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

****

**Form 10-Q**

****

| **[X]**                  |                                                           | **Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|--------------------------|-----------------------------------------------------------|----------------------------------------------------------------------------------------------|
|                          | **For the quarterly period ended September 30, 2009**     |
|                          | **or**                                                    |
| **[   ]** |                                                           | **Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                          | **For the transition period from__________ to__________** |

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

**Delaware**(*State or other jurisdiction of incorporation or organization)*

**    **

**76-0517977***(I.R.S. Employer Identification No.)*

  

**700 North Sam Houston Parkway West, Suite 200 Houston, Texas***(Address of principal executive offices)*

**77067***(Zip Code)*

**832-353-1000***(Registrant's telephone number, including area code)*

**NOT APPLICABLE***(**Former name, former address and former fiscal year, if changed since last report)*

            Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Yes  

[ X ] 

    No 

[   ] 

            Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S‐T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

     Yes  

[  ] 

    No 

[  ] 

            Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer 

[   ] 

Accelerated filer 

[    ]

Non-accelerated filer 

[   ] 

Smaller reporting company 

[ X ]

            Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

     Yes  

[   ] 

    No 

[ X ] 

As of November 11, 2009, 15,647,005 shares of common stock were outstanding.
**
**TABLE OF CONTENTS**

** **

** **

**PART I.**

 

**FINANCIAL INFORMATION**

**PAGE**

 Item 1.

 

Financial Statements:

 

 

Condensed Consolidated Statements of Operations: Three Months Ended September 30, 2009 (Unaudited) and 2008 (Unaudited)

1

 

 

Condensed Consolidated Statements of Operations: Nine Months Ended September 30, 2009 (Unaudited) and 2008 (Unaudited)

2

 

  

Condensed Consolidated Balance Sheets; September 30, 2009 (Unaudited) and December 31, 2008

3

 

  

   Assets

3

 

  

   Liabilities and Stockholders’ Equity

4

Condensed Consolidated Statements of Cash Flows: Nine Months Ended September 30, 2009 (Unaudited) and 2008 (Unaudited)

5

Notes to Condensed Consolidated Financial Statements (Unaudited)

 6

 Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

28

 Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

47

 Item 4.

Controls and Procedures

49

**PART II.**

 

**OTHER INFORMATION**

 Item 1.

Legal Proceedings

49

 Item 1A.

Risk Factors

49

 Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

49

 Item 3.

Defaults Upon Senior Securities

50

 Item 4.

Submission of Matters to a Vote of Security Holders

50

 Item 5.

Other Information

50

 Item 6.

Exhibits

51

Signatures

52
**
**Table of Contents**

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

**Three Months Ended September 30,**
****
**                                                                                                   **

**2009**

**2008****(as restated – Note 1)**
********
(Unaudited)

(Unaudited)

Operating Revenue

     Passenger

 

$

153,017

 

$

245,170

 

     Corporate Aviation

18,045

 

7,615

 

     Ground handling and other

8,138

9,541

179,200

262,326

Operating Expenses:

     Wages, salaries and related costs

81,435

98,252

     Maintenance, materials and repairs

44,251

48,296

     Other rentals and landing fees

16,367

22,646

     Depreciation and amortization

6,921

6,718

     Outside services

6,344

8,509

     Aircraft rentals

5,472

18,917

     Aircraft fuel and related taxes

4,555

32,235

     Ground handling

1,896

5,862

     Marketing and distribution

428

1,767

     Special charges

—

21,187

     Other operating expenses

19,670

26,898

 

 

187,339

291,287

 

Operating Loss

(8,139

)

(28,961

)

 

Nonoperating Income (Expense):

     Gain on sale of short-term investments, net

1,274

—

     Impairment charge on investments

(108

)

—

     Extinguishment of debt

(966

)

—

     Gain from debt discount

—

27,785

     Settlement of fuel contracts

—

23,149

     Amortization of debt discount

(1,583

)

(2,516

)

     Interest expense, net of capitalized interest

(1,825

)

(2,057

)

     Interest income

200

1,218

     Equity investments income, net

—

96

     Other, net

200

(203

)

 

(2,808

)

47,472

Income (Loss) before Income Taxes

(10,947

)

18,511

Income Tax Benefit (Expense)

1,902

(14,096

)

 

Net Income (Loss)

$

(9,045

)

$

4,415

 

Basic and Diluted Earnings (Loss) per Common Share

(0.61

)

0.28

 

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

14,851

15,872

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

14,851

15,880

The accompanying notes are an integral part of these condensed consolidated financial statements.
**
**Table of Contents**

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

**Nine Months Ended September 30,**
****
**                                                                                                   **

**2009**

**2008****(as restated – Note 1)**
********
(Unaudited)

(Unaudited)

Operating Revenue

     Passenger

 

$

446,618

 

$

1,094,240

 

     Corporate Aviation

46,920

 

31,441

 

     Ground handling and other

25,959

31,989

519,497

1,157,670

Operating Expenses:

     Wages, salaries and related costs

240,729

321,686

     Maintenance, materials and repairs

123,922

160,349

     Other rentals and landing fees

45,491

81,398

     Depreciation and amortization

22,180

24,145

     Outside services

20,071

41,819

     Aircraft rentals

16,416

192,432

     Aircraft fuel and related taxes

10,175

226,184

     Ground handling

7,497

57,813

     Marketing and distribution

2,093

25,173

     Impairment of fixed assets and goodwill

—

21,410

     Special charges

—

21,896

     Other operating expenses

60,958

91,107

 

 

549,532

1,265,412

 

Operating Loss

(30,035

)

(107,742

)

 

Nonoperating Income (Expense):

     Gain on sale of short-term investments, net

1,755

—

     Impairment charges on investments

(108

)

(18,892

)

     Extinguishment of debt

(394

)

2,107

     Gain from debt discount

—

27,785

     Settlement of fuel contracts

—

23,149

     Amortization of debt discount

(3,912

)

(8,431

)

     Interest expense, net of capitalized interest

(5,835

)

(6,265

)

     Interest income

837

4,980

     Equity investments loss, net

(377

)

(967

)

     Other, net

(929

)

1,408

 

(8,963

)

24,874

Loss before Income Taxes

(38,998

)

(82,868

)

Income Tax Benefit

5,452

22,764

 

Net Loss

$

(33,546

)

$

(60,104

)

 

Basic and Diluted Loss per Common Share

$

(2.15

)

$

(6.88

)

 

Shares Used in Computing Basic and Diluted Loss per Common Share

15,581

8,737

The accompanying notes are an integral part of these condensed consolidated financial statements.
**
**Table of Contents**

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

**ASSETS**

**September 30,**

**December 31,**

                                                                                                

**2009**

**2008****(as restated – Note 1)**

** **
********
(Unaudited)

Current Assets:

     Cash and cash equivalents

$

61,710

$

57,528

 

     Restricted cash

19,523

20,460

     Short-term investments

24,118

41,369

     Accounts receivable, net of allowance of $1,351 and $744,         respectively

10,273

11,212

     Amounts due from Continental Airlines, net

1,165

—

     Spare parts and supplies, net

19,894

23,850

     Income tax receivable

3,549

383

     Prepayments and other

4,211

6,929

        Total Current Assets

144,443

161,731

Property and Equipment:

     Owned property and equipment:

        Flight equipment

210,147

222,401

        Other

145,016

168,334

 

355,163

390,735

        Less:  Accumulated depreciation

(159,562

)

(169,815

)

        Total Property and Equipment

195,601

220,920

Investments in Other Entities

1,223

1,600

Debt Issuance Cost, net

1,222

1,722

Other Assets, net

2,515

2,916

 

        Total Assets

$

345,004

$

388,889

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.
****
**Table of Contents**

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

**LIABILITIES AND STOCKHOLDERS' EQUITY**

**September 30,**

**December 31,**

**2009**

**2008****(as restated – Note 1)**

**                                                       **
********
(Unaudited)

 

Current Liabilities:

 

     Current maturities of long-term debt

  

$

3,459

$

3,459

     Accounts payable

7,564

1,842

     Accrued payroll and related costs

35,941

36,672

     Accrued airport service costs

6,040

10,221

     Accrued maintenance, materials and repair costs

13,409

11,558

     Accrued taxes

9,278

10,541

     Amounts due to Continental Airlines, net

—

1,539

     Credit facility

5,000

—

     Accrued other liabilities

10,824

20,440

        Total Current Liabilities

91,515

96,272

Long-term Debt

3,459

5,848

11.25% Convertible Secured Notes due 2023, net of discount   of $15,108 and $21,109, respectively

37,003

39,740

Deferred Income Taxes

48,113

47,598

Other Long-term Liabilities

456

1,761

Commitments and Contingencies – See Note 10

Stockholders’ Equity:

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

—

—

     Common stock - $.01 par, 150,000,000 shares authorized,        and 22,731,424 and 22,024,439 shares issued, respectively

227

220

     Additional paid-in capital

266,846

263,859

     Accumulated loss

(83,581

)

(49,329

)

     Accumulated other comprehensive loss

475

(20

)

     Common stock held in treasury, at cost 7,084,419 and         4,344,666 shares, respectively

(19,509

)

(17,060

)

        Total Stockholders’ Equity

164,458

197,670

        Total Liabilities and Stockholders’ Equity

$

345,004

$

388,889

 

The accompanying notes are an integral part of these condensed consolidated financial statements.
**
**Table of Contents**

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

**Nine Months Ended September 30,**

**                                                                                                 **
****
**2009**

**2008**
********
(Unaudited)

(Unaudited)

 

Net Cash Flows used in Operating Activities

$

(12,344

)

 

$

(44,404

)

Cash Flows from Investing Activities:

  Capital expenditures

(3,941

)

(9,059

)

  Proceeds from the sale of property and equipment

10,230

11,739

  Sale (purchase) of short-term investments

19,394

(64,425

)

  Investments in restricted cash

(2,192

)

(2,516

)

  Net cash provided by (used in) investing activities

23,491

(64,261

)

Cash Flows from Financing Activities:

  Repurchase of common stock

(3,380

)

(3,128

)

  Payments on long-term debt and capital lease obligations

(2,390

)

(2,605

)

  Payments on convertible debt

(7,072

)

(6,500

)

  Proceeds from credit facility

5,000

—

  Payments related to convertible debt

— 

(2,000

)

  Proceeds from issuance of common stock related to benefit plans

484

1,484

  Other

393

77

  Net cash used in financing activities

(6,965

)

(12,672

)

  Net Increase (Decrease) in Cash and Cash Equivalents

4,182

(121,337

)

Cash and Cash Equivalents – Beginning of Period

57,528

189,259

  

Cash and Cash Equivalents – End of Period

$

61,710

$

67,922

Supplemental Cash Flow Information:

  Interest paid, net

$

7,062

$

5,038

  Income taxes paid (refunded)

$

284

$

(37,567

)

The accompanying notes are an integral part of these condensed consolidated financial statements.
**
**Table of Contents**

**EXPRESSJET HOLDINGS, INC. AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

**Overview**

            ExpressJet Holdings, Inc. (“Holdings”) has strategic investments in the air transportation industry.  Our principal asset is all of the issued andoutstanding shares of stock of XJT Holdings, Inc., the sole stockholder of ExpressJet Airlines, Inc. (referred to in this report as “Airlines” and, together with Holdings, as “ExpressJet”, “we” or“us”). 

            Our primary business is flying 244 aircraft under contractual arrangements for network carriers and entities desiring cost-effective and fully customizablegroup travel.  As of September 30, 2009, our fleet was assigned as follows:

   • 

214 aircraft for Continental Airlines, Inc. (“Continental”) as Continental Express pursuant to a capacity purchase agreement (the “Amended Continental CPA”); and

• 

30 aircraft in our Corporate Aviation division, which is dedicated to long-term charter agreements and ad-hoc charter arrangements. 

            **Liquidity. ** In light of the ongoing challenges faced by the airline industry and the recession facing the global economy, we believe controlling costs andpreserving cash are crucial to sustaining our liquidity and meeting our financial obligations over the next year. 

            As of September 30, 2009, our cash balance (including restricted cash and short-term investments) was $105.4 million, net of fair-value discounts applied to ourshort-term investments.  We believe that our existing liquidity and projected 2009 cash flows will be sufficient to fund current operations and our financial obligations through the twelve months ending September 30, 2010.  However, factors beyond ourcontrol may have a material adverse impact on our ability to sustain operations over the long-term.

            The interim financial information in the accompanying Condensed Consolidated Financial Statements and notes is unaudited, but reflects all adjustments necessary, in ouropinion, to provide a fair presentation of our financial results for the interim periods presented.  These adjustments are of a normal, recurring nature.  In addition, all intercompany transactions have been eliminated in consolidation.  Certainamounts reported in previous periods have been reclassified to conform to the current presentation.  These interim Condensed Consolidated Financial Statements should be read in conjunction with the financial statements and the notes thereto for the fiscal yearended December 31, 2008 contained in our Current Report on Form 8-K dated October 16, 2009 (the “Revised 2008 10-K”) in addition to our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 (the “Original 200810-K”).

