**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

----

 

**FORM 10-Q**

 
| **ý** | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|------------|---------------------------------------------------------------------------------------------------------|

 

**For theQuarterly Period Ended September 30, 2005.**

 

**OR**

 
| **o** | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
|-------|----------------------------------------------------------------------------------------------------------|

 

**For theTransition Period From             To**

 

**Commissionfile number 1-12175.**

 

 

**SABRE HOLDINGS CORPORATION**

(Exact name of registrant asspecified in its charter)

 
| **Delaware**                                                    | ** ** | **75-2662240**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or  other jurisdiction of incorporation or organization) |       | (I.R.S.  Employer Identification No.) |
| ** **                                                      | ** ** | ** **                            |
| **3150  Sabre Drive, Southlake, Texas**                         | ** ** | **76092**                             |
| (Address of  principal executive offices)                       |       | (Zip Code)                            |

 

Registrant’s telephone number,including area code **(682) 605-1000**

 

**NotApplicable**

(Former name, former address and formerfiscal year, if changed since last report)

 

----

 

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

 

Indicate by checkmark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct).  Yes ý  No o

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).  Yes o   No ý

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.

 

Class A Common Stock, $.01 par value—131,229,140 as of October 31,2005

 

 

----

 

**INDEX**

 

**SABREHOLDINGS CORPORATION**

 
| PART I:  | FINANCIAL  INFORMATION                                                                                        | 3  |
|---------------|---------------------------------------------------------------------------------------------------------------|----|
| Item 1.       | Financial Statements (Unaudited)                                                                              | 3  |
|          | Consolidated Balance Sheets—December 31, 2004 and September 30,  2005                          | 3  |
|          | Consolidated Statements of Income—Three and nine months ended September 30,  2004 and 2005          | 4  |
|          | Consolidated Condensed Statement of Stockholders’ Equity—Nine months  ended September 30, 2005 | 5  |
|          | Consolidated Statements of Cash Flows—Nine months ended September 30,  2004 and 2005                | 6  |
|          | Notes to Consolidated Financial Statements                                                                    | 7  |
| Item  2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                   | 34 |
| Item 3.       | Quantitative  and Qualitative Disclosures About Market Risk                                                   | 69 |
| Item 4.       | Controls  and Procedures                                                                                      | 70 |
| PART II: | OTHER  INFORMATION                                                                                            | 71 |
| Item 1.       | Legal Proceedings                                                                                             | 71 |
| Item 2.       | Unregistered Sales of Equity Securities and  Use of Proceeds                                                  | 72 |
| Item 3.       | Defaults Upon Senior Securities                                                                               | 72 |
| Item 4.       | Submission of Matters to a Vote of Security  Holders                                                          | 73 |
| Item 5.       | Other Information                                                                                             | 73 |
| Item 6.       | Exhibits                                                                                                      | 74 |
| SIGNATURE     |                                                                                                          | 75 |

 

2

----

 

**PART I.FINANCIAL INFORMATION**

 

***Item 1. Financial Statements***

 

**SABRE HOLDINGSCORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(Inthousands)**

 
| ** **                                                                                                                                           | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                           | ** ** | **(Unaudited)**              | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                           | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Current  assets**                                                                                                                                  |       |                         |       |                        |       |
| Cash                                                                                                                                                 |       | $                            | 104,722    |                        | $          | 49,671 |   |
| Restricted cash                                                                                                                                      |       | 42,392                       |       | —                      |       |
| Marketable securities                                                                                                                                |       | 447,637                      |       | 787,353                     |       |
| Accounts receivable, net                                                                                                                             |       | 634,197                      |       | 349,621                     |       |
| Prepaid expenses                                                                                                                                     |       | 44,356                       |       | 63,521                      |       |
| Deferred income taxes                                                                                                                                |       | 14,870                       |       | 23,349                      |       |
| Total current assets                                                                                                                                 |       | 1,288,174                    |       | 1,273,515                   |       |
|                                                                                                                                                 |       |                         |       |                        |       |
| **Property  and equipment**                                                                                                                          |       |                         |       |                        |       |
| Buildings and leasehold improvements                                                                                                                 |       | 318,861                      |       | 309,635                     |       |
| Furniture, fixtures and equipment                                                                                                                    |       | 42,433                       |       | 33,579                      |       |
| Computer equipment                                                                                                                                   |       | 137,482                      |       | 120,515                     |       |
| Internally developed software                                                                                                                        |       | 244,077                      |       | 195,638                     |       |
|                                                                                                                                                 |       | 742,853                      |       | 659,367                     |       |
| Less accumulated depreciation and  amortization                                                                                                      |       | (316,833                     | )          | (272,026                    | )          |
| Total property and equipment                                                                                                                         |       | 426,020                      |       | 387,341                     |       |
|                                                                                                                                                 |       |                         |       |                        |       |
| Deferred income taxes                                                                                                                                |       | 4,945                        |       | 9,955                       |       |
| Investments in joint ventures                                                                                                                        |       | 159,353                      |       | 176,249                     |       |
| Goodwill and intangible assets, net                                                                                                                  |       | 2,313,433                    |       | 988,600                     |       |
| Other assets, net                                                                                                                                    |       | 193,067                      |       | 182,317                     |       |
| **Total  assets**                                                                                                                                    |       | $                            | 4,384,992  |                        | $          | 3,017,977 |   |
|                                                                                                                                                 |       |                         |       |                        |       |
| **Liabilities  and stockholders’ equity**                                                                                                       |       |                         |       |                        |       |
| **Current  liabilities**                                                                                                                             |       |                         |       |                        |       |
| Accounts payable                                                                                                                                     |       | $                            | 185,043    |                        | $          | 177,207 |   |
| Travel supplier liabilities and related  deferred revenue                                                                                            |       | 422,286                      |       | 72,264                      |       |
| Accrued compensation and related benefits                                                                                                            |       | 59,243                       |       | 80,448                      |       |
| Accrued subscriber incentives                                                                                                                        |       | 95,940                       |       | 84,357                      |       |
| Deferred revenues                                                                                                                                    |       | 27,648                       |       | 24,906                      |       |
| Other accrued liabilities                                                                                                                            |       | 336,893                      |       | 169,110                     |       |
| Bridge facility                                                                                                                                      |       | 800,000                      |       | —                      |       |
| Total current liabilities                                                                                                                            |       | 1,927,053                    |       | 608,292                     |       |
|                                                                                                                                                 |       |                         |       |                        |       |
| Pensions and other postretirement benefits                                                                                                           |       | 154,506                      |       | 154,537                     |       |
| Other liabilities                                                                                                                                    |       | 21,099                       |       | 23,101                      |       |
| Minority interests                                                                                                                                   |       | 9,027                        |       | 5,143                       |       |
| Long-term capital lease obligation                                                                                                                   |       | 159,495                      |       | 161,114                     |       |
| Public and other notes payable                                                                                                                       |       | 430,070                      |       | 439,309                     |       |
|                                                                                                                                                 |       |                         |       |                        |       |
| Commitments and contingencies (Note 8)                                                                                                               |       |                         |       |                        |       |
|                                                                                                                                                 |       |                         |       |                        |       |
| **Stockholders’  equity**                                                                                                                       |       |                         |       |                        |       |
| Preferred stock: $0.01 par value; 20,000  shares authorized;  no shares issued                                                                       |       | —                       |       | —                      |       |
| Class A Common Stock: $0.01 par value;  250,000 shares authorized;  145,855 shares issued at September 30, 2005 and December 31, 2004 |       | 1,459                        |       | 1,459                       |       |
| Additional paid-in capital                                                                                                                           |       | 1,275,576                    |       | 1,289,574                   |       |
| Retained earnings                                                                                                                                    |       | 768,944                      |       | 644,360                     |       |
| Accumulated other comprehensive loss                                                                                                                 |       | (28,711                      | )          | (9,426                      | )          |
| Less treasury stock at cost: 14,632 and  12,913 shares, respectively                                                                                 |       | (333,526                     | )          | (299,486                    | )          |
| Total stockholders’ equity                                                                                                                      |       | 1,683,742                    |       | 1,626,481                   |       |
| **Total  liabilities and stockholders’ equity**                                                                                                 |       | $                            | 4,384,992  |                        | $          | 3,017,977 |   |

 

See Notes to Consolidated FinancialStatements.

 

3

----

 

**SABRE HOLDINGS CORPORATION**

### **CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited) (In thousands, except per shareamounts)**

 
| ** **                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues**                                 |       | $                                          | 699,706    |                                      | $          | 544,390 |   | $ | 1,900,849 |   | $ | 1,635,046 |   |
| Cost of revenues                             |       | 372,367                                    |       | 302,015                                   |       | 1,083,673 |   | 921,307 |   |
| **Gross profit**                             |       | 327,339                                    |       | 242,375                                   |       | 817,176 |   | 713,739 |   |
| **Other operating expenses**                 |       |                                       |       |                                      |       |   |   |   |   |
| Selling, general and administrative          |       | 211,945                                    |       | 153,209                                   |       | 532,661 |   | 439,293 |   |
| Amortization of intangible assets            |       | 15,823                                     |       | 11,999                                    |       | 30,644 |   | 39,348 |   |
| Total other operating expenses               |       | 227,768                                    |       | 165,208                                   |       | 563,305 |   | 478,641 |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| **Operating income**                         |       | 99,571                                     |       | 77,167                                    |       | 253,871 |   | 235,098 |   |
| **Other income (expense)**                   |       |                                       |       |                                      |       |   |   |   |   |
| Interest income                              |       | 5,303                                      |       | 4,300                                     |       | 15,772 |   | 10,841 |   |
| Interest expense                             |       | (15,801                                    | )          | (6,861                                    | )          | (31,803 | ) | (19,719 | ) |
| Gain/(loss) on sale of investments           |       | (100                                       | )          | —                                    |       | 20,494 |   | — |   |
| Gain/(loss) on derivative instruments        |       | 1,746                                      |       | —                                    |       | (8,248 | ) | — |   |
| Other, net                                   |       | 2,791                                      |       | 2,119                                     |       | 4,388 |   | 8,603 |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| Total other income (expense)                 |       | (6,061                                     | )          | (442                                      | )          | 603 |   | (275 | ) |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| **Income before provision for income taxes** |       | 93,510                                     |       | 76,725                                    |       | 254,474 |   | 234,823 |   |
| Provision for income taxes                   |       | 35,014                                     |       | 9,299                                     |       | 94,410 |   | 65,424 |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| **Net earnings**                             |       | $                                          | 58,496     |                                      | $          | 67,426 |   | $ | 160,064 |   | $ | 169,399 |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| **Earnings per common share**                |       |                                       |       |                                      |       |   |   |   |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                        |       | $                                          | 0.45       |                                      | $          | 0.50 |   | $ | 1.23 |   | $ | 1.23 |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| Diluted                                      |       | $                                          | 0.45       |                                      | $          | 0.49 |   | $ | 1.23 |   | $ | 1.22 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

4

----

 

**SABRE HOLDINGS CORPORATION**

### **CONSOLIDATEDCONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY**

**NINE MONTHS ENDED SEPTEMBER 30, 2005**

**(Unaudited) (In thousands)**

 
| ** **                                                                                       | ** ** | ** **       | ** ** | ** **           | ** ** | ** **       | ** ** | ** **   | ** ** | **Accumulated**   | ** ** | ** **   | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------|------------|----------------------|------------|------------------|------------|--------------|------------|-------------------|------------|--------------|------------|------------|------------|
| ** **                                                                                       | ** ** | **Class A** | ** ** | ** **           | ** ** | ** **       | ** ** | ** **   | ** ** | **Other**         | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Common**       | ** ** | **Additional  Paid** | ** ** | **Deferred**     | ** ** | **Retained** | ** ** | **Comprehensive** | ** ** | **Treasury** | ** ** | ** ** | ** ** |
| ** **                                                                                       | ** ** | **Stock**        | ** ** | **in  Capital**      | ** ** | **Compensation** | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** ** | **Stock**    | ** ** | **Total**  | ** ** |
| Balance  at December 31, 2004                                                               |       | $                | 1,459      |                 | $          | 1,305,739        |       | $            | (16,165    | )                 | $          | 644,360      |       | $          | (9,426     | ) | $ | (299,486 | ) | $ | 1,626,481 |   |
| Issuance  of Class A Common Stock pursuant to:                                              |       |             |       |                 |       |             |       |         |       |              |       |         |       |       |       |
| Stock  option plans                                                                              |       | —           |       | (827                 | )          | —           |       | —       |       | —            |       | 2,774        |       | 1,947      |       |
| Restricted  stock plan (net of forfeitures)                                                      |       | —           |       | (1,572               | )          | (19,572          | )          | —       |       | —            |       | 21,144       |       | —     |       |
| Restricted  stock withheld upon vesting                                                          |       | —           |       | —               |       | —           |       | —       |       | —            |       | (1,754       | )          | (1,754     | )          |
| Employee  stock purchase plan                                                                    |       | —           |       | (883                 | )          | —           |       | —       |       | —            |       | 4,783        |       | 3,900      |       |
| Tax  benefit from exercise of employee stock options                                             |       | —           |       | 171                  |       | —           |       | —       |       | —            |       | —       |       | 171        |       |
| Dividends,  $0.27 per common share                                                               |       | —           |       | —               |       | —           |       | (35,480      | )          | —            |       | —       |       | (35,480    | )          |
| Purchases  of treasury stock                                                                     |       | —           |       | —               |       | —           |       | —       |       | —            |       | (60,987      | )          | (60,987    | )          |
| Amortization  of restricted stock                                                                |       | —           |       | —               |       | 7,512            |       | —       |       | —            |       | —       |       | 7,512      |       |
| Amortization  of other stock-based compensation                                                  |       | —           |       | 1,202                |       | —           |       | —       |       | —            |       | —       |       | 1,202      |       |
| **Comprehensive income:**                                                                        |       |             |       |                 |       |             |       |         |       |              |       |         |       |       |       |
| Net  earnings                                                                                    |       | —           |       | —               |       | —           |       | 160,064      |       | —            |       | —       |       | 160,064    |       |
| Unrealized  loss on foreign currency forward and option contracts, net of deferred income  taxes |       | —           |       | —               |       | —           |       | —       |       | (9,471            | )          | —       |       | (9,471     | )          |
| Unrealized  gain on investments, net of deferred income taxes                                    |       | —           |       | —               |       | —           |       | —       |       | 600               |       | —       |       | 600        |       |
| Unrealized  foreign currency translation loss                                                    |       | —           |       | —               |       | —           |       | —       |       | (10,553           | )          | —       |       | (10,553    | )          |
| Other                                                                                            |       | —           |       | —               |       | —           |       | —       |       | 139               |       | —       |       | 139        |       |
| Total  comprehensive income                                                                      |       |             |       |                 |       |             |       |         |       |              |       |         |       | 140,779    |       |
| Other                                                                                            |       | —           |       | (19                  | )          | (10              | )          | —       |       | —            |       | —       |       | (29        | )          |
| Balance  at September 30, 2005                                                              |       | $                | 1,459      |                 | $          | 1,303,811        |       | $            | (28,235    | )                 | $          | 768,944      |       | $          | (28,711    | ) | $ | (333,526 | ) | $ | 1,683,742 |   |

 

See Notes to Consolidated FinancialStatements.

 

5

----

 

**SABRE HOLDINGS CORPORATION**

### **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited) (In thousands)**

 
| ** **                                                                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| **Operating Activities**                                                         |       |                                     |       |   |   |
| Net earnings                                                                     |       | $                                        | 160,064    |   | $ | 169,399 |   |
| Adjustments to reconcile net earnings to  cash provided by operating activities: |       |                                     |       |   |   |
| Depreciation and amortization                                                    |       | 92,120                                   |       | 94,476 |   |
| Stock-based compensation for employees                                           |       | 8,714                                    |       | 9,182 |   |
| Allowance for doubtful accounts                                                  |       | 4,520                                    |       | 15,404 |   |
| Deferred income taxes                                                            |       | 8,077                                    |       | (2,451 | ) |
| Loss on derivative instruments                                                   |       | 8,248                                    |       | — |   |
| Joint venture equity loss                                                        |       | 1,992                                    |       | 7,066 |   |
| Gain on sale of investments                                                      |       | (20,494                                  | )          | — |   |
| Other                                                                            |       | (9,974                                   | )          | (4,733 | ) |
| Changes in operating assets and  liabilities:                                    |       |                                     |       |   |   |
| Accounts receivable                                                              |       | (50,657                                  | )          | (47,001 | ) |
| Prepaid expenses                                                                 |       | 12,065                                   |       | 1,520 |   |
| Other assets                                                                     |       | 12,783                                   |       | 25,031 |   |
| Accounts payable and other accrued  liabilities                                  |       | 34,592                                   |       | 29,426 |   |
| Accrued compensation and related benefits                                        |       | (21,205                                  | )          | 13,580 |   |
| Postretirement medical and other benefits                                        |       | 108                                      |       | 7,769 |   |
| Other liabilities                                                                |       | (2,722                                   | )          | (498 | ) |
| Cash provided by operating activities                                            |       | 238,231                                  |       | 318,170 |   |
|                                                                             |       |                                     |       |   |   |
| **Investing  Activities**                                                        |       |                                     |       |   |   |
| Additions to property and equipment                                              |       | (62,727                                  | )          | (56,463 | ) |
| Purchases of marketable securities                                               |       | (8,282,115                               | )          | (7,713,992 | ) |
| Sales of marketable securities                                                   |       | 8,623,107                                |       | 7,741,718 |   |
| Proceeds from sale of investments                                                |       | 40,920                                   |       | — |   |
| Loans and investments to joint venture  partners                                 |       | (16,538                                  | )          | (30,561 | ) |
| Acquisitions (net of cash acquired)                                              |       | (1,172,320                               | )          | (37,569 | ) |
| Other investing activities                                                       |       | (17,697                                  | )          | (16,774 | ) |
| Cash used for investing activities                                               |       | (887,370                                 | )          | (113,641 | ) |
|                                                                             |       |                                     |       |   |   |
| **Financing  Activities**                                                        |       |                                     |       |   |   |
| Proceeds from bridge facility                                                    |       | 800,000                                  |       | — |   |
| Proceeds from issuance of common stock                                           |       | 4,093                                    |       | 15,364 |   |
| Dividends paid                                                                   |       | (35,480                                  | )          | (31,301 | ) |
| Purchases of treasury stock                                                      |       | (63,213                                  | )          | (165,011 | ) |
| Other financing activities                                                       |       | (1,210                                   | )          | (1,895 | ) |
| Cash provided by (used for) financing  activities                                |       | 704,190                                  |       | (182,843 | ) |
|                                                                             |       |                                     |       |   |   |
| Increase in cash                                                                 |       | 55,051                                   |       | 21,686 |   |
| Cash at beginning of period                                                      |       | 49,671                                   |       | 40,862 |   |
| Cash at end of period                                                            |       | $                                        | 104,722    |   | $ | 62,548 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

6

----

 

**SABRE HOLDINGS CORPORATION**

 

### **NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

#### ***1.***             General Information

 

SabreHoldings Corporation (“Sabre Holdings”) is a Delaware holding company. SabreInc. is the principal operating subsidiary and sole direct subsidiary of SabreHoldings. Sabre Inc. or its direct or indirect subsidiaries conduct all of ourbusinesses. In this Quarterly Report on Form 10-Q, references to the “company”,“we”, “our”, “ours” and “us” refer to Sabre Holdings and its consolidatedsubsidiaries unless otherwise stated or the context otherwise requires.

 

We are a world leader in travel commerce,marketing travel products and providing distribution and technology solutionsfor the travel industry. We operate in multiple travel distribution channels:the travel agency channel, the consumer-direct channel and the business-directchannel. Through our *Sabre*Ò(1) global distribution system(the “*Sabre*system” or “*Sabre*GDS”) subscribers can accessinformation about, and can book reservations for, among other things, airlinetrips, hotel stays, car rentals, cruises and tour packages. Our*Sabre Travel Network*Ô business operates the *Sabre*GDS and markets and distributes travel-relatedproducts and services through the travel agency and business-direct channels.We engage in consumer-direct, business-direct and travel agency travelmarketing and distribution through our *Travelocity*Ò business, includingdistribution through the newly acquired *lastminute.com*Ò business whichsignificantly expands our presence in Europe. In addition, our *Sabre Airline Solutions*Ô business is a leading provider of technology andservices, including development and consulting services, to airlines and othertravel providers.

 

#### ***2.***             Summary of Significant Accounting Policies

 

**Basis of Presentation****–**The accompanying unaudited consolidated financial statements havebeen prepared in accordance with generally accepted accounting principles (“GAAP”)in the United States for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X.Accordingly, they do not include all of the information and footnotes requiredby GAAP in the United States for complete financial statements. In the opinionof management, these financial statements contain all adjustments, consistingof normal recurring accruals, necessary to present fairly the financialposition, results of operations and cash flows for the periods indicated. Thepreparation of financial statements in accordance with GAAP in the UnitedStates requires management to make estimates and assumptions that affect theamounts reported in the financial statements and accompanying notes. Operatingresults for the three and nine months ended September 30, 2005 are notnecessarily indicative of results that may be expected for any other interimperiod or for the year ended December 31, 2005.  Our quarterly financial data should be readin conjunction with our consolidated financial statements for the year ended December 31,2004 (including the notes thereto), set forth in Sabre Holdings Corporation’sAnnual Report on Form 10-K filed with the Securities and ExchangeCommission on March 11, 2005.

 

We consolidate all of our majority-ownedsubsidiaries and companies that are not variable interest entities over whichwe exercise control through majority voting rights.  We would also consolidate all variableinterest entities of which we are the primary beneficiary.  However, no entities are currently consolidateddue to us being the primary beneficiary through operating agreements, financingagreements, or other arrangements (including variable interests held invariable interest entities).  In the fourth quarter of 2005, we expect toloan additional funds or may possibly choose to participate in futureanticipated capital calls of Zuji Holdings Limited (“Zuji”), a joint venture inwhich we hold a 13% equity stake through direct and indirect ownership. Weaccount for Zuji using the equity method. Without a pro rata contribution fromthe other equity holders, we would be required to consolidate Zuji beginning inthe fourth quarter of 2005 under the guidance of the Financial AccountingStandards Board (“FASB”) Interpretation No. 46R, *Consolidation of Variable Interest Entities.* See*“Management’s Discussion and Analysis – BusinessTrends – Investments in Travelocity.”*

 

----

(1)           Hotel Spotlight, GetThere, Jurni Network,Nexion, Sabre, Sabre Airline Solutions, Sabre Holdings, the Sabre Holdingslogo, Sabre Travel Network, SabreSonic, Surround, Showtickets.com, Site59,Site59.com, SynXis, TotalTrip, Travelocity, Travelocity Business,lastminute.com and Travelocity.com are trademarks and/or service marks of anaffiliate of Sabre Holdings Corporation. All other trademarks, service marks, or trade names are the property oftheir respective owners.   © 2005 SabreHoldings Corporation. All rights reserved.

 

7

----

 

Theconsolidated financial statements include our accounts after elimination of allsignificant intercompany balances and transactions.  We account for our interests in jointventures and investments in common stock of other companies that we do notcontrol but over which we exert significant influence using the equity method,with our share of their results classified as revenues.  Investments in the common stock of othercompanies over which we do not exert significant influence are accounted for atcost.  We periodically evaluate forimpairment equity and debt in entities accounted for as cost investments byreviewing updated financial information provided by the investee, includingvaluation information from new financing transactions by the investee andinformation relating to competitors of investees when available.  If we determine that a cost method investmentis other than temporarily impaired, the carrying value of the investment isreduced to its estimated fair value.  Todate, write-downs of investments have been insignificant to our results ofoperations.

 

**Reclassifications–**Certain reclassifications have been made to the 2004financial statements to conform to the 2005 presentation.  These reclassifications are not material,either individually or in the aggregate, to our financial statements.

 

**Revenue Recognition –**lastminute.com entities recognize revenue related to air travel at the time ofdeparture whereas the remainder of our Travelocity segment recognizes revenue relatedto air travel at the time the reservation is made.  The revenue recognition method used bylastminute.com is appropriate under U.S. GAAP, but it will be changed to conformto the method used by the remainder of our Travelocity segment.  The alignment of these accounting policies willaffect the timing of lastminute.com revenue recognition but it is notanticipated to materially impact our results of operations.

 

**Non-income taxes –** With the lastminute.com acquisition, we adopted an accounting policyregarding the recording of anticipated refund claims for certain value-addedtaxes (“VAT”) associated with customer transactions in certain regions ofEurope.  The refund claims are accrued as a contra-expense at the time theunderlying customer transaction is booked as revenue. The revenue from thecustomer transaction is recorded at the date of consumption by thecustomer.  We believe this policy appropriately recognizes thiscontra-expense consistently with the associated revenue.

 

**Advertising–**Prior to 2005, certain advertising costs weredeferred within the fiscal year to future interim periods where the benefit ofthat advertising extended beyond the quarter in which they occurred.  Beginning in the first quarter of 2005, advertisingcosts are expensed in the period in which they are incurred with no deferral tosubsequent interim periods.  Our currentadvertising strategy, particularly for Travelocity, is to generate interest intravel promotions and products where returns are more immediate, whereas in thepast our strategy was developing overall brand awareness.

 

This expensetiming change resulted in lower selling, general and administrative expensesfor the three months ended September 30, 2005 of an estimated $7 millionand higher net income of $4 million or $.03 per share.  For the nine months ended September 30,2005, this timing change resulted in lower selling, general and administrativeexpenses of an estimated $1 million and higher net income of less than $1million or $.01 per share.  The impact ofthis timing change will be neutral to advertising expense for the full year.

 

 We estimate that if we had used our currentadvertising expense method in 2004, selling, general and administrativeexpenses would have been an estimated $10 million lower and net income anestimated $6 million, or $.05 per share higher for the three months ended September 30,2004 and selling, general and administrative expenses would have been $4million higher and net income an estimated $2 million, or $.02 per share lowerfor the nine months ended September 30, 2004.

 

**Travel Supplier Liabilities andRelated Deferred Revenue –**To facilitate the provision of travel accommodations to travelers, weenter into agreements with travel suppliers for the right to market theirproducts, services and other content offerings.  Under some agreementswith travel suppliers in Europe, including air travel, we collect the fullprice of the travel from the consumer and remit the payment to the travelsupplier, after withholding our service fee. The amount due to the travel supplier and our fee is recorded in travelsupplier liabilities and related deferred revenue on the balance sheets untilthese amounts are paid to the supplier or recognized as revenue uponconsumption of the travel.  Under otheragreements with travel suppliers, content is available to us at pre-determinednet rates.  Net rate travel offerings can include air travel, hotel stays,car rentals and dynamically packaged combinations of those components.  Wemarket those offerings to travelers at a price that includes an amountsufficient to pay the travel supplier for its charge for providing the travelaccommodations, along with any applicable taxes we expect will be invoiced tous by the travel supplier on that charge, as well as additional amountsrepresenting our service fees.  For this type of business model, werequire pre-payment by the traveler at the time of booking or at a pre-determinedtime before departure.  Travel supplier liabilities also reflects amountspayable to travel suppliers under these net rate travel offering and relateddeferred revenue, which reflects the amounts representing our service fees thatare recognized as revenue when the travel has been consumed.

 

8

----

 

**EarningsPer Share****–** Basicearnings per share excludes any dilutive effect of stock awards oroptions.  The number of shares used inthe diluted earnings per share calculations includes the dilutive effect ofstock awards or options.

 

The followingtable reconciles weighted average shares used in computing basic and dilutedearnings per common share (in thousands):

 
| ** **                                                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Denominator for basic earnings per common  share - weighted-average shares            |       | 129,328                                    |       | 135,513                                   |       | 129,619 |   | 137,370 |   |
| Dilutive effect of stock awards and options                                           |       | 764                                        |       | 2,583                                     |       | 674 |   | 1,861 |   |
|                                                                                  |       |                                       |       |                                      |       |   |   |   |   |
| Denominator for diluted earnings per common  share - adjusted weighted-average shares |       | 130,092                                    |       | 138,096                                   |       | 130,293 |   | 139,231 |   |

 

Options topurchase approximately 20,896,599 and 20,321,717 weighted-average shares of ourClass A Common Stock, par value $0.01 per share (“Common Stock”), wereoutstanding during the three and nine month periods ending September 30,2005, respectively, but were excluded from the computation of diluted earningsper share because the effect would be anti-dilutive.  For the corresponding periods in 2004,anti-dilutive options to purchase approximately 16,734,112 and 16,117,038weighted-average shares of our Common Stock were excluded from the computationof diluted earnings per share.  The increasein anti-dilutive weighted-average shares from September 30, 2004 to September 30,2005 is due primarily to a lower market price for shares of our Common Stock.  The decrease in weighted-average shares from September 30,2004 to September 30, 2005 is due to our share repurchase programs.

 

**StockAwards and Options –** Currently, we account for stockawards and stock option grants using the intrinsic value method set forth inAccounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB 25”), and relatedinterpretations.  Generally, nocompensation expense is recognized for stock option grants to employees if theexercise price is at or above the fair market value of the underlying stock onthe date of grant.  Compensation expenserelating to other stock awards is recognized over the period during which theemployee renders service to us necessary to earn the award.

