**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

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**FORM 10-Q**

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

 

**For the Quarterly Period Ended June 30, 2005.**

 

**OR**

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

 

**For the Transition Period From             To              **

 

**Commission file number 1-12175.**

 

 

**SABREHOLDINGS CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **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 areacode **(682) 605-1000**

 

**Not Applicable**

(Former name, former address and former fiscal year, if changed sincelast report)

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter periods that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý  No o

 

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

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

Class A Common Stock, $.01 par value—**131,116,780**as of July 29, 2005

 

 

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**INDEX**

 

**SABRE HOLDINGS CORPORATION**

 
| PART I:   | FINANCIAL INFORMATION                                                                              | 3  |
|-----------|----------------------------------------------------------------------------------------------------|----|
| Item 1.   | Financial Statements (Unaudited)                                                                   | 3  |
|      | Consolidated Balance Sheets—December 31, 2004 and June 30, 2005                               | 3  |
|      | Consolidated Statements of Income—Three and six months ended June 30,  2004 and 2005          | 4  |
|      | Consolidated Condensed Statement of Stockholders’ Equity—Six months  ended June 30, 2005 | 5  |
|      | Consolidated Statements of Cash Flows—Six months ended June 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        | 25 |
| Item 3.   | Quantitative  and Qualitative Disclosures About Market Risk                                        | 60 |
| Item 4.   | Controls and  Procedures                                                                           | 61 |
| PART II:  | OTHER INFORMATION                                                                                  | 62 |
| Item 1.   | Legal Proceedings                                                                                  | 62 |
| Item 2.   | Unregistered Sales of Equity Securities and  Use of Proceeds                                       | 63 |
| Item 3.   | Defaults Upon Senior Securities                                                                    | 63 |
| Item 4.   | Submission of Matters to a Vote of Security  Holders                                               | 64 |
| Item 5.   | Other Information                                                                                  | 64 |
| Item 6.   | Exhibits                                                                                           | 65 |
| SIGNATURE | 67                                                                                                 |

 

2

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**PART I. FINANCIAL INFORMATION**

 

***Item 1. Financial Statements***

 

**SABRE HOLDINGS CORPORATION**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands)**

 
| ** **                                                                                                                       | ** ** | **June 30,**    | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------|------------|
| ** **                                                                                                                       | ** ** | **2005**        | ** ** | **2004**         | ** ** |
| ** **                                                                                                                       | ** ** | **(Unaudited)** | ** ** | ** **       | ** ** |
| **Assets**                                                                                                                       |       |            |       |             |       |
| **Current  assets**                                                                                                              |       |            |       |             |       |
| Cash                                                                                                                             |       | $               | 47,427     |             | $          | 49,671 |   |
| Marketable securities                                                                                                            |       | 756,613         |       | 787,353          |       |
| Accounts receivable, net                                                                                                         |       | 431,341         |       | 349,621          |       |
| Prepaid expenses                                                                                                                 |       | 78,355          |       | 63,521           |       |
| Deferred income taxes                                                                                                            |       | 31,105          |       | 23,349           |       |
| Total current assets                                                                                                             |       | 1,344,841       |       | 1,273,515        |       |
|                                                                                                                             |       |            |       |             |       |
| **Property  and equipment**                                                                                                      |       |            |       |             |       |
| Buildings and leasehold improvements                                                                                             |       | 313,916         |       | 309,635          |       |
| Furniture, fixtures and equipment                                                                                                |       | 36,017          |       | 33,579           |       |
| Computer equipment                                                                                                               |       | 118,586         |       | 120,515          |       |
| Internally developed software                                                                                                    |       | 227,165         |       | 195,638          |       |
|                                                                                                                             |       | 695,684         |       | 659,367          |       |
| Less accumulated depreciation and  amortization                                                                                  |       | (299,578        | )          | (272,026         | )          |
| Total property and equipment                                                                                                     |       | 396,106         |       | 387,341          |       |
|                                                                                                                             |       |            |       |             |       |
| Deferred income taxes                                                                                                            |       | 7,665           |       | 9,955            |       |
| Investments in joint ventures                                                                                                    |       | 158,125         |       | 176,249          |       |
| Goodwill and intangible assets, net                                                                                              |       | 1,015,231       |       | 988,600          |       |
| Other assets, net                                                                                                                |       | 198,464         |       | 182,317          |       |
| **Total  assets**                                                                                                                |       | $               | 3,120,432  |             | $          | 3,017,977 |   |
|                                                                                                                             |       |            |       |             |       |
| **Liabilities  and stockholders’ equity**                                                                                   |       |            |       |             |       |
| **Current  liabilities**                                                                                                         |       |            |       |             |       |
| Accounts payable                                                                                                                 |       | $               | 146,681    |             | $          | 177,207 |   |
| Net rate program related liabilities                                                                                             |       | 148,594         |       | 58,313           |       |
| Accrued compensation and related benefits                                                                                        |       | 56,279          |       | 80,448           |       |
| Accrued subscriber incentives                                                                                                    |       | 91,288          |       | 84,357           |       |
| Deferred revenues                                                                                                                |       | 25,058          |       | 24,906           |       |
| Other accrued liabilities                                                                                                        |       | 227,641         |       | 183,061          |       |
| Total current liabilities                                                                                                        |       | 695,541         |       | 608,292          |       |
|                                                                                                                             |       |            |       |             |       |
| Pensions and other postretirement benefits                                                                                       |       | 154,692         |       | 154,537          |       |
| Other liabilities                                                                                                                |       | 22,164          |       | 23,101           |       |
| Minority interests                                                                                                               |       | 11,456          |       | 5,143            |       |
| Long-term capital lease obligation                                                                                               |       | 162,322         |       | 161,114          |       |
| Public and other notes payable                                                                                                   |       | 438,278         |       | 439,309          |       |
|                                                                                                                             |       |            |       |             |       |
| Commitments and contingencies                                                                                                    |       |            |       |             |       |
|                                                                                                                             |       |            |       |             |       |
| **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 June 30, 2005 and December 31, 2004 |       | 1,459           |       | 1,459            |       |
| Additional paid-in capital                                                                                                       |       | 1,275,213       |       | 1,289,574        |       |
| Retained earnings                                                                                                                |       | 722,398         |       | 644,360          |       |
| Accumulated other comprehensive loss                                                                                             |       | (26,594         | )          | (9,426           | )          |
| Less treasury stock at cost: 14,770 and  12,913 shares, respectively                                                             |       | (336,497        | )          | (299,486         | )          |
| Total stockholders’ equity                                                                                                  |       | 1,635,979       |       | 1,626,481        |       |
| **Total  liabilities and stockholders’ equity**                                                                             |       | $               | 3,120,432  |             | $          | 3,017,977 |   |

 

See Notes to Consolidated Financial Statements.

 

3

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**SABRE HOLDINGS CORPORATION**

### **CONSOLIDATEDSTATEMENTS OF INCOME**

**(Unaudited) (In thousands, except per share amounts)**

 
| ** **                                    | ** ** | **Three Months Ended  June 30,** | ** **  | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------|-------------|--------------------------------|------------|
| ** **                                    | ** ** | **2005**                         | ** **  | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues**                                  | ** ** | **$**                            | **619,255** |                           | $          | 550,903 | ** ** | **$** | **1,201,143** |   | $ | 1,090,656 |   |
| Cost of revenues                              | ** ** | **365,736**                      |        | 307,777                        | ** ** | **703,759** |   | 619,292 |   |
| **Gross  profit**                             | ** ** | **253,519**                      |        | 243,126                        | ** ** | **497,384** |   | 471,364 |   |
| **Other  operating expenses**                 |       |                             |        |                           |       |   |   |   |   |
| Selling, general and administrative           | ** ** | **163,620**                      |        | 139,455                        | ** ** | **328,263** |   | 286,084 |   |
| Amortization of intangible assets             | ** ** | **6,793**                        |        | 15,228                         | ** ** | **14,821** |   | 27,349 |   |
| Total other operating expenses                | ** ** | **170,413**                      |        | 154,683                        | ** ** | **343,084** |   | 313,433 |   |
|                                          |       |                             |        |                           |       |   |   |   |   |
| **Operating  income**                         | ** ** | **83,106**                       |        | 88,443                         | ** ** | **154,300** |   | 157,931 |   |
| **Other  income (expense)**                   |       |                             |        |                           |       |   |   |   |   |
| Interest income                               | ** ** | **6,100**                        |        | 3,306                          | ** ** | **10,469** |   | 6,541 |   |
| Interest expense                              | ** ** | **(8,388**                       | )           | (6,431                         | **)**      | **(16,002** | ) | (12,858 | ) |
| Gain on sale of investment                    | ** ** | **—**                       |        | —                         | ** ** | **20,594** |   | — |   |
| Loss on derivative instrument                 | ** ** | **(9,994**                       | )           | —                         | ** ** | **(9,994** | ) | — |   |
| Other, net                                    | ** ** | **988**                          |        | 6,057                          | ** ** | **1,597** |   | 6,485 |   |
|                                          | ** ** | ** **                       |        |                           | ** ** | ** ** |   |   |   |
| Total other income (expense)                  | ** ** | **(11,294**                      | )           | 2,932                          | ** ** | **6,664** |   | 168 |   |
| ** **                                    | ** ** | ** **                       |        |                           | ** ** | ** ** |   |   |   |
| **Income  before provision for income taxes** | ** ** | **71,812**                       |        | 91,375                         | ** ** | **160,964** |   | 158,099 |   |
| Provision for income taxes                    | ** ** | **27,925**                       |        | 32,438                         | ** ** | **59,396** |   | 56,125 |   |
|                                          |       |                             |        |                           |       |   |   |   |   |
| **Net  earnings**                             | ** ** | **$**                            | **43,887**  |                           | $          | 58,937 | ** ** | **$** | **101,568** |   | $ | 101,974 |   |
| ** **                                    | ** ** | ** **                       |        |                           | ** ** | ** ** |   |   |   |
| **Earnings  per common share**                |       |                             |        |                           |       |   |   |   |   |
|                                          |       |                             |        |                           |       |   |   |   |   |
| Basic                                         |       | $                                | 0.34        |                           | $          | 0.43 |   | $ | 0.78 |   | $ | 0.74 |   |
|                                          |       |                             |        |                           |       |   |   |   |   |
| Diluted                                       |       | $                                | 0.34        |                           | $          | 0.42 |   | $ | 0.78 |   | $ | 0.73 |   |

 

See Notes to Consolidated FinancialStatements.

 

4

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**SABRE HOLDINGS CORPORATION**

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

**SIX MONTHS ENDED JUNE 30, 2005**

**(Unaudited) (In thousands)**

 
| ** **                                                                                      | ** ** | **Class A  Common  Stock** | ** ** | **Additional Paid   in Capital** | ** ** | **Retained   Earnings** | ** ** | **Accumulated   Other   Comprehensive  Loss** | ** ** | **Treasury   Stock** | ** ** | **Total** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------------------------------|------------|-------------------------|------------|-----------------------------------------------|------------|----------------------|------------|-----------|------------|
| Balance at December 31, 2004                                                                    |       | $                          | 1,459      |                             | $          | 1,289,574               |       | $                                             | 644,360    |                 | $          | (9,426    | )          | $ | (299,486 | ) | $ | 1,626,481 |   |
| Issuance of class A common stock pursuant to:                                                   |       |                       |       |                             |       |                    |       |                                          |       |                 |       |      |       |
| Stock option plans                                                                              |       | —                     |       | (516                             | )          | —                  |       | —                                        |       | 2,206                |       | 1,690     |       |
| Restricted stock plan                                                                           |       | —                     |       | (18,744                          | )          | —                  |       | —                                        |       | 16,993               |       | (1,751    | )          |
| Employee stock purchase plan                                                                    |       | —                     |       | (882                             | )          | —                  |       | —                                        |       | 4,777                |       | 3,895     |       |
| Tax benefit from exercise of employee stock  options                                            |       | —                     |       | 127                              |       | —                  |       | —                                        |       | —               |       | 127       |       |
| Dividends, $0.09 per common share                                                               |       | —                     |       | —                           |       | (23,530                 | )          | —                                        |       | —               |       | (23,530   | )          |
| Purchases of treasury stock                                                                     |       | —                     |       | —                           |       | —                  |       | —                                        |       | (60,987              | )          | (60,987   | )          |
| Stock based compensation for employees                                                          |       | —                     |       | 5,663                            |       | —                  |       | —                                        |       | —               |       | 5,663     |       |
| **Comprehensive  income:**                                                                      |       |                       |       |                             |       |                    |       |                                          |       |                 |       |      |       |
| Net earnings                                                                                    |       | —                     |       | —                           |       | 101,568                 |       | —                                        |       | —               |       | 101,568   |       |
| Unrealized loss on foreign currency forward  and option contracts, net of deferred income taxes |       | —                     |       | —                           |       | —                  |       | (8,103                                        | )          | —               |       | (8,103    | )          |
| Unrealized gain on investments, net of  deferred income taxes                                   |       | —                     |       | —                           |       | —                  |       | 579                                           |       | —               |       | 579       |       |
| Unrealized foreign currency translation  loss                                                   |       | —                     |       | —                           |       | —                  |       | (9,783                                        | )          | —               |       | (9,783    | )          |
| Other                                                                                           |       | —                     |       | —                           |       | —                  |       | 139                                           |       | —               |       | 139       |       |
| Total comprehensive income                                                                      |       |                       |       |                             |       |                    |       |                                          |       |                 |       | 84,400    |       |
| Other                                                                                           |       | —                     |       | (9                               | )          | —                  |       | —                                        |       | —               |       | (9        | )          |
| Balance at June 30, 2005                                                                        |       | $                          | 1,459      |                             | $          | 1,275,213               |       | $                                             | 722,398    |                 | $          | (26,594   | )          | $ | (336,497 | ) | $ | 1,635,979 |   |

 

See Notes to Consolidated Financial Statements.

 

5

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**SABRE HOLDINGS CORPORATION**

### **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(Unaudited) (In thousands)**

 
| ** **                                                                       | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                       | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| **Operating  Activities**                                                        |       |                          |       |   |   |
| Net earnings                                                                     |       | $                             | 101,568    |   | $ | 101,974 |   |
| Adjustments to reconcile net earnings to  cash provided by operating activities: |       |                          |       |   |   |
| Depreciation and amortization                                                    |       | 53,334                        |       | 64,448 |   |
| Stock-based compensation for employees                                           |       | 5,663                         |       | 6,433 |   |
| Allowance for doubtful accounts                                                  |       | 687                           |       | 9,790 |   |
| Deferred income taxes                                                            |       | 2,757                         |       | (3,180 | ) |
| Loss on derivative instrument                                                    |       | 9,994                         |       | — |   |
| Joint venture equity loss                                                        |       | 2,661                         |       | 7,621 |   |
| Gain on sale of investment                                                       |       | (20,594                       | )          | — |   |
| Other                                                                            |       | (2,231                        | )          | (4,431 | ) |
| Changes in operating assets and  liabilities:                                    |       |                          |       |   |   |
| Accounts receivable                                                              |       | (78,409                       | )          | (34,482 | ) |
| Prepaid expenses                                                                 |       | (23,620                       | )          | 5,328 |   |
| Other assets                                                                     |       | 2,788                         |       | 20,270 |   |
| Accrued compensation and related benefits                                        |       | (24,169                       | )          | (4,293 | ) |
| Accounts payable and other accrued  liabilities                                  |       | 30,936                        |       | 73,065 |   |
| Net rate program related liabilities                                             |       | 90,282                        |       | 40,835 |   |
| Pensions and other postretirement benefits                                       |       | 294                           |       | 5,075 |   |
| Other liabilities                                                                |       | 2,434                         |       | (2,102 | ) |
| Cash provided by operating activities                                            |       | 154,375                       |       | 286,351 |   |
|                                                                             |       |                          |       |   |   |
| **Investing  Activities**                                                        |       |                          |       |   |   |
| Additions to property and equipment                                              |       | (40,609                       | )          | (35,908 | ) |
| Purchases of marketable securities                                               |       | (5,837,810                    | )          | (4,138,162 | ) |
| Sales of marketable securities                                                   |       | 5,869,207                     |       | 4,030,234 |   |
| Proceeds from sale of investment                                                 |       | 26,013                        |       | — |   |
| Loans and investments to joint venture  partners                                 |       | (12,538                       | )          | (32,934 | ) |
| Acquisitions (net of cash acquired)                                              |       | (66,773                       | )          | — |   |
| Purchase of foreign currency options                                             |       | (10,000                       | )          | — |   |
| Other investing activities                                                       |       | —                        |       | (5,000 | ) |
| Cash used for investing activities                                               |       | (72,510                       | )          | (181,770 | ) |
|                                                                             |       |                          |       |   |   |
| **Financing  Activities**                                                        |       |                          |       |   |   |
| Proceeds from issuance of common stock                                           |       | 3,834                         |       | 10,802 |   |
| Dividends paid                                                                   |       | (23,530                       | )          | (20,906 | ) |
| Purchases of treasury stock                                                      |       | (63,213                       | )          | (101,925 | ) |
| Other financing activities, net                                                  |       | (1,200                        | )          | (1,712 | ) |
| Cash used for financing activities                                               |       | (84,109                       | )          | (113,741 | ) |
|                                                                             |       |                          |       |   |   |
| Decrease in cash                                                                 |       | (2,244                        | )          | (9,160 | ) |
| Cash at beginning of period                                                      |       | 49,671                        |       | 40,862 |   |
| Cash at end of period                                                            |       | $                             | 47,427     |   | $ | 31,702 |   |

 

See Notes to Consolidated FinancialStatements.

 

6

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**SABRE HOLDINGS CORPORATION**

 

### **NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

Sabre Holdings Corporation (“SabreHoldings”) is a Delaware holding company. Sabre Inc. is the principal operatingsubsidiary and sole direct subsidiary of Sabre Holdings. Sabre Inc. or itsdirect or indirect subsidiaries conduct all of our businesses. In thisQuarterly Report on Form 10-Q, references to the “company”, “we”, “our”, “ours”and “us” refer to Sabre Holdings and its consolidated subsidiaries unlessotherwise stated or the context otherwise requires.

 

We are a world leader in travel commerce, marketing travel products andproviding distribution and technology solutions for the travel industry. Weoperate in multiple travel distribution channels: the travel agency channel,the consumer-direct channel and the business-direct channel. 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 corporate channels. Weengage in consumer-direct and business-direct travel marketing and distributionthrough our *Travelocity*Ò business. In addition, our *SabreAirline Solutions*Ôbusiness is a leading provider of technology and services, includingdevelopment and consulting services, to airlines and other travel providers.

 

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

 

**Basis of Presentation****–**The accompanying unaudited consolidated financial statements havebeen prepared in accordance with accounting principles generally accepted inthe United States for interim financial information and with the instructionsto Form 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatements. In the opinion of management, these financial statements containall adjustments, consisting of normal recurring accruals, necessary to presentfairly the financial position, results of operations and cash flows for theperiods indicated. The preparation of financial statements in accordance withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the financial statements and accompanying notes. Operating results for thethree and six months ended June 30, 2005 are not necessarily indicative ofresults that may be expected for any other interim period or for the year endedDecember 31, 2005.  Our quarterlyfinancial data should be read in conjunction with our consolidated financialstatements for the year ended December 31, 2004 (including the notesthereto), set forth in Sabre Holdings Corporation’s Annual Report onForm 10-K filed with the Securities and Exchange Commission on March 11,2005.

 

We consolidate all of our majority-owned subsidiaries and companiesthat are not variable interest entities over which we exercise control throughmajority voting rights.  We would alsoconsolidate all variable interest entities of which we are the primarybeneficiary.  However, no entities arecurrently consolidated due to us being the primary beneficiary throughoperating agreements, financing agreements, or other arrangements (includingvariable interests held in variable interest entities).  In the third or fourth quarter of 2005, we expect to loan additionalfunds or may possibly choose to participate in future anticipated capital callsof Zuji Holdings Limited (“Zuji”), a joint venture in which we hold a 13%equity stake through direct and indirect ownership, and which we account forunder the equity method. Without a pro rata contribution from the other equityholders, we could be required to consolidate Zuji under the guidance of theFinancial Accounting Standards Board (“FASB”) Interpretation No. 46R, *Consolidation of Variable Interest Entities.* See*“Management’s Discussion and Analysis – BusinessTrends – Investments in Travelocity.”*

 

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(1)   Agent 59, Custom Trip, Direct Connect,Hotel Spotlight, GetThere, Internet View, Jurni, Jurni Network, JurniCruise,MySabre, Nexion, Sabre, Sabre Airline Solutions, Sabre Holdings, the SabreHoldings logo, Sabre Travel Network, SabreSonic, SabreSurround,Showtickets.com, Site 59, Site59.com, SynXis, TotalTrip, Travelocity,Travelocity Business, and Travelocity.com are trademarks of affiliates of SabreHoldings Corporation.  All othertrademarks are the property of their respective owners.   ©2005 Sabre Holdings Corporation. All rightsreserved.

 

7

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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.

 

**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 2005 and all subsequent interimperiods, advertising costs are expensed as incurred with no deferral within thefiscal year.  Our current advertisingstrategy is to generate immediate interest in travel promotions and productswhere returns are more immediate than in the past when our strategy wasdeveloping overall brand awareness.

 

This timingchange resulted in lower selling, general and administrative expenses for thethree months ended June 30, 2005 of an estimated $2 million and higher netincome of $1 million or $.01 per share. For the six months ended June 30, 2005, this timing change resulted inhigher selling, general and administrative expenses of an estimated $6 millionand lower net income of $4 million or $.03 per share.  Due to this timing change, we expect torecognize lower advertising expenses in subsequent quarters of 2005 than in thecomparable periods of the prior year, offset by any increases in advertisingvolume.

 

Had weemployed the revised methodology in 2004, selling, general and administrativeexpenses would have been an estimated $2 million higher and net income anestimated $1 million, or $.01 per share lower for the three months ended June30, 2004.  For the six months ended June30, 2004, selling, general and administrative expenses would have been anestimated $14 million higher and net income an estimated $9 million, or $.07per share lower under the revised methodology.

 

**Net RateProgram Related Liabilities –**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 at pre-determined netrates.  Net rate travel offerings can include air travel, hotel stays, anddynamically packaged combinations (via Travelocity*TotalTrip*and LastMinute Deals).  We market those offerings to travelers at a pricethat includes an amount sufficient to pay the travel supplier for its chargefor providing the travel accommodations, along with any applicable taxes weexpect will be invoiced to us by the travel supplier on that charge, as well asadditional amounts representing our service fees.  For this type of business model, we requirepre-payment by the traveler at the time of booking.  The net rate program related liabilityincluded on our balance sheet represents the amounts we have collected from thecustomer that are payable to the travel supplier as well as the amount receivedfrom the customer for our service fees that will be recognized as revenue whenthe travel has been consumed.

 

8

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**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 of anystock awards or options.

 

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

 
| ** **                                                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                            | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Denominator for basic earnings per common  share - weighted-average shares            |       | 129,286                          |       | 137,397                        |       | 129,767 |   | 138,309 |   |
| Dilutive effect of stock awards and options                                           |       | 756                              |       | 2,583                          |       | 628 |   | 1,497 |   |
|                                                                                  |       |                             |       |                           |       |   |   |   |   |
| Denominator for diluted earnings per common  share - adjusted weighted-average shares |       | 130,042                          |       | 139,980                        |       | 130,395 |   | 139,806 |   |

 

Options topurchase approximately 21,216,956 and 20,029,511 weighted-average shares of ourClass A Common Stock, par value $0.01 per share (“Common Stock”), wereoutstanding during the three and six month periods ending June 30, 2005,respectively, but were excluded from the computation of diluted earnings pershare because the effect would be anti-dilutive.  For the corresponding periods in 2004,anti-dilutive options to purchase approximately 13,512,386 and 15,628,627weighted average shares of our Common Stock were excluded from the computationof diluted earnings per share.  Theincrease in anti-dilutive weighted average shares from June 30, 2004 to June30, 2005 is due primarily to a lower market price for shares of our Common Stock.  The decrease in weighted average shares fromJune 30, 2004 to June 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, *Accounting for StockIssued to Employees* (“APB 25”), and related interpretations.  Generally, no compensation expense isrecognized for stock option grants to employees if the exercise price is at orabove the fair market value of the underlying stock on the date of grant.  Compensation expense relating to other stockawards is recognized over the period during which the employee renders serviceto us necessary to earn the award.

