  |      | 8,305 |      |  |      | 7,772 |   |  |  | 6,664 |   |  |  | 5,698 |  
|Revenue passenger miles (millions)(3)                              |  |                         | 3,952 |      |  |      | 3,388 |      |  |      | 2,947 |   |  |  | 2,149 |   |  |  | 1,564 |  
|Available seat miles (millions)(4)                                 |  |                         | 6,219 |      |  |      | 5,437 |      |  |      | 4,735 |   |  |  | 3,431 |   |  |  | 2,641 |  
|Passenger load factor(5)                                           |  |                         | 63.5  | %    |  |      | 62.3  | %    |  |      | 62.2  | % |  |  | 62.6  | % |  |  | 59.2  | %
|Operating cost per available seat mile
    (cents)(6)(7)           |  |                         | 15.14 |      |  |      | 16.18 |      |  |      | 18.56 |   |  |  | 18.79 |   |  |  | 19.93 |  
|Block hours (thousands)(8)                                         |  |                         | 494.8 |      |  |      | 509.7 |      |  |      | 489.1 |   |  |  | 396.5 |   |  |  | 346.1 |  
|Average price per gallon of fuel, excluding fuel
    taxes (cents) |  |                         | 60.72 |      |  |      | 76.01 |      |  |      | 86.92 |   |  |  | 47.39 |   |  |  | 45.55 |  
|Fuel gallons consumed (millions)                                   |  |                         | 164.9 |      |  |      | 144.5 |      |  |      | 122.1 |   |  |  | 87.2  |   |  |  | 66.5  |  
|Average length of aircraft flight (miles)                          |  |                         | 414   |      |  |      | 379   |      |  |      | 342   |   |  |  | 289   |   |  |  | 249   |  
|Average daily utilization of each aircraft
    (hours)(9)          |  |                         | 7:38  |      |  |      | 8:00  |      |  |      | 8:25  |   |  |  | 7:56  |   |  |  | 7:49  |  
|Actual aircraft in fleet at end of period                          |  |                         | 188   |      |  |      | 170   |      |  |      | 166   |   |  |  | 147   |   |  |  | 127   |  

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---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Basic and diluted earnings per share are computed
    using the assumed number of shares of our common stock
    outstanding after the recapitalization. These items do not
    include approximately 1 million shares of our common stock
    issuable upon exercise of options outstanding under our 2002
    Stock Incentive Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(2) | Effective March 31, 2001, the amounts due
    Continental Airlines, net, of $552.3 million were converted
    into a note, which accrued interest at a fixed rate of
    approximately 4.9% through June 30, 2001 and since
    July 1, 2001 at a rate fixed for each quarter equal to the
    three-month London interbank offered rate on the second business
    day prior to such quarter plus 1.25% subject to an
    aggregate cap of 3.5% in 2002, 5.4% in 2003 and 6.7% in 2004.
    Beyond 2004 there is no cap on the interest rate. Accrued
    interest currently is payable quarterly and fixed installments
    of $27.9 million in principal and accrued interest are due
    quarterly beginning June 30, 2003, with the entire unpaid
    balance due on March 31, 2007. As of December 31,
    2002, a total of $226.8 million in principal prepayments
    have been made. See Item 7. Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations  Liquidity and Capital Resources.
|   
|(3) | Revenue passenger miles is the number of
    scheduled miles flown by revenue passengers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(4) | Available seat miles is the number of seats
    available for passengers multiplied by the number of scheduled
    miles those seats are flown.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(5) | Passenger load factor equals revenue passenger
    miles divided by available seat miles.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(6) | Includes government grant of $0.5 million
    and $24.9 million in 2002 and 2001, respectively. Excluding
    the grant, operating costs per available seat mile would have
    been 15.15 cents, and 16.63 cents for 2002 and 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(7) | Operating cost per available seat mile equals
    operating expenses divided by available seat miles.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(8) | Block hours are the hours from departure gate to
    arrival gate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(9) | The average number of hours per day that an
    aircraft flown in revenue service is operated (from gate
    departure to gate arrival).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    






|        |                                                                                                
|------- | -----------------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis of
    Financial Condition and 
     Results of Operations

The information contained in this section has
been derived from our historical financial statements and should
be read together with our historical financial statements and
related notes included elsewhere in this Form 10-K. The
discussion below contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ
materially from those expressed or implied in these
forward-looking statements as a result of various factors,
including those described in Item 1.
Business  Principal Risk Factors that May
Affect Our Business and Results of Operations and
elsewhere herein.

The following discussions and analysis provide
information which management believes is relevant to an
assessment and understanding of our results of operations and
financial condition. The discussion should be read in
conjunction with the consolidated financial statements and the
related notes thereto in Item 8. Financial Statements
and Supplementary Data, and the selected financial data
and operating data contained in Item 6. Selected
Financial Data.




OVERVIEW

We are the largest operator of regional jets in
the world and the second-largest regional airline in the world
based on available seat miles. As of December 31, 2002, we
offered scheduled passenger service with approximately
1,000 average daily departures to more than 108 cities in
37 states, the District of Columbia, Mexico and Canada. We
provide Continental Airlines, Inc. (Continental
Airlines) all of its regional airline capacity at its hub
airports in Houston, Cleveland and Newark. Our available seat
miles have grown at a compounded annual rate of 24.1% from
2.1 billion in 1997 to 6.2 billion in 2002. We are
economically dependent upon Continental Airlines, as
substantially all of our revenue is currently received from
Continental Airlines. See discussion below in
 Liquidity and Capital Commitments 
Relationship with Continental Airlines.

32



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##### Table of Contents





| |                      
| | ---------------------
| | Basis of Presentation

The historical financial information we have
included here does not reflect what our financial position,
results of operations and cash flows would have been had we been
a stand-alone entity during prior periods presented. Until
January 1, 2001, we operated essentially as a division of
Continental Airlines, providing passengers to its mainline jet
operations. Our scheduling, pricing and revenue management were
designed and operated to increase overall system revenue rather
than to maximize the profitability on flight segments we
operated. As a result, we had a history of reporting operating
losses.

Moreover, our historical financial statements for
periods prior to January 1, 2001 reflect a revenue-sharing
arrangement between us and Continental Airlines that is
different from our current capacity agreement. Under our former
revenue-sharing arrangement, we received a prorated percentage
of the ticket revenue for passengers traveling one portion of
their trip on our aircraft and the other portion of their trip
on Continental Airlines aircraft, and all of the ticket
revenue for passengers traveling their entire trip solely on our
aircraft. All of the costs associated with our flights were
either borne directly by us or otherwise allocated to us by
Continental Airlines.

In addition, our historical costs and expenses
prior to 2001 reflected charges from Continental Airlines for
customer services, centralized corporate services and
infrastructure costs. These allocations were based on either
actual costs or what we and Continental Airlines considered to
be amounts representative of the cost to provide the services.
Those expense allocations are no longer indicative of our
current or future expenses.



| |                            
| | ---------------------------
| | Capacity Purchase Agreement

Effective January 1, 2001, we entered into a
capacity purchase agreement with Continental Airlines. As a
result of this agreement, we have experienced and we expect to
continue to experience significantly different financial results
from those reported in our historical financial statements for
periods prior to January 1, 2001. For a detailed discussion
of our capacity purchase agreement, see Note 2 in the Notes
to Consolidated Financial Statements in Item 8.
Financial Statements and Supplementary Data.



| |                    
| | -------------------
| | Recent Developments

We announced on February 12, 2003, that we
reached agreements in principle to amend our capacity purchase
agreement with Continental Airlines and our regional jet
aircraft purchase agreement with Empresa Brasileira de
Aeronáutica S.A. (Embraer). Under the terms of
the proposed amendments, we will modify our scheduled deliveries
of Embraer regional jets in 2003 to 36, from our original plan
for 48 deliveries, and will take 21 aircraft deliveries in 2004,
down from 36. Additionally, we will increase our aircraft
deliveries to 21 and eight for 2005 and 2006, up from two and
zero for these years, respectively. Continental Airlines
proposed the amendment to the capacity purchase agreement in
response to continuing weakness and uncertainty in the airline
industry. In return for the deferred deliveries, Continental
Airlines, among other items, extended ExpressJets
guarantee as the exclusive provider of regional jet service in
the hubs and Continental Airlines termination right
without cause by one year, to January 1, 2007. These
proposed amendments to the capacity purchase agreement and the
purchase agreement with Embraer are subject to the execution of
satisfactory definitive agreements and the approval by the Board
of Directors of Continental Airlines.



| |                             
| | ----------------------------
| | Critical Accounting Policies

The discussion and analysis of our financial
condition and results of operations are based on our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires us to make estimates and judgments that
affect the reported amount of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets and
liabilities at the date of our financial statements. In general,
we base our estimates on historical experience, on information
from third party professionals and on various other assumptions
that we believe are reasonable under the facts and
circumstances. We continually evaluate our accounting policies
and estimates we use to prepare our consolidated financial
statements. Actual results may differ from these estimates under
different assumptions or conditions.

33



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We have identified the accounting policies below
as critical to our business operations and the understanding of
our results of operations. The impact of these policies on our
business operations is discussed throughout Managements
Discussion and Analysis of Financial Condition and Results of
Operations where these policies affect our reported and expected
financial results. Critical accounting policies are defined as
those that are reflective of significant judgments and
uncertainties, and are sufficiently sensitive to result in
materially different results under different assumptions and
conditions. The discussion below is not intended to be a
comprehensive list of our accounting policies. For a detailed
discussion on the application of these and other accounting
policies, see Note 1 in the Notes to Consolidated Financial
Statements in Item 8. Financial Statements and
Supplementary Data. We believe that our critical
accounting policies are limited to those described below.



| |                             
| | ----------------------------
| | Maintenance Repair Liability

Maintenance repair liability falls into two
categories: accruals for estimated costs and power-by-the-hour
arrangements. When parts and equipment on the aircraft become
unserviceable or are due for scheduled maintenance, they are
removed and replaced with serviceable parts from inventory. The
parts in need of repair are sent to repair vendors and a
liability for that repair cost is recognized in that calendar
month. In the event that an actual quote is received, then the
accrual will be based on such. Typically, repair costs are
initially estimated based on the historical cost of a like
repair for that specific part. If no historical cost information
exists, then a percentage of replacement cost is used. The
initial estimate is replaced by a quote from the repair vendor
after they inspect the part and determine what the actual cost
will be. The accrual is adjusted accordingly. Accruals are
carried until the invoice is received, audited and paid.

For those repairs and maintenance not covered by
the above accrual method, power-by-the-hour arrangements exist.
The power-by-the-hour contracts dictate the method by which we
pay a vendor based on our actual level of operations in exchange
for vendor coverage on specific parts and equipment on our
aircraft when those parts and equipment are in need of repair or
replacement. Individual contracts are of varying term and
payment procedure, and typically either require a monthly
payment based upon flight hours incurred or payment at the time
of the repair event for a fixed dollar amount per flight hour.
Accordingly, such payment amounts are expensed as incurred. On
average, power-by-the-hour arrangements represent approximately
50% of our maintenance, materials and repair costs.



| |        
| | -------
| | Revenue

Under the capacity purchase agreement, we
recognize our operating revenue based on agreed-upon rates for
each scheduled block hour. The rates per hour were designed to
provide us with an operating margin of approximately 10% before
taking into account variations in some costs and expenses that
are generally controllable by us. Furthermore, we also record
revenue earned under certain incentive provisions, such as
percentage of flights we complete, certain on-time departures
and baggage handling, within the capacity purchase agreement.
See Note 2  Capacity Purchase agreement with
Continental Airlines in the Notes to Consolidated Financial
Statements in Item 8. Financial Statements and
Supplementary Data for details related to the block hour
rates and the performance incentive payments. Our operating
revenue is reconciled and settled with Continental Airlines on a
monthly basis, except for the quarterly reconciliation of our
costs within the margin band as defined by the capacity purchase
agreement. We recognized $1.1 billion in operating revenue
for the year ended December 31, 2002, compared with
$980.5 million for the same period in 2001.



| |                   
| | ------------------
| | Operating Expenses

Our major operating expenses are wages, salaries
and related costs, aircraft rent, maintenance, materials and
repairs and aircraft fuel.

Wages, Salaries and Related Costs.These expenses include not only wages
and salaries, but also expenses associated with various employee
benefit plans, employee incentives and payroll taxes. These
expenses will fluctuate based primarily on our level of
operations and changes in wage rates for contract and
non-contract employees.

Aircraft Rent.Our
aircraft are operated under long-term leases with Continental
Airlines. We currently anticipate subleasing from Continental
Airlines substantially all of our future deliveries of aircraft.
The lease payments

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associated with new deliveries of our firm
commitment aircraft are fixed subject only to adjustment based
upon changes in inflation and interest rates.


Maintenance, Materials and Repairs.Maintenance-related expenses include
all spare parts, materials, tooling, part repair and scrappage
required to maintain our aircraft. We have entered into
long-term maintenance power-by-the-hour service
contracts with third-party maintenance providers under which we
are charged fixed rates for each flight hour or departure
accumulated by most of our engines and some of our components.
See Critical Accounting Policies discussion.

Fuel.Fuel expense
includes the cost of aircraft fuel, excluding fuel taxes. Under
the capacity purchase agreement and the related fuel purchase
agreement we entered into with Continental Airlines, our average
fuel expense for the year ended December 31, 2002 was
60.7 cents per gallon. Under these agreements, our fuel
expense for 2003 and thereafter will be the lower of the actual
cost of fuel and agreed-upon cap of 66.0 cents per gallon.

Other Expenses.Continental Airlines has agreed, for a
limited period of time following our initial public offering,
subject to exceptions, to continue to provide us with some
corporate-level and other services at the cost of providing such
services. These services include, but are not limited to, our
information technology support, fuel purchasing, ground
handling, catering, corporate accounting, insurance, purchasing,
payroll, human resources, legal, tax and treasury administrative
services.



| |                                         
| | ----------------------------------------
| | Recently Issued Accounting
    Standards

In August 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standard No. 143, Accounting for Asset Retirement
Obligations (SFAS 143), effective for
fiscal years beginning after June 15, 2002. This statement
requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted
to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the
obligations for its recorded amount or incurs a gain or loss
upon settlement. We adopted SFAS 143 effective
January 1, 2003, and do not expect this adoption to have a
material impact on our results of operations, financial
position, or liquidity.

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

In December 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standard No. 148  Accounting for
Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement
No. 123 (SFAS 148). SFAS 148
amends FASB Statement of Financial Accounting Standard
No. 123, Accounting for Stock-Based
Compensation, (SFAS 123) to provide
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the
effect of the method used on reported results. The transition
guidance and annual disclosure provisions are effective for
fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning
after December 15, 2002. As we account for our stock-based
compensation arrangements in accordance with the provisions of
Accounting Principles Board Opinion No. 25 
Accounting for Stock Issued to Employees, we do not
currently plan to apply the accounting provisions of
SFAS 148.

FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, (Interpretation 45), will
significantly change current practice in the accounting for, and
disclosure of, guarantees. Interpretation 45 requires a
guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in
issuing the guarantee. Interpretation 45 also

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expands the disclosures required to be made by a
guarantor about its obligations under certain guarantees that it
has issued. Interpretation 45s disclosure
requirements are effective for financial statements of interim
or annual periods ending after December 15, 2002, while the
initial recognition and initial measurement provisions are
applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. See Note 15
Commitments and Contingencies  General
Guarantees and Indemnifications in the Notes to Consolidated
Financial Statements in Item 8. Financial Statements
and Supplementary Data. We do not expect the adoption of
this statement to have a material impact on our results of
operations or balance sheet.


In January 2003, the Financial Accounting
Standards Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities,
(Interpretation 46). The objective of
Interpretation 46 is to improve financial reporting by
companies involved with variable interest entities. Until now,
one company generally has included another entity in its
consolidated financial statements only if it controlled the
entity through voting interests. Interpretation 46 changes
that by requiring a variable interest entity to be consolidated
by a company if that company is subject to a majority of the
risk of loss from the variable interest entitys activities
or entitled to receive a majority of the entitys residual
returns or both. The consolidation requirements of
Interpretation 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or
interim period beginning after June 15, 2003. Certain of
the disclosure requirements apply in all financial statements
issued after January 31, 2003, regardless of when the
variable interest entity was established. We do not believe the
adoption of this statement will have a material impact on our
results of operations or financial position.



| |                        
| | -----------------------
| | Statistical Information

The following table provides an analysis of
statistical information for each of the three years ended
December 31, 2002. Our historical operating data for the
year ended December 31, 2000 reflect a revenue-sharing
arrangement between us and Continental Airlines that is
different from our current arrangement under the capacity
purchase agreement.

|                                                                   |  |                         |       |            |  |      |        |            |  |      |       |   |  |  |        |   |  |  |       |  
|------------------------------------------------------------------ |  | ----------------------- | ----- | ---------- |  | ---- | ------ | ---------- |  | ---- | ----- | - |  |  | ------ | - |  |  | ----- | -
|                                                                   |  |                        
|                                                                   |  | Year Ended December 31,
|                                                                   |  |                        
|                                                                   |  |                         |       | Increase/  |  |      |        | Increase/  |  |     
|                                                                   |  |                         |       | (Decrease) |  |      |        | (Decrease) |  |     
|                                                                   |  | 2002                    |       | 2001-2002  |  | 2001 |        | 2000-2001  |  | 2000
|                                                                   |  |                         |       |            |  |      |        |            |  |     
|Operating Statistics:                                              |  |                         |       |            |  |      |        |            |  |      |       |   |  |  |        |   |  |  |       |  
|Revenue passengers (thousands)                                     |  |                         | 9,214 |            |  |      | 10.9%  |            |  |      | 8,305 |   |  |  | 6.9%   |   |  |  | 7,772 |  
|Revenue passenger miles (millions)(1)                              |  |                         | 3,952 |            |  |      | 16.6%  |            |  |      | 3,388 |   |  |  | 15.0%  |   |  |  | 2,947 |  
|Available seat miles (millions)(2)                                 |  |                         | 6,219 |            |  |      | 14.4%  |            |  |      | 5,437 |   |  |  | 14.8%  |   |  |  | 4,735 |  
|Passenger load factor(3)                                           |  |                         | 63.5  | %          |  |      | 1.2pts |            |  |      | 62.3  | % |  |  | 0.1pts |   |  |  | 62.2  | %
|Operating cost per available seat mile
    (cents)(4)(5)           |  |                         | 15.14 |            |  |      | (6.4%  | )          |  |      | 16.18 |   |  |  | (12.8% | ) |  |  | 18.56 |  
|Block hours (thousands)(6)                                         |  |                         | 494.8 |            |  |      | (2.9%  | )          |  |      | 509.7 |   |  |  | 4.2%   |   |  |  | 489.1 |  
|Average price per gallon of fuel, excluding fuel
    taxes (cents) |  |                         | 60.72 |            |  |      | (20.1% | )          |  |      | 76.01 |   |  |  | (12.6% | ) |  |  | 86.92 |  
|Fuel gallons consumed (millions)                                   |  |                         | 164.9 |            |  |      | 14.1%  |            |  |      | 144.5 |   |  |  | 18.3%  |   |  |  | 122.1 |  
|Average length of aircraft flight (miles)                          |  |                         | 414   |            |  |      | 9.2%   |            |  |      | 379   |   |  |  | 10.8%  |   |  |  | 342   |  
|Average daily utilization of each aircraft
    (hours)(7)          |  |                         | 7:38  |            |  |      | (4.6%  | )          |  |      | 8:00  |   |  |  | (5.0%  | ) |  |  | 8:25  |  
|Actual aircraft in fleet at end of period                          |  |                         | 188   |            |  |      | 10.6%  |            |  |      | 170   |   |  |  | 2.4%   |   |  |  | 166   |  



---



|    |                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Revenue passenger miles is the number of
    scheduled miles flown by revenue passengers.                                                              
|   
|(2) | Available seat miles (ASM) is the
    number of seats available for passengers multiplied by the
    number of scheduled 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 equals
    operating expenses divided by available seat miles.                                                  

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|    |                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5) | Includes government grant of $0.5 million
    and $24.9 million in 2002 and 2001, respectively. Excluding
    the grant, operating costs per available seat mile would have
    been 15.15 cents and 16.63 cents, for 2002 and 2001,
    respectively.
|   
|(6) | Block hours are the hours from departure gate to
    arrival gate.                                                                                                                                                                                    
|   
|(7) | The average number of hours per day that an
    aircraft flown in revenue service is operated (from gate
    departure to gate arrival).                                                                                                              




RESULTS OF OPERATIONS

The following table sets forth information
regarding our operating expense components. Individual operating
expense components are expressed as a percentage of our total
operating revenues and as cents per ASM.

|                                    |  |                |         |         |  |       |      |                |  |         |       |       |  |                |         |         |  |       |      |    |  |  |        |  |  |   |         |  |  |  |      |   |  |  |       | 
|----------------------------------- |  | -------------- | ------- | ------- |  | ----- | ---- | -------------- |  | ------- | ----- | ----- |  | -------------- | ------- | ------- |  | ----- | ---- | -- |  |  | ------ |  |  | - | ------- |  |  |  | ---- | - |  |  | ----- | 
|                                    |  |                |         |         |  |      
|                                    |  | 2002           |         | 2001    |  | 2000 
|                                    |  |                |         |         |  |      
|                                    |  |                |         | Percent |  | Cents |      |                |  | Percent |       | Cents |  |                |         | Percent |  | Cents
|                                    |  |                |         | of      |  | per   |      |                |  | of      |       | per   |  |                |         | of      |  | per  
|                                    |  | Amount         |         | Revenue |  | ASM   |      | Amount         |  | Revenue |       | ASM   |  | Amount         |         | Revenue |  | ASM  
|                                    |  |                |         |         |  |       |      |                |  |         |       |       |  |                |         |         |  |      
|                                    |  | (in thousands) |         |         |  |       |      | (in thousands) |  |         |       |       |  | (in thousands) |         |         |  |      
|Wages, salaries and related costs   |  | $              | 237,307 |         |  |       | 21.8 | %              |  |         | 3.82  |       |  | $              | 213,604 |         |  |       | 21.8 | %  |  |  | 3.93   |  |  | $ | 155,706 |  |  |  | 18.4 | % |  |  | 3.29  | 
|Aircraft rentals                    |  |                | 199,160 |         |  |       | 18.3 | %              |  |         | 3.20  |       |  |                | 168,748 |         |  |       | 17.2 | %  |  |  | 3.10   |  |  |   | 146,838 |  |  |  | 17.4 | % |  |  | 3.10  | 
|Aircraft fuel                       |  |                | 100,115 |         |  |       | 9.2  | %              |  |         | 1.61  |       |  |                | 109,841 |         |  |       | 11.2 | %  |  |  | 2.02   |  |  |   | 106,138 |  |  |  | 12.6 | % |  |  | 2.24  | 
|Maintenance, materials and repairs  |  |                | 97,220  |         |  |       | 8.9  | %              |  |         | 1.56  |       |  |                | 135,447 |         |  |       | 13.8 | %  |  |  | 2.49   |  |  |   | 115,608 |  |  |  | 13.7 | % |  |  | 2.44  | 
|Reservation and sales               |  |                |        |         |  |       |     |                |  |         |      |       |  |                |        |         |  |       |     |    |  |  |       |  |  |   | 62,916  |  |  |  | 7.5  | % |  |  | 1.33  | 
|Other rentals and landing fees      |  |                | 89,114  |         |  |       | 8.2  | %              |  |         | 1.43  |       |  |                | 71,291  |         |  |       | 7.3  | %  |  |  | 1.31   |  |  |   | 58,144  |  |  |  | 6.9  | % |  |  | 1.23  | 
|Commissions                         |  |                |        |         |  |       |     |                |  |         |      |       |  |                |        |         |  |       |     |    |  |  |       |  |  |   | 37,480  |  |  |  | 4.4  | % |  |  | 0.79  | 
|Ground handling                     |  |                | 74,083  |         |  |       | 6.8  | %              |  |         | 1.19  |       |  |                | 72,776  |         |  |       | 7.4  | %  |  |  | 1.34   |  |  |   | 49,545  |  |  |  | 5.9  | % |  |  | 1.05  | 
|Depreciation and amortization       |  |                | 29,787  |         |  |       | 2.7  | %              |  |         | 0.48  |       |  |                | 23,045  |         |  |       | 2.4  | %  |  |  | 0.42   |  |  |   | 23,205  |  |  |  | 2.8  | % |  |  | 0.49  | 
|Outside services                    |  |                | 19,837  |         |  |       | 1.8  | %              |  |         | 0.32  |       |  |                | 22,693  |         |  |       | 2.3  | %  |  |  | 0.42   |  |  |   | 16,786  |  |  |  | 2.0  | % |  |  | 0.35  | 
|Hull and war risk related insurance |  |                | 17,980  |         |  |       | 1.7  | %              |  |         | 0.29  |       |  |                | 5,405   |         |  |       | 0.5  | %  |  |  | 0.10   |  |  |   | 2,583   |  |  |  | 0.3  | % |  |  | 0.05  | 
|Government grant                    |  |                | (541    | )       |  |       | (0.1 | %)             |  |         | (0.01 | )     |  |                | (24,900 | )       |  |       | (2.5 | %) |  |  | (0.45) |  |  |   |        |  |  |  |     |   |  |  |      | 
|Other operating expenses            |  |                | 77,257  |         |  |       | 7.1  | %              |  |         | 1.25  |       |  |                | 81,543  |         |  |       | 8.3  | %  |  |  | 1.50   |  |  |   | 104,006 |  |  |  | 12.3 | % |  |  | 2.20  | 
|                                    |  |                |         |         |  |       |      |                |  |         |       |       |  |                |         |         |  |       |      |    |  |  |        |  |  |   |         |  |  |  |      |   |  |  |       | 
|                                    |  | $              | 941,319 |         |  |       |      |                |  |         | 15.14 |       |  | $              | 879,493 |         |  |       |      |    |  |  | 16.18  |  |  | $ | 878,955 |  |  |  |      |   |  |  | 18.56 | 
|                                    |  |                |         |         |  |       |      |                |  |         |       |       |  |                |         |         |  |       |      |    |  |  |        |  |  |   |         |  |  |  |      |   |  |  |       | 

The following discussion provides an analysis of
our results of operations and reasons for material changes
therein for periods indicated.



| |                           
| | --------------------------
| | Comparison of 2002 to 2001



| |        
| | -------
| | General

We recorded net income available to common
stockholders of $84.3 million for the year ended
December 31, 2002 and $48.1 million for the same
period in 2001.

We had a 13.6% operating margin for the year
ended December 31, 2002, as compared to an operating margin
of 10.3% for the same period in 2001. We currently receive
substantially all of our revenue from Continental Airlines under
our capacity purchase agreement, pursuant to which Continental
Airlines purchases all of our capacity and pays us per block
hour flown by our aircraft together with certain incentive
payments and reimbursements. Our 13.6% operating margin included
the benefits of costs savings and $14.7 million in
performance incentive payments. The performance incentive
payments were made to us due to our higher than expected
controllable completion factor of 99.9% for the year ended
December 31, 2002 (versus a 99.1% controllable completion
factor for same period in

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2001). These payments were calculated by
comparing our actual controllable completion factor for each
month during the year ended December 31, 2002 to our
benchmark controllable completion factors. Controllable
completion factor is the actual number of completed flights,
excluding cancelled flights due to weather and air traffic
control, divided by the number of scheduled flights. Our
benchmark controllable completion factor is calculated as a five
year rolling average of our historical controllable completion
factors. Our benchmark controllable completion factor for the
year ended December 31, 2002 was 98.1% as compared to 97.7%
for the same period in 2001. Because these incentive payments
are based on rolling average historical rates of controllable
cancellations, lower controllable cancellation rates that result
in higher incentive payments in the near term will also reduce
our opportunity to earn incentive payments in the future, when
the lower controllable cancellation rates become part of the
historical average.


Under the capacity purchase agreement, a
substantial portion of our costs are reconciled for differences
between our actual costs and the expected costs included in our
block hour rates to allow us to operate within an operating
margin band of 8.5% to 11.5% (costs within the margin
band). During the year ended December 31, 2002, our
actual costs within the margin band were favorable to the
estimates used in the block hour rates; thus, our operating
margin exceeded 11.5%. The favorable results were primarily due
to savings in maintenance, materials and repair services and
passenger servicing expenses. Consequently, we made payments
totaling $14.7 million to Continental Airlines during the
year ended December 31, 2002. There were no such
reconciliation payments to Continental Airlines during the same
period in 2001.



| |                  
| | -----------------
| | Operating Revenue

Operating revenue increased 11.1%, or
$108.6 million, to $1.1 billion during the year ended
December 31, 2002 from $980.5 million during the same
period in 2001. This increase was due primarily to the following
factors:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A 10.7% increase in the amount paid by
    Continental Airlines per block hour under our capacity purchase
    agreement. The average rate per block hour increased due to a
    higher mix of regional jets in our fleet; and                                                                                                                                                                                                                                                                                       
|
| |  | The $32.6 million revenue concession
    payments that were made to Continental Airlines in 2001 in
    exchange for the extension of our note payable to it by
    18 months, extension of our right under the capacity
    purchase agreement to be Continental Airlines exclusive
    regional jet operator in its hubs by one year and extension by
    six months of the period during which Continental Airlines
    cannot withdraw jet aircraft under the capacity purchase
    agreement; offset in part by
|
| |  | A 2.9% decrease in actual block hours flown due
    to a 4.6% decrease in our average daily utilization. Continental
    Airlines continues to adjust its scheduled flights in response
    to current economic conditions. See our discussion of
    Continental Airlines outlook below in
     Liquidity and Capital Commitments 
    Relationship with Continental Airlines.                                                                                                                                 



| |                   
| | ------------------
| | Operating Expenses

Wages, salaries and related costs increased
11.1%, or $23.7 million, to $237.3 million during the
year ended December 31, 2002 from $213.6 million
during the same period in 2001. As a percentage of operating
revenue, wages, salaries and related costs remained constant at
21.8% for the year ending December 31, 2002 as compared to
the same period in 2001.