 

We have not made, and will not make, loans(including the acceptance of promissory notes) for the exercise of our stockoptions or the purchase of our Common Stock.

 

On December 16,2004, the FASB issued Statement of Financial Accounting Standards No. 123(Revised 2004), *Share-Based Payments* (“FAS 123R”),which is a revision of FASB Statement No. 123, *Accountingfor Stock-Based Compensation*(“FAS 123”).** FAS 123R supersedes APB 25 and amends FASBStatement No. 95, *Statement of Cash Flows.*  Generally, the approach in FAS 123R issimilar to the approach described in FAS 123. However, FAS 123R requires all share-based payments to employees,including grants of employee stock options, to be recognized on the incomestatement based on their fair values.

 

We expect toadopt FAS 123R on January 1, 2006 using the modified prospective methodand, as a result, we will begin expensing options upon adoption with no restatementof prior periods.  All options grantedprior to adoption will continue to be expensed using the fair value determinedby Black Scholes; however, options granted subsequent to our adoption of FAS123R will be valued using a lattice model which we believe provides us with amore reliable fair value. Stock option expenses will be recorded on a straight-linedbasis over the requisite service period. FAS 123R also requires that the benefits of tax deductions in excess ofrecognized compensation cost to be reported as a financing cash flow, ratherthan as an operating cash flow, as required under the current guidance.  We cannot estimate what the impact of thiswill be on our financing cash flows as this will depend on the future exercisebehavior of option holders. We expect the of adoption of FAS 123R will impactpre-tax income by approximately $18 million or $.09 per share in 2006 althoughthis amount may change based on the level of future grants of options,unforeseeable changes in our assumptions used in the lattice model such as ourstock volatility and actual forfeiture rates not matching our currentestimates.

 

9

----

 

The followingtable summarizes the pro forma effect of stock-based compensation on our net earningsand net earnings per share for the three and nine months ended September 30,2005 and 2004, as if we had accounted for such compensation at fair value (inthousands, except per share data).  Proforma footnote disclosure is no longer an alternative once FAS 123R is requiredto be adopted.

 
| ** **                                                                                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Net earnings as reported                                                                                                            |       | $                                          | 58,496     |                                      | $          | 67,426 |   | $ | 160,064 |   | $ | 169,399 |   |
| Add stock compensation expense determined  under intrinsic value method, net of income taxes                                        |       | 1,914                                      |       | 1,697                                     |       | 5,466 |   | 5,671 |   |
| Less total stock-based employee  compensation expense determined under fair value based method for all awards,  net of income taxes |       | (7,736                                     | )          | (7,396                                    | )          | (24,027 | ) | (23,559 | ) |
| Pro forma net earnings                                                                                                              |       | $                                          | 52,674     |                                      | $          | 61,727 |   | $ | 141,503 |   | $ | 151,511 |   |
|                                                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Net earnings per common share, as reported:                                                                                         |       |                                       |       |                                      |       |   |   |   |   |
|                                                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                                                                                                               |       | $                                          | 0.45       |                                      | $          | 0.50 |   | $ | 1.23 |   | $ | 1.23 |   |
| Diluted                                                                                                                             |       | $                                          | 0.45       |                                      | $          | 0.49 |   | $ | 1.23 |   | $ | 1.22 |   |
| Net earnings per common share, pro forma:                                                                                           |       |                                       |       |                                      |       |   |   |   |   |
|                                                                                                                                |       |                                       |       |                                      |       |   |   |   |   |
| Basic                                                                                                                               |       | $                                          | 0.41       |                                      | $          | 0.46 |   | $ | 1.09 |   | $ | 1.10 |   |
| Diluted                                                                                                                             |       | $                                          | 0.40       |                                      | $          | 0.45 |   | $ | 1.09 |   | $ | 1.09 |   |

 

**Restricted cash**- Restricted cash of $42 million primarily represents cash that is required tobe held to fulfill bonding requirements in Europe which are in place toprotect European travel consumers in the event a travel supplier isunable to provide the travel products purchased or we default on our obligationto pay the travel supplier.  The amounts of the required deposits areestablished annually based on forecasted transaction value sold and are********influenced by the creditstability and ratings of the company**** acting as collectionagent or merchant for the transaction (us in this instance) and do notrepresent the entire cost of the travel product purchased.  Therefore, weare contingently liable for additional amounts beyond those on deposit asrestricted cash with bonding agencies.

 

10

----

 

**Goodwill and Long-Lived Assets****–**At September 30, 2005 and December 31, 2004, ourintangible assets were comprised of the following (in thousands):

 
| ** **                                               | ** ** | ** **         | ** ** | **September 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|----------------------------------------------------------|------------|--------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                                               | ** ** | **Weighted-**      | ** ** | **Gross Carrying**          | ** ** | ** **                 | ** ** | **Gross Carrying** | ** ** | ** ** | ** ** |
| ** **                                               | ** ** | **Average Useful** | ** ** | **Amount,**                 | ** ** | **Accumulated**            | ** ** | **Amount,** | ** ** | **Accumulated** | ** ** |
| ** **                                               | ** ** | **Lives**          | ** ** | **at Cost**                 | ** ** | **Amortization**           | ** ** | **at Cost** | ** ** | **Amortization** | ** ** |
|                                                     |       |               |       |                        |       |                       |       |   |   |   |   |
| Not subject to amortization:                             |       |               |       |                        |       |                       |       |   |   |   |   |
| Goodwill                                                 |       |               |       | $                           | 1,784,806  |                       | $          | — |   | $ | 993,481 |   | $ | — |   |
|                                                     |       |               |       |                        |       |                       |       |   |   |   |   |
| Tradenames, trademarks and domain names                  |       |               |       | 314,060                     |       | —                     |       | 30,608 |   | — |   |
|                                                     |       |               |       |                        |       |                       |       |   |   |   |   |
|                                                     |       |               |       | 2,098,866                   |       | —                     |       | 1,024,089 |   | — |   |
| Subject to amortization:                                 |       |               |       |                        |       |                       |       |   |   |   |   |
| Purchased technology                                     |       | 4 years            |       | 249,944                     |       | (146,323                   | )          | 149,820 |   | (134,874 | ) |
|                                                     |       |               |       |                        |       |                       |       |   |   |   |   |
| Acquired customer relationships and  database            |       | 7 years            |       | 161,406                     |       | (37,823                    | )          | 57,145 |   | (27,270 | ) |
|                                                     |       |               |       |                        |       |                       |       |   |   |   |   |
| Non-compete agreements                                   |       | 7 years            |       | 25,809                      |       | (21,400                    | )          | 24,009 |   | (19,581 | ) |
|                                                     |       |               |       |                        |       |                       |       |   |   |   |   |
| Trademarks and brandnames                                |       | 14 years           |       | 45,305                      |       | (886                       | )          | 300 |   | (33 | ) |
|                                                     |       |               |       |                        |       |                       |       |   |   |   |   |
| Acquired contracts, supplier and  distributor agreements |       | 4 years            |       | 60,512                      |       | (28,201                    | )          | 30,667 |   | (21,601 | ) |
|                                                     |       |               |       |                        |       |                       |       |   |   |   |   |
|                                                     |       |               |       | 542,976                     |       | (234,633                   | )          | 261,941 |   | (203,359 | ) |
|                                                     |       |               |       |                        |       |                       |       |   |   |   |   |
| Total                                                    |       |               |       | $                           | 2,641,842  |                       | $          | (234,633 | ) | $ | 1,286,030 |   | $ | (203,359 | ) |

 

Amortizationexpense relating to intangible assets subject to amortization totaled $16million and $12 million for the three months ended September 30, 2005 and2004, respectively and $31 million and $39 million during the nine monthsended September 30, 2005 and 2004, respectively. Included in the ninemonths ended September 30, 2004 is an impairment charge of $3 millionfor technology-related assets. No other significant impairments of our goodwillor intangible assets have been recorded.

 

11

----

 

Estimated amortization expense relating tointangible assets subject to amortization for each of the five succeeding yearsis as follows (in thousands):

 

| 2006            |   | $      | 69,936  |   |
|-----------------|--------|--------|---------|--------|
| 2007            |   | 65,948 |    |
| 2008            |   | 57,224 |    |
| 2009            |   | 25,050 |    |
| 2010 and beyond |   | 70,864 |    |
|            |   |   |    |
| Total           |   | $      | 289,022 |   |

 

Changes in the carrying amount of goodwillduring the nine months ended September 30, 2005 and the twelve monthsended December 31, 2004 are as follows (in thousands):

 
| ** **                         | ** ** | **Sabre Travel  Network** | ** ** | **Travelocity** | ** ** | **Sabre Airline  Solutions** | ** ** | **Total** | ** ** |
|------------------------------------|------------|---------------------------|------------|-----------------|------------|------------------------------|------------|-----------|------------|
|                               |       |                      |       |            |       |                         |       |      |       |
| Balance at December 31, 2004  |       | $                         | 351,384    |            | $          | 589,347                      |       | $         | 52,750     |   | $ | 993,481 |   |
| Goodwill acquired                  |       | 30,828                    |       | 784,363         |       | —                       |       | 815,191   |       |
| Goodwill adjustments               |       | (19,545                   | )          | (2,621          | )          | (1,700                       | )          | (23,866   | )          |
|                               |       |                      |       |            |       |                         |       |      |       |
| Balance at September 30, 2005 |       | $                         | 362,667    |            | $          | 1,371,089                    |       | $         | 51,050     |   | $ | 1,784,806 |   |

 

Goodwill adjustments in Sabre Travel Network include thereclassification of $11 million from goodwill to intangible assets based onmanagements’ estimation and an independent valuation of the fair value ofassets acquired with our Gulf Air joint venture.  Other goodwill adjustments primarily consistof foreign currency exchange revaluations of goodwill.

 

The goodwill balances at December 31, 2004and September 30, 2005 include $94 million of goodwill related to ourinvestments in joint ventures. Goodwill resulting from joint ventures isincluded in investments in joint ventures in the accompanying balance sheet.

 

12

----

 

#### ***3.***             Significant Events

 

**Acquisition of lastminute.com –**OnJuly 20, 2005, we completed the acquisition of lastminute.com, a leading online travel agency and leisurecompany in Europe. The aggregate cost of the acquisition was approximately$1.2 billion ($1,070 million net of cash acquired). The aggregate cost includescash paid to lastminute.com plc stockholders of $1,023 million, debt retired of$138 million and direct acquisition costs of $12 million. We used approximately $367 million ofavailable cash and marketable securities ($264 million, net of cash acquired)to fund the acquisition and incurred $800 million in additional indebtednessunder the Bridge Facility as discussed in Note 7.  We plan to refinance the Bridge Facilitybefore it expires on August 12, 2006, and are considering various sources of funds, which may or may not includea combination of debt, cash, equity or equity-like securities.

 

With the acquisition of lastminute.com ourTravelocity segment greatly expanded its scale. We can now offer travel suppliersa greater number of potential buyers in a broader geographic area, particularlyEurope.  We expect this increased scaleto allow us to offer consumers even better travel deals and a greater range ofinternational options.  An immediatebenefit is our ability to give lastminute.com customers access to the widerange of hotels in Travelocity’s net rate hotel program. lastminute.comcustomers will have a greater range of U.S. and international travel options,and over time, Travelocity should gain more European travel choices.

 

lastminute.com has been included in ourConsolidated Income Statement from the date of acquisition, July 20,2005.  The assets acquired andliabilities assumed have been recorded on our Consolidated Balance Sheets basedon preliminary estimates of fair value by management and results of anindependent valuation.  We continue toreview the fair value of assets and liabilities acquired.  The final allocation of the purchase pricewill be based on a complete evaluation of the assets and liabilities oflastminute.com.  Accordingly, theinformation presented on our Consolidated Balance Sheets and elsewhere in thisreport may differ materially from the final purchase price allocation. Therecorded goodwill related to the acquisition of lastminute.com by ourTravelocity segment will be deductible for income tax purposes and represents avalue attributable to an increased competitive position in Europe and greater scale.

 

The following table summarizes the allocationof the purchase price and the amounts allocated to goodwill (in thousands):

 
| Working capital                                             |   | $       | (169,049  | )      |
|-------------------------------------------------------------|--------|---------|-----------|--------|
| Property and equipment                                      |   | 26,183  |      |
| Investments in joint ventures and other assets, net         |   | 556     |      |
| Tradenames (indefinite life)                                |   | 281,789 |      |
| Tradenames (14.2 year average useful life)                  |   | 45,005  |      |
| Technology (3.5 year useful life)                           |   | 95,411  |      |
| Customer and contractual relationships (7 year useful life) |   | 108,012 |      |
| Non-compete agreements (1 year useful life)                 |   | 1,800   |      |
| Goodwill                                                    |   | 784,363 |      |
| Non-current liabilities                                     |   | (1,483  | )         |
|                                                        |   |    |      |
| Total purchase price                                        |   | $       | 1,172,587 |   |

 

Working capital includesan accrual of approximately $43 million of acquisition related cost. Thisaccrual includes $9 million, net of deferred taxes, for the fair value of arestructuring plan which we began to develop shortly after the acquisition toeliminate duplicate costs including certain duplicate facilities and to restructurecertain areas of the lastminute.com business. We estimate that the restructuring plan will be completed by mid-2006. Theaccrual also includes a material contingent liability in relation to a disputewith a vendor and other items.

 

13

----

 

**Pro forma Statement of Operations Data forlastminute.com Acquisition**

 

The following unaudited pro forma informationpresents our results of operations from continuing operations as if theacquisition of lastminute.com, discussed above, had occurred as of January 1,2004.  The pro forma information has beenprepared by combining our results of operations and lastminute.com’s results ofoperations for the three and nine months ended September 30, 2004 and 2005.  Priorto the acquisition lastminute.com utilized a September 30 fiscal yearend.  The lastminute.com statements ofoperations have been adjusted to conform to our calendar year end financialstatement presentation.  For purposes of this report, unaudited proforma adjustments, including a reconciliation between GAAP in the UnitedKingdom, where lastminute.com is headquartered, and GAAP in the United States,have been made to the lastminute.com historical financial statements.  The pro forma information does not purport tobe indicative of the results that would have occurred if the acquisition hadactually been in effect earlier than July 20, 2005 nor indicative offuture performance. The lastminute.com nine months ended September 30,2005 results include several one-time adjustments totaling $43 million whichhave a material effect on the results presented.  These adjustments, which are not anticipatedin future periods, include costs incurred and amounts expensed related to theacquisition and a material disputed amount possibly due to a vendor.  Pro forma adjustments related to theacquisition of SynXis and the Gulf Air joint venture have not been included, asthe effect of doing so would be immaterial. Amounts below are presented in thousands, except per share data:

 
| ** **                            | ** ** | **Three months ended  September 30, 2004** | ** ** | **Nine months ended  September 30, 2004** | ** ** |
|---------------------------------------|------------|-------------------------------------------------|------------|------------------------------------------------|------------|
|                                  |       |                                            |       |                                           |       |
| Proforma revenues                     |       | $                                               | 662,704    |                                           | $          | 1,892,605 |   |
| Proforma net income                   |       | 58,399                                          |       | 132,846                                        |       |
|                                  |       |                                            |       |                                           |       |
| Proforma net income per common share: |       |                                            |       |                                           |       |
| Basic                                 |       | $                                               | 0.43       |                                           | $          | 0.97 |   |
| Diluted                               |       | $                                               | 0.42       |                                           | $          | 0.95 |   |
|                                  |       |                                            |       |                                           |       |
| ** **                            | ** ** | **Three months ended  September 30, 2005** | ** ** | **Nine months ended  September 30, 2005** | ** ** |
|                                  |       |                                            |       |                                           |       |
| Proforma revenues                     |       | $                                               | 730,434    |                                           | $          | 2,085,206 |   |
| Proforma net income                   |       | 59,848                                          |       | 98,595                                         |       |
|                                  |       |                                            |       |                                           |       |
| Proforma net income per common share: |       |                                            |       |                                           |       |
| Basic                                 |       | $                                               | 0.46       |                                           | $          | 0.76 |   |
| Diluted                               |       | $                                               | 0.46       |                                           | $          | 0.76 |   |

 

14

----

 

**Gulf Air Joint Venture**- On December 31, 2004, we entered into a joint venture with Gulf Air, aleading airline carrier in the Middle East, for which we will pay $31 millionduring 2005, $28 million of which has been paid as of September 30, 2005.The joint venture, Sabre Travel Network Middle East, is owned 60% by SabreTravel Network and 40% by Gulf Air and will further extend our travel networkproducts and services into the Middle East region. The joint venture willprovide technology services, bookable travel products and distribution servicesfor travel agencies, corporations and travel suppliers in the region.  In addition, Sabre Airline Solutions enteredinto a five-year revised contract with Gulf Air to provide the *SabreSonic*SM suite of products forpassenger management, as well as additional operational software and consultingservices. The goodwill resulting from this transaction is not deductible fortax purposes. Intangible assets subject to amortization will be amortized overtheir respective lives. The results of the Gulf Air joint venture areconsolidated into our financial results. The following table summarizes theallocation of the purchase price and the amounts allocated to goodwill (inthousands):

 
| Subscriber contracts (3 year useful life) |   | $      | 10,679 |   |
|-------------------------------------------|--------|--------|--------|--------|
| Net assets                                |   | 517    |   |
| Goodwill                                  |   | 20,008 |   |
| Total                                     |   | $      | 31,204 |   |

 

**Acquisitionof SynXis -** On January 19, 2005, we completed theacquisition of SynXis Corporation (“SynXis”), for approximately $41 million incash including acquisition costs, of which $37 million has been paid as of September 30,2005. The acquisition of the *SynXis*®reservation management, distribution and technology services for hotels enablesus to further build on our capabilities and offerings to hoteliers, to leveragenew hotel content for all of our travel agents, and to extend reservationtechnology currently used at approximately 6,000 hotels, primarily in theUnited States and Europe and is a part of our Sabre Travel Network segment. Theacquired goodwill is not deductible for tax purposes.  Intangible assets subject to amortizationwill be amortized over their respective lives. The following table summarizes the allocation of the purchase price andthe amounts allocated to goodwill (in thousands):

 
| Assets acquired net of liabilities assumed  |   | $      | 5,506  |   |
|---------------------------------------------|--------|--------|--------|--------|
| Purchased technology (5 year useful life)   |   | 3,900  |   |
| Customer relationships (8 year useful life) |   | 10,700 |   |
| Tradenames                                  |   | 1,800  |   |
| Goodwill                                    |   | 19,226 |   |
| Total                                       |   | $      | 41,132 |   |

 

15

----

 

**Sale of Karavel Investment**–****On March 11, 2005, we sold our interest in Karavel SA,a French tour operator. We received approximately $27 million (Euro 20 million)in cash proceeds in connection with the sale and recorded a $21 million gain inother income.

 

**Conversion of TRX Note****and Warrants** – During the third quarter2005, we converted a note receivable and warrants of TRX, Inc. (“TRX”), aprovider of transaction processing and data integration to the travel industry,into shares of TRX common stock, a majority of which we sold.  As a result of these transactions, werecorded a loss of $1 million to other income and received cash proceeds of $15million, including payments for accrued interest. Before these transactions,our Consolidated Balance Sheets reflected under other assets a net assetbalance of $17 million related to TRX, including accrued interest.  At September 30, 2005, net assets of $2million remained on our Consolidated Balance Sheets, reflecting the marketvalue of TRX shares we still owned.

 

**CostReductions******–****We incurred approximately $4 million in severance andrelated cost during 2004 for a workforce reduction of which less than $1million remains accrued for as of September 30, 2005. In June 2005, we announced a plan for aworkforce reduction and accrued approximately $3 million for severance andrelated costs due to employees under the plan, $2 million of which remainsaccrued at September 30, 2005.  Weexpect the majority of the accruals under this plan will be paid out in thefourth quarter of 2005.

 

16

----

 

#### ***4.***             Pension and Other Post Retirement Benefit Plans

 

The componentsof net periodic benefit cost of defined benefit pension plans and other definedbenefit postretirement plans for the three and nine months ended September 30,2005 and 2004 are presented in the tables below (in thousands):

 
| ** **                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| **Pension  Benefits**                        | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Components of net periodic benefit cost:** |       |                                       |       |                                      |       |   |   |   |   |
| Service cost                                 |       | $                                          | 1,510      |                                      | $          | 1,618 |   | $ | 4,529 |   | $ | 3,904 |   |
| Interest cost                                |       | 5,405                                      |       | 6,096                                     |       | 16,212 |   | 14,319 |   |
| Expected return on plan assets               |       | (6,332                                     | )          | (6,855                                    | )          | (18,341 | ) | (15,840 | ) |
| Amortization of transition asset             |       | (3                                         | )          | (3                                        | )          | (8 | ) | (11 | ) |
| Amortization of prior service cost           |       | 35                                         |       | 13                                        |       | 104 |   | 48 |   |
| Amortization of actuarial loss               |       | 1,189                                      |       | 1,017                                     |       | 3,565 |   | 2,422 |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| Net periodic benefit cost                    |       | $                                          | 1,804      |                                      | $          | 1,886 |   | $ | 6,061 |   | $ | 4,842 |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| ** **                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
| **Other  Benefits**                          | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Components of net periodic benefit cost:** |       |                                       |       |                                      |       |   |   |   |   |
| Service cost                                 |       | $                                          | 276        |                                      | $          | 697 |   | $ | 899 |   | $ | 2,280 |   |
| Interest cost                                |       | 1,040                                      |       | 1,642                                     |       | 3,201 |   | 5,373 |   |
| Amortization of transition asset             |       | 4                                          |       | 3                                         |       | 11 |   | 10 |   |
| Amortization of prior service cost           |       | (1,542                                     | )          | 78                                        |       | (4,620 | ) | 237 |   |
| Amortization of actuarial loss               |       | 661                                        |       | 666                                       |       | 2,253 |   | 2,040 |   |
|                                         |       |                                       |       |                                      |       |   |   |   |   |
| Net periodic benefit cost                    |       | $                                          | 439        |                                      | $          | 3,086 |   | $ | 1,744 |   | $ | 9,940 |   |

 

We made a $15million contribution to fund our defined benefit pension plan during the ninemonths ended September 30, 2005. During the nine months ended September 30,2004, $5 million was contributed to fund our defined benefit pension plan and$10 million was contributed in the fourth quarter of 2004. Annual contributionsto our defined benefit pension plans are based on several factors that may varyfrom year to year, therefore, past contributions are not always indicative offuture contributions.

 

On January 21, 2005,the final regulations implementing the Medicare Prescription Drug, Improvement,and Modernization Act of 2003 were issued.  We have considered the effects of the regulations and we do not expectthem to have a significant impact on our financial condition or results ofoperations.

 

17

----

 

**5.****             IncomeTaxes**

 

The provisionfor income taxes relating to continuing operations differs from amountscomputed at the statutory federal income tax rate as follows (in thousands):

 
| ** **                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income tax provision at statutory federal  income tax rate |       | $                                          | 32,729     |                                      | $          | 26,854 |   | $ | 89,066 |   | $ | 82,188 |   |
| State income taxes, net of federal benefit                 |       | 1,454                                      |       | 989                                       |       | 4,640 |   | 3,189 |   |
| Reversal of previously accrued taxes                       |       | —                                     |       | (17,939                                   | )          | — |   | (17,939 | ) |
| Other, net                                                 |       | 831                                        |       | (605                                      | )          | 704 |   | (2,014 | ) |
|                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Total provision for income taxes                           |       | $                                          | 35,014     |                                      | $          | 9,299 |   | $ | 94,410 |   | $ | 65,424 |   |

 

During the third quarter of 2004, we reversedpreviously accrued taxes of $18 million related primarily to our federal incometax treatment of lump-sum payments made to subscribers at the beginning of acontract term (“upfront subscriber incentive payments”).  During the quarter, we changed our federalincome tax treatment of such payments in accordance with recently issuedTreasury regulations, and such change is effective for our 2003 tax year.  By changing our federal income tax treatmentof these payments to comply with the new regulations effective for our 2003 taxreturn, the manner in which we treated such payments in years before 2003 willbe respected.  Accordingly, we reversedpreviously accrued taxes of $18 million related to our treatment of thesepayments for federal income tax purposes for years before 2003.

 

#### ***6.***             Derivatives

 

In order to hedge ouroperational exposure to foreign currency movements, we are a party to certainforeign currency forward and option contracts. We have designated theseinstruments as cash flow hedges. Amounts reclassified from other comprehensiveincome to earnings due to the settlement of forward and option contracts were approximately$1 million and $2 million during the three months ended September 30, 2005and 2004, respectively and approximately $5 million and $9 million for the ninemonths ended September 30, 2005 and 2004, respectively.  No hedgingineffectiveness was recorded in earnings relating to the forwards or optionsduring the nine months ended September 30, 2005 and 2004.  Theestimated fair values of the foreign currency forward and option contracts werea liability of $3 million at September 30, 2005 and an asset of $12million at December 31, 2004.  Theseforeign currency forward and option contracts were recorded in other accruedliabilities at September 30, 2005 and prepaid assets at December 31,2004 on the Consolidated Balance Sheets. We also have short term forward contracts in our lastmintue.comsubsidiaries that hedge a portion of our foreign currency exposure related totravel supplier liability payments.  Theimpact of these contracts on the financial statements for the quarter ended September 30,2005 was not significant.

 

We are also aparty to certain interest rate swap contracts.  We have designated theswaps as fair value hedges of our public notes payable and capital lease obligation.No hedging ineffectiveness was recorded in earnings relating to our interestrate swaps during the nine months ended September 30, 2005 or 2004. The estimated fair values of the interest rate swaps were a net liability of $0.4million at September 30, 2005 and a net asset of $9 million at December 31,2004. These interest rate swap contracts were recorded in otherliabilities at September 30, 2005 and other assets at December 31,2004 on the Consolidated Balance Sheet.

 

In order tooffset our currency exposure in relation to the acquisition of lastminute.com,in May 2005, we purchased an option to acquire British Pounds Sterling (“GBP”)and Euros (“EUR”) at a fixed rate at or near the closing of the transaction for$10 million.  Due to the strengthening ofthe U.S. Dollar against these currencies, this transaction resulted in a lossof $10 million to the Consolidated Statement of Income, the majority of whichwas recorded in the second quarter of 2005.

 

On June 29, 2005, we entered into forward contractsto purchase GBP 578 million and EUR 115 million to hedge the U.S. Dollar costs of the acquisition oflastminute.com, including debt held by lastminute.com.  In the third quarter of 2005, these forwardcontracts matured resulting in a gain of $2 million.

 

18

----

 

**7.****            ****Debt**

 

**Bridge FinancingArrangement—**On May 12, 2005, we entered into an$800 million unsecured bridge loan agreement (the “Bridge Facility”) thatmatures on August 12, 2006, in order to provide short-term financing inconnection with the lastminute.com acquisition and to satisfy legalrequirements for certainty of funding for the acquisition.  On July 22, 2005, we entered into anamendment to the Bridge Facility whereby all the rights and obligations ofSabre Inc. under the Bridge Facility were assumed by Sabre Holdings and SabreInc. was discharged from its obligations thereunder.

 

Effective August 1,2005, we borrowed $800 million under the Bridge Facility in order to fund aportion of the purchase of the shares of lastminute.com in connection with thelastminute.com acquisition.

 

The interestrate on borrowings under the Bridge Facility is variable, based at ourdiscretion on either the London Interbank Offered Rate (“LIBOR”) plus aborrowing spread or the prime rate, and is sensitive to our creditrating.  The LIBOR spread at our current credit rating is 0.75%,which at September 30, 2005 equated to a borrowing rate of 4.61%.

 

We may prepayall or any part of the Bridge Facility without prepayment penalties, other thanany breakage costs associated with the early repayment of loans bearinginterest based upon LIBOR.  We would berequired to repay borrowings under the Bridge Facility with net cash proceedswe receive from (i) the issuance of capital stock and indebtedness formoney borrowed with a maturity in excess of one year (excluding, among otherthings, borrowings under our existing revolving credit agreement) and (ii) assetsales with proceeds of more than $200 million.

 

The BridgeFacility contains other covenants, representations, terms and conditions thatare typical for a bridge credit facility of this type which, among otherthings, restricts our ability to incur additional debt and limits our abilityto pay in excess of $150 million during the term of the Bridge Facility asdividends or to repurchase our stock.

 

As of September 30,2005, we were in compliance with all covenants under the Bridge Facilityincluding the following financial covenants:

 
| **Covenant**                                 | ** ** | **Requirement** | ** **  | **Level at  September 30,  2005** | ** ** |
|----------------------------------------------|------------|-----------------|-------------|----------------------------------------|------------|
|                                         |       |            |        |                                   |       |
| Consolidated Leverage Ratio (Debt to EBITDA) |       | 5.0 to 1        |        | 3.14 to 1                              |       |
|                                         |       |            |        |                                   |       |
| Consolidated Net Worth                       |       | $               | 1.3 billion |                                   | $          | 1.7 billion |   |
|                                              |            |                 |             |                                        |            |  |  |

 

We willrefinance the Bridge Facility prior to its expiration on August 12, 2006with long-term financing.