 

We have not made, and will not make, loans (including the acceptance ofpromissory notes) for the exercise of our stock options or the purchase of our CommonStock.

 

On December16, 2004, the FASB issued Statement of Financial Accounting Standards No. 123(Revised 2004), *Share-Based Payment* (“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. Pro forma footnote disclosure is no longer an alternative once thestandard is required to be adopted.

 

We expect toadopt FAS 123R on January 1, 2006 and we intend to use the modified prospectivemethod.  We expect the adoption of FAS123R to have a significant impact on our results of operations, although itwill have no impact on our overall financial position.  FAS 123R also requires that the benefits oftax deductions in excess of recognized compensation cost to be reported as afinancing cash flow, rather than as an operating cash flow, as required underthe current guidance.  We expect theimpact of adoption of FAS 123R to be somewhat similar to that disclosed in ourcurrent pro forma disclosures, however, levels of share-based payments grantedin the future could cause results to be different.

 

9

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The followingtable summarizes the pro forma effect of stock-based compensation on our netearnings and net earnings per share for the three and six months ended June 30,2005 and 2004, as if we had accounted for such compensation at fair value (inthousands, except per share data):

 
| ** **                                                                                                                          | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                                                          | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                                                                |       |                             |       |                           |       |   |   |   |   |
| Net earnings as reported                                                                                                            |       | $                                | 43,887     |                           | $          | 58,937 |   | $ | 101,568 |   | $ | 101,974 |   |
| Add stock compensation expense determined  under intrinsic value method, net of income taxes                                        |       | 1,874                            |       | 1,889                          |       | 3,552 |   | 3,972 |   |
| Less total stock-based employee  compensation expense determined under fair value based method for all awards,  net of income taxes |       | (8,022                           | )          | (7,978                         | )          | (16,291 | ) | (16,266 | ) |
| Pro forma net earnings                                                                                                              |       | $                                | 37,739     |                           | $          | 52,848 |   | $ | 88,829 |   | $ | 89,680 |   |
|                                                                                                                                |       |                             |       |                           |       |   |   |   |   |
| Net earnings per common share, as reported:                                                                                         |       |                             |       |                           |       |   |   |   |   |
|                                                                                                                                |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                               |       | $                                | 0.34       |                           | $          | 0.43 |   | $ | 0.78 |   | $ | 0.74 |   |
| Diluted                                                                                                                             |       | $                                | 0.34       |                           | $          | 0.42 |   | $ | 0.78 |   | $ | 0.73 |   |
| Net earnings per common share, pro forma:                                                                                           |       |                             |       |                           |       |   |   |   |   |
|                                                                                                                                |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                                                               |       | $                                | 0.29       |                           | $          | 0.38 |   | $ | 0.68 |   | $ | 0.65 |   |
| Diluted                                                                                                                             |       | $                                | 0.29       |                           | $          | 0.38 |   | $ | 0.68 |   | $ | 0.64 |   |

 

10

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

 

**AOL Agreement** - OnJanuary 21, 2004, we revised the terms of and extended our agreement withAmerica Online (“AOL”) so that Travelocity would continue to be the exclusivereservations engine for AOL’s internet properties through March 2006, with anoptional year after that. Under the revised terms of the agreement, we benefitfrom more strategically aligned terms for placement within AOL’s brands.  Further, we are obligated for a payment of upto $13 million for 2005.  In February of2005, AOL agreed to revise the contract terms to incorporate a formula by whichthe anticipated $13 million payment may be reduced if AOL does not achievecertain revenue targets under the agreement. The revised terms also allow AOLto continue and expand in the travel search arena through its sites andpartners. The anticipated payment, along with the unamortized portion of fixedpayments previously paid under the original contract, is being expensed on astraight-line basis over the remaining term of the agreement.  For 2005, this expense is expected to beapproximately $23 million.

 

**Yahoo!Agreement -**Wehave an agreement with Yahoo! whereby we are the exclusive air, car andhotel booking engine on Yahoo! Travel. That agreement was set to expireon December 31, 2005. In July 2005, we agreed with Yahoo! to extendour relationship through December 31, 2006.  Travelocity willcontinue to be the exclusive provider of air, car, and hotel products to Yahoo!Travel.  Our fees for 2006 will consist of a fixed payment of $26 million,which includes payments for purchased advertising and corporate services; pluswe will pay a productivity component, whereby Yahoo! is paid a percentage ofthe transaction services revenue generated through the Yahoo! network.  $10million of the $26 million fixed fee could be less depending on revenueperformance compared to 2005 levels, and a formula agreed to between us andYahoo!.  We believe this variability provides necessary downsideprotections into the contract extension to preserve the value of our investmentin that partnership. The revised terms also allow Yahoo! to continueand expand in the travel search arena throughout the Yahoo! network. Pursuant to this agreement, Travelocity has decided to notparticipate in Yahoo!’s Farechase metasearch model under either the Travelocitybrand or the Yahoo! travel brand.

 

**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 millionthroughout 2005, $20 million of which has been paid as of June 30, 2005. Thejoint venture, Sabre Travel Network Middle East, is owned 60% by Sabre TravelNetwork and 40% by Gulf Air and will further extend our travel network productsand services into the Middle East region. The joint venture will providetechnology services, bookable travel products and distribution services fortravel 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*Ôsuite of products for passenger management, as well as additional operationalsoftware and consulting services. The goodwill resulting from this transactionis not deductible for tax purposes. The results of the Gulf Air joint venturewill be consolidated into our financial results. The following table summarizesthe allocation 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”), a provider of the *SynXis*® reservation management,distribution and technology services for hotels, for approximately $41 millionin cash including acquisition costs, of which $37 million has been paid as ofJune 30, 2005. This acquisition enables Sabre Travel Network to further buildon our capabilities and offerings to hoteliers, to leverage new hotel contentfor all of our travel agents, and to extend reservation technology currentlyused at approximately 6,000 hotels, primarily in the United States andEurope.  SynXis will continue to operateunder the SynXis name as a wholly-owned subsidiary of Sabre Inc. The acquiredgoodwill is not deductible for tax purposes. Intangible assets subject to amortization will be amortized over theirrespective lives.  The following tablesummarizes the allocation of the purchase price and the amounts allocated togoodwill (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 |   |

 

11

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**Sale of Karavel Investment -**OnMarch 11, 2005, we sold our interest in Karavel SA, a French tour operator, toOpodo Limited. We received approximately $26 million (Euro 20 million) in cashproceeds in connection with the sale and recorded a $21 million gain in otherincome.

 

**CostReductions****-**We incurredapproximately $4 million in severance and related cost during 2004 for aworkforce reduction of which approximately $1 million remains accrued for as ofJune 30, 2005. In June 2005, weannounced a plan for a workforce reduction and accrued approximately $3 millionfor severance and related costs due to employees under the plan.  We expect the majority of the amounts accruedunder this plan will be paid out in the third quarter of 2005 and expectsavings of $13 million to $16 million through 2006 and beyond.

 

#### ***4.             Pension and Other Post RetirementBenefit Plans***

 

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

 
| **Pension  Benefits**                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **Components  of net periodic benefit cost:** | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                                  |       | $                                | 1,465      |                           | $          | 982 |   | $ | 3,019 |   | $ | 2,286 |   |
| Interest cost                                 |       | 5,356                            |       | 3,220                          |       | 10,807 |   | 8,223 |   |
| Expected return on plan assets                |       | (6,033                           | )          | (3,378                         | )          | (12,009 | ) | (8,986 | ) |
| Amortization of transition asset              |       | (3                               | )          | (3                             | )          | (6 | ) | (8 | ) |
| Amortization of prior service cost            |       | 54                               |       | (8                             | )          | 69 |   | 36 |   |
| Amortization of actuarial loss                |       | 1,065                            |       | 699                            |       | 2,378 |   | 1,405 |   |
| Net periodic benefit cost                     |       | $                                | 1,904      |                           | $          | 1,512 |   | $ | 4,258 |   | $ | 2,956 |   |

 
| **Other  Benefits**                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| **Components  of net periodic benefit cost:** | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service  cost                                 |       | $                                | 54         |                           | $          | 788 |   | $ | 623 |   | $ | 1,583 |   |
| Interest cost                                 |       | 180                              |       | 1,859                          |       | 2,162 |   | 3,730 |   |
| Amortization of transition asset              |       | 4                                |       | 3                              |       | 8 |   | 7 |   |
| Amortization of prior service cost            |       | 56                               |       | 78                             |       | (3,077 | ) | 159 |   |
| Amortization of actuarial loss                |       | 218                              |       | 679                            |       | 1,591 |   | 1,375 |   |
| Net periodic benefit cost                     |       | $                                | 512        |                           | $          | 3,407 |   | $ | 1,307 |   | $ | 6,854 |   |

 

There were nocontributions to fund our various defined benefit pension plans during the sixmonths ended June 30, 2005. During the three months ended June 30, 2004, $5million was contributed to fund our defined benefit pension plans. We areevaluating making contributions during the remainder of 2005.  Annual contributions to our defined benefitpension plans are based on several factors that may vary from year to year,therefore, past contributions are not always indicative of futurecontributions.

 

On January 21, 2005, thefinal regulations implementing the Medicare Prescription Drug, Improvement, andModernization 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 of operations.

 

12

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**5.****             Income Taxes**

 

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  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Income tax provision at statutory federal  income tax rate |       | $                                | 25,134     |                           | $          | 31,982 |   | $ | 56,337 |   | $ | 55,335 |   |
| State income taxes, net of federal benefit                 |       | 1,435                            |       | 420                            |       | 3,186 |   | 2,200 |   |
| Other, net                                                 |       | 1,356                            |       | 36                             |       | (127 | ) | (1,410 | ) |
|                                                       |       |                             |       |                           |       |   |   |   |   |
| Total provision for income taxes                           |       | $                                | 27,925     |                           | $          | 32,438 |   | $ | 59,396 |   | $ | 56,125 |   |

 

#### ***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$2 million during both the three months ended June 30, 2005 and 2004 and $4million and $6 million for the six months ended June 30, 2005 and 2004,respectively.  No hedging ineffectiveness was recorded in earningsrelating to the forwards or options during the six months ended June 30, 2005and 2004.  The estimated fair values of the foreign currency forward andoption contracts were a liability of $1 million at June 30, 2005 and an assetof $12 million at December 31, 2004. These foreign currency forward and option contracts were recorded inother accrued liabilities at June 30, 2005 and prepaid assets at December 31,2004 on the Consolidated Balance Sheet.

 

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 leaseobligation. No hedging ineffectiveness was recorded in earnings relating to ourinterest rate swaps during the six months ended June 30, 2005 or 2004. The estimated fair values of the interest rate swaps were a net asset of $10million at June 30, 2005 and a net asset of $9 million at December 31, 2004,the values of which are included in other assets on the Consolidated BalanceSheet.

 

In order to offset our currency exposure in relation to the acquisitionof lastminute.com, in May 2005, we purchased an option to acquire BritishPounds Sterling (“GBP”) and Euros (“EUR”) at a fixed rate at or near the closingof the transaction for $10 million.  Dueto the strengthening of the U.S. Dollar against these currencies, the value ofthe option has declined to less than $1 million at June 30, 2005 and isincluded as a prepaid asset on the Consolidated Balance Sheet.  We recorded a loss on this option of $10million to the Consolidated Statement of Income during the quarter ended June30, 2005.  This option does not qualifyfor hedge accounting and therefore is marked to market each reporting period tothe income statement.

 

Shortly after completion of the lastminute.com shareholder vote on June29, 2005, when the outlook for completion of the acquisition became morecertain, we entered into forward contracts to purchase £578 million and 115million Euros to lock in the U.S. Dollar price of the acquisition oflastminute.com.  As of June 30, 2005,£190 million and 85 million Euros of these forward contracts had been enteredinto. These forward contracts do not qualify for hedge accounting and thereforeare marked to market each reporting period to the income statement.  We recorded a loss of less than $1 millionfor the instruments outstanding for the quarter ended June 30, 2005.  The fair value of these forwards is recordedin other accrued liabilities.

 

13

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#### ***7.***             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 and business-direct travel marketing anddistribution through our Travelocity business. 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 different marketstrategies.  The accounting policies ofthe segments are the same as those used in our consolidated results.  We account for significant intersegmenttransactions as if the transactions were to third parties, that is, atestimated current market prices.  Themajority of the intersegment revenues and cost of revenues are betweenTravelocity and Sabre Travel Network, consisting mainly of incentives paid bySabre Travel Network to Travelocity for transactions processed through the *Sabre* GDS, data processing fees paid byTravelocity to Sabre Travel Network for transactions processed through the *Sabre* GDS, transaction fees paid byTravelocity to Sabre Travel Network for transactions facilitated through the *Sabre* GDS in which the travel supplier pays Travelocitydirectly, and fees paid by Sabre Travel Network to Travelocity for corporatetrips booked through the *Travelocity*®online booking technology.  In addition,Sabre Airline Solutions pays fees to Travelocity for airline trips bookedthrough the *Travelocity* online booking technology.Personnel and related costs for the corporate headquarters, certain legal andprofessional fees, and other corporate charges are allocated to the segmentsthrough a management fee based on the relative size of the segments and usageof corporate resources or services. Depreciation expense on the corporate headquarters buildings and relatedfacilities costs are allocated to the segments through a facility fee based onheadcount.  Benefits expense, includingpension expense, postretirement benefits, medical insurance and workers’compensation are allocated to the segments based on headcount.

 

14

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Selectedinformation for our three reportable segments for the three and six months endedJune 30, 2005 and 2004 follows (in thousands). This presentation is consistent with the manner in which our managementassesses the operating performance of our business segments.

 
| ** **                                                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                    | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Revenues from external customers, excluding  adjusting items: |       |                             |       |                           |       |   |   |   |   |
| Sabre Travel Network                                          |       | $                                | 416,619    |                           | $          | 393,477 |   | $ | 830,321 |   | $ | 797,049 |   |
| Travelocity                                                   |       | 134,485                          |       | 97,474                         |       | 243,866 |   | 180,981 |   |
| Sabre Airline Solutions                                       |       | 66,844                           |       | 60,511                         |       | 129,617 |   | 120,247 |   |
| Total                                                         |       | $                                | 617,948    |                           | $          | 551,462 |   | $ | 1,203,804 |   | $ | 1,098,277 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Intersegment revenues:                                        |       |                             |       |                           |       |   |   |   |   |
| Sabre Travel Network                                          |       | $                                | 8,939      |                           | $          | 7,688 |   | $ | 14,895 |   | $ | 15,227 |   |
| Travelocity                                                   |       | 39,655                           |       | 34,850                         |       | 81,468 |   | 69,584 |   |
| Total                                                         |       | $                                | 48,594     |                           | $          | 42,538 |   | $ | 96,363 |   | $ | 84,811 |   |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Equity in net income/(loss) of equity  method investees:      |       |                             |       |                           |       |   |   |   |   |
| Sabre Travel Network                                          |       | $                                | 3,383      |                           | $          | 6,222 |   | $ | 3,532 |   | $ | 5,947 |   |
| Travelocity                                                   |       | (2,076                           | )          | (6,781                         | )          | (6,193 | ) | (13,568 | ) |
| Total                                                         |       | $                                | 1,307      |                           | $          | (559 | ) | $ | (2,661 | ) | $ | (7,621 | ) |
|                                                          |       |                             |       |                           |       |   |   |   |   |
| Consolidated revenues:                                        |       |                             |       |                           |       |   |   |   |   |
| Sabre Travel Network                                          |       | $                                | 428,941    |                           | $          | 407,387 |   | $ | 848,748 |   | $ | 818,223 |   |
| Travelocity                                                   |       | 172,064                          |       | 125,543                        |       | 319,141 |   | 236,997 |   |
| Sabre Airline Solutions                                       |       | 66,844                           |       | 60,511                         |       | 129,617 |   | 120,247 |   |
| Elimination of intersegment revenues                          |       | (48,594                          | )          | (42,538                        | )          | (96,363 | ) | (84,811 | ) |
| Total                                                         |       | $                                | 619,255    |                           | $          | 550,903 |   | $ | 1,201,143 |   | $ | 1,090,656 |   |

 

15

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A summary ofthe adjusting items and reconciliation to consolidated operating income is setforth below (in thousands):

 
| ** **                                                                     | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Segment operating income (loss) excluding adjusting  items:                    |       |                             |       |                           |       |   |   |   |   |
| Sabre Travel Network                                                           |       | $                                | 71,536     |                           | $          | 89,308 |   | $ | 152,824 |   | $ | 173,794 |   |
| Travelocity                                                                    |       | 6,544                            |       | 9,643                          |       | (5,236 | ) | 8,178 |   |
| Sabre Airline Solutions                                                        |       | 11,660                           |       | 5,593                          |       | 21,570 |   | 4,971 |   |
| Net corporate allocations                                                      |       | 321                              |       | (41                            | )          | 334 |   | 629 |   |
| Total                                                                          |       | $                                | 90,061     |                           | $          | 104,503 |   | $ | 169,492 |   | $ | 187,572 |   |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| *Impact of  adjusting items on operating income – (increase) / decrease:* |       |                             |       |                           |       |   |   |   |   |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Sabre Travel Network:                                                          |       |                             |       |                           |       |   |   |   |   |
| Intangibles amortization                                                       |       | $                                | 4,402      |                           | $          | 7,349 |   | $ | 9,611 |   | $ | 11,517 |   |
| Total Sabre Travel Network                                                     |       | $                                | 4,402      |                           | $          | 7,349 |   | $ | 9,611 |   | $ | 11,517 |   |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Travelocity:                                                                   |       |                             |       |                           |       |   |   |   |   |
| Intangibles amortization                                                       |       | $                                | 1,614      |                           | $          | 7,390 |   | $ | 3,617 |   | $ | 14,852 |   |
| Stock compensation                                                             |       | 376                              |       | 1,318                          |       | 831 |   | 3,255 |   |
| Total Travelocity                                                              |       | $                                | 1,990      |                           | $          | 8,708 |   | $ | 4,448 |   | $ | 18,107 |   |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Sabre Airline Solutions:                                                       |       |                             |       |                           |       |   |   |   |   |
| Intangibles amortization                                                       |       | $                                | 563        |                           | $          | — |   | $ | 1,133 |   | $ | — |   |
| Total Sabre Airline Solutions                                                  |       | $                                | 563        |                           | $          | — |   | $ | 1,133 |   | $ | — |   |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Corporate:                                                                     |       |                             |       |                           |       |   |   |   |   |
| Stock compensation                                                             |       | —                           |       | 3                              |       | — |   | 17 |   |
| Total Corporate                                                                |       | $                                | —     |                           | $          | 3 |   | $ | — |   | $ | 17 |   |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Total operating income adjusting items                                         |       | $                                | 6,955      |                           | $          | 16,060 |   | $ | 15,192 |   | $ | 29,641 |   |
|                                                                           |       |                             |       |                           |       |   |   |   |   |
| Consolidated operating income (loss):                                          |       |                             |       |                           |       |   |   |   |   |
| Sabre Travel Network                                                           |       | $                                | 67,134     |                           | $          | 81,959 |   | $ | 143,213 |   | $ | 162,277 |   |
| Travelocity                                                                    |       | 4,554                            |       | 935                            |       | (9,684 | ) | (9,929 | ) |
| Sabre Airline Solutions                                                        |       | 11,097                           |       | 5,593                          |       | 20,437 |   | 4,971 |   |
| Net corporate allocations                                                      |       | 321                              |       | (44                            | )          | 334 |   | 612 |   |
| Total                                                                          |       | $                                | 83,106     |                           | $          | 88,443 |   | $ | 154,300 |   | $ | 157,931 |   |

 

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

 

16

----

 

**8.****             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 a dividendor loan other than typical dividend requirements under Delaware law.  Additionally, there are no significantrestrictions on Sabre Inc.’s ability to obtain funds from its direct orindirect subsidiaries other than those that would exist under state or foreignlaw.  Sabre Inc. is the sole directsubsidiary of Sabre Holdings.  All othersubsidiaries 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 six monthsended June 30, 2005 and 2004, Sabre Inc. recognized operating expenses inconnection with these agreements totaling approximately $165 million and $120million, respectively.  These amounts,and the corresponding amounts recognized by the non-guarantor subsidiaries areeliminated in consolidation.

 

17

----

 

##### **UNAUDITED CONSOLIDATING CONDENSED BALANCE SHEETS**

##### **JUNE 30, 2005**

**(in thousands)**

 
| ** **                                                 | ** ** | **Sabre**    | ** ** | **Sabre**        | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Sabre**        | ** ** |
|------------------------------------------------------------|------------|--------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **Holdings** | ** ** | **Incorporated** | ** ** | **Subsidaries**   | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **Assets**                                                 |       |         |       |             |       |              |       |             |       |             |       |
| **Current  Assets**                                        |       |         |       |             |       |              |       |             |       |             |       |
| Cash and marketable securities                             |       | $            | —     |             | $          | 747,509           |       | $                | 56,531     |             | $          | — |   | $ | 804,040 |   |
| Accounts receivable, net                                   |       | —       |       | 289,677          |       | 141,664           |       | —           |       | 431,341          |       |
| Intercompany accounts receivable (payable)                 |       | —       |       | (267,289         | )          | 267,289           |       | —           |       | —           |       |
| Other current assets                                       |       | —       |       | 33,837           |       | 75,623            |       | —           |       | 109,460          |       |
| Total current assets                                       |       | —       |       | 803,734          |       | 541,107           |       | —           |       | 1,344,841        |       |
|                                                       |       |         |       |             |       |              |       |             |       |             |       |
| Property and equipment, net                                |       | —       |       | 342,635          |       | 53,471            |       | —           |       | 396,106          |       |
|                                                       |       |         |       |             |       |              |       |             |       |             |       |
| Investment in subsidiaries                                 |       | 751,829      |       | 1,460,105        |       | —            |       | (2,211,934       | )          | —           |       |
| Intercompany notes                                         |       | 1,303,205    |       | (1,303,205       | )          | —            |       | —           |       | —           |       |
| Investment in joint ventures                               |       | —       |       | 4,171            |       | 153,954           |       | —           |       | 158,125          |       |
| Goodwill and intangible assets, net                        |       | —       |       | 11,768           |       | 1,003,463         |       | —           |       | 1,015,231        |       |
| Other assets, net                                          |       | 14,904       |       | 119,254          |       | 71,971            |       | —           |       | 206,129          |       |
| **Total  assets**                                          |       | $            | 2,069,938  |             | $          | 1,438,462         |       | $                | 1,823,966  |             | $          | (2,211,934 | ) | $ | 3,120,432 |   |
|                                                       |       |         |       |             |       |              |       |             |       |             |       |
| **Liabilities  and stockholders’ equity**             |       |         |       |             |       |              |       |             |       |             |       |
| **Current  liabilties**                                    |       |         |       |             |       |              |       |             |       |             |       |
| Accounts payable and net rate program  related liabilities |       | 19           |       | 102,634          |       | 192,622           |       | —           |       | 295,275          |       |
| Accrued compensation and related benefits                  |       | —       |       | 38,116           |       | 18,163            |       | —           |       | 56,279           |       |
| Other current accrued liabilities                          |       | 9,617        |       | 169,646          |       | 164,724           |       | —           |       | 343,987          |       |
| Total current liabilities                                  |       | 9,636        |       | 310,396          |       | 375,509           |       | —           |       | 695,541          |       |
|                                                       |       |         |       |             |       |              |       |             |       |             |       |
| Pensions and other postretirement benefits                 |       | —       |       | 154,124          |       | 568               |       | —           |       | 154,692          |       |
| Other liabilities                                          |       | 1,121        |       | 59,791           |       | (38,748           | )          | —           |       | 22,164           |       |
| Minority interests                                         |       | —       |       | —           |       | 11,456            |       | —           |       | 11,456           |       |
| Long-term capital lease obligation                         |       | —       |       | 162,322          |       | —            |       | —           |       | 162,322          |       |
| Public and other notes payable                             |       | 423,202      |       | —           |       | 15,076            |       | —           |       | 438,278          |       |
|                                                       |       |         |       |             |       |              |       |             |       |             |       |
| Total stockholders’ equity                            |       | 1,635,979    |       | 751,829          |       | 1,460,105         |       | (2,211,934       | )          | 1,635,979        |       |
|                                                       |       |         |       |             |       |              |       |             |       |             |       |
| **Total  liabilities and stockholders’ equity**       |       | $            | 2,069,938  |             | $          | 1,438,462         |       | $                | 1,823,966  |             | $          | (2,211,934 | ) | $ | 3,120,432 |   |