Increases in wages, salaries and related costs
were due primarily to the following:



| |   |                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | higher wage rates for pilots as a result of the
    higher mix of jets in our fleet in 2002;                                                                                                                           
|
| |  | a more senior pilot workforce, due to the
    reduction-in-force after the September 11, 2001 events;                                                                                                                  
|
| |  | higher number of maintenance employees due to the
    in-sourcing of some of our routine maintenance activities and
    increases in resources required to support maintenance
    activities related to regional jets;
|
| |  | higher employee benefit costs as a result of
    increases in medical costs and 401(k) expense; and                                                                                                                    
|
| |  | higher profit sharing expense, as a result of our
    financial performance                                                                                                                                            

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It is possible for wages, salaries and related
costs to increase in 2003 primarily due to possible increases in
pilot wages as a result of our ongoing contract negotiations
with the Air Line Pilots Association, International
(ALPA). However, in 2003 we believe wages, salaries
and related costs as a percentage of operating revenue will
remain consistent with 2002.

Aircraft rentals increased 18.0%, or
$30.5 million, to $199.2 million during the year ended
December 31, 2002 from $168.7 million during the same
period in 2001. As a percentage of operating revenues, aircraft
rentals increased to 18.3% for the year ended December 31,
2002 from 17.2% for the same period in 2001. This increase was
due to a 37.2% increase in the number of regional jets.

Aircraft fuel expense decreased 8.9%, or
$9.7 million, to $100.1 million during the year ended
December 31, 2002 from $109.8 million during the same
period in 2001. As a percentage of operating revenue, aircraft
fuel decreased to 9.2% for the year ended December 31, 2002
from 11.2% for the same period in 2001. Although fuel
consumption increased 14.1% due to our replacement of turboprop
aircraft with regional jets, this was more than offset by a
20.1% decrease in the price of fuel, or 15.3 cents per
gallon, to 60.7 cents per gallon during the year ended
December 31, 2002 from 76.0 cents per gallon during
the same period in 2001. Under the capacity purchase agreement
and the related fuel purchase agreement with Continental
Airlines, we incur a fuel price equal to the lower of the actual
cost of fuel or the agreed-upon cap. Our caps on fuel were
61.1 cents and 80.9 cents per gallon for 2002 and
2001. In 2003, our cap on fuel increases to 66.0 cents per
gallon.

Maintenance, materials and repairs decreased
28.2%, or $38.2 million, to $97.2 million during the
year ended December 31, 2002 from $135.4 million
during the same period in 2001. As a percentage of operating
revenue, maintenance, materials and repairs decreased to 8.9%
for the year ended December 31, 2002 from 13.8% for the
same period in 2001. This decrease was primarily due to the
following factors:



| |   |                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the in-sourcing of some of our routine
    maintenance activities in 2002, which reduced our maintenance
    expense by approximately $11.5 million; and                                                                         
|
| |  | fewer major maintenance overhauls and
    miscellaneous overhead, as our mix of aircraft during the year
    ended December 31, 2002 consisted of a higher number of the
    newer regional jets versus older turboprop aircraft.

In 2003, we expect maintenance, materials and
repairs as a percentage of revenue to increase slightly. This
expected increase is due to increases in the average age of our
aircraft.

Other rentals and landing fees increased 25.0%,
or $17.8 million, to $89.1 million during the year
ended December 31, 2002 from $71.3 million during the
same period in 2001. As a percentage of operating revenue, other
rentals and landing fees increased to 8.2% for the year ended
December 31, 2002 from 7.3% for the same period in 2001.
This increase is primarily due to higher facility rent in one of
our hubs and increases in landing fees as a result of increased
rates imposed by airport authorities and increased regional jet
departures.

Ground handling increased 1.8%, or
$1.3 million, to $74.1 million during the year ended
December 31, 2002 from $72.8 million during the same
period in 2001. The increase in ground handling expense in 2002
was primarily due to the increases in ground handling activities
at Continental Airlines stations, offset in part by insourcing
of our ground handling activities at our stations.

Depreciation and amortization increased 29.3%, or
$6.8 million, to $29.8 million during the year ended
December 31, 2002, from $23.0 million during the same
period in 2001. As a percentage of operating revenue,
depreciation and amortization increased to 2.7% for the year
ended December 31, 2002, from 2.4% for the same period in
2001. This increase was primarily due to the accelerated
depreciation of spare parts related to the retirement of our
turboprops during 2002.

Hull and war risk related insurance expense
increased $12.6 million to $18.0 million during the
year ended December 31, 2002 from $5.4 million during
the same period in 2001. As a percentage of operating revenues,
hull and war risk related insurance expense increased to 1.7%
for the year ended December 31, 2002 from 0.5% during the
same period in 2001. This increase was due to the terrorist
attacks on September 11, 2001, as insurance rates increased
significantly following the attacks. The Air Transportation
Safety and System Stabilization Act, (the Stabilization
Act) provides all U.S. air carriers with the option
to purchase certain war risk liability insurance from the United
States government on an interim basis at rates that are more
favorable than those available from the private

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market. We continue to purchase hull coverage
through the private insurance market and anticipate renewing the
government war risk insurance for as long as the coverage is
available. In 2003, we expect a decrease in hull and war risk
related insurance expense as a result of decreases in our
insurance rates through both the private insurance market and
the U.S. government. Some of the expected decreases will be
offset by increases in passenger liability insurance, which is
reported as part of our other operating expense.


Other operating expenses decreased 5.3%, or
$4.2 million, to $77.3 million during the year ended
December 31, 2002 from $81.5 million during the same
period in 2001. As a percentage of operating revenue, other
operating expenses decreased to 7.1% for the year ended
December 31, 2002 from 8.3% during the same period in 2001.
This decrease was primarily due to decreases in passenger
servicing costs, crew traveling expenses and professional and
technical fees related to our flight operations and training.
These decreases were offset in part by increases in
administrative fees related to employee benefits, legal costs
and higher property taxes.



| |                      
| | ---------------------
| | Nonoperating Expenses

The majority of interest expense is related to
the note payable to Continental Airlines, which bore an average
annual interest rate of 3.1% and 4.7% for the year ending
December 31, 2002 and 2001. Interest expense decreased
56.9%, or $12.1 million, to $9.2 million during the
year ended December 31, 2002 from $21.3 million during
the same period in 2001, as we applied $146.8 million of
our proceeds from our initial public offering to repay a portion
of our note payable to Continental Airlines on April 23,
2002. Moreover, we made additional discretionary principal
prepayments of $80.0 million during 2002.



| |                           
| | --------------------------
| | Comparison of 2001 to 2000



| |        
| | -------
| | General

We recorded net income of $48.1 million for
the year ended December 31, 2001 and a net loss of
$38.8 million for the same period in 2000. Effective
January 1, 2001, we entered into a capacity purchase
agreement with Continental Airlines. As a result of this
agreement, we have experienced significantly different financial
results from those reported prior to January 1, 2001.
Assuming the capacity purchase agreement had been in effect
during 2000, our net income, operating revenue and operating
expenses would have been $38.9 million, $837.8 million
and $754.3 million, respectively, for 2000. The rates used
to determine the results were based on historical and expected
operating costs in 2000, which had been set to provide us with
the capacity purchase agreements targeted margin on
earnings before interest and taxes. Net income for 2001 was
$48.1 million, or $9.2 million or 23.7%, higher than
the net income for 2000, assuming the capacity purchase
agreement had been in effect during 2000, primarily due to
growth in our operations in 2001.



| |                  
| | -----------------
| | Operating Revenue

Operating revenue increased 16.2%, or
$136.7 million, to $980.5 million during the year
ended December 31, 2001 from $843.8 million during the
same period in 2000. This increase was primarily due to a 14.8%
growth in available seat miles. Operating revenue in 2001 was
negatively impacted by the reduction in our flight schedule
subsequent to the September 11, 2001 terrorist attacks and
our agreement with Continental Airlines to reduce its aggregate
payments to us by $32.6 million. Partially offsetting this
reduction in revenue was a $24.9 million grant from the
federal government under the Stabilization Act, which is
reflected as a reduction to our operating expenses. Assuming the
capacity purchase agreement had been in effect during 2000,
operating revenue would have been $837.8 million for 2000.



| |                   
| | ------------------
| | Operating Expenses

Due to the different revenue sharing agreements
in 2001 and 2000, our operating expenses as a percentage of
operating revenue analysis is not meaningful.

Wages and salaries and related costs increased
37.2%, or $57.9 million, to $213.6 million during the
year ended December 31, 2001 from $155.7 million
during the same period in 2000, primarily due to a 25% increase
in average full-time equivalent employees to support increased
flying and replacement of turboprop aircraft with regional jets,

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increased employee incentives and higher wage
rates. On September 15, 2001, we announced that we would be
forced to furlough approximately 470 employees in
connection with the reduction of our flight schedule in the wake
of the September 11, 2001 terrorist attacks. Severance
costs and related company-offered benefits of $1.3 million
are included in wages, salaries and related costs in the
consolidated statement of operations for 2001.


Aircraft rentals increased 14.9%, or
$21.9 million, to $168.7 million during the year ended
December 31, 2001 from $146.8 million during the same
period in 2000, primarily due to the delivery of 41 new
aircraft.

Aircraft fuel expenses increased 3.5%, or
$3.7 million, to $109.8 million during the year ended
December 31, 2001 from $106.1 million during the same
period in 2000 primarily as a result of increased jet fuel
consumption, offset by a reduction in our cost of fuel. Jet fuel
consumption increased 18.3% due to increased flight operations,
while our average price per gallon of fuel declined 12.6%. Under
the capacity purchase agreement and the related fuel purchase
agreement with Continental Airlines, in 2001, we incurred a fuel
price equal to the lower of the actual cost of fuel or the
agreed-upon cap. Our cap in 2001 was 80.9 cents per gallon.
There was no such cap in 2000.

Maintenance, materials and repairs increased
17.2%, or $19.8 million, to $135.4 million during 2001
from $115.6 million during 2000, due to an increase in
fleet size, line maintenance and the volume and timing of
airframe checks and engine overhauls as part of our ongoing
maintenance program.

We had no reservations and sales expense during
2001 as compared to $62.9 million during 2000. Under the
capacity purchase agreement, Continental Airlines is responsible
for all of these costs.

Other rentals and landing fees increased 22.6%,
or $13.2 million, to $71.3 million during 2001 from
$58.1 million during 2000, primarily due to higher
facilities rent and landing fees resulting from increased
operations and higher rates.

We had no commissions expense during 2001 as
compared to $37.5 million during 2000. Under the capacity
purchase agreement, Continental Airlines is directly responsible
for all commission costs.

Ground handling expenses increased 46.9%, or
$23.3 million, to $72.8 million during the year ended
December 31, 2001 from $49.5 million during the same
period in 2000, primarily due to an increase in departures of
regional jets and the rate per departure charged by Continental
Airlines at locations where they provide ground handling.

Outside services costs increased 35.2% or
$5.9 million, to $22.7 million during the year ended
December 31, 2001 from $16.8 million during the same
period in 2000. This increase was primarily due to increases in
Continental Airlines administrative fees for centralized
services and infrastructure costs, including technology,
accounting, legal, treasury, human resources and risk
management. See Note 16 Related Party
Transactions in Notes to Consolidated Financial Statements
in Item 8. Financial Statements and Supplementary
Data.

Hull and war risk related insurance increased
$2.8 million to $5.4 million during the year ended
December 31, 2001 from $2.6 million during the same
period in 2000. The increase in insurance costs was a direct
result of the terrorist attacks on September 11, 2001.
Following the attacks, hull and war risk related insurance rates
increased significantly.

In 2001 we recorded a $24.9 million
reduction in operating expenses as a result of a grant from the
federal government under the Stabilization Act in 2001 for
direct losses incurred beginning on September 11, 2001
through December 31, 2001 as a result of the
September 11, 2001 terrorists attacks. During 2001, we
received from the federal government $21.1 million in cash.

Other operating expense decreased 21.6%, or
$22.5 million to $81.5 million during the year ended
December 31, 2002 from $104.0 million during the same
period in 2000. The decrease was primarily due to the
elimination of catering expenses, revenue-related expenses
including advertising and passenger ticketing processing
expenses, which, under the capacity purchase agreement, are
borne directly by Continental Airlines. These decreases were
partially offset by increases in flight crew training and other
incidental costs resulting from the increase in flight
operations.

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| |                      
| | ---------------------
| | Nonoperating Expenses

Interest expense, net, decreased 10.8% or
$2.6 million, to $21.3 million during the year ended
December 31, 2001 from $23.9 million during the same
period in 2000. The majority of interest expense is related to
amounts payable to Continental Airlines. Amounts due Continental
Airlines carried an interest rate of approximately 4.7% and
6.2% per annum in 2001 and 2000. Effective March 31,
2001, the amounts due Continental Airlines, net, of
$552.3 million were converted into a note, which accrued
interest at a fixed rate of approximately 4.9% through
June 30, 2001 and effective July 1, 2001, at a rate
fixed for each quarter equal to the three-month London interbank
offered rate on the second business day prior to such quarter
plus 1.25% per annum. The decrease in interest expense,
net, was due to the decrease in interest rate, partially offset
by an increase in amounts due to Continental Airlines.




LIQUIDITY AND CAPITAL COMMITMENTS

As of December 31, 2002, we had
$120.9 million in cash and cash equivalents compared to
$71.9 million as of December 31, 2001. During 2002,
cash and cash equivalents increased by $49.0 million,
reflecting net cash provided by operating activities of
$162.1 million, net cash used in investing activities of
$29.1 million, and net cash used in financing activities of
$83.9 million. The net change in cash provided by operating
activities was primarily the result of net income for the period
of $84.8 million, deferred income taxes of
$48.4 million, non-cash depreciation and amortization
expenses of $29.8 million and other expense of
$8.4 million, offset by a net decrease in cash from
operating assets and liabilities of $9.2 million. The net
decrease in cash from operating assets and liabilities was
primarily due to an increase in prepayments and other assets as
a result of credits received from vendors for spare parts and
other equipment and a decrease in accounts payable due to timing
of cash disbursements, offset by an increase in other
liabilities. The net cash used in investing activities consisted
primarily of purchases of property and equipment, offset in part
by the sale of flight equipment and parts related to turboprops
to Continental Airlines. Financing activities consisted
primarily of our payments on our note payable to Continental
Airlines, offset in part by our net proceeds from our initial
public offering.



| |        
| | -------
| | Outlook

As we continue to operate in an uncertain global
and domestic economy, overall revenue for the airline industry
is depressed. Corporate profitability has declined, resulting in
reduced business travel, typically the most profitable source of
revenue for mainline carriers. In addition, we believe that
reduced demand persists not only because of the weak economy,
but also due to some customers concerns about future
terrorist attacks and reprisals. The continued specter of a war
with Iraq and unrest in the Middle East may further decrease the
demand for air travel just as the Persian Gulf War did in 1990
and 1991. Demand is further weakened by customer dissatisfaction
with the hassle and delay of heightened airport security. Under
our capacity purchase agreement as described above, Continental
Airlines assumes the risk of revenue volatility associated with
fares and passenger traffic. Therefore, although we are not
directly affected by the decline in demand, so long as
Continental Airlines is our largest customer, this factor could
influence their commitments to us under the capacity purchase
agreement and lead to a reduction in our revenue. See
Item 1. Business  Principal Risk
Factors that May Affect Our Business and Results of
Operations for further details regarding risks related to
our company and our industry.

Although a significant portion of our costs,
including those relating to fuel, aircraft ownership and
financing, substantially all regional jet engine maintenance,
passenger related facility rent, administrative fees and ground
handling expenses, are reimbursed by Continental Airlines at
actual cost plus a 10% margin under the capacity purchase
agreement, certain other costs provide risk exposure to us such
as labor, other maintenance and general and administrative costs.



| |                                           
| | ------------------------------------------
| | Relationship with Continental
    Airlines

We currently receive substantially all of our
revenue from Continental Airlines under our capacity purchase
agreement, pursuant to which Continental Airlines purchases all
of our capacity and pays us specified rates per block hour flown
by our aircraft, together with certain incentive payments and
reimbursements. As a result, we are dependent on Continental
Airlines and can be directly affected by its financial and
operational strength. In addition, under the capacity purchase
agreement, either Continental Airlines or we have the right to
meet and confer with

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the other regarding any material change in the
underlying assumptions regarding the cost of providing services
under the capacity purchase agreement and whether the
compensation provisions of the capacity purchase agreement
should be changed as a result of such change in assumptions.
Neither Continental Airlines nor we are required under the
capacity purchase agreement to accept any of such changes in the
compensation provision.


Continental Airlines reported a net loss of
$451 million for the year ended December 31, 2002 and
does not currently anticipate that they will be profitable in
2003. Although Continental Airlines has been able to raise
capital, downsize operations and reduce expenses significantly,
current trends in the airline industry and the U.S. economy
make it likely that they will continue to post significant
losses for the foreseeable future. Although Continental Airlines
believes their liquidity will be sufficient to fund current
operations through 2003 or beyond if they are successful in
implementing previously announced cost cutting and revenue
generating measures, together with the capacity reductions
announced by other carriers and capacity reductions that could
come from restructurings within the industry, they believe that
the economic and political environment in which they operate
must improve for them to operate at their current size and
expense level beyond that time. Even absent such adverse factors
as further economic recession, additional terrorist attacks, a
war affecting the United States (if the war were prolonged),
decreased consumer demand, or increased fuel prices, Continental
Airlines may find it necessary to further downsize their
operations and further reduce expenses. Therefore, Continental
Airlines could reduce the level of their commitment or their
utilization of our aircraft under the capacity purchase
agreement. For a detailed discussion of Continental
Airlines results of operations, please see their report on
Form 10-K for the year ended December 31, 2002 as
filed with the SEC. In addition, refer to Item 8.
Financial Statements and Supplementary Data 
Notes to Consolidated Financial Statements 
Note 3  ExpressJet Initial Public Offering and
Capacity Purchase Agreement in such Form 10-K, which
sets forth Continental Airlines disclosure of their future
minimum noncancellable commitments under the capacity purchase
agreement.

We completed our initial public offering on
April 23, 2002, issuing 10.0 million shares of common
stock for $160.0 million before underwriting discount and
expenses. Also, on April 23, 2002, we applied
$146.8 million of our proceeds from our initial public
offering to repay a portion of our note payable to Continental
Airlines. This reduced the note balance to $405.5 million.
Additionally, we made discretionary principal prepayments of
$80.0 million during 2002 to further reduce our note
payable to Continental Airlines to $325.5 million at
December 31, 2002. In consideration for these principal
prepayments, our next scheduled principal payment, as stated in
the amended and restated promissory note agreement with
Continental Airlines in November 2002, is not required until
June 30, 2003. Accrued interest is currently payable
quarterly, and installments of $27.9 million in principal
and accrued interest are due quarterly beginning June 30,
2003, with the entire unpaid balance due on March 31, 2007.
Under our registration rights agreement with Continental
Airlines, we have agreed that we will not, without Continental
Airlines approval, issue or sell any capital stock of our
company or any of our subsidiaries, except in connection with
our employee benefit plans, until the earlier of April 23,
2003 or the date on which Continental Airlines and its
controlled affiliates own less than 20% of our outstanding
shares of common stock. If we or any of our subsidiaries issue
or sell any capital stock of our company or any of our
subsidiaries, except in connection with our employee benefit
plans, between April 23, 2003 and April 23, 2004, we
are required to use 75% of the net proceeds from that sale to
make a principal payment on our note payable to Continental
Airlines, unless Continental Airlines and its controlled
affiliates then own less than 20% of our outstanding shares of
common stock. If we default on our payment obligations under the
note or under our aircraft subleases with Continental Airlines,
in addition to any other remedies it may have, Continental
Airlines can elect to reduce its payments to us under the
capacity purchase agreement by the amount of the defaulted
payment. If Continental Airlines defaults on the payment
obligations it has to us under our tax agreement, then in
addition to any other remedies we may have, we can set off the
amount of the defaulted payments against amounts we owe to
Continental Airlines under the note. In addition, Continental
Airlines or we can reduce any payments to the other party under
the capacity purchase agreement in an amount corresponding to
any defaulted payments by the other party under the foregoing
obligations.

As of December 31, 2002, we also had
approximately $6.6 million (including current maturities)
of capital lease obligations.

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| |                                     
| | ------------------------------------
| | Collective Bargaining
    Agreements

The following is a table of our principal
collective bargaining agreements, and their respective amendable
dates as of December 31, 2002.

|                        |  |             |       |                    |  |                                                                   |  |  |               | 
|----------------------- |  | ----------- | ----- | ------------------ |  | ----------------------------------------------------------------- |  |  | ------------- | 
|                        |  | Approximate |       |                    |  |                                                                  
|                        |  | Number of   |       |                    |  |                                                                  
|                        |  | Full-Time   |       |                    |  | Contract                                                         
|                        |  | Equivalent  |       |                    |  | Amendable                                                        
|Employee Group          |  | Employees   |       | Representing Union |  | Date                                                             
|                        |  |             |       |                    |  |                                                                  
|Pilots                  |  |             | 1,800 |                    |  | Air Line Pilots Association, International                        |  |  | October 2002  | 
|Maintenance technicians |  |             | 800   |                    |  | International Brotherhood of Teamsters                            |  |  | February 2004 | 
|Flight Attendants       |  |             | 800   |                    |  | International Association of Machinists and
    Aerospace Workers |  |  | December 2004 | 
|Dispatchers             |  |             | 60    |                    |  | Transport Workers Union of America                                |  |  | July 2004     | 

We are currently engaged in labor negotiations
with our pilots. At this time we cannot predict the outcome of
these negotiations. Our other employees are not covered by
collective bargaining agreements.



| |                           
| | --------------------------
| | Deferred Income Tax Assets

In conjunction with our IPO completed on
April 23, 2002, we prospectively separated from Continental
Airlines consolidated federal tax group and began filing
our own federal tax return. For the period up to the IPO, we
were included in the consolidated federal income tax return of
Continental Airlines and our income tax expense was calculated
on a separate-company basis. In addition, tax payments were made
to Continental Airlines on the basis of separate taxable income,
however, utilization of our tax net operating loss and credits
was based on utilization within the consolidated Continental
Airlines group rather than on a stand-alone basis. In certain
states we will continue filing consolidated or combined returns
with Continental Airlines until their majority ownership of us
ceases.

At December 31, 2002, we had federal net
operating loss carryforwards of approximately
$105.2 million, which expire between 2004 and 2020.

In conjunction with our IPO, the tax basis of our
tangible and intangible assets was increased to fair value. This
increase resulted in the utilization of a substantial portion of
our state net operating loss carryovers available at
December 31, 2001. The increased tax basis should result in
additional tax deductions being available to us over a period of
15 years. In accordance with our tax agreement with
Continental Airlines, to the extent we generate taxable income
sufficient to realize the additional tax deductions, we will be
required to pay Continental Airlines a percentage of the amount
of tax savings actually realized, excluding the effect of any
loss carrybacks. We will be required to pay Continental Airlines
100% of the first third of the anticipated tax benefit, 90% of
the second third, and 80% of the last third. However, if the tax
benefits are not realized by the end of 2018, we will be
obligated to pay Continental Airlines 100% of any benefit
realized after that date. Since these future payments are solely
dependent on our ability to generate sufficient taxable income
to realize these deferred tax assets, they are recorded as an
obligation to Continental Airlines within the deferred tax asset
account, and the portion we may retain in the future is offset
by a valuation allowance. Both of these items directly offset
the step-up in basis of assets in our long-term deferred tax
asset account.

Our tax agreement with Continental Airlines
provides that Continental Airlines will reimburse us for any net
increase in our cash tax payments resulting from the decreased
availability of net operating loss carryovers related to the
basis increase at the time our payment occurs. The resulting
receivable and/or payable with Continental Airlines related to
the impact on net operating losses resulting from the basis
increase is recorded within the deferred tax asset account since
its performance is dependent on our ability to generate taxable
income.

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No valuation allowance was established on our net
operating loss carryforwards, or on our receivable from
Continental Airlines for reimbursing carryforward losses
utilized resulting from the basis increase, because we believe
our stand-alone taxable income will be sufficient to utilize
substantially all of these assets in approximately two years.

We believe that our IPO created a change in
ownership limitation on the utilization of our carryforward tax
attributes, primarily net operating losses. This limitation,
under Section 382 of the Internal Revenue Code, will limit
our utilization of these attributes to offset up to
approximately $43 million of post-change taxable income per
year. We do not expect this limitation to have any impact on our
financial condition.



| |                     
| | --------------------
| | Purchase Commitments

As of December 31, 2002, we had firm
commitments to acquire 86 regional jets from Embraer. The
estimated aggregate cost of these firm commitments is
approximately $1.7 billion. In addition, we expect to
purchase 17 spare engines for approximately
$46.7 million in connection with the firm order jet
aircraft. These commitments include the effect of the currently
proposed amendment to our regional jet aircraft purchase
agreement with Embraer. See
 Overview  Recent Development.
We also have options to purchase an additional 100 Embraer
regional jets. We will not have any obligation to take any of
the aircraft under firm commitments if they are not financed by
a third party and leased to either Continental Airlines or us.
Furthermore, we currently do not have any financing in place for
the 17 spare engines, and would have no obligation to acquire
the spare engines if for any reason the firm order aircraft are
not delivered to us.

We also have other contractual obligations of
approximately $782.5 million under our power-by-the-hour
contracts with various service providers. This estimate includes
the effect of the currently proposed amendments to our capacity
purchase agreement with Continental Airlines and our regional
jet aircraft purchase agreement with Embraer. See
 Overview  Recent Development.

For the year ended December 31, 2002, we
spent $55.1 million in capital expenditures. Approximately
$25.0 million of our 2002 planned capital expenditures will
be carried over as part of our expected 2003 capital
expenditures. Considering the agreements in principle with
Continental Airlines and Embraer, as discussed in
Overview  Recent Developments, we
anticipate cash outlays for 2003 fleet-related capital
expenditures to be approximately $47.8 million. Other 2003
cash outlays, exclusive of fleet plan requirements, relating to
automation projects, facility improvements, toolings and ground
equipment are expected to aggregate approximately
$27.2 million.

We expect to fund our future capital commitments
through internally generated funds together with general
financings and aircraft financing transactions. However, there
can be no assurance that sufficient financing will be available
for all aircraft and other capital expenditures not covered by
firm financing commitments.



| |                
| | ---------------
| | Aircraft Leases

We have significant lease and sublease
obligations for aircraft that are classified as operating
leases, which are not reflected as assets and liabilities on our
balance sheet. These leases expire between 2013 and 2019. As of
December 31, 2002, taking into consideration the effect of
the currently proposed amendment to our regional jet aircraft
purchase agreement with Embraer, our expected total minimum
annual rental payments for 2003 under current and future
non-cancelable aircraft operating leases are approximately
$249.9 million. Over 90% of our aircraft are leased
directly by Continental Airlines from third parties, and are in
turn subleased to us. If Continental Airlines were to default
under these leases, our ability to retain access to those
aircraft could be adversely affected.

Under our capacity purchase agreement with
Continental Airlines and our agreements with Embraer,
Continental Airlines will acquire or lease all of our current
firm order aircraft and sublease these aircraft to us, although
neither we nor Continental Airlines has any obligation to
acquire or lease any of these aircraft that are not financed by
a third party and leased either to us or Continental Airlines.
Continental Airlines is not required to provide any financing
for our Embraer option aircraft or any other aircraft that we
may acquire. In addition, Continental Airlines may require us to
substitute aircraft subject to our existing Embraer options for
aircraft that have been removed from the terms of the capacity
purchase agreement but that we continue to sublease from
Continental Airlines. If Continental Airlines elects to do this,
it will be entitled to terminate our sublease and take
possession of the replaced aircraft on the

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aircrafts scheduled delivery date. However,
we will be required to finance the option aircraft independent
of Continental Airlines, and even if we are unable to finance
the option aircraft or the option aircraft is not delivered for
any other reason, Continental Airlines will still be entitled to
cancel the sublease and take possession of the replaced
aircraft, resulting in a decrease in the size of our fleet.