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

            The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles and include the accountsof Holdings and its subsidiaries.  All material intercompany transactions have been eliminated in consolidation.  The following are changes to the accounting policies and estimates described in our Revised 2008 10-K and Original 2008 10-K.
**
**Table of Contents**

**Adopted Accounting Policies**

            ***Codification.*** Effective July 1, 2009, the Financial Accounting Standards Board’s (“FASB”) Accounting StandardsCodification (“ASC”) became the exclusive authoritative reference for nongovernmental generally accepted accounting principles (“GAAP”) in the United States.  The ASC became the only level of authoritative GAAP and eliminated the previousfour-level hierarchy.  Our accounting policies were not affected by the conversion to ASC.  However, references to specific accounting standards in the footnotes to our Condensed Consolidated Financial Statements have been changed to refer to theappropriate section of ASC.

***            Convertible Notes*****.**  On January 1, 2009, we adopted the Cash ConversionSubsections of ASC Subtopic 470-20, “Debt with Conversion and Other Options – Cash Conversion” (“Debt with Conversion Options Subtopic”) which applies to all convertible debt instruments that have a “net settlement feature”,meaning that such convertible debt instruments, by their terms, may be settled either wholly or partially in cash or shares upon conversion.  The Debt with Conversion Options Subtopic requires issuers to account separately for the liability and equity componentsof certain convertible debt instruments in a manner that reflects the issuer’s nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized.  The Debt with Conversion Options Subtopic requires we split a component of the debt, theclassification of that component in equity and the accretion of the resulting discount on the debt to be recognized as part of interest expense in our Condensed Consolidated Statements of Operations.

            The Debt with Conversion Options Subtopic requires retrospective application to the terms of instruments as they existed for all periods presented. The adoption of the Debt with Conversion Options Subtopic affects the accounting for our original 4.25% convertible notes due 2023 issued in 2003 (the “Original 4.25% Convertible Notes due 2023”), which on August 2, 2008, became our 11.25% ConvertibleSecured Notes due 2023.  The retrospective application of this pronouncement resulted in increased non-cash interest expense for 2003 through 2008.  We adjusted the Condensed Consolidated Statements of Operations for the three months and nine monthsended September 30, 2008 to include non-cash interest expense (presented as Amortization of debt discount in our Condensed Consolidated Statements of Operations) of $2.5 million and $8.4 million, respectively, related to our Original 4.25% Convertible Notes due2023.  During the first half of 2008, we recognized extinguishment gains of $2.1 million related to repurchases of our Original 4.25% Convertible Notes due 2023 prior to the tender offer we initiated in July 2008 in connection with suchnotes.  At the time of our tender offer, our Original 4.25% Convertible Notes due 2023 were trading at a discount as a result of the nature of the credit environment and our own liquidity position.  As a result, the repurchase of debt under the tender offerresulted in debt extinguishment gains.  The 11.25% Convertible Secured Notes due 2023, of which $68.5 million remained outstanding after the tender offer in 2008, were also subject to the Debt with Conversion Options Subtopic, and we determined the fair value ofthe liability component to be $40.7 million at that time.  The remainder was allocated to equity and accounted for as a debt discount which will be amortized over the period until the next put date in August 2011.  The fair value of the liability componentof the 11.25% Convertible Secured Notes due 2023 was based on current market data of our convertible notes, considering interest rates for stand alone debt given the disruption in the credit markets and our own credit rating.  Adjustments toincome taxes have been recorded on the foregoing adjustments to the extent tax benefits were available.  As of September 30, 2009, $37.0 million, net of discount of $15.1 million, of our 11.25% Convertible Secured Notes due 2023 remainoutstanding.
****
**Table of Contents**

            The following table sets forth the effect of the retrospective application of the Debt with Conversion Options Subtopic and the correction of an immaterialtax matter on certain previously reported line items (in thousands, except per share data):

**Three Months Ended September 30, 2008**
****
**Condensed Consolidated Statement of Operations**:

**Originally Reported**

**As Restated**

                                                                      
********
 

(Unaudited)

(Unaudited)

Amortization of debt discount

$

—

$

(2,516

)

Interest expense, net of capitalized interest

(3,600

)

(2,057

)

 

Income before Income Taxes

19,484

18,511

Income Tax Expense

(14,466

)

(14,096

)

Net Income

$

5,018

$

4,415

Basic and Diluted Earnings per Common Share

$

0.32

 

$

0.28

**Nine Months Ended September 30, 2008**
****
**Condensed Consolidated Statement of Operations**:

**Originally Reported**

**As Restated**

                                                                               
********
(Unaudited)

(Unaudited)

Extinguishment of debt

$

—

$

2,107

Amortization of debt discount

—

(8,431

)

Interest expense, net of capitalized interest

(7,808

)

(6,265

)

 

Loss before Income Taxes

(78,087

)

(82,868

)

Income Tax Benefit

20,068

22,764

Net Loss

$

(58,019

)

$

(60,104

)

Basic and Diluted Loss per Common Share

$

(6.64

) 

$

(6.88

)

**December 31, 2008**
****
**Condensed Consolidated Balance Sheet:**

**Originally Reported**

**As Restated**

                                                            
********
Deferred Income Taxes

$

42,807

$

47,598

Additional paid-in capital

$

238,065

$

263,859

Accumulated loss

$

(18,744

) 

$

(49,329

)

Total Stockholders’ Equity

$

202,461

 

$

197,670

            As we continued to evaluate the adoption of the Debt with Conversion Options Subtopic, the restated balance sheet noted above includes revisions from what was originallypresented for the periods ended March 31, 2009 and June 30, 2009.  The Company finalized and filed a Form 8-K to reflect the adoption of the Debt with Conversion Options Subtopic for the 2008, 2007 and 2006 financial statements on October 16, 2009.
**
**Table of Contents**

***            Other-Than-Temporary Impairments.***In April 2009, the FASB issued new guidance which modifies the requirements forrecognizing other-than-temporarily-impaired debt securities and the presentation of other-than-temporary impairments in the financial statements. This guidance, which affects the accounting for our portfolio of auction rate securities (“ARS”), wasadopted during the quarter ended June 30, 2009.  Other-than-temporary impairments are now reflected in our Condensed Consolidated Statements of Operations as “Impairment charges on investments.”

**            *Subsequent Events.* **In May 2009, the FASB issued guidance which establishes general standards of accounting for, and disclosureof, events that occur after the balance sheet date but before financial statements are issued.  This guidance is contained in ASC Topic 855, “Subsequent Events” (“ASC Topic 855”).  We adopted the provisions of ASC Topic 855 for thequarter ended June 30, 2009.  The adoption of these provisions did not have a material effect on our Condensed Consolidated Financial Statements.  The Company has evaluated subsequent events for potential recognition and/or disclosure through November 13,2009, the date the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q were issued.  For further discussion of our subsequent events, see Note 11 – “Subsequent Events.” 

**Other Accounting Matter**

            In the process of adjusting our tax accrual for our 2008 actual tax return filed in the current quarter we identified an immaterial error related to our recording ofdeferred tax assets and liabilities and related valuation allowance in 2008.  The correction of the error resulted in a $4.8 million increase to “Deferred Income Taxes” and a $4.8 million increase to “Accumulated loss” in our CondensedConsolidated Balance Sheet as of December 31, 2008.  In addition, the correction of the error resulted in an increase to our income tax expense and an increase to our net loss for the three months ended December 31, 2008 of $4.8 million ($0.25 per common share)and an increase to our income tax expense and an increase to our net loss for the year ended December 31, 2008 of $4.8 million ($0.43 per common share).  We concluded that this item was not material to the 2008 financial statements and an amendment to theRevised 2008 10-K is not required.           

**Note 2 – Contract Flying **

***            Amended Continental CPA***.  Prior to July 1, 2008, Airlines was entitled to receive payment for each block hour that Continental scheduledit to fly pursuant to the terms of our original capacity purchase agreement with Continental (the “Original Continental CPA”).  Payment was based on a formula designed to provide Airlines with a target operating margin of 10% before taking intoaccount variations in certain costs and expenses that were generally within our control.  We had exposure for most labor costs and some maintenance and general administrative expenses if actual costs were higher than those budgeted in our block hour rates. For the first six months of 2008, we recognized revenues using 2007 block hour rates, pursuant to a settlement agreement signed with Continental. 
**
**Table of Contents**

           In June 2008, we reached an agreement with Continental toamend the Original Continental CPA.  The Amended Continental CPA, which became effective July 1, 2008, has a seven-year term and provides that we will fly a minimum of 205 aircraft for Continental through June 30, 2009, and a minimum of 190aircraft for the remainder of the term.  Currently, we fly 214 aircraft for Continental.  As of the date of this filing, we have not received notice from Continental of its intent to reduce the size of the fleet under the Amended Continental CPA. Continental retains the right to reduce the number of aircraft to a minimum of 190 aircraft at any time during the remainder of the initial term ending on June 30, 2015.  Pursuant to the first amendment to the Amended Continental CPA, we recognized anadditional $4.8 million in contract revenues related to shortfalls in aircraft utilization for the six months ended June 30, 2009.  Pursuant to the terms of the first and second amendments to the Amended Continental CPA, beginning in July 2009 and throughout theremainder of term of the Amended CPA, if Continental increases utilization of our aircraft above a pre-determined threshold, then Continental is entitled to receive a discount on the agreed, pre-determined block hour rates; provided that theaggregate discount received by Continental shall not exceed $10 million.  For the three months ended September 30, 2009, there was an increase in utilization of our aircraft above the pre-determined threshold for such period that resulted in Continentalreceiving a discount in the amount of approximately $0.2 million.

**Note 3– Restructuring and Related Special Charges**

            As of September 30, 2009, our remaining accruals for the special charges we incurred in 2008 and expect to pay in cash are as follows (in thousands):

**Balance December 31, 2008**

**Payments/ Adjustments**

**Balance September 30, 2009**

**                                           **

Wages and fringe

$

297

  

$

(297

)

  

$

—

Contract termination costs

970

(970

)

—

Unused facility costs

3,952

(2,339

)

1,613

$

5,219

 

 

$

(3,606

)

 

$

1,613

           The remaining special charge accrual of $1.6 million related to unused facility costs is included in “Accrued other liabilities” in ourCondensed Consolidated Balance Sheet as of September 30, 2009.  Final cash payments and adjustments related to the wages and fringe accrual and contract termination costs were made during the nine months ended September 30, 2009.  Cashpayments remaining on our lease obligations for unused facilities will continue through 2010.  For a detailed discussion of special charges incurred in 2008, refer to our Revised 2008 10-K and our Original 2008 10-K.
**
**Table of Contents**

**Note 4 *–* Segment Reporting**

            The following business discussion is based on two reportable segments, Contract Flying and Aviation Services, as they were structured during the three and nine monthsended September 30, 2009.

*            **Contract Flying**.** ***This reportable segment includes components related to thefleet operated by us under the Amended Continental CPA and long-term charter agreements and ad-hoc charter service arrangements within our Corporate Aviation division.

*            **Aviation Services**.*  This reportable segment includes components related to our ground-handling services; our two wholly owned subsidiaries, ExpressJet Services, LLC and InTech Aerospace Services, LP and our majority owned subsidiary, Saltillo Jet Center, S. de R.L. C.V.  These entities are collectively referred to herein as“Services”.  Under Services’ brand, we paint aircraft and repair composite structures, aircraft interiors (including refurbishment of seats, galleys, lavatories and panels) and thrust reversers throughout our fourfacilities in the United States and Mexico.  

**

            A significant portion of our operating expenses and infrastructure are integrated across segments (e.g., for maintenance, non-airport facility rentals, outside services,general and administrative expenses) in order to support our entire fleet of aircraft and ExpressJet Services; therefore, we do not allocate these costs to the individual segments identified above, but evaluate them for our consolidated operations.  Thepresentation of our consolidated shared costs is consistent with the manner in which these expenses are reviewed and business decisions are made.  Consequently, the tables below present (in thousands) our operating revenues, including inter-segment revenues, andsegment profit / (losses) generated per reportable segment for the three and nine months ended September 30, 2009 and 2008.  We also included our reconciliation of the consolidated operating revenue to consolidated net loss before taxes and of our total assetsas of September 30, 2009 and 2008.  The segmented information for prior periods will be restated to reflect all changes in reportable segments.
**
**Table of Contents**

**Contract Flying**

**Aviation Services**

**Eliminations**

**Consolidated**
****************
**Three Months Ended September 30, 2009:**

 

 

Revenue from customers

$

171,062

 

$

10,034

 

$

(1,896

) 

$

179,200

Direct segment expenses

126,958

5,688

(1,896

)

130,750

    Segment profit

$

44,104

$

4,346

$

—

$

48,450

Other shared expenses (1)

(56,589

)

Gain on sale of short-term investments, net

1,274

Impairment charge on investments

(108

)

Extinguishment of debt

(966

)

Amortization of debt discount

(1,583

)

Interest expense, net of capitalized interest

(1,825

)

Interest income

200

Other, net

200

Consolidated loss before income taxes

$

(10,947

)

** **

**Nine Months Ended September 30, 2009:**

 

 

Revenue from customers

$

493,538

 

$

32,191

 

$

(6,232

) 

$

519,497

Direct segment expenses

367,350

17,066

(6,232

)

378,184

    Segment profit

$

126,188

$

15,125

$

—

$

141,313

Other shared expenses (2)

(171,348

)

Gain on sale of short-term investments, net

1,755

Impairment charge on investments

(108

)

Extinguishment of debt

(394

)

Amortization of debt discount

(3,912

)

Interest expense, net of capitalized interest

(5,835

)

Interest income

837

Equity investments loss, net

(377

)

Other, net

(929

)

Consolidated loss before income taxes

$

(38,998

)

** **

**Assets as of September 30, 2009**

Segment assets

$

177,650

$

17,950

$

—

$

195,600

Other shared assets (3)

149,404

    Total consolidated assets

$

345,004

(1) 

Some of the major components of other shared expenses for the three months ended September 30, 2009 are maintenance labor – $16.9 million; general and administrative labor and related expenses – $14.9 million; other generaland administrative expenses – $17.5 million; outside services – $5.6 million; non-airport rentals – $1.7 million.  