 

18

----

 

**UNAUDITED CONSOLIDATING CONDENSED BALANCESHEETS**

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

**(in thousands)**

 
| ** **                                                 | ** ** | **Sabre**    | ** ** | **Sabre**        | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Sabre**        | ** ** |
|------------------------------------------------------------|------------|--------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **Holdings** | ** ** | **Incorporated** | ** ** | **Subsidaries**   | ** ** | **Eliminations** | ** ** | **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                                 |       | 692,123      |       | 1,331,046        |       | —            |       | (2,023,169       | )          | —           |       |
| Intercompany notes                                         |       | 1,361,035    |       | (1,361,035       | )          | —            |       | —           |       | —           |       |
| Investment 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**                                          |       | $            | 2,068,358  |             | $          | 1,302,279         |       | $                | 1,670,509  |             | $          | (2,023,169 | ) | $ | 3,017,977 |   |
|                                                       |       |         |       |             |       |              |       |             |       |             |       |
| **Liabilities  and stockholders’ equity**             |       |         |       |             |       |              |       |             |       |             |       |
| **Current  liabilties**                                    |       |         |       |             |       |              |       |             |       |             |       |
| Accounts payable and net rate program  related liabilities |       | 7,790        |       | 105,146          |       | 122,584           |       | —           |       | 235,520          |       |
| Accrued compensation and related benefits                  |       | —       |       | 64,386           |       | 16,062            |       | —           |       | 80,448           |       |
| Other current accrued liabilities                          |       | 8,504        |       | 128,412          |       | 155,408           |       | —           |       | 292,324          |       |
| Total current liabilities                                  |       | 16,294       |       | 297,944          |       | 294,054           |       | —           |       | 608,292          |       |
|                                                       |       |         |       |             |       |              |       |             |       |             |       |
| Pensions and other postretirement benefits                 |       | —       |       | 153,694          |       | 843               |       | —           |       | 154,537          |       |
| Other liabilities                                          |       | 1,350        |       | (2,596           | )          | 24,347            |       | —           |       | 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    |       | 692,123          |       | 1,331,046         |       | (2,023,169       | )          | 1,626,481        |       |
|                                                       |       |         |       |             |       |              |       |             |       |             |       |
| **Total  liabilities and stockholders’ equity**       |       | $            | 2,068,358  |             | $          | 1,302,279         |       | $                | 1,670,509  |             | $          | (2,023,169 | ) | $ | 3,017,977 |   |

 

19

----

 

**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF INCOME**

##### **FOR THE THREE MONTHS ENDED JUNE 30, 2005**

##### **(in thousands)**

 
| ** **                                    | ** ** | **Sabre**    | ** ** | **Sabre**        | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Sabre**        | ** ** |
|-----------------------------------------------|------------|--------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Holdings** | ** ** | **Incorporated** | ** ** | **Subsidaries**   | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                          |       |         |       |             |       |              |       |             |       |             |       |
| Revenues                                      |       | $            | —     |             | $          | 397,375           |       | $                | 352,767    |             | $          | (130,887 | ) | $ | 619,255 |   |
| Operating expenses                            |       | 880          |       | 346,064          |       | 320,092           |       | (130,887         | )          | 536,149          |       |
| Operating income (loss)                       |       | (880         | )          | 51,311           |       | 32,675            |       | —           |       | 83,106           |       |
| **Other  income (expense)**                   |       |         |       |             |       |              |       |             |       |             |       |
| Interest income                               |       | 24,116       |       | 4,633            |       | 6,351             |       | (29,000          | )          | 6,100            |       |
| Interest expense                              |       | (5,499       | )          | (31,403          | )          | (486              | )          | 29,000           |       | (8,388           | )          |
| Income from subsidiaries                      |       | 32,266       |       | 24,409           |       | —            |       | (56,675          | )          | —           |       |
| Other, net                                    |       | —       |       | (9,611           | )          | 605               |       | —           |       | (9,006           | )          |
| Total other income (expense)                  |       | 50,883       |       | (11,972          | )          | 6,470             |       | (56,675          | )          | (11,294          | )          |
| **Income  before provision for income taxes** |       | 50,003       |       | 39,339           |       | 39,145            |       | (56,675          | )          | 71,812           |       |
| Provision for income taxes                    |       | 6,116        |       | 7,073            |       | 14,736            |       | —           |       | 27,925           |       |
|                                          |       |         |       |             |       |              |       |             |       |             |       |
| **Net  income**                               |       | $            | 43,887     |             | $          | 32,266            |       | $                | 24,409     |             | $          | (56,675 | ) | $ | 43,887 |   |

 

##### **UNAUDITED CONSOLIDATING CONDENSED STATEMENTS OF INCOME**

##### **FOR THE THREE MONTHS ENDED JUNE 30, 2004**

**(in thousands)**

 
| ** **                                    | ** ** | **Sabre**    | ** ** | **Sabre**        | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Sabre**        | ** ** |
|-----------------------------------------------|------------|--------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Holdings** | ** ** | **Incorporated** | ** ** | **Subsidaries**   | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                          |       |         |       |             |       |              |       |             |       |             |       |
| Revenues                                      |       | $            | —     |             | $          | 375,303           |       | $                | 305,535    |             | $          | (129,935 | ) | $ | 550,903 |   |
| Operating expenses                            |       | 1,027        |       | 322,995          |       | 268,373           |       | (129,935         | )          | 462,460          |       |
| Operating income (loss)                       |       | (1,027       | )          | 52,308           |       | 37,162            |       | —           |       | 88,443           |       |
| **Other  income (expense)**                   |       |         |       |             |       |              |       |             |       |             |       |
| Interest income                               |       | 24,282       |       | 2,370            |       | 2,921             |       | (26,267          | )          | 3,306            |       |
| Interest expense                              |       | (4,166       | )          | (28,214          | )          | (318              | )          | 26,267           |       | (6,431           | )          |
| Income from subsidiaries                      |       | 46,363       |       | 27,076           |       | —            |       | (73,439          | )          | —           |       |
| Other, net                                    |       | —       |       | 6,578            |       | (521              | )          | —           |       | 6,057            |       |
| Total other income                            |       | 66,479       |       | 7,810            |       | 2,082             |       | (73,439          | )          | 2,932            |       |
| **Income  before provision for income taxes** |       | 65,452       |       | 60,118           |       | 39,244            |       | (73,439          | )          | 91,375           |       |
| Provision for income taxes                    |       | 6,515        |       | 13,755           |       | 12,168            |       | —           |       | 32,438           |       |
|                                          |       |         |       |             |       |              |       |             |       |             |       |
| **Net  income**                               |       | $            | 58,937     |             | $          | 46,363            |       | $                | 27,076     |             | $          | (73,439 | ) | $ | 58,937 |   |

 

20

----

 

**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF INCOME**

##### **FOR THE SIX MONTHS ENDED JUNE 30, 2005**

**(in thousands)**

 
| ** **                                    | ** ** | **Sabre**    | ** ** | **Sabre**        | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Sabre**        | ** ** |
|-----------------------------------------------|------------|--------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Holdings** | ** ** | **Incorporated** | ** ** | **Subsidaries**   | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                          |       |         |       |             |       |              |       |             |       |             |       |
| Revenues                                      |       | $            | —     |             | $          | 798,648           |       | $                | 639,561    |             | $          | (237,066 | ) | $ | 1,201,143 |   |
| Operating expenses                            |       | 1,826        |       | 670,533          |       | 611,550           |       | (237,066         | )          | 1,046,843        |       |
| Operating income (loss)                       |       | (1,826       | )          | 128,115          |       | 28,011            |       | —           |       | 154,300          |       |
| **Other  income (expense)**                   |       |         |       |             |       |              |       |             |       |             |       |
| Interest income                               |       | 50,238       |       | 7,854            |       | 8,195             |       | (55,818          | )          | 10,469           |       |
| Interest expense                              |       | (10,657      | )          | (60,387          | )          | (776              | )          | 55,818           |       | (16,002          | )          |
| Income from subsidiaries                      |       | 76,831       |       | 35,439           |       | —            |       | (112,270         | )          | —           |       |
| Other, net                                    |       | —       |       | (9,757           | )          | 21,954            |       | —           |       | 12,197           |       |
| Total other income (expense)                  |       | 116,412      |       | (26,851          | )          | 29,373            |       | (112,270         | )          | 6,664            |       |
| **Income  before provision for income taxes** |       | 114,586      |       | 101,264          |       | 57,384            |       | (112,270         | )          | 160,964          |       |
| Provision for income taxes                    |       | 13,018       |       | 24,433           |       | 21,945            |       | —           |       | 59,396           |       |
|                                          |       |         |       |             |       |              |       |             |       |             |       |
| **Net  income**                               |       | $            | 101,568    |             | $          | 76,831            |       | $                | 35,439     |             | $          | (112,270 | ) | $ | 101,568 |   |

 

##### **UNAUDITED CONSOLIDATING CONDENSED STATEMENTS OF INCOME**

##### **FOR THE SIX MONTHS ENDED JUNE 30, 2004**

**(in thousands)**

 
| ** **                                    | ** ** | **Sabre**    | ** ** | **Sabre**        | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | **Sabre**        | ** ** |
|-----------------------------------------------|------------|--------------|------------|------------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                    | ** ** | **Holdings** | ** ** | **Incorporated** | ** ** | **Subsidaries**   | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|                                          |       |         |       |             |       |              |       |             |       |             |       |
| Revenues                                      |       | $            | —     |             | $          | 766,518           |       | $                | 574,156    |             | $          | (250,018 | ) | $ | 1,090,656 |   |
| Operating expenses                            |       | 2,293        |       | 659,765          |       | 520,685           |       | (250,018         | )          | 932,725          |       |
| Operating income (loss)                       |       | (2,293       | )          | 106,753          |       | 53,471            |       | —           |       | 157,931          |       |
| **Other  income (expense)**                   |       |         |       |             |       |              |       |             |       |             |       |
| Interest income                               |       | 50,047       |       | 4,883            |       | 5,335             |       | (53,724          | )          | 6,541            |       |
| Interest expense                              |       | (8,316       | )          | (57,648          | )          | (618              | )          | 53,724           |       | (12,858          | )          |
| Income from subsidiaries                      |       | 75,995       |       | 40,311           |       | —            |       | (116,306         | )          | —           |       |
| Other, net                                    |       | —       |       | 6,228            |       | 257               |       | —           |       | 6,485            |       |
| Total other income (expense)                  |       | 117,726      |       | (6,226           | )          | 4,974             |       | (116,306         | )          | 168              |       |
| **Income  before provision for income taxes** |       | 115,433      |       | 100,527          |       | 58,445            |       | (116,306         | )          | 158,099          |       |
| Provision for income taxes                    |       | 13,459       |       | 24,532           |       | 18,134            |       | —           |       | 56,125           |       |
|                                          |       |         |       |             |       |              |       |             |       |             |       |
| **Net  income**                               |       | $            | 101,974    |             | $          | 75,995            |       | $                | 40,311     |             | $          | (116,306 | ) | $ | 101,974 |   |

 

21

----

 

**UNAUDITED CONSOLIDATING CONDENSED STATEMENTSOF CASH FLOWS**

##### **FOR THE SIX MONTHS ENDED JUNE 30, 2005**

**(inthousands)**

 
| ** **                                          | ** ** | ** **   | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **      | ** ** | ** **       | ** ** |
|-----------------------------------------------------|------------|--------------|------------|------------------|------------|------------------|------------|-----------------|------------|------------------|------------|
| ** **                                          | ** ** | **Sabre**    | ** ** | **Sabre**        | ** ** | **Guarantor**    | ** ** | **Eliminating** | ** ** | **Sabre**        | ** ** |
| ** **                                          | ** ** | **Holdings** | ** ** | **Incorporated** | ** ** | **Subsidiaries** | ** ** | **Entries**     | ** ** | **Consolidated** | ** ** |
|                                                |       |         |       |             |       |             |       |            |       |             |       |
| **Operating  Activities**                           |       |         |       |             |       |             |       |            |       |             |       |
| Cash provided by operating activities               |       | $            | —     |             | $          | 141,084          |       | $               | 13,291     |             | $          | — |   | $ | 154,375 |   |
| **Investing  Activities**                           |       |         |       |             |       |             |       |            |       |             |       |
| Additions to property and equipment                 |       | —       |       | (25,411          | )          | (15,198          | )          | —          |       | (40,609          | )          |
| Net sales of marketable securities                  |       | —       |       | 13,088           |       | 18,309           |       | —          |       | 31,397           |       |
| Proceeds from sale of investment                    |       | —       |       | —           |       | 26,013           |       | —          |       | 26,013           |       |
| Loans and investments to joint venture  partners    |       | —       |       | —           |       | (12,538          | )          | —          |       | (12,538          | )          |
| Acquisitions (net of cash acquired)                 |       | —       |       | (41,708          | )          | (25,065          | )          | —          |       | (66,773          | )          |
| Investments in subsidiaries, net                    |       | —       |       | —           |       | —           |       | —          |       | —           |       |
| Other investing activities                          |       | —       |       | (10,000          | )          | —           |       | —          |       | (10,000          | )          |
| Cash used for investing activities                  |       | —       |       | (64,031          | )          | (8,479           | )          | —          |       | (72,510          | )          |
| **Financing  Activities**                           |       |         |       |             |       |             |       |            |       |             |       |
| Proceeds from exercise of common stock              |       | 3,834        |       | —           |       | —           |       | —          |       | 3,834            |       |
| Dividends paid                                      |       | (23,530      | )          | —           |       | —           |       | —          |       | (23,530          | )          |
| Contributions/(distributions) from  affiliates, net |       | 82,909       |       | (82,909          | )          | —           |       | —          |       | —           |       |
| Purchases of treasury stock                         |       | (63,213      | )          | —           |       | —           |       | —          |       | (63,213          | )          |
| Other financing activities, net                     |       | —       |       | (1,200           | )          | —           |       | —          |       | (1,200           | )          |
| Cash used for financing activities                  |       | —       |       | (84,109          | )          | —           |       | —          |       | (84,109          | )          |
| Increase (decrease) in cash                         |       | —       |       | (7,056           | )          | 4,812            |       | —          |       | (2,244           | )          |
| Cash at beginning of period                         |       | —       |       | 7,467            |       | 42,204           |       | —          |       | 49,671           |       |
| Cash at end of period                               |       | $            | —     |             | $          | 411              |       | $               | 47,016     |             | $          | — |   | $ | 47,427 |   |

 

##### **UNAUDITED CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS**

##### **FOR THE SIX MONTHS ENDED JUNE 30, 2004**

**(inthousands)**

 
| ** **                                          | ** ** | ** **   | ** ** | ** **       | ** ** | **Non-**         | ** ** | ** **      | ** ** | ** **       | ** ** |
|-----------------------------------------------------|------------|--------------|------------|------------------|------------|------------------|------------|-----------------|------------|------------------|------------|
| ** **                                          | ** ** | **Sabre**    | ** ** | **Sabre**        | ** ** | **Guarantor**    | ** ** | **Eliminating** | ** ** | **Sabre**        | ** ** |
| ** **                                          | ** ** | **Holdings** | ** ** | **Incorporated** | ** ** | **Subsidiaries** | ** ** | **Entries**     | ** ** | **Consolidated** | ** ** |
|                                                |       |         |       |             |       |             |       |            |       |             |       |
| **Operating  Activities**                           |       |         |       |             |       |             |       |            |       |             |       |
| Cash provided by operating activities               |       | $            | —     |             | $          | 258,242          |       | $               | 28,109     |             | $          | — |   | $ | 286,351 |   |
| **Investing  Activities**                           |       |         |       |             |       |             |       |            |       |             |       |
| Additions to property and equipment                 |       | —       |       | (25,752          | )          | (10,156          | )          | —          |       | (35,908          | )          |
| Net sales/(purchases) of marketable securities      |       | —       |       | (109,590         | )          | 1,662            |       | —          |       | (107,928         | )          |
| Loans and investments to joint venture  partners    |       | —       |       | —           |       | (32,934          | )          | —          |       | (32,934          | )          |
| Other investing activities                          |       | —       |       | —           |       | (5,000           | )          | —          |       | (5,000           | )          |
| Cash used for investing activities                  |       | —       |       | (135,342         | )          | (46,428          | )          | —          |       | (181,770         | )          |
| **Financing  Activities**                           |       |         |       |             |       |             |       |            |       |             |       |
| Proceeds from exercise of common stock              |       | 10,802       |       | —           |       | —           |       | —          |       | 10,802           |       |
| Dividends paid                                      |       | (20,906      | )          | —           |       | —           |       | —          |       | (20,906          | )          |
| Contributions/(distributions) from  affiliates, net |       | 112,029      |       | (121,708         | )          | 9,679            |       | —          |       | —           |       |
| Purchases of treasury stock                         |       | (101,925     | )          | —           |       | —           |       | —          |       | (101,925         | )          |
| Other financing activities, net                     |       | —       |       | (824             | )          | (888             | )          | —          |       | (1,712           | )          |
| Cash provided by (used for) financing  activities   |       | —       |       | (122,532         | )          | 8,791            |       | —          |       | (113,741         | )          |
| Increase (decrease) in cash                         |       | —       |       | 368              |       | (9,528           | )          | —          |       | (9,160           | )          |
| Cash at beginning of period                         |       | —       |       | 10,969           |       | 29,893           |       | —          |       | 40,862           |       |
| Cash at end of period                               |       | $            | —     |             | $          | 11,337           |       | $               | 20,365     |             | $          | — |   | $ | 31,702 |   |

 

22

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#### ***9.***                                      Subsequent Events

 

**Acquisition of lastminute.com**

 

On May 12,2005, we announced that we had reached an agreement on the terms of arecommended cash acquisition (the “lastminute.com acquisition”) oflastminute.com plc (“lastminute.com”) at a price of 165 pence in cash perlastminute.com share. On July 19, 2005, the High Court granted an Ordersanctioning the Scheme of Arrangement (“Scheme”) under which we have acquiredall of the shares of lastminute.com at a price of 165 pence per share, orapproximately £577****million ($1,020million).  The corresponding Order was filed July 20,2005 and registered at the Companies Registry in England and Wales. Accordingly, the Scheme is now effective and all shares of lastminute.com heldby persons other than us have been cancelled. lastminute.com’s proposal to redeemits EUR 102,582,000 6% Convertible Bonds due 2008 (the “Bonds”) for EUR1,116.58 per EUR 1,000 principal amount of Bonds on August 3, 2005 is alsounconditional now that the scheme is effective and these bonds have beenredeemed as a part of the lastminute.com acquisition. Our expanded worldwide Travelocity organization (includinglastminute.com) will have greater global scale, allowing us to offer to oursupplier partners a greater geographical reach with a larger number ofpotential buyers.  This is expected togive us a greater ability to obtain enhanced travel deals that we can offerconsumers.

 

The aggregate cost of the acquisition was approximately £584 million(approximately $1,034 million) which includes an equity value of £577 million($1,020 million), debt of £79 million (approximately $138 million) for thebonds redeemed as noted above and is net of cash in bank and on hand ofapproximately £72 million (approximately $125 million).  We used $359 million of available cash andmarketable securities ($234 million, net of cash acquired) to fund theacquisition and incurred $800 million in additional indebtedness under theBridge Facility discussed below under *Bridge FinancingArrangement.*  We plan to refinancea portion of the borrowings under the Bridge Facility with borrowings under ourrevolving credit facility.  We plan to refinancethe remaining borrowings under the Bridge Facility with long-term financing inthe fourth quarter of 2005 or early in 2006.

 

Asnoted in Footnote 6, we entered into forward contracts to lock in the U.S.Dollar purchase price for the acquisition of lastminute.com.  On August 1, 2005, we settled these forwardcontracts and delivered the foreign currency to the appropriate payment agentsin the U.K. for further payment to the shareholders and bond holders oflastminute.com.  The gain on theseforwards, due to the change in the exchange rate from the time we entered theforward contracts to the time they settled on August 1, 2005, was immaterial.

 

The acquisition will be included in our Consolidated Income Statementfrom the date of acquisition, July 20, 2005. The assets acquired and liabilities assumed will be recorded at theirestimated fair values as determined by management based on an independentvaluation on the net assets acquired, including intangible assets.  We expect that the excess of the purchaseprice over the estimated fair value of the net assets acquired to be asignificant portion of the total purchase price.  The recorded goodwill will be deductible forincome tax purposes.

 

Prior to the acquisition, awholly owned subsidiary of lastminute.com was made aware by Worldspan ServicesLimited L.P. (“Worldspan”) of potential claims arising out of the relationshipbetween lastminute.com and Worldspan for the provision of global distributionservices. The claims are material and relate to fees that lastminute.com isalleged to owe Worldspan. lastminute.com disputes this potential liability andis in discussions with Worldspan to resolve these potential claims. ***Because this claim existed at the date we acquired lastminute.com, wewill analyze this potential liability in conjunction with our purchase priceallocation of fair values of assets and liabilities and in accordance withStatement of Financial Accounting Standards No. 5,******Accounting for Contingencies******.***

 

**Bridge Financing Arrangement**

 

On May 12,2005, we entered into an $800 million, unsecured, multi-draw bridge loanagreement (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.

 

EffectiveAugust 1, 2005, we borrowed $800 million under the Bridge Facility in order topartially finance the purchase of the shares of lastminute.com in connectionwith the lastminute.com acquisition.

 

23

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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 based interest rate at our current credit ratingis equal to approximately 4%. The Bridge Facility requires us to pay, quarterlyand upon termination of the Bridge Facility, a commitment fee based on thepreceding quarter’s unused portion of the Bridge Facility multiplied by acommitment fee percentage specified in the Bridge Facility.  We are also required to pay other fees basedon the Bridge Facility amount.  Thesefees are not material.

 

We may prepayall or any part of the Bridge Facility without prepayment penalty, 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 for moneyborrowed with a maturity in excess of one year (excluding, among other things,borrowings under our existing revolving credit agreement) and (ii) asset saleswith 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 other things,restricts our ability to incur additional debt and limits our ability to pay inexcess of $150 million during the term of the Bridge Facility as dividendsor to repurchase our stock.

 

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

 

| ****Covenant****                             | **** **** | ****Requirement**** | **** **** | ****Level at  June 30, 2005**** | **** **** |
|----------------------------------------------|----------------|---------------------|----------------|---------------------------------|----------------|
|                                         |           |                |           |                            |           |
| Consolidated Leverage Ratio (Debt to EBITDA) |           | 5.0 to 1            |           | 1.4 to 1                        |           |
|                                         |           |                |           |                            |           |
| Consolidated Net Worth                       |           | $                   | 1.252 billion  |                            | $              | 1.6 billion |   |
|                                              |                |                     |                |                                 |                |  |  |

 

On August 1,2005, we used approximately $359 million in cash ($234 million, net of cashacquired) and incurred approximately $800 million in additional indebtednessunder the Bridge Facility.  Although thismaterially increases our Consolidated Leverage Ratio, we believe we continue tobe in compliance with the financial and other covenants under the BridgeFacility.

 

Asa result of the additional debt incurred on August 1, 2005 to fund thelastminute.com deal, Standard & Poor’s changed our credit rating from BBB+to BBB.  That is still an investmentgrade credit rating and is not anticipated to have a material impact on ourborrowing cost.

 

Moody’sInvestors Service is still evaluating a potential change in our current creditrating of Baa2, which is also investment grade.

 

**RevolvingCredit Facility**

 

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 an existing revolving credit agreement(the “Revolver”) with Bank of America, N.A., as agent.  Under the amendments, Sabre Holdings assumedall of the rights and obligations of Sabre Inc. under the Revolver and SabreInc. was discharged from its obligations thereunder.  The amendments also include, among otherthings: (i) amendments to certain financial and negative covenants (includingamendments to provide us more flexibility under the Consolidated Leverage Ratiocovenant, as shown in the table below, and amendments that place additionalrestrictions on the ability of our subsidiaries to incur indebtedness), (ii)amendments that prohibit us from using proceeds from the Revolver to repay theBridge Facility to the extent such proceeds represent more than 50% of the thenaggregate committed amount of the lenders under the Revolver, (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 the aggregateamount committed by the lenders under the Revolver to as much as $500 million.