Since we will be subject to a continuing risk of
losing aircraft removed from the terms of the capacity purchase
agreement that are subject to subleases with Continental
Airlines if we are not able to finance a replacement option
aircraft, we may be unable to enter into contracts with other
carriers to sell the capacity of those aircraft. In addition,
Continental Airlines may terminate the sublease relating to, and
take possession of, any of our aircraft that has been removed
from the terms of the capacity purchase agreement to the extent
that Continental Airlines provides us with an equivalent
replacement aircraft. We will be required to use commercially
reasonable efforts to finance the replacement aircraft. If we
are unable to obtain financing after using commercially
reasonable efforts, we will not be required to exchange our
aircraft for the replacement aircraft. There is no assurance
that, if Continental Airlines exercises its rights to replace an
aircraft, we will be able to obtain alternative financing or
that the terms of any such alternative financing will be
comparable to those in our subleases with Continental Airlines.

Furthermore, our credit status could decline as a
result or our operating separately from Continental Airlines,
and as a result, we may face increased borrowing costs, more
restrictive covenants and reduced amounts of credit, which may
result in a reduction in the size of our fleet or impair our
ability to fly for other carriers. Our operations as a separate
entity from Continental Airlines may have a negative impact on
our ability to obtain credit on terms similar to those we were
able to obtain previously. Historically, Continental Airlines
has provided financing and credit support to us. We expect that,
except as required by the capacity purchase agreement,
Continental Airlines will not continue to provide us financing
and credit support. As a result, we may face increased borrowing
costs, more restrictive covenants and reduced credit from
lenders and suppliers, all of which would adversely affect our
operating results, financial condition and our ability to raise
capital to pursue other business opportunities.



| |                                                       
| | ------------------------------------------------------
| | Contractual Obligations and Commercial
    Commitments

The following table summarizes the anticipated
effect our material debt, capital lease, operating lease and
other contractual obligations at December 31, 2002 has on
our cash flow in the future periods. Our estimated future
contractual obligations and commercial commitments include the
effect of the currently proposed amendments to the capacity
purchase agreement with Continental Airlines and our regional
jet aircraft purchase agreement with Embraer. See
 Overview  Recent Development
(in millions):

|                                           |  |       |         |              |  |           |       |           |  |         |         |  |  |   |       |  |  |   |         | 
|------------------------------------------ |  | ----- | ------- | ------------ |  | --------- | ----- | --------- |  | ------- | ------- |  |  | - | ----- |  |  | - | ------- | 
|                                           |  |       |         |             
|                                           |  |       |         | Payments Due
|                                           |  |       |         |             
|                                           |  |       |         | Less         |  |          
|                                           |  |       |         | than         |  |           |       | Over     
|Contractual Obligations                    |  | Total |         | 1 year       |  | 1-3 Years |       | 4-5 Years |  | 5 Years
|                                           |  |       |         |              |  |           |       |           |  |        
|Note payable to Continental Airlines(1)    |  | $     | 347.2   |              |  | $         | 81.7  |           |  | $       | 265.5   |  |  | $ |      |  |  | $ |        | 
|Capital leases(2)                          |  |       | 7.5     |              |  |           | 2.4   |           |  |         | 3.7     |  |  |   | 1.4   |  |  |   |        | 
|Aircraft operating leases(3)               |  |       | 3,128.2 |              |  |           | 222.6 |           |  |         | 661.9   |  |  |   | 440.4 |  |  |   | 1,803.3 | 
|Other operating leases(4)                  |  |       | 109.2   |              |  |           | 13.7  |           |  |         | 28.8    |  |  |   | 18.9  |  |  |   | 47.8    | 
|Unconditional purchase obligations(5)      |  |       | 1,798.8 |              |  |           | 27.3  |           |  |         | 259.9   |  |  |   | 224.8 |  |  |   | 1,286.8 | 
|Capacity purchase agreement obligations(6) |  |       | 73.9    |              |  |           | 34.4  |           |  |         | 39.5    |  |  |   |      |  |  |   |        | 
|Other contractual obligations(7)           |  |       | 829.2   |              |  |           | 84.7  |           |  |         | 330.6   |  |  |   | 217.3 |  |  |   | 196.6   | 
|                                           |  |       |         |              |  |           |       |           |  |         |         |  |  |   |       |  |  |   |         | 
|Total contractual cash obligations         |  | $     | 6,294.0 |              |  | $         | 466.8 |           |  | $       | 1,589.9 |  |  | $ | 902.8 |  |  | $ | 3,334.5 | 
|                                           |  |       |         |              |  |           |       |           |  |         |         |  |  |   |       |  |  |   |         | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Based on our amended and restated promissory note
    agreement dated November 5, 2002, our quarterly payments to
    Continental Airlines for principal and interest on our note
    payable is $27.9 million, commencing on June 30, 2003.
    On March 31, 2007, the entire unpaid principal balance of
    this note, if any, together with all accrued unpaid interest,
    will be due and payable in full. The expected effect of our note
    payable on our cash flows is calculated based on the forward
    three-month London interbank offered rate on December 31,
    2002 plus

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| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.25% per annum and based on our current
    principal balance and includes principal payments of
    $325.5 million and estimated interest payments of
    $21.7 million over the remaining life of the note payable.



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Capital lease obligations are the minimum lease
    payments, including interest expense, for our spare engines and
    some of our ground service equipments that are under capital
    lease agreements. See Item 8. Financial Statements
    and Supplementary Data  Notes to the Consolidated
    Financial Statements  Note 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(3) | Aircraft operating lease obligations are the
    minimum lease payments for all of our aircraft and spare engines
    under long-term operating leases from Continental Airlines at
    December 31, 2002. Our sublease agreements with Continental
    Airlines have substantially the same terms as the lease
    agreements between Continental Airlines and the third-party
    lessors, and expire between 2013 and 2019. See Item 8.
    Financial Statements and Supplementary Data 
    Notes to the Consolidated Financial Statements 
    Note 3.                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(4) | Other operating lease obligations represent the
    estimated lease payments for our ground service equipment and
    substantially all of our ground facilities, including facilities
    at public airports, from Continental Airlines or the
    municipalities or agencies owning and controlling such airports
    that are under operating leases. Other operating lease
    obligations also include the estimated lease payments related to
    our flight simulators which we will begin making payments to
    third-parties in 2003.                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(5) | Unconditional purchase obligations are related to
    our firm commitments to acquire 86 Embraer regional jets. The
    estimated aggregate cost of these firm commitments excluding
    estimated leasing costs is approximately $1.7 billion.
    Estimated effect on our cash flows calculated above includes
    estimated leasing costs and is based on the currently proposed
    amendment to our regional aircraft purchase agreement with
    Embraer. See  Overview  Recent
    Developments. Estimated leasing costs are calculated based
    on the terms of leases currently in place. The actual effects
    these unconditional purchase obligations may have on our future
    cash flows may differ materially from our estimates here due to
    the actual leasing or financing terms for these purchases.                                                                                                                      
|   
|(6) | Capacity purchase agreement obligations represent
    our payments to Continental Airlines for it to provide
    centralized services and infrastructure costs, such as
    technology, accounting, legal, tax, treasury, human resources,
    and risk management and fixed charges for ground handling costs
    at Continental Airlines stations. These payments will cease by
    December 31, 2004, at which time we will meet and confer
    with Continental Airlines regarding new fixed payments, if
    applicable. These payments are subject to change based on the
    progress of our transitioning plan with Continental Airlines for
    these services prior to 2004.                                                                                                                                                                                                                                                                 
|   
|(7) | Other contractual obligations include our
    power-by-the-hour contracts and our commitment to purchase spare
    engines based on aircraft deliveries in accordance with the
    currently proposed amendments to the capacity purchase agreement
    with Continental Airlines and our regional jet aircraft purchase
    agreement with Embraer. See
     Overview  Recent
    Developments. We expect to fund these commitments with
    cash generated from operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | The power-by-the-hour contracts dictate the method by which we
    pay a vendor based on our actual level of operations in exchange
    for vendor coverage on specific parts and equipment on our
    aircraft when those parts and equipment are in need of repair or
    replacement. The estimated amount of future commitment is based
    on assumptions related to future level of operations and
    forecast payment rates. The level of operations inherent in the
    estimated amounts detailed above is based on Continental
    Airlines most recent operating plan for us, which can be
    altered at Continental Airlines sole discretion.
    Contractual rate increases at actual time of occurrence may be
    different than the forecast rates inherent in the amounts
    detailed above. 
    Under the power-by-the-hour contracts, we are also required to
    purchase one spare engine for every five aircraft delivered.



| |                                                
| | -----------------------------------------------
| | Other Contingent Liabilities or
    Commitments

We are parties to many contracts in which it is
common for us to agree to indemnify third parties for tort
liabilities that arise out of or relate to the subject matter of
the contract. In some cases, this indemnity extends to related
liabilities arising from the negligence of the indemnified
parties, but usually excludes any 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 a liability under the
indemnities. However, we expect that we would be covered by
insurance for any such liabilities, subject to deductibles.

47



---



##### Table of Contents





| |             
| | ------------
| | Future Costs

We believe that our costs are likely to be
affected in the future by:



| |   |                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | wages, salaries and related costs;                                                                                                                                          
|
| |  | changes in the costs of materials and services;                                                                                                                             
|
| |  | changes in governmental regulations, insurance
    and taxes affecting air transportation and the costs charged for
    airport access, including new security requirements;
|
| |  | our continuing efforts to reduce costs throughout
    our operations, including reduced maintenance costs for new
    aircraft;                                             
|
| |  | higher aircraft ownership costs as new aircraft
    are delivered to the extent these aircraft are not covered by
    the capacity purchase agreement; and                  
|
| |  | changes in cost of services currently provided by
    Continental Airlines at fixed rates under the capacity purchase
    agreement which will be renegotiated in 2004.     




Item 7A.     Quantitative
and Qualitative Disclosure About Market Risk

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




Aircraft Fuel

Effective January 1, 2001, we entered into
the capacity purchase agreement, which expires December 31,
2010 (subject to extensions by Continental Airlines through 2030
and its right to terminate the agreement without cause after
January 1, 2007 upon 12 months notice or for
cause at any time), and a related fuel purchase agreement with
Continental Airlines, which terminates when the capacity
purchase agreement terminates. Under these agreements,
Continental Airlines provides all of our aircraft fuel needs for
the aircraft covered by the capacity purchase agreement, and we
incur an expense equal to the lower of the actual cost of the
fuel or an agreed-upon cap. In 2001, our average fuel price was
76.0 cents per gallon (which was below our agreed-upon cap of
80.9 cents per gallon). For the year ended December 31,
2002, the actual average cost of fuel was 60.7 cents per gallon
(which was below our agreed-upon cap of 61.1 cents per gallon).
Our fuel expense for 2003 and thereafter to termination, related
to all jet aircraft covered under the capacity purchase
agreement, will be the lower of the actual cost of fuel or 66.0
cents per gallon. Under the capacity purchase agreement, we
recover our fuel expense from Continental Airlines with a 10%
margin.




Interest Rates

As of December 31, 2002, we had firm
commitments to acquire 86 Embraer regional jets, which we expect
to lease from Continental Airlines. Changes in interest rates
may impact the actual cost to us for the related leasing
transactions in the future. However, under our capacity purchase
agreement, our block hour rates will be adjusted higher or lower
to reflect any changes in our aircraft rental rates. We also
have potential exposure with respect to our note payable to
Continental Airlines, which bears interest at a floating rate of
the three-month London interbank offered rate plus
1.25% per annum capped at 3.5% in 2002, 5.4% in 2003 and
6.7% in 2004. Beyond 2004 there is no cap on the interest rate.
The interest rate applicable to this variable rate note may
rise, increasing our interest expense. The impact of market risk
is estimated using a hypothetical increase in interest rates up
to the capped rate or by one percentage point for our variable
rate long-term debt. Based on this hypothetical assumption, we
would have incurred an additional $1.0 million
(capped) and $4.2 million in interest expense for the
year ended December 31, 2002 and 2001, respectively. We do
not hold long-term interest-sensitive assets and therefore the
value of our assets is not subject to interest rate
fluctuations. We do not purchase or hold any derivative
financial instruments to protect against the effects of changes
in interest rates.

If 2003 average short-term interest rates
decreased by 100 basis points over 2002 average rates, our
projected interest income from cash, cash equivalents and
short-term investments would decrease by approximately
$1.4 million during 2003.

48



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##### Table of Contents






Item 8.     Financial
Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                                                                      |  |          |    | 
|--------------------------------------------------------------------------------------------------------------------- |  | -------- | -- | 
|                                                                                                                      |  | Page No.
|                                                                                                                      |  |         
|Report of Independent Auditors                                                                                        |  |          | 50 | 
|Consolidated Statements of Operations for each of
    the Three Years Ended December 31, 2002                         |  |          | 51 | 
|Consolidated Balance Sheets as of
    December 31, 2002 and 2001                                                      |  |          | 52 | 
|Consolidated Statements of Cash Flows for each of
    the Three Years Ended December 31, 2002                         |  |          | 54 | 
|Consolidated Statements of Stockholders
    Equity (Deficit) for each of the Three Years Ended
    December 31, 2002 |  |          | 55 | 
|Notes to Consolidated Financial Statements                                                                            |  |          | 56 | 

49



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##### Table of Contents






REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

ExpressJet Holdings, Inc.


We have audited the accompanying consolidated
balance sheets of ExpressJet Holdings, Inc. (the
Company) as of December 31, 2002 and 2001, and
the related consolidated statements of operations,
stockholders equity (deficit) and cash flows for each of
the three years in the period ended December 31, 2002.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above, present fairly, in all material
respects, the consolidated financial position of the Company as
of December 31, 2002 and 2001, and the consolidated results
of its operations and its cash flows for each of the three years
in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.

As discussed in Note 1 to the Consolidated
Financial Statements, the Company adopted Statement of Financial
Accounting Standard No. 142 in 2002.



| |                  
| | -----------------
| | ERNST & YOUNG LLP

Houston, Texas

January 14, 2003


50



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##### Table of Contents



EXPRESSJET HOLDINGS, INC.




CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
data)


|                                                                      |                                     |                         |           |         |   |      |         |         |   |   |         |         |  
|--------------------------------------------------------------------- | ----------------------------------- | ----------------------- | --------- | ------- | - | ---- | ------- | ------- | - | - | ------- | ------- | -
|                                                                      |                                     |                        
|                                                                      |                                     | Year Ended December 31,
|                                                                      |                                     |                        
|                                                                      |                                     | 2002                    |           | 2001    |   | 2000
|                                                                      |                                     |                         |           |         |   |     
|Operating Revenue                                                     |                                     | $                       | 1,089,099 |         |   | $    | 980,473 |         |   | $ | 843,773 |        
|                                                                      |                                     |                         |           |         |   |      |         |         |   |   |         |        
|Operating Expenses:                                                   |                                     |                         |           |         |   |      |         |         |   |   |         |        
|                                                                      | Wages, salaries and related costs   |                         |           | 237,307 |   |      |         | 213,604 |   |   |         | 155,706 |  
|                                                                      | Aircraft rentals                    |                         |           | 199,160 |   |      |         | 168,748 |   |   |         | 146,838 |  
|                                                                      | Aircraft fuel                       |                         |           | 100,115 |   |      |         | 109,841 |   |   |         | 106,138 |  
|                                                                      | Maintenance, materials and repairs  |                         |           | 97,220  |   |      |         | 135,447 |   |   |         | 115,608 |  
|                                                                      | Reservation and sales               |                         |           |        |   |      |         |        |   |   |         | 62,916  |  
|                                                                      | Other rentals and landing fees      |                         |           | 89,114  |   |      |         | 71,291  |   |   |         | 58,144  |  
|                                                                      | Commissions                         |                         |           |        |   |      |         |        |   |   |         | 37,480  |  
|                                                                      | Ground handling                     |                         |           | 74,083  |   |      |         | 72,776  |   |   |         | 49,545  |  
|                                                                      | Depreciation and amortization       |                         |           | 29,787  |   |      |         | 23,045  |   |   |         | 23,205  |  
|                                                                      | Outside services                    |                         |           | 19,837  |   |      |         | 22,693  |   |   |         | 16,786  |  
|                                                                      | Hull and war risk related insurance |                         |           | 17,980  |   |      |         | 5,405   |   |   |         | 2,583   |  
|                                                                      | Government grant                    |                         |           | (541    | ) |      |         | (24,900 | ) |   |         |        |  
|                                                                      | Other operating expenses            |                         |           | 77,257  |   |      |         | 81,543  |   |   |         | 104,006 |  
|                                                                      |                                     |                         |           |         |   |      |         |         |   |   |         |        
|                                                                      |                                     |                         | 941,319   |         |   |      | 879,493 |         |   |   | 878,955 |        
|                                                                      |                                     |                         |           |         |   |      |         |         |   |   |         |        
|Operating Income (Loss)                                               |                                     |                         | 147,780   |         |   |      | 100,980 |         |   |   | (35,182 | )      
|                                                                      |                                     |                         |           |         |   |      |         |         |   |   |         |        
|Nonoperating Income (Expense):                                        |                                     |                         |           |         |   |      |         |         |   |   |         |        
|                                                                      | Interest expense                    |                         |           | (14,042 | ) |      |         | (25,636 | ) |   |         | (29,969 | )
|                                                                      | Capitalized interest                |                         |           | 961     |   |      |         | 2,210   |   |   |         | 4,977   |  
|                                                                      | Interest income                     |                         |           | 3,553   |   |      |         | 2,353   |   |   |         | 1,221   |  
|                                                                      | Other, net                          |                         |           | 354     |   |      |         | (202    | ) |   |         | (85     | )
|                                                                      |                                     |                         |           |         |   |      |         |         |   |   |         |        
|                                                                      |                                     |                         | (9,174    | )       |   |      | (21,275 | )       |   |   | (23,856 | )      
|                                                                      |                                     |                         |           |         |   |      |         |         |   |   |         |        
|Income (Loss) before Income Taxes and Dividends                       |                                     |                         | 138,606   |         |   |      | 79,705  |         |   |   | (59,038 | )      
|Income Tax Expense (Benefit)                                          |                                     |                         | 53,822    |         |   |      | 31,631  |         |   |   | (20,286 | )      
|                                                                      |                                     |                         |           |         |   |      |         |         |   |   |         |        
|Income (Loss) before Dividends                                        |                                     |                         | 84,784    |         |   |      | 48,074  |         |   |   | (38,752 | )      
|                                                                      |                                     |                         |           |         |   |      |         |         |   |   |         |        
|Dividends on Mandatorily Redeemable Preferred
    Stock of Subsidiary |                                     |                         | (504      | )       |   |      |        |         |   |   |        |        
|                                                                      |                                     |                         |           |         |   |      |         |         |   |   |         |        
|Net Income (Loss)                                                     |                                     | $                       | 84,280    |         |   | $    | 48,074  |         |   | $ | (38,752 | )      
|                                                                      |                                     |                         |           |         |   |      |         |         |   |   |         |        
|Basic and Diluted Earnings (Loss) per Common Share                    |                                     | $                       | 1.38      |         |   | $    | 0.89    |         |   | $ | (0.72   | )      
|                                                                      |                                     |                         |           |         |   |      |         |         |   |   |         |        
|Shared Used in Computing Earnings per Common Share                    |                                     |                         |           |         |   |      |         |         |   |   |         |        
|Basic:                                                                |                                     |                         | 61,068    |         |   |      | 54,000  |         |   |   | 54,000  |        
|Diluted:                                                              |                                     |                         | 61,069    |         |   |      | 54,000  |         |   |   | 54,000  |        

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

51



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##### Table of Contents






EXPRESSJET HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except for share
data)


|                                                                                    |                                                 |                                |                              |         |         |         |         |        |         |         | 
|----------------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------ | ---------------------------- | ------- | ------- | ------- | ------- | ------ | ------- | ------- | 
|                                                                                    |                                                 |                               
|                                                                                    |                                                 | December 31,                  
|                                                                                    |                                                 |                               
|                                                                                    |                                                 | 2002                           |                              | 2001   
|                                                                                    |                                                 |                                |                              |        
|ASSETS                                                                             
|Current Assets:                                                                     |                                                 |                                |                              |         |         |         |         |       
|                                                                                    | Cash and cash equivalents                       |                                | $                            | 120,930 |         |         | $       | 71,877 |        
|                                                                                    | Accounts receivable, net                        |                                |                              | 1,526   |         |         |         | 4,632  |        
|                                                                                    | Amounts due from Continental
    Airlines, Inc. |                                |                              | 17,419  |         |         |         | 14,235 |        
|                                                                                    | Spare parts and supplies, net                   |                                |                              | 26,842  |         |         |         | 37,804 |        
|                                                                                    | Prepayments and other                           |                                |                              | 10,775  |         |         |         | 2,821  |        
|                                                                                    | Deferred income taxes                           |                                |                              | 2,299   |         |         |         |       |        
|                                                                                    |                                                 |                                |                              |         |         |         |         |       
|                                                                                    |                                                 |                                | Total Current Assets         |         |         | 179,791 |         |        |         | 131,369 | 
|                                                                                    |                                                 |                                |                              |         |         |         |         |       
|Property and Equipment:                                                             |                                                 |                                |                              |         |         |         |         |       
|                                                                                    | Owned property and equipment:                   |                                |                              |         |         |         |         |        |        
|                                                                                    |                                                 | Flight equipment               |                              |         | 188,366 |         |         |        | 189,496 |        
|                                                                                    |                                                 | Other                          |                              |         | 89,859  |         |         |        | 70,371  |        
|                                                                                    |                                                 |                                |                              |         |         |         |         |       
|                                                                                    |                                                 |                                | 278,225                      |         |         |         | 259,867 |       
|                                                                                    |                                                 | Less: Accumulated depreciation |                              |         | (68,130 | )       |         |        | (55,215 | )      
|                                                                                    |                                                 |                                |                              |         |         |         |         |       
|                                                                                    |                                                 |                                | 210,095                      |         |         |         | 204,652 |       
|                                                                                    |                                                 |                                |                              |         |         |         |         |       
|                                                                                    | Capital Leases:                                 |                                |                              |         |         |         |         |        |        
|                                                                                    |                                                 | Flight equipment               |                              |         | 10,643  |         |         |        | 10,643  |        
|                                                                                    |                                                 | Other                          |                              |         | 4,358   |         |         |        | 4,917   |        
|                                                                                    |                                                 |                                |                              |         |         |         |         |       
|                                                                                    |                                                 |                                | 15,001                       |         |         |         | 15,560  |       
|                                                                                    |                                                 | Less: Accumulated amortization |                              |         | (2,518  | )       |         |        | (1,410  | )      
|                                                                                    |                                                 |                                |                              |         |         |         |         |       
|                                                                                    |                                                 |                                | 12,483                       |         |         |         | 14,150  |       
|                                                                                    |                                                 |                                |                              |         |         |         |         |       
|                                                                                    |                                                 |                                | Total Property and Equipment |         |         | 222,578 |         |        |         | 218,802 | 
|                                                                                    |                                                 |                                |                              |         |         |         |         |       
|Deferred Income Taxes                                                               |                                                 |                                | 8,835                        |         |         |         | 59,519  |       
|Reorganization Value In Excess of Amounts
    Allocable to Identifiable Assets, net |                                                 |                                | 12,789                       |         |         |         | 12,789  |       
|Airport Operating Rights, net                                                       |                                                 |                                | 4,693                        |         |         |         | 4,944   |       
|Note Receivable                                                                     |                                                 |                                | 5,000                        |         |         |         |        |       
|Other Assets, net                                                                   |                                                 |                                | 462                          |         |         |         | 2,328   |       
|                                                                                    |                                                 |                                |                              |         |         |         |         |       
|                                                                                    |                                                 |                                | Total Assets                 |         | $       | 434,148 |         |        | $       | 429,751 | 
|                                                                                    |                                                 |                                |                              |         |         |         |         |       

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EXPRESSJET HOLDINGS, INC.


CONSOLIDATED BALANCE SHEETS 
(Continued)

|                                                         |                                                                                                                                       |                                                          |                                      |          |         |         |         |          |         |          |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ------------------------------------ | -------- | ------- | ------- | ------- | -------- | ------- | -------- | -
|                                                         |                                                                                                                                       |                                                         
|                                                         |                                                                                                                                       | December 31,                                            
|                                                         |                                                                                                                                       |                                                         
|                                                         |                                                                                                                                       | 2002                                                     |                                      | 2001    
|                                                         |                                                                                                                                       |                                                          |                                      |         
|LIABILITIES AND STOCKHOLDERS EQUITY
    (DEFICIT)      
|Current Liabilities:                                     |                                                                                                                                       |                                                          |                                      |          |         |         |         |         
|                                                         | Current maturities of note payable to Continental
    Airlines, Inc.                                                                  |                                                          | $                                    | 73,551   |         |         | $       |         |        
|                                                         | Current maturities of capital leases                                                                                                  |                                                          |                                      | 2,174    |         |         |         | 2,026    |        
|                                                         | Accounts payable                                                                                                                      |                                                          |                                      | 8,153    |         |         |         | 15,147   |        
|                                                         | Accrued payroll and related costs                                                                                                     |                                                          |                                      | 18,260   |         |         |         | 17,770   |        
|                                                         | Accrued other liabilities                                                                                                             |                                                          |                                      | 45,648   |         |         |         | 43,891   |        
|                                                         |                                                                                                                                       |                                                          |                                      |          |         |         |         |         
|                                                         |                                                                                                                                       |                                                          | Total Current Liabilities            |          |         | 147,786 |         |          |         | 78,834   |  
|                                                         |                                                                                                                                       |                                                          |                                      |          |         |         |         |         
|Note Payable to Continental
    Airlines, Inc.           |                                                                                                                                       |                                                          | 251,961                              |          |         |         | 552,312 |         
|Capital Leases                                           |                                                                                                                                       |                                                          | 4,394                                |          |         |         | 6,568   |         
|Other Long Term Liabilities                              |                                                                                                                                       |                                                          | 9,705                                |          |         |         | 6,398   |         
|Mandatorily Redeemable Preferred Stock of
    Subsidiary |                                                                                                                                       |                                                          | 5,000                                |          |         |         |        |         
|Stockholders Equity (Deficit):                          |                                                                                                                                       |                                                          |                                      |          |         |         |         |         
|                                                         | Special Voting Preferred stock 
    $.01 par, one share authorized, issued, and outstanding                                          |                                                          |                                      |         |         |         |         |         |        
|                                                         | Preferred stock  $.01 par,
    10,000,000 shares authorized, none issued or outstanding                                              |                                                          |                                      |         |         |         |         |         |        
|                                                         | Common stock  $.01 par,
    200,000,000 shares authorized, 64,000,000 and
    54,000,000 shares issued and outstanding, respectively |                                                          |                                      | 640      |         |         |         | 540      |        
|                                                         | Additional paid-in capital                                                                                                            |                                                          |                                      | 159,743  |         |         |         | 14,460   |        
|                                                         | Accumulated deficit                                                                                                                   |                                                          |                                      | (145,081 | )       |         |         | (229,361 | )      
|                                                         |                                                                                                                                       |                                                          |                                      |          |         |         |         |         
|                                                         |                                                                                                                                       |                                                          | Total Stockholders Equity (Deficit) |          |         | 15,302  |         |          |         | (214,361 | )
|                                                         |                                                                                                                                       |                                                          |                                      |          |         |         |         |         
|                                                         |                                                                                                                                       | Total Liabilities and Stockholders Equity
    (Deficit) |                                      | $        | 434,148 |         |         | $        | 429,751 |         
|                                                         |                                                                                                                                       |                                                          |                                      |          |         |         |         |         

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

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EXPRESSJET HOLDINGS, INC.