(2) 

Some of the major components of other shared expenses for the nine months ended September 30, 2009 are maintenance labor – $49.6 million; general and administrative labor and related expenses – $43.5 million; other generaland administrative expenses – $54.7 million; outside services – $17.3 million; non-airport rentals – $6.2 million. 

(3) 

Other shared assets include assets that are interchangeable between segments.
****
**Table of Contents**

**Contract Flying**

**Branded Flying**

**Aviation Services**

**Eliminations**

**Consolidated**
********************
**Three Months Ended September 30, 2008:****(****as restated – Note 1)**

 

 

 

 

 

Revenue from customers

$

184,428

 

$

69,286

 

$

10,618

$

(2,006

)

$

262,326

Direct segment expenses

133,238

62,767

4,806

(2,006

)

198,805

    Segment profit

$

51,190

$

6,519

$

5,812

$

—

$

63,521

Shared special charges (1)

(21,187

)

(21,187

)

Other shared expenses (2)

(71,295

)

Gain from debt discount

27,785

Settlement of fuel contracts

23,149

23,149

Amortization of debt discount

(2,516

)

Interest expense, net of capitalized interest

(2,057

)

Interest income

1,218

Equity investments income, net

96

Other, net

 

(203

)

Consolidated income before income   taxes

 

$

18,511

    

**Nine Months Ended September 30, 2008:****(as restated – Note 1)**

 

 

 

 

 

Revenue from customers

$

908,348

 

$

221,258

 

$

32,770

$

(4,706

)

$

1,157,670

Direct segment expenses

679,897

289,480

16,827

(4,706

)

981,498

    Segment profit (loss)

$

228,451

$

(68,222

)

$

15,943

$

—

$

176,172

Shared special charges (3)

(13,498

)

(29,809

)

(43,307

)

Other shared expenses (4)

(240,607

)

Impairment charges on investments

(18,892

)

Extinguishment of debt

2,107

Gain from debt discount

27,785

Settlement of fuel contracts

23,149

23,149

Amortization of debt discount

(8,431

)

Interest expense, net of capitalized interest

(6,265

)

Interest income

4,980

Equity investments loss, net

(967

)

Other, net

1,408

Consolidated loss before income taxes

 

$

(82,868

)

    

**Assets at September 30, 2008**

Segment assets

$

136,608

$

46,439

$

14,603

$

—

$

197,650

Other shared assets (5)

251,936

    Total consolidated assets

$

449,586
**
**Table of Contents**

(1) 

Shared special charges for the three months ended September 30, 2008, include $21.2 million related to suspended flying under several lines of our at-risk operations.

(2) 

Some of the major components of other shared expenses for the three months ended September 30, 2008 are maintenance labor – $20.0 million; general and administrative labor and related expenses – $17.3 million; other generaland administrative expenses – $20.0 million; outside services – $8.0 million; and non-airport rentals – $2.5 million.  Transition costs incurred were approximately $3.5 million. 

(3) 

Shared special charges for the nine months ended September 30, 2008, include $21.2 million related to suspended flying under several lines of our at-risk operations in addition to a $12.8 million impairment of goodwill, an $8.6 millionimpairment of fixed assets and $0.7 million charge related to base closure costs.

(4) 

Some of the major components of other shared expenses for the nine months ended September 30, 2008 are maintenance labor – $60.3 million; general and administrative labor and related expenses – $62.4 million; other generaland administrative expenses – $72.6 million; outside services – $29.9 million; and non-airport rentals – $7.7 million.  Transition costs incurred were approximately $7.7 million.   

(5) 

Other shared assets include assets that are used across segments.

            We will continue to monitor various components of our business and, if necessary, isolate those components into new reportable segments or transfer those componentswithin our existing reporting structure.

**Note 5 – Fair Value Measurements.**

            In February 2008, we invested approximately $65 million in ARS, which are classified as available-for-sale securities and reflected at fair value.  For a detailed discussion of our ARS, refer to our Revised 2008 10-K and our Original 2008 10-K.

            In April 2009, the FASB issued new guidance which modifies the requirements for recognizing other-than-temporarily-impaired debt securities and thepresentation of other-than-temporary impairments in the financial statements. This guidance, which affects the accounting for our ARS portfolio, was adopted during the quarter ended June 30, 2009.  Other-than-temporary impairments are now reflected in ourCondensed Consolidated Statements of Operations as “Impairment charges on investments.”

            Prior to the adoption of the new guidance on other-than-temporary-impairments, we recorded any changes in fair value of our ARS that we deemed to be temporary toaccumulated other comprehensive income.  If we determined that any future decline in value was other than temporary, it was recognized as a charge to earnings as applicable.   Under the new guidance onother-than-temporary-impairmentsif the fair value of our ARS falls below our adjusted cost basis and if it is our intent to sell the ARS, then an other-than-temporary impairment has occurred and a loss should be recorded in our CondensedConsolidated Statements of Operations.  As it is our intent to continue exploring opportunities to monetize the ARS, future declines in fair value below our adjusted cost basis will be deemed to be other-than-temporary and an adjustment will be recorded as“Impairment charges on investments” in our Condensed Consolidated Statements of Operations.  The fair value of our $31.0 million ARS portfolio, as calculated using a discounted cash flow valuation model as ofSeptember 30, 2009, was $24.1 million.  As such, we recognized an impairment charge on investments of $0.1 million for declines in fair value below the adjusted cost basis of our ARS holdings for the quarter ended September 30,2009.
**
**Table of Contents**

            In July 2009, we entered into a settlement agreement related to our ARS litigation against RBC Capital Markets Corporation et al. (collectively“RBC”) with respect to certain ARS (CUSIPs 36156HAG3, 679110CM6, 709163EH8, and 78442GJC1) purchased from RBC. Among other terms, the settlement agreement provided for RBC to immediately repurchase ARS with an aggregate par value of $18,000,000 itsold to ExpressJet for 87.5% of par value.  Additionally, if within twelve months of the date of the execution of the settlement agreement, any of the ARS is redeemed or refinanced by its issuer and RBC is paid a sum representing greater than 87.5% of the parvalue of that ARS, we shall be paid a sum representing the difference between (1) 87.5% of the par value of that ARS and (2) the sum actually received by RBC.  As part of the settlement agreement, we dismissed our lawsuit against RBC and releasedclaims related to RBC’s sale of the ARS to us.  Pursuant to this settlement, we recorded an adjustment to other comprehensive income to reverse temporary impairments of $0.3 million recognized in previous periods. 

            As of September 30, 2009, we continue to earn interest at an average rate of 1.70% on our remaining ARS whose rates are reset every 7 or 28 days, depending on the termsof the particular instrument. 

            We continue to closely monitor the ARS market and are aggressively pursuing the monetization of the assets at or near facevalue through additional market transactions.  In September 2009, we initiated litigation against Bank of America Corporation et al. (“BOA”) related to auction rate securities that BOA sold to ExpressJet in January 2008.  As of September 30,2009, the aggregate par value of our ARS holdings purchased from BOA was $21.0 million.  Subsequent to September 30, 2009, we consummated three separate transactions pursuant to which we monetized $5.0 million of our ARS purchased from BOA for 90.5% of the facevalue of the securities and $10.0 million of our ARS purchased from BOA for 90.0% of the face value of the securities.

            Assets that we measure at fair value on a recurring basis are shown below (in thousands):

**As of September 30, 2009 Fair Value Measurements Using**

**Total**

**Level 1**

**Level 2**

**Level 3**

**                                            **

Cash equivalents

$

61,340

  

$

61,340

  

$

—

  

$

—

Short-term investments

24,118

—

—

24,118

Total

$

85,458

$

61,340

$

—

$

24,118
**
**Table of Contents**

            The following table presents our ARS which were measured at fair value on a recurring basis using significant unobservable inputs (Level 3) as defined in ASC Topic 820,“Fair Value Measurements and Disclosures” (in thousands):

**Nine Months Ended September 30,**

 

 

**2009**

**2008**

                                                                               

ARS Beginning Balance

$

41,369

$

—

Purchases

—

65,075

Sales / Redemptions

(3,631

)

—

Gross realized gains on sales

482

—

Other Than Temporary Impairments (included in   non-operating income)

—

(13,661

)

Temporary Changes in Market Value (included in   other comprehensive income)

(628

)

—

ARS Balance as of March 31

$

37,592

$

51,414

Sales / Redemptions

—

(650

)

Temporary Changes in Market Value (included in   other comprehensive income)

957

1,100

ARS Balance as of June 30

$

38,549

$

51,864

Sales / Redemptions / Settlements

(15,763

)

—

Gross realized gains on sales

1,274

—

Other Than Temporary Impairments (included in   non-operating income)

(108

)

—

Temporary Changes in Market Value (included in   other comprehensive income)

166

803

ARS Balance as of September 30

$

24,118

$

52,667

            We determine the cost basis for our ARS sold using the specific identification method.

            In March 2009, we entered into and drew down fully on a $5 million revolving line of credit (the “Citigroup Credit Facility”) with Citigroup Global MarketsInc. (“Citigroup”) to increase our liquidity.  The Citigroup Credit Facility, which has a five year term and is pre-payable at any time at our election, is secured by $10 million of our ARS holdings that were purchased from Citigroup.  Since thecredit facility is secured by a portion of our ARS holdings, we classified the liability as current on our Condensed Consolidated Balance Sheet.  We anticipate that the Citigroup Credit Facility will remain outstanding until we successfully monetize the ARSpurchased from Citigroup.  
******
**Table of Contents**

**Note 6 – Debt**

            As of September 30, 2009 and December 31, 2008, respectively, our debt consisted of the following (in thousands):

**September 30,**

**December 31,**

**2009**

**2008**

**                                                                                                        **
********
(Unaudited)

 

Current Debt:

 

     Current maturities of EDC Loans

  

$

3,459

$

3,459

     Citigroup Credit Facility

5,000

—

Long-term Debt

     EDC Loans

  

$

3,459

$

5,848

     11.25% Convertible Secured Notes due 2023, net of discount        of $15,108 and $21,109, respectively

37,003

39,740
********
$

48,921

$

49,047

            We estimated fair value of our 11.25% Convertible Secured Notes due 2023 based on an average of market trading activity for the convertible notes subsequent to thetender offer that was completed in August 2008.

            Pursuant to the terms of the amended indenture governing the 11.25% Convertible Secured Notes due 2023, we are required to deliver a certificate to the trustee from athird-party appraiser dated no later than 15 business days after January 1 of each year certifying the value of the pledged collateral for the notes as of January 1 or such later date.  We delivered a certificate from our independent appraiser in January 2009indicating the previously appraised value of $180.4 million has not changed materially from the initial appraisal as of the amendment date.  Based on the principal amount of notes remaining outstanding as of September 30, 2009, the pledged collateral requiredunder the 11.25% Convertible Secured Notes due 2023 is approximately $39.2 million of spare parts and $34.5 million of spare engines.

            The 11.25% Convertible Secured Notes due 2023 are guaranteed by Airlines.  Except as otherwise specified in the amended indenture governing the 11.25% ConvertibleSecured Notes due 2023, there are no restrictions on Airlines’ ability to transfer funds to Holdings in the form of cash dividends, loans or advances.  General provisions of applicable state law, however, may limit the ability of any subsidiary to paydividends or make distributions to its parent in certain circumstances. 
**
**Table of Contents**

            We have the right to redeem the notes for cash in whole at any time, or from time to time in part, for a price equal to 100% of the principal amountplus accrued and unpaid interest, if any.  Additionally, pursuant to the terms of the 11.25% Convertible Secured Notes, due 2023, we can elect to use shares of common stock to repurchase any 11.25% Convertible Secured Notes due 2023,the number of shares will be equal to the repurchase price divided by 97.5% of the average closing sales price of our common stock for the five consecutive trading days ending on the third business day prior to the applicable repurchase date (adjusted to take intoaccount the occurrence of certain events that would require adjustment of the conversion rate).  In certain circumstances, the notes are convertible into our common stock, at a ratio of 54.9451 shares of common stock per $1,000 principal amount of notes, whichwas equivalent to an initial conversion price of approximately $18.20 per common share.  As a result of the reverse split of our common shares that occurred in October 2008, the ratio is now 5.49451 shares of common stock per $1,000 principal amount of notes,which is equivalent to a price of approximately $182.00 per common share.  The ratio is subject to adjustments if certain events take place, and holders may convert only if the closing sale price per common share exceeds 120% of the conversion price for at least20 trading days in the 30 consecutive trading day period ending on the last trading day of the preceding calendar quarter.