 

Our new 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 |       |

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operations**

 

**SABRE HOLDINGS CORPORATION**

**RESULTS OF OPERATIONS**

 

The following discussion and analysis containsforward-looking statements about trends, uncertainties and our plans andexpectations of what may happen in the future. Forward-looking statements are based on a number of assumptions andestimates that are inherently subject to significant risks and uncertainties,and our results could differ materially from the results anticipated by ourforward-looking statements as a result of many known or unknown factors,including, but not limited to, those factors discussed below in this Item underthe sub-heading “Risk Factors.”

 

### **Overviewof Business**

 

Weoperate our business through the following business 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 and mortar,subscribe to our services. Sabre Travel Network primarily generates revenuesfrom transaction fees charged to airlines and non-air travel suppliers whodistribute 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. Due to the changing nature of our business, atransaction will now be defined as any travel reservation that generates a feepaid directly to us including but not limited to the following:  traditional booking fees paid by travelsuppliers, 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 forpurchase 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 websites and contact centers, and websites ownedby its supplier and distribution partners. Travelocity customers can access offerings,pricing and information about airlines, hotels, car rental companies, cruiselines, vacation and last-minute travel packages from *Site 59*® and lastminute.com and othertravel-related services such as show tickets and tours from *Showtickets.com**TM*.For business travelers, *Travelocity BusinessTM*provides the integrated online corporate travel technology and full-serviceoffering 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.

 

Travelocityfacilitates transactions between travel suppliers and consumers for the bookingof, and payment for, travel accommodations. Travelocity generates revenue fromproviding such facilitation services equal to the total amount paid by thecustomer for products and services, minus its payment to the travel supplier.Travelocity also generates revenues from commissions or transaction fees fromtravel suppliers 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 Airline Solutions:**SabreAirline Solutions is a global leader in providing passenger managementsolutions, software products and related services, and consulting services tohelp airlines simplify operations and lower costs. We provide airline reservations, inventory and check-in hostingsolutions that help airlines address the challenge of building and retainingcustomer loyalty through enhanced customer centric offerings and service whilealso reducing costs.  We also supply the decision-supportsoftware and technology necessary for airlines to improve profitability,increase revenue, 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.

 

Inthe six months ended June 30, 2005, approximately 65.4% of our revenue wasgenerated from Sabre Travel Network, 24.6% from Travelocity and 10.0% fromSabre Airline Solutions based on segment results that include intersegmentrevenues.  For the six months ended June30, 2004, revenues (including intersegment revenue) as a percentage of total revenueswere 69.6% for Sabre Travel Network, 20.2% for Travelocity and 10.2% for SabreAirline Solutions.

 

25

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## **Business Trends**

 

Potential effects of the following trends, events anduncertainties are discussed in *Risk Factors*.

 

*Transaction Volumes. *During the sixmonths ended June 30, 2005, Sabre Travel Network experienced transaction growthof 4.0% compared to the first six months of 2004 due primarily to an increasein non-traditional transactions.   See *“Business Trends - Changing our Sabre Travel Network Business Model...”*

 

**Factors Influencing the Travel Industry, Particularly Airlines**.  Ourrevenues are highly dependent on the travel and transportation industries, andparticularly on airlines.  Most of ourrevenue is derived from airlines, hotel operators, car rental companies, cruiseoperators, and other suppliers in the travel and transportationindustries.  Our revenue increases anddecreases with the level of travel and transportation transactions processed byour systems.  Consequently, our revenuesare highly subject to declines in, or disruptions to, travel and transportationdue to factors entirely out of our control, such as ongoing travel securityconcerns due to potential terrorist attacks. In addition, we depend on a relatively small number of major airlinesfor a significant portion of our revenues. Several of these airlines are experiencing financial difficulty, some(including U.S. Airways Group Inc. and America West Holdings Corp.) areconsidering consolidation, some (including United Air Lines, Inc., U.S. AirwaysGroup, Inc. and ATA Holdings Corporation) have sought bankruptcy protection andstill others may consider bankruptcy relief. See “*Risk Factors*—*Our Revenues Are Highly Dependent....”*

 

*Supplier Efforts to Control Travel Distribution*. Airlines have been working aggressively for several years to divert transactionsaway from GDS networks and towards alternative travel distribution channels,including websites that they control and online travel agencies that bookdirectly with those airlines.  See “*Risk Factors — Some Travel Suppliers are SeekingAlternative Distribution Models....*” The efforts of suppliers to divert transactions away from independentdistributors (such as online and conventional travel agencies using our *Sabre* GDS) towards supplier-direct channels (such assupplier-controlled websites and call centers) are referred to as “channelshift.”  Over the last two years, we haveexperienced a moderation in the rate of channel shift, which we attributepartly to our current pricing options for suppliers, discussed below, andpartly due to a rebound in corporate travel. The rate of channel shift varies quarter-to-quarter but in general isbelow pre-2003 levels, which is an encouraging indicator, but it is not clearif this pattern will continue over the long-term.

 

**Competition and Consolidation.**  The marketplacefor 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 for travel management companies or corporations.  They require the integration of a new, standalone system into most existing agency or corporate booking tool workflows.Many of these alternative travel distribution channels, such as the LTDs, arein start-up or developing mode, are well-financed and have yet to fully definetheir 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 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...”*

** **

**26**

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** **

 

**PricingOptions for Suppliers***.* Primarily to ensure that our customers had access to themost comprehensive airline fares, in 2002 and 2003, we introduced alternativebooking fee pricing options, such as the *DirectConnect**ÒAvailability* 3-Year Pricing Option (“DCA 3-Year Option”), to airlines thatparticipate in the *Sabre*GDS.  Through the DCA 3-Year Option, participating airlines committed to thehighest level of participation in the *Sabre*system for three years. Participating airlines provide all *Sabre* GDS users with broad access toschedules, seat availability and published fares, including web fares and otherpromotional fares but excluding certain fares such as “opaque” fares (where theairline’s identity is not disclosed until after the sale) and privatediscounts. Participating airlines also furnish generally the same customerperquisites and amenities to passengers booked through the *Sabre* GDS as those afforded through otherGDS’s and websites. Airlines selecting this option under their *Sabre* GDS participating carrier agreementsreceive a discount from our standard DCA booking fee rates which is fixed forthe term of the agreement. Our DCA 3-Year Option agreements prepared us for GDSindustry deregulation in the United States, by giving us access to virtuallyall of a participating carrier’s content and eliminating “fare confusion” inthe marketplace. See*“Computer Reservation System Industry Regulation”*below and “*Risk Factors—Some TravelSuppliers Are Seeking....”*

 

With the deregulation of the GDS industry in mid-2004, (described belowunder *Computer Reservation System IndustryRegulation*), we have new flexibility to price our services basedupon a variety of factors. We have already implemented new pricing models forsome suppliers. For example, during the second quarter of 2004, we completedtwo “opt-in” agreements with international carriers that are generally similarto our DCA 3-Year Option agreements. For bookings created in the participatingcarriers’ home countries, these opt-in agreements offer a deeper discount thanunder the DCA 3-Year Option, which offers participating airlines smallerdiscounts across multiple regions. These agreements provide discounts only tothose *Sabre* GDS subscribers thataccept lowered customer incentive rates. As of June 30, 2005,approximately 50% of our global direct air bookings were subject to our currentdiscount pricing options (DCA 3-Year Option and “Opt-In” agreements).

 

We are evaluating variousother options for pricing our services to suppliers, and are pursuingadditional options such as pricing that includes services from our SabreAirline Solutions segment and expanding our merchandizing efforts within the *Sabre* GDS. Pricing options might be offered to airlinesaccording to their operational needs, such as pricing that varies with thevolume of an airline’s transactions through the *Sabre* GDS or pricing that differs between long-haul orshort-haul trips. In some cases we may approach airlines with pricing optionsfrom any combination of our business units. We plan to offer airlines a choiceof multiple pricing schedules, and we expect that each new airlineparticipation agreement will differ in many ways, including by price.  We believe that airlines will see theadvantages that may be inherent in moving quickly to enter into these new, morecustomizable relationships with us.  Itis difficult to predict with certainty, in a recently deregulated environment,the impact of new pricing models on our revenues.  It is our goal to maintain, over a severalyear period, a neutral impact to the average unit revenue (includingmerchandizing revenue) in the Sabre Travel Network business.  If certain pricing models were to gain furthertraction, we could see a reduction in our average unit revenue which could bepartially offset by reduced expenses. Our goal is to have new agreements in place with many airlines beforethe expiration of our DCA 3-Year Option agreements in 2006.  Our DCA 3-Year Option agreement with USAirways, the only such agreement with a major U.S. airline that had a 2005 expirationdate, was extended for one year beginning in October of 2005. Regardless of theoutcome of these pricing models, it is our intent to reduce costs in the SabreTravel Network business.  *See “Risk Factors—Adverse Changes In Or Interruptions To...”*

 

**Changing our Sabre Travel Network Business Model.**  Weare also taking actions both to strengthen our core **Sabre** GDS business withenhanced content and capabilities and to take advantage of the opportunitiesavailable in merchandising as we benefit from the insight we gain from havingtravel distribution and travel marketing assets in one integrated portfolio:

 

•                  Historically, the vast majority of our traveldistribution revenues have been derived from transaction fees paid by travelsuppliers to our Sabre Travel Network unit. Sabre Travel Network paysincentives to its travel agency customers for bookings through the *Sabre* GDS as a cost of revenue.  Recently, we have negotiated limitedarrangements that depart from our traditional business model.  For example, we have entered intoarrangements under which the travel suppliers pay our travel agency customer,which in turn pays a transaction fee to our Sabre Travel Network unit.  In these arrangements, we only have anagreement with the travel agency for its transactions with participatingsuppliers. We are evaluating the desirability 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....”*

 

•                  Due to the changing nature of our business,we now define a “transaction” as any travel reservation that generates a feepaid directly to us including but not limited to the following:  traditional booking fees paid by travelsuppliers, 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.

 

27

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•                  Duringthe second quarter of 2005, Sabre Travel Network experienced growth in travelagency incentives, as projected, and absorbed most of the $3 million severancecharge described below under “*Cost Reductions andExpense Savings*.”  This,combined with our investments in new emerging businesses (such as the *Jurni Network*Ô consortia) putpressure on the Sabre Travel Network margin this quarter.

 

•                  We are continuing to build on the actions wetook in 2004 to enhance our competitive position by reducing our operatingexpenses.  See “*Cost Reductions and Expense Savings”*below. We continue to seek ways to provide more flexible and cost-effectivedistribution options to our customers.

 

•                  In2004, we rolled out several new features for our *Jurni Networ*k**offering, including the new *Jurni*® *Custom Trip*Ô packaging capabilities from Travelocity, *Agent**59**®* whichincorporates last minute travel offerings from *Site59.com**®* and *JurniCruise*TM**whichprovides automated shopping and booking capability for cruises.  All of the features are available to *Jurni* agents in our *InternetView*Ôpoint-of-sale tool.

 

•                  During the third quarter of 2004, weintroduced the *Hotel SpotlightTM*program which offers premium marketing opportunities to hoteliers through the *Sabre* GDS.

 

•                  In 2004 we launched *MySabre*Ô, a new web-based agent booking portal which provides agents andsuppliers with new merchandising opportunities at the point of sale.

 

•                  In January of 2005, we acquired SynXisCorporation (“SynXis”), which provides *SynXis*reservation management, distribution and technology services to approximately6,000 hotel properties, to further expand the range of services we offer tohotels.

 

•                  During the second quarter of 2005, welaunched *SabreSurround*Ô, a bundled offering that includes services like *Hotel**Spotlight*, Sabre Media, targeted emailmarketing campaigns and our Agent Reward loyalty program.

 

**Investments in Travelocity.**  The development of Travelocity continues tobe a strategic focus for us. We are investing and continue to look for ways toinvest in developing products and segments that we believe offer rapid growthopportunities, such as in the business-direct segment and online distributionin Europe and Asia.  For example:

 

•              In January 2005,Travelocity entered into a put option agreement pursuant to which it may gaincontrol of 100% of Zuji Holdings Limited (“Zuji”), a joint venture operating inthe Asia Pacific region in which we currently hold a 13% equity stake throughdirect and indirect ownership and which we account for under the equity method. Inthe third or fourth quarter of 2005, we expect to either loan additional fundsor may possibly choose to participate in future anticipated capital calls ofZuji.  Without a pro rata contributionfrom the other equity holders, we may be required to consolidate Zuji under theguidance of the Financial Accounting Standards Board (“FASB”) InterpretationNo. 46R, *Consolidation of Variable InterestEntities. *Initially, this consolidation would have anegative affect on Travelocity’s operating income, although we believe that theimpact to net earnings, including minority interests, would be immaterial.  We also expect significant growth from Zujias adoption to online travel continues to grow in Asia.

 

•              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.

 

Our expanded worldwideTravelocity organization (including lastminute.com) has greater global scale,meaning we can now offer greater reach to our travel supplier partners in termsof geographies and number of potential buyers. This is expected to give us a greater ability to secure even bettertravel deals that we can currently offer consumers.

 

We will also be able tooffer travelers a greater range of international options on each of oursites.  An immediate benefit will beoffering the wide range of hotels in Travelocity’s net rate hotel program tolastminute.com customers. lastminute.com customers will get a greater range ofU.S. and international travel options, and over time, Travelocity should gainmore European travel choices.  SabreTravel Network also expects to offer its network of travel agency subscribersexpanded European travel options as a result of the acquisition, expandingdistribution reach for lastminute.com travel suppliers.  See “*Risk Factors* —*We may be unsuccessful inpursuing and integrating business combinations...”*

 

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*Yahoo!Agreement. *We have an agreement with Yahoo! wherebywe are the exclusive air, car and hotel booking engine on Yahoo! Travel. Thatagreement was set to expire on December 31, 2005. In July 2005, weagreed with Yahoo! to extend our relationship through December31, 2006.  Travelocity will continue to be the exclusive provider of air,car, and hotel products to Yahoo! Travel.  Our fees for 2006 will consistof a fixed payment of $26 million, which includes payments for purchasedadvertising and corporate services; plus we will pay a productivity component,whereby Yahoo! is paid a percentage of the transaction services revenuegenerated through the Yahoo! network.  $10 million of the $26 million fixedfee could be less depending on revenue performance compared to 2005 levels, anda formula agreed to between us and Yahoo!.  We believe this variabilityprovides necessary downside protections into the contract extension to preservethe value of our investment in that partnership. The revised terms alsoallow Yahoo! to continue and expand in the travel search arena throughoutthe Yahoo! network.  Pursuant to this agreement, Travelocity hasdecided to not participate in Yahoo!’s Farechase metasearch model undereither the Travelocity brand or the Yahoo! travel brand.

 

**Net Rate Hotel Program.**  In aneffort to provide additional choices to consumers, Travelocity is increasinglypromoting our net rate hotel program, commonly referred to in the industry as a“merchant model hotel program” due to the fact that Travelocity is the merchantof record for credit card purposes. Under the net rate program, we facilitate transactions between travelsuppliers and travelers for the booking of and payment for travelaccommodations.  To facilitate theprovision of travel accommodations to travelers, we enter into agreements withtravel suppliers for the right to market their products, services and othercontent offerings at pre-determined net rates.  Net rate travel offeringscan include air travel, hotel stays, and dynamically packaged combinations (viaTravelocity the***TotalTrip*Ô**and Last MinuteDeals**offerings).  We market those offerings totravelers at a price that includes an amount sufficient to pay the travelsupplier for its charge for providing the travel accommodations, along with anyapplicable taxes we expect will be invoiced to us by the travel supplier onthat 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. Net rate content isbeneficial for travelers because they can often book travel at a price lowerthan regularly published offerings.  For us, the model generally delivershigher service fee revenue per transaction than comparable transactions underan agency commission booking fee model and we experience improved operatingcash flows as a result of receiving pre-payments from customers while payinghotel, car and travel suppliers after the travel occurs.  We generally donot purchase and resell travel accommodations and do not have any obligationswith respect to travel accommodations listed online that do not sell.  For net rate transactions, we recognize asrevenue the amount paid by the traveler for products, fees and services minusthe amount paid to the travel supplier. See “*Risk Factors — State and LocalTax Issues....”*

 

Ourbusiness strategy depends on net rate bookings as a significant source offuture revenue growth and increased margins.  Our strategy calls for us toincrease or maintain the number of hotel rooms we can market under our net ratehotel program, based upon arrangements we make directly with individual hotelproperties and hotel chains.  Because of Travelocity’s supplier friendlyapproach, which includes a two-way seamless connectivity to hotels’ propertymanagement system so that reservations are not lost, its hotel program hasbecome successful even though it was started later than some competingprograms. One example of the success of this approach was Travelocity’sannouncement in the third quarter of 2004, that it was the first onlineintermediary to be certified by InterContinental Hotels Group (IHG) for itsmore than 3,500 hotels worldwide, including InterContinental Hotels andResorts, Crowne Plaza, Holiday Inn, Holiday Inn Express, Staybridge Suites andCandlewood Suites.  See “*Risk Factors — Our business plans call for thesignificant growth of our net rate hotel....”*

 

*CostReductions and Expense Savings. *In the fourthquarter of 2003, we began implementing plans to enhance our competitiveposition by reducing our operating expenses and better aligning expenses withrevenue targets.  Through theseinitiatives, we realized over $80 million in cost savings in 2004.  Further,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 adevelopment group in our Sabre Travel Network segment.  This move will reduce headcount byapproximately 120 to 150 employees. These changes are expected to go into effect in August 2005 and to becompleted by the end of 2005.  As aresult of this move, we expect annual cost savings in 2006 and beyond ofapproximately $13 million to $16 million.

 

*Short andLong-Term Financings.*  We have funded the acquisition of lastminute.cominitially with debt and available cash. We have obtained bridge financing for this acquisition and areconsidering various long-term financing arrangements, which may or may notinclude a combination of debt, cash, equity or equity-like securities.  See*“Management’s Discussionand Analysis – Liquidity and Capital Resources – Financing Arrangements.”*

 

29

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**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 an ownershipinterest in a CRS, and

 

•                  limits on travel agency contract terms.

 

AllCRS regulations promulgated by the U.S. Department of Transportation that wereapplicable in the United States expired on July 31, 2004.  We believe that this deregulation in theUnited States will enhance our opportunities to creatively market airlineservices and freely negotiate with travel agencies.  However, deregulation also presentschallenges associated with maintaining participation levels in the *Sabre* GDS by travel suppliers who are no longer subject toequal participation regulations.

 

TransportCanada issued final rules on May 7, 2004, eliminating all CRS regulations inCanada, except rules prohibiting screen preference and discrimination inproviding the right to participate in service enhancements.  In addition, regulators in the EuropeanCommission are reviewing their CRS regulations for possible changes, which mayinclude some level of deregulation.  Itis not clear whether or when any amendments in the European Union will takeeffect or what form they may take.

 

The potential effects of these trends, events and uncertainties arediscussed below under **Risk Factors**.

 

30

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**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 *SabreSurround*program (which bundles the *Hotel Spotlight*services with other advertising products) to travel-suppliers, subscribers andother customers.  Earnings (or losses asthe case may be) derived from interests in joint ventures and other investmentsare also included in revenues.  SabreTravel Network earns intersegment revenues from data processing fees andtransaction fees paid by Travelocity.  Travelocity generates revenues fromcommissions or transaction fees from travel-suppliers for the purchase oftravel products and services pursuant to reservations made through our system.Travelocity also generates net rate revenue from providing facilitationservices equal to the amount paid by the customer for travel products andservices, minus Travelocity’s payment to the travel supplier. AdditionalTravelocity revenues include other fees charged to customers and advertisingrevenues from our websites. Travelocity derives intersegment revenuesfrom Sabre Travel Network, consisting of incentives earned for Travelocitytransactions processed through the *Sabre*GDS, and fees paid by Sabre Travel Network for corporate trips and SabreAirline Solutions for airline trips booked through Travelocity’s online bookingtechnology.  Sabre Airline Solutions generates revenues from the sale of airlinereservations hosting services, inventory and check-in hosting solutions,decision-support software and technology, and airline consulting services.

 

*Cost ofRevenues. *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 bookingsand depreciation and amortization charges. Sabre Airline Solutions cost of revenues are comprised of labor costincurred in the development and delivery of software and consulting servicesand depreciation and amortization.  SabreAirline Solutions also incurs intersegment expenses paid to Travelocity forairline trips booked through Travelocity’s online booking technology.

 

*OperatingExpenses.*SabreTravel Network selling, general and administrative expenses and other operatingexpenses consist of salaries, benefits and employee related expenses for stafffunctions required to support the business. Travelocity selling, general and administrative and other operatingexpenses consist primarily of advertising and promotion expenses, payments madeto our distribution partners and salaries, benefits and employee relatedexpenses for staff functions required to support the business.  Sabre Airline Solutions operating expensesconsist of the costs of the sales organization and the staff functions requiredto support the business.

 

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### **Financial Results**

 

The following tablespresent operating results for the three and six months ended June 30, 2005 and2004 (in thousands of dollars).  Thesegment revenues and cost of revenues are shown including intersegment activity.  We have included the elimination ofintersegment activity below in order to agree to the results of operationspresented in the consolidated financial statements:

 
| ** **                              | ** ** | **Three  Months Ended June 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:                      |       | $                                | 428,941    |   | $ | 407,387 |   | $ | 172,064 |   | $ | 125,543 |   | $ | 66,844 |   | $ | 60,511 |   | $ | — |   | $ | — |   | $ | (48,594 | ) | $ | (42,538 | ) | $ | 619,255 |   | $ | 550,903 |   |
|                                    |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost  of revenues:                      |       | 294,384                          |       | 257,131 |   | 74,490 |   | 49,132 |   | 45,476 |   | 44,049 |   | (20 | ) | 3 |   | (48,594 | ) | (42,538 | ) | 365,736 |   | 307,777 |   |
|                                    |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross  profit:                          |       | 134,557                          |       | 150,256 |   | 97,574 |   | 76,411 |   | 21,368 |   | 16,462 |   | 20 |   | (3 | ) | — |   | — |   | 253,519 |   | 243,126 |   |
|                                    |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling,  general & administrative: |       | 62,968                           |       | 60,948 |   | 91,406 |   | 68,086 |   | 9,547 |   | 10,380 |   | (301 | ) | 41 |   | — |   | — |   | 163,620 |   | 139,455 |   |
|                                    |       |                             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization  of intangible assets:     |       | 4,455                            |       | 7,349 |   | 1,614 |   | 7,390 |   | 724 |   | 489 |   | — |   | — |   | — |   | — |   | 6,793 |   | 15,228 |   |
|                                         |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| Operating  income (loss) |   | $ | 67,134 |   | $ | 81,959 |   | $ | 4,554 |   | $ | 935 |   | $ | 11,097 |   | $ | 5,593 |   | $ | 321 |   | $ | (44 | ) | $ | — |   | $ | — |   | $ | 83,106 |   | $ | 88,443 |   |
|--------------------------|--------|---|--------|--------|---|--------|--------|---|-------|--------|---|-----|--------|---|--------|--------|---|-------|--------|---|-----|--------|---|-----|---|---|--------|--------|---|--------|--------|---|--------|--------|---|--------|--------|

 
| ** **                              | ** ** | **Six  Months Ended June 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:                      |       | $                              | 848,748    |   | $ | 818,223 |   | $ | 319,141 |   | $ | 236,997 |   | $ | 129,617 |   | $ | 120,247 |   | $ | — |   | $ | — |   | $ | (96,363 | ) | $ | (84,811 | ) | $ | 1,201,143 |   | $ | 1,090,656 |   |
|                                    |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost  of revenues:                      |       | 568,354                        |       | 511,762 |   | 144,137 |   | 101,557 |   | 88,011 |   | 91,291 |   | (380 | ) | (507 | ) | (96,363 | ) | (84,811 | ) | 703,759 |   | 619,292 |   |
|                                    |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gross  profit:                          |       | 280,394                        |       | 306,461 |   | 175,004 |   | 135,440 |   | 41,606 |   | 28,956 |   | 380 |   | 507 |   | — |   | — |   | 497,384 |   | 471,364 |   |
|                                    |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Selling,  general & administrative: |       | 127,431                        |       | 132,667 |   | 181,071 |   | 130,517 |   | 19,715 |   | 23,005 |   | 46 |   | (105 | ) | — |   | — |   | 328,263 |   | 286,084 |   |
|                                    |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Amortization  of intangible assets:     |       | 9,750                          |       | 11,517 |   | 3,617 |   | 14,852 |   | 1,454 |   | 980 |   | — |   | — |   | — |   | — |   | 14,821 |   | 27,349 |   |
|                                    |       |                           |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating  income (loss)                |       | $                              | 143,213    |   | $ | 162,277 |   | $ | (9,684 | ) | $ | (9,929 | ) | $ | 20,437 |   | $ | 4,971 |   | $ | 334 |   | $ | 612 |   | $ | — |   | $ | — |   | $ | 154,300 |   | $ | 157,931 |   |

 

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

 

Totalrevenues for the three months ended June 30, 2005 after intercompanyeliminations increased approximately $68 million, or 12%, compared to the threemonths ended June 30, 2004, from $551 million to $619 million.  Cost of revenues after intercompanyeliminations for the three months ended June 30, 2005 increased approximately$58 million or 19%, compared to the three months ended June 30, 2004, from $308million to $366 million.