 

**Revolving Credit Agreement**—On July 22, 2005, in order to facilitate theconsummation of the lastminute.com acquisition and to provide additionalliquidity and flexibility in our capital structure, we entered into certain amendmentsto our current revolving credit agreement (“Credit Facility”).  Under the amendments, Sabre Holdings assumedall of the rights and obligations of Sabre Inc. under the Credit Facility andSabre Inc. was discharged from its obligations thereunder.  The amendments also include, among otherthings: (i) amendments to certain financial and negative covenants(including amendments to provide us more flexibility under the ConsolidatedLeverage Ratio covenant, as shown in the table below, and amendments that placeadditional restrictions on the ability of our subsidiaries to incurindebtedness), (ii) amendments that prohibit us from using proceeds fromthe Credit Facility to repay the Bridge Facility to the extent such proceedsrepresent more than 50% of the then aggregate committed amount of the lendersunder the Credit Facility, (iii) amendments that increase the aggregateamount committed by those lenders to $360 million, and (iv) amendmentsthat allow us to request a future increase of the aggregate amount committed bythe lenders under the Credit Facility to as much as $500 million.

 

As of September 30,2005, there are no borrowings outstanding under this agreement. As of September 30,2005, we were in compliance with all covenants under this agreement includingthe following financial covenants:

 

19

----

 
| **Covenant**                                 | ** ** | **Requirement**   | ** ** | **Level at  September 30,  2005** | ** ** |
|----------------------------------------------|------------|-------------------|------------|----------------------------------------|------------|
|                                         |       |              |       |                                   |       |
| Consolidated Leverage Ratio (Debt to EBITDA) |       | 3.75 to 1 maximum |       | 3.14 to 1                              |       |
|                                         |       |              |       |                                   |       |
| Consolidated Net Worth                       |       | $1.3 billion      |       | $1.7 billion                           |       |

 

Our covenants under the amended revolvingcredit agreement are as follows:

 

| **As  amended on July 22, 2005**              | ** ** | **Requirement**   | ** ** |
|----------------------------------------------------|------------|-------------------|------------|
|                                               |       |              |       |
| Consolidated Leverage Ratio (Debt to EBITDA):      |       |              |       |
| July 22, 2005 through March 30, 2006     |       | 3.75 to 1 maximum |       |
| June 30, 2006 through September 30, 2006 |       | 3.50 to 1 maximum |       |
| December 31, 2006 through March 31, 2007 |       | 3.25 to 1 maximum |       |
| June 30, 2007 and thereafter                  |       | 3.00 to 1 maximum |       |

 

**Public Notes—**In August 2001, we issued through SabreHoldings Corporation $400 million in unsecured notes (“Notes”), bearinginterest at 7.35% and maturing August 1, 2011, in an underwritten publicoffering resulting in net cash proceeds to us of approximately $397million.  The Notes include certainnon-financial covenants, including restrictions on incurring certain types ofdebt or entering into certain sale and leaseback transactions. As of September 30,2005, we were in compliance with all covenant requirements under theNotes.  Sabre Inc., a 100% ownedsubsidiary of Sabre Holdings Corporation, unconditionally guarantees all debtobligations of Sabre Holdings Corporation. In conjunction with these Notes, we have entered into two interest rateswaps through 2011 for a total of $300 million, which pay us 7.35% and on whichwe pay a variable rate based on a six-month LIBOR plus 231 basis points.

 

**Capital Lease Obligation—**In June 2003, we entered into a ten-yearmaster lease for our corporate headquarters facility in Southlake, Texas, whichis accounted for as a capital lease.  Theinterest rate on the capital lease financing is fixed at 5.37%.  At the inception of the lease, we recorded anasset of approximately $168 million, along with a liability of approximately$168 million, representing the present value of the minimum lease payments dueunder the lease and the residual value guarantee discussed below.

 

At any time during the leaseterm, we have the option to terminate the lease and purchase the properties forapproximately $179 million, plus a make-whole amount, if applicable. We alsohave the option at any time up to one year prior to lease expiration to causethe properties to be sold. If this sell option is exercised, we have guaranteedthat proceeds on a sale will be at least approximately $159 million, and we areresponsible for the first dollar loss up to approximately $159 million due to adecrease in the value of the property below approximately $179 million. If thesales proceeds exceed approximately $179 million plus any sales-relatedexpenses, we retain the excess.  Inconjunction with this lease, we have entered into a $100 million interest rateswap which pays us 5.37% and on which we pay a variable rate based on asix-month LIBOR plus 153 basis points.  Under the lease agreement, we are subject to certain covenants.  As of September 30, 2005, we were incompliance with all covenants under this agreement including the followingfinancial covenant:

 
| **Covenant**           | ** ** | **Requirement** | ** **  | **Level at  September 30,  2005** | ** ** |
|------------------------|------------|-----------------|-------------|----------------------------------------|------------|
|                   |       |            |        |                                   |       |
| Consolidated Net Worth |       | $               | 1.0 billion |                                   | $          | 1.7 billion |   |
|                        |            |                 |             |                                        |            |  |  |

 

20

----

 

**8.****            ****Commitments andContingencies**

 

**Future Minimum Payments Under Contractual Obligations**—The table presented below updatessignificant obligations obtained from our acquisition of lastminute.com andother items. At September 30, 2005, future minimum payments required underthe Notes, the capital lease for our corporate headquarters facility, operatinglease agreements with terms in excess of one year for facilities, equipment andsoftware licenses and other significant contractual cash obligations were asfollows (in thousands):

 
| ** **                                             | ** ** | **Payments Due by Year**                   | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **For the Years Ending December 31,** | ** ** |
| **Contractual  Obligations**                           | ** ** | **Total**                                  | ** ** | **2005  (remaining)** | ** ** | **2006 -  2007** | ** ** | **2008 -  2009** | ** ** | **Thereafter** | ** ** |
| Notes payable (1)                                      |       | $                                          | 1,408,253  |   | $ | 9,220 |   | $ | 881,433 |   | $ | 58,800 |   | $ | 458,800 |   |
| Capital lease obligations (2)                          |       | 236,155                                    |       | 4,803 |   | 19,214 |   | 19,214 |   | 192,924 |   |
| Operating lease obligations                            |       | 129,502                                    |       | 8,869 |   | 53,365 |   | 29,539 |   | 37,729 |   |
| IT outsourcing agreement (3)                           |       | 128,936                                    |       | 21,396 |   | 107,540 |   | — |   | — |   |
| AOL agreement (4)                                      |       | 6,500                                      |       | 6,500 |   | — |   | — |   | — |   |
| Yahoo! agreement (5)                                   |       | 32,755                                     |       | 6,755 |   | 26,000 |   | — |   | — |   |
| WNS agreement (6)                                      |       | 135,472                                    |       | 931 |   | 44,796 |   | 58,942 |   | 30,803 |   |
| Pension and other benefit obligations (Note  4)        |       | 156,394                                    |       | 3,001 |   | 25,811 |   | 37,167 |   | 90,415 |   |
| Other long-term obligations (7)                        |       | 90,181                                     |       | 22,118 |   | 42,859 |   | 6,477 |   | 18,727 |   |
| Amounts receivable under non-cancelable  subleases (8) |       | (92,943                                    | )          | (1,717 | ) | (13,475 | ) | (13,078 | ) | (64,673 | ) |
|                                                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Total contractual cash obligations                     |       | $                                          | 2,231,205  |   | $ | 81,876 |   | $ | 1,187,543 |   | $ | 197,061 |   | $ | 764,725 |   |

 

----

(1) Includes all interest and principal related to our $400 millionunsecured public notes.  Also includesall interest and principal related to our $800 million Bridge Facility, whichmatures on August 12, 2006, see Note 7 of the Consolidated FinancialStatements.  Excludes the effect ofinterest rate swaps. See Note 6 of the Consolidated Financial Statements.

 

(2) Consists primarily of headquarters facility lease. Excludes the effectof interest rate swap. See Note 6 of the Consolidated Financial Statements.

 

(3) Represents minimum amounts due to Electronic Data Systems Corporation (“EDS”)under the terms of our Outsourcing Agreement.

 

(4)  Payments due under anagreement with America Online (“AOL”) that provides, among other things, thatTravelocity would be the exclusive reservations engine for AOL’s Internetproperties through March 2006.

 

(5)  Fixed payment under an agreementwith Yahoo! Inc. whereby we are the exclusive air, car and hotel booking engineon Yahoo! Travel through December 31, 2006.

 

(6)  We are committed to minimum payments to WNSNorth America, Inc., an entity that we outsource a portion of our contactcenter operations and back-office fulfillment, through 2010 based upon currentand historical transactions.

 

(7) Consists primarily of minimum payments due under various marketingagreements. Also, includes a note payable and related interest owed to a jointventure partner.

 

(8) EDS subleases from us an office facility in Fort Worth, Texas, under a subleasethat will expire in 2019.

 

21

----

 

**Future financing requirements—**Wewill be required to refinance the $800 million acquisition Bridge Facilityprior to its expiration on August 12, 2006.  We expect that funds to refinance the BridgeFacility will come from several sources, including external financing, cashgenerated from operations, and existing cash and marketable securities from ourbalance sheet.  We will evaluate multiplerefinancing alternatives, including public and private markets for debt,equity, and equity-like securities.  Thetiming and choice of refinancing options will be subject to market conditions. Otherwise,we believe available balances of cash and short-term investments, cash flowsfrom operations and funds available under our revolving credit agreement, asamended in July 2005, will be sufficient to meet our cash requirements forthe foreseeable future. We continually evaluate opportunities to sell additionalequity or debt securities, obtain credit facilities from lenders, orrestructure our long-term debt for strategic reasons or to further strengthenour financial position. If market conditions warrant, we may engage inadditional financing transactions. In addition, to the extent we consideradditional acquisitions of or investments in complementary businesses,products, services and technologies, such additional activities might affectour liquidity requirements or cause us to issue additional equity or debtsecurities.

 

**Other contingencies**—We have established a reserve for potential occupancy taxliability. The reserve represents our best estimate of our contingent liabilityfor occupancy taxes. We are involved in certain disputes and other mattersarising in the normal course of business. Additionally, we are subject toreview and assessment by various taxing authorities. Although the ultimateresolution of these matters cannot be reasonably estimated at this time, we donot believe that they will have a material adverse effect on our financialcondition or results of operations.

 

Otheraccrued liabilities on the Consolidated Balance Sheets includes our bestestimate of a reserve for an ongoing dispute with a vendor of lastminute.com.  To date, the vendor has not indicated howmuch they believe they are owed.  Theaccrual did not affect our earnings as the liability existed at the date ofacquisition and was established in the purchase price allocation forlastminute.com as a component of working capital.

 

We arealso engaged from time to time in routine legal proceedings incidental to ourbusinesses. We do not believe that any of these routine legal proceedings willhave a material impact on the business or our financial condition.

 

22

----

 

#### ***9.***             Business Segments

 

We are a worldleader in travel commerce, marketing travel products and providing distributionand technology solutions for the travel industry.  We operate in multiple travel distributionchannels: the travel agency channel, the consumer-direct channel and thecorporate or business-direct channel. Through our *Sabre* GDSsubscribers can access information about, and can book reservations for, amongother things, airline trips, hotel stays, car rentals, cruises and tourpackages. Our Sabre Travel Network business operates the *Sabre* GDS and markets and distributestravel-related products and services through the travel agency and corporatechannels. We engage in consumer-direct, business-direct and travel agencytravel marketing and distribution through our Travelocity business, includingdistribution through the newly acquired lastminute.com business whichsignificantly expands our presence in Europe. In addition, our Sabre Airline Solutions business is a leading providerof technology and services, including development and consulting services, toairlines and other travel providers.

 

Our reportablesegments are strategic business segments that offer different products andservices and are managed separately because each business requires differentmarket strategies.  The accountingpolicies of the segments are the same as those used in our consolidatedresults.  Due to similarities inproducts, services and operations, lastminute.com is included in the Travelocitysegment pursuant to SFAS 131, “Disclosures about Segments of an Enterprise andRelated Information.”  We account forsignificant intersegment transactions as if the transactions were to thirdparties, that is, at estimated current market prices.  The majority of the intersegment revenues andcost of revenues are between Travelocity and Sabre Travel Network, consistingmainly of incentives paid by Sabre Travel Network to Travelocity fortransactions processed through the *Sabre*GDS, data processing fees paid by Travelocity to Sabre Travel Network fortransactions processed through the *Sabre*GDS, transaction fees paid by Travelocity to Sabre Travel Network fortransactions facilitated through the *Sabre* GDS inwhich the travel supplier pays Travelocity directly, and fees paid by SabreTravel Network to Travelocity for corporate trips booked through the *Travelocity*® online booking technology.  In addition, Sabre Airline Solutions paysfees to Travelocity for airline trips booked through the *Travelocity*online booking technology. Personnel and related costs for the corporateheadquarters, certain legal and professional fees, and other corporate chargesare allocated to the segments through a management fee based on the relativesize of the segments and usage of corporate resources or services.  Depreciation expense on the corporateheadquarters buildings and related facilities costs are allocated to thesegments through a facility fee based on headcount.  Benefits expense, including pension expense,postretirement benefits, medical insurance and workers’ compensation areallocated to the segments based on headcount.

 

23

----

 

Selectedinformation for our three reportable segments for the three and nine monthsended September 30, 2005 and 2004 follows (in thousands).

 
| ** **                                              | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                    |       |                                       |       |                                      |       |   |   |   |   |
| Revenues from external customers                        |       |                                       |       |                                      |       |   |   |   |   |
| Sabre Travel Network                                    |       | $                                          | 389,335    |                                      | $          | 373,514 |   | $ | 1,221,627 |   | $ | 1,170,563 |   |
| Travelocity                                             |       | 240,591                                    |       | 109,916                                   |       | 484,457 |   | 290,897 |   |
| Sabre Airline Solutions                                 |       | 67,140                                     |       | 60,405                                    |       | 196,757 |   | 180,652 |   |
| Total                                                   |       | $                                          | 697,066    |                                      | $          | 543,835 |   | $ | 1,902,841 |   | $ | 1,642,112 |   |
|                                                    |       |                                       |       |                                      |       |   |   |   |   |
| Intersegment revenues:                                  |       |                                       |       |                                      |       |   |   |   |   |
| Sabre Travel Network                                    |       | $                                          | 7,555      |                                      | $          | 7,845 |   | $ | 22,450 |   | $ | 23,073 |   |
| Travelocity                                             |       | 38,687                                     |       | 35,569                                    |       | 120,155 |   | 105,152 |   |
| Total                                                   |       | $                                          | 46,242     |                                      | $          | 43,414 |   | $ | 142,605 |   | $ | 128,225 |   |
|                                                    |       |                                       |       |                                      |       |   |   |   |   |
| Equity in net income (loss) of equity method investees: |       |                                       |       |                                      |       |   |   |   |   |
| Sabre Travel Network                                    |       | $                                          | 5,727      |                                      | $          | 6,545 |   | $ | 7,288 |   | $ | 12,492 |   |
| Travelocity                                             |       | (3,087                                     | )          | (5,990                                    | )          | (9,280 | ) | (19,558 | ) |
| Total                                                   |       | $                                          | 2,640      |                                      | $          | 555 |   | $ | (1,992 | ) | $ | (7,066 | ) |
|                                                    |       |                                       |       |                                      |       |   |   |   |   |
| Consolidated revenues:                                  |       |                                       |       |                                      |       |   |   |   |   |
| Sabre Travel Network                                    |       | $                                          | 402,617    |                                      | $          | 387,904 |   | $ | 1,251,365 |   | $ | 1,206,128 |   |
| Travelocity                                             |       | 276,191                                    |       | 139,495                                   |       | 595,332 |   | 376,491 |   |
| Sabre Airline Solutions                                 |       | 67,140                                     |       | 60,405                                    |       | 196,757 |   | 180,652 |   |
| Elimination of intersegment revenues                    |       | (46,242                                    | )          | (43,414                                   | )          | (142,605 | ) | (128,225 | ) |
| Total                                                   |       | $                                          | 699,706    |                                      | $          | 544,390 |   | $ | 1,900,849 |   | $ | 1,635,046 |   |

 

24

----

 

Our ChiefOperating Decision Maker allocates resources to and assesses the performance ofeach segment using adjusted operating income. A summary of the adjusting itemsand reconciliation of adjusted operating income to consolidated operatingincome is set forth below (in thousands). In addition to the segment data see Item 2, “*Management’sDiscussion and Analysis of Financial Condition and Results of Operations***”**:

 
| ** **                                                                     | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Segment operating income (loss) excluding  adjusting items:                    |       |                                       |       |                                      |       |   |   |   |   |
| Sabre Travel Network                                                           |       | $                                          | 59,467     |                                      | $          | 77,629 |   | $ | 212,291 |   | $ | 251,423 |   |
| Travelocity                                                                    |       | 42,782                                     |       | 9,655                                     |       | 37,546 |   | 17,833 |   |
| Sabre Airline Solutions                                                        |       | 10,877                                     |       | 2,904                                     |       | 32,447 |   | 7,876 |   |
| Net corporate allocations                                                      |       | (1,056                                     | )          | (441                                      | )          | (722 | ) | 188 |   |
| Total                                                                          |       | $                                          | 112,070    |                                      | $          | 89,747 |   | $ | 281,562 |   | $ | 277,320 |   |
|                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| *Impact of  adjusting items on operating income – (increase) / decrease:* |       |                                       |       |                                      |       |   |   |   |   |
|                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Sabre Travel Network:                                                          |       |                                       |       |                                      |       |   |   |   |   |
| Intangibles amortization                                                       |       | $                                          | 3,910      |                                      | $          | 3,471 |   | $ | 13,521 |   | $ | 14,989 |   |
| Total Sabre Travel Network                                                     |       | $                                          | 3,910      |                                      | $          | 3,471 |   | $ | 13,521 |   | $ | 14,989 |   |
|                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Travelocity:                                                                   |       |                                       |       |                                      |       |   |   |   |   |
| Intangibles amortization                                                       |       | $                                          | 11,104     |                                      | $          | 7,556 |   | $ | 14,721 |   | $ | 22,408 |   |
| Stock compensation                                                             |       | 371                                        |       | 1,219                                     |       | 1,202 |   | 4,474 |   |
| Total Travelocity                                                              |       | $                                          | 11,475     |                                      | $          | 8,775 |   | $ | 15,923 |   | $ | 26,882 |   |
|                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Sabre Airline Solutions:                                                       |       |                                       |       |                                      |       |   |   |   |   |
| Intangibles amortization                                                       |       | $                                          | 558        |                                      | $          | 334 |   | $ | 1,691 |   | $ | 334 |   |
| Total Sabre Airline Solutions                                                  |       | $                                          | 558        |                                      | $          | 334 |   | $ | 1,691 |   | $ | 334 |   |
|                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Corporate:                                                                     |       |                                       |       |                                      |       |   |   |   |   |
| Other                                                                          |       | (3,444                                     | )          | —                                    |       | (3,444 | ) | 17 |   |
| Total Corporate                                                                |       | $                                          | (3,444     | )                                         | $          | — |   | $ | (3,444 | ) | $ | 17 |   |
|                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Total operating income adjusting items                                         |       | $                                          | 12,499     |                                      | $          | 12,580 |   | $ | 27,691 |   | $ | 42,222 |   |
|                                                                           |       |                                       |       |                                      |       |   |   |   |   |
| Consolidated operating income (loss):                                          |       |                                       |       |                                      |       |   |   |   |   |
| Sabre Travel Network                                                           |       | $                                          | 55,557     |                                      | $          | 74,158 |   | $ | 198,770 |   | $ | 236,434 |   |
| Travelocity                                                                    |       | 31,307                                     |       | 880                                       |       | 21,623 |   | (9,049 | ) |
| Sabre Airline Solutions                                                        |       | 10,319                                     |       | 2,570                                     |       | 30,756 |   | 7,542 |   |
| Net corporate allocations                                                      |       | 2,388                                      |       | (441                                      | )          | 2,722 |   | 171 |   |
| Total                                                                          |       | $                                          | 99,571     |                                      | $          | 77,167 |   | $ | 253,871 |   | $ | 235,098 |   |

 

Segmentoperating income for Travelocity for 2005 includes the impact of changes in thetiming of recognizing advertising expenses within the fiscal year.  See Note 2.

 

Corporateoperating income adjusting items for the third quarter of 2005 includes a $3million reversal of an accrual relating to disputes with former employeesarising from the sale of our IT outsourcing business to EDS in 2001.  A majority of these disputes were resolved inthe third quarter of 2005.

 

Theacquisition of lastminute.com has materially changed Travelocity’s segmentassets.  See Note 3 for additionalinformation.

 

25

----

 

**10.****          SupplementalGuarantor/Non-Guarantor Financial Information**

 

Certainobligations of Sabre Holdings have been solely guaranteed by its 100% ownedoperating subsidiary, Sabre Inc. There are currently no restrictions onSabre Holdings’ ability to obtain funds from Sabre Inc. in the form of adividend or loan other than typical dividend requirements under Delawarelaw.  Additionally, there are nosignificant restrictions on Sabre Inc.’s ability to obtain funds from itsdirect or indirect subsidiaries other than those that would exist under stateor foreign law.  Sabre Inc. is the soledirect subsidiary of Sabre Holdings.  Allother subsidiaries are direct or indirect subsidiaries of Sabre Inc.  These other subsidiaries are all included inthe non-guarantor financial statements. The following financial information presents condensed consolidatingbalance sheets, statements of income and statements of cash flows for SabreHoldings, Sabre Inc. and non-guarantor subsidiaries. The information hasbeen presented as if Sabre Holdings accounted for its ownership ofSabre Inc., and Sabre Inc. accounted for its ownership of thenon-guarantor subsidiaries, using the equity method of accounting.  Certain reclassifications have been made tothe 2004 financial statements to conform to the 2005 presentation.  These reclassifications are not material,either individually or in the aggregate, to our financial statements.

 

Sabre Inc.conducts the domestic operations of both the Sabre Travel Network and SabreAirline Solutions segments.  Theoperations of the Travelocity segment, the principal international operationsof the Sabre Travel Network segment as well as the principal internationaloperations of Sabre Airline Solutions, are conducted by the non-guarantorsubsidiaries.

 

Sabre Inc.and certain non-guarantor subsidiaries are parties to various intercompanyagreements that affect the amount of operating expenses reported in thefollowing condensed consolidating statements of income. Among other things,fees are paid by Sabre Inc. to a non-guarantor subsidiary relating to theuse of trademarks, tradenames, etc. owned by a non-guarantor subsidiary;incentive and marketing payments are made by Sabre Inc. to non-guarantorsubsidiaries relating to the use and distribution of the *Sabre*system; and payments are made by non-guarantor subsidiaries to Sabre Inc.for access to the *Sabre* system under the terms ofthese agreements.  During the nine monthsended September 30, 2005 and 2004, Sabre Inc. recognized operatingexpenses in connection with these agreements totaling approximately $252 millionand $181 million, respectively.  Theseamounts, and the corresponding amounts recognized by the non-guarantorsubsidiaries are eliminated in consolidation.

 

26

----

 

##### **UNAUDITEDCONSOLIDATING CONDENSED BALANCE SHEETS**

##### **SEPTEMBER 30,2005**

**(Inthousands)**

 
| ** **                                                | ** ** | **Sabre  Holdings** | ** ** | **Sabre  Incorporated** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Sabre  Consolidated** | ** ** |
|-----------------------------------------------------------|------------|---------------------|------------|-------------------------|------------|---------------------------------|------------|------------------|------------|-------------------------|------------|
| **Assets**                                                |       |                |       |                    |       |                            |       |             |       |                    |       |
| **Current Assets**                                        |       |                |       |                    |       |                            |       |             |       |                    |       |
| Cash and marketable securities                            |       | $                   | —     |                    | $          | 449,889                         |       | $                | 102,470    |                    | $          | — |   | $ | 552,359 |   |
| Restricted cash                                           |       | —              |       | —                  |       | 42,392                          |       | —           |       | 42,392                  |       |
| Accounts receivable, net                                  |       | —              |       | 285,986                 |       | 348,211                         |       | —           |       | 634,197                 |       |
| Intercompany accounts receivable (payable)                |       | —              |       | (311,396                | )          | 311,396                         |       | —           |       | —                  |       |
| Other current assets                                      |       | —              |       | 27,035                  |       | 32,191                          |       | —           |       | 59,226                  |       |
| Total current assets                                      |       | —              |       | 451,514                 |       | 836,660                         |       | —           |       | 1,288,174               |       |
|                                                      |       |                |       |                    |       |                            |       |             |       |                    |       |
| Property and equipment, net                               |       | —              |       | 343,112                 |       | 82,908                          |       | —           |       | 426,020                 |       |
|                                                      |       |                |       |                    |       |                            |       |             |       |                    |       |
| Investment in subsidiaries                                |       | 795,212             |       | 2,664,137               |       | —                          |       | (3,459,349       | )          | —                  |       |
| Intercompany notes                                        |       | 2,101,918           |       | (2,101,918              | )          | —                          |       | —           |       | —                  |       |
| Investments in joint ventures                             |       | —              |       | 4,164                   |       | 155,189                         |       | —           |       | 159,353                 |       |
| Goodwill and intangible assets, net                       |       | —              |       | 11,532                  |       | 2,301,901                       |       | —           |       | 2,313,433               |       |
| Other assets, net                                         |       | 7,037               |       | 133,674                 |       | 57,301                          |       | —           |       | 198,012                 |       |
| **Total  assets**                                         |       | $                   | 2,904,167  |                    | $          | 1,506,215                       |       | $                | 3,433,959  |                    | $          | (3,459,349 | ) | $ | 4,384,992 |   |
|                                                      |       |                |       |                    |       |                            |       |             |       |                    |       |
| **Liabilities and stockholders’ equity**             |       |                |       |                    |       |                            |       |             |       |                    |       |
| **Current liabilities**                                   |       |                |       |                    |       |                            |       |             |       |                    |       |
| Accounts payable                                          |       | 2                   |       | 92,347                  |       | 92,694                          |       | —           |       | 185,043                 |       |
| Travel supplier liabilities and related deferred  revenue |       | —              |       | —                  |       | 422,286                         |       | —           |       | 422,286                 |       |
| Accrued compensation and related benefits                 |       | —              |       | 43,071                  |       | 16,172                          |       | —           |       | 59,243                  |       |
| Other current accrued liabilities                         |       | 4,377               |       | 195,749                 |       | 260,355                         |       | —           |       | 460,481                 |       |
| Bridge facility                                           |       | 800,000             |       | —                  |       | —                          |       | —           |       | 800,000                 |       |
| Total current liabilities                                 |       | 804,379             |       | 331,167                 |       | 791,507                         |       | —           |       | 1,927,053               |       |
|                                                      |       |                |       |                    |       |                            |       |             |       |                    |       |
| Pensions and other postretirement benefits                |       | —              |       | 153,841                 |       | 665                             |       | —           |       | 154,506                 |       |
| Other liabilities                                         |       | 1,053               |       | 66,500                  |       | (46,454                         | )          | —           |       | 21,099                  |       |
| Minority interests                                        |       | —              |       | —                  |       | 9,027                           |       | —           |       | 9,027                   |       |
| Long-term capital lease obligation                        |       | —              |       | 159,495                 |       | —                          |       | —           |       | 159,495                 |       |
| Public and other notes payable                            |       | 414,993             |       | —                  |       | 15,077                          |       | —           |       | 430,070                 |       |
|                                                      |       |                |       |                    |       |                            |       |             |       |                    |       |
| Total stockholders’ equity                           |       | 1,683,742           |       | 795,212                 |       | 2,664,137                       |       | (3,459,349       | )          | 1,683,742               |       |
|                                                      |       |                |       |                    |       |                            |       |             |       |                    |       |
| **Total  liabilities and stockholders’ equity**      |       | $                   | 2,904,167  |                    | $          | 1,506,215                       |       | $                | 3,433,959  |                    | $          | (3,459,349 | ) | $ | 4,384,992 |   |

 

27

----

 