CONSOLIDATED STATEMENTS OF CASH
FLOWS


(In thousands)


|                                                                                                 |                                                                                              |                                                         |         |          |         |      |        |         |         |   |    |         |         |  
|------------------------------------------------------------------------------------------------ | -------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------- | -------- | ------- | ---- | ------ | ------- | ------- | - | -- | ------- | ------- | -
|                                                                                                 |                                                                                              |                                                        
|                                                                                                 |                                                                                              | Year Ended December 31,                                
|                                                                                                 |                                                                                              |                                                        
|                                                                                                 |                                                                                              | 2002                                                    |         | 2001     |         | 2000
|                                                                                                 |                                                                                              |                                                         |         |          |         |     
|Cash Flows from Operating Activities:                                                            |                                                                                              |                                                         |         |          |         |      |        |         |         |   |    |        
|                                                                                                 | Income (loss) before dividends                                                               |                                                         | $       | 84,784   |         |      | $      | 48,074  |         |   | $  | (38,752 | )      
|                                                                                                 | Adjustments to reconcile net income (loss) to net
    cash provided by operating activities: |                                                         |         |          |         |      |        |         |         |   |    |         |        
|                                                                                                 |                                                                                              | Deferred income taxes                                   |         |          | 48,385  |      |        |         | 6,131   |   |    |         | (20,286 | )
|                                                                                                 |                                                                                              | Depreciation and amortization                           |         |          | 29,787  |      |        |         | 23,045  |   |    |         | 23,205  |  
|                                                                                                 |                                                                                              | Fleet disposition/impairment losses                     |         |          |        |      |        |         |        |   |    |         | 6,196   |  
|                                                                                                 |                                                                                              | Other, net                                              |         |          | 8,353   |      |        |         | 12,522  |   |    |         | 7,197   |  
|Changes in operating assets and liabilities:                                                     |                                                                                              |                                                         |         |          |         |      |        |         |         |   |    |        
|                                                                                                 | (Increase) decrease in accounts receivable, net                                              |                                                         |         | 3,106    |         |      |        | 8,399   |         |   |    | (1,672  | )      
|                                                                                                 | (Increase) decrease in amounts due from
    Continental Airlines, Inc.                       |                                                         |         | (3,185   | )       |      |        | (14,235 | )       |   |    |        |        
|                                                                                                 | Increase in spare parts and supplies, net                                                    |                                                         |         | (1,911   | )       |      |        | (10,835 | )       |   |    | (12,289 | )      
|                                                                                                 | (Increase) decrease in prepayments and other
    assets                                      |                                                         |         | (5,843   | )       |      |        | (8,472  | )       |   |    | 1,441   |        
|                                                                                                 | Increase (decrease) in accounts payable                                                      |                                                         |         | (6,991   | )       |      |        | (2,494  | )       |   |    | 11,923  |        
|                                                                                                 | Increase in amounts due to Continental Airlines,
    Inc.                                    |                                                         |         |         |         |      |        |        |         |   |    | 76,554  |        
|                                                                                                 | Increase in other liabilities                                                                |                                                         |         | 5,663    |         |      |        | 6,592   |         |   |    | 9,716   |        
|                                                                                                 |                                                                                              |                                                         |         |          |         |      |        |         |         |   |    |        
|                                                                                                 |                                                                                              | Net cash provided by operating activities               |         |          | 162,148 |      |        |         | 68,727  |   |    |         | 63,233  |  
|                                                                                                 |                                                                                              |                                                         |         |          |         |      |        |         |         |   |    |        
|Cash Flows from Investing Activities:                                                            |                                                                                              |                                                         |         |          |         |      |        |         |         |   |    |        
|                                                                                                 | Capital expenditures                                                                         |                                                         |         | (55,080  | )       |      |        | (53,470 | )       |   |    | (62,562 | )      
|                                                                                                 | Purchase deposits refunded in connection with
    aircraft delivered                         |                                                         |         |         |         |      |        |        |         |   |    | 42,382  |        
|                                                                                                 | Purchase deposits paid in connection with future
    aircraft deliveries                     |                                                         |         |         |         |      |        |        |         |   |    | (66,739 | )      
|                                                                                                 | Proceeds from transfer of purchase deposits to
    Continental Airlines, Inc.                |                                                         |         |         |         |      |        |        |         |   |    | 61,712  |        
|                                                                                                 | Purchase of flight equipment from Continental
    Airlines, Inc.                             |                                                         |         |         |         |      |        | (14,205 | )       |   |    | (34,782 | )      
|                                                                                                 | Proceeds from the transfer of flight equipment to
    Continental Airlines, Inc.             |                                                         |         | 24,144   |         |      |        |        |         |   |    |        |        
|                                                                                                 | Proceeds from disposition of equipment                                                       |                                                         |         | 1,788    |         |      |        | 1,594   |         |   |    | 754     |        
|                                                                                                 |                                                                                              |                                                         |         |          |         |      |        |         |         |   |    |        
|                                                                                                 |                                                                                              | Net cash used in investing activities                   |         |          | (29,148 | )    |        |         | (66,081 | ) |    |         | (59,235 | )
|                                                                                                 |                                                                                              |                                                         |         |          |         |      |        |         |         |   |    |        
|Cash Flows from Financing Activities:                                                            |                                                                                              |                                                         |         |          |         |      |        |         |         |   |    |        
|                                                                                                 | Advance from Continental
    Airlines, Inc.                                                  |                                                         |         |         |         |      |        | 71,000  |         |   |    |        |        
|                                                                                                 | Proceeds from sale/leaseback with Continental
    Airlines, Inc.                             |                                                         |         |         |         |      |        |        |         |   |    | 15,541  |        
|                                                                                                 | Payments on note payable to Continental
    Airlines, Inc.                                   |                                                         |         | (226,800 | )       |      |        |        |         |   |    |        |        
|                                                                                                 | Payments on long-term debt and capital lease
    obligations                                 |                                                         |         | (2,026   | )       |      |        | (1,782  | )       |   |    | (19,539 | )      
|Proceeds from issuance of common stock, net of
    IPO underwriting discounts and other expenses |                                                                                              |                                                         | 145,383 |          |         |      |        |         |         |   |    |        
|                                                                                                 | Dividends paid on mandatorily redeemable
    preferred stock                                 |                                                         |         | (504     | )       |      |        |        |         |   |    |        |        
|                                                                                                 |                                                                                              |                                                         |         |          |         |      |        |         |         |   |    |        
|                                                                                                 |                                                                                              | Net cash (used in) provided by financing
    activities |         |          | (83,947 | )    |        |         | 69,218  |   |    |         | (3,998  | )
|                                                                                                 |                                                                                              |                                                         |         |          |         |      |        |         |         |   |    |        
|Net Increase in Cash and Cash Equivalents                                                        |                                                                                              |                                                         | 49,053  |          |         |      | 71,864 |         |         |   |   |        
|Cash and Cash Equivalents  Beginning
    of Period                                              |                                                                                              |                                                         | 71,877  |          |         |      | 13     |         |         |   | 13 |        
|                                                                                                 |                                                                                              |                                                         |         |          |         |      |        |         |         |   |    |        
|Cash and Cash Equivalents  End of
    Period                                                    |                                                                                              | $                                                       | 120,930 |          |         | $    | 71,877 |         |         | $ | 13 |        
|                                                                                                 |                                                                                              |                                                         |         |          |         |      |        |         |         |   |    |        
|Supplemental Cash Flow Information:                                                              |                                                                                              |                                                         |         |          |         |      |        |         |         |   |    |        
|                                                                                                 | Interest paid                                                                                |                                                         | $       | 14,042   |         |      | $      | 545     |         |   | $  | 1,822   |        
|                                                                                                 | Income taxes paid                                                                            |                                                         | $       | 4,875    |         |      | $      | 25,502  |         |   | $  |        |        

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

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EXPRESSJET HOLDINGS, INC






CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY (DEFICIT)


(In thousands)


|                             |                                    |                 |   |              |  |            |   |             |  |               |        |         |  |                  |     |     |  |   |         |         |   |   |          |         |   |   |          |         |  
|---------------------------- | ---------------------------------- | --------------- | - | ------------ |  | ---------- | - | ----------- |  | ------------- | ------ | ------- |  | ---------------- | --- | --- |  | - | ------- | ------- | - | - | -------- | ------- | - | - | -------- | ------- | -
|                             |                                    |                 |   |              |  |            |   |             |  |              
|                             |                                    | Preferred Stock |   | Common Stock |  | Additional |   |             |  | Total        
|                             |                                    |                 |   |              |  | Paid-in    |   | Accumulated |  | Stockholders
|                             |                                    | Share           |   | Amount       |  | Share      |   | Amount      |  | Capital       |        | Deficit |  | Equity (Deficit)
|                             |                                    |                 |   |              |  |            |   |             |  |               |        |         |  |                 
|Balance at December 31, 1999 |                                    |                 |  |              |  | $          |  |             |  |               | 54,000 |         |  | $                | 540 |     |  | $ | 14,460  |         |   | $ | (238,683 | )       |   | $ | (223,683 | )      
|                             | Net Loss                           |                 |   |             |  |            |   |            |  |               |        |        |  |                  |     |    |  |   |         |        |   |   |          | (38,752 | ) |   |          | (38,752 | )
|                             |                                    |                 |   |              |  |            |   |             |  |               |        |         |  |                  |     |     |  |   |         |         |   |   |          |         |   |   |          |        
|Balance at December 31, 2000 |                                    |                 |  |              |  |            |  |             |  |               | 54,000 |         |  |                  | 540 |     |  |   | 14,460  |         |   |   | (277,435 | )       |   |   | (262,435 | )      
|                             | Net Income                         |                 |   |             |  |            |   |            |  |               |        |        |  |                  |     |    |  |   |         |        |   |   |          | 48,074  |   |   |          | 48,074  |  
|                             |                                    |                 |   |              |  |            |   |             |  |               |        |         |  |                  |     |     |  |   |         |         |   |   |          |         |   |   |          |        
|Balance at December 31, 2001 |                                    |                 |  |              |  |            |  |             |  |               | 54,000 |         |  |                  | 540 |     |  |   | 14,460  |         |   |   | (229,361 | )       |   |   | (214,361 | )      
|                             | Common Stock Issuance              |                 |   |             |  |            |   |            |  |               |        | 10,000  |  |                  |     | 100 |  |   |         | 159,900 |   |   |          |        |   |   |          | 160,000 |  
|                             | Expenses Related to Stock Issuance |                 |   |             |  |            |   |            |  |               |        |        |  |                  |     |    |  |   |         | (14,617 | ) |   |          |        |   |   |          | (14,617 | )
|                             | Dividends                          |                 |   |             |  |            |   |            |  |               |        |        |  |                  |     |    |  |   |         |        |   |   |          | (504    | ) |   |          | (504    | )
|                             | Net Income                         |                 |   |             |  |            |   |            |  |               |        |        |  |                  |     |    |  |   |         |        |   |   |          | 84,784  |   |   |          | 84,784  |  
|                             |                                    |                 |   |              |  |            |   |             |  |               |        |         |  |                  |     |     |  |   |         |         |   |   |          |         |   |   |          |        
|Balance at December 31, 2002 |                                    |                 |  |              |  | $          |  |             |  |               | 64,000 |         |  | $                | 640 |     |  | $ | 159,743 |         |   | $ | (145,081 | )       |   | $ | 15,302   |        
|                             |                                    |                 |   |              |  |            |   |             |  |               |        |         |  |                  |     |     |  |   |         |         |   |   |          |         |   |   |          |        

55



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##### Table of Contents



EXPRESSJET HOLDINGS, INC.






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


We are a regional U.S. air carrier engaged
in the business of transporting passengers, cargo and mail. Our
sole asset is all of the issued and outstanding shares of
capital stock of XJT Holdings, Inc., the sole owner of the
issued and outstanding shares of common stock of ExpressJet
Airlines, Inc., which operates as Continental Express (together,
ExpressJet, we, us and
our). All of our flying is currently performed on
behalf of Continental Airlines, Inc. (Continental
Airlines or Continental) pursuant to a
capacity purchase agreement, and substantially all of our
revenue is received under that agreement. We currently provide
substantially all of Continental Airlines regional jet
service out of Houston, Newark and Cleveland. We offer, on
behalf of Continental Airlines, scheduled passenger service with
approximately 1,000 average daily departures to more than 108
cities in 37 states, the District of Columbia, Mexico and
Canada. We are economically dependent upon Continental Airlines
for our operations and cash flows as all of our revenue is
currently received from Continental Airlines. In addition, the
capacity purchase agreement (see Note 2) covers all of
our existing fleet and all of our regional jets currently
subject to firm aircraft orders. Continental Airlines owns 53.1%
of our outstanding common stock.

We are dependent on the financial and operational
strength of Continental Airlines. For the full year 2002,
Continental Airlines reported a net loss of $451 million.
Continental has stated that it believes that absent adverse
factors outside of its control such as those described herein,
its liquidity and access to cash will be sufficient to fund its
current operations through 2003 (and beyond if it is successful
in implementing its previously announced revenue generation and
cost cutting measures, as well as additional measures currently
being developed). However, they have stated that the economic
environment must improve for it to continue to operate at its
current size and expense level beyond that time. Therefore,
Continental Airlines may find it necessary to further downsize
their operations and further reduce expenses and could reduce
the level of their commitment or their utilization of our
aircraft under the capacity purchase agreement, which could
materially reduce our revenue and earnings. Continental has also
stated that it anticipates that its previously announced
capacity and cost reductions, together with the capacity
reductions announced by other carriers and capacity reductions
that could come from restructurings within the industry, should
result in a better financial environment by the end of 2003,
absent adverse factors outside its control such as a further
economic recession, additional terrorist attacks, and a war
affecting the United States (if the war were prolonged). For a
detailed discussion of Continental Airlines results of
operations, please see their report on Form 10-K for the
year ended December 31, 2002 as filed with the SEC. In
addition, refer to Item 8. Financial Statements and
Supplementary Data  Notes to Consolidated Financial
Statements  Note 3  ExpressJet
Initial Public Offering and Capacity Purchase Agreement.
in such Form 10-K that sets forth Continental Airlines
disclosure of their future minimum non-cancellable commitments
under the capacity purchase agreement.

We completed the initial public offering
(IPO) of our common stock, par value $.01 per
share, and the related Preferred Stock Purchase Rights
(collectively, the Common Stock), on April 23,
2002, issuing 10 million shares of our common stock and
raising $160.0 million, before underwriting discount and
expenses. On April 23, 2002, we applied $146.8 million
of our proceeds from our IPO to repay a portion of our note
payable to Continental Airlines. Continental Airlines also sold
20 million shares of our common stock in the offering. We
did not receive any of the proceeds from the sale of our stock
by Continental Airlines.

The terms ExpressJet, we,
us, our and similar terms refer to
ExpressJet Holdings, Inc., XJT Holdings, Inc., and ExpressJet
Airlines, Inc.

Note 1  Summary of Significant
Accounting Policies



| |                                      
| | -------------------------------------
| | (a) Principles of
    Consolidation -

The accompanying consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
and include the accounts of ExpressJet Holdings, Inc. and its
subsidiaries. All intercompany transactions have been eliminated
in consolidation.

56



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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                
| | -------------------------------
| | (b) Basis of
    Presentation -

The financial statements for the years ended
December 31, 2001 and 2000 have been prepared using
Continentals historical basis in the assets and
liabilities of the company and include the accounts of
ExpressJet Holdings, Inc. and its subsidiary ExpressJet
Airlines, Inc. The financial statements for 2001 and 2000
reflect our results of operations, financial condition and cash
flows as a division of Continental and would not be indicative
of our actual results of operations and financial position had
we been a separate stand-alone entity during the periods
presented.

We utilized certain systems, facilities and
services provided by Continental, including our information
technology support, fuel purchasing, ground handling, catering,
corporate accounting, insurance, purchasing, payroll, human
resources, legal, tax and treasury management services. We
believe the statements of operations for the year ended
December 31, 2000 reflect expense allocations for these
services that are representative of the actual costs to provide
the services. We were operated essentially as a division of
Continental Airlines in 2000 providing passengers to their
mainline jet operations. Our scheduling, pricing and revenue
management were designed and operated to increase overall system
revenue rather than to maximize the profitability on flight
segments we operated. As a result, we had a history of operating
losses prior to 2001.

Effective January 1, 2001, we implemented a
capacity purchase agreement with Continental. The financial
statements for the years ended December 31, 2002 and 2001
have been prepared reflecting the terms of the capacity purchase
agreement. Under the capacity purchase agreement, we fly all of
our aircraft on behalf of Continental, which handles scheduling,
ticket prices and seat inventories for these flights. In
exchange for our operation of the flights, Continental pays us
for each scheduled block hour based on an agreed formula
designed to provide us with an operating margin of approximately
10% before taking into account incentive payments and certain
costs, including labor, maintenance (except for regional jet
engine maintenance), and general administrative costs as further
described in Note 2. Under the agreement, Continental
retains all passenger, cargo and other revenues associated with
each flight, and is responsible for all revenue-related
expenses. We continue to utilize certain systems, facilities and
services of Continental in a manner similar to periods prior to
2001, at rates established in the capacity purchase agreement
and related agreements. See Notes 2 and 15.



| |                           
| | --------------------------
| | (c) Use of
    Estimates -

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates
and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results
could differ from those estimates.



| |                                    
| | -----------------------------------
| | (d) Cash and Cash
    Equivalents -

Cash and cash equivalents consist of cash and
short-term, highly liquid investments, which are readily
convertible into cash and have a maturity of three months or
less when purchased.



| |                                   
| | ----------------------------------
| | (e) Spare Parts and
    Supplies -

Inventories, expendable parts and supplies
relating to flight equipment are carried at average acquisition
cost and are expensed when incurred in operations. An allowance
for obsolescence is provided over the remaining estimated useful
life of the related aircraft , plus allowances for spare parts
currently identified as excess to reduce the carrying costs to
the lower of amortized cost or net realizable value. These
allowances are based on management estimates, which are subject
to change.



| |                                 
| | --------------------------------
| | (f) Property and
    Equipment -

Property and equipment are recorded at cost and
are depreciated to estimated residual values over their
estimated useful lives using the straight-line method. Property
and equipment acquired under capital leases are recorded at the

57



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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

lower of the present value of the future minimum
lease payments or the fair value of the asset at the inception
of the lease. The estimated useful lives and residual values for
our property and equipment are as follows:

|                                  |  |                                                |  |                |           | 
|--------------------------------- |  | ---------------------------------------------- |  | -------------- | --------- | 
|                                  |  |                                                |  | Estimated     
|                                  |  | Estimated Useful Life                          |  | Residual Value
|                                  |  |                                                |  |               
|Flight equipment                  |  | Shorter of estimated useful life or lease term |  |                | 0% to 15% | 
|Ground property and equipment     |  | 3 to 26 years                                  |  |                | 0%        | 
|Capital lease  flight and ground |  | Shorter of estimated useful life or lease term |  |                | 0%        | 

As shown in the following table, our aircraft
fleet consisted of 188 regional jets at December 31, 2002.
All of our regional jet aircraft are subleased from Continental
Airlines. See Note 3. Our aircraft purchase orders and
options as of December 31, 2002 are also shown below.

|               |       |          |     |        |  |        |     |         |  |               |    |    |  |  |     |     |  |  |    |  | 
|-------------- | ----- | -------- | --- | ------ |  | ------ | --- | ------- |  | ------------- | -- | -- |  |  | --- | --- |  |  | -- |  | 
|               |       |          |     |        |  |        |     |         |  | Seats in     
|               |       | Total    |     |        |  | Firm   |     |         |  | Standard     
|Type           |       | Aircraft |     | Leased |  | Orders |     | Options |  | Configuration
|               |       |          |     |        |  |        |     |         |  |              
|Regional Jets: |       |          |     |        |  |        |     |         |  |               |    |    |  |  |     |     |  |  |    | 
|ERJ-145XR      |       |          | 18  |        |  |        | 18  |         |  |               | 86 |    |  |  | 100 |     |  |  | 50 | 
|ERJ-145        |       |          | 140 |        |  |        | 140 |         |  |               |   |    |  |  |    |     |  |  | 50 | 
|ERJ-135        |       |          | 30  |        |  |        | 30  |         |  |               |   |    |  |  |    |     |  |  | 37 | 
|               |       |          |     |        |  |        |     |         |  |               |    |    |  |  |     |     |  |  |    | 
|               | Total |          |     | 188    |  |        |     | 188     |  |               |    | 86 |  |  |     | 100 |  |  |    |  | 
|               |       |          |     |        |  |        |     |         |  |               |    |    |  |  |     |     |  |  |    | 



| |                            
| | ---------------------------
| | (g) Intangible
    Assets -

Reorganization value in excess of amounts
allocable to identifiable assets represents an amount arising
from our emergence from bankruptcy reorganization in 1993.

In July 2001, the Financial Accounting Standards
Board issued Financial Accounting Standard
No. 142  Goodwill and Other Intangible
Assets (SFAS 142). SFAS 142 includes
requirements to test goodwill and indefinite lived intangible
assets for impairment rather than amortize them. Effective
January 1, 2002, we adopted SFAS 142 and discontinued
amortization of our Reorganization Value in Excess of Amounts
Allocable to Identifiable Assets, which will result in reduced
expense of approximately $1.1 million on an annualized
basis. We performed the first of these impairment tests in April
2002 and determined that we did not have any impairment of our
Reorganization Value in Excess of Amounts Allocable to
Identifiable Assets upon adoption based on our assessment of
fair values.

Pro forma results for the year ended
December 31, 2001 and 2000, assuming the discontinuation of
amortization of Reorganization Value in Excess of Amounts
Allocable to Identifiable Assets, are shown below:

|                                             |                                   |              |      |              |  |   |       |       |  
|-------------------------------------------- | --------------------------------- | ------------ | ---- | ------------ |  | - | ----- | ----- | -
|                                             |                                   | Year Ended   |      | Year Ended  
|                                             |                                   | December 31, |      | December 31,
|(in millions, except per share data)         |                                   | 2001         |      | 2000        
|                                             |                                   |              |      |             
|Reported net income (loss)                   |                                   | $            | 48.1 |              |  | $ | (38.8 | )    
|Reorganization value amortization            |                                   |              | 0.7  |              |  |   | 0.7   |      
|                                             |                                   |              |      |              |  |   |       |      
|Adjusted net income (loss)                   |                                   | $            | 48.8 |              |  | $ | (38.1 | )    
|                                             |                                   |              |      |              |  |   |       |      
|Basic and diluted earnings (loss) per share: |                                   |              |      |              |  |   |       |      
|                                             | As reported                       |              | $    | 0.89         |  |   | $     | (0.72 | )
|                                             | Reorganization value amortization |              |      | 0.01         |  |   |       | 0.01  |  
|                                             |                                   |              |      |              |  |   |       |      
|                                             | As adjusted                       |              | $    | 0.90         |  |   | $     | (0.71 | )
|                                             |                                   |              |      |              |  |   |       |      

We evaluate the carrying value each reporting
period to determine whether events and circumstances continue to
support an indefinite useful life. On an annual basis, or more
frequently if events or changes in circumstances indicate

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

that the asset may be impaired, we perform an
impairment review. If this review indicates that reorganization
value in excess of amounts allocable to identifiable assets will
not be recoverable, as determined based on the undiscounted cash
flows over the remaining amortization periods, the carrying
value is reduced by the estimated shortfall of cash flows.

Airport operating rights, the rights to use
certain takeoff and landing slots and gates, are amortized on a
straight-line basis over the life of the related airport
facility lease, which approximates 20 years.



| |                           
| | --------------------------
| | (h) Deferred
    Credits -

Our spare parts and flight training credits,
included in other long term liabilities with offsetting
receivables in prepayments and other current assets, consist of
contractual concessions obtained from our purchase agreement
with Empresa Brasileira de Aeronáutica S.A.,
(Embraer). All spare parts credits are to be used to
offset the purchase price of initial spare parts provisioning
for our newly delivered aircraft. Similarly, the flight training
credits are used to pay for the initial simulator rent costs for
our pilots. Both of these credits are amortized as a reduction
to our aircraft rent expense over the life of the associated
aircraft lease. Amortization totaled $0.9 million and
$0.4 million for 2002 and 2001.



| |                                 
| | --------------------------------
| | (i) Frequent Flyer
    Program -

We participate in Continentals frequent
flyer program, OnePass, in which passengers may use
mileage accumulated in that program to obtain discounted or free
trips that might include a flight segment on one of our flights.
Continental is responsible for the administration of OnePass. We
accrued the incremental costs for mileage awards expected to be
redeemed by OnePass customers on our flights in 2000 and
received no compensation from Continental when mileage awards
were redeemed on us and paid no compensation to Continental when
mileage awards earned on us were redeemed on Continental.
Effective January 1, 2001, under the capacity purchase
agreement, Continental is responsible for all costs related to
the program and no separate accounting is required.



| |                                            
| | -------------------------------------------
| | (j) Operating Revenue and
    Commissions -

For the years ending December 31, 2002 and
2001, we recognized our operating revenue under the capacity
purchase agreement based on agreed upon rates for each scheduled
block hour. The rates per hour were designed to provide us with
an operating margin of approximately 10% before taking into
account variations in some costs and expenses that are generally
controllable by us. Furthermore, we also record revenue earned
under certain incentive provisions, such as percentage of
flights we complete, certain on-time departures and baggage
handling, within the capacity purchase agreement. See
Note 2  Capacity Purchase Agreement with
Continental Airlines for details related to the block hour rates
and the performance incentive payments. Our operating revenue is
reconciled and settled with Continental Airlines on a monthly
basis, except for the quarterly reconciliation of our costs
within the margin band as defined by the capacity purchase
agreement.

We had a revenue sharing agreement with
Continental through December 31, 2000 that provided us with
a proration percentage of the ticket revenue and related
commissions for those passengers traveling for one portion of
their trip on our aircraft and the other portion of their trip
on Continentals aircraft. Passenger revenue and
commissions were recognized when transportation was provided. We
did not record an air traffic liability or the related asset as
all passenger ticket sales were made on Continental ticket
stock. Consequently, Continental bore the liability to provide
the service or refund the ticket. Cargo revenue and related
commissions were also included in the revenue sharing
arrangement; our proration percentage of cargo revenue and
commissions was recognized when the service was provided.

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                   
| | ------------------
| | (k) Income Taxes -

In conjunction with our IPO completed on
April 23, 2002, we prospectively separated from Continental
Airlines consolidated federal tax group and began filing
our own federal tax return. For the period up to the IPO, we are
included in the consolidated federal income tax return of
Continental Airlines and our income tax expense is calculated on
a separate-company basis. In addition, tax payments were made to
Continental Airlines on the basis of separate taxable income,
however, utilization of our tax net operating loss and credits
was based on utilization within the consolidated Continental
Airlines group rather than on a stand-alone basis. In certain
states we will continue filing consolidated or combined returns
with Continental Airlines until their majority ownership of us
ceases.

Deferred income taxes are provided under the
liability method and are determined based on differences between
financial reporting and income tax basis of assets and
liabilities and are measured using enacted tax rates and laws. A
valuation allowance is provided on deferred tax assets if, based
on available evidence, it is more likely than not that future
tax benefits will not be realized. For tax periods up to the
IPO, subject to the provisions of our tax sharing agreement with
Continental Airlines, we computed our provision for deferred
income taxes using the liability method as if we were a separate
taxpayer.

For tax periods up to the IPO, provision to
return adjustments were charged to the intercompany account with
Continental Airlines when identified and interest charged
prospectively.



| |                                       
| | --------------------------------------
| | (l) Maintenance and Repair
    Costs -

Maintenance and repair costs for owned and leased
flight equipment, including the overhaul of aircraft components,
are charged to operating expense as incurred, including engine
overhaul costs covered by power-by-the hour agreements, which
are expensed on the basis of hours flown. On average,
power-by-the-hour arrangements represent approximately 50% of
our maintenance, materials and repair costs.



| |                            
| | ---------------------------
| | (m) Advertising
    Costs -

We expense the costs of advertising as incurred.
Advertising expense was $2.8 million for the year ended
December 31, 2000. In accordance with the terms of the
capacity purchase agreement, we incurred no advertising expense
in 2002 or 2001.



| |                                    
| | -----------------------------------
| | (n) Earnings (Loss) Per
    Share -

We account for earnings (loss) per share in
accordance with SFAS No. 128, Earnings per
Share. Basic earnings (loss) per common share (Basic
EPS) excludes dilution and is computed by dividing net
income (loss) available to common stockholders by the weighted
average number of common shares outstanding during the periods
presented. Diluted earnings (loss) per share (Diluted
EPS) reflects the potential dilution that could occur if
securities or other obligations to issue common stock were
exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings (loss)
of the company. The following table sets forth the reconciliation

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

of the numerator and denominator of Basic EPS to
the numerator and denominator of Diluted EPS for the years ended
December 31, 2002, 2001 and 2000 (in thousands, except per
share amounts):

|                                            |  |                         |        |      |  |      |        |  |  |   |         |  
|------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------- | -
|                                            |  |                        
|                                            |  | Year ended December 31,
|                                            |  |                        
|                                            |  | 2002                    |        | 2001 |  | 2000
|                                            |  |                         |        |      |  |     
|Numerator:                                  |  |                         |        |      |  |      |        |  |  |   |         |  
|Net income (loss)                           |  | $                       | 84,280 |      |  | $    | 48,074 |  |  | $ | (38,752 | )
|                                            |  |                         |        |      |  |      |        |  |  |   |         |  
|Denominator:                                |  |                         |        |      |  |      |        |  |  |   |         |  
|Weighted average common shares outstanding  |  |                         | 61,068 |      |  |      | 54,000 |  |  |   | 54,000  |  
|Effect of stock options                     |  |                         | 1      |      |  |      |       |  |  |   |        |  
|                                            |  |                         |        |      |  |      |        |  |  |   |         |  
|                                            |  |                         | 61,069 |      |  |      | 54,000 |  |  |   | 54,000  |  
|                                            |  |                         |        |      |  |      |        |  |  |   |         |  
|Basic and diluted earnings (loss) per share |  | $                       | 1.38   |      |  | $    | 0.89   |  |  | $ | (0.72   | )



| |                                 
| | --------------------------------
| | (o) Stock Plans and
    Awards -

We account for our stock-based compensation
arrangements using the intrinsic value method in accordance with
the provisions of Accounting Principles Board Opinion
No. 25  Accounting for Stock Issued to
Employees (APB 25), and related
interpretations. Under APB 25, if the exercise price of our
employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is
recognized. Since our stock options have all been granted with
exercise prices at fair value, no compensation expense has been
recognized under APB 25.