 

Management’sdiscussion and analysis of revenues, cost of revenues, selling, general andadministrative expenses, amortization of intangible assets and operating incomeby business segment are based upon segment results including intersegmentrevenues and cost of revenues of approximately $49 million and $43 million forthe three months ended June 30, 2005 and 2004, respectively.  We account for significant intersegmenttransactions as if the transactions were to third parties, that is, atestimated current market prices.  Themajority of the intersegment revenues and cost of revenues are betweenTravelocity and Sabre Travel Network, consisting mainly of incentives paid toTravelocity for Travelocity transactions processed through the *Sabre* GDS, data processing fees and transactionfees paid by Travelocity to Sabre Travel Network (including for transactionsprocessed through the *Sabre* GDS),and fees paid by Sabre Travel Network to Travelocity for corporate trips bookedthrough 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.

 

Totalrevenues (including intersegment revenues) for the three months ended June 30,2005 increased approximately $75 million, or 13%, as compared to the threemonths ended June 30, 2004, from $593 million to $668 million.

 

Totalcost of revenues (including intersegment cost of revenues) for the three monthsended June 30, 2005 increased $64 million, or 18%, as compared to the threemonths ended June 30, 2004, from $350 million to $414 million.

 

##### **Sabre TravelNetwork**

 

| ** **                             | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **2005**                        | ** ** | **2004** | ** ** | **change** | ** ** |
| ** **                             | ** ** | **(thousands)**                 | ** ** |
|                                   |       |                            |       |   |   |   |   |
| Segment revenues:                      |       | $                               | 428,941    |   | $ | 407,387 |   | $ | 21,554 |   |
|                                   |       |                            |       |   |   |   |   |
| Cost of revenues:                      |       | 294,384                         |       | 257,131 |   | 37,253 |   |
|                                   |       |                            |       |   |   |   |   |
| Gross profit:                          |       | 134,557                         |       | 150,256 |   | (15,699 | ) |
|                                   |       |                            |       |   |   |   |   |
| Selling, general & administrative: |       | 62,968                          |       | 60,948 |   | 2,020 |   |
|                                   |       |                            |       |   |   |   |   |
| Amortization of intangible assets:     |       | 4,455                           |       | 7,349 |   | (2,894 | ) |
|                                   |       |                            |       |   |   |   |   |
| Operating income                       |       | $                               | 67,134     |   | $ | 81,959 |   | $ | (14,825 | ) |

 

*Revenues*

 

Revenuesfor the three months ended June 30, 2005 increased $22 million, or 5%, ascompared to the three months ended June 30, 2004, from $407 million to $429million.

 

•                  Transaction revenue (see *Componentsof Revenues and Expenses*) increased by $18 million, or 5%.  This $18 million increase includes a $21million increase resulting from higher transaction volumes and a $3 milliondecrease driven by a lower average rate per transaction, due to growth inlower-priced, non-traditional transactions. Total transactions were 90 millionfor the three months ended June 30, 2005, an increase of 6% from 85 milliontransactions in the three months ended June 30, 2004 (see*BusinessTrends:  Changing our Sabre TravelNetwork Business Model.*)

 

•                  Subscriber revenue decreased by $5 million,reflecting the trend towards the adoption of third-party equipment solutions bysubscribers.

 

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•                  Other revenue increased by $9 million,primarily driven by increased revenue from the *SynXis*reservation management distribution and technology services and various otherproducts.  SynXis, which we acquired inJanuary 2005, earned revenues of $5 million in the three months ended June 30,2005.  The *HotelSpotlight*program, which was not launched until late 2004,contributed $2 million in revenue growth in the three months ended June 30,2005.  The remaining $2 million increaserelates to revenue increases associated with various other products.

 

*Cost of Revenues*

 

Costof revenues for the three months ended June 30, 2005 increased $37 million, or14%, as compared to the three months ended June 30, 2004, from $257 million to$294 million. The increase in cost of revenues consisted of a $9 millionincrease in subscriber support costs, a $7 million increase in technologyrelated spending and a $21 million increase in other expenses.

 

The$9 million increase in subscriber support costs was driven by a $9 millionincrease in customer incentives.  Thisincludes an increase in incentives paid to Travelocity of $2 million resultingfrom higher transaction volumes. Non-Travelocity incentives grew $6 million asa result of year-over-year growth in the average incentive per transactiondriven by competitive pressure on renewals and conversions. Growth inincentives relating to higher bookings volumes grew by $1 million.

 

Technology related spendingincreased $7 million due to a $4 million increase over prior year as a resultof an expiration of contractual credits and a $3 million increase in ouroperating costs relating to our phased implementation of our open systempricing and shopping engine.

 

Other expenses increased $21million.  Headcount related expenses grew$8 million as a result of a $3 million increase in severance related costs, $2million from growth in new businesses such as SynXis and a $3 million increasein other headcount costs.  Spending oninternal product development for new pricing, shopping and merchandisingfunctionalities increased $3 million. Fulfillment costs for GetThere corporate trips increased by $2 millionas a result of volume growth.  Otherincreases include $2 million related to distribution costs for growing newbusinesses, $2 million in depreciation related to new product investment, $1million related to consulting services purchased to assist with development ofnew businesses, and $3 million in other various expenses.

 

*Selling, General andAdministrative Expenses*

 

Selling,general and administrative expenses increased by $2 million, or 3%, from $61million for the three months ended June 30, 2004 to $63 million for the threemonths ended June 30, 2005, primarily driven by a $2 million increase in legaland other professional fees.

 

*Amortization of Intangible Assets*

 

Amortization of intangibleassets decreased $3 million, or 43%, from $7 million for the three months endedJune 30, 2004 to $4 million for the three months ended June 30, 2005, dueprimarily to the $3 million write-off of an intangible asset in the secondquarter of 2004. Amortization expense from newly acquired entities was offsetby intangibles that fully amortized in 2004.

 

*Operating Income*

 

Operating income decreasedby $15 million, or 18%, from $82 million for the three months ended June 30,2004 to $67 million for the three months ended June 30, 2005. The decline inoperating income was the result of severance charges incurred this quarter,higher incentives, and investments in emerging businesses such as SynXis thatexceeded our revenue growth.

 

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##### **Travelocity**

 

| ** **                             | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **2005**                        | ** ** | **2004** | ** ** | **change** | ** ** |
| ** **                             | ** ** | **(thousands)**                 | ** ** |
|                                   |       |                            |       |   |   |   |   |
| Segment revenues:                      |       | $                               | 172,064    |   | $ | 125,543 |   | $ | 46,521 |   |
|                                   |       |                            |       |   |   |   |   |
| Cost of revenues:                      |       | 74,490                          |       | 49,132 |   | 25,358 |   |
|                                   |       |                            |       |   |   |   |   |
| Gross profit:                          |       | 97,574                          |       | 76,411 |   | 21,163 |   |
|                                   |       |                            |       |   |   |   |   |
| Selling, general & administrative: |       | 91,406                          |       | 68,086 |   | 23,320 |   |
|                                   |       |                            |       |   |   |   |   |
| Amortization of intangible assets:     |       | 1,614                           |       | 7,390 |   | (5,776 | ) |
|                                   |       |                            |       |   |   |   |   |
| Operating income                       |       | $                               | 4,554      |   | $ | 935 |   | $ | 3,619 |   |

 

*Revenues*

 

Revenuesfor the three months ended June 30, 2005 increased $46 million, or 37%, ascompared to the three months ended June 30, 2004, from $126 million to $172million.

 

InOctober of 2004, we acquired sole control of the non-German operations of the *Travelocity*® Europe business, purchasing 50% of theseentities (the “TEU acquisition”). The remaining 50% that we already ownindirectly through the Travelocity Europe joint venture was distributed to usby the joint venture so that 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.

 

•                  Transaction revenue, including TravelocityEurope in 2005, increased $40 million, or 37%, primarily driven by a $36million increase in non-air transaction revenue (including revenue resultingfrom sales of package offerings that include air travel as a component) and a$4 million increase in stand-alone air transaction revenue.

 

The $36 million increase in non-air transactionrevenue consisted primarily of the following:

 

•                              Packaged trip revenue increased approximately$20 million due to the growth of our Travelocity *TotalTrip* and**Last MinuteDeals offerings;

 

•                              Stand-alone hotel revenue increased $12million due to the growth of our net rate hotel program;

 

•                              All other non-air transaction revenueincreased $4 million.

 

The $4 million increase in stand-alone air transaction revenue wasprimarily due to a volume increase in stand-alone air ticket sales compared tothe same period in 2004.  Our volumeincreased due to an overall increase in online travel demand and the TEUacquisition.

 

•                  Non-transaction revenue increased $6 million,or 38%, consisting primarily of the following:

 

•                              Joint venture equity method losses, whichreduce our revenues, decreased by approximately $5 million.  The decreased equity losses resulted from theTEU acquisition;

 

•                              Corporate revenue, the fees paid by SabreTravel Network and Sabre Airline Solutions to Travelocity for trips bookedthrough Travelocity’s online booking technology, increased by approximately $3million due primarily to higher booking volumes;

 

•          All other non-transaction revenue decreased $2 million.

 

35

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*Cost of Revenues*

 

Costof revenues for the three months ended June 30, 2005 increased $25 million, or51%, as compared to the three months ended June 30, 2004, from $49 million to$74 million. The increase was primarily the result of a $9 million increase inexpenses associated with the volume growth of our published, net rate hotel, *TotalTrip* and Last Minute Deals programs, as explained abovein transaction revenue as well as an increase in service compensation. Inaddition, this increase includes $8 million from Travelocity Europe andShowtickets.com, which were acquired in the fourth quarter of 2004, and $5million related to customer service costs as a result of improved transactionvolumes. All other expenses increased approximately $3 million.

 

*Selling, General and Administrative Expenses*

 

Selling,general and administrative expenses increased approximately $23 million, or34%, from $68 million for the three months ended June 30, 2004, to $91 millionfor the three months ended June 30, 2005. This increase includes $12 million from Travelocity Europe andShowtickets.com and $9 million from increased advertising and customeracquisition costs to drive additional travelers to our websites.  Other selling, general and administrativeexpenses increased $2 million.

 

*Amortization of Intangible Assets*

 

Amortizationof intangible assets decreased $5 million, or 71%, from $7 million in the threemonths ended June 30, 2004, to $2 million in the three months ended June 30,2005, due to certain intangible assets becoming fully amortized in 2004.

 

*Operating income*

 

Operating income increased$4 million, or 400%, from $1 million in the three months ended June 30, 2004,to $5 million in the three months ended June 30, 2005, due to strong revenuegrowth in our published, *Total Trip*,Last Minute Deals and net rate hotel programs as well as lower intangible amortizationcosts, which offset the incremental losses resulting from the TEU acquisition.

 

36

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

 

| ** **                             | ** ** | **Three Months Ended June 30,** | ** ** |
|----------------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **2005**                        | ** ** | **2004** | ** ** | **change** | ** ** |
| ** **                             | ** ** | **(thousands)**                 | ** ** |
|                                   |       |                            |       |   |   |   |   |
| Segment revenues:                      |       | $                               | 66,844     |   | $ | 60,511 |   | $ | 6,333 |   |
|                                   |       |                            |       |   |   |   |   |
| Cost of revenues:                      |       | 45,476                          |       | 44,049 |   | 1,427 |   |
|                                   |       |                            |       |   |   |   |   |
| Gross profit:                          |       | 21,368                          |       | 16,462 |   | 4,906 |   |
|                                   |       |                            |       |   |   |   |   |
| Selling, general & administrative: |       | 9,547                           |       | 10,380 |   | (833 | ) |
|                                   |       |                            |       |   |   |   |   |
| Amortization of intangible assets:     |       | 724                             |       | 489 |   | 235 |   |
|                                   |       |                            |       |   |   |   |   |
| Operating income                       |       | $                               | 11,097     |   | $ | 5,593 |   | $ | 5,504 |   |

 

*Revenues*

 

Revenues increased approximately $6 million, or 10%, from $61 millionfor the three months ended June 30, 2004 to $67 million for the three monthsended June 30, 2005. The increase in revenues was driven primarily by a $4million increase in airline reservations hosting revenue due to highertransaction volumes from new customers as well as transaction volume growthfrom our existing customer base. Additionally, product revenue increased $3 million as a result of higherdemand for our products and consulting revenue increased $1 million due tocertain contractual objectives being met. This growth was offset by a $2 million decline in our low margin, customdeveloped software business.

 

*Cost of Revenues*

 

Cost of revenues increased approximately $1 million, or 2%, from $44million for the three months ended June 30, 2004 to $45 million for the threemonths ended June 30, 2005. This increase is due to a $1 million increase indata processing costs due to transaction volume growth, a $1 million increasein communication costs caused by an increase in data network rates and a $1million increase in depreciation and amortization due to higher capitalizedproduct labor and capitalized project delivery costs. These increases wereoffset by a $2 million decrease in headcount related costs due to an increasein capitalized salaries and benefits, a decrease in headcount and a decrease inseverance costs.

 

*Selling, General and Administrative Expenses*

 

Selling,general and administrative expenses decreased approximately $1 million, or 10%,from $10 million for the three months ended June 30, 2004, to $9 million forthe three months ended June 30, 2005. The decrease in selling, general andadministrative expenses was driven by a decrease in bad debt expense as aresult of receiving payments on accounts that had been previously reserved.

 

*Amortization of Intangible Assets*

 

Amortizationof intangible assets increased a nominal amount due to intangible amortizationassociated with the acquisition of RM Rocade in August 2004.

 

*Operating Income*

 

##### **Operating income increased $5 million, or 83%, from $6million in the three months ended June 30, 2004, to $11 million in the threemonths ended June 30, 2005, due primarily to higher revenues.**

 

37

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##### **Interest Income**

 

Interestincome for the three months ended June 30, 2005 increased approximately $3million as compared to the three months ended June 30, 2004.  Average balances of our short-terminvestments were lower, offset by improved rates of return on those balances.

 

##### **Interest Expense**

 

Interestexpense for the three months ended June 30, 2005 increased approximately $2million as compared to the three months ended June 30, 2004, due to a higherLIBOR rate. A portion of our fixed rate debt is swapped into variable rate debtbased on the LIBOR rate.  See Note 6 ofthe Consolidated Financial Statements and *“Item 3. Quantitative andQualitative Disclosures about Market Risk.”*

 

**Loss onDerivative Instrument**

 

Inorder to offset our currency exposure in relation to the acquisition oflastminute.com we purchased an option in May 2005 to acquire GBP and EUR at afixed rate at or near the closing of the transaction for $10 million.  Due to the strengthening of the U.S. Dollaragainst these currencies, the value of the option has declined to less than $1million at June 30, 2005, resulting in a $10 million loss.

 

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

 

Other,net income for the three months ended June 30, 2005 decreased by $5 millioncompared to the three months ended June 30, 2004, due to a gain from settling acontract dispute in 2004.

#####  

##### **Income Taxes**

 

The****provision for income taxes for the three months ended June30, 2005 decreased by $5 million as compared to the three months ended June 30,2004. This decrease is due to the tax effect of an approximately $20 milliondecrease in pre-tax income between periods offset by increased state income taxof $1 million and a reduction of foreign tax credits of $1 million. See Note 5to the Consolidated Financial Statements for additional information regardingincome taxes.

 

##### **Net Earnings**

 

Netearnings decreased by $15 million during the three months ended June 30, 2005as compared to the three months ended June 30, 2004.  Net earnings was primarily impacted byinvestments in emerging businesses, hedging activities related to theacquisition of lastminute.com, incentive costs and severance charges.

 

38

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**Six Months Ended June 30, 2005 and 2004**

 

Totalrevenues for the six months ended June 30, 2005 after intercompany eliminationsincreased approximately $110 million or 10%, compared to the six months endedJune 30, 2004, from $1,091 million to $1,201 million.  Cost of revenues after intercompanyeliminations for the six months ended June 30, 2005 increased approximately $85million or 14%, compared to the six months ended June 30, 2004, from $619million to $704 million.

 

Management’sdiscussion and analysis of revenues, cost of revenues, selling, general andadministrative expenses, amortization of intangible assets and operating incomeby business segment are based upon segment results including intersegmentrevenues and cost of revenues of approximately $96 million and $85 million forthe six months ended June 30, 2005 and 2004, respectively.  We account for significant intersegmenttransactions as if the transactions were to third parties, that is, at estimatedcurrent market prices.  The majority ofthe intersegment revenues and cost of revenues are between Travelocity andSabre Travel Network, consisting mainly of incentives paid to Travelocity forTravelocity transactions processed through the *Sabre*GDS, data processing fees and transaction fees paid by Travelocity to SabreTravel Network, and fees paid by Sabre Travel Network to Travelocity forcorporate trips booked 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.

 

Totalrevenues (including intersegment revenues) for the six months ended June 30,2005 increased approximately $123 million, or 10%, as compared to the sixmonths ended June 30, 2004, from $1,175 million to $1,298 million.

 

Totalcost of revenues (including intersegment cost of revenues) for the six monthsended June 30, 2005 increased $96 million, or 14%, as compared to the sixmonths ended June 30, 2004, from $704 million to $800 million.

#####  

##### **SabreTravel Network**

 

| ** **                             | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **2005**                      | ** ** | **2004** | ** ** | **change** | ** ** |
| ** **                             | ** ** | **(thousands)**               | ** ** |
|                                   |       |                          |       |   |   |   |   |
| Segment revenues:                      |       | $                             | 848,748    |   | $ | 818,223 |   | $ | 30,525 |   |
|                                   |       |                          |       |   |   |   |   |
| Cost of revenues:                      |       | 568,354                       |       | 511,762 |   | 56,592 |   |
|                                   |       |                          |       |   |   |   |   |
| Gross profit:                          |       | 280,394                       |       | 306,461 |   | (26,067 | ) |
|                                   |       |                          |       |   |   |   |   |
| Selling, general & administrative: |       | 127,431                       |       | 132,667 |   | (5,236 | ) |
|                                   |       |                          |       |   |   |   |   |
| Amortization of intangible assets:     |       | 9,750                         |       | 11,517 |   | (1,767 | ) |
|                                   |       |                          |       |   |   |   |   |
| Operating income                       |       | $                             | 143,213    |   | $ | 162,277 |   | $ | (19,064 | ) |

 

*Revenues*

 

Revenuesfor the six months ended June 30, 2005 increased $31 million, or 4%, ascompared to the six months ended June 30, 2004, from $818 million to $849million.

 

•                  Transaction revenue (see *Componentsof Revenues and Expenses*) increased by $27 million, or 4%.  This $27 million increase includes a $29million increase resulting from increased transaction volumes and a $2 milliondecrease driven by a lower average net effective rate due to the growth ofnon-traditional transactions.  Totaltransactions were 182 million for the six months ended June 30, 2005, anincrease of 4% from 175 million transactions in the six months ended June 30,2004 *(*see *Business Trends:  Changing our Sabre Travel Network BusinessModel.)*

 

•                  Subscriber revenue decreased by $11 million,reflecting the trend towards the adoption of third-party equipment solutions bysubscribers.

 

39

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•                  Other revenue increased by $15 million,driven by $10 million of SynXis revenue and $4 million of *HotelSpotlight* revenue, neither of which were a part of the business in2004.  The remaining $1 million increaserelates to various other products.

 

*Cost of Revenues*

 

Costof revenues for the six months ended June 30, 2005 increased $56 million, or11%, as compared to the six months ended June 30, 2004, from $512 million to$568 million. The increase in cost of revenues consisted of a $16 millionincrease in subscriber support costs, a $15 million increase in technologyrelated spending and an approximate $25 million increase in other expenses.

 

The$16 million increase in subscriber support costs includes an $18 millionincrease in customer incentives. Incentives paid to Travelocity increased $7million, as a result of higher transaction volumes. Non-Travelocity incentivesgrew $13 million as a result of growth in the average incentive pertransaction. This growth was partially offset by a $2 million decrease in non-Travelocitytransaction volumes. The increase in incentive expense was offset by reductionsin hardware support and communications costs of $2 million driven by migrationto lower cost solutions and the adoption of third-party solutions bysubscribers.

 

Technology related spendingincreased $15 million due to a $4 million increase related to our continuingexpansion of our new functionality and other data processing costs. Operatingcost relating to our phased implementation of our open system pricing and shoppingengine increased $5 million. Technology costs increased by $6 million as aresult of the expiration of contractual credits in the first quarter of 2005.

 

Other expenses increasedapproximately $25 million.  Headcountrelated expenses grew $7 million as a result of $3 million from the growth innew businesses, a $3 million increase in severance related costs and $1 millionfrom growth in other headcount costs. Internal product development for new pricing, shopping and merchandizingfunctionalities increased $4 million. Fulfillment costs for *GetThere* tripsincreased $4 million as a result of volume growth.  Other increases include $4 million indistribution costs for new businesses, $2 million in depreciation related toinvestment in new products, $1 million in consulting services purchased toassist with development of new businesses, and $3 million in other expenses.

 

*Selling, General andAdministrative Expenses*

 

Selling,general and administrative expenses decreased by $6 million, or 5%, from $133million for the six months ended June 30, 2004 to $127 million for the sixmonths ended June 30, 2005, primarily driven by a $9 million reduction in taxaccruals due to events occurring that decreased our potential liabilities fortaxes and associated interest which was partially offset by a $2 millionincrease in legal and other professional fees and a $1 million increase inother expenses.

 

*Amortization of Intangible Assets*

 

Amortizationof intangible assets decreased $2 million, or 17%, from $12 million for the sixmonths ended June 30, 2004 to $10 million for the six months ended June 30,2005. The decrease in amortization of intangible assets is primarily due to the$3 million write-off of an intangible asset in the second quarter of 2004.  In addition, increased amortization expensefrom newly acquired entities was partially offset by intangibles that fullyamortized in 2004 and 2005 resulting in a net increase of $1 million.

 

*Operating Income*

 

Operating income decreased$19 million, or 12%, from $162 million in the six months ended June 30, 2004,to $143 million in the six months ended June 30, 2005, as a result of severance cost incurred in thesecond quarter of 2005, higher incentives, the loss of contractual credits andinvestments in new emerging businesses such as SynXis that exceeded our revenuegrowth.

 

40

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##### **Travelocity**

 

| ** **                             | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **2005**                      | ** ** | **2004** | ** ** | **change** | ** ** |
| ** **                             | ** ** | **(thousands)**               | ** ** |
|                                   |       |                          |       |   |   |   |   |
| Segment revenues:                      |       | $                             | 319,141    |   | $ | 236,997 |   | $ | 82,144 |   |
|                                   |       |                          |       |   |   |   |   |
| Cost of revenues:                      |       | 144,137                       |       | 101,557 |   | 42,580 |   |
|                                   |       |                          |       |   |   |   |   |
| Gross profit:                          |       | 175,004                       |       | 135,440 |   | 39,564 |   |
|                                   |       |                          |       |   |   |   |   |
| Selling, general & administrative: |       | 181,071                       |       | 130,517 |   | 50,554 |   |
|                                   |       |                          |       |   |   |   |   |
| Amortization of intangible assets:     |       | 3,617                         |       | 14,852 |   | (11,235 | ) |
|                                   |       |                          |       |   |   |   |   |
| Operating loss                         |       | $                             | (9,684     | ) | $ | (9,929 | ) | $ | 245 |   |

 

*Revenues*

 

Revenuesfor the six months ended June 30, 2005 increased $82 million, or 35%, ascompared to the six months ended June 30, 2004, from $237 million to $319million.