**UNAUDITEDCONSOLIDATING CONDENSED BALANCE SHEETS**

##### **DECEMBER 31,2004**

**(Inthousands)**

 
| ** **                                                | ** ** | **Sabre  Holdings** | ** ** | **Sabre  Incorporated** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Sabre  Consolidated** | ** ** |
|-----------------------------------------------------------|------------|---------------------|------------|-------------------------|------------|---------------------------------|------------|------------------|------------|-------------------------|------------|
| **Assets**                                                |       |                |       |                    |       |                            |       |             |       |                    |       |
| **Current  Assets**                                       |       |                |       |                    |       |                            |       |             |       |                    |       |
| Cash and marketable securities                            |       | $                   | —     |                    | $          | 766,401                         |       | $                | 70,623     |                    | $          | — |   | $ | 837,024 |   |
| Accounts receivable, net                                  |       | —              |       | 236,160                 |       | 113,461                         |       | —           |       | 349,621                 |       |
| Intercompany accounts receivable (payable)                |       | —              |       | (159,414                | )          | 159,414                         |       | —           |       | —                  |       |
| Other current assets                                      |       | —              |       | 22,288                  |       | 64,582                          |       | —           |       | 86,870                  |       |
| Total current assets                                      |       | —              |       | 865,435                 |       | 408,080                         |       | —           |       | 1,273,515               |       |
|                                                      |       |                |       |                    |       |                            |       |             |       |                    |       |
| Property and equipment, net                               |       | —              |       | 340,964                 |       | 46,377                          |       | —           |       | 387,341                 |       |
|                                                      |       |                |       |                    |       |                            |       |             |       |                    |       |
| Investment in subsidiaries                                |       | 692,122             |       | 1,331,046               |       | —                          |       | (2,023,168       | )          | —                  |       |
| Intercompany notes                                        |       | 1,361,035           |       | (1,361,035              | )          | —                          |       | —           |       | —                  |       |
| Investments in joint ventures                             |       | —              |       | 4,348                   |       | 171,901                         |       | —           |       | 176,249                 |       |
| Goodwill and intangible assets, net                       |       | —              |       | 12,209                  |       | 976,391                         |       | —           |       | 988,600                 |       |
| Other assets, net                                         |       | 15,200              |       | 109,312                 |       | 67,760                          |       | —           |       | 192,272                 |       |
| **Total  assets**                                         |       | $                   | 2,068,357  |                    | $          | 1,302,279                       |       | $                | 1,670,509  |                    | $          | (2,023,168 | ) | $ | 3,017,977 |   |
|                                                      |       |                |       |                    |       |                            |       |             |       |                    |       |
| **Liabilities  and stockholders’ equity**            |       |                |       |                    |       |                            |       |             |       |                    |       |
| **Current  liabilities**                                  |       |                |       |                    |       |                            |       |             |       |                    |       |
| Accounts payable                                          |       | 7,790               |       | 105,146                 |       | 64,271                          |       | —           |       | 177,207                 |       |
| Travel supplier liabilities and related deferred  revenue |       | —              |       | —                  |       | 72,264                          |       | —           |       | 72,264                  |       |
| Accrued compensation and related benefits                 |       | —              |       | 64,386                  |       | 16,062                          |       | —           |       | 80,448                  |       |
| Other current accrued liabilities                         |       | 8,504               |       | 128,412                 |       | 141,457                         |       | —           |       | 278,373                 |       |
| Total current liabilities                                 |       | 16,294              |       | 297,944                 |       | 294,054                         |       | —           |       | 608,292                 |       |
|                                                      |       |                |       |                    |       |                            |       |             |       |                    |       |
| Pensions and other postretirement benefits                |       | —              |       | 153,695                 |       | 842                             |       | —           |       | 154,537                 |       |
| Other liabilities                                         |       | 1,349               |       | (2,596                  | )          | 24,348                          |       | —           |       | 23,101                  |       |
| Minority interests                                        |       | —              |       | —                  |       | 5,143                           |       | —           |       | 5,143                   |       |
| Long-term capital lease obligation                        |       | —              |       | 161,114                 |       | —                          |       | —           |       | 161,114                 |       |
| Public and other notes payable                            |       | 424,233             |       | —                  |       | 15,076                          |       | —           |       | 439,309                 |       |
|                                                      |       |                |       |                    |       |                            |       |             |       |                    |       |
| Total stockholders’ equity                           |       | 1,626,481           |       | 692,122                 |       | 1,331,046                       |       | (2,023,168       | )          | 1,626,481               |       |
|                                                      |       |                |       |                    |       |                            |       |             |       |                    |       |
| **Total  liabilities and stockholders’ equity**      |       | $                   | 2,068,357  |                    | $          | 1,302,279                       |       | $                | 1,670,509  |                    | $          | (2,023,168 | ) | $ | 3,017,977 |   |

 

28

----

 

**UNAUDITEDCONSOLIDATING CONDENSED STATEMENTS OF INCOME**

##### **FOR THE THREEMONTHS ENDED SEPTEMBER 30, 2005**

##### **(In thousands)**

 
| ** **                                    | ** ** | **Sabre  Holdings** | ** ** | **Sabre  Incorporated** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Sabre  Consolidated** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|-------------------------|------------|---------------------------------|------------|------------------|------------|-------------------------|------------|
|                                          |       |                |       |                    |       |                            |       |             |       |                    |       |
| Revenues                                      |       | $                   | —     |                    | $          | 380,833                         |       | $                | 451,966    |                    | $          | (133,093 | ) | $ | 699,706 |   |
| Operating expenses                            |       | 648                 |       | 342,538                 |       | 390,042                         |       | (133,093         | )          | 600,135                 |       |
| Operating income (loss)                       |       | (648                | )          | 38,295                  |       | 61,924                          |       | —           |       | 99,571                  |       |
| **Other  income (expense)**                   |       |                |       |                    |       |                            |       |             |       | —                  |       |
| Interest income                               |       | 32,935              |       | 3,729                   |       | 4,965                           |       | (36,326          | )          | 5,303                   |       |
| Interest expense                              |       | (12,586             | )          | (38,733                 | )          | (808                            | )          | 36,326           |       | (15,801                 | )          |
| Income from subsidiaries                      |       | 45,588              |       | 43,981                  |       | —                          |       | (89,569          | )          | —                  |       |
| Other, net                                    |       | —              |       | 1,775                   |       | 2,662                           |       | —           |       | 4,437                   |       |
| Total other income (expense)                  |       | 65,937              |       | 10,752                  |       | 6,819                           |       | (89,569          | )          | (6,061                  | )          |
| **Income  before provision for income taxes** |       | 65,289              |       | 49,047                  |       | 68,743                          |       | (89,569          | )          | 93,510                  |       |
| Provision for income taxes                    |       | 6,793               |       | 3,459                   |       | 24,762                          |       | —           |       | 35,014                  |       |
| **Net  income**                               |       | $                   | 58,496     |                    | $          | 45,588                          |       | $                | 43,981     |                    | $          | (89,569 | ) | 58,496 |   |
|                                               |            |                     |            |                         |            |                                 |            |                  |            |                         |            |  |  |  |  |  |

 

##### **UNAUDITEDCONSOLIDATING CONDENSED STATEMENTS OF INCOME**

##### **FOR THE THREEMONTHS ENDED SEPTEMBER 30, 2004**

**(Inthousands)**

 
| ** **                                    | ** ** | **Sabre  Holdings** | ** ** | **Sabre  Incorporated** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Sabre  Consolidated** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|-------------------------|------------|---------------------------------|------------|------------------|------------|-------------------------|------------|
|                                          |       |                |       |                    |       |                            |       |             |       |                    |       |
| Revenues                                      |       | $                   | —     |                    | $          | 377,093                         |       | $                | 289,060    |                    | $          | (121,763 | ) | $ | 544,390 |   |
| Operating expenses                            |       | 549                 |       | 320,658                 |       | 267,779                         |       | (121,763         | )          | 467,223                 |       |
| Operating income (loss)                       |       | (549                | )          | 56,435                  |       | 21,281                          |       | —           |       | 77,167                  |       |
| **Other  income (expense)**                   |       |                |       |                    |       |                            |       |             |       |                    |       |
| Interest income                               |       | 28,191              |       | 3,592                   |       | 1,088                           |       | (28,571          | )          | 4,300                   |       |
| Interest expense                              |       | (4,547              | )          | (30,490                 | )          | (395                            | )          | 28,571           |       | (6,861                  | )          |
| Income from subsidiaries                      |       | 52,431              |       | 14,519                  |       | —                          |       | (66,950          | )          | —                  |       |
| Other, net                                    |       | —              |       | 2,100                   |       | 19                              |       | —           |       | 2,119                   |       |
| Total other income (expense)                  |       | 76,075              |       | (10,279                 | )          | 712                             |       | (66,950          | )          | (442                    | )          |
| **Income  before provision for income taxes** |       | 75,526              |       | 46,156                  |       | 21,993                          |       | (66,950          | )          | 76,725                  |       |
| Provision for income taxes                    |       | 8,100               |       | (6,275                  | )          | 7,474                           |       | —           |       | 9,299                   |       |
| **Net  income**                               |       | $                   | 67,426     |                    | $          | 52,431                          |       | $                | 14,519     |                    | $          | (66,950 | ) | $ | 67,426 |   |

 

29

----

 

**UNAUDITEDCONSOLIDATING CONDENSED STATEMENTS OF INCOME**

##### **FOR THE NINE MONTHS ENDED SEPTEMBER 30,2005**

**(Inthousands)**

 
| ** **                                    | ** ** | **Sabre  Holdings** | ** ** | **Sabre  Incorporated** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Sabre  Consolidated** | ** ** |
|-----------------------------------------------|------------|---------------------|------------|-------------------------|------------|---------------------------------|------------|------------------|------------|-------------------------|------------|
|                                          |       |                |       |                    |       |                            |       |             |       |                    |       |
| Revenues                                      |       | $                   | —     |                    | $          | 1,179,481                       |       | $                | 1,091,527  |                    | $          | (370,159 | ) | $ | 1,900,849 |   |
| Operating expenses                            |       | 2,474               |       | 1,013,071               |       | 1,001,592                       |       | (370,159         | )          | 1,646,978               |       |
| Operating income (loss)                       |       | (2,474              | )          | 166,410                 |       | 89,935                          |       | —           |       | 253,871                 |       |
| **Other  income (expense)**                   |       |                |       |                    |       |                            |       |             |       | —                  |       |
| Interest income                               |       | 83,173              |       | 11,583                  |       | 13,160                          |       | (92,144          | )          | 15,772                  |       |
| Interest expense                              |       | (23,243             | )          | (99,120                 | )          | (1,584                          | )          | 92,144           |       | (31,803                 | )          |
| Income from subsidiaries                      |       | 122,419             |       | 79,420                  |       | —                          |       | (201,839         | )          | —                  |       |
| Other, net                                    |       | —              |       | (7,982                  | )          | 24,616                          |       | —           |       | 16,634                  |       |
| Total other income (expense)                  |       | 182,349             |       | (16,099                 | )          | 36,192                          |       | (201,839         | )          | 603                     |       |
| **Income  before provision for income taxes** |       | 179,875             |       | 150,311                 |       | 126,127                         |       | (201,839         | )          | 254,474                 |       |
| Provision for income taxes                    |       | 19,811              |       | 27,892                  |       | 46,707                          |       | —           |       | 94,410                  |       |
| **Net  income**                               |       | $                   | 160,064    |                    | $          | 122,419                         |       | $                | 79,420     |                    | $          | (201,839 | ) | $ | 160,064 |   |

 

##### **UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF INCOME**

##### **FOR THE NINE MONTHS ENDED SEPTEMBER 30,2004**

**(Inthousands)**

 
| ** **                                   | ** ** | **Sabre  Holdings** | ** ** | **Sabre  Incorporated** | ** ** | **Non-Guarantor  Subsidiaries** | ** ** | **Eliminations** | ** ** | **Sabre  Consolidated** | ** ** |
|----------------------------------------------|------------|---------------------|------------|-------------------------|------------|---------------------------------|------------|------------------|------------|-------------------------|------------|
|                                         |       |                |       |                    |       |                            |       |             |       |                    |       |
| Revenues                                     |       | $                   | —     |                    | $          | 1,143,611                       |       | $                | 863,216    |                    | $          | (371,781 | ) | $ | 1,635,046 |   |
| Operating expenses                           |       | 2,842               |       | 980,423                 |       | 788,464                         |       | (371,781         | )          | $                       | 1,399,948  |   |
| Operating income (loss)                      |       | (2,842              | )          | 163,188                 |       | 74,752                          |       | —           |       | 235,098                 |       |
| **Other income (expense)**                   |       |                |       |                    |       |                            |       |             |       |                    |       |
| Interest income                              |       | 78,238              |       | 8,475                   |       | 6,423                           |       | (82,295          | )          | 10,841                  |       |
| Interest expense                             |       | (12,864             | )          | (88,138                 | )          | (1,012                          | )          | 82,295           |       | (19,719                 | )          |
| Income from subsidiaries                     |       | 128,426             |       | 54,830                  |       | —                          |       | (183,256         | )          | —                  |       |
| Other, net                                   |       | —              |       | 8,328                   |       | 275                             |       | —           |       | 8,603                   |       |
| Total other income (expense)                 |       | 193,800             |       | (16,505                 | )          | 5,686                           |       | (183,256         | )          | (275                    | )          |
| **Income before provision for income taxes** |       | 190,958             |       | 146,683                 |       | 80,438                          |       | (183,256         | )          | 234,823                 |       |
| Provision for income taxes                   |       | 21,559              |       | 18,257                  |       | 25,608                          |       | —           |       | 65,424                  |       |
| **Net income**                               |       | $                   | 169,399    |                    | $          | 128,426                         |       | $                | 54,830     |                    | $          | (183,256 | ) | $ | 169,399 |   |

 

30

----

 

**UNAUDITEDCONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS**

##### **FOR THE NINE MONTHSENDED SEPTEMBER 30, 2005**

**(Inthousands)**

 
| ** **                                          | ** ** | **Sabre  Holdings** | ** ** | **Sabre  Inc.** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Sabre  Consolidated** | ** ** |
|-----------------------------------------------------|------------|---------------------|------------|-----------------|------------|-----------------------------------|------------|--------------------------|------------|-------------------------|------------|
|                                                |       |                |       |            |       |                              |       |                     |       |                    |       |
| **Operating Activities**                            |       |                |       |            |       |                              |       |                     |       |                    |       |
| Cash provided by operating activities               |       | $                   | —     |            | $          | 143,532                           |       | $                        | 94,699     |                    | $          | — |   | $ | 238,231 |   |
| **Investing Activities**                            |       |                |       |            |       |                              |       |                     |       |                    |       |
| Additions to property and equipment                 |       | —              |       | (41,821         | )          | (20,906                           | )          | —                   |       | (62,727                 | )          |
| Net sales of marketable securities                  |       | —              |       | 316,755         |       | 24,237                            |       | —                   |       | 340,992                 |       |
| Proceeds from sale of investments                   |       | —              |       | —          |       | 40,920                            |       | —                   |       | 40,920                  |       |
| Loans and investments to joint venture  partners    |       | —              |       | —          |       | (16,538                           | )          | —                   |       | (16,538                 | )          |
| Acquisitions (net of cash acquired)                 |       | —              |       | (41,708         | )          | (1,130,612                        | )          | —                   |       | (1,172,320              | )          |
| Other investing activities                          |       | —              |       | (10,000         | )          | (7,697                            | )          | —                   |       | (17,697                 | )          |
| Cash provided by (used for) investing  activities   |       | —              |       | 223,226         |       | (1,110,596                        | )          | —                   |       | (887,370                | )          |
| **Financing Activities**                            |       |                |       |            |       |                              |       |                     |       |                    |       |
| Proceeds from bridge facility                       |       | 800,000             |       | —          |       | —                            |       | —                   |       | 800,000                 |       |
| Proceeds from issuance of common stock              |       | 4,093               |       | —          |       | —                            |       | —                   |       | 4,093                   |       |
| Dividends paid                                      |       | (35,480             | )          | —          |       | —                            |       | —                   |       | (35,480                 | )          |
| Contributions (distributions) from  affiliates, net |       | (705,400            | )          | (366,702        | )          | 1,072,102                         |       | —                   |       | —                  |       |
| Purchases of treasury stock                         |       | (63,213             | )          | —          |       | —                            |       | —                   |       | (63,213                 | )          |
| Other financing activities                          |       | —              |       | (1,210          | )          | —                            |       | —                   |       | (1,210                  | )          |
| Cash provided by (used for) financing  activities   |       | —              |       | (367,912        | )          | 1,072,102                         |       | —                   |       | 704,190                 |       |
|                                                |       |                |       |            |       |                              |       |                     |       |                    |       |
| Increase (decrease) in cash                         |       | —              |       | (1,154          | )          | 56,205                            |       | —                   |       | 55,051                  |       |
| Cash at beginning of period                         |       | —              |       | 7,467           |       | 42,204                            |       | —                   |       | 49,671                  |       |
| Cash at end of period                               |       | $                   | —     |            | $          | 6,313                             |       | $                        | 98,409     |                    | $          | — |   | $ | 104,722 |   |

 

31

----

 

##### **UNAUDITEDCONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS**

##### **FOR THE NINE MONTHSENDED SEPTEMBER 30, 2004**

**(Inthousands)**

 
| ** **                                          | ** ** | **Sabre  Holdings** | ** ** | **Sabre  Inc.** | ** ** | **Non-  Guarantor  Subsidiaries** | ** ** | **Eliminating  Entries** | ** ** | **Sabre  Consolidated** | ** ** |
|-----------------------------------------------------|------------|---------------------|------------|-----------------|------------|-----------------------------------|------------|--------------------------|------------|-------------------------|------------|
|                                                |       |                |       |            |       |                              |       |                     |       |                    |       |
| **Operating  Activities**                           |       |                |       |            |       |                              |       |                     |       |                    |       |
| Cash provided by operating activities               |       | $                   | —     |            | $          | 229,358                           |       | $                        | 88,812     |                    | $          | — |   | $ | 318,170 |   |
| **Investing  Activities**                           |       |                |       |            |       |                              |       |                     |       |                    |       |
| Additions to property and equipment                 |       | —              |       | (41,009         | )          | (15,454                           | )          | —                   |       | (56,463                 | )          |
| Net sales of marketable securities                  |       | —              |       | 26,064          |       | 1,662                             |       | —                   |       | 27,726                  |       |
| Loans and investments to joint venture  partners    |       | —              |       | —          |       | (30,561                           | )          | —                   |       | (30,561                 | )          |
| Acquisitions (net of cash acquired)                 |       | —              |       | —          |       | (37,569                           | )          | —                   |       | (37,569                 | )          |
| Other investing activities                          |       | —              |       | —          |       | (16,774                           | )          | —                   |       | (16,774                 | )          |
| Cash used for investing activities                  |       | —              |       | (14,945         | )          | (98,696                           | )          | —                   |       | (113,641                | )          |
| **Financing  Activities**                           |       |                |       |            |       |                              |       |                     |       |                    |       |
| Proceeds from issuance of common stock              |       | 15,364              |       | —          |       | —                            |       | —                   |       | 15,364                  |       |
| Dividends paid                                      |       | (31,301             | )          | —          |       | —                            |       | —                   |       | (31,301                 | )          |
| Contributions (distributions) from  affiliates, net |       | 180,948             |       | (210,041        | )          | 29,093                            |       | —                   |       | —                  |       |
| Purchases of treasury stock                         |       | (165,011            | )          | —          |       | —                            |       | —                   |       | (165,011                | )          |
| Other financing activities                          |       | —              |       | (838            | )          | (1,057                            | )          | —                   |       | (1,895                  | )          |
| Cash provided by (used for) financing  activities   |       | —              |       | (210,879        | )          | 28,036                            |       | —                   |       | (182,843                | )          |
|                                                |       |                |       |            |       |                              |       |                     |       |                    |       |
| Increase in cash                                    |       | —              |       | 3,534           |       | 18,152                            |       | —                   |       | 21,686                  |       |
| Cash at beginning of period                         |       | —              |       | 9,565           |       | 31,297                            |       | —                   |       | 40,862                  |       |
| Cash at end of period                               |       | $                   | —     |            | $          | 13,099                            |       | $                        | 49,449     |                    | $          | — |   | $ | 62,548 |   |

 

32

----

 

#### ***11.          Subsequent Events***

 

On November 3, 2005, we advised affected employees that we amendedThe Sabre Inc. Legacy Pension Plan (the “Pension Plan”) and our SupplementalExecutive Retirement Plans (the “SERPs”), effective December 31, 2005, tofreeze accruals of credit under the Pension Plan, and under the Pension Plancomponent of the SERPs, for years of service or increases in compensation orboth (except for determining vesting and benefit eligibility). The Pension Planprovides retirement benefits for certain eligible employees. The SERPs provideretirement benefits for certain eligible key employees, including certainexecutive officers. The amendments do not affect any benefit accrued on orbefore December 31, 2005, and the Pension Plan and SERPs will continue tooperate and pay these accrued benefits. A copy of the amended Pension Plan andeach of the affected SERPs will be filed with our annual report on Form 10-Kfor the year ended December 31, 2005.

 

33

----

 

**Item 2.    Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**SABRE HOLDINGS CORPORATION**

**RESULTS OF OPERATIONS**

 

We begin Management’s Discussion and Analysis ofFinancial Condition and Results of Operations with an overview of our businessby segment.   This is followed by adiscussion of various trends that are occurring in our business and how thosetrends are impacting our business.  Wefollow the discussion on trends with a description of the revenues and expensesby segment which is followed by our period over period results of operationsfor the described revenues and expenses. We then discuss our balance sheet and statement of cash flows in the “*Liquidity and Capital Resources”* section.  Lastly, we discuss our Critical AccountingPolicies that we believe are important in understanding judgments andassumptions incorporated into our financial results.

 

The following discussionand analysis contains forward-looking statements about trends, uncertaintiesand our plans and expectations of what may happen in the future.  Forward-looking statements are based on anumber of assumptions and estimates that are inherently subject to significantrisks and uncertainties, and our results could differ materially from theresults anticipated by our forward-looking statements as a result of many knownor unknown factors, including, but not limited to, those factors discussedbelow in this Item under the sub-heading “*Risk Factors*.”

 

### **Overview of Business**

 

We operate our business through the followingbusiness segments:

 

**SabreTravel Network:** Our Sabre Travel Network segmentmarkets and distributes travel-related products and services through the travelagency and corporate channels. Travel agencies, both online and brick andmortar, subscribe to our services. Sabre Travel Network primarily generatesrevenues from transaction fees charged to airlines and non-air travel supplierswho distribute their products and services through the *Sabre*system.  Sabre Travel Network markets the *Sabre*GDS to travel suppliers, travel agency subscribers (online and brick andmortar) and corporations. A “transaction” is defined as any travel reservationthat generates a fee paid directly to us including but not limited to thefollowing:  traditional booking fees paidby travel suppliers, non-traditional transaction fees paid by travel suppliers,transaction fees paid by travel agency subscribers, and transaction fees paidby corporations related to our online booking tool. Our services providetravel agency subscribers information about, and the ability to reserve for andpurchase travel-related products and services from airlines, hotels, car rentalcompanies, cruise lines and others. We also provide travel agency officeautomation tools, enable travel agencies to provide services via the Internetand provide reservation management, distribution and technology services tohotel properties.

 

**Travelocity:**OurTravelocity segment markets and distributes travel-related products andservices directly to individuals, including leisure travelers and businesstravelers, through Travelocity owned websites and contact centers, and websitesand contact centers owned by its supplier, travel agency and distributionpartners. Travelocity customers can access offerings, pricing and informationabout airlines, hotels, car rental companies, cruise lines, vacation andlast-minute travel packages from *Site59.com*® and lastminute.com, and othertravel-related services such as show tickets and tours from lastminute.com and *Showtickets.com**TM*.For business travelers, *TravelocityBusinessTM* provides the integrated online corporate travel technologyand full-service offering of our *GetThere*âproduct along with the online expertise of Travelocity. For corporations, Travelocity Business offers a full service corporatetravel agency and GetThere provides a corporate online travel reservationsystem that works in conjunction with any travel agency a company chooses.

 

Travelocity facilitates transactions between travelsuppliers and consumers for the booking of, and payment for, travelaccommodations. Travelocity generates net revenue from providing suchfacilitation services equal to the total amount paid by the customer forproducts and services, minus its payment to the travel supplier. Travelocityalso generates revenues from commissions or transaction fees from travelsuppliers for the purchase of travel products and services pursuant toreservations made through our system. Additionally, Travelocity revenuesinclude service fees charged to customers and advertising revenues.

 

**Sabre AirlineSolutions:**Sabre Airline Solutions is a global leaderin providing passenger management solutions, software products and relatedservices, and consulting services to help airlines simplify operations andlower costs. We provide airlinereservations, inventory and check-in hosting solutions that help airlinesaddress the challenge of building and retaining customer loyalty throughenhanced customer-centric offerings and service while also reducing costs.  We also supply the decision-support softwareand technology necessary for airlines to improve profitability, increaserevenue, streamline operations and improve workflow.  We also offer a complete range of consultingservices to the airline industry, ranging from one time to extendedengagements. Typical engagements include projects such as achieving thenecessary standards to join an alliance, preparing for privatization andoptimizing current operations. Clients include airlines, airports,manufacturers and governments, as well as individuals, travel agencies andmembers of the financial community.

 

34

----

 

In the nine months ended September 30, 2005,approximately 61.3% of our revenue was generated from Sabre Travel Network, 29.1%from Travelocity and 9.6% from Sabre Airline Solutions based on segment resultsthat include intersegment revenues.  Forthe nine months ended September 30, 2004, revenues (including intersegmentrevenue) as a percentage of total revenues were 68.4% for Sabre Travel Network,21.4% for Travelocity and 10.2% for Sabre Airline Solutions.

 

## **Business Trends**

##  

The following trends represent what managementbelieves are the most significant challenges and opportunities that arecurrently impacting our business and industry. The discussion also includesmanagement’s best assessment of what effects these trends are having on ourbusiness. Potential effects of the following trends are discussedin *Risk Factors*.

 

*Transaction Volumes. *During the nine months ended September 30, 2005, Sabre TravelNetwork experienced transaction growth of 4.1% compared to the first ninemonths of 2004 due primarily to an increase in non-traditionaltransactions.   See *“BusinessTrends - Changing our Sabre Travel Network Business Model...”*

 

**Factors Influencing the Travel Industry,Particularly Airlines**.  Our revenues are highlydependent on the travel and transportation industries, and particularly onairlines.  Most of our revenue is derivedfrom airlines, hotel operators, car rental companies, cruise and tour operators,and other suppliers in the travel and transportation industries.  Our revenue increases and decreases with thelevel of travel and transportation transactions processed by our systems.  Consequently, our revenues are highly subjectto declines in, or disruptions to, travel and transportation due to factorsentirely out of our control, such as ongoing travel security concerns due to potentialterrorist attacks, health concerns or severe weather.  In addition, we depend on a relatively smallnumber of major airlines for a significant portion of our revenues.  Several of these airlines are experiencingfinancial difficulty, some (including U.S. Airways Group Inc. and America WestHoldings Corp.) are consolidating, some (including United Air Lines, Inc.,U.S. Airways Group, Inc., Delta Air Lines Inc., Northwest Airlines Corp.and ATA Holdings Corporation) have sought bankruptcy protection and stillothers may consider bankruptcy relief. See “*Risk Factors*—*Our Revenues Are Highly Dependent....”*

 

*Supplier Efforts to Control TravelDistribution*.  Airlines have been working aggressively forseveral years to divert transactions away from GDS networks and towardsalternative travel distribution channels, including websites that they controland online travel agencies that book directly with those airlines.  See “*RiskFactors — Some Travel Suppliers are Seeking Alternative Distribution Models....*”  The efforts of suppliers to divert transactionsaway from independent distributors (such as online and conventional travelagencies using our *Sabre* GDS)towards supplier-direct channels (such as supplier-controlled websites and callcenters) are referred to as “channel shift.” Over the last two years, we have experienced a moderation in the rate ofchannel shift, which we attribute partly to our current pricing options forsuppliers, discussed below, and partly due to a rebound in corporatetravel.  Over the last several years wehave experienced channel shift at an annualized rate of approximately twopercentage points.  This rate of channelshift, which varies quarter-to-quarter, is an encouraging indicator, but it isnot clear if this pattern will continue over the long-term.