The following table illustrates the effect on net
income (loss) and earnings (loss) per share assuming the
compensation costs for our stock option and purchase plans had
been determined using the fair value method, prorated over the
vesting periods, at the grant dates as required under Statement
of Financial Accounting Standard No. 123 
Accounting for Stock-Based Compensation
(SFAS123) for the years ended December 31,
2002, 2001 and 2000 (in thousands except for share data):

|                                                                                                                                               |  |      |        |      |  |      |        |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                                                                                                               |  | 2002 |        | 2001 |  | 2000
|                                                                                                                                               |  |      |        |      |  |     
|Net Income (Loss)                                                                                                                              |  | $    | 84,280 |      |  | $    | 48,074 |   |  | $ | (38,752 | )
|As reported                                                                                                                                    |  |      |        |      |  |      |        |   |  |   |         |  
|Deduct (Add): Total stock-based employee
    compensation expense (credit) determined under fair value
    based method for all awards, net(1) |  |      | 2,499  |      |  |      | (619   | ) |  |   | 1,366   |  
|                                                                                                                                               |  |      |        |      |  |      |        |   |  |   |         |  
|Pro forma                                                                                                                                      |  | $    | 81,781 |      |  | $    | 48,693 |   |  | $ | (40,118 | )
|                                                                                                                                               |  |      |        |      |  |      |        |   |  |   |         |  
|Basic and Diluted Earnings (Loss) per share                                                                                                    |  |      |        |      |  |      |        |   |  |   |         |  
|As reported                                                                                                                                    |  | $    | 1.38   |      |  | $    | 0.89   |   |  | $ | (0.72   | )
|Pro forma                                                                                                                                      |  | $    | 1.34   |      |  | $    | 0.90   |   |  | $ | (0.74   | )






| |     |                                                                                                                            
| | --- | ---------------------------------------------------------------------------------------------------------------------------
| | (1) | During 2001, the majority of outstanding options
    under the Continental Airlines Plans were voluntarily
    surrendered.

See Note 11  Stock Based
Compensation Plan for the assumptions we used to compute the
pro-forma amounts above.

The pro forma effect on net income or loss per
share is not representative of the pro forma effects in future
years.

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |                                    
| | -----------------------------------
| | (p) Measurement of
    Impairment -

In accordance with Statement of Financial
Accounting Standards No. 144   Accounting
for the Impairment or Disposal of Long-Lived Assets
(SFAS 144), we record impairment losses on
long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. The
net carrying value of assets not recoverable is reduced to fair
value if lower than carrying value.



| |                               
| | ------------------------------
| | (q) Comprehensive
    Income -

We do not have any adjustments to net income to
arrive at comprehensive income.



| |                                               
| | ----------------------------------------------
| | (r) Recently Issued Accounting
    Standards -

In August 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standard No. 143, Accounting for Asset Retirement
Obligations (SFAS 143), effective for
fiscal years beginning after June 15, 2002. This statement
requires entities to record the fair value of a liability for an
asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity
capitalizes the cost by increasing the carrying amount of the
related long-lived asset. Over time, the liability is accreted
to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the
obligations for its recorded amount or incurs a gain or loss
upon settlement. We adopted SFAS 143 effective
January 1, 2003, and do not expect this adoption to have a
material impact on our results of operations, financial
position, or liquidity.

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

In December 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standard No. 148  Accounting for
Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement
No. 123 (SFAS 148). SFAS 148
amends FASB Statement of Financial Accounting Standard
No. 123, Accounting for Stock-Based
Compensation, (SFAS 123) to provide
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure
requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method
of accounting for stock-based employee compensation and the
effect of the method used on reported results. The transition
guidance and annual disclosure provisions are effective for
fiscal years ending after December 15, 2002. The interim
disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning
after December 15, 2002. As we account for our stock-based
compensation arrangements in accordance with the provisions of
Accounting Principles Board Opinion No. 25 
Accounting for Stock Issued to Employees, we do not
currently plan to apply the accounting provisions of
SFAS 148.

FASB Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, (Interpretation 45), will
significantly change current practice in the accounting for, and
disclosure of, guarantees. Interpretation 45 requires a
guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in
issuing the guarantee. Interpretation 45 also expands the
disclosures required to be made by a guarantor about its
obligations under certain guarantees that it has issued.
Interpretation 45s disclosure requirements are effective
for financial statements of interim or annual periods ending
after December 15, 2002, while the initial recognition and
initial measurement provisions are applicable on a

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

prospective basis to guarantees issued or
modified after December 31, 2002. See Note 15 for
required disclosure. We do not expect the adoption of this
statement to have a material impact on our results of operations
or balance sheet.

In January 2003, the Financial Accounting
Standards Board issued Interpretation No. 46,
Consolidation of Variable Interest Entities,
(Interpretation 46). The objective of Interpretation
46 is to improve financial reporting by companies involved with
variable interest entities. Until now, one company generally has
included another entity in its consolidated financial statements
only if it controlled the entity through voting interests.
Interpretation 46 changes that by requiring a variable interest
entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable
interest entitys activities or entitled to receive a
majority of the entitys residual returns or both. The
consolidation requirements of Interpretation 46 apply
immediately to variable interest entities created after
January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure
requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest
entity was established. We do not believe the adoption of this
statement will have a material impact on our results of
operations or financial position.



| |                        
| | -----------------------
| | (s) Reclassifications -

Certain reclassifications have been made in prior
years financial statements to conform to the current year
presentation.

Note 2  Capacity Purchase Agreement
with Continental Airlines

General

Effective January 1, 2001, we implemented a
capacity purchase agreement with Continental Airlines. The
agreement expires on December 31, 2010. Continental
Airlines has the option to extend the term of the agreement with
24 months notice for up to four additional five-year terms
through December 31, 2030. Under our capacity purchase
agreement, we operate flights on behalf of Continental Airlines,
which controls and is responsible for scheduling, pricing and
managing seat inventories for these flights. Continental
Airlines is entitled to all revenue associated with the
operation of the aircraft and is responsible for all
revenue-related expenses, including commissions, reservations,
catering and passenger ticket processing expenses consisting
primarily of revenue accounting. Under the agreement, we are
entitled to receive a payment for each scheduled block hour
based on an agreed formula.

We have reached agreements in principle with
Continental Airlines to amend our capacity purchase agreement.
See Note 17 for further discussion regarding this
subsequent event.

Compensation and Operational
Responsibilities

Under the agreement, Continental Airlines pays us
a base fee for each scheduled block hour based on a formula that
will remain in place through December 31, 2004. The formula
is designed to provide us with an operating margin of
approximately 10% before taking into account variations in some
costs and expenses that are generally controllable by us. Under
the formula, a substantial portion of our costs, including those
relating to fuel, aircraft ownership and financing,
substantially all routine or normal regional jet engine
maintenance, passenger-related facility rent, administrative
fees and ground handling expenses paid to Continental Airlines,
but excluding most labor, other maintenance or general
administrative costs, are reconciled for differences between our
actual costs and the expected costs included in our block hour
rates, and our payments from Continental Airlines are adjusted
to reflect these actual costs plus a 10% margin. In addition, a
reconciliation payment is made by Continental Airlines to us or
by us to Continental Airlines, as applicable, if the operating
margin calculated as described below in any fiscal quarter is
not between 8.5% and 11.5%. As a result, if this operating
margin exceeds 11.5%, then a reconciliation payment will be made
by us to Continental Airlines in an amount sufficient to reduce
it to 11.5%. If it is less than 8.5%, then a reconciliation
payment will be made by Continental Airlines to us in an amount
sufficient to raise the margin to 8.5%. For purposes of
calculating this operating margin, we do not take into account
unanticipated changes in most

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

of our labor costs, any performance incentive
payments, including payments from controllable cancellation
performance (cancellations other than weather or air traffic
control cancellations), litigation costs and other costs that
are not included in our block hour rates (or covered by any
adjustments to them) and are not reasonable and customary in the
industry. If these excluded costs are higher than those
anticipated in our block hour rates, then our operating margin,
taking these costs into effect, could be lower than 8.5% even
after any reconciliation payment is made. If these costs are
lower than those anticipated in our block hour rates, then our
operating margin, taking these costs into effect, could be
higher than 11.5% even after any reconciliation payment is made.
For the year ended December 31, 2002, our reconciliation
payments to Continental Airlines totaled $14.7 million.
There were no reconciliation payments made to Continental
Airlines for the year ended December 31, 2001.

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

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Cost Category                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | Reconciliation Payment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Fully-reconciled costs: Fuel and intoplane
    expense(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
     Administrative services provided by Continental
    Airlines
     Ground Handling services
     Third party security and screening expenses
     Substantially all regional jet engine expenses under
    current long-term third-party contracts
     Depreciation and amortization(2)
     Pilot training volumes
     Glycol, de-icing, snow removal
     Mexican and Canadian navigational fees
     Prop maintenance(3)
     Captain/ First Officer mix(3)
     Pilot soft time(4) |  | Reconciliation payment, including 10% margin, to
    the full extent our actual costs differ from estimated costs.                                                                                                                                                                                                                                                                                                                                                                                    
|Costs within the margin band: Maintenance, materials and
    repairs not included above
     Passenger services
     Other rentals (excluding corporate headquarters
    rental costs)
     Other operating expenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |  | If actual expenses in this category are
    sufficiently different from estimates used in the block hour
    rates so that our operating margin (calculated to exclude the
    impact of unreconciled costs, to the extent they differ from our
    estimated costs, and other items(5)) is less than 8.5% or
    greater than 11.5%, then a reconciliation payment will be made
    by us or Continental Airlines to the other so that this
    operating margin will be 8.5% or 11.5%, as applicable

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                                                                                                                    |  |                          
|------------------------------------------------------------------------------------------------------------------- |  | -------------------------
|Cost Category                                                                                                       |  | Reconciliation Payment   
|                                                                                                                    |  |                          
|Unreconciled costs: Wages and salaries
     Benefits not included above
     Corporate headquarters rental costs |  | No reconciliation payment






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | We incur fuel expense equal to the lower of the
    actual cost of fuel or an agreed-upon cap based on our fuel
    purchase agreement with Continental Airlines. For the year ended
    December 31, 2002, the actual average cost of fuel was
    60.7 cents per gallon, which was below our agreed-upon cap
    of 61.1 cents per gallon. In 2003 and future years, the
    agreed-upon cap is 66.0 cents per gallon.                                                                                           
|   
|(2) | Depreciation is reconciled for assets and capital
    projects accounted for in the capacity purchase agreement.                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|(3) | Reconciliation for turboprop maintenance and
    Captain/ First Officer mix ended December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                               
|   
|(4) | Pilot soft time reconciliation ends upon
    ExpressJets hiring a new pilot or recalling a furloughed
    pilot.                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(5) | In addition to our unreconciled costs, the
    operating margin used to calculate the reconciliation payment
    does not take into account any performance incentive payments,
    including payments from controllable cancellation performance
    (cancellations other than weather or air traffic control
    cancellations), litigation costs and other costs that are not
    included in our block hour rates (or covered by adjustments to
    them) and are not reasonable and customary in the industry.

Our base rate per scheduled block hour includes
compensation for scheduled block hours associated with some
cancelled flights, based on historical cancellation rates
constituting rolling five-year monthly averages. To the extent
that our rate of controllable cancellations, such as those due
to maintenance or crew shortages, is less than our historical
controllable cancellation rate, we will be entitled to
additional payments. On the other hand, we may make a payment to
Continental Airlines for controllable cancellations above
historical rates of cancellations. If cancellations outside our
control, such as those due to weather or air-traffic control,
exceed the historical average of cancellations for the
applicable period, we will be paid for the cancelled flight at a
reduced rate, calculated to cover our fixed costs. We will
generally not be entitled to any payment for controllable
cancellations, which include cancellations due to labor unrest,
regulatory action, fuel unavailability, crew shortages or
maintenance, and all other cancellations other than weather or
air traffic control cancellation, above historical rates of
cancellations. In the event of a union-authorized labor strike
we will not be entitled to payment for any controllable or
uncontrollable cancellations. Because these incentive payments
are based on rolling average historical rates of controllable
cancellation, lower controllable cancellation rates that result
in higher incentive payments in the near term will also reduce
our opportunity to earn incentive payments in the future, when
the lower controllable cancellation rates become part of the
historical average. Also, because we use monthly rolling
averages, our opportunity to earn these payments in any
particular fiscal quarter is affected by seasonal variations in
historical controllable cancellation rates. We are also entitled
to receive a small per-passenger fee and incentive payments for
certain on-time departures and baggage handling performance.

If a change of control (as defined in the
agreement) of ExpressJet occurs without the consent of
Continental Airlines, the block hour rates that we will receive
under the agreement will be substantially reduced.

In addition, some marketing-related costs
normally associated with operating an airline are borne directly
by Continental Airlines, which is responsible for marketing
under the capacity purchase agreement. These costs include those
associated with reservations and sales, commissions,
advertising, revenue accounting, fare and tariff filings, and
food and beverage. While Continental Airlines will continue to
provide operational support services under the terms of the
capacity purchase agreement, their provisions of corporate
services will continue, subject to some exceptions, only for a
limited period of time following the initial public offering of
our stock completed on April 23, 2002. After the expiration
or termination of these various arrangements, we may not be able
to replace the services with a comparable quality of service or
terms and conditions as favorable as those we receive from
Continental Airlines.

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

We have agreed to meet with Continental Airlines
each year beginning in 2004 to review and set the block hour
rates to be paid in the following year, in each case based on
the formula used to set the original block hour rates (including
a 10% targeted operating margin). If we and Continental Airlines
cannot come to an agreement on the annual adjustments, we have
agreed to submit our disagreement to arbitration.

Capacity and Fleet Matters

The capacity purchase agreement covers all of our
existing fleet, as well as the 86 Embraer ERJ-145XR subject to
firm orders at December 31, 2002. However, beginning
July 1, 2003, Continental Airlines has the right to give
notice to reduce the number of our regional jets covered by the
agreement, resulting in the earliest effective date for capacity
reduction of July 1, 2004. Under the agreement, Continental
Airlines is entitled to decline capacity with respect to:



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | any regional jets subject to firm orders that
    have not been delivered before the effective date of the
    reduction in capacity; and
|
| |  | up to 25% of our delivered regional jets over any
    rolling three-year period                                                          

If Continental Airlines removes regional jet
aircraft from the terms of the agreement, we would have the
option to:



| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | fly the released aircraft for another airline or
    ourselves (subject to our ability to obtain facilities, such as
    gates and slots, and our exclusive arrangement with Continental
    Airlines in their hub airports); or
|
| |  | decline to fly these aircraft and cancel the
    related subleases with Continental Airlines                                                                                                                                    

If we elect not to terminate these subleases and
fly one or more of the aircraft released from the capacity
purchase agreement either for another party or for our own
benefit, the interest rate implicit in calculating the scheduled
lease payments will automatically increase by 200 basis points
to compensate Continental Airlines for its continued
participation in our lease financing arrangement, which would
directly increase our expense and adversely affect our earnings.
If we elect not to fly these aircraft, the sublease between
Continental Airlines and us for these aircraft will be canceled
and Continental Airlines will take possession of the aircraft.
In that event, Continental Airlines will be responsible for all
direct reasonable costs we incur associated with the removal of
those aircraft from our fleet. In addition, upon a reduction in
capacity, we will be entitled to meet and confer with
Continental Airlines regarding the impact of the reduction on
our cash flow and to negotiate, in good faith, a credit facility
with Continental Airlines for up to $75 million in the
aggregate for a term of up to two years and at an interest rate
equal to the London interbank offered rate (LIBOR)
plus 200 basis points to help cover any potential cash needs as
a result of the reduction in capacity. However, Continental
Airlines has no obligation to provide this facility.

Additionally, Continental Airlines has the right
to require us to exercise any of the aircraft options we hold to
purchase 100 Embraer ERJ-145XR aircraft, and include these
aircraft under the capacity purchase agreement. If Continental
Airlines elects to do this, it may either lease or sublease the
aircraft to us, or substitute these aircraft for aircraft in our
possession that have been removed from the terms of the capacity
purchase agreement and that we sublease from Continental
Airlines, in which case we will be required to finance the
option aircraft ourselves. If Continental Airlines does not
require us to exercise these aircraft options, we will retain
the right to exercise the options and fly these aircraft for
other airlines or for other purposes, subject to some
restrictions; however, we will have to finance our acquisition
of these aircraft independently.

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

As a result of the decline in our passenger
traffic following the terrorist attacks on September 11,
2001, together with the lower passenger traffic and yields
experienced by Continental Airlines and the airline industry in
general,

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Continental Airlines, withdrew 17 of our
turboprop aircraft from the capacity purchase agreement
effective October 1, 2001, resulting in our termination of
16 subleased aircraft and returning them to Continental
Airlines. Continental Airlines was obligated to purchase from us
at book value the one turboprop aircraft we owned. As provided
in the capacity purchase agreement, Continental Airlines was
responsible for our reasonable out-of-pocket expenses associated
with the withdrawal of these aircraft (including some of the
cost of reassigning pilots to other aircraft types).

During 2002, we retired all of the 33 turboprop
aircraft in our fleet at December 31, 2001. In accordance
with the capacity purchase agreement, Continental Airlines has
covered all direct costs associated with terminating our 29
turboprop aircraft leases and had purchased from us at net book
value our four turboprop aircraft that we owned as well as the
related spare parts inventory. As of December 31, 2002,
Continental Airlines has remitted to us approximately
$21.3 million as a result of this retirement.

Under the terms of the capacity purchase
agreement, Continental Airlines is also required to reimburse us
for any impairment charges incurred related to turboprop
aircraft and related spare parts inventories, and airport
operating rights. The Company recorded impairment charges in
2001 related to turboprop aircraft and related inventory of
$29 million and $4 million, respectively. Such
impairment charges are not reflected in the consolidated
statement of operations in 2001 as a result of the
reimbursement. The remaining net book value of turboprop
aircraft, spare parts inventory (including rotables), and
airport operating rights was $21 million, $18 million
and $5 million, respectively at December 31, 2001.

We currently lease or sublease all of our
existing regional jets from Continental Airlines. Under the
capacity purchase agreement, Continental Airlines is required to
lease from Embraer or its designee all of our current firm order
aircraft and sublease these aircraft to us. Neither we nor
Continental Airlines have any obligation to take any such firm
order Embraer aircraft that are not financed by a third party
under the lease terms and economics already agreed to. However,
Continental Airlines is not required to provide any financing
for Embraer option aircraft or any other aircraft that we may
acquire.

Meet and Confer Provisions

The agreement gives each party the right to
meet and confer with the other regarding any
material change in the underlying assumptions regarding the
costs of providing services under the agreement and whether the
compensation provisions of the agreement should be changed as a
result, but does not require any party to agree to any change in
the compensation provisions. Under these terms, Continental
Airlines requested that both parties meet and confer regarding
the effects of the September 11, 2001 terrorist attacks. As
a result of the decrease in Continental Airlines revenue
from the reduced number of passengers and decreased yields, the
decrease in Continental Airlines revenue per available
seat mile caused by the reduction in our flight schedule, we
agreed with Continental Airlines in the meet and confer process
to reduce Continental Airlines payments to us for the
September through December 2001 period by $33 million
in the aggregate. In return, Continental Airlines, extended our
note payable to Continental Airlines by 18 months, extended
by one year our right under the capacity purchase agreement to
be Continental Airlines exclusive regional jet operator in
its hubs and extended by six months the period during which
Continental Airlines cannot withdraw aircraft under the capacity
purchase agreement.

Term of Agreement

The agreement expires on December 31, 2010;
however, Continental Airlines may terminate the agreement at any
time after January 1, 2006 (January 1, 2007 based on
the currently proposed amendment  see Note 17)
upon 12 months notice, or at any time without notice
for cause consisting of 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-authorized labor strike or any temporary cessation not
to exceed 14 days, a union-authorized labor strike that
continues for 90 days or an intentional or willful material
breach by us that substantially deprives Continental Airlines of
the benefits of the agreement, which is not cured within
90 days of notice of the breach. Continental

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Airlines may also terminate the agreement at any
time upon a material breach by us that does not constitute cause
and continues for 90 days after notice of such breach, or
without notice or opportunity to cure if Continental Airlines
makes a reasonable and good faith determination, using
recognized standards of safety, that there is a material safety
concern with our flight operations. Continental Airlines has the
option to extend the term of the agreement with
24 months notice for up to four additional five-year
terms through December 31, 2030.

Note 3  Leases

We lease or sublease all 188 of our aircraft
under long-term operating leases from Continental Airlines. Our
sublease agreements with Continental Airlines have substantially
the same terms as the lease agreements between Continental
Airlines and the third-party lessors, and expire between 2013
and 2019. We lease or sublease, under various operating leases,
ground equipment and substantially all of our ground facilities,
including facilities at public airports from Continental
Airlines or the municipalities or agencies owning and
controlling such airports. Our leases do not include residual
value guarantees.

At December 31, 2002, the scheduled future
minimum lease payments under capital leases due to third-party
lessors and the scheduled future minimum lease payments under
operating leases that have initial or remaining noncancellable
lease terms in excess of one year, are as follows (in millions):

|                                           |  |         |     |                  |  |              |         |  |  |   |      | 
|------------------------------------------ |  | ------- | --- | ---------------- |  | ------------ | ------- |  |  | - | ---- | 
|                                           |  |         |     |                 
|                                           |  |         |     | Operating Leases
|                                           |  | Capital |     |                 
|                                           |  | Leases  |     | Aircraft         |  | Non-Aircraft
|                                           |  |         |     |                  |  |             
|Year ending December 31, 2003              |  | $       | 2.4 |                  |  | $            | 222.6   |  |  | $ | 12.1 | 
|2004                                       |  |         | 1.8 |                  |  |              | 221.5   |  |  |   | 10.2 | 
|2005                                       |  |         | 1.0 |                  |  |              | 220.2   |  |  |   | 8.6  | 
|2006                                       |  |         | 0.9 |                  |  |              | 220.2   |  |  |   | 5.8  | 
|2007                                       |  |         | 0.9 |                  |  |              | 220.2   |  |  |   | 11.7 | 
|Later years                                |  |         | 0.5 |                  |  |              | 2023.5  |  |  |   | 41.8 | 
|                                           |  |         |     |                  |  |              |         |  |  |   |      | 
|Total minimum lease payments               |  |         | 7.5 |                  |  | $            | 3,128.2 |  |  | $ | 90.2 | 
|                                           |  |         |     |                  |  |              |         |  |  |   |      | 
|Less: amount representing interest         |  |         | 0.9 |                  |  |              |         |  |  |   |      | 
|                                           |  |         |     |                  |  |              |         |  |  |   |      | 
|Present value of capital leases            |  |         | 6.6 |                  |  |              |         |  |  |   |      | 
|Less: current maturities of capital leases |  |         | 2.2 |                  |  |              |         |  |  |   |      | 
|                                           |  |         |     |                  |  |              |         |  |  |   |      | 
|Long-term capital leases                   |  | $       | 4.4 |                  |  |              |         |  |  |   |      | 
|                                           |  |         |     |                  |  |              |         |  |  |   |      | 

Our total rental expense for all non-aircraft
operating leases was approximately $56.6 million,
$49.4 million and $37.3 million for the years ended
December 31, 2002, 2001 and 2000, respectively, which
included $7.5 million, $8.4 million and
$8.4 million, respectively, related to leases with
Continental Airlines.

Total rental expense was approximately
$255.8 million, $218.2 million and $184.2 million
for the years ended December 31, 2002, 2001 and 2000,
respectively, which included $231.0 million and
$196.2 million for 2002 and 2001, respectively, related to
leases with Continental Airlines under the capacity purchase
agreement. For 2000, we operated as a division within
Continental Airlines.

If we default on our payment obligations under
our aircraft subleases with Continental Airlines, Continental
Airlines is entitled to reduce any payments required to be made
by it to us under the capacity purchase agreement by the amount
of the defaulted payment.

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 4  Income Taxes

Income tax expense (benefit) for the years ended
December 2002, 2001 and 2000 consists of the following (in
millions):

|                                   |          |      |      |      |   |      |      |      |  |   |       |       |  
|---------------------------------- | -------- | ---- | ---- | ---- | - | ---- | ---- | ---- |  | - | ----- | ----- | -
|                                   |          | 2002 |      | 2001 |   | 2000
|                                   |          |      |      |      |   |     
|Federal:                           |          |      |      |      |   |      |      |      |  |   |       |      
|                                   | Current  |      | $    | 7.1  |   |      | $    | 25.5 |  |   | $     |      |  
|                                   | Deferred |      |      | 41.0 |   |      |      | 4.0  |  |   |       | (18.9 | )
|State:                             |          |      |      |      |   |      |      |      |  |   |       |      
|                                   | Current  |      |      | (1.7 | ) |      |      |     |  |   |       |      |  
|                                   | Deferred |      |      | 7.4  |   |      |      | 2.1  |  |   |       | (1.4  | )
|                                   |          |      |      |      |   |      |      |      |  |   |       |      
|Total Income Tax Expense (Benefit) |          | $    | 53.8 |      |   | $    | 31.6 |      |  | $ | (20.3 | )    
|                                   |          |      |      |      |   |      |      |      |  |   |       |      

The reconciliations of income tax computed at the
United States federal statutory tax rates to income tax expense
(benefit) for the years ended December 31, 2002, 2001 and
2000 are as follows:

|                                                                                               |  |               |      |            |  |      |      |      |  |      |       |      |  |  |      |   |  |  |      |   |  |  |      |  
|---------------------------------------------------------------------------------------------- |  | ------------- | ---- | ---------- |  | ---- | ---- | ---- |  | ---- | ----- | ---- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                                                                                               |  |               |      |           
|                                                                                               |  | Amount        |      | Percentage
|                                                                                               |  |               |      |           
|                                                                                               |  | 2002          |      | 2001       |  | 2000 |      | 2002 |  | 2001 |       | 2000
|                                                                                               |  |               |      |            |  |      |      |      |  |      |       |     
|                                                                                               |  |               |      |            |  |      |      |     
|                                                                                               |  | (In millions) |      |            |  |      |      |     
|Income tax expense (benefit) at United States
    statutory rates                              |  | $             | 48.5 |            |  | $    | 27.8 |      |  | $    | (20.6 | )    |  |  | 35.0 | % |  |  | 35.0 | % |  |  | 35.0 | %
|State income tax expense (benefit) (net of
    federal benefit)                                |  |               | 3.8  |            |  |      | 2.1  |      |  |      | (1.3  | )    |  |  | 2.7  |   |  |  | 2.6  |   |  |  | 2.3  |  
|Amortization of reorganization value in excess of
    amounts allocable to identifiable assets |  |               |     |            |  |      | 0.4  |      |  |      | 0.4   |      |  |  |     |   |  |  | 0.5  |   |  |  | (0.7 | )
|Meals and entertainment disallowance                                                           |  |               | 1.3  |            |  |      | 1.3  |      |  |      | 1.3   |      |  |  | 0.9  |   |  |  | 1.6  |   |  |  | (2.3 | )
|Other                                                                                          |  |               | 0.2  |            |  |      |     |      |  |      | (0.1  | )    |  |  | 0.2  |   |  |  |     |   |  |  | 0.1  |  
|                                                                                               |  |               |      |            |  |      |      |      |  |      |       |      |  |  |      |   |  |  |      |   |  |  |      |  
|Income tax expense (benefit), net                                                              |  | $             | 53.8 |            |  | $    | 31.6 |      |  | $    | (20.3 | )    |  |  | 38.8 | % |  |  | 39.7 | % |  |  | 34.4 | %
|                                                                                               |  |               |      |            |  |      |      |      |  |      |       |      |  |  |      |   |  |  |      |   |  |  |      |  

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Deferred income taxes reflect the net tax effects
of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the related
amounts used for income tax purposes. Significant components of
our deferred tax liabilities and assets as of December 31,
2002 and 2001 are as follows (in millions):

|                                                                     |                               |      |       |       |  |   |      |      | 
|-------------------------------------------------------------------- | ----------------------------- | ---- | ----- | ----- |  | - | ---- | ---- | 
|                                                                     |                               | 2002 |       | 2001 
|                                                                     |                               |      |       |      
|Deferred Tax Liabilities:                                            |                               |      |       |       |  |   |      |     
|                                                                     | Fixed assets                  |      | $     | 3.1   |  |   | $    | 5.9  | 
|                                                                     | Other                         |      |       | 0.3   |  |   |      | 0.3  | 
|                                                                     |                               |      |       |       |  |   |      |     
|Gross deferred tax liabilities                                       |                               |      | 3.4   |       |  |   | 6.2  |     
|                                                                     |                               |      |       |       |  |   |      |     
|Deferred Tax Assets:                                                 |                               |      |       |       |  |   |      |     
|                                                                     | Federal loss carryforwards    |      | $     | 36.8  |  |   | $    | 47.5 | 
|                                                                     | State loss carryforwards, net |      |       | 0.9   |  |   |      | 11.9 | 
|                                                                     | Intangible assets             |      |       | 352.8 |  |   |      |     | 
|                                                                     | Other                         |      |       | 8.5   |  |   |      | 6.3  | 
|                                                                     |                               |      |       |       |  |   |      |     
|Gross deferred tax assets                                            |                               |      | 399.0 |       |  |   | 65.7 |     
|                                                                     |                               |      |       |       |  |   |      |     
|Valuation allowance/ Net tax agreement obligation
    to Continental |                               |      | 384.5 |       |  |   |     |     
|                                                                     |                               |      |       |       |  |   |      |     
|Net deferred tax assets                                              |                               | $    | 11.1  |       |  | $ | 59.5 |     
|                                                                     |                               |      |       |       |  |   |      |     

At December 31, 2002, we had federal net
operating loss carryforwards of approximately
$105.2 million, which expire between 2004 and 2020.