            In the first quarter of 2009, we repurchased $1.8 million par value (book value of $1.1 million) of our 11.25% Convertible Secured Notes due 2023 for $1.3 million,resulting in a net realized loss of $0.2 million.  In the second quarter of 2009, we repurchased $75,000 par value (book value of $51,101) of our 11.25% Convertible Secured Notes due 2023 for $54,000, resulting in an immaterial net realized loss.  In thethird quarter of 2009, we repurchased $6.8 million par value (book value of $4.8 million) of our 11.25% Convertible Secured Notes due 2023 for approximately $5.8 million resulting in a net loss of $1.0 million.  Subsequent to these repurchases, our interestexpense, calculated using the effective interest method, related to the debt discount will be $1.6 million for the remainder of 2009, $7.8 million in 2010 and $5.7 million for the seven months ending July 31, 2011.

            As a result of the adoption of the Debt with Conversion Options Subtopic, we were required to separately account for the debt and equity components of our 11.25%Convertible Secured Notes due 2023 in a manner that reflects our nonconvertible debt (unsecured debt) borrowing rate when interest expense is recognized.  The debt and equity components for 11.25% Convertible Secured Notes due 2023 were as follows (inmillions):

**September 30, 2009**

**December 31, 2008****(as restated – Note 1)**

**                                                                         **
********
(Unaudited)

 

  

Principal amount of convertible notes

 

$

52.1

$

60.8

Unamortized debt discount

15.1

21.1

Net carrying amount

$

37.0

$

39.7

Additional paid-in capital

$

27.8

$

27.8

            At September 30, 2009, the unamortized discount had a remaining recognition period of approximately 22 months.
**
**Table of Contents**

            As a result of adopting the Debt with Conversion Options Subtopic, the effective interest rates for the convertible notes for the three month periods ended September 30,2009 and 2008 were approximately 33% and 25%, respectively.

            We estimated the fair values of our $52.1 million and $60.8 million (carrying value)11.25% Convertible Secured Notes due 2023 to be $45.2 millionand $38.9 million as of September 30, 2009 and December 31, 2008, respectively, based upon actual quoted market prices which are Level II fair value measurements under ASC Topic 820, “Fair Value Measurement and Disclosures.”

            The following table presents the changes in our convertible notes (in millions):

**Nine Months Ended September 30,**
****
**2009**

**2008****(as restated – Note 1)**

                                                              
********
(Unaudited)

(Unaudited)

Convertible notes beginning balance

$

39.7

  

$

127.6

Repurchases, net

(6.6

)

(6.3

)

Convertible notes converted to equity

—

(87.5

)

Amortization of debt discount

3.9

8.4

Convertible notes balance as of September 30

$

37.0

$

42.2

            In 2003, we entered into a series of secured loan agreements (the “EDC Loans”)with Export Development Canada. The EDC Loans consistof $10.7 million loaned to us in May 2003 and $6.6 million loaned to us in September 2003.  During the nine months ended September 30, 2009, we made payments in the amount of $2.7 million on the EDC Loans, of which$2.4 million related to principal.  As of September 30, 2009, the outstanding principal balance of the EDC Loans was $6.9 million.

            In March 2009, we entered into and drew down fully on the Citigroup Credit Facility in an effort to provide increased liquidity with respect to our ARS.  TheCitigroup Credit Facility, which has a five year term and is pre-payable at any time at our election, is secured by $10 million of our ARS holdings that were purchased from Citigroup.  Since the credit facility is secured by a portion of our ARS holdings, weclassified the liability as current on our Condensed Consolidated Balance Sheet.  We anticipate that the Citigroup Credit Facility will remain outstanding until we successfully monetize the ARS purchased from Citigroup.  

            Other than our 11.25% Convertible Secured Notes due 2023, the EDC Loans and the Citigroup Credit Facility, we do not have any other material borrowings or availablelines of credit. 
**
**Table of Contents**

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

**Condensed Consolidated Balance Sheet September 30, 2009 (In thousands)**
****
                                                       

**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**
********************
Current assets

 

$

—

$

138,669

$

5,774

$

—

$

144,443

Property and equipment, net

 

105

186,639

8,857

—

195,601

Investments in other entities

 

1,223

—

—

—

1,223

Other assets

 

1,222

4,410

2,033

 

(3,928

)

3,737

Total assets

$

2,550

$

329,718

$

16,664

$

(3,928

)

$

345,004

Current liabilities

994

89,384

1,137

—

91,515

Intercompany payables (receivables)

(336,696

)

332,749

3,947

—

—

Long-term debt

37,003

3,459

—

—

40,462

Other liabilities

3,840

48,657

—

(3,928

)

48,569

Stockholders’ equity

297,409

(144,531

)

11,580

—

164,458

Total liabilities and stockholders’   equity

$

2,550

$

329,718

$

16,664

$

(3,928

)

$

345,004

**Condensed Consolidated Balance Sheet December 31, 2008 (In thousands)****(as restated – Note 1)**
****
**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**

                                                         

 

 

 

 

Current assets

 

$

—

$

153,182

$

8,549

$

—

$

161,731

Property and equipment, net

 

108

207,257

13,555

—

220,920

Investments in other entities

 

1,600

—

—

—

1,600

Other assets

 

1,722

4,666

2,206

 

(3,956

)

4,638

Total assets

$

3,430

$

365,105

$

24,310

$

(3,956

)

$

388,889

Current liabilities

2,662

91,562

2,048

—

96,272

Intercompany payables (receivables)

(338,432

)

332,187

6,245

—

—

Long-term debt

39,740

5,848

—

—

45,588

Other liabilities

3,840

49,463

12

(3,956

)

49,359

Stockholders’ equity

295,620

(113,955

)

16,005

—

197,670

Total liabilities and stockholders’   equity

$

3,430

$

365,105

$

24,310

$

(3,956)

$

388,889
**
**Table of Contents**

**Condensed Consolidated Results of Operations Three Months Ended September 30, 2009 (In thousands)**
****
**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**

                                                      
********************
Operating revenue

 

$

—

 

$

177,877

 

$

3,219

$

(1,896

)

 

$

179,200

Operating expenses

 

1

186,307

2,927

(1,896

)

187,339

 

Operating income (loss)

 

(1

)

(8,430

)

292

—

(8,139

)

Gain on sale of short-term investments,   net

—

1,274

—

—

1,274

Impairment charge on investments

—

(108

)

—

—

(108

)

Extinguishment of debt

(966

)

—

—

—

(966

)

Amortization of debt discount

(1,583

)

—

—

—

(1,583

)

Interest expense, net of capitalized   interest

(1,733

)

(4,544

)

—

4,452

(1,825

)

Interest income

4,452

200

—

(4,452

)

200

Other, net

—

(18

)

218

—

200

Income (loss) before income taxes

169

(11,626

)

510

—

(10,947

)

Income tax benefit

—

1,902

—

—

1,902

Net income (loss)

$

169

$

(9,724

)

$

510

$

—

$

(9,045

)

****

**Condensed Consolidated Results of Operations Nine Months Ended September 30, 2009 (In thousands)**
****
**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**

                                                       
********************
Operating revenue

 

$

—

 

$

514,729

 

$

11,001

$

(6,233

)

 

$

519,497

Operating expenses

 

15

545,025

10,725

(6,233

)

549,532

 

Operating income (loss)

 

(15

)

(30,296

)

276

—

(30,035

)

Gain on sale of short-term investments,   net

—

1,755

—

—

1,755

Impairment charge on investments

—

(108

)

—

—

(108

)

Extinguishment of debt

(394

)

—

—

—

(394

)

Amortization of debt discount

(3,912

)

—

—

—

(3,912

)

Interest expense, net of capitalized   interest

(5,602

)

(13,591

)

—

13,358

(5,835

)

Interest income

13,357

838

—

(13,358

)

837

Equity investments income, net

(377

)

—

—

—

(377

)

Other, net

(6,519

)

(2,369

)

1,495

6,464

(929

)

Income (loss) before income taxes

(3,462

)

(43,771

)

1,771

6,464

(38,998

)

Income tax benefit

—

5,452

—

—

5,452

Net income (loss)

$

(3,462

)

$

(38,319

)

$

1,771

$

6,464

$

(33,546

)
**
**Table of Contents**

**Condensed Consolidated Results of Operations Three Months Ended September 30, 2008 (In thousands)****(as restated – Note 1)**
****
**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**

                                                         
********************
Operating revenue

 

$

—

 

$

259,257

 

$

5,075

$

(2,006

)

 

$

262,326

Operating expenses

 

599

288,244

4,450

(2,006

)

291,287

 

Operating income (loss)

 

(599

)

(28,987

)

625

—

(28,961

)

Gain from debt discount

27,785

—

—

—

27,785

Settlement of fuel contracts

—

23,149

—

—

23,149

Amortization of debt discount

(2,516

)

—

—

—

(2,516

)

Interest expense, net of capitalized   interest

(2,172

)

(4,339

)

(2

)

4,456

(2,057

)

Interest income

4,456

1,218

—

(4,456

)

1,218

Equity investments income, net

96

—

—

—

96

Other, net

—

(35

)

(168

)

—

(203

)

Income (loss) before income taxes

27,050

(8,994

)

455

—

18,511

Income tax expense

(11,207

)

(2,606

)

(283

)

—

(14,096

)

Net income (loss)

$

15,843

$

(11,600

)

$

172

$

—

$

4,415

**Condensed Consolidated Results of Operations Nine Months Ended September 30, 2008 (In thousands)****(as restated – Note 1)**
****
**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**

                                                       
********************
Operating revenue

 

$

—

 

$

1,149,029

 

$

13,347

$

(4,706

)

 

$

1,157,670

Operating expenses

 

673

1,254,875

14,570

(4,706

)

1,265,412

 

Operating loss

 

(673

)

(105,846

)

(1,223

)

—

(107,742

)

Impairment charge on investments

—

(13,661

)

(5,231

)

—

(18,892

)

Extinguishment of debt

2,107

—

—

—

2,107

Gain from debt discount

27,785

—

—

—

27,785

Settlement of fuel contracts

—

23,149

—

—

23,149

Amortization of debt discount

(8,431

)

—

—

—

(8,431

)

Interest expense, net of capitalized   interest

(6,689

)

(12,936

)

(14

)

13,374

(6,265

)

Interest income

13,374

4,980

—

(13,374

)

4,980

Equity investments income, net

261

—

(1,228

)

—

(967

)

Other, net

525

1,172

(289

)

—

1,408

Income (loss) before income taxes

28,259

(103,142

)

(7,985

)

—

(82,868

)

Income tax benefit (expense)

(10,636

)

31,127

2,273

—

22,764

Net income (loss)

$

17,623

$

(72,015

)

$

(5,712

)

$

—

$

(60,104

)
****
**Table of Contents**

**Condensed Consolidated Cash Flows Nine Months Ended September 30, 2009 (In thousands)**
****
                                                         

**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**

 

 

 

 

Operating activities

 

$

—

$

(6,157

)

$

(6,187

)

$

—

$

(12,344

)

Investing activities

 

—

17,873

5,442

176

23,491

Financing activities

 

—

(6,964

)

175

(176

)

(6,965

)

 

 

Net increase (decrease) in cash   and cash equivalents

 

—

4,752

(570

)

—

4,182

Cash and cash equivalents at the   beginning of the period

 

—

56,672

856

—

57,528

 

Cash and cash equivalents at the   end of the period

 

$

—

$

61,424

$

286

$

—

$

61,710

**Condensed Consolidated Cash Flows Nine Months Ended September 30, 2008 (In thousands)****(as restated – Note 1)**
****
**Holdings**

**Airlines**

**Other Non- Guarantor Subsidiaries**

**Eliminations**

**Consolidated Totals**

                                                            
********************
Operating activities

$

—

 

 

$

(44,617

)

 

$

(1,043

)

 

$

1,256

 

$

(44,404

)

Investing activities

—

(64,261

)

—

—

(64,261

)

Financing activities

—

(12,670

)

1,254

(1,256

)

(12,672

)

 

Net increase (decrease) in cash   and cash equivalents

—

(121,548

)

211

—

(121,337

)

Cash and cash equivalents at the   beginning of the period

—

188,834

425

—

189,259

Cash and cash equivalents at the   end of the period

$

—

$

67,286

$

636

$

—

$

67,922
******
**Table of Contents**

****

**Note 7 – Income Taxes**

           The tender offer and partial redemption in August 2008 of the Original 4.25% Convertible Notes due 2023 triggered a change in ownership limitationunder Section 382 of the Internal Revenue Code (“Section 382”) of Holdings.  Prior to the finalization of our 2008 tax return, we estimated an after tax charge, primarily related to interest on the timing of certain tax obligations, in our statementof operations for the year ended December 31, 2008.  Upon completion of our 2008 tax return, we have reversed such estimate as part of our tax benefit of $5.4 million during the nine months ended September 30, 2009.  The $5.4 million tax benefit alsoincluded the recognition of additional state carry back claims and refunds filed or received year to date. In the process of adjusting our tax accrual for our 2008 actual tax return filed in the current quarter we identified an immaterialerror related to our recording of deferred tax assets and liabilities and related valuation allowance in 2008.  The correction of the error resulted in a $4.8 million increase to “Deferred Income Taxes” and a $4.8 million increase to“Accumulated loss” in our Condensed Consolidated Balance Sheet as of December 31, 2008. 