 

InOctober of 2004, we acquired sole control of the non-German operations ofTravelocity Europe, purchasing 50% of these entities (the “TEU acquisition”).The remaining 50% that we did already own indirectly through the TravelocityEurope joint venture was distributed to us by the joint venture so that we nowdirectly own 100% of these entities. Since this acquisition, we have been consolidating the results ofTravelocity Europe, whereas prior to October 2004, 50% of these results wererecorded in other revenues as equity losses.

 

•              Transaction revenue, including TravelocityEurope, in 2005 increased $69 million, or 34%, primarily driven by a $60million increase in non-air transaction revenue (including revenue resultingfrom sales of package offerings that include air travel as a component) and a$9 million increase in stand-alone air transaction revenue.

 

The $60 million increase in non-air transactionrevenue consisted primarily of the following:

 

•                              Packaged trip revenue increased approximately$36 million due to the growth of our Travelocity *TotalTrip* and**Last MinuteDeals offerings;

 

•                              Stand-alone hotel revenue increased $20million due to the growth of our net rate hotel program;

 

•                              All other non-air transaction revenueincreased $4 million.

 

The $9 million increase in stand-alone air transaction revenue wasprimarily due to a volume increase in stand-alone air ticket sales compared tothe same period in 2004.  Our volumeincreased due to an overall increase in online travel demand and the TEUacquisition.

 

•                  Non-transaction revenue increased $13million, or 38%, consisting primarily of the following:

 

•                              Joint venture equity method losses, whichreduce our revenues, decreased by approximately $7 million.  The decreased equity losses resulted from theTEU acquisition;

 

41

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•                              Corporate revenue, the fees paid by SabreTravel Network and Sabre Airline Solutions to Travelocity for trips bookedthrough Travelocity’s online booking technology, increased by approximately $5million due primarily to higher booking volumes;

 

•                              All other non-transaction revenue increased$1 million.

 

*Cost of Revenues*

 

Costof revenues for the six months ended June 30, 2005 increased $42 million, or41%, as compared to the six months ended June 30, 2004, from $102 million to$144 million. The increase in cost of revenues in the six months ended June 30,2005 compared with the six months ended June 30, 2004 was primarily the resultof a $16 million increase in expenses associated with the volume growth of ourpublished, net rate hotel, *TotalTrip*and**Last Minute Deals programs, as explained above intransaction revenue as well as an increase in service compensation.  In addition, this increase includes $14million from Travelocity Europe and Showtickets.com, which were acquired in thefourth quarter of 2004, and $10 million related to customer service costs as aresult of improved transaction volumes. All other expenses increasedapproximately $2 million.

 

*Selling, General and Administrative Expenses*

 

Selling,general and administrative expenses increased approximately $50 million, or38%, from $131 million for the six months ended June 30, 2004 to $181 millionfor the six months ended June 30, 2005. This increase includes $28 million from Travelocity Europe andShowtickets.com and $21 million due to increased advertising and customeracquisition costs to drive additional travelers to our websites. The increasein advertising expense includes changes in the timing of recognizingadvertising expenses within the fiscal year which resulted in a $6 millionincrease in advertising expenses (See Note 2 to the Consolidated FinancialStatements).  Other selling, general andadministrative expenses increased $1 million.

 

*Amortization of Intangible Assets*

 

Amortizationof intangible assets decreased $11 million, or 73%, from $15 million in the sixmonths ended June 30, 2004 to $4 million in the six months ended June 30, 2005,due to certain intangible assets becoming fully amortized in 2004.

 

*Operating Loss*

 

Operatingloss for the six months ended June 30, 2005 was unchanged compared with the sixmonths ended June 30, 2004, due to higher revenue growth and lower intangibleamortization offset by higher incremental cost resulting from the TEUacquisition and an increase in advertising expenses.

 

42

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

 

| ** **                             | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------|------------|
| ** **                             | ** ** | **2005**                      | ** ** | **2004** | ** ** | **change** | ** ** |
| ** **                             | ** ** | **(thousands)**               | ** ** |
|                                   |       |                          |       |   |   |   |   |
| Segment revenues:                      |       | $                             | 129,617    |   | $ | 120,247 |   | $ | 9,370 |   |
|                                   |       |                          |       |   |   |   |   |
| Cost of revenues:                      |       | 88,011                        |       | 91,291 |   | (3,280 | ) |
|                                   |       |                          |       |   |   |   |   |
| Gross profit:                          |       | 41,606                        |       | 28,956 |   | 12,650 |   |
|                                   |       |                          |       |   |   |   |   |
| Selling, general & administrative: |       | 19,715                        |       | 23,005 |   | (3,290 | ) |
|                                   |       |                          |       |   |   |   |   |
| Amortization of intangible assets:     |       | 1,454                         |       | 980 |   | 474 |   |
|                                   |       |                          |       |   |   |   |   |
| Operating income                       |       | $                             | 20,437     |   | $ | 4,971 |   | $ | 15,466 |   |

 

*Revenues*

 

Revenues increased approximately $10 million, or 8%, from $120 millionfor the six months ended June 30, 2004 to $130 million for the six months endedJune 30, 2005. The increase in revenues was driven primarily by a $7 millionincrease in product revenue as a result of higher demand for our products.  Additionally, airline reservations hostingrevenue increased $6 million due to higher transaction volumes from newcustomers as well as transaction volume growth from our existing customer base.Consulting revenues increased $2 million due to certain contractual objectivesbeing met.  This growth was offset by a$5 million decline in our low margin, custom developed software business.

 

*Cost of Revenues*

 

Cost of revenues decreased approximately $3 million, or 3%, from$91 million for the six months ended June 30, 2004 to $88 million for the sixmonths ended June 30, 2005. This decrease is due to an $8 million decrease inheadcount related expenses driven by an increase in capitalized salary andbenefits and a decrease in headcount. This decrease is offset by a $1 millionincrease in data processing cost primarily due to transaction volume growth, a$1 million increase in depreciation and amortization due to an increase incapitalized product labor and capitalized project delivery costs, a $1 millionincrease in services purchased due primarily to the outsourcing of training andother services and a $2 million increase in other expenses.

 

*Selling, General and Administrative Expenses*

 

Selling,general and administrative expenses decreased approximately $3 million, or 13%,from $23 million for the six months ended June 30, 2004 to $20 million for thesix months ended June 30, 2005. This decrease in selling, general andadministrative expenses was driven by a $5 million decrease in bad debt expensecaused by the receipt of payments on accounts that had been previouslyreserved. This decrease was somewhat offset by increases in other expenses of$2 million.

 

*Amortization of Intangible Assets*

 

Amortizationof intangible assets increased a nominal amount due to intangible amortizationassociated with the acquisition of RM Rocade in August 2004.

 

*Operating Income*

 

##### **Operating income increased $15 million, or 300%, from $5million in the six months ended June 30, 2004, to $20 million in the six monthsended June 30, 2005. The increase in operating income was primarily driven byhigher revenues, cost savings in headcount related expenses and more favorablecollection activities.**

 

43

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##### **Interest Income**

 

Interestincome for the six months ended June 30, 2005 increased by $4 million ascompared to the six months ended June 30, 2004. Average balances of our short-term investments were lower, offset byimproved rates of return on those balances.

#####  

##### **Interest Expense**

 

Interestexpense for the six months ended June 30, 2005 increased approximately $3million as compared to the six months ended June 30, 2004 due to a higher LIBORrate.  A portion of our fixed rate debtis swapped into 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 onSale of Investment**

 

On March 11, 2005, we sold our interest in Karavel SA, a French touroperator, to Opodo Limited. We received approximately $26 million (Euro 20million) in cash proceeds in connection with the sale and recorded a $21million gain in other income.

 

**Loss onDerivative Instrument**

 

Inorder to offset our currency exposure in relation to the acquisition oflastminute.com we purchased an option in May 2005 to acquire GBP and EUR at afixed rate at or near the closing of the transaction for $10 million.  Due to the strengthening of the U.S. Dollaragainst these currencies, the value of the option declined to less than $1million at June 30, 2005 resulting in a $10 million loss.

#####  

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

 

Other,net income for the six months ended June 30, 2005 decreased by $5 millioncompared to the six months ended June 30, 2004, due to a gain from settling acontract dispute in 2004.

 

##### **Income Taxes**

 

The****provision for income taxes forthe six months ended June 30, 2005 increased $3 million as compared to thesix months ended June 30, 2004.  Thisincrease is due to the tax effect of an approximately $3 million increase inpre-tax income between periods, an increase in state taxes of $1 million, and areduction of foreign tax credits of $1 million. See Note 5 to the Consolidated Financial Statements for additionalinformation regarding income taxes.

 

##### **Net Earnings**

 

Net earnings for the six months ended June 30, 2005 was unchanged as compared to the six months ended June30, 2004. During this period weexperienced revenue growth and realized a gain from the sale of an investment,however, these gains to net earnings were offset by investments inemerging businesses, hedging activities related to the acquisition oflastminute.com, incentive costs and severance charges.

 

44

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**SABRE HOLDINGS CORPORATION**

**LIQUIDITY AND CAPITAL RESOURCES**

 

Werequire cash to pay our operating expenses, make capital expenditures, investin our products and offerings, pay dividends, repurchase shares of our CommonStock and service our debt and other long-term liabilities.  Although our primary source of funds has beenfrom our operations, we have in the past and may in the future raise externalfunds through the sale of stock or debt in the public capital markets or inprivately negotiated transactions.  Inassessing our liquidity, key components include our net income adjusted fornon-cash and non-operating items, and current assets and liabilities, inparticular accounts receivable, accounts payable, and accrued expenses.  For the longer term, our debt and long-termliabilities are also considered key to assessing our liquidity.

 

Our current cash flows fromoperations, existing balances in cash and short-term investments and fundsavailable under our revolving credit facility and our Bridge Facility for thelastminute.com acquisition 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 acquisitions of, or investments in, complementary businesses, products,services and technologies when such opportunities become available. These typesof additional activities might affect our liquidity requirements or cause us toissue additional equity or debt securities.

 

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,among other 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 Optionagreements;

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

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

 

See“*Risk Factors*” for a morecomplete discussion of risk factors that might affect the availability of ourinternally generated funds.

 

Asa result of the additional debt we incurred on August 1, 2005 to fund theacquisition of lastminute.com, Standard & Poor’s changed our credit ratingfrom BBB+ to BBB.  That is still aninvestment grade credit rating and is not anticipated to have a material impacton our borrowing cost.

 

Moody’sInvestors Service is still evaluating a potential change in our current creditrating of Baa2, which is also investment grade.

 

***Cash Investments***

 

We invest cash in highlyliquid instruments, including high credit quality money market mutual funds,certificates of deposit, banker’s acceptances, commercial paper, repurchaseagreements, mortgage-backed and receivables-backed securities and corporate andgovernment notes, including tax-exempt municipal securities. We try to investall of our excess cash in marketable securities.  Therefore, our annual investments will fluctuatedepending on the levels of cash provided or used by all of our other investing,operating and financing activities.

 

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***Capital Activities***

 

**Dividends.**  On January 20, 2004, weannounced a dividend of $.075 per share. We paid dividends of that same amount in all quarters of 2004.  On February 1, 2005, we announced a dividendof $.09 per share which was paid on February 28, 2005 to stockholders of recordat February 11, 2005.  On May 3, 2005, weannounced a dividend of $.09 per share which was paid on May 26, 2005 tostockholders of record at May 13, 2005. On July 26, 2005, we announced a dividend of $.09 per share payable onAugust 18, 2005 to stockholders of record at August 5, 2005.  Based on a quarterly dividend of $.09 pershare, and assuming that the current number of outstanding shares of our CommonStock remains constant for the remainder of 2005, we expect to pay an aggregateof approximately $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. **On October 20,2003, our Board of Directors approved a share repurchase program authorizing usto repurchase up to $100 million of our Common Stock.  At December 31,2003, we had remaining authorization to repurchase approximately $72 million ofour Common Stock under this program.  During the three months ended March31, 2004, we repurchased 3,336,862 shares of our Common Stock for approximately$72 million, thereby completing the remaining authorization to repurchaseshares under that program.  On April 19, 2004, our Board of Directorsapproved another share repurchase program authorizing us to repurchase up to anadditional $100 million of our Common Stock.  We repurchased 4,038,166 sharesof our Common Stock under this authorization. This authorization was completedon November 1, 2004.  On October 25,2004, our Board of Directors approved another share repurchase programauthorizing us to repurchase up to an additional $100 million of our Common Stock.At December 31, 2004, we had repurchased 2,516,284 shares of our Common Stockand had remaining authorization to repurchase approximately $43 million of ourCommon Stock under this program.  Duringthe first quarter of 2005, we repurchased 2,042,063 shares of our Common Stock,completing this authorization on March 14, 2005.

 

OnMay 2, 2005, we received authorization from the Board of Directors torepurchase an additional $100 million of our Common Stock.  Due to the acquisition of lastminute.com, no purchasesof our Common Stock have been made under this authorization as of the date ofthis report.  As in the past,implementation of the program is at management’s discretion and will depend onthe best uses for our available cash.

 

Inaddition, on October 20, 2003, our Board of Directors authorized the purchaseof shares of our Common Stock to satisfy our obligations to deliver sharesunder our Employee Stock Purchase Plan and our Long-Term Incentive Plan. We did not repurchase any shares of our Common Stock under this program during2004.  We purchased 840,000 shares underthis authorization in January 2005.

 

Wewill generally seek to make any future share repurchases pursuant to 10b5-1trading plans, unless such plans are terminated at the discretion ofmanagement.

 

***Financing Arrangements***

 

**Bridge FinancingArrangement**

 

On May 12,2005,  we entered into an$800 million, unsecured, multi-draw bridge loan agreement (the “BridgeFacility”) that matures on August 12, 2006, in order to provide temporaryfinancing in connection with the lastminute.com acquisition of all of theshares of lastminute.com and to satisfy legal requirements for certainty offunding for the lastminute.com acquisition. On July 22, 2005, we entered into an amendment to the Bridge Facilitywhereby all the rights and obligations of Sabre Inc. under the Bridge Facilitywere assumed by Sabre Holdings and Sabre Inc. was discharged from itsobligations thereunder.

 

EffectiveAugust 1, 2005, we borrowed $800 million under the Bridge Facility in order topartially finance the purchase of the shares of lastminute.com in connectionwith the lastminute.com acquisition.

 

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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 based interest rate at our current credit ratingis equal to approximately 4%.  The BridgeFacility requires us to pay, quarterly and upon termination of the BridgeFacility, a commitment fee based on the preceding quarter’s unused portion ofthe Bridge Facility multiplied by a commitment fee percentage specified in theBridge Facility.  We are also required topay other fees based on the Bridge Facility amount.  These fees are not material.

 

We may prepayall or any part of the Bridge Facility without prepayment penalty, 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 for moneyborrowed with a maturity in excess of one year (excluding, among other things,borrowings under our existing revolving credit agreement) and (ii) asset saleswith 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 June 30,2005, we are in compliance with all covenants under the Bridge Facilityincluding the following financial covenants: 

 

| ****Covenant****                             | **** **** | ****Requirement**** | **** **** | ****Level at  June 30, 2005**** | **** **** |
|----------------------------------------------|----------------|---------------------|----------------|---------------------------------|----------------|
|                                         |           |                |           |                            |           |
| Consolidated Leverage Ratio (Debt to EBITDA) |           | 5.0 to 1 maximum    |           | 1.4 to 1                        |           |
|                                         |           |                |           |                            |           |
| Consolidated Net Worth                       |           | $                   | 1.252 billion  |                            | $              | 1.6 billion |   |
|                                              |                |                     |                |                                 |                |  |  |

 

On August 1, 2005, we used approximately $359 million in cash ($234million, net of cash acquired) and incurred approximately $800 million inadditional indebtedness.  Although thismaterially increases our Consolidated Leverage Ratio, we believe we continue tobe in compliance with the financial and other covenants under the BridgeFacility.

 

**Revolving Credit Facility.**

 

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 existing $300 million revolvingcredit agreement (the “Revolver”) with Bank of America, N.A., as agent.  Under the amendments, Sabre Holdings assumedall of the rights and obligations of Sabre Inc. under the Revolver and SabreInc. was discharged from its obligations thereunder.  The amendments also include, among otherthings: (i) amendments to certain financial and negative covenants (includingamendments to provide us more flexibility under the Consolidated Leverage Ratiocovenant and amendments that place additional restrictions on our subsidiaries’ability to incur indebtedness), (ii) amendments that prohibit us from usingproceeds from the Revolver to repay the Bridge Facility to the extent suchproceeds represent more than 50% of the then aggregate committed amount of thelenders under the Revolver, (iii) amendments that increase the aggregate amountcommitted by those lenders to $360 million, and (iv) amendments that allow usto request a future increase of the aggregate amount committed by the lendersunder the Revolver to as much as $500 million.

 

As of June 30, 2005, we were in compliance with all covenants under theRevolver including:

 

| **Prior  to amendment dated July 22, 2005**   | ** ** | **Requirement** | ** **    | **Level at  June 30, 2005** | ** ** |
|-----------------------------------------------|------------|-----------------|---------------|-----------------------------|------------|
|                                          |       |            |          |                        |       |
| Consolidated Leverage Ratio (Debt to  EBITDA) |       | 3 to 1 maximum  |          | 1.4 to 1                    |       |
| Consolidated Net Worth                        |       | $               | 1.252 billion |                        | $          | 1.6 billion |   |
|                                               |            |                 |               |                             |            |  |  |

 

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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 |       |

 

In order to fund amounts due in connection withcompleting the lastminute.com acquisition, we used approximately $359 millionin cash ($234 million, net of cash acquired) and incurred approximately $800million in additional indebtedness. Although this materially increases our Consolidated Leverage Ratio, webelieve we continue to be in compliance with the financial and other covenantsunder the Revolver.

** **

**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 June 30,2005, we are in compliance with all covenant requirements under the Notes.  Sabre Inc., a 100% owned subsidiary of SabreHoldings Corporation, unconditionally guarantees all debt obligations of SabreHoldings Corporation.  In conjunctionwith these Notes, we have entered into two interest rate swaps through 2011 fora total of $300 million, which pay us 7.35% and on which we pay a variable ratebased on a six-month LIBOR plus 231 basis points.

 

**Capital Lease Obligation. **In June 2003, we entered into a ten-year master lease for our corporateheadquarters facility in Southlake, Texas, which is accounted for as a capitallease.  The interest rate on the capitallease financing is fixed at 5.37%.  Atthe inception of the lease, we recorded an asset of approximately $168 million,along with a liability of approximately $168 million, representing the presentvalue of the minimum lease payments due under the lease and the residual valueguarantee 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.  In conjunctionwith this lease, we have entered into a $100 million interest rate swap whichpays us 5.37% and on which we pay a variable rate based on a six-month LIBORplus 153 basis points.   Under the leaseagreement, we are subject to certain covenants. As of June 30, 2005, we are in compliance with all covenants under thisagreement including the following financial covenant:

 

| ** **             | ** ** | **Requirement** | ** **         | **Level at  June 30, 2005** | ** ** |
|------------------------|------------|-----------------|--------------------|-----------------------------|------------|
|                   |       |            |               |                        |       |
| Consolidated Net Worth |       | $               |  1.0  billion |                        | $          |  1.6  billion |   |
|                        |            |                 |                    |                             |            |  |  |

 

***Off-Balance Sheet Arrangements***

 

Wedo not have any relationships or agreements as of June 30, 2005 that would beconsidered an off balance sheet arrangement as defined by Item 303(a)4ii ofRegulation S-K.

 

***Cash Flows (in thousands)***

 
| ** **                            | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------|------------|
| ** **                            | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| Cash provided by operating activities |       | $                             | 154,375    |   | $ | 286,351 |   |
| Cash used for investing activities    |       | $                             | (72,510    | ) | $ | (181,770 | ) |
| Cash used for financing activities    |       | $                             | (84,109    | ) | $ | (113,741 | ) |

 

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**Operating Activities**.Cash provided by operating activities during the six months ended June 30, 2005was $154 million, which was primarily from net earnings of $102 millionadjusted for non-cash and non-operating items. Cash provided by working capital items was less than $1 million, whichincludes accounts receivable, prepaid expenses, accrued compensation andbenefits, accounts payable and other accrued liabilities.  Non-cash adjustments are an increase to netearnings of $52 million for the six months ended June 30, 2005 and included depreciation and amortization of $53million, equity losses of $3 million in joint ventures, a loss on a foreigncurrency option of $10 million, deferred income taxes of $3 million and stockcompensation expense of $6 million offset by a gain on the sale of ourinvestment in Karavel of $21 million and other non-cash adjustments of $2million.

 

Cash provided by operating activities during the six months ended June30, 2004 was $286 million, which was primarily from net earnings of $102million adjusted for non-cash and non-operating items and cash provided byworking capital items totaling $104 million, which includes accountsreceivable, prepaid expenses, accrued compensation and benefits, accountspayable and other accrued liabilities.  Non-cashadjustments to net earnings of $81 million for the first half of 2004 includeddepreciation and amortization of $64 million, equity losses of $8 million injoint ventures, $10 million in allowances for doubtful accounts and stockcompensation expense of $6 million offset by $3 million in deferred taxes and$4 million in other non-cash adjustments.

 

Cash provided by operating activities decreased by $132 million in thesix months ended June 30, 2005 as compared to the year-agoperiod.  This decrease in cash providedby operating activities was partially due to a decrease in net income adjustedfor non-cash adjustments of $29 million. Additionally, cash provided by working capital decreased by $103million.  Although working capital waspositively impacted by the increased use of our net rate program, severalfactors contributed to offset this, including: a higher payout of incentive compensation, a one time receipt of $20million in 2004 from contracts cancelled in 2003, timing of payments to our netrate program suppliers, payment of incentives in the second quarter of 2005that were not paid until the third quarter in 2004, timing of tax payments andan increase in our accounts receivable balances from higher bookings and fromentities acquired in the last half of 2004 and 2005.

 

**Investing Activities**.  The $109 million decrease in cash used forinvesting activities in the six months ended June 30, 2005 as compared to the year-ago period primarilyresults from a $139 million increase in net sales of our portfolio ofmarketable securities. Also contributing to the decrease, was the $26 millionof proceeds from the sale of our investment in Karavel. Offsetting theseproceeds from investing activities were $67 million of cash expenditures foracquisitions and $13 million in loans and investments to joint ventures in thefirst half of 2005 compared to $33 million of such expenditures in the sameperiod a year ago.  Additionally, in thefirst half of 2005, we had $5 million more in capital expenditures and spent$10 million to purchase a foreign currency option.

 

**Financing Activities.**  Cash used for financing activities decreased$30 million for the six months ended June30, 2005 as compared to the same period a year ago.  This decrease was primarily due to areduction in the number of shares of our Common Stock that we repurchased underour Board authorized stock repurchasing plans resulting in a $39 millionreduction in cash outflows.  Offsettingthis decrease in shares of Common Stock repurchased was an increase individends paid of $3 million due to an increase in our dividend rate from $.075per share in 2004 to $.09 per share in 2005. Proceeds from the issuance ofCommon Stock decreased $7 million due to fewer employee stock option excercisesresulting from a generally lower price of our Common Stock.

 

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**Critical Accounting Policies**

 

Thediscussion and analysis of our financial condition and results of operations isbased on our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United States.The preparation of these financial statements requires us to make estimates andjudgments that affect our reported assets and liabilities, revenues andexpenses, and other financial information. Actual results may differsignificantly from these estimates, and our reported financial condition andresults of operations could vary under different assumptions and conditions. Inaddition, our reported financial condition and results of operations could varydue to a change in the application of a particular accounting standard.

 

Weregard an accounting estimate underlying our financial statements as a “criticalaccounting estimate” if the accounting estimate requires us to make assumptionsabout matters that are highly uncertain at the time of estimation and ifdifferent estimates that reasonably could have been used in the current period,or changes in the estimate that are reasonably likely to occur from period toperiod, would have had a material effect on the presentation of financialcondition, changes in financial condition, or results of operations.

 

Therehave been no changes to our critical accounting policies or significant changesin assumptions or estimates that would affect such policies in the three monthsended June 30, 2005. Our critical accounting policies are described under thecaption “*Management’s Discussion andAnalysis of Financial Condition and Results of Operations*” in ourAnnual Report on Form 10-K.  In addition,for a discussion of significant accounting policies, see Footnote 2 of ouraudited financial statements included in our Annual Report on Form 10-K for theyear ended December 31, 2004, as well as Footnote 2 to our unaudited interimfinancial statements included in this Quarterly Report on Form 10-Q.