In conjunction with our IPO completed on
April 23, 2002, the tax basis of our tangible and
intangible assets was increased to fair value. This increase
resulted in the utilization of a substantial portion of our
state net operating loss carryovers available at
December 31, 2001. The increased tax basis should result in
additional tax deductions being available to us over a period of
15 years. In accordance with our tax agreement with Continental
Airlines, to the extent we generate taxable income sufficient to
realize the additional tax deductions, we will be required to
pay Continental Airlines a percentage of the amount of tax
savings actually realized, excluding the effect of any loss
carrybacks. We will be required to pay Continental Airlines 100%
of the first third of the anticipated tax benefit, 90% of the
second third, and 80% of the last third. However, if the tax
benefits are not realized by the end of 2018, we will be
obligated to pay Continental Airlines 100% of any benefit
realized after that date. Since these future payments are solely
dependent on our ability to generate sufficient taxable income
to realize these deferred tax assets, they are recorded as an
obligation to Continental Airlines within the deferred tax asset
account, and the portion we may retain in the future is offset
by a valuation allowance. Both of these items directly offset
the step-up in basis of assets in our long-term deferred tax
asset account.

Our tax agreement with Continental Airlines
provides that Continental Airlines will reimburse us for any net
increase in our cash tax payments resulting from any decreased
availability of net operating loss carryovers related to the
basis increase at the time our payment occurs. The resulting
receivable and/or payable with Continental Airlines related to
the impact on net operating losses resulting from the basis
increase is recorded within the deferred tax asset account since
its performance is dependent on our ability to generate taxable
income.

No valuation allowance was established on our net
operating loss carryforwards, or on our receivable from
Continental Airlines for reimbursing carryforward losses
utilized resulting from the basis increase, because we believe
our stand-alone taxable income will be sufficient to utilize
substantially all of these assets in approximately two years.

We believe that our IPO created a change in
ownership limitation on the utilization of our carryforward tax
attributes, primarily net operating losses. This limitation,
under Section 382 of the Internal Revenue Code, will limit

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

our utilization of these attributes to offset up
to approximately $43 million of post-change taxable income
per year. We do not expect this limitation to have any impact on
our financial condition.

Note 5  Accrued Other
Liabilities

Accrued liabilities consist of the following:

|                                   |  |                    |        |      |  |   |        | 
|---------------------------------- |  | ------------------ | ------ | ---- |  | - | ------ | 
|                                   |  |                   
|                                   |  | As of December 31,
|                                   |  |                   
|                                   |  | 2002               |        | 2001
|                                   |  |                    |        |     
|                                   |  |                   
|                                   |  | (In thousands)    
|Airport services                   |  | $                  | 10,481 |      |  | $ | 13,948 | 
|Employee benefits                  |  |                    | 10,099 |      |  |   | 1,309  | 
|Maintenance, materials and repairs |  |                    | 9,062  |      |  |   | 14,651 | 
|Taxes                              |  |                    | 6,548  |      |  |   | 5,861  | 
|Flight operation related expenses  |  |                    | 3,795  |      |  |   | 5,819  | 
|Other                              |  |                    | 5,663  |      |  |   | 2,303  | 
|                                   |  |                    |        |      |  |   |        | 
|                                   |  | $                  | 45,648 |      |  | $ | 43,891 | 
|                                   |  |                    |        |      |  |   |        | 

Note 6  Note Payable to Continental
Airlines

Under the promissory noted dated March 31,
2001, net amounts due Continental Airlines were converted into a
long-term note payable of $552.3 million, which bore
interest at a fixed rate of 4.9% through June 30, 2001.
Effective July 1, 2001, the rate for subsequent quarters
was set at the three-month London interbank offered rate
(LIBOR) plus 1.25% per annum, subject to a cap
of 3.5% in 2002, 5.4% in 2003 and 6.7% in 2004. There is no
interest rate cap beyond 2004.

In April 2002, we applied the proceeds from our
initial public offering of $146.8 million to our note
payable to Continental Airlines. In addition, we made
discretionary prepayments of $80.0 million during 2002 to
further reduce our note payable to Continental Airlines to
$325.5 million at December 31, 2002. In consideration
for these principal prepayments, our next scheduled principal
payment, as stated in the amended and restated promissory note
agreement with Continental Airlines dated November 5, 2002,
is not required until June 30, 2003. The quarterly
principal and interest fixed installments are
$27.9 million. On March 31, 2007, the entire unpaid
principal balance of this note, if any, along with all accrued
unpaid interest, will be due and payable in full. Based on the
forward three-month LIBOR on December 31, 2002 plus
1.25% per annum and our current principal balance of
$325.5 million, maturities of our note payable to
Continental Airlines as of December 31, 2002 are as follows
(in millions):

|                         |      |  |   |       | 
|------------------------ | ---- |  | - | ----- | 
|Year ending December 31, |      |  |   |      
|                         | 2003 |  | $ | 73.6  | 
|                         | 2004 |  | $ | 104.1 | 
|                         | 2005 |  | $ | 106.5 | 
|                         | 2006 |  | $ | 41.3  | 

The note payable to Continental Airlines is an
unsecured general obligation of our company and is subordinated
in right of payment to all future senior indebtedness of our
company.

Note 7  Financial Instruments and
Risk Management

Financial Instruments

Our financial instruments consist of cash and
cash equivalents, accounts receivable, accounts payable, and our
note payable to Continental Airlines. The carrying amount of
cash and cash equivalents, accounts receivable and accounts
payable approximate fair value due to the highly liquid nature
of these short-term instruments. The fair

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

value of our note payable to Continental Airlines
with a carrying value of $325.5 million and
$552.3 million at December 31, 2002 and 2001,
respectively, estimated based on the discounted amount of future
cash flows using our current incremental rate of borrowing for a
similar liability or market prices, approximated
$244.5 million and $431.1 million, respectively.

Credit Risk Due to Certain
Concentrations

We provide Continental Airlines all of its
regional airline capacity at its hub airports. We are
economically dependent upon Continental Airlines as
substantially all of our revenues is currently received from
Continental Airlines. See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Liquidity and Capital
Commitments  Relationship with Continental Airlines.

Note 8  Other Long Term
Liabilities

Other long term liabilities consists of the
following:

|                            |  |                    |       |      |  |   |       | 
|--------------------------- |  | ------------------ | ----- | ---- |  | - | ----- | 
|                            |  |                   
|                            |  | As of December 31,
|                            |  |                   
|                            |  | 2002               |       | 2001
|                            |  |                    |       |     
|                            |  |                   
|                            |  | (in thousands)    
|Spare parts credits         |  | $                  | 4,821 |      |  | $ | 3,583 | 
|Flight training credits     |  |                    | 4,781 |      |  |   |      | 
|Long-term incentive program |  |                    |      |      |  |   | 2,629 | 
|Other                       |  |                    | 103   |      |  |   | 186   | 
|                            |  |                    |       |      |  |   |       | 
|                            |  | $                  | 9,705 |      |  | $ | 6,398 | 
|                            |  |                    |       |      |  |   |       | 

Our long-term incentive program with Continental
Airlines was discontinued effective on December 31, 2001 as
part of our employee benefit separation agreement dated
April 17, 2002.

Note 9  Mandatorily Redeemable
Preferred Stock of Subsidiary

Prior to the completion of our IPO, ExpressJet
Airlines, Inc. issued one share of non-voting Series A
Cumulative Mandatorily Redeemable Preferred Stock, par value
$.01 per share, (Series A Preferred Stock)
to our subsidiary XJT Holdings, Inc., in exchange for a portion
of its assets and liabilities. The Series A Preferred Stock
is entitled to receive, on a cumulative basis, dividends at a
rate of 14% per annum on a liquidation preference of
$5.0 million and is callable beginning in April 2005 and
mandatorily redeemable in April 2012. Upon issuance, XJT
Holdings, Inc. immediately sold the Preferred Stock to an
independent third party in exchange for a $5.0 million
promissory note, with no rights of offset, due in April 2012.
The note bears interest equal to the three-month LIBOR plus
0.6% per annum, payable quarterly which commenced on
August 1, 2002.

Note 10  Preferred and Common
Stock

Preferred Stock

We have 10 million shares of authorized
preferred stock, par value $.01 per share. No shares of
preferred stock were issued or outstanding at December 31,
2002.

One share of a series of preferred stock called
special voting preferred stock is currently authorized and
outstanding and is owned by Continental Airlines. The special
voting preferred stock can be owned only by Continental Airlines
(or its successor) and its controlled affiliates. So long as the
special voting preferred stock is beneficially owned by one of
these parties, its holder will be entitled to elect to our board
of directors.



| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | five directors, for so long as Continental
    Airlines and its controlled affiliates own shares representing
    50% or more of our outstanding shares of common stock;

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | four directors, for so long as Continental
    Airlines and its controlled affiliates own shares representing
    40% or more (but less than 50%) of our outstanding shares of
    common stock;   
|
| |  | three directors, for so long as Continental
    Airlines and its controlled affiliates own shares representing
    30% or more (but less than 40%) of our outstanding shares of
    common stock;  
|
| |  | two directors, for so long as Continental
    Airlines and its controlled affiliates own shares representing
    20% or more (but less than 30%) of our outstanding shares of
    common stock; and
|
| |  | one director, for so long as Continental Airlines
    and its controlled affiliates own shares representing 10% or
    more (but less than 20%) of our outstanding shares of common
    stock;     

Common Stock

We currently have one class of common stock, par
value $.01 per share, with 64 million shares issued
and outstanding. Each share of common stock is entitled to one
vote. Common stockholders participate ratable in any dividends
or distributions on the common stock.

Note 11  Stock Based Compensation
Plans

At December 31, 2002, the Company has three
stock based compensation plans consisting of two stock option
plans and a stock purchase plan.

Stock Option Plans

Prior to the completion of our IPO of our common
stock on April 23, 2002, Continental Airlines, as our then
sole stockholder, and our board of directors approved the
ExpressJet Holdings, Inc. 2002 Stock Incentive Plan (the
Plan). The Plan provides that the Company may grant
awards in the form of common stock options or restricted stock
awards to non-employee directors of the company or the employees
of the company or its subsidiaries. The aggregate number of
shares of our common stock that may be issued under the Plan may
not exceed 3.2 million shares, subject to adjustments as
provided in the Plan. Options granted under the Plan were
awarded with an exercise price equal to the fair market value of
the stock on the date of grant, vest over a four-year period and
generally expire five years after the date of grant. During
2002, the Company issued options with respect to
1,049,000 shares of the Companys common stock under
the Plan, with a weighted average grant date fair value of
approximately $10.0 million.

Continental Airlines has stock option and
incentive plans (Continental Airlines Plans) under
which ExpressJet employees may be granted awards, of Continental
Airlines common stock, in the form of stock options or
restricted stock. There were no stock awards granted to our
employees under the Continental Airlines Plans during 2002.
Employee eligibility to participate in the Continental Airlines
Plans will cease upon termination of Continental Airlines
majority interest ownership in ExpressJet.

Under the terms of the Plan and Continental
Airlines Plans, a change in control would result in all
outstanding options under these plans becoming exercisable in
full and restrictions on restricted shares being terminated.

73



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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The table below summarizes stock option
transactions pursuant to the Plan and Continental Airlines Plans
(share data in thousands).

|                                   |  |         |       |                |  |         |       |                |  |         |      |                |  |   |       |  |  |  |      |   |  |   |       | 
|---------------------------------- |  | ------- | ----- | -------------- |  | ------- | ----- | -------------- |  | ------- | ---- | -------------- |  | - | ----- |  |  |  | ---- | - |  | - | ----- | 
|                                   |  |         |       |                |  |        
|                                   |  | 2002    |       | 2001           |  | 2000   
|                                   |  |         |       |                |  |        
|                                   |  |         |       | Weighted-      |  |         |       | Weighted-      |  |         |      | Weighted-     
|                                   |  |         |       | Average        |  |         |       | Average        |  |         |      | Average       
|                                   |  | Options |       | Exercise Price |  | Options |       | Exercise Price |  | Options |      | Exercise Price
|                                   |  |         |       |                |  |         |       |                |  |         |      |               
|ExpressJet Options                 |  |         |       |                |  |         |       |                |  |         |      |                |  |   |       |  |  |  |      |   |  |   |       | 
|Outstanding at Beginning of Year   |  |         |      |                |  | $       |      |                |  |         |     |                |  | $ |      |  |  |  |     |   |  | $ |      | 
|Granted                            |  |         | 1,049 |                |  | $       | 15.97 |                |  |         |     |                |  | $ |      |  |  |  |     |   |  | $ |      | 
|Exercised                          |  |         |      |                |  | $       |      |                |  |         |     |                |  | $ |      |  |  |  |     |   |  | $ |      | 
|Cancelled                          |  |         | (60   | )              |  | $       | 16.00 |                |  |         |     |                |  | $ |      |  |  |  |     |   |  | $ |      | 
|                                   |  |         |       |                |  |         |       |                |  |         |      |                |  |   |       |  |  |  |      |   |  |   |       | 
|Outstanding at End of Year         |  |         | 989   |                |  | $       | 15.96 |                |  |         |     |                |  | $ |      |  |  |  |     |   |  | $ |      | 
|                                   |  |         |       |                |  |         |       |                |  |         |      |                |  |   |       |  |  |  |      |   |  |   |       | 
|Options exercisable at end of year |  |         | 20    |                |  | $       | 14.60 |                |  |         |     |                |  | $ |      |  |  |  |     |   |  | $ |      | 
|                                   |  |         |       |                |  |         |       |                |  |         |      |                |  |   |       |  |  |  |      |   |  |   |       | 
|Continental Airlines Options       |  |         |       |                |  |         |       |                |  |         |      |                |  |   |       |  |  |  |      |   |  |   |       | 
|Outstanding at Beginning of Year   |  |         | 34    |                |  | $       | 37.77 |                |  |         | 545  |                |  | $ | 35.70 |  |  |  | 560  |   |  | $ | 32.83 | 
|Granted                            |  |         |      |                |  | $       |      |                |  |         | 119  |                |  | $ | 49.31 |  |  |  | 88   |   |  | $ | 41.95 | 
|Exercised                          |  |         | (2    | )              |  | $       | 30.18 |                |  |         | (216 | )              |  | $ | 30.88 |  |  |  | (102 | ) |  | $ | 25.40 | 
|Cancelled                          |  |         | (14   | )              |  | $       | 41.11 |                |  |         | (414 | )              |  | $ | 41.88 |  |  |  | (1   | ) |  | $ | 31.16 | 
|                                   |  |         |       |                |  |         |       |                |  |         |      |                |  |   |       |  |  |  |      |   |  |   |       | 
|Outstanding at End of Year         |  |         | 18    |                |  | $       | 36.03 |                |  |         | 34   |                |  | $ | 37.77 |  |  |  | 545  |   |  | $ | 35.70 | 
|                                   |  |         |       |                |  |         |       |                |  |         |      |                |  |   |       |  |  |  |      |   |  |   |       | 
|Options exercisable at end of year |  |         | 12    |                |  | $       | 33.21 |                |  |         | 16   |                |  | $ | 34.06 |  |  |  | 267  |   |  | $ | 33.40 | 
|                                   |  |         |       |                |  |         |       |                |  |         |      |                |  |   |       |  |  |  |      |   |  |   |       | 

The following table summarizes the range of
exercise prices and the weighted average remaining contractual
life of ExpressJet and Continental Airlines options outstanding
held by our employees and the range of exercise prices for
ExpressJet and Continental Airlines options exercisable at
December 31, 2002 (share data in thousands):

|                             |  |             |     |                  |  |                |      |  |  |   |       | 
|---------------------------- |  | ----------- | --- | ---------------- |  | -------------- | ---- |  |  | - | ----- | 
|                            
|Options Outstanding         
|                            
|                             |  | Weighted    |     |                 
|                             |  | Average     |     | Weighted        
|                             |  | Remaining   |     | Average         
|Range of Exercise Prices     |  | Outstanding |     | Contractual Life |  | Exercise Price
|                             |  |             |     |                  |  |               
|ExpressJet Options           |  |             |     |                  |  |                |      |  |  |   |       | 
|$11.15  $12.30              |  |             | 9   |                  |  |                | 4.77 |  |  | $ | 11.73 | 
|$14.60                       |  |             | 20  |                  |  |                | 9.42 |  |  | $ | 14.60 | 
|$16.00                       |  |             | 960 |                  |  |                | 4.29 |  |  | $ | 16.00 | 
|                             |  |             |     |                  |  |                |      |  |  |   |       | 
|$11.15  $16.00              |  |             | 989 |                  |  |                | 4.38 |  |  | $ | 15.96 | 
|                             |  |             |     |                  |  |                |      |  |  |   |       | 
|Continental Airlines Options |  |             |     |                  |  |                |      |  |  |   |       | 
|$10.69  $29.19              |  |             | 4   |                  |  |                | 1.01 |  |  | $ | 19.41 | 
|$29.25  $32.13              |  |             | 3   |                  |  |                | 0.96 |  |  | $ | 32.13 | 
|$32.25  $35.00              |  |             | 2   |                  |  |                | 1.94 |  |  | $ | 32.52 | 
|$35.13  $43.31              |  |             | 5   |                  |  |                | 1.33 |  |  | $ | 39.38 | 
|$43.50  $56.81              |  |             | 4   |                  |  |                | 2.64 |  |  | $ | 49.55 | 
|                             |  |             |     |                  |  |                |      |  |  |   |       | 
|$10.69  $56.81              |  |             | 18  |                  |  |                | 1.62 |  |  | $ | 36.03 | 
|                             |  |             |     |                  |  |                |      |  |  |   |       | 

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|                             |  |             |    |                |  |   |       | 
|---------------------------- |  | ----------- | -- | -------------- |  | - | ----- | 
|                            
|Options Exercisable         
|                            
|                             |  | Weighted   
|                             |  | Average    
|Range of Exercise Prices     |  | Exercisable |    | Exercise Price
|                             |  |             |    |               
|ExpressJet Options           |  |             |    |                |  |   |       | 
|$11.15  $12.30              |  |             |   |                |  | $ |      | 
|$14.60                       |  |             | 20 |                |  | $ | 14.60 | 
|$16.00                       |  |             |   |                |  | $ |      | 
|$11.15  $16.00              |  |             | 20 |                |  | $ | 14.60 | 
|Continental Airlines Options |  |             |    |                |  |   |       | 
|$10.69  $29.19              |  |             | 4  |                |  | $ | 19.41 | 
|$29.25  $32.13              |  |             | 1  |                |  | $ | 32.13 | 
|$32.25  $35.00              |  |             | 1  |                |  | $ | 32.53 | 
|$35.13  $43.31              |  |             | 4  |                |  | $ | 38.66 | 
|$43.50  $56.81              |  |             | 2  |                |  | $ | 49.54 | 
|$10.69  $56.81              |  |             | 12 |                |  | $ | 33.21 | 

Employee Stock Purchase Plan

All our employees are eligible to participate in
Continental Airlines stock purchase program under which
they may purchase shares of Continental Airlines common stock at
a price equal to 85% of the lower of the fair market value on
the first day of the quarterly option period or the last day of
the option period. During 2002, 175,419 shares of
Continental Airlines common stock were issued to our employees
at prices ranging from $4.58 to $23.46. During 2001 and 2000,
47,357 shares and 24,998 shares, respectively, of
Continental Airlines common stock were issued to our employees
at prices ranging from $13.40 to $38.30 in 2001 and $27.73 to
$38.30 in 2000. Our employees are eligible to participate in the
Continental Airlines stock purchase plan for as long as
Continental Airlines owns 50% or more of our outstanding
shares of common stock.

Pro Forma SFAS 123 Results

Pro forma information regarding net income and
earnings per share has been determined as if we had accounted
for our employee stock options and purchase rights under the
fair value method of SFAS123. The fair value of ExpressJet
options granted during 2002 was estimated at the date of grant
using the Black-Scholes options pricing model with the following
weighted-average assumptions for 2002: risk-free interest rate
of 4.6%, dividend yield of 0%, expected volatility of ExpressJet
stock of 67% and expected life of the option of 4.4 years.
The weighted average grant date fair value of the stock options
granted in 2002 was $9.57 per option.

The fair value for options granted under the
Continental Airlines Plans was estimated at the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions for 2001 and 2000, respectively:
risk free interest rate of 4.8% and 6.5%, dividend yield of 0%,
expected volatility of Continental Airlines stock of 46% and
47%, and a weighted-average expected life of the option of
4.9 years and 3.6 years. The weighted average grant
date fair value of the stock options granted in 2001 and 2000
was $22.63 and $17.37 per option, respectively. There were
no options granted under the Continental Airlines Plans
during 2002.

The fair value of the purchase rights under the
stock purchase plan was also estimated using the Black-Scholes
model with the following weighted average assumptions for 2002,
2001 and 2000, respectively: risk-free interest rates of 1.7%,
3.3% and 5.9%, dividend yields of 0%, expected volatility of
Continental Airlines Stock of 63%, 46% and 47% and an expected
life of 0.25 years. The weighted-average fair value of each
purchase right granted in 2002, 2001 and 2000 was $2.86, $5.12
and $10.18, respectively.

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected
stock price volatility. Because our employee stock options and
purchase rights have characteristics significantly different
from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair
value estimate, in our opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of our employee stock options and purchase rights.

Note 12  Employee Benefit
Plans

We participated in Continental Airlines
defined contribution 401(k) savings plan until December 31,
2002. Substantially all our domestic employees are covered by
this plan. Under the plan document, we matched 100% of employee
contributions up to $300 per year per person. Effective
July 1, 2000, the Continental Airlines defined
contribution 401(k) savings plan was amended and an additional
100% retirement match up to five percent of pay per person was
instituted. For the years ended December 31, 2002, 2001,
and 2000, our total expense for the defined contribution plan
was $9.7 million, $7.6 million and $3.0 million.
On December 31, 2002, the ExpressJet Airlines, Inc. 401(k)
Savings Plan was adopted. The terms of this agreement are the
same as Continental Airlines defined contribution 401(k)
savings plan as amended.

Prior to January 1, 2002, we participated in
Continental Airlines profit sharing program under which an
award pool consisting of 15% of Continental Airlines
pre-tax earnings, subject to certain adjustments, is distributed
each year to substantially all non-management employees (other
than employees whose collective bargaining agreements provide
otherwise or who otherwise receive profit sharing payments as
required by local law) on a pro rata basis according to base
salary. Under this plan, profit sharing expense for the years
ended December 31, 2001 and 2000 was $0.3 million and
$1.5 million.

The ExpressJet Airlines, Inc. Profit Sharing Plan
was adopted on January 1, 2002. Under this plan, the annual
award pool consists of 10% of our pre-tax earnings, subject to
certain adjustments, and is distributed to all employees of the
company excluding employees whose collective bargaining
agreements provide otherwise and employees who participate in
the management bonus program or any other bonus program of the
company on a pro rata basis according to base salary received
during the current year. Profit sharing expense for the year
ended December 31, 2002 was $6.9 million.

Note 13  Fleet Disposition/
Impairment Charges

We recorded a fleet disposition/impairment charge
of $6.2 million in 2000 as a result of our decision to
accelerate the retirement of our ATR 42-500 and ATR 72 aircraft.
The charge related to the impairment of owned ATR 72 aircraft
and commitments on leased ATR 42-500 aircraft past the dates
they would be removed from service. The charge is reflected in
other operating expenses in the accompanying consolidated
statements of operations.

Note 14  Air Transportation Safety
and System Stabilization Act Grant

On September 22, 2001, President Bush signed
into law the Air Transportation Safety and System Stabilization
Act (the Stabilization Act). The Stabilization Act
provided cash grants to commercial air carriers as compensation
for (1) direct losses incurred beginning with the terrorist
attacks on September 11, 2001 as a result of any Federal
Aviation Administration (FAA) mandated ground stop
order issued by the Secretary of Transportation (and for any
subsequent order which continues or renews such a stoppage), and
(2) incremental losses incurred during the period beginning
September 11, 2001 and ending December 31, 2001 as a
direct result of such attacks. We recognized $24.9 million
in compensation under the Stabilization Act for the year ended
December 31, 2001, approximately $21.1 million of
which we received in cash. For the year ended December 31,
2002, we received our final $4.3 million in cash under the
Stabilization Act and recognized an additional $0.5 million
in compensation based on our final application. Such amounts are
included in government grant in the accompanying consolidated
statements of operations.

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 15  Commitments and
Contingencies



| |                            
| | ---------------------------
| | Capacity Purchase Agreement

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

Under the capacity purchase agreement, at any
airport to which we fly scheduled flights on behalf of
Continental Airlines, subject to some exceptions, Continental
Airlines can require us at any time, including upon cessation of
the scheduled flights to the airport, to use commercially
reasonable efforts to assign any lease for the facilities that
is in our name to Continental Airlines or its designee (or to
sublease the facilities to it or its designee), with no
compensation to us.

Continental Airlines is responsible for all
capital and start-up costs at its hub airports and at any other
facilities where it elects to provide baggage-handling services
to us. We are generally responsible for any capital and start-up
costs associated with any airport terminal facilities at other
airports to which we fly and any non-terminal facilities not
also regularly used by Continental Airlines. In addition, if the
capacity purchase agreement is terminated after our material
breach of that agreement, we may be required by Continental
Airlines to vacate our non-terminal space (including our
maintenance and training facilities) that is subleased to us by
Continental Airlines and used to support the scheduled flights
we fly on behalf of Continental Airlines, and we may be required
by Continental Airlines to use commercially reasonable efforts
to assign to Continental Airlines or its designee any lease in
our name for non-terminal space (including our maintenance
facilities) used to support the scheduled flights we fly on
behalf of Continental Airlines (or to sublease the space to it
or its designee).



| |                     
| | --------------------
| | Purchase Commitments

As of December 31, 2002, we had firm
commitments to acquire 86 regional jets from Embraer. The
estimated aggregate cost of these firm commitments is
approximately $1.7 billion. In addition, we expect to
purchase 17 spare engines for approximately
$46.6 million in connection with the firm order jet
aircraft. We also have options to purchase an additional 100
Embraer regional jets. We will not have any obligation to take
any of the aircraft under firm commitments if they are not
financed by a third party and leased to either Continental
Airlines or us. Furthermore, we currently do not have any
financing in place for the 17 spare engines, and would have no
obligation to acquire the spare engines if for any reason the
firm order aircraft are not delivered to us.

We also have other contractual obligations of
approximately $798.8 million under our power-by-the-hour
contracts with various service providers. We expect to fund
these commitments through internally generated funds together
with general financings and aircraft financing transactions.
However, there can be no assurance that sufficient internal
funds or financing will be available for items not covered by
firm financing commitments.

We have agreements in principal to amend our
capacity purchase agreement with Continental Airlines and our
regional jet aircraft purchase agreement with Embraer. See
Note 17 for further discussion of the effect these proposed
amendments have on our purchase commitments.

The power-by-the-hour contracts dictate the
method by which we pay a vendor based on our actual level of
operations in exchange for vendor coverage on specific parts and
equipment on our aircraft when those parts and equipment are in
need of repair or replacement. Individual contracts are of
varying term and payment procedure. The estimated amount of
future commitment is based on assumptions related to future
level of operations and forecast payment rates. Our level of
operations is determined by Continental Airlines, which has
exclusive scheduling authority over our fleet per the capacity
purchase agreement. The level of operations inherent in the
estimate is based

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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

on Continental Airlines most recent
operating plan for us, which can be altered at Continental
Airlines sole discretion. Forecast payment rates are based
on actual rates as of December 31, 2002 and increased
annually according to the particular inflation index detailed in
each individual contract. Contractual rate increases at actual
time of occurrence may be different than the forecasted rates.



| |                                            
| | -------------------------------------------
| | General Guarantees and
    Indemnifications

We are parties to many contracts, in which it is
common for us to agree to indemnify third parties for tort
liabilities that arise out of or relate to the subject matter of
the contract. In some cases, this indemnity extends to related
liabilities arising from the negligence of the indemnified
parties, but usually excludes any 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 a liability under the
indemnities. However, we expect that we would be covered by
insurance for any such liabilities, subject to deductibles.



| |          
| | ---------
| | Employees

Approximately 68% of our employees are covered by
collective bargaining agreements, which include pilots,
mechanics, dispatchers and flight attendants. The pilot contract
became amendable on October 2002. The contracts for mechanics,
dispatchers and flight attendants become amendable on February
2004, July 2004, and December 2004. Negotiations have commenced
with the Air Line Pilots Association, International in 2002. We
continue to believe that mutually acceptable agreements can be
reached with such employees, although the ultimate outcome of
the negotiations is unknown at this time.



| |                  
| | -----------------
| | Legal Proceedings

We are a defendant in various lawsuits and
proceedings arising in the ordinary course of our business.
While the outcome of these lawsuits and proceedings cannot be
predicted with certainty and could have a material adverse
effect on our financial position, results of operations or cash
flows, it is our opinion that the ultimate disposition of these
proceedings will not have a material adverse effect on our
financial position.