            In conjunction with our initial public offering in April 2002, the tax basis of our tangible and intangible assets was adjusted to fair value.  This adjustment totax basis should result in additional tax deductions being available to us through 2017.  In accordance with our tax agreement with Continental, to the extent we generate taxable income sufficient to realize the additional tax deductions and tax attributesallocated to us, we are required to pay Continental a percentage of the amount of tax savings actually realized, excluding the effect of any loss carryback.  We are required to pay Continental 100% of the first third of the anticipated tax benefit, 90% of thesecond third and 80% of the last third.  However, if the tax benefits are not realized by the end of 2018, we will be obligated to pay Continental 100% of any benefit realized after that date.  Since these payments are solely dependent on our ability togenerate sufficient taxable income to realize these deferred tax assets, they are recorded as an obligation to Continental within the deferred tax asset accounts, and the portion we may retain in the future is offset by a valuation allowance. 

            At the time of the initial public offering, the valuation allowance and the obligation to Continental offset the step-up in basis of assets in our long-term deferred taxasset account.  There were no payments made to Continental under the tax agreement during the nine months ended September 30, 2009.  The Section 382 ownership change that occurred in August 2008, and any further Section 382 ownership changes, limit ourability to realize our gross deferred tax assets.  Federal and many state net operating loss carryovers are subject to substantial annual limitations over their remaining life, while our regular federal tax deductions for our tax amortizable intangible assetsare limited for the five year period after this ownership change.  Due to these limitations we have not recorded deferred tax assets related to our net losses before income taxes for the quarter ended September 30, 2009 and we have fully reserved for ourremaining deferred tax assets.

            We account for income taxes in accordance with the subsections of ASC Topic 740, “Income Taxes.”  This guidance clarifies the accounting for uncertaintyin income taxes recognized in financial statements if a position is more likely than not of being sustained by a taxing authority.  As of September 30, 2009 there were no material unrecognized tax benefits or associated accrued interest and penalties.
******
**Table of Contents**

****

**Note 8 – Earnings / (Loss) Per Share**

            We account for earnings per share in accordance with the subsections in ASC Topic 260 “Earnings Per Share.” Basic earnings per common share (“BasicEPS”) excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the periods presented.  Diluted EPS reflects the potential dilution that could occur ifsecurities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.  As discussed below under “Reverse Stock Split,” ourstock began trading on a split-adjusted basis when the market opened on October 2, 2008.  As required per SEC Staff Accounting Bulletin Topic 4C, “Changes in Capital Structure”, the computation of basic and diluted loss per share has beenretroactively adjusted to reflect the reverse stock split for all periods presented in our Condensed Consolidated Statements of Operations. 

            The following table sets forth the reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for the three and ninemonths ended September 30, 2009 and the three and nine months ended September 30, 2008 (in thousands, except per share amounts). 

                                                             

**Three Months Ended September 30,**

**Nine Months Ended September 30,**
********
**2009**

**2008****(as restated – Note 1)**

**2009**

**2008****(as restated – Note 1)**
********
** **
********
**Numerator:**

Net earnings (loss)

$

(9,045

)

$

4,415

$

(33,546

)

$

(60,104

)

Income impact of assumed conversion of   convertible debt

—

—

—

—

 

$

(9,045

)

$

4,415

$

(33,546

)

$

(60,104

)

**Denominator:**

Weighted average common shares   outstanding

14,851

15,872

15,581

8,737

Effect of stock options and restricted   stock outstanding

—

8

—

—

Assumed conversion of convertible debt

—

—

—

—

14,851

15,880

15,581

8,737

Basic earnings (loss) per share

$

(0.61

)

$

0.28

$

(2.15

)

$

(6.88

)

Diluted earnings (loss) per share

$

(0.61

)

$

0.28

$

(2.15

)

$

(6.88

)

            We excluded 795,592 shares of restricted stock from the weighted average shares used in computing Basic EPS and Diluted EPS for the three and nine months ended September30, 2009 and 236,881 shares of restricted stock from the weighted average shares used in computing Basic EPS and Diluted EPS for the three and nine months ended September 30, 2008, as these shares were not vested as of these dates.
**
**Table of Contents**

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

   • 

Options to purchase 0.3 million and 0.4 million shares of our common stock for the three and nine months ended September 30, 2009 and 0.4 million and 0.5 million shares of our common stock for the three and nine months ended September30, 2008, as these options exercise prices were greater than the average market price of the common shares for the respective periods;

• 

0.1 million shares of restricted stock for the three months ended September 30, 2008; and

• 

0.3 million shares of common stock equivalents for the assumed conversion of convertible debt for the three and nine months ended September 30, 2009 in addition to 0.4 million shares of common stock equivalents for the assumedconversion of convertible debt for the three and nine months ended September 30, 2008.

**Note 9 – Investments in Other Entities**

           In January 2006, we purchased a 44% interest in Flight Services and Systems, Inc. (“FSS”) for $3 million.  At thesame time, we loaned FSS $1 million which was originally classified in Other Assets, net, on our Condensed Consolidated Balance Sheets.  The note was due and payable in full on September 30, 2007, and provided that interest was due and payable quarterly on the15th day following the close of each calendar quarter.  The note provided that if International Total Services, Inc. (“ITS”) (also owned by the non-ExpressJet owners of FSS) emerged from bankruptcy and FSS could utilize its federal income taxattributes through a transaction or series of transactions, then any unpaid balance of the note would be deemed paid in full as a contribution by us to the capital of FSS.  The loan interest rate was equal to the lesser of 7% per annum or the three-month LIBORplus 150 basis points.  In 2008, we reached a tentative agreement with FSS with respect to its obligations under the note; and accordingly, we reclassified the note from “Other Assets, net” to “Investments in Other Entities” on ourCondensed Consolidated Balance Sheets pending finalization of the agreement.  As of December 31, 2008, we evaluated and determined that the carrying value of our investment in FSS was other-than-temporarily impaired due to the uncertainty surrounding therealizability of FSS’s tax attributes and FSS’s 2008 financial performance.  As such, we recorded an impairment charge of $2.6 million in 2008.  This impairment charge was recognized as a decrease to our investment balance and correspondingequity loss presented in the line “Impairment charges on investments” in our Condensed Consolidated Statements of Operations.  As of September 30, 2009 our investment in FSS totaled $1.2 million.  On October 27, 2009, we finalized an agreementwith FSS pursuant to which, among other things, FSS repurchased our interest and each party granted the other a mutual release of all present and future claims against the other.  The purchase price received from FSS consisted of $1.0 million and a promissorynote in the amount of $600,000, which note is payable in sixty (60) equal monthly installments of principal plus interest, with the first payment to be made on December 1, 2009.
******
**Table of Contents**

****

**Note 10 – Commitments and Contingencies**

            ***Capacity Purchase Agreement.***  See Note 2 – “Contract Flying” for further information regarding our original and amended capacitypurchase agreements with Continental.

            ***Purchase Commitments.***  As of September 30, 2009, we held options for 25 ERJ-145XR aircraft that may be exercised for other types of aircraft withinthe ERJ-145 family.  These options will expire on December 1, 2009 if we do not exercise such options on or before such date.  We retain the right to exercise the unexpired options and fly these aircraft for other airlines or under our own code, subject tocertain restrictions; however, we will have to finance our acquisition of these aircraft independently.  Currently, we do not have any firm commitments for aircraft purchases. 

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

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

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

**Note 11 – Subsequent Events**

****

***            United. ***United Air Lines, Inc. ("United") announced today that we were awarded a multiyear arrangement to fly 22ERJ-145 aircraft as United Express beginning May 1, 2010.  The arrangement will have an initial term of three years for 11 aircraft and two years for the remaining 11 aircraft, and will have a renewal option, at United’s election, for additional periods upto a total term of five years.  From May 2010 through October 2010, we will fly an additional 10 aircraft for United in the current ExpressJet livery.  These aircraft will be sourced from our corporate aviation division and as necessary, leased fromalternate sources.

            Prior to May 1, 2010, we will operate up to 22 aircraft under a short-term arrangement for United to assist with the transition of flying from their previouspartner.  The aircraft, crew maintenance and insurance (ACMI) arrangement will begin with three aircraft on December 1, 2009 and increase to 22 aircraft by March 2010.  These aircraft will also be sourced from our corporate aviation division.

            We anticipate that the definitive agreement with respect to the multiyear arrangement will include a grant to United of 2.7 million common stock warrants with anexercise price of $0.01 per share of common stock and that all related documents will be executed in the near future.  Once executed, we will file a Current Report on Form 8-K with respect to the definitive agreement.
**
**Table of Contents**

***            ARS. ***Subsequent to September 30, 2009, we consummated three separate transactions pursuant to which we monetized $5.0 millionof our ARS purchased from BOA for 90.5% of the face value of the securities and $10.0 million of our ARS purchased from BOA for 90.0% of the face value of the securities.

           ***Investments in Other Entities. ***On October 27, 2009, we finalized an agreement with FSS pursuant to which,among other things, FSS repurchased our interest and each party granted the other a mutual release of all present and future claims against the other.  The purchase price received from FSS consisted of $1.0 million and a promissory note in the amount of$600,000, which note is payable in sixty (60) equal monthly installments of principal plus interest, with the first payment to be made on December 1, 2009.

**Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations**

            The following discussion contains a number of forward-looking statements that are based on our current expectations and involve a number of risks and uncertainties, manyof which are outside our control.  Specifically statements regarding our future results of operations, operating costs, business prospects, growth and capital expenditures, including plans with respect to our fleet, are forward-looking statements. Important factors that could cause actual results to differ materially from the expectations expressed or implied in the forward-looking statements include known and unknown risks.  Some of the known risks that could significantly impact our revenues, operatingresults, and capacity include, but are not limited to:  our dependence on Continental Airlines, Inc. (“Continental”) and our operations under the capacity purchase agreement (the “Amended Continental CPA”); our charter operations; oursmall shareholder base; our current debt obligations; government regulations; dependence upon technology infrastructure; and any adverse effects from an aviation accident involving one of our aircraft.

            For further discussion of these risks, please see our Current Report on Form 8-K dated October 16, 2009 (the “Revised 2008 10-K”) in addition to our AnnualReport on Form 10-K for the fiscal year ended December 31, 2008 (the “Original 2008 10-K”).  The statements in this report are made as of November 13, 2009 and the events described in forward-looking statements might not occur or might occur to amaterially different extent than described in this report.  We undertake no duty to update or revise any of our forward-looking statements, whether as a result of new information, future events or otherwise.

            Our website address is www.expressjet.com.  All of our SEC filings, together with exhibits, are available free of charge through our website as soon as reasonablypracticable after we file them with, or furnish them to, the SEC.

**Third Quarter Financial Highlights**

   • 

Generated $4.5 million in positive cash flow during the quarter;

• 

Reported a 35.7% reduction in expenses year-over-year due to the Amended Continental CPA and suspension of non-profitable flying operations;

• 

Added approximately $16 million to our cash and cash equivalents balance by entering into a settlement agreement related to our auction rate securities (“ARS”) litigationagainst RBC Capital Markets Corporation et al. (collectively “RBC”);

• 

Allocated an additional $10 million to our securities repurchase program – purchasing debt at discounted prices to market value at the time of purchase;

• 

Experienced increased wage pressure due to our experienced workforce and a significant decrease in employee attrition; and

• 

Achieved significantrevenue growth in corporate aviation due to a short-term flying arrangement during the quarter with United Air Lines (“United”).
******
**Table of Contents**

****

**Third Quarter Operational Highlights**

   • 

Established a new all-time record for on-time performance with the Department of Transportation – turning in an 87.3% on-time performance during the month of September;

• 

Completed 99.9% of our 97,967 scheduled flights during the quarter for items we could control (maintenance, crews and scheduling), and operated 99.2% of all scheduled flights considering all types of cancellations (weather and airtraffic control);

• 

Implemented new guidelines to take a proactive approach with Continental to reduce extended tarmac delays;

• 

Added one station to our aviation services division totaling 30 stations ground-handled by us for Continental as well as other operators; and

• 

Continued to fly at low utilization levels due to decreased demand. Utilization began declining in the third quarter of 2008 due to record-breaking fuel prices and has continued to remain depressed due to the global economicrecession.

**Outlook**

            ExpressJet continues to focus on three core areas:  contract flying for mainline partners; long-term charter agreements and ad-hoc charter arrangements forcustomers seeking customizable travel solutions (corporate aviation) and aviation services.  As we now generate revenue for hours flown versus scheduled, our reported results will closely follow the general trends of the aviation industry.  For example, webelieve our results for the fourth quarter 2009 and first quarter 2010 will reflect the decline in travel demand, typically seen across the industry during the slower travel season resulting in continued lower utilization across our system.