 

**Advertising –**Priorto 2005, certain advertising costs were deferred within the fiscal year tofuture interim periods where the benefit of that advertising extended beyond thequarter in which they occurred. Beginning in 2005 and all subsequent interim periods, advertising costsare expensed as incurred with no deferral within the fiscal year.  Our current advertising strategy is togenerate immediate interest in travel promotions and products where returns aremore immediate than in the past when our strategy was developing overall brandawareness.

 

This timingchange resulted in lower selling, general and administrative expenses for thethree months ended June 30, 2005 of an estimated $2 million and higher netincome of $1 million or $.01 per share. For the six months ended June 30, 2005, this timing change resulted inhigher selling, general and administrative expenses of an estimated $6 millionand lower net income of $4 million or $.03 per share.  Due to this timing change, we expect torecognize lower advertising expenses in subsequent quarters of 2005 than in thecomparable periods of the prior year, offset by any increases in advertisingvolume.

 

Had weemployed the revised methodology in 2004, selling, general and administrativeexpenses would have been an estimated $2 million higher and net income anestimated $1 million, or $.01 per share lower for the three months ended June30, 2004.  For the six months ended June30, 2004, selling, general and administrative expenses would have been anestimated $14 million higher and net income an estimated $9 million, or $.07per share lower under the revised methodology.

 

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**SABRE HOLDINGS CORPORATION**

**CAUTIONARYSTATEMENT**

 

Statementsin this report which are not purely historical facts or which necessarilydepend upon future events, including statements regarding our anticipations,beliefs, expectations, hopes, intentions or strategies for the future, may beforward-looking statements within the meaning of Section 21E of theSecurities Exchange Act of 1934, as amended. All forward-looking statements inthis report are based upon information available to us on the date of thisreport. We undertake no obligation to publicly update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise. Any forward-looking statements made in this report involverisks and uncertainties that could cause actual events or results to differmaterially from the events or results described in the forward-lookingstatements. Readers are cautioned not to place undue reliance on theseforward-looking statements. In addition, oral statements made by our directors,officers and employees to the investor and analyst communities, mediarepresentatives and others, depending upon their nature, may also constituteforward-looking statements.  As with theforward-looking statements included in this report, these forward-lookingstatements are by nature inherently uncertain, and actual results may differmaterially as a result of many factors including, but not limited to, thosediscussed below.

 

### **RISK FACTORS**

 

Risks associated with an investment in our securities, and withachieving the forward-looking statements contained in this report or in ournews releases, websites, public filings, investor and analyst conferences orelsewhere, include, but are not limited to, the risk factors described below.Any of the risk factors described below could have a material adverse effect onour business, financial condition or results of operations. We may not succeedin addressing these challenges and risks.

 

**Our revenues are highly dependent on thetravel and transportation industries, and particularly on airlines, and aprolonged substantial decrease in travel transaction volumes could adverselyaffect us.**

 

Most of our revenue is derived from airlines, hotel operators, carrental companies, cruise operators and other suppliers in the travel andtransportation industries. Our revenue increases and decreases with the levelof travel and transportation activity and is therefore highly subject todeclines in or disruptions to travel and transportation due to factors entirelyout of our control. The travel industry is seasonal and our revenue variessignificantly from quarter to quarter. Factors that may adversely affect traveland transportation activity include:

 

•                  economicdownturns and recessions,

 

•                  globalsecurity issues, political instability, acts of terrorism, hostilities and war,

 

•                  increasedairport security that could reduce the convenience of air travel,

 

•                  inclementweather,

 

•                  increasedoccurrence of travel-related accidents,

 

•                  travelers’concerns about exposure to contagious diseases such as SARS or avian bird flu,

 

•                  economicand political issues in the Middle East and elsewhere, and

 

•                  thefinancial condition of travel suppliers.

 

The possibility of further terrorist attacks, hostilities and war, theresulting security measures at airports, and the financial instability of manyof the air carriers may continue to adversely affect the travel industry.Airlines may reduce the number of their flights, making fewer offeringsavailable to us.  We depend on arelatively small number of airlines for a significant portion of ourrevenues.  Several major airlines areexperiencing liquidity problems, some (including U.S. Airways Group,Inc. and America West Holdings Corp.) are pursuing consolidation, some(including United Airlines, Inc., U.S. Airways Group, Inc. and ATA HoldingsCorporation) have sought bankruptcy protection and still others may considerbankruptcy relief.  Travelers’perceptions of passenger security or airlines’ financial stability may have anadverse effect on demand.  The financialinstability of airlines or a prolonged substantial decrease in traveltransaction volumes could have an adverse impact on our financial performance,operations, liquidity, or capital resources and could impair our ability torecover the carrying value of certain of our assets, including capitalizedsoftware, other intangible assets and goodwill.

 

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**We will also encounter risks and difficultiesfrequently experienced in rapidly evolving industries such as the travelindustry, and particularly the online travel industry.  Some of these risks relate to our ability to:**

 

•                  attractand retain customers on a cost-effective basis,

 

•                  expandand enhance our service offerings,

 

•                  operate,support, expand and develop our operations, our websites, our software and ourcommunications and other systems,

 

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

 

•                  maintainand develop our existing brands and distribution channels, as well as to makecost-effective expenditures in connection with these initiatives,

 

•                  manageour relationships with important travel suppliers and other industryparticipants,

 

•                  managelitigation, including our current litigation with Northwest, and

 

•                  respondto competitive marketplace conditions.

 

If we are unsuccessful in addressing these risks or in executing ourbusiness strategy, our business, financial condition or results of operationsmay suffer.

 

**We face competition from established andemerging travel distribution channels, risks related to deregulation of the CRSindustry and possible internal channel conflict, which could divert customersto our competitors and adversely affect our results of operations.**

 

Our business includes channels of distribution that support the travelagency, business-direct and consumer-direct segments of the global traveldistribution marketplace.  In all ofthese distribution channels, we face significant competition.  In the travel agency channel, our *Sabre* GDS competes primarily against otherlarge and well-established global distribution systems, but new GDSalternatives and limited travel distributors, or “LTDs.”, arealso being promoted in the marketplace. With the deregulation of the CRS industry in the United States, our CRSbusiness will be competing in a free-market system.  Our current and potential customers may electto use a competing GDS or an LTD offering lower prices.  Furthermore, one or more airlines may electto discontinue or to lower their levels of participation in the *Sabre* GDS. Losing access to inventory from one or more major suppliers would makethe *Sabre* GDS less attractive totravel agencies and travel purchasers, which could reduce our transaction feerevenue.  In order to gain access tosuppliers’ inventory (including suppliers for whom DCA 3-Year Option contractswill be expiring in 2005 and 2006), it might become necessary for us to reducefurther the fees charged to suppliers, which could reduce our transaction feerevenue without a corresponding reduction in costs.  In addition, we face increasing competitionin the travel agency channel from travel suppliers that distribute directly totravel agencies as well as to consumers.

 

In the business-direct channel, both the *Travelocity Business* and Sabre Travel Network *GetThere* products compete against similarofferings from other travel agencies. Some competitors market business travel systems that are bundled withfinancial and other non-travel software systems that we do not offer.  As a result, our current and potentialcustomers may choose the convenience or cost-effectiveness of our competitors’bundled products and services, which may increase the pricing pressure on ourofferings.

 

In the consumer-direct channel, our Travelocity offering competes notonly against similar offerings from affiliates of other global distributionsystems, but also with travel suppliers, online vertical search engines, and alarge number of online travel agencies.

 

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Our Sabre Airline Solutions business unit competes against severalorganizations offering internal reservation system and related technologyservices to airlines. This segment is highly competitive. If we cannot competeeffectively to keep and grow this segment of business, we risk losing customersand economies of scale, which could have a negative impact on our operatingresults.

 

We expect existing competitors, business partners and new entrants tothe travel business to constantly revise and improve their business models inresponse to challenges from competing businesses, including ours.  If these or other travel industryparticipants introduce changes or developments that we cannot meet in a timelyor cost-effective manner, our business may be adversely affected.  In addition, consumers frequently use ourwebsites for route pricing and other travel information, and then choose topurchase travel offerings from a source other than our website, includingtravel suppliers’ own websites.   Suchuse may increase our costs without producing revenue.

 

In addition, consolidation among our competitors may give ourcompetitors increased negotiating leverage with travel suppliers and greatermarketing resources, thereby providing corresponding competitive advantagesover us. Consolidation among travel suppliers, including airline mergers, mayincrease competition from distribution channels related to those suppliers andplace more leverage in the hands of those suppliers to negotiate lowertransaction fees.  Consolidation amongtravel agencies could increase this leverage over Sabre Travel Network innegotiating contract terms, such as customer incentives payable by Sabre TravelNetwork. If we are unable to compete effectively, competitors could divert ourcustomers away from our travel distribution channels and adversely affect ourresults of operations.

 

In certain limited circumstances, our business segments may conflictwith each other.  For example, both our *Travelocity.com*âand *Travelocity Business* websitesmay compete with the travel-agency subscribers of Sabre Travel Network.  Although we believe that our participation inboth the traveler-direct and distribution intermediary businesses is a distinctadvantage for Sabre Holdings due to synergies including greater scale of ourtechnology, conflicts with customers of our different businesses couldadversely affect our results of operations. For example, such conflict could cause some of our current or potentialtravel agency customers to consider competing GDS providers (or onlinewebsites) or other direct or indirect channels of travel distribution.

 

**Some travel suppliers are seeking alternativedistribution models, and alternative models of travel distribution areemerging, which may adversely affect our results of operations.**

 

Some travel suppliers are seeking to decrease their reliance ondistribution intermediaries, including global distribution systems such as our *Sabre* GDS. Travel suppliers may giveadvantages to distribution intermediaries in which they have an economic stakeor may create or expand commercial relationships with online and traditionaltravel agencies that work with travel suppliers to directly book travel withthose suppliers.  Many airlines, hotels,car rental companies and cruise operators have established their own traveldistribution websites.  Several suppliershave formed joint ventures that offer multi-supplier travel distributionwebsites.  From time to time, travelsuppliers offer advantages, such as bonus miles, lower transaction fees, ordiscounted prices, when their products and services are purchased from thesesupplier-related websites.  Some of theseofferings are not available to unrelated intermediaries, or thoseintermediaries must accept lower transaction fees in exchange for access to theofferings.  In addition, the airlineindustry has experienced a shift in segment share from full-service carriers tolow-price carriers. Some low-cost carriers do not distribute their ticketsthrough the *Sabre* GDS or throughother third-party intermediaries.  Inaddition, established search engine companies as well as start ups areattempting to enter the online travel marketplace by leveraging searchtechnology to aggregate travel search results across supplier, travel agent andother travel-related websites.  Thesesearch engines and alternative travel distribution channels have the potentialto divert customers from our online sites and our *Sabre* GDS. These developments put pressure on our revenues,pricing and operating margins.  See “*Business Trends - Supplier Efforts to Control TravelDistribution”*and*“Business Trends – Competition and Consolidation.”*

 

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**Adverse changes in or interruptions to ourrelationships with travel suppliers could affect our access to travel offeringsand reduce our revenues.**

 

Werely on participating carrier agreements, such as our DCA 3-Year Option, withour airline suppliers, and these agreements contain terms that reduce ourrevenues by providing discounted pricing. None of these arrangements is exclusive and airline suppliers couldenter into, and in some cases may have entered into, similar agreements withour competitors.  In addition, most ofthe agreements we have with airline suppliers will expire by their terms withinthe next year unless they are extended or replaced. The new agreements we areexecuting and expect to execute with airline suppliers may have substantiallydifferent pricing and/or operational structures than our DCA 3-Year Option agreements.  In some cases we may approach airlineswith pricing options from any combination of our business units.  Theseand other new business models we are exploring for our Sabre Travel Networkbusiness are untested in the market and are based on assumptions regardingvolume, pricing and costs that may or may not prove to be accurate.  Accordingly, our operating results could beadversely affected by new business models that replace the DCA 3-Year Optionsor that we otherwise offer to travel industry participants.

 

Wecannot assure you that our arrangements with travel suppliers will remain ineffect, that the net impact of these pricing options will not adversely impactrevenue or the results of operations of one or more of our business units, orthat any of these suppliers will continue to supply us with the same level ofaccess to inventory of travel offerings in the future. Additionally, we cannotassure you that potential disputes with our travel suppliers (such as ourlitigation with Northwest Airlines) will not affect our businesses.  See “Part II - Item 1 – Legal Proceedings.”  Because our major airline relationshipsrepresent such a large part of our business, the loss of any of our majorairline relationships, including due to the bankruptcy of an airline, couldhave a material negative impact on our business.  If our access to inventory or features isaffected, or our ability to offer their inventory on comparatively favorableeconomic terms is diminished, it could have a material adverse effect on ourbusiness, financial condition or results of operations.

 

**Consolidation in the travel industry andincreased competition for travel agency subscribers may result in increasedexpenses, lost transactions and reduced revenue.**

 

GDSs compete to attract and retain travel agencies.  The number of transactions produced by ourtravel agency subscriber base is an important factor in our success. Sometravel suppliers have reduced or eliminated commissions paid to travel agencies(including consumer-direct travel sites like Travelocity).  The loss of commissions causes travelagencies to become more dependent on other sources of revenues, such astraveler-paid service fees and GDS-paid incentives.  The reduction or elimination of supplier-paidcommissions has forced some smaller travel agencies to close or to combine withlarger travel agencies.  Although the *Sabre* GDS has a leading share of largetravel agencies, competition is particularly intense among global distributionsystems for larger travel agency subscribers, including online travelagencies.  Consolidation of travelagencies may result in increased competition for these subscribers.  In order to compete effectively, we may needto increase incentives, pre-pay incentives, increase spending on marketing orproduct development, or make significant investments to purchase strategicassets.  In addition, consolidation amongtravel suppliers, such as major hotels and airline mergers and alliances, mayincrease competition from these supplier-related distribution channels or givethem additional leverage to negotiate lower transaction fees payable to GDSoperators like Sabre Travel Network.

 

**Travelocity’sgrowth cannot be assured.**

 

The online travel marketplace is highly competitive, with bothindependent online travel agencies and suppliers’ proprietary websitescompeting for customers.  Our businessstrategy is dependent on expanding Travelocity’s transaction revenues,increasing its percentage of merchant transactions, maintaining the breadth ofits merchant suppliers, developing its brand in a cost-effective manner both inthe United States and in other growth regions (such as Europe and Asia) andincreasing its site traffic (including direct distribution as well as throughcurrent and future distribution partners). Key components of this strategyinclude the growth of revenue from our merchant model hotel business,last-minute packaging and the *TotalTrip*dynamic packaging offering.  We also planto expand the appeal of *Travelocity Business*to corporate travelers and to invest strategically in growth opportunities suchas the European and Asian marketplaces, in large part through the acquisitionof lastminute.com. If any of these initiatives is not successful or requiresextensive investment, Travelocity’s growth may be limited and it may be unableto achieve or maintain profitability.  Inaddition, Travelocity’s growth strategy relies on the continuing growth in thetravel industry of the internet as a distribution channel. If consumers do notcontinue to book more travel online than they currently do today or if the useof the internet as a medium of commerce for travel bookings does not continueto grow or grows more slowly than expected, our revenues and profit may beadversely affected.

 

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**Our business plans call for the significantgrowth of our net rate hotel and packaging businesses, and we may beunsuccessful in managing or expanding that business.**

 

Our business strategy is dependent for a significant source of revenuegrowth and increased margins upon our net rate programs, primarily our net ratehotel program, which are commonly referred to in the industry as a “merchantmodel” business because we are the merchant of record for credit cardprocessing. Our net rate hotel strategy is particularly dependent upon ourability to obtain the right to offer adequate hotel rooms.  We remain subject to numerous risks in theoperation and growth of the net rate business. In particular, we cannot ensure that we will continue to be successfulin adding and retaining hotel properties or other suppliers in a sufficientnumber of domestic or international geographic markets.  Many hoteliers utilize net rate arrangementswith us and with our competitors as a channel to dispose of excess hotel roomsat discounted rates. Demand for supplier offerings may increase as a result ofincreased travel and competition from net rate offerings by our competitors.  If demand increases for suppliers’ products,services and other content offerings, suppliers may limit our right todistribute their offerings or may increase the cost of those offerings.  These types of events could exert downwardpressure on the margins we expect to achieve in our net rate hotel business. Wemay be unable to achieve our financial objectives for the net rate hotelprogram, especially if economic conditions improve or if competitionincreases.   Similar risks could alsoimpact any future net rate programs we might explore for other types ofsupplier offerings, such as air travel.

 

**We may be unsuccessful in pursuing and integratingbusiness combinations, strategic alliances, or products and technologies, whichcould result in increased expenditures or cause us to fail to achieveanticipated cost savings or revenue growth.**

 

We are currently seeking to integrate the completed acquisitionsdescribed in this report, including our acquisitions of lastminute.com.  In addition, we plan to continue to examine possiblebusiness combinations, investments, joint ventures or other strategic allianceswith other companies in order to maintain and grow revenue and marketplacepresence.  As a result of these completedor potential transactions, our businesses will be subject to new or increasedrisks related to the nature of the transactions.  We may be unable to successfully completepotential acquisitions due to multiple factors, such as issues related toregulatory review of the proposed transactions. In addition, there are risks inherent in these types of transactions,such as: difficulty in assimilating or integrating the operations, technologyand personnel of the combined companies; difficulties and costs associated withintegrating and evaluating the internal control systems of acquired businesses;disruption of our ongoing business, including loss of management focus onexisting businesses and marketplace developments; problems retaining keytechnical and managerial personnel; expenses associated with the amortizationof identifiable intangible assets; additional or unanticipated operatinglosses, expenses or liabilities of acquired businesses; impairment ofrelationships with existing employees, customers and business partners; andfluctuations in value and losses that may arise from equity investments.  In addition, we may not be able to: identifysuitable candidates for additional business combinations and strategicinvestments; obtain financing on acceptable terms for such businesscombinations and strategic investments; or otherwise consummate such businesscombinations and strategic investments on acceptable terms.  To consummate such transactions, we may needto raise external funds through the sale of stock and/or debt in the capitalmarkets or through private placements, which might affect our liquidityrequirements.

 

Weexpect to realize strategic and other benefits as a result of our acquisitionof lastminute.com. Our ability to realize these benefits or successfullyintegrate lastminute.com’s businesses, however, is subject to certain risks anduncertainties, including:

 

•                  Thecosts of integrating lastminute.com and upgrading and enhancing its operationsmay be higher than we expect and may require more resources, capitalexpenditures and management attention than anticipated.

 

•                  Employeesimportant to lastminute.com’s operations may decide not to continue employmentunder our ownership.

 

•                  Wemay be unable to maintain and enhance our relationship 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.

 

•                  To replace the Bridge Facilityfinancing we utilized to consummate the lastminute.com acquisition, we willneed to raise external funds through the sale of securities in the publiccapital markets or through private transactions, which might affect ourliquidity and capital resources or cause dilution to common stockholders.

 

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•                  We have initiated our efforts to assess the internal controls overfinancial reporting related to lastminute.com’s business but we do not expectto report on the assessment until 2006. The lastminute.com business may havesignificant deficiencies or material weaknesses in their internal controls overfinancial reporting. We will attempt to promptly resolve identifieddeficiencies and weaknesses, but we may not identify significant deficienciesor material weaknesses until our assessment is nearly completed and we cannotprovide assurance that existing internal controls over financial reporting willbe able to detect or prevent material reporting errors or fraud. We may incursignificant additional costs to resolve deficiencies in internal controls anddisclosure controls.

 

Ourfailure to manage these risks, or other risks related to the acquisition thatare not presently known to us, could prevent us from realizing the expectedbenefits of the acquisition and also may have a material adverse effect on ourresults of operations and financial condition.

 

**We are not certain that our ongoing costreduction plans will continue to be successful.**

 

Our strategy depends, to a substantial degree, on reducing andcontrolling operating expenses. In furtherance of this strategy, we haveengaged in ongoing, company-wide activities intended to reduce costs.  These activities include personnelreductions, reductions in personnel-related costs, programs designed to reducethe growth rate of incentive payments to travel agencies, and realigning andstreamlining operations and consolidating facilities. We cannot assure you thatour efforts will continue to result in the increased profitability, costsavings or other benefits that we expect.

 

Part of our cost reduction strategy involves leveraging our status as aglobal company to conduct some of our operations outside the United States,such as customer call centers and software development, either by contractingwith foreign companies that work for us or by expanding our own operationsoutside the United States.  These foreignoperations are subject to unique risks, including: business, political andeconomic instability in foreign locations; governments policies that couldadversely affect business and economic conditions related to our operations orbusiness; adverse political or consumer reactions in the United States;disruptions to communication and transportation services supportingglobalization; actual or threatened terrorist activities; and military actionoverseas.  Risks such as these couldadversely affect our ability to effectively implement global sourcing.

 

**Rapid technological changes and newdistribution channels or unauthorized use of our intellectual property mayadversely affect the value of our current or future technologies to us and ourcustomers, which could cause us to increase expenditures to upgrade and protectour technology or develop and protect competing offerings in new distributionchannels.**

 

New distribution channels and technology in our industry are evolvingrapidly.  Our ability to compete and ourfuture results depend in part on our continued ability to maintain and to maketimely and cost-effective enhancements, upgrades and additions to ourtechnology in response to changes in consumer preferences and increased demandfor our products and services.  We mustalso keep pace with rapid advancements in industry technology, standards andpractices, and protect our technology. Additionally, we must maintain our ability to ensure the security andprivacy of personal information transmitted through our websites and otherdistribution channels.  Unauthorized useof our intellectual property could have a material adverse effect on us, andour legal remedies may not adequately compensate us for the damages to ourbusiness caused by such use.  Protectingour intellectual property from unauthorized use could be expensive and timeconsuming.  Maintaining flexibility torespond to technological and marketplace dynamics or to respond to evolvingsecurity and privacy requirements may require substantial expenditures andlead-time.  We cannot assure you that wewill successfully identify and develop new products or services in a timelymanner, that offerings, technologies or services developed by others will notrender our offerings obsolete or noncompetitive, or that the technologies inwhich we focus our research and development investments will achieve acceptancein the marketplace and provide a return on our investment.

 

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**Our systems may suffer failures, capacityconstraints and business interruptions, which could increase our operatingcosts and cause us to lose customers.**

 

Our businesses are largely dependent on the computer data centers andnetwork systems operated for us by Electronic Data Systems Corporation and onthe global telecommunications infrastructure. We rely on several communications service suppliers and on the globalInternet to provide network access between our computer data center and callcenters and end-users of our services. Both the Travelocity and *Site59*âbusinesses are dependent upon GDS’s (the *Sabre*GDS and a third-party provider, respectively) to process theirtravel bookings.  We occasionallyexperience system interruptions that make some or all of our globaldistribution system or other data processing services (including the servicesthat Sabre Airline Solutions provides to airlines) unavailable, which mayprevent us from efficiently providing services to our customers or other thirdparties and which could result in our losing customers or becoming liable tothem as a result of these interruptions. System capacity limits or constraints arising from unexpected increasesin our volume of business could cause interruptions, outages or delays in ourservices, or deterioration in their performance, or could impair our ability toprocess transactions.  Much of thecomputer and communications hardware upon which we depend is located in asingle facility.  Our systems might bedamaged or interrupted by fire, flood, power loss, telecommunications failure,break-ins, earthquakes, terrorist attacks, hostilities or war or similarevents.  Computer viruses, physical orelectronic break-ins and similar disruptions affecting the global Internet orour systems might cause service interruptions, delays and loss of criticaldata, 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 of any of these events could result in amaterial adverse effect on our business, financial condition or results ofoperations (particularly if such events occur at Travelocity).

 

**Our success depends on maintaining the integrity of,and upgrading the quality of, our systems and infrastructure.**

 

In order to be successful, we must provide reliable, real-time accessto our systems for our customers and suppliers while also pursuing a low-costmodel. As our operations grow in both size and scope, we will continuously needto improve and upgrade our systems and infrastructure to offer an increasingnumber of customers and travel suppliers enhanced products, services, featuresand functionality – all while maintaining the reliability and integrity of oursystems and infrastructure and while pursuing the lowest cost pertransaction.  The expansion of oursystems and infrastructure will require us to commit substantial financial,operational and technical resources before the volume of business increases,with no assurance that the volume of business will increase. Consumers andsuppliers will not tolerate a service hampered by slow delivery times,unreliable service levels, service outages due to the installation of upgrades,or insufficient capacity, any of which could have a material adverse effect onour business, financial condition or results of operations.