Note 16  Related Party
Transactions

The following is a summary of significant related
party transactions that occurred during the three years ended
December 31, 2002, other than those discussed elsewhere in
the Notes to Consolidated Financial Statements.

Continental Airlines controls the scheduling,
ticket prices and seat inventories with respect to our
operations. In connection with this activity, Continental
Airlines performs all sales and ticketing functions for us on
Continental Airlines ticket stock and received cash directly
from the sale of our tickets.

Continental Airlines purchases or provides
payment of certain items on our behalf, including fuel, certain
payroll expenditures (including related benefits), insurance and
catering (2000 only), and charged us the actual amounts incurred
in 2000, and amounts as stipulated in the capacity purchase
agreement in 2001 and 2002. Transfers or sales of assets between
us and Continental Airlines are recorded at net book value, in
accordance with the capacity purchase agreement.

Continental Airlines provides various services to
us and charges us amounts that were either directly attributable
to our operations or allocations that management believed were
representative of the costs to provide the services in 2000.
Charges for these services were at rates in accordance with the
capacity purchase agreement in 2001 and 2002. The services
provided to us by Continental Airlines are as follows:



| |   |                                                                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Certain customer services such as ground
    handling. Charges related to these services were approximately
    $52.3 million, $49.2 million and $34.9 million
    for the years ended December 31, 2002, 2001 and 2000,
    respectively.

78



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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



| |   |                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Centralized services and infrastructure costs,
    such as technology, accounting, legal, treasury, tax, human
    resources and risk management. Charges related to these services
    were approximately $14.3 million, $12.9 million and
    $8.1 million for the years ended December 31, 2002,
    2001 and 2000.
|
| |  | All other Continental Airlines purchases or
    payments for certain items on our behalf were approximately
    $34.5 million, $17.3 million, and $61.9 million
    for the years ended December 31, 2002, 2001 and 2000.                                                                                             

The centralized services are provided under the
administrative support and information services agreement. Under
the agreement, we and Continental Airlines have negotiated in
good faith to transition some of the services with terms
reasonably acceptable to each party. We will continue to work
with Continental Airlines to transition the services and to
provide for the termination of all of the services provided to
us under the administrative services agreement over a period of
time to be mutually agreed by Continental Airlines and us.

The net advances from Continental Airlines
related to intercompany activities described above included
accrued interest at 6% per annum through March 31,
2001, when they were converted to a long-term note. For the
period from April 2, 2001 through June 30, 2001, the
note payable to Continental Airlines accrued interest at a rate
of approximately 4.9% and effective July 1, 2001 at a rate
fixed for each quarter at the three-month LIBOR on the second
business day prior to such quarter plus 1.25% per annum.
Weighted average interest rate for the year ended
December 31, 2002 was 3.1% per annum. The statements
of operations include total interest charges from Continental
Airlines, net of capitalized interest, of $13.1 million,
$23.4 million and $25.0 million for the years ended
December 31, 2002, 2001 and 2000, respectively, and total
interest income of $3.6 million, $2.4 million and
$1.2 million for the years ended December 31, 2002,
2001 and 2000, respectively.

Note 17  Subsequent Events
(Unaudited)



| |                                                                
| | ---------------------------------------------------------------
| | Capacity Purchase Agreement and Aircraft
    Purchase Agreement

We announced on February 12, 2003, that we
reached agreements in principle to amend our capacity purchase
agreement with Continental Airlines and our regional jet
aircraft purchase agreement with Embraer. Under the terms of the
proposed amendments, we will modify our scheduled deliveries of
Embraer regional jets in 2003 to 36, from our original plan for
48 deliveries, and will take 21 aircraft deliveries in 2004,
down from 36. Additionally, we will increase our aircraft
deliveries to 21 and eight for 2005 and 2006, up from two and
zero for these years, respectively. Continental Airlines
proposed the amendment to the capacity purchase agreement in
response to continuing weakness and uncertainty in the airline
industry. In return for the deferred deliveries, Continental
Airlines, among other items, extended ExpressJets
guarantee as the exclusive provider of regional jet service in
the hubs and Continental Airlines termination right
without cause by one year, to January 1, 2007. These
proposed amendments to the capacity purchase agreement and the
purchase agreement with Embraer are subject to the execution of
satisfactory definitive agreements and the approval by the Board
of Directors of Continental Airlines.



| |                                          
| | -----------------------------------------
| | Aircraft Leases and Other
    Commitments

Based on these proposed amendments to our
capacity purchase agreement with Continental Airlines and our
regional jet aircraft purchase agreement with Embraer, as
announced on February 12, 2003, the estimated aggregate
cost of our firm commitments, as discussed in Note 15, will
remain at $1.7 billion. However, we expect the purchase of
17 spare engines in connection with the firm order jet aircraft
to increase to approximately $46.7 million, from our
estimate at December 31, 2002 of $46.6 million.
Furthermore, our contractual obligations under our
power-by-the-hour contracts with various service providers, as
discussed in Note 15, are expected to decrease to
approximately $782.5 million, from our original estimate of
$798.8 million. We expect to fund these commitments through
internally generated funds together with general financings and
aircraft financing transactions. However, there can be no
assurance that sufficient internal funds or financing will be
available for items not covered by firm financing commitments.

79



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EXPRESSJET HOLDINGS, INC.


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Note 18  Selected Quarterly
Financial Data (Unaudited)

Unaudited summarized financial data by quarter
for 2002 and 2001 is as follows (in millions, except per share
data):

|                                        |  |               |       |         |  |              |       |             |  |   |       |   |  |   |       |  
|--------------------------------------- |  | ------------- | ----- | ------- |  | ------------ | ----- | ----------- |  | - | ----- | - |  | - | ----- | -
|                                        |  |              
|                                        |  | Quarter Ended
|                                        |  |              
|                                        |  | March 31      |       | June 30 |  | September 30 |       | December 31
|                                        |  |               |       |         |  |              |       |            
|2002                                    |  |               |       |         |  |              |       |             |  |   |       |   |  |   |       |  
|Operating revenue                       |  | $             | 265.2 |         |  | $            | 269.7 |             |  | $ | 270.1 |   |  | $ | 284.0 |  
|Operating income                        |  |               | 35.5  |         |  |              | 36.4  |             |  |   | 37.4  |   |  |   | 38.5  |  
|Non-operating income (expense), net     |  |               | (2.9  | )       |  |              | (2.5  | )           |  |   | (2.0  | ) |  |   | (1.8  | )
|Net income                              |  |               | 20.0  |         |  |              | 20.5  |             |  |   | 21.5  |   |  |   | 22.3  |  
|Basic and Diluted Earnings per share(a) |  | $             | 0.37  |         |  | $            | 0.33  |             |  | $ | 0.34  |   |  | $ | 0.35  |  
|2001                                    |  |               |       |         |  |              |       |             |  |   |       |   |  |   |       |  
|Operating revenue                       |  | $             | 244.9 |         |  | $            | 260.1 |             |  | $ | 250.6 |   |  | $ | 224.9 |  
|Operating income                        |  |               | 26.7  |         |  |              | 26.9  |             |  |   | 26.3  |   |  |   | 21.1  |  
|Non-operating income (expense), net     |  |               | (5.2  | )       |  |              | (6.1  | )           |  |   | (6.6  | ) |  |   | (3.4  | )
|Net income                              |  |               | 12.9  |         |  |              | 12.6  |             |  |   | 11.9  |   |  |   | 10.6  |  
|Basic and Diluted Earnings per share(a) |  | $             | 0.24  |         |  | $            | 0.23  |             |  | $ | 0.22  |   |  | $ | 0.20  |  






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | The sum of the four quarterly earnings per share
    amounts does not agree with the earnings per share as calculated
    for the full year due to the fact that the full year calculation
    uses a weighted average number of shares based on the sum of the
    four quarterly weighted average shares divided by four quarters.
    In addition, basic and diluted earnings per share are computed
    using the assumed number of shares of our common stock
    outstanding after the recapitalization. These items do not
    include approximately 1 million shares of our common stock
    issuable upon exercise of options outstanding under our 2002
    Stock Incentive Plan.

During the third and fourth quarters of 2001, we
recognized $12.1 and $12.8 million, respectively, of
compensation under the Stabilization Act.

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|        |                                                                                             
|------- | --------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and
    Financial Disclosure

There were no changes in or disagreements on any
matters of accounting principles or financial statement
disclosure between us and our independent auditors.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The information required by Item 10 is
included under Item 4A. Executive Officers of the
Company in Part I of this report, which is
incorporated by reference here, as well as, incorporated herein
by reference to the information contained under the headings
Election of Directors and Section 16(a)
Beneficial Ownership Reporting Compliance as set forth in
our definitive proxy statement for our 2003 annual meeting of
stockholders.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by Item 11 is
incorporated herein by reference to the information under the
heading Compensation of Directors,
Compensation of Executive Officers,
Performance Graph and Executive Compensation
Report of the Human Resources Committee as set forth in
our definitive proxy statement for our 2003 annual meeting of
stockholders.






|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

The information required by Item 12 is
incorporated herein by reference to the information under the
headings Securities Authorized for Issuance under Equity
Compensation Plans and Voting Rights and Principal
Stockholders as set forth in our definitive proxy
statement for our 2003 annual meeting of stockholders.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by Item 13 is
incorporated herein by reference to the information under the
heading Certain Transactions as set forth in our
definitive proxy statement for our 2003 annual meeting of
stockholders.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

(a) Evaluation of disclosure controls and
procedures. Based on their evaluation of our disclosure
controls and procedures as of a date within 90 days of the
filing of this report, the Chief Executive Officer and Chief
Financial Officer of ExpressJet Holdings, Inc. have concluded
that the disclosure controls and procedures are effective.

(b) Changes in internal controls.
There were no significant changes in our internal controls or in
other factors that could significantly affect these controls
subsequent to the date of their evaluation.




PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) The following financial statements are
included in Part II, Item 8. Financial
Statements and Supplementary Data:



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | Report of Independent Auditors                                                                                                  
|
| | Consolidated Statements of Operations for each of
    the Three Years in the Period Ended December 31, 2002                     
|
| | Consolidated Balance Sheets as of
    December 31, 2002 and 2001                                                                
|
| | Consolidated Statements of Cash Flows for each of
    the Three Years in the Period Ended December 31, 2002                     
|
| | Consolidated Statements of Common
    Stockholders Equity for each of the Three Years in the
    Period Ended December 31, 2002

81



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| |                                           
| | ------------------------------------------
| | Notes to Consolidated Financial Statements

(b) Financial Statement Schedules:



| |                                                    
| | ---------------------------------------------------
| | Report of Independent Auditors                     
|
| | Schedule II  Valuation and
    Qualifying Accounts

All other schedules have been omitted because
they are inapplicable, not required, or the information is
included elsewhere in the consolidated financial statements or
notes thereto.

(c) Reports on Form 8-K:

The following reports on Form 8-K were filed
during the last quarter of 2002:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) Report dated October 1, 2002
    reporting Item 5. Other Events. No financial
    statements were filed with this report, which included a press
    release announcing September capacity and traffic performance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | (ii) Report dated October 17, 2002
    reporting Item 5. Other Events. No financial
    statements were filed with this report, which included a press
    release reporting earnings for the third quarter ended
    September 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | (iii) Report dated November 1, 2002
    reporting Item 5. Other Events. No financial
    statements were filed with this report, which included a press
    release announcing October capacity and traffic performance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | (iv) Report dated November 14, 2002
    reporting Item 7. Financial Statements and
    Exhibits and Item 9. Regulation FD
    Disclosure. No financial statements were filed with this
    report, which included exhibits relating the press release
    announcing pre-payment of $50.0 million in principal on its
    note payable to Continental Airlines, $92.8 million in
    expected capital expenditures in 2003 and projected compound
    average growth rate from 2002 through 2005 in available seat
    miles, corresponding presentation data of such, and exhibits
    relating to the presentation provided at the Salomon Smith
    Barney 2002 Transportation Conference.
|
| | (v) Report dated December 2, 2002
    reporting Item 5. Other Events. No financial
    statements were filed with this report, which included a press
    release announcing November capacity and traffic performance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | (vi) Report dated December 6, 2002
    reporting Item 9. Regulation FD
    Disclosure. No financial statements were filed with this
    report, which included information relating to Form 8-Ks
    filed by Continental Airlines, Inc. and its financial outlook
    for the remainder of 2002 and 2003. The Form 8-Ks included
    information regarding Continental Airlines, Inc. estimates for
    available seat miles growth and load factors for its Continental
    Express operations.                                                                                                                                                                                              

(d) Exhibits:

|        |       |  |  |             |  |                                                                                                                                                                                                                                                                                                                  
|------- | ----- |  |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |            
|Number  |       |  |  | Description
|        |       |  |  |            
|        | 3.1   |  |  |            |  | Amended and Restated Certificate of Incorporation
    (incorporated by reference as Exhibit 3.1 to the
    Companys Registration Statement on Form S-1
    (Registration No. 333-64808) (the ExpressJet
    Form S-1).                                                                                        
|        | 3.2*  |  |  |            |  | Amended and Restated Bylaws.                                                                                                                                                                                                                                                                                     
|        | 4.1   |  |  |            |  | Specimen Stock Certificate (incorporated by
    reference as Exhibit 4.1 To the ExpressJet Form S-1).                                                                                                                                                                                                            
|        | 4.2   |  |  |            |  | Rights Agreement among the Company, Continental
    Airlines, Inc. and Mellon Investor Services LLC, as Rights
    Agent, including form of Rights Certificate, updated as of
    April 1, 2002 (incorporated by reference as
    Exhibit 4.2 to the Company Form 10-Q for the quarter
    ended March 31, 2002).
|        | 10.1 |  |  |            |  | Amended and Restated Capacity Purchase Agreement
    among the Company, XJT Holdings, Inc., ExpressJet Airlines, Inc.
    and Continental Airlines, Inc. (incorporated by reference as
    Exhibit 10.1 to the ExpressJet Form S-1).                                                                             
|        | 10.2  |  |  |            |  | Master Facility and Ground Handling Agreement
    (incorporated by reference as Exhibit 10.1 to the
    ExpressJet Form S-1).                                                                                                                                                                                    

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|        |           |   |  |             |  |                                                                                                                                                                                                                                                                                                                                                                        
|------- | --------- | - |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |   |  |            
|Number  |           |   |  | Description
|        |           |   |  |            
|        | 10.3      |   |  |            |  | Administrative Support and Information Services
    Provisioning Agreement (incorporated by reference as
    Exhibit 10.1 to the ExpressJet Form S-1).                                                                                                                                                                                                                 
|        | 10.4      |   |  |            |  | Form of Initial Public Offering Agreement
    (incorporated by reference as Exhibit 10.4 to the
    Companys Form 10-Q for the quarter ended
    March 31, 2002).                                                                                                                                                                                                     
|        | 10.5      |   |  |            |  | Form of Registration Rights Agreement
    (incorporated by reference as Exhibit 10.5 to the
    Companys Form 10-Q for the quarter ended
    March 31, 2002).                                                                                                                                                                                                         
|        | 10.6      |   |  |            |  | Form of Employee Benefits Separation Agreement
    (incorporated by. reference as Exhibit 10.6 to the
    Companys Form 10-Q for the quarter ended
    March 31, 2002).                                                                                                                                                                                               
|        | 10.7      |   |  |            |  | Amended and Restated Tax Agreement (incorporated
    by reference as Exhibit 10.1 to the Companys
    Form 10-Q for the quarter ended June 30, 2002).                                                                                                                                                                                                                 
|        | 10.8    |   |  |            |  | 2002 Stock Incentive Plan (incorporated by
    reference as Exhibit 10.8 to the Companys
    Form 10-Q for the quarter ended March 31, 2002).                                                                                                                                                                                                                         
|        | 10.8(a) |   |  |            |  | Form of Employee Stock Option Agreement pursuant
    to the 2002 Stock Incentive Plan (incorporated by reference as
    Exhibit 10.8(a) to ExpressJet Form S-1).                                                                                                                                                                                                       
|        | 10.8(b) |   |  |            |  | Form of Outside Director Stock Option Agreement
    pursuant to the 2002 Stock Incentive Plan (incorporated by
    reference as Exhibit 10.8(b) to ExpressJet Form S-1).                                                                                                                                                                                               
|        | 10.9    |   |  |            |  | Employment Agreement between the Company and
    James B. Ream (incorporated by reference as Exhibit 10.9 to
    the ExpressJet Form S-1).                                                                                                                                                                                                                             
|        | 10.9(a) |   |  |            |  | Letter Agreement between the Company, Continental
    and James B. Ream dated as of April 24, 2002 (incorporated
    by reference as Exhibit 10.9(a) to the Companys
    Form 10-Q for the quarter ended March 31, 2002).                                                                                                                                             
|        | 10.10   |   |  |            |  | Employment Agreement between the Company and
    Frederick S. Cromer (incorporated by reference as
    Exhibit 10.10 to the ExpressJet S-1.                                                                                                                                                                                                                            
|        | 10.10(a) |  |  |            |  | Letter Agreement between the Company, Continental
    and Frederick S. Cromer dated as of April 24, 2002
    (incorporated by reference as Exhibit 10.10(a) to the
    Companys Form 10-Q for the quarter ended
    March 31, 2002).                                                                                                                                  
|        | 10.11   |   |  |            |  | Employment Agreement between the Company and
    Jerry E. Losness (incorporated by reference as Exhibit 10.9
    to the ExpressJet Form S-1).                                                                                                                                                                                                                          
|        | 10.11(a) |  |  |            |  | Letter Agreement among the Company, Continental
    and Jerry E. Losness, dated April 24, 2002 (incorporated by
    reference as Exhibit 10.11(a) to the Companys
    Form 10-Q for the quarter ended March 31, 2002).                                                                                                                                                
|        | 10.12    |   |  |            |  | Purchase Agreement No. GPJ-003/96, between
    Empresa Brasileira de Aeronautica S. A. (Embraer)
    and the Company dated August 5, 1996 relating to the
    purchase of EMB 145 aircraft (P.A. 3/96)
    (incorporated by reference to Exhibit 10.3 to Amendment
    No. 1 to Embraers Form F-1 Registration
    Statement (No. 333-12220) (the Embraer F-1)).
|        | 10.12(a)  |   |  |            |  | Amendment No. 1 to P.A. 3/96 dated
    August 31, 1996 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                             
|        | 10.12(b)  |   |  |            |  | Amendment No. 2 to P.A. 3/96 dated
    May 22, 1997 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                                
|        | 10.12(c) |   |  |            |  | Amendment No. 3 to P.A. 3/96 dated
    August 20, 1997 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                             
|        | 10.12(d) |   |  |            |  | Amendment No. 4 to P.A. 3/96 dated
    October 1, 1997 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                             
|        | 10.12(e) |   |  |            |  | Amendment No. 5 to P.A. 3/96 dated
    November 12, 1997 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                           
|        | 10.12(f) |   |  |            |  | Amendment No. 6 to P.A. 3/96 dated
    August 19, 1998 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                             
|        | 10.12(g) |   |  |            |  | Amendment No. 7 to P.A. 3/96 dated
    February 19, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                           

83



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|        |           |  |  |             |  |                                                                                                                                                                                                                                                            
|------- | --------- |  |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |  |  |            
|Number  |           |  |  | Description
|        |           |  |  |            
|        | 10.12(h) |  |  |            |  | Amendment No. 8 to P.A. 3/96 dated
    March 31, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                  
|        | 10.12(i) |  |  |            |  | Amendment No. 9 to P.A. 3/96 dated
    October 29, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                
|        | 10.12(j) |  |  |            |  | Amendment No. 10 to P.A. 3/96 dated
    October 20, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                               
|        | 10.12(k) |  |  |            |  | Amendment No. 11 to P.A. 3/96 dated
    December 15, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                              
|        | 10.12(l) |  |  |            |  | Amendment No. 12 to P.A. 3/96 dated
    February 18, 2000 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                              
|        | 10.12(m) |  |  |            |  | Amendment No. 13 to P.A. 3/96 dated
    April 28, 2000 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                 
|        | 10.12(n) |  |  |            |  | Amendment No. 14 to P.A. 3/96 dated
    April 28, 2000 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                 
|        | 10.12(o) |  |  |            |  | Amendment No. 15 to P.A. 3/96 dated
    July 25, 2000 (incorporated by reference to
    Exhibit 10.33(o) to the Annual Report on Form 10-K for
    the year ended December 31, 2001 filed by Continental
    Airlines, Inc. (the Continental 2000 10-K)).
|        | 10.12(p) |  |  |            |  | Amendment No. 16 to P.A. 3/96 dated
    July 24, 2000 (incorporated by reference to
    Exhibit 10.33(p) to the Continental 2000 10-K).                                                                                                                    
|        | 10.12(q) |  |  |            |  | Amendment No. 17 to P.A. 3/96 dated
    November 7, 2000 (incorporated by reference to
    Exhibit 10.33(q) to the Continental 2000 10-K).                                                                                                                 
|        | 10.12(r) |  |  |            |  | Amendment No. 18 to P.A. 3/96 dated
    November 17, 2000 (incorporated by reference to
    Exhibit 10.33(r) to the Continental 2000 10-K).                                                                                                                
|        | 10.12(s) |  |  |            |  | Amendment No. 19 to P.A. 3/96 dated
    July 31, 2001 (incorporated by reference to
    Exhibit 10.35(s)) to the Annual Report on Form 10-K
    for the year ended December 31, 2001 filed by Continental
    Airlines, Inc. (the Continental 2001 10-K).
|        | 10.12(t) |  |  |            |  | Amendment No. 20 to P.A. 3/96 dated
    July 31, 2001 (incorporated by reference to
    Exhibit 10.35(t) to the Continental 2001 10-K).                                                                                                                    
|        | 10.12(u) |  |  |            |  | Amendment No. 21 to P.A. 3/96 dated
    October 10, 2001 (incorporated by reference to
    Exhibit 10.35(u) to the Continental 2001 10-K).                                                                                                                 
|        | 10.12(v) |  |  |            |  | Amendment No. 22 to P.A. 3/96 dated
    January 24, 2002 (incorporated by reference to
    Exhibit 10.35(v) to the Continental 2001 10-K).                                                                                                                 
|        | 10.12(w) |  |  |            |  | Amendment No. 23 to P.A. 3/96 dated
    February 28, 2002 (incorporated by reference to
    Exhibit 10.6 to the Quarterly Report on Form 10-Q for
    the quarterly period ended March 31, 2002 (the
    Continental 10-Q)).                             
|        | 10.12(x) |  |  |            |  | Amendment No. 24 to P.A. 3/96 dated
    March 28, 2002 (incorporated by reference to
    Exhibit 10.7 to the Continental 10-Q).                                                                                                                            
|        | 10.13    |  |  |            |  | Letter Agreement No. GPJ-004/96 dated
    August 5, 1996 between Embraer and the Company (L.A.
    4/96) (incorporated by reference to Exhibit 10.3 to
    the Embraer F-1).                                                                             
|        | 10.13(a)  |  |  |            |  | Amendment No. 1 to L.A. 4/96 dated
    August 31, 1996 (incorporated by reference to
    Exhibit 10.34(a) to the Continental 2000 10-K).                                                                                                                   
|        | 10.13(b) |  |  |            |  | Amendment No. 2 to L.A. 4/96 and Amendment
    No. 1 to L.A. 4A/96 (defined below) dated July 24,
    2000 between Embraer and the Company (incorporated by reference
    to Exhibit 10.34(b) to the Continental 2000 10-K).                               
|        | 10.13(c) |  |  |            |  | Amendment No. 3 to L.A. 4/96 and Amendment
    No. 1 to L.A. 4A/96 (defined below) dated January 24,
    2002 between Embraer and ExpressJet (incorporated by reference
    to Exhibit 10.36(c) to the Continental 2001 10-K).                             
|        | 10.14    |  |  |            |  | Letter Agreement No. PCJ-004A/96 dated
    August 31, 1996 among Continental Airlines, the Company and
    Embraer (L.A. 4A/96) (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                      

84



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|        |           |  |  |             |  |                                                                                                                                                                                                                   
|------- | --------- |  |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |  |  |            
|Number  |           |  |  | Description
|        |           |  |  |            
|        | 10.15    |  |  |            |  | Letter Agreement DCT 059/2000 dated
    October 27, 2000 between the Company and Embraer
    (incorporated by reference to Exhibit 10.36 to the
    Continental 2000 10-K).                                       
|        | 10.16    |  |  |            |  | Purchase Agreement No. DCT-054/98 dated
    December 23, 1998 between Embraer and the Company
    (P.A. 54/98) (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                              
|        | 10.16(a) |  |  |            |  | Amendment No. 1 to P.A. 54/98 dated
    July 30, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                         
|        | 10.16(b) |  |  |            |  | Amendment No. 2 to P.A. 54/98 dated
    July 30, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                         
|        | 10.16(c) |  |  |            |  | Amendment No. 3 to P.A. 54/98 dated
    October 21, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                      
|        | 10.16(d)  |  |  |            |  | Amendment No. 4 to P.A. 54/98 dated
    January 31, 2000 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                      
|        | 10.16(e) |  |  |            |  | Amendment No. 5 to P.A. 54/98 dated
    February 15, 2000 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                     
|        | 10.16(f) |  |  |            |  | Amendment No. 6 to P.A. 54/98 dated
    April 17, 2000 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                        
|        | 10.16(g) |  |  |            |  | Amendment No. 7 to P.A. 54/98 dated
    July 24, 2000 (incorporated by reference to
    Exhibit 10.37(g) to the Continental 2000 10-K).                                                                           
|        | 10.16(h) |  |  |            |  | Amendment No. 8 to P.A. 54/98 dated
    November 7, 2000 (incorporated by reference to
    Exhibit 10.37(h) to the Continental 2000 10-K).                                                                        
|        | 10.16(i) |  |  |            |  | Amendment No. 9 to P.A. 54/98 dated
    September 20, 2000 (incorporated by reference to
    Exhibit 10.37(i) to the Continental 2000 10-K).                                                                      
|        | 10.16(j) |  |  |            |  | Amendment No. 10 to P.A. 54/98 dated
    November 17, 2000 (incorporated by reference to
    Exhibit 10.37(j) to the Continental 2000 10-K).                                                                      
|        | 10.16(k) |  |  |            |  | Amendment No. 11 to P.A. 54/98 dated
    July 31, 2001 (incorporated by reference to
    Exhibit 10.39(k) to the Continental 2001 10-K).                                                                          
|        | 10.16(l) |  |  |            |  | Amendment No. 12 to P.A. 54/98 dated
    July 31, 2001 (incorporated by reference to
    Exhibit 10.39(l) to the Continental 2001 10-K).                                                                          
|        | 10.16(m) |  |  |            |  | Amendment No. 13 to P.A. 54/98 dated
    October 10, 2001 (incorporated by reference to
    Exhibit 10.39(m) to the Continental 2001 10-K).                                                                       
|        | 10.16(n) |  |  |            |  | Amendment No. 14 to P.A. 54/98 dated
    January 24, 2002 (incorporated by reference to
    Exhibit 10.39(n) to the Continental 2001 10-K).                                                                       
|        | 10.17    |  |  |            |  | Letter of Agreement DCT-055/98 dated
    December 23, 1998 between the Company and Embraer
    (L.A. 55/98) (incorporated by reference to
    Exhibit 10.38 to the Continental 2000 10-K).                      
|        | 10.17(a) |  |  |            |  | Amendment No. 1 to L.A. 55/98 dated
    July 24, 2000 (incorporated by reference to
    Exhibit 10.38(a) to the Continental 2000 10-K).                                                                           
|        | 10.18    |  |  |            |  | EMB-135 Financing Letter of Agreement dated
    March 23, 2000 among Continental Airlines, the Company and
    Embraer (L.A. 135) (incorporated by reference to
    Exhibit 10.39 to the Continental 2000 10-K).
|        | 10.18(a) |  |  |            |  | Amendment No. 1 to L.A. 135 (incorporated by
    reference to Exhibit 10.39(a) to the Continental 2000 10-K).                                                                                                     
|        | 10.18(b) |  |  |            |  | Amendment No. 2 to L.A. 135 (incorporated by
    reference to Exhibit 10.39(b) to the Continental 2000 10-K).                                                                                                     
|        | 10.18(c) |  |  |            |  | Amendment No. 3 to L.A. 135 dated
    October 27, 2000 (incorporated by reference to
    Exhibit 10.39(c) to the Continental 2000 10-K).                                                                          
|        | 10.19    |  |  |            |  | Letter Agreement DCT-058/2000 dated
    October 27, 2000 between Embraer and the Company
    (incorporated by reference to Exhibit 10.40 to the
    Continental 2000 10-K).                                       
|        | 10.20*    |  |  |            |  | Promissory Note, dated as of March 31, 2001,
    between Continental Express, Inc. and Continental Airlines,
    Inc., as amended and restated                                                                    

85



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##### Table of Contents



|        |          |  |  |             |  |                                                                                                                                                                                                                                                                                                                                                          
|------- | -------- |  |  | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |  |  |            
|Number  |          |  |  | Description
|        |          |  |  |            
|        | 10.21* |  |  |            |  | Employment Agreement between the Company and John
    F. Wombwell.                                                                                                                                                                                                                                                                                       
|        | 10.22   |  |  |            |  | Amendment No. 25 to Purchase Agreement
    No. GPJ-003/96, between Empresa Brasileira de Aeronautica
    S.A. (Embraer) and ExpressJet Airlines, Inc. dated
    July 9, 2002 relating to the purchase of EMB 145 aircraft
    (incorporated by reference as Exhibit 10.22 to the
    Companys Form 10-Q for the quarter ended
    September 30, 2002).
|        | 10.23   |  |  |            |  | Amendment No. 26 to Purchase Agreement
    No. GPJ-003/96 between Embraer and ExpressJet Airlines,
    Inc., dated August 30, 2002 relating to the purchase of EMB
    145 aircraft (incorporated by reference as Exhibit 10.23 to
    the Companys 10-Q for the quarter ended September 30,
    2002).                                                 
|        | 10.24* |  |  |            |  | Amendment No. 27 to Purchase Agreement
    No. GPJ-003/96 between Embraer and ExpressJet Airlines,
    Inc., dated December 27, 2002 relating to the purchase of
    EMB 145 aircraft.                                                                                                                                                                   
|        | 10.25* |  |  |            |  | Supplemental Retirement Plan.                                                                                                                                                                                                                                                                                                                            
|        | 10.26* |  |  |            |  | Management Bonus Plan.                                                                                                                                                                                                                                                                                                                                   
|        | 21.1*    |  |  |            |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                             
|        | 23.1*    |  |  |            |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                                                                            
|        | 24.1*    |  |  |            |  | Powers of Attorney.                                                                                                                                                                                                                                                                                                                                      
|        | 99.1*    |  |  |            |  | Section 906 Certification of Periodic
    Financial Reports by Chief Executive Officer.                                                                                                                                                                                                                                                                  
|        | 99.2*    |  |  |            |  | Section 906 Certification of Periodic
    Financial Reports by Chief Financial Officer.                                                                                                                                                                                                                                                                  



---



|  |                
|- | ---------------
|* | Filed herewith.



|  |                                                                                                                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The SEC has granted confidential treatment of
    certain provisions of these exhibits. Omitted material for which
    confidential treatment has been granted has been filed
    separately with the SEC.



|   |                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------
| | The Company has applied to the SEC for
    confidential treatment for portions of this exhibit.                                         
|  
| | Indicates a management contract or compensatory
    plan or arrangement in which any director or any executive
    officer participates.