            The industry continues to experience a significant decrease in demand due to the global economic recession.  The Air Transport Association recentlyreportedsystem-wide passenger unit revenue fell by 16.1% to 10.08 cents in September 2009 from 12.00 cents in September 2008 and a decline of 5.6% from the 10.68 cents reported for August 2009.  A sequential monthly decline in September 2009 versus August 2009 indicates weakness continues as we head into the typically slower travel period during the fourth and first quarters.  As a result, the capacity we fly for mainline partners, asmeasured in block hours, will likely remain at historically low levels through this period.  However, those reductions could be somewhat offset by our partners capability to utilize our smaller aircraft to economically serve markets that may not otherwise beviable in this reduced demand environment.  We will continue to focus on providing the most economically efficient and reliable service possible to best position ourselves for opportunities within the airline industry.  We believe this strategy will assistus in bidding regional contracts; or capitalizing on short-term contract opportunities to increase the overall block hours of our fleet. 

            In addition given the increased regulatory and media scrutiny on regional airline carriers in the aftermath of the Colgan Q400 accident in Buffalo, NewYork, we believe ExpressJet is well positioned to respond to any additional regulatory requirements.  During the quarter ended September 30, 2009, we began implementation of our Advanced Qualification Program.  This program complements our current FlightOperations Quality Assurance (FOQA) Program, Aviation Safety Action Program (ASAP) and Threat and Error Management training and helps us in our adoption of an overall Safety Management System. We currentlyincorporate the costs associated with these programs into our financial results and do not expect large additional expenditures as we move to an overall Safety ManagementSystem.  Our workforce is also very senior and while it causes additional pressures on our expenses, we believe a senior workforce, in addition to managing all training for our flight crews in-house, provides us a distinct advantage for responding to anyadditional regulatory requirements in a cost-effective and efficient manner.
**
**Table of Contents**

            We will also continue to market our unscheduled services to customers needing customizable travel solutions.  Currently our corporate aviation section is growingmainly because our aircraft size fills a niche (41 and 50-seats) in the charter sector and because we are able to utilize the aircraft in unique ways.  One example during the third quarter is transporting college football fans to away games through ourpartnership with Premiere Sports.  Because of our success in this relationship, we are currently adding trips for additional sporting events planned in early 2010.  Other advantages in our charter segment include providing one of the most reliable servicesin the industry marked by our 99.96% maintenance completion factor.  We expect our revenues to continue growing in this division as we enter into additional contracts, generate additional brand awareness and the global economy recovers.

            We also continue to leverage our aviation services segment.  This segment includes providing customer and ramp ground-handling services, interior and seatrefurbishments and aircraft painting.  The ground handling operations allow us to generate additional income and provide a seamless product to our partners’ customers while the services functions decrease our overall costs helping ensure we remaincompetitive in the current environment.  During the quarter, we were successful in a bid to begin providing aircraft cleaning services to Continental at its Houston hub in Terminal B for a one-year period beginning in early December. We are in the process ofreviewing specific terms of the agreement with Continental and anticipate entering into a definitive agreement in the near future.  This service should provide an incremental revenue stream within the aviation services segment.

The following highlights key statistics within our three core areas during third quarter 2009:

   • 

214 EMB-145 aircraft operated for Continental;

• 

30 EMB-145 aircraft operated within our corporate aviation division;

• 

30 stations under management for 40 ground-handling contracts;

• 

7 hours 55 minute system-wide average daily aircraft utilization;

• 

99.2% system-wide completion factor; and

• 

177,649 system-wide block hours flown.

            We will continue to focus on keeping our variable costs below the revenue-generating capability of our aircraft to be competitive as we begin concentrating on addingadditional flying for other mainline partners as contracts go out for renewal in 2009 and 2010.  We believe we are well positioned for these contracts due to the cost restructuring we underwent in 2008 creating alignment with the financial performance of ourpartner.  We believe we are also one of the best operators in the regional industry and can provide excellent results in extraordinarily complex operating environments.

            As we are able to diversify our revenue streams, add block hours or increase our profitability within the corporate aviation segment, we expect that we will begin togenerate positive cash flows followed by positive income streams.  Due to seasonal weakness coupled with the global economic recession, we expect losses for the remainder of 2009, despite positive cash flows during the second and thirdquarters.

            United announced today that we were awarded a multiyear arrangement to fly 22 ERJ-145 aircraft as United Express beginning May 1, 2010.  The arrangement will havean initial term of three years for 11 aircraft and two years for the remaining 11 aircraft, and will have a renewal option, at United’s election, for additional periods up to a total term of five years.  From May 2010 through October 2010, we will fly anadditional 10 aircraft for United in the current ExpressJet livery.  These aircraft will be sourced from our corporate aviation division and as necessary, leased from alternate sources.
**
**Table of Contents**

            Prior to May 1, 2010, we will operate up to 22 aircraft under a short-term arrangement for United to assist with the transition of flying from their previouspartner.  The aircraft, crew maintenance and insurance (ACMI) arrangement will begin with three aircraft on December 1, 2009 and increase to 22 aircraft by March 2010.  These aircraft will also be sourced from our corporate aviation division.

            We anticipate that the definitive agreement with respect to the multiyear arrangement will include a grant to United of 2.7 million common stock warrants with anexercise price of $0.01 per share of common stock and that all related documents will be executed in the near future.  Once executed, we will file a Current Report on Form 8-K with respect to the definitive agreement.

            In both cases, we expect these operations to service United’s existing hubs.  We expect that block hours within our contract flying segment should increasebetween 10% and 15% as a result of this flying for United.  As the capacity flown for United will be based on a longer term arrangement, future reporting for United will be categorized in the contract segment.  For the quarter ending September 30, 2009, weincluded the operational results for United in our corporate aviation (charter) segment.

            As we progress into 2010, our objective will be to control expenses to ensure we are well positioned for strategic opportunities and continued low utilization.  Ifutilization of our aircraft does not improve, we will be required to review our fleet allocation and consider further cost savings measures.

            As of September 30, 2009, our available liquidity (including restricted and unrestricted cash and our ARSholdings) was $105.4 million.  We will continue to focus onimproving our balance sheet through generating cash flow from operations, selling non-core assets, making repurchases under our approved security repurchase program and attempting to secure financing, if necessary.  We also intend to continue evaluating themarket for our ARS holdings to attempt to monetize the assets at or near face value and initiated litigation in September 2009 against Bank of America Corporation et al. related to such investments brokered by the firm.

           We believe that our existing liquidity and projected 2009 cash flows will be sufficient to fund current operations and our financial obligationsthrough the twelve months ending September 30, 2010.  However, as noted above, factors outside our control may dictate that we alter our current plans and expectations.

**Critical Accounting Policies and Estimates**

            The following are changes to our accounting policies and estimates described in our Revised 2008 10-K and Original 2008 10-K.

**Adopted Accounting Policies**

            ***Convertible Notes***.  On January 1, 2009, we adopted the Cash Conversion Subsections of ASC Subtopic 470-20, “Debt withConversion and Other Options – Cash Conversion” (“Debt with Conversion Options Subtopic”) which applies to all convertible debt instruments that have a “net settlement feature”, meaning that such convertible debt instruments, bytheir terms, may be settled either wholly or partially in cash upon conversion.  The Debt with Conversion Options Subtopic requires issuers to account separately for the liability and equity components of certain convertible debt instruments in a manner thatreflects the issuer’s nonconvertible debt (unsecured debt) borrowing rate when interest cost is recognized.  The Debt with Conversion Options Subtopic requires we split a component of the debt, the classification of that component in equity and theaccretion of the resulting discount on the debt to be recognized as part of interest expense in our Condensed Consolidated Statements of Operations.
**
**Table of Contents**

            The Debt with Conversion Options Subtopic requires retrospective application to the terms of instruments as they existed for all periods presented. The adoption of the Debt with Conversion Options Subtopic affects the accounting for our original 4.25% convertible notes due 2023 issued in 2003 (the “Original 4.25% Convertible Notes due 2023”) which on August 2, 2008, became our 11.25% ConvertibleSecured Notes due 2023.  The retrospective application of this pronouncement resulted in increased non-cash interest expense for 2003 through 2008.  We adjusted the Condensed Consolidated Statements of Operations for the three months and nine monthsended September 30, 2008 to include non-cash interest expense (presented as Amortization of debt discount in our Condensed Consolidated Statements of Operations) of $2.5 million and $8.4 million related to our Original 4.25% Convertible Notes due 2023.  During the first half of 2008, we recognized extinguishment gains of $2.1 million related to repurchases of our Original 4.25% Convertible Notes due 2023 prior to the tender offer we initiated in July 2008 in connection with such notes.  At thetime of our tender offer, our Original 4.25% Convertible Notes due 2023 were trading at a discount as a result of the nature of the credit environment and our own liquidity position.  As a result, the repurchase of debt under the tender offer resulted in debtextinguishment gains.  The 11.25% Convertible Secured Notes due 2023, of which $68.5 million remained outstanding after the tender offer in 2008, were also subject to the Debt with Conversion Options Subtopic, and we determined the fair value of the liabilitycomponent to be $40.7, million at that time.  The remainder was allocated to equity and accounted for as a debt discount which will be amortized over the period until the next put date in August 2011.  The fair value of the liability component of the 11.25%Convertible Secured Notes due 2023 was based on current market data of our convertible notes, considering interest rates for stand alone debt given the disruption in the credit markets and our own credit rating.  Adjustments to income taxeshave been recorded on the foregoing adjustments to the extent tax benefits were available.  As of September 30, 2009, $37.0 million, net of discount of $15.1 million, of our 11.25% Convertible Secured Notes due 2023 remain outstanding.

***            Other-Than-Temporary Impairments. ***In April 2009, the FASB issued new guidance which modifies therequirements for recognizing other-than-temporarily-impaired debt securities and the presentation of other-than-temporary impairments in the financial statements. This guidance, which affects the accounting for our ARS portfolio, was adopted during the quarterended June 30, 2009.  Other-than-temporary impairments are now reflected in our Condensed Consolidated Statements of Operations as “Impairment charges on investments.”

***            Subsequent Events.***** **In May 2009, the FASB issued guidance which establishes general standards ofaccounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued.  This guidance is contained in ASC Topic 855, “Subsequent Events” (“ASC Topic 855”).  We adopted theprovisions of ASC Topic 855 for the quarter ended June 30, 2009.  The adoption of these provisions did not have a material effect on our Condensed Consolidated Financial Statements.  The Company has evaluated subsequent events for potential recognitionand/or disclosure through November 13, 2009, the date the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q were issued.

**Results of Operations**

            The following discussion provides an analysis of our results of operations and reasons for material changes in those results for the three and nine months endedSeptember 30, 2009, compared to the three and nine months ended September 30, 2008.
****
**Table of Contents**

**

**Comparison of Three Months Ended September 30, 2009 to Three Months Ended September 30, 2008**

**            Operating Revenue and Segment Profit (Loss)**

**

            The table below (in thousands, except percentage data) sets forth the changes in revenue, direct segment costs and segment profit (loss) from the three months endedSeptember 30, 2009 compared to the same period in 2008. A significant portion of our operating expenses and infrastructure is integrated across segments (e.g., for maintenance, non-airport facility rentals, outside services, general andadministrative expenses) in order to support our entire fleet of aircraft; therefore, we do not allocate these costs to the individual segments identified above, but evaluate them for our consolidated operation.  The presentation of our consolidated shared costsis consistent with the manner in which these expenses are reviewed by our chief operating decision makers.  These costs are included as a part of the analysis of our operating expenses below.   

**Three Months Ended September 30,**

**2009**

**Total Revenue %**

**2008****(as restated – Note 1)**

**Total Revenue %**

**Change**

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

 

  Contract Flying

$

171,062

95.5

%

 

$

184,428

70.3

%

 

$

(13,366

)

(7.2

%)

  Branded Flying

**—**

n/a

(1)

69,286

26.4

(69,286

)

n/a

(1)

  Aviation Services

10,034

5.6

10,618

4.0

(584

)

(5.5

)

  Eliminations

(1,896

)

(1.1

)

(2,006

)

(0.8

)

110

 

(5.5

)

Total Revenue from customers

179,200

100.0

262,326

100.0

(83,126

)

(31.7

)

 

  Contract Flying

126,958

70.8

133,238

50.8

(6,280

)

(4.7

)

  Branded Flying

**—**

n/a

(1)

62,767

23.9

(62,767

)

n/a

(1)

  Aviation Services

5,688

3.2

4,806

1.8

882

18.4

  Eliminations

(1,896

)

(1.1

)

(2,006

)

(0.8

)

110

(5.5

)

Total Direct segment costs

130,750

72.9

198,805

75.8

(68,055

)

(34.2

)

Segment profit

48,450

27.1

63,521

24.2

(15,071

)

(23.7

)

Special charges

**—**

(21,187

)

Other shared expenses, including   transition costs

(56,589

)

(71,295

)

Gain on sale of short-term investments, net

1,274

—

Impairment charges on investments

(108

)

—

Extinguishment of debt

(966

)

—

Gain from debt discount

—

27,785

Settlement of fuel contracts

—

23,149

Amortization of debt discount

(1,583

)

(2,516

)

Interest expense, net of capitalized   interest

(1,825

)

(2,057

)

Interest income

200

1,218

Equity investments income, net

—

96

Other, net

200

(203

)

Consolidated income (loss) before   income taxes

$

(10,947

)

$

18,511

(1) 

Branded flying operations were suspended on September 2, 2008.
**
**Table of Contents**

            The table below (in thousands, except percentage data) sets forth the segment profit for the three months ended September 30, 2009 and the three months ended September30, 2008 for each segment. 