 

**Competition and Consolidation.**  Themarketplace for travel distribution is intensely competitive.  We routinely face new competitors and newmethods of travel distribution. Suppliers and third parties seek to create distribution systems thatbook directly with travel suppliers at a reduced cost. These alternativedistribution channels include limited travel distributors, or “LTDs.” Thesesystems are not global and offer a limited subset of transactions from alimited subset of air carriers in one market segment.  In addition, these systems still rely on thescale and functionality of a GDS for a complete travel distribution solution,as they do not offer a comprehensive system and do not have the service andsupport infrastructure to adequately work with travel management companies orcorporations.  They require theintegration of a new, stand alone system into most existing agency or corporatebooking tool workflows. Many of these alternative travel distribution channels,such as the LTDs, are in start-up or developing mode, are well-financed andhave yet to fully define their functionality and costs (**See***Supplier Efforts to Control TravelDistribution*, above).  Inaddition, new competitors are entering the travel marketplace.  Both established and start up search enginecompanies are attempting to enter the travel marketplace by leveraging searchtechnology to aggregate travel search results across supplier, travel agent andother websites.  These search engines,LTDs and other alternative travel distribution channels may have the effect ofdiverting customers from our online sites and our *Sabre* GDS, putting pressure on our revenues, pricing andoperating margins.  See “*Risk Factors—Some Travel Suppliers Are Seeking....” *We also face consolidation amongsuppliers, travel marketing and distribution competitors, and online andconventional travel agencies, which may offer them negotiating leverage andother advantages of scale and may cause an increase in competition for theresulting consolidated business.  See “*Risk Factors*-*We face competition...”*and*“Risk Factors — Consolidation...”*

 

35

----

 

*Pricing Options forAirline Suppliers*. Our service and pricing offerings to airlines are designed to ensure that ourcustomers will continue to have broad, dependable access to airline schedules,seat availability and fares, including web fares.  With the deregulationof the GDS industry in mid-2004, (described below under *Computer Reservation System Industry Regulation*),we have more flexibility to price our services based upon a variety offactors.  We expect that, from airline to airline, our pricing and othercontract terms will differ based on a variety of factors.   Webelieve that airlines will see the benefits of more customizable relationshipswith us, including possible reductions in transaction fees.  We areevaluating various pricing options for airline suppliers, including optionsthat may include services from each of our business segments and may expand “netrate” or other merchandising opportunities. We have already implementednew pricing models with some suppliers.  For example, our Sabre Travel Network and Travelocity units recentlysigned agreements with AirTran Airways, under which our subscribers will obtainbroad, dependable access to that airline’s content and Travelocity will becomethe sole supplier of hotel, cruise and vacation packaging content for theairline’s website. Wealso have “opt-in” agreements that offer participating airlines lowertransaction fees for bookings created in certain regions, and make discountedfares on those airlines available only to those *Sabre* GDS subscribers that accept lowered incentivepayments. It is difficult to predict with certainty, in a recently deregulatedenvironment, the impact of new pricing models on our revenues.  As weconsider these new pricing models, our goal is to maintain a neutral impact toour earnings over a multi-year period, including the effects of merchandisingopportunities and reduced costs.  We expect to have new agreements inplace with many airlines before the expiration of our current Direct ConnectAvailability (“DCA”) 3-Year Option agreements in 2006.  Our DCA 3-YearOption agreement with US Airways, the only such agreement with a major U.S.airline that had a 2005 expiration date, was extended for one year in October of2005.  Regardless of the outcome of these pricing models, it is our intentto reduce costs in the Sabre Travel Network business.  See*“Risk Factors—Adverse Changes In...”*

 

*Changing our Sabre TravelNetwork Business Model.*   Historically, the vast majority of our travel distribution revenueshave been derived from transaction fees paid by travel suppliers for bookingsthrough the *Sabre* GDS from which Sabre TravelNetwork pays incentives to its travel agency subscribers as a cost ofrevenue.  We continue to seek ways toprovide more flexible and cost-effective distribution options to ourcustomers.  As our business evolves, wehave broadened our description of “transaction” to include any travel reservationthat generates a fee paid directly to us, including but not limited to thefollowing:  traditional booking fees paidby travel suppliers, non-traditional transaction fees paid by travel suppliers,transaction fees paid by travel agency subscribers, and transaction fees paidby corporations related to our online booking tool, *GetThere*.  We have entered into arrangements that departfrom our traditional business model.  Forexample, arrangements under which some travel suppliers, rather than payingSabre Travel Network directly, pay Travelocity or our travel agency customer,which in turn pays a transaction fee to Sabre Travel Network.  We are also looking for more opportunities tomarket net rate offerings, benefiting from the merchandising insight that wegain from our integrated portfolio of travel distribution and travel marketingassets.  We are evaluating thedesirability of more of these agreements. See “*Pricing Options for Suppliers*”above.  Some of these non-traditionaltransactions may have a lower rate per transaction than a traditional bookingfee, therefore, the overall average revenue per transaction may be lower asthese non-traditional transactions increase. See “*Ris**k Factors—Adverse Changes In...”*

 

**Investmentsin Travelocity.** The development of Travelocity continues to be a strategic focus for us.We are investing and continue to look for ways to invest in developing productsand segments that we believe offer rapid growth opportunities, such as in thebusiness-direct segment and online distribution in Europe and Asia.  For example:

 

•     On July 20, 2005, we completed a cashacquisition of lastminute.com, aleading online travel and leisure brand in Europe that will become the leadbrand in Europe for Travelocity. With the acquisition of lastminute.com,Travelocity greatly expanded its scale. We can now offer travel suppliers a greater number of potential buyersin a broader geographic area, particularly in Europe.  We expect this increased scale to allow us tooffer consumers even better travel deals and a greater range of internationaloptions.  An immediate benefit is ourability to give lastminute.com customers access to the wide range of hotels inTravelocity’s net rate hotel program. lastminute.com customers will have a greater range of U.S. andinternational travel options, and over time, Travelocity should gain moreEuropean travel choices. Sabre Travel Network also expects to offer itsnetwork of travel agency subscribers expanded European travel options as aresult of the acquisition, expanding distribution reach for lastminute.comtravel suppliers.  See “*Risk Factors* —*We may be unsuccessful in pursuing and integrating business combinations...”*

 

•     InJanuary 2005, Travelocity entered into a put option agreement pursuant towhich it may gain control of 100% of Zuji Holdings Limited (“Zuji”), a jointventure operating in the Asia Pacific region in which we currently hold a 13%equity stake through direct and indirect ownership and which we account forunder the equity method. In the fourth quarter of 2005, we expect toeither loan additional funds or may possibly choose to participate in futureanticipated capital calls of Zuji. Without a pro rata contribution from the other equity holders, we would berequired to consolidate Zuji under the guidance of the Financial AccountingStandards Board (“FASB”) Interpretation No. 46R, *Consolidation of Variable Interest Entities. *Initially, this consolidation would have a negative effect onTravelocity’s operating income, although we believe that the impact to netearnings, including minority interests, would be immaterial.  We also expect significant growth from Zujias adoption of online travel continues to grow in Asia.

 

36

----

 

**NetRate Program.**  In an effort to provide additional choices toconsumers, Travelocity is increasingly promoting our net rate program, commonlyreferred to in the industry as a “merchant model program” due to the fact thatTravelocity is the merchant of record for credit card purposes.  Under the net rate program, we facilitatetransactions between travel suppliers and travelers for the booking of andpayment for travel accommodations.  Tofacilitate the provision of travel accommodations to travelers, we enter intoagreements with travel suppliers for the right to market their products,services and other content offerings at pre-determined net rates.  Netrate travel offerings can include air travel, hotel stays, car rentals anddynamically packaged combinations.  We market those offerings to travelersat a price that includes an amount sufficient to pay the travel supplier forits charge for providing the travel accommodations, along with any applicabletaxes we expect will be invoiced to us by the travel supplier on that charge,as well as additional amounts representing our service fees.  For this type of business model, we requirepre-payment by the traveler at the time of booking or at a pre-determined timebefore departure. Net rate content is beneficial for travelers because they canoften book travel at a price lower than regularly published offerings. For us, the model generally delivers higher service fee revenue per transactionthan comparable transactions under an agency commission booking fee model andwe experience improved operating cash flows as a result of receivingpre-payments from customers while paying hotel, car and travel suppliers afterthe travel occurs.  We generally do not purchase and resell travelaccommodations and do not have any obligations with respect to travelaccommodations listed online that do not sell. For net rate transactions, we recognize as revenue the amount paid bythe traveler for products, fees and services minus the amount paid to the travelsupplier.  See “*Risk Factors — State and Local Tax Issues....”*

 

Our business strategy depends on net rate bookingsas a significant source of future revenue growth and increased margins. Our strategy calls for us to increase or maintain the number of hotel rooms wecan market under our net rate hotel program, based upon arrangements we makedirectly with individual hotel properties and hotel chains.  Because ofTravelocity’s supplier friendly approach, which includes a two-way seamlessconnectivity to hotels’ property management system so that reservations are notlost, its hotel program has become successful even though it was started laterthan some competing programs.  See “*Risk Factors — Our business plans call for thesignificant growth of our net rate hotel....”*

 

*Cost Reductions and Expense Savings. *As part of our cost leadership strategy we are, as a standard practice,evaluating efficiency opportunities across the company to ensure that weoptimally manage our operational costs. Some of these cost-saving opportunities have involved and may continueto involve globally-sourcing some of our operations (either by contracting withcompanies that work for us, such as through the opening of call centers weoperate abroad, or by expanding our own operations abroad). In the secondquarter of 2005 we began implementing an effort to resize and reorganize asoftware development group in our Sabre Travel Network segment.  This move will reduce headcount byapproximately 120 employees.  Thesechanges went into effect in August 2005 and are expected to be completedby the end of 2005.  As a result of thismove, we expect annual cost savings in 2006 and beyond of approximately $12million.

 

*Short and Long-Term Financings.*  Wefunded the acquisition of lastminute.com initially with debt and availablecash.  We have obtained bridge financingfor this acquisition and are considering various long-term financingarrangements, which may or may not include a combination of debt, cash, equityor equity-like securities.  See*“Management’s Discussion and Analysis – Liquidity and CapitalResources – Financing Arrangements.”*

 

37

----

 

**Computer Reservation System Industry Regulation.** Aspects of our travel marketing and distribution businesses are subjectto the Computer Reservation Systems (“CRS”) regulations in the European Union, Canada and Peru.  These regulations generally govern GDSservices for airlines and travel agencies, but not for non-airline suppliers(except rail suppliers in limited circumstances).  Among the topics addressed in some of thecurrent regulations are:

 

•      no preferencing CRS displays based uponairline identity,

 

•      equal treatment of airlines by the CRSs,

 

•      equal participation by airlines that have anownership interest in a CRS, and

 

•      limits on travel agency contract terms.

 

All CRS regulations promulgated by the U.S.Department of Transportation that were applicable in the United States expiredon July 31, 2004.  We believe thatthis deregulation in the United States will enhance our opportunities tocreatively market airline services and freely negotiate with travelagencies.  However, deregulation alsopresents challenges associated with maintaining participation levels in the *Sabre* GDS by travel suppliers who are no longer subject toequal participation regulations.

 

Transport Canada issued final rules on May 7,2004, eliminating all CRS regulations in Canada, except rules prohibitingscreen preference and discrimination in providing the right to participate inservice enhancements.  In addition, regulatorsin the European Commission are reviewing their CRS regulations for possiblechanges, which may include some level of deregulation.  It is not clear whether or when anyamendments in the European Union will take effect or what form they may take.

 

38

----

 

**Components of Revenues and Expenses**

 

*Revenues. *Sabre Travel Network primarily generatesrevenues from transaction fees paid directly to us related to a travelreservation including the following: traditional booking fees paid by travel suppliers, non-traditionaltransaction fees paid by travel suppliers, transaction fees paid by travelagency subscribers, and transaction fees paid by corporations related to ourbooking tool.  Sabre Travel Network earnsrevenue through equipment service charges paid by subscribers. In addition,Sabre Travel Network earns revenue through the sale of other products andservices (including the *Hotel Spotlight*program, which offers premium marketing opportunities to hoteliers through the *Sabre* GDS, the *JurniNetwork* consortia as well as *Nexion*® and *SynXis*offerings to hoteliers) and the *Sabre*®*Surround*SM program (which bundles the *Hotel Spotlight* services with other advertising products) totravel-suppliers, subscribers and other customers.  Earnings (or losses as the case may be)derived from interests in joint ventures and other investments are alsoincluded in revenues.  SabreTravel Network earns intersegment revenues from data processing fees andtransaction fees paid by Travelocity.  Travelocity generates revenues fromcommissions or transaction fees from suppliers for the purchase of travel andlifestyle products and services pursuant to reservations made through oursystem. Travelocity also generates net rate revenue from providing facilitationservices equal to the amount paid by the customer for travel and non-travel productsand services, minus Travelocity’s payment to the supplier. AdditionalTravelocity revenues include other fees charged to customers and advertising revenuesfrom our websites. Travelocity derives intersegment revenues from SabreTravel Network, consisting of incentives earned for Travelocity transactionsprocessed through the *Sabre* GDS,and fees paid by Sabre Travel Network for corporate trips and Sabre AirlineSolutions for airline trips booked through Travelocity’s online bookingtechnology. Travelocity also generates incentives earned for Travelocitytransactions processed through other global distribution systems. Sabre Airline Solutions generates revenuesfrom the sale of airline reservations hosting services; product revenueincluding: inventory and check-in hosting solutions; decision-support softwareand technology; and airline consulting services.

 

*Cost of Revenues. *Sabre Travel Network cost of revenues consistprimarily of customer incentives paid to subscribers, data processing chargesresulting from the operation of the *Sabre*system, and salaries and other operating expenses.  Sabre Travel Network also incursintersegment expenses paid to Travelocity for incentives for Travelocitytransactions processed through the *Sabre*GDS, as well as fees for corporate trips booked through Travelocity’s onlinebooking technology.  Travelocity cost of revenues consistsprimarily of customer service costs, technology costs, salaries, benefits andother employee expenses, data processing fees and transaction fees paid toSabre Travel Network, credit card fees, charges related to fraudulent bookings,service compensation and depreciation and amortization charges.  In addition, Travelocity cost of revenuesincludes recovery of certain VAT expenses which is treated as acontra-expense.  Sabre Airline Solutionscost of revenues are comprised of labor cost incurred in the development anddelivery of software and consulting services and depreciation andamortization.  Sabre Airline Solutionsalso incurs intersegment expenses paid to Travelocity for airline trips bookedthrough Travelocity’s online booking technology.

 

*Operating Expenses.  *Sabre Travel Network selling, general andadministrative expenses and other operating expenses consist of salaries,benefits and employee related expenses for staff functions required to supportthe business.  Travelocity selling,general and administrative and other operating expenses consist primarily ofadvertising and promotion expenses, payments made to our travel agency and distributionpartners and salaries, benefits and employee related expenses for stafffunctions required to support the business. Sabre Airline Solutions operating expenses consist of the costs of thesales organization and the staff functions required to support the business.

 

39

----

 

### **Financial Results**

 

Thefollowing tables present operating results for the three and nine months ended September 30,2005 and 2004 (in thousands of dollars). The segment revenues and cost of revenues are shown includingintersegment activity.  We have includedthe elimination of intersegment activity below in order to agree to the resultsof operations presented in the consolidated financial statements:

 
| ** **                                   | ** ** | **Three  Months Ended September 30,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | **Sabre  Travel Network**                  | ** ** | **Travelocity** | ** ** | **Sabre  Airline Solutions** | ** ** | **Corporate** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Segment  revenues:                           |       | $                                          | 402,617    |   | $ | 387,904 |   | $ | 276,191 |   | $ | 139,495 |   | $ | 67,140 |   | $ | 60,405 | ** ** | $ | — |   | $ | — |   | $ | (46,242 | ) | $ | (43,414 | ) | $ | 699,706 |   | $ | 544,390 |   |
|                                         |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost  of revenues:                           |       | 274,948                                    |       | 247,815 |   | 97,400 |   | 54,442 |   | 45,131 |   | 42,837 |   | 1,130 |   | 335 |   | (46,242 | ) | (43,414 | ) | 372,367 |   | 302,015 |   |
|                                         |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross  profit (loss):                        |       | 127,669                                    |       | 140,089 |   | 178,791 |   | 85,053 |   | 22,009 |   | 17,568 |   | (1,130 | ) | (335 | ) | — |   | — |   | 327,339 |   | 242,375 |   |
|                                         |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling,  general & administrative: |       | 68,111                                     |       | 62,460 |   | 136,381 |   | 76,469 |   | 10,971 |   | 14,174 |   | (3,518 | ) | 106 |   | — |   | — |   | 211,945 |   | 153,209 |   |
|                                         |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization  of intangible assets:          |       | 4,001                                      |       | 3,471 |   | 11,103 |   | 7,704 |   | 719 |   | 824 |   | — |   | — |   | — |   | — |   | 15,823 |   | 11,999 |   |
|                                         |       |                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  income (loss)                     |       | $                                          | 55,557     |   | $ | 74,158 |   | $ | 31,307 |   | $ | 880 |   | $ | 10,319 |   | $ | 2,570 |   | $ | 2,388 |   | $ | (441 | ) | $ | — |   | $ | — |   | $ | 99,571 |   | $ | 77,167 |   |

 
| ** **                                   | ** ** | **Nine  Months Ended September 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                   | ** ** | **Sabre  Travel Network**                 | ** ** | **Travelocity** | ** ** | **Sabre  Airline Solutions** | ** ** | **Corporate** | ** ** | **Eliminations** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Segment  revenues:                           |       | $                                         | 1,251,365  |   | $ | 1,206,128 |   | $ | 595,332 |   | $ | 376,491 |   | $ | 196,757 |   | $ | 180,652 |   | $ | — |   | $ | — |   | $ | (142,605 | ) | $ | (128,225 | ) | $ | 1,900,849 |   | $ | 1,635,046 |   |
|                                         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost  of revenues:                           |       | 850,849                                   |       | 759,576 |   | 241,537 |   | 156,000 |   | 133,142 |   | 134,128 |   | 750 |   | (172 | ) | (142,605 | ) | (128,225 | ) | 1,083,673 |   | 921,307 |   |
|                                         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross  profit (loss):                        |       | 400,516                                   |       | 446,552 |   | 353,795 |   | 220,491 |   | 63,615 |   | 46,524 |   | (750 | ) | 172 |   | — |   | — |   | 817,176 |   | 713,739 |   |
|                                         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling,  general & administrative: |       | 187,995                                   |       | 195,129 |   | 317,452 |   | 206,984 |   | 30,686 |   | 37,179 |   | (3,472 | ) | 1 |   | — |   | — |   | 532,661 |   | 439,293 |   |
|                                         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization  of intangible assets:          |       | 13,751                                    |       | 14,989 |   | 14,720 |   | 22,556 |   | 2,173 |   | 1,803 |   | — |   | — |   | — |   | — |   | 30,644 |   | 39,348 |   |
|                                         |       |                                      |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                              |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Operating  income (loss) |   | $ | 198,770 |   | $ | 236,434 |   | $ | 21,623 |   | $ | (9,049 | ) | $ | 30,756 |   | $ | 7,542 |   | $ | 2,722 |   | $ | 171 |   | $ | — |   | $ | — |   | $ | 253,871 |   | $ | 235,098 |   |
|--------------------------|--------|---|---------|--------|---|---------|--------|---|--------|--------|---|--------|---|---|--------|--------|---|-------|--------|---|-------|--------|---|-----|--------|---|--------|--------|---|--------|--------|---|---------|--------|---|---------|--------|

 

40

----

 

**Three Months Ended September 30, 2005and 2004**

 

Total revenues for the three months ended September 30,2005 after intercompany eliminations increased approximately $156 million, or29%, compared to the three months ended September 30, 2004, from $544million to $700 million.  Cost ofrevenues after intercompany eliminations for the three months ended September 30,2005 increased approximately $70 million or 23%, compared to the three monthsended September 30, 2004, from $302 million to $372 million.

 

Management’s discussion and analysis of revenues,cost of revenues, selling, general and administrative expenses, amortization ofintangible assets and operating income by business segment are based uponsegment results including intersegment revenues and cost of revenues ofapproximately $46 million and $43 million for the three months ended September 30,2005 and 2004, respectively.  We accountfor significant intersegment transactions as if the transactions were to thirdparties, that is, at estimated current market prices.  The majority of the intersegment revenues andcost of revenues are between Travelocity and Sabre Travel Network, consistingmainly of incentives paid to Travelocity for Travelocity transactions processedthrough the *Sabre* GDS, dataprocessing fees and transaction fees paid by Travelocity to Sabre TravelNetwork (including for transactions processed through the *Sabre* GDS), and fees paid by Sabre TravelNetwork to Travelocity for corporate trips booked through Travelocity’s onlinebooking technology.  In addition, SabreAirline Solutions pays fees to Travelocity for airline trips booked throughTravelocity’s online booking technology. All intersegment revenues and corresponding cost of revenues have beeneliminated in consolidation.

 

Total revenues (including intersegment revenues) forthe three months ended September 30, 2005 increased approximately $158million, or 27%, as compared to the three months ended September 30, 2004,from $588 million to $746 million.

 

Total cost of revenues (including intersegment costof revenues) for the three months ended September 30, 2005 increased $74million, or 21%, as compared to the three months ended September 30, 2004,from $345 million to $419 million.

 

41

----

 

##### **Sabre TravelNetwork**

 
| ** **                                  | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **change** | ** ** | **% change** | ** ** |
| ** **                                  | ** ** | **(thousands)**                           | ** ** | ** ** | ** ** |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Segment revenues:                           |       | $                                         | 402,617    |   | $ | 387,904 |   | $ | 14,713 |   | 4 | % |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Cost of revenues:                           |       | 274,948                                   |       | 247,815 |   | 27,133 |   | 11 | % |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Gross profit:                               |       | 127,669                                   |       | 140,089 |   | (12,420 | ) | (9 | )% |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Selling, general & administrative: |       | 68,111                                    |       | 62,460 |   | 5,651 |   | 9 | % |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Amortization of intangible assets:          |       | 4,001                                     |       | 3,471 |   | 530 |   | 15 | % |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Operating income                            |       | $                                         | 55,557     |   | $ | 74,158 |   | $ | (18,601 | ) | (25 | )% |

 

*Revenues*

 

The increase in revenues is due to the following:

 

•      Transaction revenue (see *Componentsof Revenues and Expenses*) increased by $13 million, or 4.0%.  This $13 million increase includes a $14million increase resulting from higher transaction volumes and a $1 milliondecrease driven by a lower average rate per transaction, due to growth inlower-priced, non-traditional transactions. Total transactions were 86 millionfor the three months ended September 30, 2005, an increase of 4 % from thethree months ended September 30, 2004 (see*BusinessTrends:  Changing our Sabre TravelNetwork Business Model.*)

 

•      Subscriber revenue decreased by $6 millionreflecting the trend towards the adoption of third-party equipment solutions bysubscribers.

 

•      Other revenue increased by $8 million drivenby $5 million in revenue from SynXis hotel reservation services and $3 millionin *Hotel Spotlight*revenue, neither ofwhich were sources of revenue in the third quarter of 2004.

 

*Cost of Revenues*

 

The increasein cost of revenues includes increases in technology related spending of $7million, $4 million as a result of an expiration of contractual credits and $3million from increased transaction volume and continued implementation of ouropen system pricing and shopping engine.  Customer incentives increased $3 million dueto higher transaction volume and higher average incentive rates.  Other cost of revenue increasesinclude incremental investments in new businesses and new business models of $9million, an increase in fulfillment costs for GetThere trips as a result ofyear over year volume growth of $2 million and other expense increases of $6million.

 

*Selling, General andAdministrative Expenses*

 

The increase in selling, general and administrativeexpenses was driven by a $3 million increase in headcount relatedexpense driven by growth in new businesses and a $3 million increase in professional services due tovarious ongoing litigations and consulting.

 

*Amortization of Intangible Assets*

 

The increase in amortizationof intangible assets is due to increased amortization expense from newlyacquired entities, offset by intangibles that fully amortized in 2004.

 

*Operating Income*

 

The decline in operating incomewas largely the result of increased technology expenses and investments in newbusinesses and new business models that exceeded our revenue growth.

 

42

----

 

##### **Travelocity**

 
| ** **                                  | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **change** | ** ** | **% change** | ** ** |
| ** **                                  | ** ** | **(thousands)**                           | ** ** | ** ** | ** ** |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Segment revenues:                           |       | $                                         | 276,191    |   | $ | 139,495 |   | $ | 136,696 |   | 98 | % |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Cost of revenues:                           |       | 97,400                                    |       | 54,442 |   | 42,958 |   | 79 | % |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Gross profit:                               |       | 178,791                                   |       | 85,053 |   | 93,738 |   | 110 | % |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Selling, general & administrative: |       | 136,381                                   |       | 76,469 |   | 59,912 |   | 78 | % |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Amortization of intangible assets:          |       | 11,103                                    |       | 7,704 |   | 3,399 |   | 44 | % |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Operating income                            |       | $                                         | 31,307     |   | $ | 880 |   | $ | 30,427 |   | 3,458 | % |

 

*Revenues*

 

In October of 2004, we acquired sole control ofthe non-German operations of the Travelocity Europe business, purchasing 50% ofthese entities. The remaining 50% that we already owned indirectly through theTravelocity Europe joint venture was distributed to us by the joint venture sothat we now directly own 100% of these entities.  Since this acquisition, we have beenconsolidating the results of Travelocity Europe, whereas prior to October 2004,50% of these results were recorded in other revenues as equity losses.

 

The results of lastminute.com are included in ourfinancial results from the date of the acquisition on July 20, 2005.

 

Transaction revenue, including Travelocity Europe in2005 and lastminute.com since the acquisition, increased $127 million, or 104%,primarily driven by a $110 million increase in non-air transaction revenue(including revenue resulting from sales of package offerings that include air travelas a component) and a $17 million increase in stand-alone air transactionrevenue.

 

The $110 million increase innon-air transaction revenue consisted primarily of the following:

 

•          $90 million increase related to theacquisitions of Travelocity Europe and lastminute.com.

 

•          $20 million increase related to North America(including our Zuji joint venture) driven primarily by a $12 million increasein packaged trip revenue and a $7 million increase in stand-alone hotel revenue,both of which were driven by increases in transaction volumes. All other NorthAmerican non-air transaction revenue increased $1 million.

 

The $17 million increase in stand-alone airtransaction revenue was primarily due to the lastminute.com acquisition.  In North American regions, strong volumegrowth was partially offset by a decline in the average revenue per transaction.

 

Non-transaction revenue increased $10 million, or55%, consisting primarily of the following:

 

•          $8 million increase related to theacquisitions of Travelocity Europe and lastminute.com which includes the $4million favorable impact of reduced JV equity method losses that resulted fromthe TEU acquisition, and $4 million of advertising revenue.

 

•          $2 million increase related to North America(including our Zuji joint venture) driven primarily by a $3 million increase inCorporate revenue, the fees paid by Sabre Travel Network and Sabre AirlineSolutions to Travelocity for trips booked through Travelocity’s online bookingtechnology, and a $1 million decrease in other non-transaction revenue.

 

43

----

 

*Cost of Revenues*

 

The increase in cost of revenues includes a $30million increase from the acquisitions of lastminute.com, Travelocity Europeand Showtickets.com. In addition, the increase includes a $6 million increasein expenses associated with the volume growth of our published, net rate hotel,*TotalTrip*SM and Last MinuteDeals programs, as explained above in transaction revenue as well as a rateincrease for merchant credit card transactions and an increase in servicecompensation. Additionally, we had a $7 million increase related to customerservice costs as a result of higher transaction volumes.

 

*Selling, General and Administrative Expenses*

 

The increase in selling, general and administrative includes$63 million from lastminute.com, Travelocity Europe and Showtickets.com.Advertising and customer acquisition costs to drive additional travelers to ourNorth American Websites (including our Zuji joint venture) decreased by $4million. This decrease includes changes in the timing of recognizingadvertising expenses within the fiscal year (See Note 2 to the ConsolidatedFinancial Statements). Otherselling, general and administrative expenses increased $1 million.

 

*Amortization of Intangible Assets*

 

Amortization of intangible assets increased due to $10million in amortization from intangibles acquired in the lastminute.comacquisition offset partially by lower amortization due to certain intangibleassets becoming fully amortized in 2004.

 

*Operating income*

 

Operating income increased due to the acquisition oflastminute.com as well as strong revenue growth in North America, which offsetthe incremental losses resulting from our acquisition of Travelocity Europe.

 

44

----

 

##### **Sabre Airline Solutions**

 
| ** **                                  | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **change** | ** ** | **% change** | ** ** |
| ** **                                  | ** ** | **(thousands)**                           | ** ** | ** ** | ** ** |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Segment revenues:                           |       | $                                         | 67,140     |   | $ | 60,405 |   | $ | 6,735 |   | 11 | % |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Cost of revenues:                           |       | 45,131                                    |       | 42,837 |   | 2,294 |   | 5 | % |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Gross profit:                               |       | 22,009                                    |       | 17,568 |   | 4,441 |   | 25 | % |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Selling, general & administrative: |       | 10,971                                    |       | 14,174 |   | (3,203 | ) | (23 | )% |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Amortization of intangible assets:          |       | 719                                       |       | 824 |   | (105 | ) | (13 | )% |
|                                        |       |                                      |       |   |   |   |   |   |   |
| Operating income                            |       | $                                         | 10,319     |   | $ | 2,570 |   | $ | 7,749 |   | 302 | % |

 

*Revenues*

 

The increase in revenues was driven primarilyby a $6 million increase in airline reservation hosting revenue due to highervolumes from adding new customers as well as volume growth from our existingcustomer base.  Additionally, consultingrevenues increased $5 million due to certain contractual objectives being metand an increase in customer engagements. This growth was offset by a decline in product revenue of $2 million anda decline in our low margin, custom developed software business of $2 million.

 

*Cost of Revenues*

 

The increase in cost of revenues is due to a$2 million increase in communications costs caused by an increase in datanetwork rates, a $1 million increase in data processing costs due totransaction growth and a $1 million increase in amortization of internallydeveloped software and project delivery costs due to higher capitalizedbalances. These increases were offset by a $2 million decrease in developmentlabor costs caused by a decline in demand in our low margin, custom developedsoftware business.

 

*Selling, General and Administrative Expenses*

 

The decrease in selling, general and administrativeexpenses was driven by a $4 million decrease in bad debt expense as a result ofreceiving payments on accounts that had been previously reserved. This decreasewas partially offset by increases in other expenses of $1 million.

 

*Amortization of Intangible Assets*

 

Amortization of intangibleassets decreased due to intangibles fully amortizing in 2004 partially offsetby intangible amortization associated with the acquisition of RM Rocade in August 2004.

 

*Operating Income*

 

##### **Operating income increased due primarily to higherrevenues and more favorable collection activities.**

 

45

----

 

##### **The following section describes ourresults of operations on a consolidated basis for non-operating income andexpense items.  See ConsolidatedStatements of Income:**

#####  

##### **Interest Income**

#####  

Interestincome for the three months ended September 30, 2005 increasedapproximately $1 million as compared to the three months ended September 30,2004. Average balances of our short-term investments were lower, offset byimproved rates of return on those balances. In addition, we earned interest from our $11 million note with Zujiwhich was entered into in January 2005.