86



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

We have audited the consolidated financial
statements of ExpressJet Holdings, Inc. (the
Company) as of December 31, 2002 and 2001, and
for each of the three years in the period ended
December 31, 2002, and have issued our report thereon dated
January 14, 2003 (included elsewhere in this
Form 10-K). Our audits also included the financial
statement schedule listed in Item 15(b) of this
Form 10-K. This schedule is the responsibility of the
Companys management. Our responsibility is to express an
opinion based on our audits.

In our opinion, the financial statement schedule
referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.



| |                  
| | -----------------
| | ERNST & YOUNG LLP

Houston, Texas

January 14, 2003


87



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##### Table of Contents



EXPRESSJET HOLDINGS, INC.

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

For the Years Ended December 31, 2000,
2001 and 2002


(In thousands)


|                           |                              |                      |    |               |   |                    |        |        |   |   |         |         | 
|-------------------------- | ---------------------------- | -------------------- | -- | ------------- | - | ------------------ | ------ | ------ | - | - | ------- | ------- | 
|                           |                              |                      |    |               |   | Deferred Tax Asset
|                           |                              | Allowance for        |    | Allowance for |   | Valuation         
|                           |                              | Doubtful Receivables |    | Obsolescence  |   | Allowance(1)      
|                           |                              |                      |    |               |   |                   
|Balance, December 31, 1999 |                              | $                    | 30 |               |   | $                  | 9,101  |        |   | $ |        |        
|                           | Additions charged to expense |                      |    | 85            |   |                    |        | 4,707  |   |   |         |        | 
|                           | Deductions from reserve      |                      |    | (85           | ) |                    |        | (961   | ) |   |         |        | 
|                           | Other                        |                      |    |              |   |                    |        | (130   | ) |   |         |        | 
|                           |                              |                      |    |               |   |                    |        |        |   |   |         |        
|Balance, December 31, 2000 |                              |                      | 30 |               |   |                    | 12,717 |        |   |   |        |        
|                           | Additions charged to expense |                      |    | 114           |   |                    |        | 4,660  |   |   |         |        | 
|                           | Deductions from reserve      |                      |    | (114          | ) |                    |        | (1,485 | ) |   |         |        | 
|                           | Other                        |                      |    |              |   |                    |        | (2,334 | ) |   |         |        | 
|                           |                              |                      |    |               |   |                    |        |        |   |   |         |        
|Balance, December 31, 2001 |                              |                      | 30 |               |   |                    | 13,558 |        |   |   |        |        
|                           | Additions charged to expense |                      |    | 105           |   |                    |        | 4,000  |   |   |         |        | 
|                           | Deductions from reserve      |                      |    | (78           | ) |                    |        | (718   | ) |   |         |        | 
|                           | Other                        |                      |    |              |   |                    |        | (120   | ) |   |         | 384,514 | 
|                           |                              |                      |    |               |   |                    |        |        |   |   |         |        
|Balance, December 31, 2002 |                              | $                    | 57 |               |   | $                  | 16,720 |        |   | $ | 384,514 |        
|                           |                              |                      |    |               |   |                    |        |        |   |   |         |        



---



|    |                                                                                       
|--- | --------------------------------------------------------------------------------------
|(1) | Valuation allowance includes net tax agreement
    obligation to Continental Airlines.

88



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, ExpressJet
Holdings, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.



| |                          
| | -------------------------
| | EXPRESSJET HOLDINGS, INC.
| | (Registrant)             



| |     |                        
| | --- | -----------------------
| | By: | /s/ FREDERICK S. CROMER

| |                                               
| | ----------------------------------------------
| |                                               
| | Frederick S. Cromer                           
| | Vice President and Chief Financial
    Officer

Date: February 14, 2003

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities indicated on February 14, 2003.

|                                            |  |                                                                                      
|------------------------------------------- |  | -------------------------------------------------------------------------------------
|Signature                                   |  | Capacity                                                                             
|                                            |  |                                                                                      
|                                           
|/s/ JAMES B. REAMJames B. Ream              |  | President, Chief Executive Officer and
    Director
    (Principal Executive Officer)
|                                           
|/s/ FREDERICK S. CROMERFrederick S. Cromer  |  | Vice President and Chief Financial Officer
    (Principal Financial Officer)         
|                                           
|/s/ PHUNG NGO-BURNSPhung Ngo-Burns          |  | Senior Director and Controller
    (Principal Accounting Officer)                    
|                                           
|/s/ GORDON M. BETHUNE*Gordon M. Bethune     |  | Director                                                                             
|                                           
|/s/ JANET M. CLARKE*Janet M. Clarke         |  | Director                                                                             
|                                           
|/s/ KIM A. FADEL*Kim A. Fadel               |  | Director                                                                             
|                                           
|/s/ LAWRENCE W. KELLNER*Lawrence W. Kellner |  | Director                                                                             
|                                           
|/s/ C.D. MCLEAN*C.D. McLean                 |  | Director                                                                             
|                                           
|/s/ THOMAS E. SCHICK*Thomas E. Schick       |  | Director                                                                             

89



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##### Table of Contents



|                                        |  |         
|--------------------------------------- |  | --------
|Signature                               |  | Capacity
|                                        |  |         
|                                       
|/s/ L.E. SIMMONS*L.E. Simmons           |  | Director
|                                       
|/s/ JEFFERY A. SMISEK*Jeffery A. Smisek |  | Director



|     |                      | 
|---- | -------------------- | 
|*By: | /s/ JOHN F. WOMBWELL | 

|                                 | 
|-------------------------------- | 
|John F. Wombwell, Vice President | 
|Pursuant to a Power-of-Attorney  | 
|dated February 12, 2003.         | 
|February 14, 2003                | 

90



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##### Table of Contents






CERTIFICATIONS

I, James B. Ream, certify that:



|   |                                                                                                                                                                                                                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | I have reviewed this annual report on
    Form 10-K of ExpressJet Holdings, Inc;                                                                                                                                                                                                                                                            
|  
|2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|  
|3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|  
|4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



| |    |                                                                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual a) report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                         
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                   



|   |                                                                                                                                                                                                                                                                
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation,
    to the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



|   |                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. | The registrants other certifying officers
    and I have indicated in this annual report whether or not
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

|                        |  |                                                                                                                               
|----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Date: February 14, 2003 |  | /s/ JAMES B. REAM
    --------------------------------------------
    James B. Ream
    President and Chief Executive Officer

91



---



##### Table of Contents



I, Frederick S. Cromer, certify that:



|   |                                                                                                                                                                                                                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | I have reviewed this annual report on
    Form 10-K of ExpressJet Holdings, Inc;                                                                                                                                                                                                                                                            
|  
|2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|  
|3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|  
|4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                       



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



|   |                                                                                                                                                                                                                                                                
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation,
    to the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent functions):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



|   |                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|6. | The registrants other certifying officers
    and I have indicated in this annual report whether or not
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

|                        |  |                                                                                                                                                
|----------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|Date: February 14, 2003 |  | /s/ FREDERICK S. CROMER
    --------------------------------------------
    Frederick S. Cromer
    Vice President and Chief Financial Officer

92



---



##### Table of Contents






INDEX TO EXHIBITS

OF EXPRESSJET HOLDINGS, INC.


|        |            |  |  |             |  |                                                                                                                                                                                                                                                                                                                  
|------- | ---------- |  |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |            |  |  |            
|Number  |            |  |  | Description
|        |            |  |  |            
|        | 3.1        |  |  |            |  | Amended and Restated Certificate of Incorporation
    (incorporated by reference as Exhibit 3.1 to the
    Companys Registration Statement on Form S-1
    (Registration No. 333-64808) (the ExpressJet
    Form S-1).                                                                                        
|        | 3.2*       |  |  |            |  | Amended and Restated Bylaws.                                                                                                                                                                                                                                                                                     
|        | 4.1        |  |  |            |  | Specimen Stock Certificate (incorporated by
    reference as Exhibit 4.1 To the ExpressJet Form S-1).                                                                                                                                                                                                            
|        | 4.2        |  |  |            |  | Rights Agreement among the Company, Continental
    Airlines, Inc. and Mellon Investor Services LLC, as Rights
    Agent, including form of Rights Certificate, updated as of
    April 1, 2002 (incorporated by reference as
    Exhibit 4.2 to the Company Form 10-Q for the quarter
    ended March 31, 2002).
|        | 10.1      |  |  |            |  | Amended and Restated Capacity Purchase Agreement
    among the Company, XJT Holdings, Inc., ExpressJet Airlines, Inc.
    and Continental Airlines, Inc. (incorporated by reference as
    Exhibit 10.1 to the ExpressJet Form S-1).                                                                             
|        | 10.2       |  |  |            |  | Master Facility and Ground Handling Agreement
    (incorporated by reference as Exhibit 10.1 to the
    ExpressJet Form S-1).                                                                                                                                                                                    
|        | 10.3       |  |  |            |  | Administrative Support and Information Services
    Provisioning Agreement (incorporated by reference as
    Exhibit 10.1 to the ExpressJet Form S-1).                                                                                                                                                           
|        | 10.4       |  |  |            |  | Form of Initial Public Offering Agreement
    (incorporated by reference as Exhibit 10.4 to the
    Companys Form 10-Q for the quarter ended
    March 31, 2002).                                                                                                                                               
|        | 10.5       |  |  |            |  | Form of Registration Rights Agreement
    (incorporated by reference as Exhibit 10.5 to the
    Companys Form 10-Q for the quarter ended
    March 31, 2002).                                                                                                                                                   
|        | 10.6       |  |  |            |  | Form of Employee Benefits Separation Agreement
    (incorporated by. reference as Exhibit 10.6 to the
    Companys Form 10-Q for the quarter ended
    March 31, 2002).                                                                                                                                         
|        | 10.7       |  |  |            |  | Amended and Restated Tax Agreement (incorporated
    by reference as Exhibit 10.1 to the Companys
    Form 10-Q for the quarter ended June 30, 2002).                                                                                                                                                           
|        | 10.8     |  |  |            |  | 2002 Stock Incentive Plan (incorporated by
    reference as Exhibit 10.8 to the Companys
    Form 10-Q for the quarter ended March 31, 2002).                                                                                                                                                                   
|        | 10.8(a)  |  |  |            |  | Form of Employee Stock Option Agreement pursuant
    to the 2002 Stock Incentive Plan (incorporated by reference as
    Exhibit 10.8(a) to ExpressJet Form S-1).                                                                                                                                                 
|        | 10.8(b)  |  |  |            |  | Form of Outside Director Stock Option Agreement
    pursuant to the 2002 Stock Incentive Plan (incorporated by
    reference as Exhibit 10.8(b) to ExpressJet Form S-1).                                                                                                                                         
|        | 10.9     |  |  |            |  | Employment Agreement between the Company and
    James B. Ream (incorporated by reference as Exhibit 10.9 to
    the ExpressJet Form S-1).                                                                                                                                                                       
|        | 10.9(a)  |  |  |            |  | Letter Agreement between the Company, Continental
    and James B. Ream dated as of April 24, 2002 (incorporated
    by reference as Exhibit 10.9(a) to the Companys
    Form 10-Q for the quarter ended March 31, 2002).                                                                                       
|        | 10.10    |  |  |            |  | Employment Agreement between the Company and
    Frederick S. Cromer (incorporated by reference as
    Exhibit 10.10 to the ExpressJet S-1.                                                                                                                                                                      
|        | 10.10(a) |  |  |            |  | Letter Agreement between the Company, Continental
    and Frederick S. Cromer dated as of April 24, 2002
    (incorporated by reference as Exhibit 10.10(a) to the
    Companys Form 10-Q for the quarter ended
    March 31, 2002).                                                                            
|        | 10.11    |  |  |            |  | Employment Agreement between the Company and
    Jerry E. Losness (incorporated by reference as Exhibit 10.9
    to the ExpressJet Form S-1).                                                                                                                                                                    
|        | 10.11(a) |  |  |            |  | Letter Agreement among the Company, Continental
    and Jerry E. Losness, dated April 24, 2002 (incorporated by
    reference as Exhibit 10.11(a) to the Companys
    Form 10-Q for the quarter ended March 31, 2002).                                                                                          

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|        |           |  |  |             |  |                                                                                                                                                                                                                                                                                                                                                                        
|------- | --------- |  |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |  |  |            
|Number  |           |  |  | Description
|        |           |  |  |            
|        | 10.12    |  |  |            |  | Purchase Agreement No. GPJ-003/96, between
    Empresa Brasileira de Aeronautica S. A. (Embraer)
    and the Company dated August 5, 1996 relating to the
    purchase of EMB 145 aircraft (P.A. 3/96)
    (incorporated by reference to Exhibit 10.3 to Amendment
    No. 1 to Embraers Form F-1 Registration
    Statement (No. 333-12220) (the Embraer F-1)).
|        | 10.12(a)  |  |  |            |  | Amendment No. 1 to P.A. 3/96 dated
    August 31, 1996 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                             
|        | 10.12(b)  |  |  |            |  | Amendment No. 2 to P.A. 3/96 dated
    May 22, 1997 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                                
|        | 10.12(c) |  |  |            |  | Amendment No. 3 to P.A. 3/96 dated
    August 20, 1997 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                             
|        | 10.12(d) |  |  |            |  | Amendment No. 4 to P.A. 3/96 dated
    October 1, 1997 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                             
|        | 10.12(e) |  |  |            |  | Amendment No. 5 to P.A. 3/96 dated
    November 12, 1997 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                           
|        | 10.12(f) |  |  |            |  | Amendment No. 6 to P.A. 3/96 dated
    August 19, 1998 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                             
|        | 10.12(g) |  |  |            |  | Amendment No. 7 to P.A. 3/96 dated
    February 19, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                           
|        | 10.12(h) |  |  |            |  | Amendment No. 8 to P.A. 3/96 dated
    March 31, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                              
|        | 10.12(i) |  |  |            |  | Amendment No. 9 to P.A. 3/96 dated
    October 29, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                            
|        | 10.12(j) |  |  |            |  | Amendment No. 10 to P.A. 3/96 dated
    October 20, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                           
|        | 10.12(k) |  |  |            |  | Amendment No. 11 to P.A. 3/96 dated
    December 15, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                          
|        | 10.12(l) |  |  |            |  | Amendment No. 12 to P.A. 3/96 dated
    February 18, 2000 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                          
|        | 10.12(m) |  |  |            |  | Amendment No. 13 to P.A. 3/96 dated
    April 28, 2000 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                             
|        | 10.12(n) |  |  |            |  | Amendment No. 14 to P.A. 3/96 dated
    April 28, 2000 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                                                                                                                                                             
|        | 10.12(o) |  |  |            |  | Amendment No. 15 to P.A. 3/96 dated
    July 25, 2000 (incorporated by reference to
    Exhibit 10.33(o) to the Annual Report on Form 10-K for
    the year ended December 31, 2001 filed by Continental
    Airlines, Inc. (the Continental 2000 10-K)).                                                                                                            
|        | 10.12(p) |  |  |            |  | Amendment No. 16 to P.A. 3/96 dated
    July 24, 2000 (incorporated by reference to
    Exhibit 10.33(p) to the Continental 2000 10-K).                                                                                                                                                                                                                                
|        | 10.12(q) |  |  |            |  | Amendment No. 17 to P.A. 3/96 dated
    November 7, 2000 (incorporated by reference to
    Exhibit 10.33(q) to the Continental 2000 10-K).                                                                                                                                                                                                                             
|        | 10.12(r) |  |  |            |  | Amendment No. 18 to P.A. 3/96 dated
    November 17, 2000 (incorporated by reference to
    Exhibit 10.33(r) to the Continental 2000 10-K).                                                                                                                                                                                                                            
|        | 10.12(s) |  |  |            |  | Amendment No. 19 to P.A. 3/96 dated
    July 31, 2001 (incorporated by reference to
    Exhibit 10.35(s)) to the Annual Report on Form 10-K
    for the year ended December 31, 2001 filed by Continental
    Airlines, Inc. (the Continental 2001 10-K).                                                                                                            
|        | 10.12(t) |  |  |            |  | Amendment No. 20 to P.A. 3/96 dated
    July 31, 2001 (incorporated by reference to
    Exhibit 10.35(t) to the Continental 2001 10-K).                                                                                                                                                                                                                                
|        | 10.12(u) |  |  |            |  | Amendment No. 21 to P.A. 3/96 dated
    October 10, 2001 (incorporated by reference to
    Exhibit 10.35(u) to the Continental 2001 10-K).                                                                                                                                                                                                                             

94



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|        |           |  |  |             |  |                                                                                                                                                                                                                               
|------- | --------- |  |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |  |  |            
|Number  |           |  |  | Description
|        |           |  |  |            
|        | 10.12(v) |  |  |            |  | Amendment No. 22 to P.A. 3/96 dated
    January 24, 2002 (incorporated by reference to
    Exhibit 10.35(v) to the Continental 2001 10-K).                                                                                    
|        | 10.12(w) |  |  |            |  | Amendment No. 23 to P.A. 3/96 dated
    February 28, 2002 (incorporated by reference to
    Exhibit 10.6 to the Quarterly Report on Form 10-Q for
    the quarterly period ended March 31, 2002 (the
    Continental 10-Q)).
|        | 10.12(x) |  |  |            |  | Amendment No. 24 to P.A. 3/96 dated
    March 28, 2002 (incorporated by reference to
    Exhibit 10.7 to the Continental 10-Q).                                                                                               
|        | 10.13    |  |  |            |  | Letter Agreement No. GPJ-004/96 dated
    August 5, 1996 between Embraer and the Company (L.A.
    4/96) (incorporated by reference to Exhibit 10.3 to
    the Embraer F-1).                                                
|        | 10.13(a)  |  |  |            |  | Amendment No. 1 to L.A. 4/96 dated
    August 31, 1996 (incorporated by reference to
    Exhibit 10.34(a) to the Continental 2000 10-K).                                                                                      
|        | 10.13(b) |  |  |            |  | Amendment No. 2 to L.A. 4/96 and Amendment
    No. 1 to L.A. 4A/96 (defined below) dated July 24,
    2000 between Embraer and the Company (incorporated by reference
    to Exhibit 10.34(b) to the Continental 2000 10-K).  
|        | 10.13(c) |  |  |            |  | Amendment No. 3 to L.A. 4/96 and Amendment
    No. 1 to L.A. 4A/96 (defined below) dated January 24,
    2002 between Embraer and ExpressJet (incorporated by reference
    to Exhibit 10.36(c) to the Continental 2001 10-K).
|        | 10.14    |  |  |            |  | Letter Agreement No. PCJ-004A/96 dated
    August 31, 1996 among Continental Airlines, the Company and
    Embraer (L.A. 4A/96) (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                         
|        | 10.15    |  |  |            |  | Letter Agreement DCT 059/2000 dated
    October 27, 2000 between the Company and Embraer
    (incorporated by reference to Exhibit 10.36 to the
    Continental 2000 10-K).                                                   
|        | 10.16    |  |  |            |  | Purchase Agreement No. DCT-054/98 dated
    December 23, 1998 between Embraer and the Company
    (P.A. 54/98) (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                          
|        | 10.16(a) |  |  |            |  | Amendment No. 1 to P.A. 54/98 dated
    July 30, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                     
|        | 10.16(b) |  |  |            |  | Amendment No. 2 to P.A. 54/98 dated
    July 30, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                     
|        | 10.16(c) |  |  |            |  | Amendment No. 3 to P.A. 54/98 dated
    October 21, 1999 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                  
|        | 10.16(d)  |  |  |            |  | Amendment No. 4 to P.A. 54/98 dated
    January 31, 2000 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                  
|        | 10.16(e) |  |  |            |  | Amendment No. 5 to P.A. 54/98 dated
    February 15, 2000 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                 
|        | 10.16(f) |  |  |            |  | Amendment No. 6 to P.A. 54/98 dated
    April 17, 2000 (incorporated by reference to
    Exhibit 10.3 to the Embraer F-1).                                                                                                    
|        | 10.16(g) |  |  |            |  | Amendment No. 7 to P.A. 54/98 dated
    July 24, 2000 (incorporated by reference to
    Exhibit 10.37(g) to the Continental 2000 10-K).                                                                                       
|        | 10.16(h) |  |  |            |  | Amendment No. 8 to P.A. 54/98 dated
    November 7, 2000 (incorporated by reference to
    Exhibit 10.37(h) to the Continental 2000 10-K).                                                                                    
|        | 10.16(i) |  |  |            |  | Amendment No. 9 to P.A. 54/98 dated
    September 20, 2000 (incorporated by reference to
    Exhibit 10.37(i) to the Continental 2000 10-K).                                                                                  
|        | 10.16(j) |  |  |            |  | Amendment No. 10 to P.A. 54/98 dated
    November 17, 2000 (incorporated by reference to
    Exhibit 10.37(j) to the Continental 2000 10-K).                                                                                  
|        | 10.16(k) |  |  |            |  | Amendment No. 11 to P.A. 54/98 dated
    July 31, 2001 (incorporated by reference to
    Exhibit 10.39(k) to the Continental 2001 10-K).                                                                                      
|        | 10.16(l) |  |  |            |  | Amendment No. 12 to P.A. 54/98 dated
    July 31, 2001 (incorporated by reference to
    Exhibit 10.39(l) to the Continental 2001 10-K).                                                                                      

95



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|        |           |  |  |             |  |                                                                                                                                                                                                                                                                                                                                                          
|------- | --------- |  |  | ----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |           |  |  |            
|Number  |           |  |  | Description
|        |           |  |  |            
|        | 10.16(m) |  |  |            |  | Amendment No. 13 to P.A. 54/98 dated
    October 10, 2001 (incorporated by reference to
    Exhibit 10.39(m) to the Continental 2001 10-K).                                                                                                                                                                                                              
|        | 10.16(n) |  |  |            |  | Amendment No. 14 to P.A. 54/98 dated
    January 24, 2002 (incorporated by reference to
    Exhibit 10.39(n) to the Continental 2001 10-K).                                                                                                                                                                                                              
|        | 10.17    |  |  |            |  | Letter of Agreement DCT-055/98 dated
    December 23, 1998 between the Company and Embraer
    (L.A. 55/98) (incorporated by reference to
    Exhibit 10.38 to the Continental 2000 10-K).                                                                                                                                                             
|        | 10.17(a) |  |  |            |  | Amendment No. 1 to L.A. 55/98 dated
    July 24, 2000 (incorporated by reference to
    Exhibit 10.38(a) to the Continental 2000 10-K).                                                                                                                                                                                                                  
|        | 10.18    |  |  |            |  | EMB-135 Financing Letter of Agreement dated
    March 23, 2000 among Continental Airlines, the Company and
    Embraer (L.A. 135) (incorporated by reference to
    Exhibit 10.39 to the Continental 2000 10-K).                                                                                                                                       
|        | 10.18(a) |  |  |            |  | Amendment No. 1 to L.A. 135 (incorporated by
    reference to Exhibit 10.39(a) to the Continental 2000 10-K).                                                                                                                                                                                                                                            
|        | 10.18(b) |  |  |            |  | Amendment No. 2 to L.A. 135 (incorporated by
    reference to Exhibit 10.39(b) to the Continental 2000 10-K).                                                                                                                                                                                                                                            
|        | 10.18(c) |  |  |            |  | Amendment No. 3 to L.A. 135 dated
    October 27, 2000 (incorporated by reference to
    Exhibit 10.39(c) to the Continental 2000 10-K).                                                                                                                                                                                                                 
|        | 10.19    |  |  |            |  | Letter Agreement DCT-058/2000 dated
    October 27, 2000 between Embraer and the Company
    (incorporated by reference to Exhibit 10.40 to the
    Continental 2000 10-K).                                                                                                                                                                              
|        | 10.20*    |  |  |            |  | Promissory Note, dated as of March 31, 2001,
    between Continental Express, Inc. and Continental Airlines,
    Inc., as amended and restated                                                                                                                                                                                                           
|        | 10.21*  |  |  |            |  | Employment Agreement between the Company and John
    F. Wombwell.                                                                                                                                                                                                                                                                                       
|        | 10.22    |  |  |            |  | Amendment No. 25 to Purchase Agreement
    No. GPJ-003/96, between Empresa Brasileira de Aeronautica
    S.A. (Embraer) and ExpressJet Airlines, Inc. dated
    July 9, 2002 relating to the purchase of EMB 145 aircraft
    (incorporated by reference as Exhibit 10.22 to the
    Companys Form 10-Q for the quarter ended
    September 30, 2002).
|        | 10.23    |  |  |            |  | Amendment No. 26 to Purchase Agreement
    No. GPJ-003/96 between Embraer and ExpressJet Airlines,
    Inc., dated August 30, 2002 relating to the purchase of EMB
    145 aircraft (incorporated by reference as Exhibit 10.23 to
    the Companys 10-Q for the quarter ended September 30,
    2002).                                                 
|        | 10.24*  |  |  |            |  | Amendment No. 27 to Purchase Agreement
    No. GPJ-003/96 between Embraer and ExpressJet Airlines,
    Inc., dated December 27, 2002 relating to the purchase of
    EMB 145 aircraft.                                                                                                                                                                   
|        | 10.25*  |  |  |            |  | Supplemental Retirement Plan.                                                                                                                                                                                                                                                                                                                            
|        | 10.26*  |  |  |            |  | Management Bonus Plan.                                                                                                                                                                                                                                                                                                                                   
|        | 21.1*     |  |  |            |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                                                                             
|        | 23.1*     |  |  |            |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                                                                                                            
|        | 24.1*     |  |  |            |  | Powers of Attorney.                                                                                                                                                                                                                                                                                                                                      
|        | 99.1*     |  |  |            |  | Section 906 Certification of Periodic
    Financial Reports by Chief Executive Officer.                                                                                                                                                                                                                                                                  
|        | 99.2*     |  |  |            |  | Section 906 Certification of Periodic
    Financial Reports by Chief Financial Officer.                                                                                                                                                                                                                                                                  



---



|  |                
|- | ---------------
|* | Filed herewith.



|  |                                                                                                                                                                                                           
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The SEC has granted confidential treatment of
    certain provisions of these exhibits. Omitted material for which
    confidential treatment has been granted has been filed
    separately with the SEC.



|   |                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------
| | The Company has applied to the SEC for
    confidential treatment for portions of this exhibit.                                         
|  
| | Indicates a management contract or compensatory
    plan or arrangement in which any director or any executive
    officer participates.

96