**Contract Flying**

**Aviation Services**

** **

**2009**

**Total Revenue %**

**2009**

**Total Revenue %**

 

 

 

Revenue from customers

 

$

171,062

100.0

%

$

10,034

$

100.0

%

Direct segment costs

126,958

74.2

5,688

56.7

Segment profit

$

44,104

25.8

%

$

4,346

43.3

%

**Contract Flying**

**Branded Flying**

**Aviation Services**

**2008**

**Total Revenue %**

**2008**

**Total Revenue %**

**2008**

**Total Revenue %**

Revenue from customers

 

$

184,428

 

100.0

%

$

69,286

 

100.0

%

$

10,618

 

100.0

%

Direct segment costs

133,238

72.2

62,767

90.6

4,806

45.3

Segment profit

$

51,190

27.8

%

$

6,519

9.4

%

$

5,812

54.7

%

**           *****Contract Flying*****.**  Block hours for contract flying with Continentalwere down by 1.5% for the three months ended September 30, 2009 as compared to the same period ended September 30, 2008.  Since we operated under the Amended Continental CPA for both periods under comparison, the decrease in operating revenue and expenses withinour Contract Flying segment for the three months ended September 30, 2009 is primarily due to a decrease in pass through expenses such as station expenditures at Continental managed stations.

            Prior to July 1, 2008, Airlines was entitled to receive payment for each block hour that Continental scheduled it to fly.  The payments were based on a formuladesigned to provide Airlines with a target operating margin of 10%.  Under the Amended Continental CPA, which became effective July 1, 2008, revenues are calculated at pre-determined rates based on block hours.  These rates are considerably lower rates thanunder the Original Continental CPA.  Likewise, under the Amended Continental CPA, Continental provides fuel for all flights and subleases the aircraft to us, both at no cost; therefore, these items are not included in our Condensed Consolidated Statements ofOperations beginning with July 1, 2008.

            Additionally, we agreed with Delta Airlines (“Delta”) to terminate our capacity purchase agreement (the “Delta CPA”) effective September 2, 2008,and accordingly, there was no activity in operations under the Delta CPA for the three month period ended September 30, 2009.  Airlines earned approximately $15.9 million in revenue under the Delta CPA for the three months ended September 30, 2008.
******
**Table of Contents**

****

**            *Branded Flying*.**  Airlines suspended flying under our ExpressJet brand and our pro-rate flying arrangement with Delta (the“Delta Prorate”) effective September 2, 2008, and accordingly, there was no activity in operations under the ExpressJet brand or the Delta Prorate for the three month period ended September 30, 2009.

***            Aviation******Services.***  For the three months ended September 30, 2009, Aviation Services had asegment profit margin of 43.3%, down from 54.7% for the three months ended September 30, 2008.  During the first quarter of 2009, we sold substantially all of the assets of a wholly-owned subsidiary, American Composites, LLC (“AmericanComposites”).  Revenues and expenses for this profitable component are no longer reflected in our Condensed Consolidated Statements of Operations.

            **Operating Expenses**

**

            Thetable below (in thousands, except percentage data) sets forththe changes in operating expenses from the three monthsended September 30, 2009 compared to the three months ended September 30, 2008.

**Fiscal Year**
****
**2009**

**Total Revenue %**

**2008**

**Total Revenue %**

**Change**

**%**

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

 $

81,435

45.4

% 

$

98,252

37.5

% 

$

(16,817

)

(17.1

%)

Maintenance, materials and repairs

44,251

24.7

48,296

18.4

(4,045

)

(8.4

)

Other rentals and landing fees

16,367

9.1

22,646

8.6

(6,279

)

(27.7

)

Depreciation and amortization

6,921

3.9

6,718

2.6

203

3.0

Outside services

6,344

3.5

8,509

3.2

(2,165

)

(25.4

)

Aircraft rentals

5,472

3.1

18,917

7.2

(13,445

)

(71.1

)

Aircraft fuel and related taxes

4,555

2.5

32,235

12.3

(27,680

)

(85.9

)

Ground handling

1,896

1.1

5,862

2.2

(3,966

)

(67.7

)

Marketing and distribution

428

0.2

1,767

0.7

(1,339

)

(75.8

)

Special charges

—

—

21,187

8.1

(21,187

)

(100.0

)

Other operating expenses

19,670

11.0

26,898

10.3

(7,228

)

(26.9

)
************
Total operating expenses

$

187,339

104.5

%

$

291,287

111.1

%

$

(103,948

)

(35.7

%)

**           **The following explanations are related to changes between the three months ended September 30, 2009 compared to the same period in2008.

            ***Wages, salaries and related costs  *** decreased 17.1% primarily due to staff and line employee reductions, net of severance, associated with thesuspension of flying under our ExpressJet brand and the Delta Prorate effective as of September 2, 2008. 

***            Other rentals and landing fees ***decreased 27.7% in total, primarily driven by fewer airport locations flown to andtransitioning some locations to Continental.  Together these events drove a reduction in airport facilities rents of $5.3 million or 90.5% from the same period in 2008. 

            ***Outside services *** decreased 25.4% due primarily to legal and consulting fees paid in 2008 related to the tender offer made in connection with ourOriginal 4.25% Convertible Notes due 2023.  No such fees were incurred during the quarter ended September 30, 2009.
**
**Table of Contents**

**

***            Aircraft rentals ***expense decreased 71.1%.   With the Amended Continental CPA, we returned 39 aircraft toContinental and reallocated 18 aircraft to our Corporate Aviation division.  For the aircraft flying in our Corporate Aviation division, we pay Continental reduced rental rates. 

***            Aircraft fuel and related taxes*** decreased 85.9%primarily due tothe suspension offlying under our ExpressJet brand, the Delta Prorate, and the Delta CPAeffective September 2, 2008.

**

***            Ground Handling ***expense decreased 67.7%primarily due tothe suspensionofflying under our ExpressJet brand, the Delta Prorate, and the Delta CPAeffective September 2, 2008.

**

***            Marketing and Distribution*** expensedecreased 75.8% primarily dueto the suspension of flying under our ExpressJet brand and the Delta Prorate that became effective September 2, 2008 leaving only expenses associated with our Corporate Aviation division and ExpressJet Services. All marketing and distribution costs for aircraftoperated by us under the Amended Continental CPA are incurred directly by Continental and are not included in our Condensed Consolidated Statements of Operations.

           ***Special charges ***decreased $21.2 million primarily due to the suspension of flying under our brandedcommercial passenger flight operations and our capacity purchase and pro-rate agreements with Delta Airlines in September 2008.  In connection with these capacity reductions and the transition of up to 39 aircraft back to Continental, we incurred special chargesrelated to aircraft, employee reductions and certain other charges.  Similar impairment charges did not occur during the three months ended September 30, 2009.

**            Non-Operating Expenses**

**

            The table below (in thousands, except percentage data) sets forth the changes in non-operating expenses from the three months ended September 30, 2009 compared to thethree months ended September 30, 2008.

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

**2009**

**Total Revenue %**

** **

**2008****(as restated – Note 1)**

**Total Revenue %**

**Change**

**%**
****
** **
************
** **
********
Gain on sale of short-term   investments, net

$

1,274

0.7

%

$

—

—

%

$

1,274

100.0

%

Impairment charge on   investments

(108

)

(0.1

)

—

—

(108

)

100.0

Extinguishment of debt

(966

)

(0.5

)

—

—

(966

)

100.0

Gain from debt discount

—

—

27,785

10.6

(27,785

)

(100.0

)

Settlement of fuel contracts

—

—

23,149

8.8

(23,149

)

(100.0

)

Amortization of debt discount

(1,583

)

(0.9

)

(2,516

)

(1.0

)

933

(37.1

)

Interest expense, net of   capitalized interest

(1,825

)

(1.0

)

(2,057

) 

(0.8

)

232

(11.3

)

Interest income

200

0.1

1,218

0.5

(1,018

)

(83.6

)

Equity investments income, net

—

—

96

0.0

(96

) 

(100.0

)

Other, net

200

0.1

(203

)

(0.1

)

403

(198.5

)
************
Total non-operating income   (expenses)

$

(2,808

)

(1.6

%)

$

47,472

18.0

%

$

(50,280

)

(105.9

%)
**************
**Table of Contents**

            The following explanations are related to changes in non-operating expenses between the three months ended September 30, 2009 compared to the same period in2008.

            ***Gain on sale of short-term investments, net*  ** was a $1.3 million gain related to the settlement agreement that provided for RBC toimmediately repurchase ARS with an aggregate par value of $18,000,000 it sold to ExpressJet for 87.5% of par value.  No sales of ARS occurred in the quarter ended September 30, 2008. 

***           ******Extinguishment of debt  ***was a $1.0 million loss related torepurchases of $6.8 million par value of our 11.25% Convertible Secured Notes due 2023 made during the third quarter of 2009.  The extinguishment of debt consists of derecognition lossesas accounted forunder the Debt with Conversion Options Subtopic.  No repurchases were made during the quarter ended September 30, 2008.

***            Gain from debt discount  ***was$27.8 million in 2008 as we determined,in accordance with the Debt with Conversion Options Subtopic, that the fair value of the liability component of our $68.5 million 11.25% Convertible Secured Notes due 2023 outstanding at September 30, 2008, to be $40.7million.  The difference was allocated to equity and is accounted for as a debt discount which will be amortized over the period until the next put date in August 2011.  The fair value adjustment was recorded as a non-recurring gain under non-operatingincome in the third quarter of 2008.  No such gain was recorded during the quarter ended September 30, 2009.

**            *Settlement of Fuel Contracts ***was $23.1 million in 2008 as we recorded the sale of ourfixed forwardpurchase contracts for periods subsequent to September 2, 2008. 

***            Impairment charges on investments  ***was $0.1 million as we adoptedFASB’s new guidance on the requirements for recognizing other-than-temporarily-impaired debt securities and the presentation of other-than-temporary impairments in the financial statements. This guidance, which affects the accounting for our ARS portfolio, was adoptedduring the quarter ended June 30, 2009.  Other-than-temporary impairments are now reflected in our Condensed Consolidated Statements of Operations as “Impairment charges on investments.”

***            Interest income ***decreased primarily due to decreases in the volume of cash invested, the rate of interest earned and spendingrelated to capital projects.
******
**Table of Contents**

****

**Comparison of Nine Months Ended September 30, 2009 to Nine Months Ended September 30, 2008**

**            Operating Revenue and Segment Profit (Loss)**

**

            The table below (in thousands, except percentage data) sets forth the changes in revenue, direct segment costs and segment profit (loss) from the nine months endedSeptember 30, 2009 compared to the same period in 2008. A significant portion of our operating expenses and infrastructure is integrated across segments (e.g., for maintenance, non-airport facility rentals, outside services, general andadministrative expenses) in order to support our entire fleet of aircraft; therefore, we do not allocate these costs to the individual segments identified above, but evaluate them for our consolidated operation.  The presentation of our consolidated shared costsis consistent with the manner in which these expenses are reviewed by our chief operating decision makers.  These costs are included as a part of the analysis of our operating expenses below. 

**Nine Months Ended September 30,**

**2009**

**Total Revenue %**

**2008****(as restated – Note 1)**

**Total Revenue %**

**Change**

**%**

                                              
****
Revenue from customers:

 

  Contract Flying

$

493,538

95.0

%

 

$

908,348

78.5

%

 

$

(414,810

)

 

(45.7

%)

  Branded Flying

**—**

n/a

(1)

221,258

19.1

(221,258

)

n/a

(1)

  Aviation Services

32,191

6.2

32,770

2.8

(579

)

(1.8

)

  Eliminations

(6,232

)

(1.2

)

(4,706

)

(0.4

)

(1,526

)

32.4

Total Revenue from customers

519,497

100.0

1,157,670

100.0

(638,173

)

(55.1

)

 

  Contract Flying

367,350

70.7

679,897

58.7

(312,547

)

(46.0

)

  Branded Flying

**—**

n/a

(1)

289,480

25.0

(289,480

)

n/a

(1)

  Aviation Services

17,066

3.3

16,827

1.5

239

1.4

  Eliminations

(6,232

)

(1.2

)

(4,706

)

(0.4

)

(1,526

)

32.4

Total Direct segment costs

378,184

72.8

981,498

84.8

(603,314

)

(61.5

)

Segment profit

141,313

27.2

176,172

15.2

(34,859

)

(19.8

)

Special charges

**—**

(43,307

)

Other shared expenses, including   transition costs

(171,348

)

(240,607

)

Gain on sale of short-term investments, net

1,755

**—**

Impairment charges on investments

(108

)

(18,892

)

Extinguishment of debt

(394

)

2,107

Gain from debt discount

**—**

27,785

Settlement of fuel contracts

**—**

23,149

Amortization of debt discount

(3,912

)

(8,431

)

Interest expense, net of capitalized   interest

(5,835

)

(6,265

)

Interest income

837

4,980

Equity investments loss, net

(377

)

(967

)

Other, net

(929

)

1,408

Consolidated loss before income taxes

$

(38,998

)

$

(82,868

)

(1) 

Branded flying operations were suspended on September 2, 2008.
**
**Table of Contents**

            The table below (in thousands, except percentage data) sets forth the segment profit (loss) for the nine months ended September 30, 2009 and the nine months endedSeptember 30, 2008 for each segment. 