 

##### **Interest Expense**

#####  

Interest expense for the three months ended September 30,2005 increased approximately $9 million as compared to the three months ended September 30,2004, due to interest paid on the Bridge Facility for the lastminute.comacquisition and a higher LIBOR rate. A portion of our fixed rate debt isswapped into variable rate debt based on the LIBOR rate. See Note 6 of theConsolidated Financial Statements and *“Item 3. Quantitative andQualitative Disclosures about Market Risk.”*

 

**Gain on Derivative Instrument**

 

On June 29, 2005, we entered intoforward contracts to purchase GBP 578 million and EUR 115 million tolock in the U.S. Dollar price of the acquisition of lastminute.com.  In the third quarter of 2005, these forwardcontracts matured resulting in a gain of $2 million.

 

**Gain on Sale of Investments**

 

Our gain on sale of investment was unchanged for thethree months ended September 30, 2005. We recorded a loss of $1 million from the conversion of a notereceivable and warrants with TRX.  Thisloss was offset by $1 million in additional proceeds from our sale of aninvestment in Karavel that occurred in the first quarter of 2005.

 

##### **Other, net**

#####  

Other, net income for the three months ended September 30,2005 did not change significantly as compared with other, net income for thethree months ended September 30, 2004.

 

##### **Income Taxes**

#####  

The****provision for income taxes for the threemonths ended September 30, 2005 increased by $26 million as compared tothe three months ended September 30, 2004. This increase is due to the tax effect of an approximately $17 millionincrease in pre-tax income between periods, additional state income taxes of $1million,  a reduction of foreign taxcredits of $1 million and a prior year release of previously accrued taxes of$18 million.  See Note 5 to theConsolidated Financial Statements for additional information regarding incometaxes.

 

##### **Net Earnings**

#####  

Despite growth in our operating income of $23million, net earnings decreased by $9 million during the three months ended September 30,2005 as compared to the three months ended September 30, 2004.  This decrease was due to higher interestexpense and the 2004 impact of releasing previously accrued taxes in the amountof $18 million.

 

46

----

 

**Nine Months Ended September 30, 2005 and2004**

 

Total revenues for the nine months ended September 30,2005 after intercompany eliminations increased approximately $266 million or 16%,compared to the nine months ended September 30, 2004, from $1,635 millionto $1,901 million.  Cost of revenuesafter intercompany eliminations for the nine months ended September 30,2005 increased approximately $163 million or 18%, compared to the nine monthsended September 30, 2004, from $921 million to $1,084 million.

 

Management’s discussion and analysis of revenues,cost of revenues, selling, general and administrative expenses, amortization ofintangible assets and operating income by business segment are based uponsegment results including intersegment revenues and cost of revenues ofapproximately $143 million and $128 million for the nine months ended September 30,2005 and 2004, respectively.  We accountfor significant intersegment transactions as if the transactions were to thirdparties, that is, at estimated current market prices.  The majority of the intersegment revenues andcost of revenues are between Travelocity and Sabre Travel Network, consistingmainly of incentives paid to Travelocity for Travelocity transactions processedthrough the *Sabre* GDS, dataprocessing fees and transaction fees paid by Travelocity to Sabre TravelNetwork (including for transactions processed through the *Sabre*GDS), and fees paid by Sabre Travel Network to Travelocity for corporate tripsbooked through Travelocity’s online booking technology.  In addition, Sabre Airline Solutions paysfees to Travelocity for airline trips booked through Travelocity’s onlinebooking technology.  All intersegmentrevenues and corresponding cost of revenues have been eliminated inconsolidation.

 

Total revenues (including intersegment revenues) forthe nine months ended September 30, 2005 increased approximately $280million, or 16%, as compared to the nine months ended September 30, 2004,from $1,763 million to $2,043 million.

 

Total cost of revenues (including intersegment costof revenues) for the nine months ended September 30, 2005 increased $176million, or 17%, as compared to the nine months ended September 30, 2004,from $1,050 million to $1,226 million.

 

47

----

 

##### **Sabre TravelNetwork**

 
| ** **                                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **change** | ** ** | **% change** | ** ** |
| ** **                                  | ** ** | **(thousands)**                          | ** ** | ** ** | ** ** |
| * *                                    | * *   | * *                                 | * *   | * * | * * | * * | * * | * * | * * |
| Segment revenues:                           |       | $                                        | 1,251,365  |   | $ | 1,206,128 |   | $ | 45,237 |   | 4 | % |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Cost of revenues:                           |       | 850,849                                  |       | 759,576 |   | 91,273 |   | 12 | % |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Gross profit:                               |       | 400,516                                  |       | 446,552 |   | (46,036 | ) | (10 | )% |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Selling, general & administrative: |       | 187,995                                  |       | 195,129 |   | (7,134 | ) | (4 | )% |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Amortization of intangible assets:          |       | 13,751                                   |       | 14,989 |   | (1,238 | ) | (8 | )% |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Operating income                            |       | $                                        | 198,770    |   | $ | 236,434 |   | $ | (37,664 | ) | (16 | )% |

 

*Revenues*

 

The increase in revenues is due to the following:

 

•      Transaction revenue (see *Componentsof Revenues and Expenses*) increased by $40 million, or 4%.  This $40 million increase includes a $42million increase resulting from higher transaction volumes and a $2 milliondecrease driven by a lower average net effective rate due to the growth ofnon-traditional transactions.  Totaltransactions were 268 million for the nine months ended September 30,2005, an increase of 4% from the nine months ended September 30, 2004 (*see**Business Trends:  Changing our Sabre Travel Network BusinessModel.*)

 

•      Subscriber revenue decreased by $18 million,reflecting the trend towards the adoption of third-party equipment.

 

•      Other revenue increased by $23 million,driven by $15 million in revenue from SynXis hotel reservation services and $7million of *Hotel Spotlight* revenue, neither ofwhich were included in the prior year. The remaining $1 million increase relates to various other products.

 

48

----

 

*Cost of Revenues*

 

The increasein cost of revenues includes increases in technology related spending of $10million as a result of the expiration of contractual credits and $13 million asa result of increased transaction volume and the continued implementation ofour open system pricing and shopping engine. Subscriber support costs increased $25 million, driven almost entirelyby growth in customer incentives as a result of the year over year growth intransaction volume and a higher average incentive rate compared to the prioryear.  Other cost of revenue increasesinclude $23 million related to continued investment in new businesses and newbusiness models, $6 million for fulfillment costs for GetThere trips as aresult of year over year volume growth, $3 million due to severance related toour second quarter reorganization of our software development group, and $11 millionof other expenses.

 

*Selling,General and Administrative Expenses*

 

The decrease in selling, general and administrativeexpenses was primarily driven by a $9 million reduction in tax accruals due toevents occurring that decreased our potential liabilities for taxes andassociated interest.  This was partiallyoffset by a $3 million increase in headcount related expenses, primarily drivenby growth in new businesses.  Otherexpenses decreased $1 million.

 

*Amortization of Intangible Assets*

 

Amortization of intangible assets decreased due tothe $3 million write-off of an intangible asset in the second quarter of2004.  In addition, increasedamortization expense from newly acquired entities was partially offset byintangibles that fully amortized in 2004 and 2005.

 

*Operating Income*

 

The decline in operatingincome was largely the result of increased technology and incentive expensesand continued investments in new businesses and new business models thatexceeded our revenue growth.

 

49

----

 

##### **Travelocity**

 
| ** **                                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **change** | ** ** | **% change** | ** ** |
| ** **                                  | ** ** | **(thousands)**                          | ** ** | ** ** | ** ** |
| * *                                    | * *   | * *                                 | * *   | * * | * * | * * | * * | * * | * * |
| Segment revenues:                           |       | $                                        | 595,332    |   | $ | 376,491 |   | $ | 218,841 |   | 58 | % |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Cost of revenues:                           |       | 241,537                                  |       | 156,000 |   | 85,537 |   | 55 | % |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Gross profit:                               |       | 353,795                                  |       | 220,491 |   | 133,304 |   | 60 | % |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Selling, general & administrative: |       | 317,452                                  |       | 206,984 |   | 110,468 |   | 53 | % |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Amortization of intangible assets:          |       | 14,720                                   |       | 22,556 |   | (7,836 | ) | (35 | )% |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Operating income (loss)                     |       | $                                        | 21,623     |   | $ | (9,049 | ) | $ | 30,672 |   | 339 | % |

 

*Revenues*

 

In October of 2004, we acquired sole control ofthe non-German operations of Travelocity Europe, purchasing 50% of theseentities. The remaining 50% that we already owned indirectly through theTravelocity Europe joint venture was distributed to us by the joint venture sothat we now directly own 100% of these entities.  Since this acquisition, we have beenconsolidating the results of Travelocity Europe, whereas prior to October 2004,50% of these results were recorded in other revenues as equity losses.

 

The results of lastminute.com are included in ourfinancial results from the date of the acquisition on July 20, 2005.

 

Transaction revenue, including Travelocity Europe in2005 and lastminute.com since the acquisition, increased $196 million, or 60%,primarily driven by a $170 million increase in non-air transaction revenue(including revenue resulting from sales of package offerings that include airtravel as a component) and a $26 million increase in stand-alone airtransaction revenue.

 

The $170 million increase innon-air transaction revenue consisted primarily of the following:

 

•                              $99 million related to the acquisitions ofTravelocity Europe and lastminute.com.

 

•                              $71 million related to North America(including our Zuji joint venture) driven primarily by a $41 million increasein packaged trip revenue and a $24 million increase in stand-alone hotelrevenue, both of which were driven by higher transaction volumes. All other NorthAmerican non-air transaction revenue decreased $6 million.

 

The $26 million increase in stand-alone airtransaction revenue was primarily due to a $20 million increase resulting fromthe acquisitions of lastminute.com and Travelocity Europe.  North American stand-alone air transactionrevenue increased by $6 million driven by strong volume growth that waspartially offset by a decline in the average revenue per transaction.

 

Non-transaction revenue increased $23 million, or44%, consisting primarily of the following:

 

•          $15 million related to the acquisitions of Travelocity Europe andlastminute.com which includes the $11 million favorable impact of reduced jointventure equity method losses that resulted from the Travelocity Europe acquisition,and $4 million of advertising revenue.

 

•          $8 million related to North America (including our Zuji joint venture) drivenprimarily by a $8 million increase in Corporate revenue, the fees paid by SabreTravel Network and Sabre Airline Solutions to Travelocity for trips bookedthrough Travelocity’s online booking technology.

 

50

----

 

*Cost of Revenues*

 

The increase in cost of revenues includes $45million from the acquisitions of lastminute.com, Travelocity Europe andShowtickets.com. In addition, the increase includes a $25 million increase inexpenses associated with the volume growth of our published, net rate hotel, TotalTrip**and**Last MinuteDeals programs, as explained above in transaction revenue as well as a rateincrease for merchant credit card transactions and an increase in servicecompensation. Additionally, we had a $16 million increase related to customerservice costs as a result of higher transaction volumes.

 

*Selling, General and Administrative Expenses*

 

The increase in selling, general and administrativeexpenses includes $91 million from lastminute.com, Travelocity Europe andShowtickets.com and $17 million due to increased advertising and customeracquisition costs to drive additional travelers to our North American websites(including our Zuji joint venture). The increase in advertising expenseincludes changes in the timing of recognizing advertising expenses within thefiscal year which resulted in a reduction of $1 million for the nine monthscompared to prior year (See Note 2 to the Consolidated FinancialStatements).  Other selling, general andadministrative expenses increased $2 million.

 

*Amortization of Intangible Assets*

 

Amortization of intangible assets decreased due to certainintangible assets becoming fully amortized in 2004, partially offset by $10million of amortization of intangibles acquired in the lastminute.comacquisition.

 

*Operating Income*

 

Operatingincome increased due to the acquisition of lastminute.com as well as strongrevenue growth in North America, which offset the incremental losses resultingfrom our acquisition of Travelocity Europe.

 

51

----

 

##### **Sabre Airline Solutions**

#####  

| ** **                                  | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------|------------|------------------------------------------|------------|
| ** **                                  | ** ** | **2005**                                 | ** ** | **2004** | ** ** | **change** | ** ** | **% change** | ** ** |
| ** **                                  | ** ** | **(thousands)**                          | ** ** | ** ** | ** ** |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Segment revenues:                           |       | $                                        | 196,757    |   | $ | 180,652 |   | $ | 16,105 |   | 9 | % |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Cost of revenues:                           |       | 133,142                                  |       | 134,128 |   | (986 | ) | (1 | )% |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Gross profit:                               |       | 63,615                                   |       | 46,524 |   | 17,091 |   | 37 | % |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Selling, general & administrative: |       | 30,686                                   |       | 37,179 |   | (6,493 | ) | (17 | )% |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Amortization of intangible assets:          |       | 2,173                                    |       | 1,803 |   | 370 |   | 21 | % |
|                                        |       |                                     |       |   |   |   |   |   |   |
| Operating income                            |       | $                                        | 30,756     |   | $ | 7,542 |   | $ | 23,214 |   | 308 | % |

 

*Revenues*

 

The increase in revenues was driven primarilyby a $13 million increase in airline reservations hosting revenue driven byhigher volumes from adding new customers as well as volume growth from ourexisting customer base.  Additionally,consulting revenues increased $6 million due to certain contractual objectivesbeing met and an increase in customer engagements, and product revenueincreased $5 million as a result of higher demand for our products.  This growth was offset by an $8 milliondecline in our low margin, custom developed software business.

 

*Cost of Revenues*

 

The decrease in cost of revenues is due to an$11 million decrease in headcount related expenses driven by an increase incapitalized salary and benefits and a decrease in headcount.  Additionally, development labor expensesdecreased $3 million caused by a decline in demand in our low margin, customdeveloped software business.  These decreaseswere offset by a $3 million increase in variable compensation due to morefavorable performance, a $3 million increase in data processing cost primarilydue to transaction volume growth, a $2 million increase in amortization ofinternally developed software and project delivery costs due to highercapitalized balances, a $2 million increase in communications expenses causedby an increase in data network rates, a $1 million increase in servicespurchased due primarily to the outsourcing of training and other services, anda $2 million increase in other employee related expenses.

 

*Selling, General and Administrative Expenses*

 

The decrease in selling, general and administrativeexpenses was driven by a $9 million decrease in bad debt expense caused by thereceipt of payments on accounts that had been previously reserved. Thisdecrease was somewhat offset by increases in other expenses of $3 million.

 

*Amortization of Intangible Assets*

 

Amortization of intangible assets increased due tointangible amortization associated with the acquisition of RM Rocade in August 2004partially offset by intangible assets becoming fully amortized in 2004.

 

*Operating Income*

 

##### **The increase in operating income was primarily drivenby higher revenues, cost savings in headcount related expenses and morefavorable collection activities.**

 

52

----

 

##### **The following section describes ourresults of operations on a consolidated basis for non-operating income andexpense items.  See ConsolidatedStatements of Income:**

#####  

##### **Interest Income**

#####  

Interestincome for the nine months ended September 30, 2005 increased by $5million as compared to the nine months ended September 30, 2004 due tointerest on short term investments and our $11 million note with Zuji that weentered into in January 2005. Average balances of our short-term investments were lower, offset byimproved rates of return on those balances.

 

##### **Interest Expense**

#####  

Interest expense for the nine months ended September 30,2005 increased approximately $12 million as compared to the nine months ended September 30,2004 due to interest paid on the Bridge Facility and a higher LIBOR rate.  A portion of our fixed rate debt is swappedinto variable rate debt based on the LIBOR rate.  See Note 6 of the Consolidated FinancialStatements and *“Item 3. Quantitative and QualitativeDisclosures about Market Risk.”*

 

**Gain on Sale of Investment**

 

On March 11, 2005, we sold our interestin Karavel SA, a French tour operator. We received approximately $27 million (EUR20 million) in cash proceeds in connection with the sale and recorded a $21million gain in other income.  This gainwas offset by a $1 million loss on the conversion of a note receivable andwarrants from TRX.

 

**Loss on Derivative Instrument**

 

In order to offset our currency exposure in relationto the acquisition of lastminute.com we purchased an option in May 2005 toacquire GBP and EUR currencies at a fixed rate at or near the closing of thetransaction for $10 million.  Due to thestrengthening of the U.S. Dollar against these currencies, we recorded a $10million loss.  This $10 million loss wasoffset in the third quarter of 2005 by a $2 million gain on forward contracts weentered into to purchase GBP 578million and EUR 115 million to lock in the U.S. Dollar price of the acquisitionof lastminute.com.  In the third quarterof 2005, these forward contracts matured resulting in a gain of $2 million.

 

##### **Other, net**

#####  

Other, net income for the nine months ended September 30,2005 decreased by $4 million compared to the nine months ended September 30,2004, due to a gain from settling a contract dispute in 2004.

 

##### **Income Taxes**

#####  

The****provision for income taxes for the ninemonths ended September 30, 2005 increased $29 million as compared tothe nine months ended September 30, 2004. This increase is due to the tax effect of an approximately $20 millionincrease in pre-tax income between periods, additional state income taxes of $2million, a reduction of foreign tax credits of $2 million and a prior yearrelease of previously accrued taxes of $18 million.  See Note 5 to the Consolidated FinancialStatements for additional information regarding income taxes.

 

##### **Net Earnings**

#####  

Net earnings for the ninemonths ended September 30,2005 decreased by $9 million ascompared to the nine months ended September 30, 2004 despite growthin our operating income of $19 million.Our gain from sale of our Karavel investment and higher interest income wasoffset by higher interest expense and a loss on hedging activities related toour lastminute.com acquisition.  Inaddition, 2004 net income was positively impacted by the release of previouslyaccrued income taxes of $18 million.

 

53

----

 

**SABRE HOLDINGS CORPORATION**

**LIQUIDITY AND CAPITALRESOURCES**

 

We require cash to pay our operating expenses, makecapital expenditures, invest in our products and offerings, pay dividends,repurchase shares of our Common Stock and service our debt and other long-termliabilities.  Although our primary sourceof funds has been from our operations, we have in the past and may in thefuture raise external funds through the sale of stock or debt in the publiccapital markets or in privately negotiated transactions.  In assessing our liquidity, key componentsinclude our net income adjusted for non-cash and non-operating items, andcurrent assets and liabilities, in particular accounts receivable, accountspayable, and accrued expenses.  For thelonger term, our debt and long-term liabilities are also considered key toassessing our liquidity.

 

Our future minimum non-cancelable contractualobligations as of September 30, 2005 are as follows (in thousands ofdollars):

 
| ** **                                             | ** ** | **Payments Due by Year**                   | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **For the Years Ending December 31,** | ** ** |
| ** **                                             | ** ** | ** **                                 | ** ** | **2005** | ** ** | **2006 -** | ** ** | **2008 -** | ** ** | ** ** | ** ** |
| **Contractual Obligations**                            | ** ** | **Total**                                  | ** ** | **(remaining)** | ** ** | **2007** | ** ** | **2009** | ** ** | **Thereafter** | ** ** |
| Notes  payable (1)                                     |       | $                                          | 1,408,253  |   | $ | 9,220 |   | $ | 881,433 |   | $ | 58,800 |   | $ | 458,800 |   |
| Capital  lease obligations (2)                         |       | 236,155                                    |       | 4,803 |   | 19,214 |   | 19,214 |   | 192,924 |   |
| Operating  lease obligations                           |       | 129,502                                    |       | 8,869 |   | 53,365 |   | 29,539 |   | 37,729 |   |
| IT  outsourcing agreement (3)                          |       | 128,936                                    |       | 21,396 |   | 107,540 |   | — |   | — |   |
| AOL  agreement (4)                                     |       | 6,500                                      |       | 6,500 |   | — |   | — |   | — |   |
| Yahoo!  agreement (5)                                  |       | 32,755                                     |       | 6,755 |   | 26,000 |   | — |   | — |   |
| WNS  agreement (6)                                     |       | 135,472                                    |       | 931 |   | 44,796 |   | 58,942 |   | 30,803 |   |
| Pension and  other benefit obligations (Note 4)        |       | 156,394                                    |       | 3,001 |   | 25,811 |   | 37,167 |   | 90,415 |   |
| Other  long-term obligations (7)                       |       | 90,181                                     |       | 22,118 |   | 42,859 |   | 6,477 |   | 18,727 |   |
| Amounts  receivable under non-cancelable subleases (8) |       | (92,943                                    | )          | (1,717 | ) | (13,475 | ) | (13,078 | ) | (64,673 | ) |
|                                                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Total  contractual cash obligations                    |       | $                                          | 2,231,205  |   | $ | 81,876 |   | $ | 1,187,543 |   | $ | 197,061 |   | $ | 764,725 |   |

 

 

----

(1) Includes all interest and principal related to our $400 millionunsecured public notes.  Also includesall interest and principal related to our $800 million Bridge Facility, whichmatures on August 12, 2006, see Note 7 of the Consolidated FinancialStatements.  Excludes the effect ofinterest rate swaps. See Note 6 of the Consolidated Financial Statements.

 

(2) Consists primarily of headquarters facility lease. Excludes the effectof interest rate swap. See Note 6 of the Consolidated Financial Statements.

 

(3) Represents minimum amounts due to Electronic Data Systems Corporation (“EDS”)under the terms of our Outsourcing Agreement.

 

(4)  Payments due under anagreement with America Online (“AOL”) that provides, among other things, thatTravelocity would be the exclusive reservations engine for AOL’s Internetproperties through March 2006.

 

(5)  Fixed payment under an agreementwith Yahoo! Inc. whereby we are the exclusive air, car and hotel booking engineon Yahoo! Travel through December 31, 2006.

 

(6)  We are committed to minimum payments to WNSNorth America, Inc., an entity that we outsource a portion of our contactcenter operations and back-office fulfillment, through 2010 based upon currentand historical transactions.

 

(7) Consists primarily of minimum payments due under various marketingagreements. Also, includes a note payable and related interest owed to a jointventure partner.

 

(8) EDS subleases from us an office facility in Fort Worth, Texas, under a subleasethat will expire in 2019.

 

54

----

 

We will be required torefinance the $800 million acquisition Bridge Facility prior to its expirationon August 12, 2006.  We expect thatfunds to refinance the Bridge Facility will come from several sources,including external financing, cash generated from operations, and existing cashand marketable securities from our balance sheet.  We will evaluate multiple refinancingalternatives, including public and private markets for debt, equity, andequity-like securities.  The timing andchoice of refinancing options will be subject to market conditions. Other thanthe Bridge Facility refinancing, our current cash flows from operations,existing balances in cash and short-term investments and funds available underour revolving credit facility are sufficient to fund our planned expenditureswhich include operating expenses, capital expenditures, investments in ourproducts and offerings, interest payments on our debt and dividends. We mayalso consider using our funds available or possibly external sources of fundsfor additional acquisitions of, or investments in, complementary businesses,products, services and technologies when such opportunities become available, seeNote 3 to the Consolidated Financial Statements for current year acquisitionsand investment activity. These types of additional activities might affect ourliquidity requirements or cause us to issue additional equity or debtsecurities.

 

In the long-term, we expectto use our existing funds and cash flows from operations to satisfy our debtand other long-term obligations.  We mayalso use our funds, as well as external sources of funds, to retire debt asappropriate, based upon market conditions and our desired liquidity and capitalstructure.

 

Risk factors that couldpossibly affect the availability of our internally generated funds include, amongother things:

 

•                  margin pressure from increased customerincentives in our Sabre Travel Network business,

 

•                  changesin our Sabre Travel Network business model, including new pricing optionsoffered to travel suppliers upon expiration of the DCA 3-Year Option agreements,

 

•                  diversion of transactions away from ourdistribution offerings and other competitive pressures, and

 

•                  increased spending to fund growth inTravelocity and the integration of lastminute.com.

 

See “*Risk Factors*”for a more complete discussion of risk factors that might affect theavailability of our internally generated funds.

 

As a result of the additional debt incurred on August 1,2005 to fund the lastminute.com acquisition, Standard & Poor’s changedour credit rating from BBB+ to BBB and maintained a stable outlook and Moody’sInvestors Service changed our credit rating from Baa2 to Baa3 and changed ouroutlook from stable to negative.  We donot anticipate the ratings change will have a material impact on our cost ofborrowing.

 

***Cash Investments***

 

We invest cash in highcredit quality marketable securities, including: fixed or variable rateobligations issued by the U.S. Treasury, government agencies andmunicipalities, mutual funds, asset backed securities issued by banks,corporations, and bankruptcy-remote trusts. We use some of our securities to enter into repurchase agreements.  Our investment objectives are preservation ofprincipal, liquidity and yield. We try to invest all of our excess cash inmarketable securities.  Therefore, ourannual investments will fluctuate depending on the levels of cash provided orused by all of our other investing, operating and financing activities.

 

55

----

 

***CapitalActivities***

 

**Dividends**

 
| **Declaration Date**   | ** ** | **Payable Date**       | ** ** | **Amount per Share** | ** ** |
|------------------------|------------|------------------------|------------|----------------------|------------|
|                   |       |                   |       |                 |       |
| **2004:**              |       |                   |       |                 |       |
| January 20,  2004 |       | February 17, 2004 |       | $                    | 0.075      |   |
| April 20,  2004   |       | May 14, 2004      |       | 0.075                |       |
| July 20,  2004    |       | August 16, 2004   |       | 0.075                |       |
| October 26,  2004 |       | November 15, 2004 |       | 0.075                |       |
|                   |       |                   |       |                 |       |
| **2005:**              |       |                   |       |                 |       |
| February 1,  2005 |       | February 28, 2005 |       | $                    | 0.09       |   |
| May 3,  2005      |       | May 26, 2005      |       | 0.09                 |       |
| July 26,  2005    |       | August 18, 2005   |       | 0.09                 |       |
| November 1,  2005 |       | November 29, 2005 |       | 0.09                 |       |

 

Based on a quarterly dividend of $.09 per share, andassuming that the current number of outstanding shares of our Common Stockremains constant for the remainder of 2005, we expect to pay an aggregate ofapproximately $45 to $50 million in dividends during the fiscal year 2005.  Our Board of Directors currently intends toconsider declaring and paying comparable future dividends on a regularquarterly basis, subject to our ability to pay dividends and to a determinationby management and our Board of Directors that dividends continue to be in ourbest interests and those of our stockholders.

 

**Repurchases of Stock**

 
| ** **            | ** ** | **Authorized for** | ** ** | ** **      | ** ** | **Repurchased** | ** ** | **Available for** | ** ** |
|-----------------------|------------|--------------------|------------|-----------------|------------|-----------------|------------|-------------------|------------|
| ** **            | ** ** | **Repurchase**     | ** ** | **Repurchased** | ** ** | **under ASSP**  | ** ** | **Repurchase**    | ** ** |
| October 20, 2003 |       | $100 million       |       | $100 million    |       | $35 million     |       | —            | (1)        |
| April 19, 2004   |       | $100 million       |       | $100 million    |       | —          |       | —            | (2)        |
| October 25, 2004 |       | $100 million       |       | $100 million    |       | —          |       | —            | (3)        |
| May 2, 2005      |       | $100 million       |       | —          |       | —          |       | $100 million      | (4)        |

 

----

(1)          On October 20, 2003, our Board of Directors approved a sharerepurchase program authorizing us to repurchase up to $100 million of our CommonStock.  At December 31, 2003, we had remaining authorization torepurchase approximately $72 million of our Common Stock under thisprogram.  During the three months ended March 31, 2004, werepurchased 3,336,862 shares of our Common Stock for approximately $72 million,thereby completing the remaining authorization to repurchase shares under thatprogram.  In addition, on October 20,2003, our Board of Directors authorized the purchase of shares of our CommonStock to satisfy our obligations to deliver shares under our Employee StockPurchase Plan and our Long-Term Incentive Plan (the “Alternative ShareSettlement Program” or “ASSP”).  Under the ASSP authorization werepurchased 850,000 shares in December 2003 and 840,000 shares in January 2005.

 

(2)          On April 19, 2004, our Board of Directors approved another sharerepurchase program authorizing us to repurchase up to an additional $100million of our Common Stock.  We repurchased 4,038,166 shares of ourCommon Stock under this authorization. This authorization was completed on November 1,2004.

 

(3)          On October 25, 2004, our Board of Directors approved another sharerepurchase program authorizing us to repurchase up to an additional $100million of our Common Stock. At December 31, 2004, we had repurchased2,516,284 shares of our Common Stock and had remaining authorization torepurchase approximately $43 million of our Common Stock under thisprogram.  During the first quarter of2005, we repurchased 2,042,063 shares of our Common Stock, completing this authorizationon March 14, 2005.

 

(4)          On May 2, 2005, we received authorization from the Board ofDirectors to repurchase an additional $100 million of our Common Stock.  Due to the acquisition of lastminute.com, nopurchases of our Common Stock have been made, and none are planned, under thisauthorization as of the date of this report. As in the past, implementation of the program is at management’sdiscretion and will depend on management’s decision about the best uses for ouravailable cash.

 

We will generally seek to make any future sharerepurchases pursuant to 10b5-1 trading plans, unless such plans are terminatedat the discretion of management.