 

**Our processing, storage, use and disclosureof personal data could give rise to liabilities as a result of governmentalregulation, conflicting legal requirements or differing views of personalprivacy rights.**

 

In our processing of travel transactions, we receive and store a largevolume of personally identifiable data. This data is increasingly subject to legislation and regulations innumerous jurisdictions around the world, including the Commission of theEuropean Union (“E.U. Commission”) through its Data Protection Directive andvariations of that directive in the member states of the European Union (“E.U.”).  This government action is typically intendedto protect the privacy of personal data that is collected, processed andtransmitted in or from the governing jurisdiction.  We could be adversely affected if legislationor regulations are expanded to require changes in our business practices or ifgoverning jurisdictions interpret or implement their legislation or regulationsin ways that negatively affect our business, financial condition and results ofoperations.

 

In addition, in the aftermath of the terrorist attacks ofSeptember 11, 2001 in the United States, government agencies have beencontemplating or developing initiatives to enhance national and aviationsecurity, including the Transportation Security Administration’sComputer-Assisted Passenger Prescreening System, known as CAPPS II. Theseinitiatives may result in conflicting legal requirements with respect to datahandling. As privacy and data protection has become a more sensitive issue, wemay also become exposed to potential liabilities as a result of differing viewson the privacy of travel data.  Travelbusinesses have also been subjected to investigations, lawsuits and adversepublicity due to allegedly improper disclosure of passenger information.  These and other privacy developments that aredifficult to anticipate could adversely impact our business, financialcondition and results of operations.

 

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**State and local tax issues have the potentialto have an adverse effect on our financial condition and results of operations.**

 

Some state and local taxing authorities impose taxes on the sale, useor occupancy of hotel room accommodations, which are called transient,occupancy, accommodation, sales or hotel room taxes.  Hotel operators generally collect and remitthese occupancy taxes.  Consistent withthat practice, when a customer books a hotel room through one of our travelservices under our net rate hotel program, we collect from the customer anamount sufficient to pay the hotel its room charge and the occupancy taxes onthat charge, as well as additional amounts representing 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 the 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.

 

We have established a reserve for potential occupancy tax liability,consistent with applicable accounting principles and in light of all currentfacts and circumstances.  The reserverepresents our best estimate of our contingent liability for occupancytaxes.  A variety of factors could affectany actual liability for occupancy taxes, such as the number of jurisdictionsthat prevail in either assessing additional occupancy taxes or negotiating asettlement with us, the fees potentially subject to tax in each jurisdiction,changes in applicable tax laws, and the timing of any or all of theforegoing.  The amount of our liabilityon occupancy taxes could exceed that reserve, which could have a materialadverse effect on our financial results.

 

**Regulatory developments abroad could limitour ability to compete by restricting our flexibility to respond to competitiveconditions, which could cause our customers to be diverted to our competitorsand adversely affect our revenue and results of operations.**

 

The E.U. Commission is engaged in a comprehensive review of its rulesgoverning CRS systems.  It is unclearwhen the E.U. Commission will complete its review and what changes, if any,will be made to its CRS rules.  We couldbe unfairly and adversely affected if, for example, these rules are retained asto traditional 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 adversely affected if changes to any of the foregoingCRS rules increase our cost of doing business or weaken the non-discriminatoryparticipation rules to allow one or more large airlines owning a competing CRSto discontinue or to lower its level of participation in our globaldistribution system.

 

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**Our international operations are subject toother risks, which may impede our ability to grow internationally and adverselyaffect our overall results of operations.**

 

We continually seek to expand the reach of our various businesses intointernational markets as well as to successfully integrate, operate and manageour existing and future international operations.  Our international operations are subject to anumber of risks, including, but not limited to, the following:

 

•                  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,

 

•                  localeconomic and political conditions, including conditions resulting from theexisting and potential conflicts in the Middle East and the damage resultingfrom the tsunami that devastated large parts Southeast Asia,

 

•                  restrictivegovernmental actions, such as consumer and trade protection measures,

 

•                  changesin legal or regulatory requirements, including changes to foreign tax laws,

 

•                  limitationson the repatriation of funds,

 

•                  lesserprotection in some jurisdictions for our intellectual property, and

 

•                  lawsand policies of the U.S. affecting trade, foreign investment and loans.

 

These risks may adversely affect our ability to conduct and growbusiness internationally, which could cause us to increase expenditures andcosts, decrease our revenue growth or both.

 

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

 

### **InterestRate Risk**

 

At June 30, 2005, ourexposure to interest rates was related primarily to our marketable securitiesportfolio.  Offsetting some of thisexposure was the fixed to floating interest rate swaps on our public notes andcapital lease.  The objectives of ourmarketable securities are safety of principal, liquidity maintenance, yieldmaximization and full investment of all available funds.  As such, our investment portfolio consistsprimarily of high credit quality money market mutual funds, certificates ofdeposit, bankers’ acceptances, commercial paper, mortgage-backed andreceivables-backed securities and corporate and government notes, includingtax-exempt municipal securities.  Ifshort-term interest rates had been 10% lower during the six months ended June30, 2005, our interest income from marketable securities would have decreasedby approximately $0.8 million.  Thisamount was determined by applying the hypothetical interest rate change to ouraverage balance of marketable securities during the six months ended June 30,2005.

 

AtJune 30, 2005 we had obligations under 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 six months ended June 30, 2005, our interest expense wouldhave increased by approximately $0.6 million. This amount was determined byapplying the hypothetical interest rate change to our floating rate borrowingsbalance during six months ended June 30, 2005. If our mix of interestrate-sensitive assets and liabilities changes significantly, we may enter intoadditional derivative transactions to manage our net interest rate exposure.

 

### **ForeignCurrency Risk**

 

We havevarious operations outside of the United States, primarily in North America,South America, Europe, Australia and Asia.  As a result of these businessactivities, we are exposed to foreign currency risk.  Because asignificant portion of our business is transacted in the United States dollar,these exposures have historically related to a small portion of our overalloperations.  Nevertheless, during times of devaluation of the U.S. dollar,such as in 2003 and 2004, the increase in our foreign expenses can have anegative impact on our operating results.  To reduce the impact of thisearnings volatility, we hedge a portion of our foreign currency exposure byentering into foreign currency forward contracts on our three largest foreigncurrency exposures.  These forward contracts, totaling $115 million atDecember 31, 2004 and $122 million at June 30, 2005, representobligations to purchase foreign currencies at a predetermined exchange rate, tofund a portion of our expenses that are denominated in foreigncurrencies.   In December 2004, wepurchased foreign currency denominated government bonds to function as a hedgeof a portion of our 2005 foreign currency exposure.  To protect these bond investments fromforeign currency risk, we purchased put options on the currencies in which thegovernment bonds are denominated.  Theseoptions give us the right to sell the foreign currencies at predeterminedprices.  The result of an immediate 10%devaluation of the U.S. dollar in 2005 from June 30, 2005 levels relative to our primary foreign currencyexposures would result in a negative U.S. dollar impact of approximately$2.8 million for the remainder of 2005, net of hedge instrumentsoutstanding.  This sensitivity analysis was prepared based upon 2005projections of our primary foreign currency-denominated expenses and foreigncurrency forwards and foreign currency denominated bonds outstanding as of June 30, 2005.

 

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

 

***Controls Evaluation and Related CEOand CFO Certifications.***    Our management, with the participation of ourprincipal executive officer (“CEO”) and principal financial officer (“CFO”)conducted an evaluation of the effectiveness of the design and operation of ourdisclosure controls and procedures as of the end of the period covered by thisQuarterly Report. The controls evaluation was conducted by our DisclosureControls Council, comprised of senior representatives from our Finance,Accounting, Internal Audit, Tax, Investor Relations, Corporate Communicationsand Legal Departments under the supervision of our CEO and CFO.

 

Attachedas exhibits to this Quarterly Report are certifications of our CEO and our CFO,which are required in accordance with Rule 13a-14 of the SecuritiesExchange Act of 1934, as amended (“Exchange Act”). This “Controls andProcedures” section includes the information concerning the controls evaluationreferred to in the certifications, and it should be read in conjunction withthe certifications for a more complete understanding of the topics presented.

 

***Limitations on the Effectiveness ofControls.***    Wedo not expect that our disclosure controls and procedures will prevent allerrors and all fraud. A system of controls and procedures, no matter how wellconceived and operated, can provide only reasonable, not absolute, assurancethat the objectives of the system are met. Because of the limitations in allsuch systems, no evaluation can provide absolute assurance that all controlissues and instances of fraud, if any, within the Company have been detected.Furthermore, the design of any system of controls and procedures is based inpart upon certain assumptions about the likelihood of future events, and therecan be no assurance that any design will succeed in achieving its stated goalsunder all potential future conditions, regardless of how unlikely. Because ofthese inherent limitations in a cost-effective system of controls andprocedures, misstatements or omissions due to error or fraud may occur and notbe detected.

 

***Scope of the Controls Evaluation.***    The evaluation of ourdisclosure controls and procedures included a review of their objectives anddesign, the Company’s implementation of the controls and procedures and theeffect of the controls and procedures on the information generated for use inthis Quarterly Report. In the course of the evaluation, we sought to identifywhether we had any data errors, control problems or acts of fraud and toconfirm that appropriate corrective action, including process improvements,were being undertaken if needed. This type of evaluation is performed on a quarterlybasis so that conclusions concerning the effectiveness of our disclosurecontrols and procedures can be reported in our Quarterly Reports onForm 10-Q, which supplement our disclosures made in our Annual Report onForm 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 regarding disclosurecontrols.***    Basedon the required evaluation of our disclosure controls and procedures, our CEOand CFO have concluded that, as of June 30, 2005, we maintain disclosurecontrols and procedures that are effective in providing reasonable assurancethat information required to be disclosed by us in the reports that we file orsubmit under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicated toour management, including our CEO and CFO, as appropriate to allow timelydecisions regarding required disclosure.

 

***Changes in internal controls overfinancial reporting.***    Duringthe quarter ended June 30, 2005, there were no changes in our internal controlover financial reporting (or in other factors) that have materially affected,or are reasonably likely to materially affect, our internal control overfinancial reporting.

 

OnJuly 20, 2005, our acquisition of lastminute.com became effective.  Webelieve the acquisition of lastminute.com will be material to our results ofoperations, financial position and cash flows from the date of acquisition, andwe believe the internal controls and procedures of lastminute.com arereasonably likely to materially affect the Company’s internal control overfinancial reporting. We will begin our integration of lastminute.com in thethird quarter of 2005.

 

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# **P**ARTII: OTHER INFORMATION

##  

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

 

Thelitigation matters described below involve issues or claims that may be ofparticular interest to the Company’s stockholders, regardless of whether any ofthese matters may be material to the financial position or operations of theCompany based upon standards set forth in SEC rules.

 

Weare party to two lawsuits (which as described below have now been consolidatedin federal court in Fort Worth, Texas) against Northwest Airlines, Inc. (“Northwest”)related to Northwest’s August 24, 2004 announcement and implementation onSeptember 1, 2004 of a fare supplement for travel reservation bookingsmade through a GDS (including the *Sabre*GDS) by traditional travel agencies and some online travel sites (such asTravelocity). We notified Northwest that it was in breach of the parties’Participating Carrier Distribution and Services Agreement (“PCA”), as amendedby the DCA 3-Year Option Agreement. We also took commercial steps, which webelieved were reasonable under the DCA 3-Year Option Agreement and PCA, inorder to enforce both agreements.

 

TheCompany sued Northwest on August 24, 2004 in Sabre Inc. v. NorthwestAirlines, Inc., Civil Action 4-04-CV-612-Y in the Fort Worth Division ofthe United States District Court for the Northern District of Texas(hereinafter the “Fort Worth Action”). We allege that Northwest breached thePCA, as amended by the DCA 3-Year Option Agreement. Among other things, the DCA3-Year Option Agreement requires that Northwest provide us with fares and othercontent for the *Sabre* GDS thatNorthwest makes available through other channels of ticket distribution. Webelieve that Northwest breached the DCA 3-Year Option Agreement by imposing acharge on tickets booked on the *Sabre*GDS but not on other channels of ticket distribution. We seek monetary damages,attorneys fees, and to compel Northwest to adhere to the terms of theiragreements.

 

OnAugust 25, 2004, Northwest sued Sabre Holdings Corporation,Sabre Inc. and Sabre Travel International Ltd. in a separate actionstyled Northwest Airlines Corporation v. Sabre Inc. et al., CauseNo. 04-CV-03889 in Minneapolis federal court (hereinafter the “MinneapolisAction”). The Minneapolis Action related to the same factual events describedabove. In its complaint filed on August 25, 2004, Northwest asserted thatwe breached our PCA with Northwest by our commercial actions in response toNorthwest’s August 24, 2004 breach of the PCA. On September 27, 2004,Northwest filed an amended complaint in the same cause number addingallegations that we had violated Section 2 of the Sherman Act, claimingthat we had monopoly power, and also asserting claims against us for allegedinterference with prospective contractual relations, deceptive trade practices,fraud, false advertising under the federal Lanham Act, and for a declaratoryjudgment that Sabre, and not Northwest, is in breach of the PCA. Northwestalleges that it has suffered unspecified damages. Northwest seeks trebledamages under the antitrust laws, attorneys fees, to have the court declarethat we breached the parties’ agreement and violated federal and statestatutes, and to enjoin us from certain conduct.

 

OnNovember 9, 2004, the Court in the Fort Worth Action rejected Northwest’smotion to transfer that case to the federal court in Minneapolis, followingwhich Northwest agreed to have the Minneapolis Action transferred to FortWorth. The two cases have now been consolidated before the Court in Fort Worth.On January 13, 2005, the Company filed a motion with the Court to dismissNorthwest’s antitrust claims and its claims under various Minnesota statestatutes and tort law theories.  Thatmotion has now been fully briefed and is ripe for decision by the Court.  In addition, both parties are pursuing thediscovery process in the litigation.

 

Weare unable to estimate the amount of the loss, if any, that might arise from thislitigation.

 

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

 

(a) – (b)  None.

 

(c)          Thefollowing table provides information about purchases by the company (and itsaffiliated purchasers) during the three months ended June 30, 2005 of equitysecurities that are registered by the company pursuant to Section 12 of theExchange Act.

 

### **ISSUERPURCHASES OF EQUITY SECURITIES**

 
| **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 Programs** | ** ** |
|-------------------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| April 1, 2005 – April 30, 2005 |       | —                                 |       | $                                            | n/a        |                                                                             | —     |                                                                                | $          | — |   |
| May 1, 2005 – May 31, 2005     |       | —                                 |       | $                                            | n/a        |                                                                             | —     |                                                                                | $          | 100,000,000 |   |
| June 1, 2005 – June 30, 2005   |       | —                                 |       | $                                            | n/a        |                                                                             | —     |                                                                                | $          | 100,000,000 |   |
| Total 2nd Quarter 2005 Repurchases  |       | —                                 |       | $                                            | n/a        |                                                                             | —     |                                                                                |       |   |

 

OnOctober 25, 2004, our Board of Directors approved a share repurchase programauthorizing us to repurchase up to $100 million of our Common Stock.  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 840,000 shares of our CommonStock under this authorization in January 2005 through the open market pursuantto 10b5-1 trading plans.

 

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.

 

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

 

None.

 

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***Item 4. Submission of Matters to a Vote ofSecurity Holders***

 

The annual meeting of the stockholders of SabreHoldings Corporation was held on May 17, 2005. The owners of 114,897,560sharesof Sabre Holdings Corporation Class A Common Stock (“Common Stock”),representing 87.69 percent of the voting power of all of the shares of CommonStock issued and outstanding on March 18, 2005, the record date for themeeting, were represented at the annual meeting. Each share of Common Stock wasentitled to one vote at the annual meeting.

 

Our stockholders elected each of the followingindividuals as a director of Sabre Holdings Corporation for a term of one year:Michael S. Gilliland (93,923,846 votes in favor, 20,973,714 votes withheld), Bob L. Martin (102,279,221 votes in favor, 12,618,339 votes withheld), and Richard L. Thomas (102,886,880 votes in favor, 12,010,680 votes withheld). Becauseour proposal to amend our certificate of incorporation to provide for theannual election of all directors was approved by the stockholders, all of ourdirectors will stand for election annually commencing at the annual meeting in2006 (see below for additional details).

 

Ourstockholders ratified the appointment of Ernst & Young LLP asindependent auditors for the Company for the year ending December 31, 2005with 112,463,366 votes in favor,1,593,056 votes against and 841,138 abstentions.

 

Ourstockholders approved the amendment of the Company’s certificate ofincorporation to provide for the annual election of all directors.  This proposal to amend the certificate ofincorporation was approved with 113,798,868votes in favor, 226,600 votesagainst, and 872,092 abstentions.

 

Ourstockholders also approved the amendment of the Company’s certificate ofincorporation to make miscellaneous changes to better reflect our governancepractices, clarify existing wording, enhance readability, apply a consistentparagraph numbering system, and make various ministerial and formattingchanges.  This proposal to amend thecertificate of incorporation received 112,423,563votes in favor, 84,204 votesagainst, and 2,389,793 abstentions.

 

TheThird Restated Certificate of Incorporation reflecting the foregoingamendments, as filed with the Secretary of State of the State of Delaware onMay 17, 2005, is attached hereto as Exhibit 3.1.

 

Ourstockholders approved the Company’s Amended and Restated 2005 Long-TermIncentive Plan, as Amended May 17, 2005 (“LTIP”), in order to combine andincrease the authorization for restricted shares and other full valuestock-based awards to 5,000,000 shares, to increase the cap on awards ofperformance shares per individual, to make changes intended to bring the planinto compliance with the American Jobs Creation Act of 2004 (“AJCA”), to revisethe definition of “Cause” to align with the Corporation’s other employee plans,to remove all references to retirement, and to make various other ministerialand formatting changes.  The proposal toamend and restate the long-term incentive plan received 80,930,927 votes in favor, 22,883,623 votes against, 1,150,254 abstentions,and 9,932,756 broker non-votes.  The total number of shares of our CommonStock reserved under the LTIP did not change as a result of this proposal.  The LTIP reflecting the foregoing amendmentsis attached hereto as Exhibit 10.1.

 

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

 

(a)  None.

 

(b)  None.

 

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***Item 6. Exhibits***

 

The following exhibits areincluded herein:

 
| **Exhibit  Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                         |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                               |
| 2.1                 |       | Form  of Implementation Agreement dated as of May 12, 2005 between Sabre Inc.,  Travelocity Europe Limited and lastminute.com plc (1)                                                                                              |
| 2.2                 |       | Form  of Scheme of Arrangement dated as of June 6, 2005 between Sabre Inc.,  Travelocity Europe Limited and lastminute.com plc (2)                                                                                                 |
| 2.3                 |       | Form  of Letter dated as of June 8, 2005 to holders of options granted under the  lastminute.com plc 2000 Approved Executive Share Option Scheme and 2000  Unapproved Executive Share Option Scheme (5)                            |
| 2.4                 |       | Form  of Letter dated as of June 8, 2005 to holders of out-of-the-money options granted  under the lastminute.com plc 1999 Unapproved Executive Share Option Scheme  (6)                                                           |
| 2.5                 |       | Form  of Letter dated as of June 8, 2005 to Mr. A. Leighton in respect of options  granted under the Non-Executive Scheme (7)                                                                                                      |
| 2.6                 |       | Form  of Letter dated as of June 8, 2005 to holders of out-of-the-money  options granted under the lastminute.com plc 2000 Approved Executive  Share Option Scheme and 2000 Unapproved Executive Share Option Scheme (8) |
| 2.7                 |       | Form  of Letter dated as of June 8, 2005 to holders of options granted under the  lastminute.com plc 1998 Unapproved Executive Share Option Scheme  and 1999 Unapproved Executive Share Option Scheme (9)                     |
| 2.8                 |       | Form  of Letter dated as of June 8, 2005 to holders of options granted under the  lastminute.com plc Sharesave Scheme (10)                                                                                                         |
| 2.9                 |       | Form  of Bondholder Circular dated as of June 6, 2005 (11)                                                                                                                                                                         |
| 3.1                 |       | Third  Restated Certificate of Incorporation of Sabre Holdings Corporation (12)                                                                                                                                                    |
| 3.2                 |       | Amended  and Restated Bylaws of Sabre Holdings Corporation (13)                                                                                                                                                                    |
| 10.1                |       | Form  of Amended and Restated 2005 Long-Term Incentive Plan (3)                                                                                                                                                                    |
| 10.2                |       | Form  of Credit Agreement dated as of May 12, 2005 among Sabre Inc., Morgan Stanley  Senior Funding, Inc., and Bear, Sterns & Co., Inc. (3)                                                                                    |
| 10.3                |       | Form  of Cash Confirmation Letter dated as of May 12, 2005 by Sabre Inc. and  Travelocity Europe Limited (3)                                                                                                                       |
| 10.4                |       | Form  of LTIP Letter dated as of June 21, 2005 (3)                                                                                                                                                                            |
| 10.5                |       | Form  of Options Cover Statement dated as of June 8, 2005 (3)                                                                                                                                                                      |
| 12.1                |       | Computation  of Ratio of Earnings to Fixed Charges (3)                                                                                                                                                                             |
| 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 August 5, 2005, signed by  Michael S. Gilliland as Chief Executive Officer (3)                   |
| 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 August 5, 2005, signed by  Jeffery M. Jackson as Chief Financial Officer (3)                     |
| 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 August 5, 2005, signed by  Michael S. Gilliland as Chief Executive Officer (4)                 |
| 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 August 5, 2005, signed by Jeffery  M. Jackson as Chief Financial Officer (4)                   |

 

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(1)Incorporated by reference to Exhibit 2.1 to our report on Form 8-K datedJuly 20, 2005.

 

(2) Incorporated by reference to Exhibit 2.2 to our report on Form 8-Kdated July 20, 2005.

 

(3)Filed herewith.

 

(4)Sabre Holdings Corporation is furnishing, but not filing, the writtenstatements pursuant to Title 18 United States Code 1350, as added by Section906 to the Sarbanes-Oxley Act of 2002, of Michael S. Gilliland, the ChiefExecutive Officer of Sabre Holdings Corporation and Jeffery M. Jackson, theChief Financial Officer of Sabre Holdings Corporation.

 

(5) Incorporated by reference to Exhibit 2.3 to our report on Form 8-Kdated July 20, 2005.

 

(6) Incorporated by reference to Exhibit 2.4 to our report on Form 8-Kdated July 20, 2005.

 

(7) Incorporated by reference to Exhibit 2.5 to our report on Form 8-Kdated July 20, 2005.

 

(8) Incorporated by reference to Exhibit 2.6 to our report on Form 8-Kdated July 20, 2005.

 

(9) Incorporated by reference to Exhibit 2.7 to our report on Form 8-Kdated July 20, 2005.

 

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(10) Incorporated by reference to Exhibit 2.8 to our report on Form 8-Kdated July 20, 2005.

 

(11) Incorporated by reference to Exhibit 2.9 to our report on Form 8-Kdated July 20, 2005.

 

(12)Incorporated by reference to Exhibit 4.1 to our report on Form S-8 dated July28, 2005.

 

(13)Incorporated by reference to Exhibit 3.2 to our report on Form 8-K dated July28, 2005.

 

 

# **PLEASE NOTE:  Exhibits 2.1 through2.9 and 10.2 of this report are provided to disclose the material termsand conditions of those exhibits.  The exhibitscontain contractual representations, warranties, covenants andother statements (collectively, “statements”) made as of the datesspecified in the exhibits, and information may have changed since the datesspecified.  Certain statements may not be accurate or completebecause they may have been intended as allocations of riskbetween the parties, rather than as expressions of fact orprojections.  Certain of the statements may be qualifiedby contractual standards of materiality that differ from thestandard of materiality under U.S. federal securities laws. Moreover, a party may have provided, or may laterprovide, confidential information that qualifies orsupersedes the statements in exhibits, which information the Companydoes not intend to disclose publicly.  Therefore, you should notrely on any of the statements contained in exhibits 2.1 through 2.9 and10.2 as expressions of fact or projections about Sabre Holdings orlastminute.com.**

 

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**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:  August 5, 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)* |

 

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