 

56

----

 

***FinancingArrangements***

 

**BridgeFinancing Arrangement**

 

On May 12,2005, we entered into an $800 million, unsecured bridge loan agreement(the “Bridge Facility”) that matures on August 12, 2006, in order toprovide temporary financing in connection with the lastminute.com acquisitionand to satisfy legal requirements for certainty of funding for theacquisition.  On July 22, 2005, weentered into an amendment to the Bridge Facility whereby all the rights andobligations of Sabre Inc. under the Bridge Facility were assumed by SabreHoldings and Sabre Inc. was discharged from its obligations thereunder.

 

Effective August 1,2005, we borrowed $800 million under the Bridge Facility in order to fund aportion of the purchase of the shares of lastminute.com in connection with thelastminute.com acquisition.

 

The interestrate on borrowings under the Bridge Facility is variable, based at ourdiscretion on either the London Interbank Offered Rate (“LIBOR”) plus aborrowing spread or the prime rate, and is sensitive to our creditrating.  The LIBOR spread at our current credit rating is 0.75%, which at September 30,2005 equated to a borrowing rate of 4.61%.

 

We may prepayall or any part of the Bridge Facility without prepayment penalty, other thanany breakage costs associated with the early repayment of loans bearing interestbased upon LIBOR.  We would be requiredto repay borrowings under the Bridge Facility with net cash proceeds we receivefrom (i) the issuance of capital stock and indebtedness for money borrowedwith a maturity in excess of one year (excluding, among other things,borrowings under our existing revolving credit agreement) and (ii) assetsales with a value of more than $200 million.

 

The BridgeFacility contains other covenants, representations, terms and conditions thatare typical for a bridge credit facility of this type which, among otherthings, restricts our ability to incur additional debt and limits our abilityto pay in excess of $150 million during the term of the Bridge Facility asdividends or to repurchase our stock.

 

As of September 30,2005, we were in compliance with all covenants under the Bridge Facilityincluding the following financial covenants:

 
| ** **                                    | ** ** | ** **      | ** ** | **Level at**           | ** ** |
|-----------------------------------------------|------------|-----------------|------------|------------------------|------------|
| ** **                                    | ** ** | ** **      | ** ** | **September 30,** | ** ** |
| **Covenant**                                  | ** ** | **Requirement** | ** ** | **2005**               | ** ** |
|                                          |       |            |       |                   |       |
| Consolidated Leverage Ratio (Debt to  EBITDA) |       | 5.0 to 1        |       | 3.14 to 1              |       |
|                                          |       |            |       |                   |       |
| Consolidated Net Worth                        |       | $1.3 billion    |       | $1.7 billion           |       |

 

We plan to refinance a portion of theborrowings under the Bridge Facility with borrowings under our revolving creditfacility. We plan to refinance the remaining borrowings under the BridgeFacility with long-term financing prior to the Bridge Facility maturing on August 12,2006.

 

**Revolving CreditFacility**

 

On July 22,2005, in order to facilitate the consummation of the lastminute.com acquisitionand to provide additional liquidity and flexibility in our capital structure,we entered into certain amendments to our current revolving credit agreement(the “Credit Facility”)with Bank of America, N.A., as agent. Under the amendments, Sabre Holdings assumed all of the rights andobligations of Sabre Inc. under the Credit Facility and Sabre Inc. wasdischarged from its obligations thereunder. The amendments also include, among other things: (i) amendments tocertain financial and negative covenants (including amendments to provide usmore flexibility under the Consolidated Leverage Ratio covenant, as shown intable in below, and amendments that place additional restrictions on oursubsidiaries’ ability to incur indebtedness), (ii) amendments thatprohibit us from using proceeds from the Credit Facility to repay the BridgeFacility to the extent such proceeds represent more than 50% of the thenaggregate committed amount of the lenders under the Credit Facility, (iii) amendmentsthat increase the aggregate amount committed by those lenders to $360 million,and (iv) amendments that allow us to request a future increase of theaggregate amount committed by the lenders under the Credit Facility to as muchas $500 million.  As of September 30,2005, there are no borrowings outstanding under this agreement.

 

57

----

 

As of September 30, 2005, we were incompliance with all covenants under this agreement including the followingfinancial covenants:

 
| ** **                                    | ** ** | ** **         | ** ** | **Level at**           | ** ** |
|-----------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                    | ** ** | ** **         | ** ** | **September 30,** | ** ** |
| **Covenant**                                  | ** ** | **Requirement**    | ** ** | **2005**               | ** ** |
|                                          |       |               |       |                   |       |
| Consolidated Leverage Ratio (Debt to  EBITDA) |       | 3.75 to 1  maximum |       | 3.14 to 1              |       |
|                                          |       |               |       |                   |       |
| Consolidated Net Worth                        |       | $1.3 billion       |       | $1.7 billion           |       |

 

 

Our covenants under the amended CreditFacility are as follows:

 
| **As amended on July 22, 2005**                | ** ** | **Requirement**    | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|
|                                                |       |               |       |
| Consolidated Leverage Ratio (Debt to  EBITDA):      |       |               |       |
| July 22, 2005 through March 30,  2006     |       | 3.75 to 1  maximum |       |
| June 30, 2006 through September 30,  2006 |       | 3.50 to 1  maximum |       |
| December 31, 2006 through March 31,  2007 |       | 3.25 to 1  maximum |       |
| June 30, 2007 and thereafter                   |       | 3.00 to 1  maximum |       |

 

**Public Notes. **In August 2001, we issued through Sabre Holdings Corporation $400million in unsecured notes (“Notes”), bearing interest at 7.35% and maturing August 1,2011, in an underwritten public offering resulting in net cash proceeds to usof approximately $397 million.  The Notesinclude certain non-financial covenants, including restrictions on incurringcertain types of debt or entering into certain sale and leaseback transactions.As of September 30, 2005, we were in compliance with all covenantrequirements under the Notes.  SabreInc., a 100% owned subsidiary of Sabre Holdings Corporation, unconditionallyguarantees all debt obligations of Sabre Holdings Corporation.  In conjunction with these Notes, we haveentered into two interest rate swaps through 2011 for a total of $300 million,which pay us 7.35% and on which we pay a variable rate based on a six-monthLIBOR plus 231 basis points.

 

**Capital Lease Obligation. **In June 2003, we entered into a ten-year master lease for ourcorporate headquarters facility in Southlake, Texas, which is accounted for asa capital lease.  The interest rate onthe capital lease financing is fixed at 5.37%. At the inception of the lease, we recorded an asset of approximately$168 million, along with a liability of approximately $168 million,representing the present value of the minimum lease payments due under thelease and the residual value guarantee discussed below.

 

At any time during the leaseterm, we have the option to terminate the lease and purchase the properties forapproximately $179 million, plus a make-whole amount, if applicable. We alsohave the option at any time up to one year prior to lease expiration to causethe properties to be sold. If this sell option is exercised, we have guaranteedthat proceeds on a sale will be at least approximately $159 million, and we areresponsible for the first dollar loss up to approximately $159 million due to adecrease in the value of the property below approximately $179 million. If thesales proceeds exceed approximately $179 million plus any sales-relatedexpenses, we retain the excess.  Inconjunction with this lease, we have entered into a $100 million interest rateswap which pays us 5.37% and on which we pay a variable rate based on asix-month LIBOR plus 153 basis points. Under the lease agreement, we are subject to certain covenants.  As of September 30, 2005, we were incompliance with all covenants under this agreement including the followingfinancial covenant:

 
| ** **             | ** ** | ** **      | ** ** | **Level at**           | ** ** |
|------------------------|------------|-----------------|------------|------------------------|------------|
| ** **             | ** ** | ** **      | ** ** | **September 30,** | ** ** |
| **Covenant**           | ** ** | **Requirement** | ** ** | **2005**               | ** ** |
|                   |       |            |       |                   |       |
| Consolidated Net Worth |       | $1.0 billion    |       | $1.7 billion           |       |

 

***Off-Balance SheetArrangements***

 

We do not have any relationships or agreements as ofSeptember 30, 2005 that would be considered an off balance sheetarrangement as defined by Item 303(a)4ii of Regulation S-K.

 

58

----

 

***Cash Flows (inthousands)***

 
| ** **                                        | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Cash provided by operating activities             |       | $                                        | 238,231    |   | $ | 318,170 |   |
| Cash used for investing activities                |       | $                                        | (887,370   | ) | $ | (113,641 | ) |
| Cash provided by (used for) financing  activities |       | $                                        | 704,190    |   | $ | (182,843 | ) |

 

**Operating Activities**- Cash provided by operating activities during the nine months ended September 30,2005 was $238 million, which was primarily from net earnings, adjusted fornon-cash and non-operating items of $253 million.  Cash used by working capital items was $15million, which includes accounts receivable, prepaid expenses, accrued compensationand benefits, accounts payable and other accrued liabilities.  Non-cash adjustments are an increase to netearnings of $93 million for the nine months ended September 30, 2005 and included depreciation andamortization of $92 million, bad debt expense of $5 million, joint venture equitylosses of $2 million, a loss on a foreign currency option and forwards of $8million, deferred income taxes of $8 million and stock compensation expense of$9 million offset by a net gain on the sale of our investments of $20 millionand other non-cash adjustments of $10 million.

 

Cash provided by operating activities duringthe nine months ended September 30, 2004 was $318 million,which was primarily from net earnings adjusted for non-cash and non-operatingitems of $288 million and cash provided by working capital items totaling $30million, which includes accounts receivable, prepaid expenses, accruedcompensation and benefits, accounts payable and other accrued liabilities.  Non-cash adjustments to net earnings of $119 millionfor the first nine months of 2004 included depreciation and amortization of $94million, bad debt expense of $15 million, joint venture equity losses of $7million and stock compensation expense of $9 million, offset by other changesof approximately $7 million.

 

Cash provided by operating activitiesdecreased by $80 million in the nine months ended September 30,2005 as compared to the year-ago period. This decrease in cash provided by operating activities was partially dueto a decrease in net income adjusted for non-cash adjustments of $35million.  Additionally, cash provided byworking capital decreased by $45 million. Although working capital was positively impacted by the increased use ofour net rate program, several factors contributed to offset this, including: a$14 million use of working capital from lastminute.com operations, a higherpayout of incentive compensation in 2005 compared to 2004 of $22 million, a onetime receipt of $20 million in 2004 from contracts cancelled in 2003, $11million more in customer incentive payouts due to volume growth and higherincentive rates and a higher contribution to our defined pension plan of $10million year to date.

 

**Investing Activities**- The $774 million increase in cash used for investing activities in the ninemonths ended September 30,2005 as compared to the year-ago period primarily results from a $1,135 millionincrease in acquisitions (net of cash acquired) which results primarily fromour acquisition of lastminute.com. Additionally, capital expenditures increased $6 million.  Offsetting these cash uses for investingactivities are the $313 million increase in net sales of our portfolio ofmarketable securities primarily used in the purchase of lastminute.com and $41million of proceeds from the sale of our investments in Karavel and TRX.Additionally, investments to joint ventures decreased $14 million primarily dueto the acquisition of the remaining 50% of our Travelocity Europe joint venturein December of 2004 which was where most of 2004 investments in jointventures were made.

 

**Financing Activities** - Cash provided by financing activities was$704 million for the nine months ended September 30, 2005, compared to a use ofcash of $183 million for the same period a year ago.  This was primarily due to the $800 million inproceeds from our Bridge Facility that we used to acquire lastminute.com.  Additionally, a reduction in the number ofshares of our Common Stock that we repurchased under our Board authorized stockrepurchasing plans resulted in a $102 million reduction in cash outflows.  Offsetting this decrease in shares of CommonStock repurchased was an increase in dividends paid of $4 million due to anincrease in our dividend rate from $.075 per share in 2004 to $.09 per share in2005. Proceeds from the issuance of Common Stock decreased $11 million due tofewer employee stock option exercises resulting from a generally lower price ofour Common Stock.

 

59

----

 

**Critical Accounting Policies**

 

The discussion and analysis of our financialcondition and results of operations is based on our consolidated financialstatements, which have been prepared in accordance with generally acceptedaccounting principles (“GAAP”) in the United States. The preparation of thesefinancial statements requires us to make estimates and judgments that affectour reported assets and liabilities, revenues and expenses, and other financialinformation. Actual results may differ significantly from these estimates, andour reported financial condition and results of operations could vary underdifferent assumptions and conditions. In addition, our reported financialcondition and results of operations could vary due to a change in theapplication of a particular accounting standard.

 

We regard an accounting estimate underlying ourfinancial statements as a “critical accounting estimate” if the accountingestimate requires us to make assumptions about matters that are highlyuncertain at the time of estimation and if different estimates that reasonablycould have been used in the current period, or changes in the estimate that arereasonably likely to occur from period to period, would have had a materialeffect on the presentation of financial condition, changes in financialcondition, or results of operations.

 

We have updated our critical accounting policiesregarding taxes and advertising.  Beyondthis update, there have been no changes to our critical accounting policies orsignificant changes in assumptions or estimates that would affect such policiesin the nine months ended September 30, 2005. Our critical accountingpolicies are described under the caption “*Management’sDiscussion and Analysis of Financial Condition and Results of Operations*”in our Annual Report on Form 10-K for the year ended December 31, 2004.  In addition, for a discussion of significantaccounting policies, see Footnote 2 of our audited financial statementsincluded in our Annual Report on Form 10-K for the year ended December 31,2004, as well as Footnote 2 to our unaudited interim financial statementsincluded in this Quarterly Report on Form 10-Q.

 

**Income and Non-Income Taxes:**  The calculation of our taxliabilities involves significant judgment and evaluation of uncertainties inthe interpretation of complex tax regulations.  As a result, we haveestablished reserves for taxes and associated interest that may become payablein future years as a result of audits by tax authorities.  Regardingvalue-added taxes, we have established reserves regarding the collection ofrefunds which are subject to audit and collection risks in various regions ofEurope.  Tax reserves are reviewed regularly pursuant to Statement ofFinancial Accounting Standard No. 5 “*Accountingfor Contingencies”*.  Tax reserves are adjusted as events occurthat affect our potential liability for additional taxes and associatedinterest, such as the expiration of statutes of limitations, conclusion of taxaudits, identification of additional exposure based on current calculations,identification of new issues, or the issuance of statutory or administrativeguidance or rendering of a court decision affecting a particular issue. The amount of our liability for taxes could exceed our reserves, which couldhave a material adverse effect on our financial results.

 

**Advertising–**Prior to 2005, certain advertising costs weredeferred within the fiscal year to future interim periods where the benefit ofthat advertising extended beyond the quarter in which they occurred.  Beginning in the first quarter of 2005,advertising costs are expensed in the period in which they are incurred with nodeferral to subsequent interim periods. Our current advertising strategy, particularly for Travelocity, is to generateinterest in travel promotions and products where returns are more immediate,whereas in the past our strategy was developing overall brand awareness.

 

This expensetiming change resulted in lower selling, general and administrative expensesfor the three months ended September 30, 2005 of an estimated $7 millionand higher net income of $4 million or $.03 per share.  For the nine months ended September 30,2005, this timing change resulted in lower selling, general and administrativeexpenses of an estimated $1 million and higher net income of less than $1million or $.01 per share.  The impact ofthis timing change will be neutral to advertising expense for the full year.

 

We estimatethat if we had used our current advertising expense method in 2004, selling,general and administrative expenses would have been an estimated $10 millionlower and net income an estimated $6 million, or $.05 per share higher for thethree months ended September 30, 2004 and selling, general andadministrative expenses would have been $4 million higher and net income anestimated $2 million, or $.02 per share lower for the nine months ended September 30,2004.

 

60

----

 

**Mergersand Acquisitions**

 

**Acquisition of lastminute.com –**OnJuly 20, 2005, we completed the acquisition of lastminute.com, a leading online travel agency and leisurecompany in Europe. The aggregate cost of the acquisition wasapproximately $1.2 billion ($1,070 million net of cash acquired). The aggregatecost includes cash paid to lastminute.com plc stockholders of $1,023 million,debt retired of $138 million and direct acquisition costs of $12 million. We used approximately $367 million ofavailable cash and marketable securities ($264 million, net of cash acquired)to fund the acquisition and incurred $800 million in additional indebtednessunder the Bridge Facility as discussed in Note 7 to the ConsolidatedFinancial Statements.  We plan torefinance the Bridge Facility before it expires on August 12, 2006, and weare considering various long-term financingarrangements, which may or may not include a combination of debt, cash, equityor equity-like securities.

 

Withthe acquisition of lastminute.com our Travelocity segment greatly expanded itsscale. We can now offer travel suppliers a greater number of potential buyersin a broader geographic area, particularly Europe.  We expect this increased scale to allow us tooffer consumers even better travel deals and a greater range of internationaloptions.  An immediate benefit is ourability to give lastminute.com customers access to the wide range of hotels inTravelocity’s net rate hotel program. lastminute.com customers will have agreater range of U.S. and international travel options, and over time,Travelocity should gain more European travel choices.

 

lastminute.com has been included in ourConsolidated Income Statement from the date of acquisition, July 20,2005.  The assets acquired andliabilities assumed have been recorded on our Consolidated Balance Sheets basedon preliminary estimates of fair value by management and results of anindependent valuation.  We continue toreview the fair value of assets and liabilities acquired.  The final allocation of the purchase pricewill be based on a complete evaluation of the assets and liabilities of lastminute.com.  Accordingly, the information presented on ourConsolidated Balance Sheets and elsewhere in this report may differ materiallyfrom the final purchase price allocation. The recorded goodwill relatedto the acquisition of lastminute.com by our Travelocity segment will bedeductible for income tax purposes and represents a value attributable to anincreased competitive position in Europe and greater scale.

 

**Gulf Air Joint Venture** - On December 31,2004, we entered into a joint venture with Gulf Air, a leading airline carrierin the Middle East, for which we will pay $31 million during 2005, $28 millionof which has been paid as of September 30, 2005. The joint venture, SabreTravel Network Middle East, is owned 60% by Sabre Travel Network and 40% by GulfAir and will further extend our travel network products and services into theMiddle East region. The joint venture will provide technology services,bookable travel products and distribution services for travel agencies,corporations and travel suppliers in the region.  In addition, Sabre Airline Solutions enteredinto a five-year revised contract with Gulf Air to provide the *SabreSonic*SM suite of products forpassenger management, as well as additional operational software and consultingservices. The goodwill resulting from this transaction is not deductible fortax purposes. Intangible assets subject to amortization will be amortized overtheir respective lives. The results of the Gulf Air joint venture areconsolidated into our financial results.

 

**Acquisition of SynXis-** On January 19, 2005, we completed theacquisition of SynXis Corporation (“SynXis”), for approximately $41 million incash including acquisition costs, of which $37 million has been paid as of September 30,2005. The acquisition of the *SynXis*®reservation management, distribution and technology services for hotels enablesus to further build on our capabilities and offerings to hoteliers, to leveragenew hotel content for all of our travel agents, and to extend reservationtechnology currently used at approximately 6,000 hotels, primarily in theUnited States and Europe and is a part of our Sabre Travel Network segment. Theacquired goodwill is not deductible for tax purposes.  Intangible assets subject to amortizationwill be amortized over their respective lives.

 

61

----

 

### **CAUTIONARY STATEMENT**

###  

Statements inthis report, or in statements by our spokespersons, which are not purelyhistorical facts or which necessarily depend upon future events, includingstatements regarding our anticipations, beliefs, expectations, hopes,intentions or strategies for the future, may be forward-looking statementswithin the meaning of Section 21E of the Securities Exchange Act of 1934,as amended.  All forward-lookingstatements in this report are based upon information available to us on thedate of this report.  We undertake noobligation to publicly update or revise any forward-looking statements, whetheras a result of new information, future events or otherwise.  Any forward-looking statements involve risksand uncertainties, such as the risk factors described below, that could causeactual events or results to differ materially from the events or resultsdescribed in the forward-looking statements. Readers are cautioned not to place undue reliance on forward-lookingstatements.

 

### **RISK FACTORS**

###  

Risksassociated with an investment in our securities, and with achieving theforward-looking statements contained in this report or in our news releases,websites, public filings, investor and analyst conferences or elsewhere,include, but are not limited to, the risk factors described below.  Any of the risk factors described below couldhave a material adverse effect on our business, financial condition or resultsof operations.  We may not succeed inaddressing these challenges and risks.

 

#### ***Ourrevenues are highly dependent on the travel and transportation industries, andparticularly on air travel, and a prolonged substantial decrease in traveltransaction volumes could adversely affect us.***

####  

Our revenueincreases and decreases with the level of travel and transportationactivity.  The travel industry isseasonal and our revenue varies significantly from quarter to quarter.  Our revenue is also highly subject to declinesin or disruptions to travel and transportation that may be caused by factorsentirely out of our control.  Forexample, negative perceptions held by travelers about the following factors mayadversely affect travel activity:

 

•                                  economicdownturns, rising fuel costs and the financial instability of travel suppliers,

 

•                                  politicalinstability, acts of terrorism, hostilities and war,

 

•                                  securityissues, including increased airport security,

 

•                                  inclementweather, including hurricanes,

 

•                                  increasedoccurrence of travel-related accidents, and

 

•                               travelers’concerns about exposure to contagious diseases such as severe acute respiratorysyndrome (SARS) or avian influenza (bird flu).

 

A prolongedsubstantial decrease in travel transaction volumes could have an adverse impacton our financial performance, operations, liquidity, or capital resources.

 

#### ***Changesto our travel supplier relationships may reduce our revenues.***

####  

Most of ourrevenue is derived from airlines, hotel operators, car rental companies, cruiseand tour operators and other suppliers in the travel and transportationindustries.  We depend on a relativelysmall number of airlines for a significant portion of our revenues.  To compete effectively in the traveldistribution industry, we must offer broad, dependable access to airlinecontent and features such as schedules, seat availability and fares, includingweb fares.  Airlines and other suppliersmay choose to reduce our access to content that we have offered in thepast.  In particular, since the deregulationof the CRS industry in the United States, airlines have more flexibility tolimit their participation in our *Sabre* GDS, orto not participate.  Several majorairlines in the United States are experiencing liquidity problems.  Some of those airlines are consolidating,others have sought bankruptcy protection, and still others may considerbankruptcy relief.  The financialinstability of airlines or other travel suppliers could have a materialnegative impact on our business.  If ouraccess to supplier-provided content or features were to be diminished relativeto our competitors, our business could be materially adversely affected.  Because offerings from major airlinesrepresent a large part of our business, if the *Sabre*GDS were to lack the ability to facilitate bookings on one or more majorairlines, our distribution channels would be relatively less attractive totravel agencies and travel purchasers, which could reduce our transaction feerevenue and materially adversely affect our business.

 

62

----

 

#### ***Travelsuppliers are pursuing distribution options that may reduce our access tocontent, which could reduce our revenues.***

####  

Some travelsuppliers are seeking to decrease their reliance on distribution intermediaries,including global distribution systems such as our *Sabre*GDS, by promoting other distribution channels. Many airlines, hotels, car rental companies and cruise operators havecall centers and have established their own travel distribution websites. Theairline industry has experienced a shift in segment share from full-servicecarriers to low-price carriers, which tend not to distribute their ticketsthrough third-party intermediaries such as the *Sabre*GDS and Travelocity. Travel suppliers may create or expand commercialrelationships with online and offline travel agencies that directly book travelwith those suppliers.  From time to time,travel suppliers offer advantages, such as bonus loyalty awards, lower transactionfees, or discounted prices, when their products and services are purchased fromthese supplier-related channels.  Some ofthese offerings are not available to unrelated intermediaries, or thoseintermediaries must accept lower transaction fees in exchange for access to theofferings.  Our *Sabre*GDS also competes with limited travel distribution (“LTD”) competitors, whichmay offer less content, functionality and marketing reach at a relatively lowerprice.  In addition, search engineproviders are attempting to enter the online travel marketplace by leveragingsearch technology to aggregate travel search results across supplier, travelagent and other travel-related websites. These search engines and alternative travel distribution channels havethe potential to divert customers from our distribution channels.  If our access to supplier-provided content orfeatures were to be diminished relative to our competitors, our business couldbe materially adversely affected. Because offerings from major airlines represent a large part of our business,if the *Sabre* GDS were to lack the ability tofacilitate bookings on one or more major airlines, our distribution channelswould be relatively less attractive to travel agencies and travel purchasers,which could reduce our transaction fee revenue and materially adversely affectour business.  See “*BusinessTrends - Supplier Efforts to Control Travel Distribution*” and “*Business Trends – Competition and Consolidation.*”

 

#### ***Customersmay reduce transactions through our distribution channels, which could reduceour revenues.***

####  

Our portfolioof travel distribution businesses includes channels that support the travelagency, business-direct and consumer-direct segments of the global traveldistribution marketplace.  We believethat we and our customers benefit when we broadly participate in the traveldistribution industry, including our direct to traveler services.  Broad participation in the industry gives usa distinct competitive advantage, including greater scale of our technology andother synergies.  In all of thesedistribution channels, we face significant competition.

 

•           Inthe travel agency channel, our *Sabre* GDShistorically has competed with other large and well-established globaldistribution systems.

 

•           Inthe business-direct channel, both the Travelocity Business and Sabre TravelNetwork GetThere products compete with similar offerings from travel agencies,airlines and other suppliers.

 

•           Inthe consumer-direct channel, Travelocity competes not only against similarofferings from affiliates of other global distribution systems, but also withtravel suppliers, online vertical search engines, and a large number of onlinetravel agencies.

 

•           OurSabre Airline Solutions business unit competes against several organizationsoffering internal reservation system and related technology services toairlines.

 

In somecircumstances, our business segments have objectives that lead to conflictswith customers of our different business segments.  For example, our *Travelocity.com*âand *Travelocity Business*websites competewith travel-agency subscribers of Sabre Travel Network.  That competition could cause current orpotential travel agency subscribers to elect to use competing GDS providers,websites or other channels of travel distribution, which could reduce ourtransaction fee revenue and materially adversely affect our business.  If our competitors introduce new pricing orofferings that we cannot meet in a timely or cost-effective manner, ourcustomers may elect to use other travel distribution channels and our businessmay be materially adversely affected.  Inaddition, travelers and other persons may use our websites and other resourcesto obtain schedules, availability, pricing and other travel information andthen elect to purchase travel from a competitor, which would tend to increaseour costs without producing revenue.

 

63

----

 

#### ***Consolidationin the travel industry and increased competition for customers may increasecosts and reduce revenue.***

####  

Consolidationamong participants in the travel industry may increase their negotiatingleverage, thereby providing them with competitive advantages over us that mayincrease our costs and reduce our revenues.

 

Consolidationamong travel suppliers, such as major hotel and airline mergers and alliances,may increase competition from these supplier-related distribution channels orgive them additional leverage to negotiate lower transaction fees payable toour travel distribution channels, including the *Sabre*GDS.  In order for our distributionchannels to obtain access to important airline content offerings (includingsuppliers with DCA 3-Year Option contract addenda), we are evaluating variouspricing models for airline suppliers.  Itis, however, difficult to predict with certainty, in a recently deregulatedenvironment, the impact of new pricing models on our revenues or results ofoperations.

 

GDSs, such asour *Sabre* GDS, compete to attract and retaintravel agencies.  Some travel suppliershave reduced or eliminated commissions paid to travel agencies (includingconsumer-direct travel sites like Travelocity). The loss of supplier commissions causes travel agencies to become moredependent on other sources of revenues, such as traveler-paid service fees andGDS-paid incentives.  The reduction orelimination of supplier-paid commissions has forced some smaller travelagencies to close or to combine with larger travel agencies.  Although the *Sabre*GDS has a leading share of large travel agencies, competition is particularly intenseamong global distribution systems for larger travel agency subscribers,including online travel agencies. Consolidation of travel agencies may increase competition for thesesubscribers and increase the ability of those agencies to negotiate highercustomer incentives.  In order to competeeffectively, we may need to increase incentives, pre-pay incentives, increasespending on marketing or product development, or make significant investmentsto purchase strategic assets.

 

#### ***Travelocity’srevenue growth largely depends on expanding net rate (merchant) programs.***

####  

Travelocity’srevenue growth is driven by expanding global use of the internet and drivingpurchases through our online travel websites. The online travel marketplace is highly competitive, with bothindependent online travel agencies and suppliers’ proprietary websitescompeting for customers.  Travelocity’sbusiness strategy largely depends on growing its net rate program offerings(commonly referred to in the industry as “merchant model” programs, because theonline agency is the merchant of record for credit card processing).  Growing the net rate programs is particularlydependent upon our ability to offer adequate hotel rooms.  Many hoteliers utilize net rate programs todispose of excess hotel rooms at discounted rates.  Demand for supplier offerings may increase asa result of increased travel and competition from net rate offerings by ourcompetitors.  If demand increases forsuppliers’ products, services and other content offerings, suppliers may limitour right to distribute their offerings or may increase the cost of thoseofferings.  Travelocity’s businessstrategy also depends on expanding its dynamic packaging offerings, maintainingthe breadth of its access to supplier offerings, developing its brand in acost-effective manner in the United States, Europe, Asia and other growthregions, increasing traffic to its websites (including direct distribution aswell as through current and future distribution partners), and expanding the appealof *Travelocity Business* to businesstravelers.  We also plan to investstrategically in growth opportunities, such as our recent acquisition oflastminute.com.  If any of theseinitiatives is not successful, or requires extensive investment, Travelocity’sgrowth may be limited and it may be unable to achieve or maintainprofitability.

 

64

----

 

#### ***We maybe unsuccessful in pursuing and integrating business combinations, strategicalliances, or products and technologies, which could result in increasedexpenditures or cause us to fail to achieve anticipated cost savings or revenuegrowth.***

####  

We arecurrently seeking to integrate recently acquired businesses as described inthis report, including our acquisition of lastminute.com.  There are risks inherent in these types oftransactions, such as: difficulty in assimilating or integrating theoperations, technology and personnel of the combined companies; difficultiesand costs associated with integrating and evaluating the internal controlsystems of acquired businesses; disruption of our ongoing business, includingloss of management focus on existing businesses and marketplace developments;problems retaining key technical and managerial personnel; expenses associatedwith the amortization of identifiable intangible assets; additional orunanticipated operating losses, expenses or liabilities of acquired businesses;impairment of relationships with existing employees, customers and businesspartners; and fluctuations in value and losses that may arise from equityinvestments.

 

We expect torealize strategic and other benefits as a result of our acquisition oflastminute.com.  Our ability to realizethese benefits or successfully integrate lastminute.com’s businesses, however,is subject to certain risks and uncertainties, including:

 

•                  Wehave initiated our efforts to assess the internal controls over financialreporting related to lastminute.com’s business, but we are in the early stagesof this evaluation process.  As we progress, we may identify individualdeficiencies that represent material weaknesses.  Further, as moreinformation is learned we may determine that some combination of deficiencieswhen evaluated together result in a material weakness.  We will attempt topromptly resolve identified deficiencies, which may involve material changes tolastminute.com’s internal controls. We cannot provide assurance that existinginternal controls over financial reporting will be able to detect or preventmaterial reporting errors or fraud, but the characterization of anyinternal controls deficiency as a material weakness would not necessarilyindicate any actual material reporting error or fraud. We may incur significantadditional costs to resolve deficiencies in internal controls and disclosurecontrols.  As we noted in item 4 of Part I of this Form 10-Q, wedo not expect to report until our 2006 Form 10-K on ourassessment of, or on any material change that we may make to, lastminute.com’sinternal controls over financial reporting.

 

•           Employeesimportant to lastminute.com’s operations may decide to discontinue employmentunder our ownership.

 

•           Wemay be unable to maintain and enhance our relationships with lastminute.com’sexisting customers and suppliers.

 

•           Wemay be unable to anticipate or manage risks that are unique to lastminute.com’sbusiness, including those related to its workforce, customer demographics,regulatory environment, information systems, culture and geography.

 

•           Toreplace the Bridge Facility financing we utilized to consummate thelastminute.com acquisition, we will need to raise external funds through thesale of securities in the public capital markets or through privatetransactions, which might affect our liquidity and capital resources or causedilution to common stockholders.

 

Our failure tomanage these or other risks related to the acquisition could prevent us fromrealizing the expected benefits of the acquisition and also may have a materialadverse effect on our results of operations and financial condition.

 

In addition,we plan to continue to examine possible business combinations, investments,joint ventures or other strategic alliances with other companies in order tomaintain and grow revenue and marketplace presence.  We may not be able to: identify suitablecandidates for additional business combinations and strategic investments;obtain financing on acceptable terms for such business combinations andstrategic investments; or otherwise consummate such business combinations andstrategic investments on acceptable terms. We may be unable to successfully complete potential acquisitions due tomultiple factors, such as issues related to regulatory review of the proposedtransactions.  To consummate suchtransactions, we may need to raise external funds through the sale of stockand/or debt in the capital markets or through private placements, which mightaffect our liquidity requirements.

 

65

----

 

#### ***Rapidtechnological changes and new distribution channels or unauthorized use of ourintellectual property may adversely affect the value of our current or futuretechnologies to us and our customers, which could cause us to increaseexpenditures to upgrade and protect our technology or develop and protectcompeting offerings in new distribution channels.***

####  

Newdistribution channels and technology in our industry are evolving rapidly.  Our ability to compete and our future resultsdepend in part on our continued ability to maintain and to make timely andcost-effective enhancements, upgrades and additions to our technology inresponse to changes in consumer preferences and increased demand for ourproducts and services.  We must also keeppace with rapid advancements in technology, standards and practices, andprotect our technology.  Additionally, wemust maintain our ability to ensure the security and privacy of personalinformation transmitted through our websites and other distribution channels.  Unauthorized use of our intellectual propertycould have a material adverse effect on us, and our legal remedies may notadequately compensate us for the damages to our business caused by suchuse.  Protecting our intellectualproperty from unauthorized use could be expensive and time consuming.  Maintaining flexibility to respond totechnological and marketplace dynamics or to respond to evolving security andprivacy requirements may require substantial expenditures and lead-time.  We cannot assure you that we will successfullyidentify and develop new products or services in a timely manner, thatofferings, technologies or services developed by others will not render ourofferings obsolete or noncompetitive, or that the technologies in which wefocus our research and development investments will achieve acceptance in themarketplace and provide a return on our investment.

 

#### ***We willencounter risks and difficulties similar to those frequently experienced inrapidly evolving industries such as the travel distribution industry.***

####  

Some of theserisks relate to our ability to:

 

•           attractand retain customers on a cost-effective basis,

 

•           expandand enhance our service offerings, including the use of new technologies,

 

•           operate,support, expand and develop our operations, websites, software, data centers,communications and other systems,

 

•           maintainand diversify our sources of revenue, including by entering into agreementsthat may reflect changes to our *Sabre* GDSbusiness model,

 

•           maintainand develop our existing brands and distribution channels, as well as to make cost-effectiveexpenditures in connection with these initiatives,

 

•           manageour relationships with important travel suppliers and other industryparticipants, and

 

•           respondto competitive marketplace conditions.

 

If we areunsuccessful in addressing these risks or in executing our business strategy,our business, financial condition or results of operations may suffer.

 

#### ***We relyon third parties to provide critical systems and infrastructure.***

####  

Our businessesare largely dependent on the computer data centers and network systems operatedfor us by Electronic Data Systems Corporation and on the globaltelecommunications infrastructure.  Werely on several communications service suppliers and on the global Internet toprovide network access between our computer data center and call centers andend-users of our services.  Travelocity(including Site59â andlastminute.com) is dependent upon GDSs (the *Sabre* GDS andothers) to process travel bookings.  Ifthose providers do not enable us to provide our customers and suppliers withreliable, real-time access to our systems, our business may be materiallyadversely affected.

 

66

----

 

#### ***Oursuccess depends on maintaining the integrity of, and upgrading the quality of,our systems and infrastructure, which may suffer failures, capacity constraintsand business interruptions, which could increase our operating costs and causeus to lose customers.***

####  

In order to besuccessful, we must provide reliable, real-time access to our systems for ourcustomers and suppliers while also pursuing a low-cost model.  Consumers and suppliers will not tolerate aservice hampered by slow delivery times, unreliable service levels, serviceoutages due to the installation of upgrades, or insufficient capacity.  As our operations grow in both size andscope, we will continuously need to improve and upgrade our systems andinfrastructure to offer an increasing number of customers and travel suppliersenhanced products, services, features and functionality – all while maintainingthe reliability and integrity of our systems and infrastructure and whilepursuing reduced costs per transaction. The expansion of our systems and infrastructure will require us tocommit substantial financial, operational and technical resources before thevolume of business increases, with no assurance that the volume of businesswill increase.  System capacity limits orconstraints arising from unexpected increases in our volume of business couldcause interruptions, outages or delays in our services, or deterioration intheir performance, or could impair our ability to process transactions.  We occasionally experience systeminterruptions that make unavailable some or all of our global distributionsystem or other data processing services (including the services that SabreAirline Solutions provides to airlines). System interruptions may prevent us from efficiently providing servicesto our customers or other third parties, which could result in our losingcustomers and revenues, or incurring liabilities.  Much of the computer and communicationshardware upon which we depend is located in a single facility.  Our systems might be damaged or interruptedby fire, flood, power loss, telecommunications failure, break-ins, earthquakes,terrorist attacks, hostilities or war or similar events.  Computer viruses, denial of service attacks,physical or electronic break-ins and similar disruptions affecting the globalInternet or our systems might cause service interruptions, delays and loss ofcritical data, and could prevent us from providing our services.  Problems affecting our systems might beexpensive to remedy and could significantly diminish our reputation and brandname and prevent us from providing services. We could be harmed by outages in, or unreliability of, the data centeror network systems.  The occurrence ofany of these events could result in a material adverse effect on our business.

 

#### ***Ourcollection, processing, storage, use and transmission of personal data mayresult in liabilities.***

####  

In ourprocessing of travel transactions, we collect, process, store, use and transmitlarge amounts of personally identifiable data. Our handling of these types of data is increasingly subject to legalrestrictions around the world, including the European Union.  In addition, the United States government iscontemplating initiatives to enhance national and aviation security, includingthe Transportation Security Administration’s Computer-Assisted PassengerPrescreening System (CAPPS II).  Theseinitiatives may result in conflicting legal requirements in the United Statesand other jurisdictions.  Companies thathandle these types of data have also been subject to investigations, lawsuitsand adverse publicity due to allegedly improper disclosure of personallyidentifiable information.  Our businesscould be materially adversely affected if legal restrictions on the use ofpersonally identifiable information are expanded or are interpreted in waysthat conflict with our business practices.

 

#### ***Tax issueshave the potential to have an adverse effect on our financial condition andresults of operations.***

####  

We are subjectto a variety of taxes in many jurisdictions globally.  We establish reserves for our potentialliability for taxes, consistent with applicable accounting principles and inlight of all current facts and circumstances. The reserves represent our best estimate of our contingent liability fortaxes.  The interpretation of tax laws,and the determination of any potential liability under those laws, is complexand the amount of our liability may exceed our established reserves which couldhave a material adverse effect on our financial results.

 

Some state andlocal taxing authorities impose taxes on the sale, use or occupancy of hotelroom accommodations, which are called transient, occupancy, accommodation,sales or hotel room taxes.  Hoteloperators generally collect and remit these occupancy taxes.  Consistent with that practice, when acustomer books a hotel room through one of our travel services under our netrate hotel program, we collect from the customer an amount sufficient to paythe hotel its room charge and the occupancy taxes on that charge, as well as anadditional amount that represents our fees. We do not collect or remit occupancy taxes on our fees.  Some tax authorities claim that occupancytaxes should be collected on some or all of those fees.  We believe there are strong arguments thatour fees are not subject to occupancy taxes (although tax laws vary among thejurisdictions).  We are attempting toresolve this issue with tax authorities in various jurisdictions, but we cannotpredict the resolution in any particular jurisdiction.  Any actual liability we may have foroccupancy taxes, or the size of the reserve we may establish for those taxes,could be affected by a variety of factors, such as the number of jurisdictionsthat prevail in either assessing additional occupancy taxes or negotiating asettlement with us, the amount of fees potentially subject to tax in each jurisdiction,changes in applicable tax laws, and the timing of any or all of the foregoing.

 

67

----

 

#### ***Regulatorydevelopments abroad could limit our ability to compete by restricting ourflexibility to respond to competitive conditions, which could cause ourcustomers to be diverted to our competitors and adversely affect our revenueand results of operations.***

####  

The E.U.Commission is engaged in a comprehensive review of its rules governing CRSsystems.  It is unclear when the E.U.Commission will complete its review and what changes, if any, will be made toits CRS rules.  We could be unfairly andadversely affected if, for example, these rules are retained as totraditional global distribution systems used by travel agencies but are notapplied to travel distribution websites owned by more than one airline.  We could also be adversely affected ifrestrictions are imposed or continued on CRS advertising and displays or ifadditional limitations are placed upon our right to contract with travel agentsor airlines.  We could also be adverselyaffected if changes to any of the foregoing CRS rules increase our cost ofdoing business or weaken the non-discriminatory participation rules toallow one or more large airlines owning a competing CRS to discontinue or tolower its level of participation in our global distribution system.

 

#### ***Ourinternational operations are subject to other risks, which may impede ourability to grow internationally and adversely affect our overall results ofoperations.***

####  

We continuallyseek to expand the reach of our various businesses into international marketsas well as to successfully integrate, operate and manage our existing andfuture international operations.  Ourinternational operations are subject to risks, including those listed below,that may adversely affect our ability to conduct and grow businessinternationally and could materially adversely affect our business:

 

•           changesin foreign currency exchange rates;

 

•           competitionfrom local businesses, which may have a better understanding of, and ability tofocus on, local consumers and their preferences, as well as more establishedlocal brand recognition and better access to local financial and strategicresources;

 

•           difficultyin developing, managing and staffing international operations as a result ofdistance, language and cultural differences;

 

•           disruptionsto communication and transportation services;

 

•           business,political and economic instability in foreign locations, including actual orthreatened terrorist activities, and military action;

 

•           adverselaws, governmental policies or actions, such as consumer and trade protectionmeasures; taxes, restrictions on foreign investment, limits on the repatriationof funds; and lesser protection for intellectual property; and

 

•           economicand political conditions, including adverse political or consumer reactions inthe United States.

 

#### ***Ourongoing cost reduction plans may not continue to be successful.***

####  

Our strategydepends, to a substantial degree, on reducing and controlling operatingexpenses.  In furtherance of thisstrategy, we have engaged in ongoing, company-wide activities intended toreduce costs.  These activities includepersonnel reductions, reductions in personnel-related costs, programs designedto reduce the growth rate of incentive payments to travel agencies, andrealigning and streamlining operations and consolidating facilities.  Part of our cost reduction strategyinvolves leveraging our status as a global company to conduct some of ouroperations outside the United States, such as customer call centers andsoftware development, either by contracting with foreign companies that workfor us or by expanding our own operations outside the United States.  We cannot assure you that our efforts willcontinue to result in the increased profitability, cost savings or otherbenefits that we expect.

 

68

----

 

## **Item 3. Quantitative and Qualitative Disclosures about Market Risk**

##  

### **Interest Rate Risk**

###  

At September 30, 2005,our exposure to interest rates was related primarily to our marketablesecurities portfolio and our Bridge Facility. Offsetting some of this exposure was the fixed to floating interest rateswaps on our public notes and capital lease. The objectives of our marketable securities are preservation ofprincipal, liquidity and yield.  As such,our investment portfolio consists primarily of fixed or variable rateobligations issued by the U.S. Treasury, government agencies and municipalities,mutual funds, asset backed securities issued by banks, corporations, andbankruptcy remote trust.  If short-terminterest rates had been 10% lower during the nine months ended September 30,2005, our interest income from marketable securities would have decreased byapproximately $1.1 million.  This amountwas determined by applying the hypothetical interest rate change to our averagebalance of marketable securities during the nine months ended September 30,2005.

 

At September 30, 2005 we had obligations underour $800 million Bridge Facility, fixed rate notes of $400 million (“Notes”)and a $168 million capital lease obligation. We entered into fixed to floating interest rate swaps related to $300million of the outstanding Notes, effectively converting $300 million of the$400 million fixed rate Notes into floating rate obligations.  We also entered into a fixed to floatinginterest rate swap that effectively converts $100 million of the capital leaseobligation into a floating rate obligation (see Note 6 to the ConsolidatedFinancial Statements for additional details on the swaps).  If short-term interest rates had been 10%higher during the nine months ended September 30, 2005, our interestexpense would have increased by approximately $1 million. This amount wasdetermined by applying the hypothetical interest rate change to our floatingrate borrowings balance during nine months ended September 30, 2005. Ifour mix of interest rate-sensitive assets and liabilities changessignificantly, we may enter into additional derivative transactions to manageour net interest rate exposure.

 

### **ForeignCurrency Risk**

###  

We have various operations outside of the United States, primarily inNorth America, South America, Europe, Australia and Asia.  As a result ofthese business activities, we are exposed to foreign currency risk.  Duringtimes of volatile currency movements this risk can materially impact ourearnings.  To reduce the impact of this earnings volatility, we hedge aportion of our foreign currency exposure by entering into foreign currencyforward contracts on our three largest foreign currency exposures.  Theseforward contracts, totaling $115 million at December 31, 2004 and $141million at September 30, 2005, represent obligations topurchase foreign currencies at a predetermined exchange rate to fund a portionof our expenses that are denominated in foreign currencies.  lastminute.comalso enters into short dated forward contracts to hedge a portion of itsforeign currency exposure related to travel supplier liability payments.  In December 2004, we purchased foreigncurrency denominated government bonds to function as a hedge of a portion ofour 2005 foreign currency exposure.  Toprotect these bond investments from foreign currency risk, we purchased putoptions on the currencies in which the government bonds are denominated.  These options give us the right to sell theforeign currencies at predetermined prices. The result of an immediate 10% devaluation of the U.S. dollar in 2005from September 30, 2005levels relative to our primary foreign currency exposures would result in anegative U.S. dollar impact of approximately $2 million for the remainderof 2005, net of hedge instruments outstanding.  This sensitivity analysiswas prepared based upon 2005 projections of our primary foreigncurrency-denominated operations and foreign currency forwards and foreigncurrency denominated bonds outstanding as of September 30, 2005.

 

69

----

 

## **Item 4. Controls and Procedures**

##  

***ControlsEvaluation and Related CEO and CFO Certifications.***    Our management, withthe participation of our principal executive officer (“CEO”) and principalfinancial officer (“CFO”) conducted an evaluation of the effectiveness of thedesign and operation of our disclosure controls and procedures as of the end ofthe period covered by this Quarterly Report. The controls evaluation wasconducted by our Disclosure Controls Council, comprised of seniorrepresentatives from our Finance, Accounting, Internal Audit, Tax, InvestorRelations, Corporate Communications and Legal Departments under the supervisionof our CEO and CFO.

 

Attached as exhibits to this Quarterly Report arecertifications of our CEO and our CFO, which are required in accordance with Rule 13a-14of the Securities Exchange Act of 1934, as amended (“Exchange Act”). This “Controlsand Procedures” section includes the information concerning the controlsevaluation referred to in the certifications, and it should be read inconjunction with the certifications for a more complete understanding of thetopics presented.

 

***Limitations onthe Effectiveness of Controls.***    We do not expect that our disclosure controlsand procedures will prevent all errors and all fraud. A system of controls andprocedures, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the system are met.Because of the limitations in all such systems, no evaluation can provideabsolute assurance that all control issues and instances of fraud, if any,within the Company have been detected. Furthermore, the design of any system ofcontrols and procedures is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions,regardless of how unlikely. Because of these inherent limitations in acost-effective system of controls and procedures, misstatements or omissionsdue to error or fraud may occur and not be detected.

 

***Scope of theControls Evaluation.***    Theevaluation of our disclosure controls and procedures included a review of theirobjectives and design, the Company’s implementation of the controls andprocedures and the effect of the controls and procedures on the informationgenerated for use in this Quarterly Report. In the course of the evaluation, wesought to identify whether we had any data errors, control problems or acts offraud and to confirm that appropriate corrective action, including processimprovements, were being undertaken if needed. This type of evaluation isperformed on a quarterly basis so that conclusions concerning the effectivenessof our disclosure controls and procedures can be reported in our QuarterlyReports on Form 10-Q, which supplement our disclosures made in our AnnualReport on Form 10-K. Many of the components of our disclosure controls andprocedures are also evaluated by our Internal Audit Department, our LegalDepartment and by personnel in our Finance organization. The overall goals ofthese various evaluation activities are to monitor our disclosure controls andprocedures on an ongoing basis, and to maintain them as dynamic systems thatchange as conditions warrant.

 

***Conclusions regardingdisclosure controls.***    Basedon the required evaluation of our disclosure controls and procedures, our CEOand CFO have concluded that, as of September 30, 2005, we maintaindisclosure controls and procedures that are effective in providing reasonableassurance that information required to be disclosed by us in the reports thatwe file or submit under the Securities Exchange Act of 1934, as amended, isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our CEO and CFO, as appropriate toallow timely decisions regarding required disclosure.

 

***Changes ininternal controls over financial reporting.***   During the quarter ended September 30,2005, we completed our acquisition of lastminute.com.  Given the significance of the acquisition, webelieve that the internal controls and procedures of lastminute.com arereasonably likely to materially affect the Company’s internal controls overfinancial reporting.  The Company beganits integration of lastminute.com during the quarter ended September 30,2005.  Relying upon guidance from the SECin its October 2004 Frequently Asked Questions Regarding Management’sReport on Internal Control Over Financial Reporting and Certification ofDisclosure in Exchange Act Periodic Reports (“FAQs”), we intend to excludelastminute.com from our assessment of the Company’s internal control overfinancial reporting as of December 31, 2005, because we believe that itwould not be possible to complete our integration and assessment oflastminute.com in time to include it in that assessment.  We will include lastminute.com in ourassessment of the Company’s internal control over financial reporting as of December 31,2006.  In addition, relying upon theFAQs, we intend to disclose in the Company’s annual report for the year ended December 31,2006 any material changes to the Company’s internal control over financialreporting that may be made as a result of the integration oflastminute.com.  As a result, we are notcommenting in this Form 10-Q about any changes in our internal controlsover financial reporting as a result of our integration of lastminute.com.

 

Other than the lastminute.com acquisition,during the quarter ended September 30, 2005, there were no changes in ourinternal controls over financial reporting (or in other factors) that havematerially affected, or are reasonably likely to materially affect, ourinternal controls over financial reporting.

 

70

----

 

# **PART **II:OTHER INFORMATION

# ** **

## ***Item 1.Legal Proceedings***

##  

The litigation matters described below involveissues or claims that may be of particular interest to the Company’sstockholders, regardless of whether any of these matters may be material to thefinancial position or operations of the Company based upon the standard setforth in the SEC’s rules.

 

We are party to two lawsuits against NorthwestAirlines, Inc. (“Northwest”) that have been consolidated in federal courtin Fort Worth, Texas.  The federal courtin Fort Worth has administratively closed the proceedings as a result ofNorthwest filing a voluntary bankruptcy petition on September 12,2005.  The proceedings may be reopened bymotion of any party in the lawsuits.  Thelawsuits relate to Northwest’s 2004 announcement and implementation of a faresupplement for travel reservation bookings made through a GDS (including the***Sabre* GDS) by traditional travel agencies and some online travel sites (suchas Travelocity).  In *Sabre Inc. v. Northwest Airlines, Inc.*, we allege that Northwest’s actions breachedits contract for participation in the***Sabre** *GDS.  In *NorthwestAirlines Corporation v. Sabre Inc. et al.*, Northwest alleges that the Company’s responsive actions breached thesame contract, violated Section 2 of the Sherman Act, interfered withprospective contractual relations, and constituted deceptive trade practices,fraud, and false advertising under the federal Lanham Act.  Northwest seeks a declaratory judgment thatthe Company, and not Northwest, breached the *Sabre* GDSparticipation contract**and violated federal and state statutes.  Northwest also seeks to enjoin the Companyfrom certain conduct and it alleges that it suffered unspecified damages, forwhich it seeks treble damages under the antitrust laws, and attorneysfees.  We are unable to estimate theamount of the loss, if any, that might arise from this litigation.

 

71

----

 

## ***Item 2.Unregistered Sales of Equity Securities and Use of Proceeds***

##  

(a) – (b) None.

 

### **ISSUERPURCHASES OF EQUITY SECURITIES**

###  

OnOctober 25, 2004, our Board of Directors approved a share repurchaseprogram authorizing us to repurchase up to $100 million of our CommonStock.  This program was announced on October 28,2004. We completed this authorization in March 2005 with the purchase of2,042,063 shares of our Common Stock during the first three months of2005.  All purchases were made throughthe open market pursuant to 10b5-1 trading plans.

 

OnMay 2, 2005, we received authorization from our Board of Directors torepurchase an additional $100 million of our Common Stock.  Due to the acquisition of lastminute.com, nopurchases of our Common Stock have been made under this authorization as of thedate of this report.  As in the past,implementation of the program is at management’s discretion and will depend onthe best uses for our available cash.

 

OnOctober 20, 2003 our Board of Directors issued a standing annualauthorization to purchase shares of our Common Stock to satisfy our obligationsto deliver shares under our Employee Stock Purchase Plan and our Long-TermIncentive Plan (the “Alternative Share Settlement Program”).  We purchased 850,000 shares of our CommonStock under this authorization in December 2003 and 840,000 shares of ourCommon Stock under this authorization in January 2005 through the openmarket pursuant to 10b5-1 trading plans. We did not make any purchases under this authorization during the lastquarter.

 

Weexpect that the timing, volume and price of any future repurchases of ourCommon Stock will be made pursuant to trading plans that we intend asqualifying under Rule 10b5-1, unless such plans are terminated at thediscretion of management.

 

As previously discussed, we made no repurchases of our Common Stockduring the last quarter:

 
| **Period**                                             | ** ** | **Total Number  of Shares  Purchased** | ** ** | **Weighted  Average  Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly  Announced  Programs** | ** ** | **Maximum Dollar  Value of Shares  That May Yet be  Purchased Under  the Program****(1)** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|---------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| July 1, 2005 – July 31, 2005            |       | —                                 |       | $                                            | n/a        |                                                                                  | —     |                                                                                           | $          | 100,000,000 |   |
| August 1,  2005 – August 31, 2005       |       | —                                 |       | $                                            | n/a        |                                                                                  | —     |                                                                                           | $          | 100,000,000 |   |
| September 1,  2005 – September 30, 2005 |       | —                                 |       | $                                            | n/a        |                                                                                  | —     |                                                                                           | $          | 100,000,000 |   |
| Total 3rd  Quarter 2005 Repurchases                    |       | —                                 |       | $                                            | n/a        |                                                                                  | —     |                                                                                           |       |   |

 

----

(1)  Our Board of Directors did notimpose a set limit on the repurchase authority under the Alternative SharesSettlement Program described above.  Theamount purchased is dependent on the number of shares required to satisfy ourobligations to deliver shares under the Employee Stock Purchase Plan andLong-Term Incentive Plan.

 

## ***Item 3.Defaults Upon Senior Securities***

##  

None.

 

72

----

 

***Item 4. Submission of Matters to aVote of Security Holders***

 

None

 

## ***Item 5.Other Information***

##  

(a)  On November 3, 2005, we advised affectedemployees that we amended The Sabre Inc. Legacy Pension Plan (the “Pension Plan”)and our Supplemental Executive Retirement Plans (the “SERPs”), effective December 31,2005, to freeze accruals of credit under the Pension Plan, and under thePension Plan component of the SERPs, for years of service or increases incompensation or both (except for determining vesting and benefit eligibility).The Pension Plan provides retirement benefits for certain eligible employees.The SERPs provide retirement benefits for certain eligible key employees,including certain executive officers. The amendments do not affect any benefitaccrued on or before December 31, 2005, and the Pension Plan and SERPswill continue to operate and pay these accrued benefits. A copy of the amendedPension Plan and each of the affected SERPs will be filed with our annualreport on Form 10-K for the year ended December 31, 2005.

 

(b)  None.

 

73

----

 

***Item 6. Exhibits***

 

The following exhibits areincluded herein:

 
| **Exhibit Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                         |
|-------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                                                               |
| 10.1                    |       | 2004 Form of Restricted Stock Unit Replacement Award Agreement  (1)                                                                                                                                                           |
| 10.2                    |       | 2005 Form of Restricted Stock Unit Replacement Award Agreement  (1)                                                                                                                                                           |
| 12.1                    |       | Computation of Ratio of Earnings to Fixed Charges (1)                                                                                                                                                                              |
| 31.1                    |       | Written statement pursuant to 17 CFR 240.13a-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 4,  2005, signed by Michael S. Gilliland as Chief Executive Officer (1)        |
| 31.2                    |       | Written statement pursuant to 17 CFR 240.13a-14(a), as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated November 4,  2005, signed by Jeffery M. Jackson as Chief Financial Officer (1)          |
| 32.1                    |       | Written statement pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 4,  2005, signed by Michael S. Gilliland as Chief Executive Officer (2) |
| 32.2                    |       | Written statement pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated November 4,  2005, signed by Jeffery M. Jackson as Chief Financial Officer (2)   |

 

----

(1) Filedherewith.

 

(2) SabreHoldings Corporation is furnishing, but not filing, the written statementspursuant to Title 18 United States Code 1350, as added by Section 906 tothe Sarbanes-Oxley Act of 2002, of Michael S. Gilliland, the Chief ExecutiveOfficer of Sabre Holdings Corporation and Jeffery M. Jackson, the ChiefFinancial Officer of Sabre Holdings Corporation.

 

74

----

 

**Signature**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| Date: November 4, 2005 | SABRE HOLDINGS CORPORATION |
|-----------------------------|----------------------------|
|                        |                       |   |
|                        |                       |   |
|                        | By:                        | /s/ JEFFERY M. JACKSON |
|                        |                       | Jeffery M. Jackson*Executive Vice President, Chief Financial Officer  and Treasurer  (Principal Financial Officer)* |
|                        |                       |   |
|                        |                       |   |
|                        | By:                        | /s/ MARK K. MILLER |
|                        |                       | Mark K. Miller*Senior Vice President and Controller  (Principal Accounting Officer)* |

 

75

----