**Contract Flying**

**Aviation Services**

** **

**2009**

**Total Revenue %**

**2009**

**Total Revenue %**

                                      

 

 

 

Revenue from customers

 

$

493,538

100.0

%

$

32,191

100.0

%

Direct segment costs

367,350

74.4

17,066

53.0

Segment profit

$

126,188

25.6

%

$

15,125

47.0

%

**Contract Flying**

**Branded Flying**

**Aviation Services**

**2008**

**Total Revenue %**

**2008**

**Total Revenue %**

**2008**

**Total Revenue %**

                                   

Revenue from customers

 

$

908,348

 

100.0

%

$

221,258

 

100.0

%

 

$

32,770

 

100.0

%

Direct segment costs

679,897

74.8

289,480

130.8

16,827

51.3

Segment profit (loss)

$

228,451

25.2

%

$

(68,222

)

(30.8

%)

$

15,943

48.7

%

**            *Contract Flying*****.** Block hours for contract flying withContinental were down 7.3% for the nine months ended September 30, 2009 as compared to the same period ended September 30, 2008.  The decrease in operating revenue and expenses within our Contract Flying segment is primarily due to operating under the OriginalContinental CPA for the first half of 2008 versus under the Amended Continental CPA for all of 2009 highlighting different revenue and expense structures contained in each agreement.

            Prior to July 1, 2008, Airlines was entitled to receive payment for each block hour that Continental scheduled it to fly, which arrangement was based on a formuladesigned to provide Airlines with a target operating margin of 10%.  Under the Amended Continental CPA, which became effective July 1, 2008, revenues are calculated at a pre-determined rate based on block hours flown at considerably lower rates than under theOriginal Continental CPA.  Likewise, under the Amended Continental CPA, Continental is responsible for the cost of providing fuel for all flights and for paying aircraft rent for all aircraft covered by the Amended Continental CPA and, therefore, these items arenot included in our Condensed Consolidated Statements of Operations beginning July 1, 2008.

            Additionally, we agreed with Delta to terminate the Delta CPA effective September 2, 2008, and accordingly, there was no activity in operations for the Delta CPA for thenine month period ended September 30, 2009.  Airlines earned approximately $43.7 million in revenue under the Delta CPA for the nine months ended September 30, 2008.

**            *Branded Flying*.**  Airlines suspended flying under our ExpressJet brand and the Delta Prorate effective September 2, 2008, andaccordingly, there was no activity in operations under the ExpressJet brand or the Delta Prorate for the nine month period ended September 30, 2009.
**
**Table of Contents**

***           ******Aviation******Services*****. **For thenine months ended September 30, 2009, Aviation Services had a segment profit margin of 47.0%, down from 48.7% for the nine months ended September 30, 2008.  The decrease in profit margin for Ground Handling during the nine months ended September 30, 2009 isoffset by increased allowance for doubtful accounts for ExpressJet Services, LLC. In addition, we sold substantially all of the assets of a wholly-owned subsidiary, American Composites.  Revenues and expenses for this profitablecomponent are no longer reflected in our Condensed Consolidated Statements of Operations.

            **Operating Expenses**

**

            Thetable below (in thousands, except percentage data) sets forththe changes in operating expenses from the nine monthsended September 30, 2009 compared to the nine months ended September 30, 2008.

**Fiscal Year**
****
**2009**

**Total Revenue %**

**2008**

**Total Revenue %**

**Change**

**%**

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

 $

240,729

46.3

% 

$

321,686

27.8

% 

$

(80,957

)

(25.2

%)

Maintenance, materials and repairs

123,922

23.9

160,349

13.9

(36,427

)

(22.7

)

Other rentals and landing fees

45,491

8.8

81,398

7.0

(35,907

)

(44.1

)

Depreciation and amortization

22,180

4.3

24,145

2.1

(1,965

)

(8.1

)

Outside services

20,071

3.9

41,819

3.6

(21,748

)

(52.0

)

Aircraft rentals

16,416

3.2

192,432

16.6

(176,016

)

(91.5

)

Aircraft fuel and related taxes

10,175

2.0

226,184

19.5

(216,009

)

(95.5

)

Ground handling

7,497

1.4

57,813

5.0

(50,316

)

(87.0

)

Marketing and distribution

2,093

0.4

25,173

2.2

(23,080

)

(91.7

)

Impairment of fixed assets and goodwill

—

—

21,410

1.8

(21,410

)

(100.0

)

Special charges

—

—

21,896

1.9

(21,896

)

(100.0

)

Other operating expenses

60,958

11.7

91,107

7.9

(30,149

)

(33.1

)
************
Total operating expenses

$

549,532

105.9

%

$

1,265,412

109.3

%

$

(715,880

)

(56.6

%)

**           **The following explanations are related to changes between the nine months ended September 30, 2009 compared to the same period in2008.

            ***Wages, salaries and related costs *** decreased 25.2% primarily due to staff and line employee reductions, net of severance, associated with thesuspension of flying under our ExpressJet brand and our pro-rate flying arrangement with Delta that went into effect September 2, 2008.

***            Maintenance, materials and repairs *** decreased 22.7% in line with the system-wide decrease in block hours of 24.3% over the same period yearover year.

***            Other rentals and landing fees ***decreased 44.1%.  As a result of our suspended operations, expenses associated with landingfees decreased approximately 17.8%.  In addition, lower expenses resulted from transitioning station management of a majority of the stations under the Amended Continental CPA from ExpressJet to Continental.  As a result, the associated facility rentals arenow incurred directly by Continental and the related expense is no longer included in our Condensed Consolidated Statements of Operations.
**
**Table of Contents**

            ***Outside services *** decreased 52.0% primarily due to the suspension of flying under our ExpressJet brand and the Delta Prorate as of September 2, 2008and in part to Continental administrative fees earned in 2008 but not in 2009.  This administrative fee was eliminated in the Amended Continental CPA effective July 1, 2008.  In addition, we incurred legal and consulting fees in 2008 from our independentfinancial advisors related to the tender offer made in connection with our Original 4.25% Convertible Notes due 2023 and the unsolicited takeover offer from SkyWest, Inc.

***            Aircraft rentals ***expense decreased 91.5% primarily due to new terms under the Amended Continental CPA which became effectiveJuly 1, 2008.  Under the Amended Continental CPA, Continental is responsible for paying aircraft rent for all aircraft operated for Continental thereunder and, therefore, the related expense is no longer included in our Condensed Consolidated Statements ofOperations.  In addition, lease payments for the 30 aircraft operating outside of the Amended Continental CPA are at significantly lower rates than the lease obligations under the Original Continental CPA.

***            Aircraft fuel and related taxes*** decreased 95.5%primarily due to newterms under the Amended Continental CPA which became effective July 1, 2008.  Prior to July 1, 2008, our fuel price, including related fuel taxes, was capped at 71.20 cents per gallon under the Original Continental CPA. Under the Amended Continental CPA, Continental is responsible for the cost of providing fuel for all aircraft operated by us under the Amended Continental CPA and, therefore, the related expense is no longer included in our CondensedConsolidated Statements of Operations. 

            ***Ground***  ***Handling *** expense decreased 87.0% primarily due to newterms under the Amended Continental CPA whichbecame effective July 1, 2008.  Under the Amended Continental CPA, Continental is responsible for the station expenditures at Continental-managed stations directly. In addition, under the Amended Continental CPA,Continental is responsible for the cost of providing fueling services for all aircraft operated by us under the Amended Continental CPA and, therefore, the related ground handling and aircraft servicing expense related to operations in respect of the AmendedContinental CPA is no longer included in our Condensed Consolidated Statements of Operations.

***            Marketing and Distribution*** expensedecreased 91.7% primarily dueto the suspension of flying under our ExpressJet brand and the Delta Prorate as of September 2, 2008 leaving only expenses associated with our Corporate Aviation division and ExpressJet Services.  All marketing and distribution costs for aircraft operated byus under the Amended Continental CPA are incurred directly by Continental and are not included in our Condensed Consolidated Statements of Operations.

           ***Impairment charges on fixed assets and goodwill ***decreased $21.4million primarily due to a $12.8 million non-cash impairment of goodwill related to the original Continental CPA and an $8.6 million non-cash impairment to write-off certain capital assets, primarily non-moveable equipment, building and aircraft improvements(associated with our Branded Flying Segment) in 2008.  Similar impairment charges did not occur during the nine months ended September 30, 2009.

***            Special charges*** decreased $21.9 million primarily due to the suspension of flying under our branded commercialpassenger flight operations and our capacity purchase and pro-rate agreements with Delta Airlines in September 2008.  In connection with these capacity reductions and the transition of up to 39 aircraft back to Continental, we incurred special charges of $21.2million related to aircraft, employee reductions and certain other charges in addition to a $0.7 million non-cash charge related to previously disputed base closure costs associated with the original Continental CPA during 2008.  Similar impairment charges didnot occur during the nine months ended September 30, 2009.
**
**Table of Contents**

**            Non-Operating Expenses**

**

            The table below (in thousands, except percentage data) sets forth the changes in non-operating expenses from the nine months ended September 30, 2009 compared to thenine months ended September 30, 2008.

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

**2009**

**Total Revenue %**

** **

**2008****(as restated – Note 1)**

**Total Revenue %**

**Change**

**%**
****
** **
************
** **
********
Gain on sale of short-term   investments, net

$

1,755

0.3

%

$

—

—

%

$

1,755

100.0

%

Impairment charge on investments

(108

)

0.0

(18,892

)

(1.6

)

18,784

(99.4

)

Extinguishment of debt

(394

)

(0.1

)

2,107

0.2

(2,501

)

 

(118.7

)

Gain from debt discount

—

—

27,785

2.4

(27,785

)

(100.0

)

Settlement of fuel contracts

—

—

23,149

2.0

(23,149

)

(100.0

)

Amortization of debt discount

(3,912

)

(0.8

)

(8,431

)

(0.7

)

4,519

(53.6

)

Interest expense, net of capitalized   interest

(5,835

)

(1.1

)

(6,265

)

(0.5

)

430

(6.9

)

Interest income

837

0.2

4,980

0.4

(4,143

)

(83.2

)

Equity investments loss, net

(377

)

(0.1

)

(967

)

(0.1

)

590

 

(61.0

)

Other, net

(929

)

(0.3

)

1,408

0.1

(2,337

)

(166.0

)
************
Total non-operating income   (expenses)

$

(8,963

)

(1.9

%)

$

24,874

2.2

%

$

(33,837

)

(136.0

%)
************
            The following explanations are related to changes in non-operating expenses between the nine months ended September 30, 2009 compared to the same period in2008.

***            Gain on sale of short-term investments, net*  ** included a $0.5 million gain recognized for a sale of ARS in January 2009 as well as gains of$1.3 million related to the settlement agreement that provided for RBC to immediately repurchase ARS with an aggregate par value of $18,000,000 it sold to ExpressJet for 87.5% of par value during the third quarter of 2009.  No such gainswere recognized during the nine months ended September 30, 2008.

***           ******Extinguishment of debt*** decreased 118.7% in 2009 and isrelated to repurchases of our 11.25% Convertible Secured Notes due 2023 made in 2009 when compared to repurchases of our Original 4.25% Convertible Notes due 2023in 2008.  Extinguishment of debt consists of derecognition gains or lossesas accounted for under the Debt with Conversion Options Subtopic using the fair value of bond trading activity at the time ofrepurchase.

***           ******Gain from debt discount ***was$27.8 million in 2008 as we determined, in accordance with the Debt with Conversion Options Subtopic, that the fair value of the liability component of our $68.5 million 11.25% Convertible Secured Notes due 2023 outstandingat September 30, 2008, to be $40.7, million.  The difference was allocated to equity and is accounted for as a debt discount which will be amortized over the period until the next put date in August 2011.  The fair value adjustment was recorded as anon-recurring gain under non-operating income in the third quarter of 2008.
********
**Table of Contents**

**

***            Settlement of Fuel Contracts ***was $23.1 million in 2008 as we recorded the sale of our fixed forward purchase contracts for periods subsequentto September 2, 2008. 

**

***            Impairment charge on investments ***decreased $18.9 million primarily due to a $13.7 million impairment that we recorded on ourARS investment during the nine months ended September 30, 2008.  The need to record an other-than-temporary decline in valuation was caused by the uncertainty in the ARS market and the fact we determined we would consider liquidating these investments at adiscount if necessary.  In addition, we impaired our remaining investment in Wing Holdings, LLC during the nine months ended September 30, 2008 for $5.2 million.  We review our investments in unconsolidated affiliates forimpairment whenever events or changes in business circumstances indicate that the carrying amount of the investments may not be fully recoverable.  In 2009, impairment charge on investments was $0.1 million as we adopted FASB’s new guidance on the requirements for recognizing other-than-temporarily-impaired debt securities and the presentation of other-than-temporary impairments in the financial statements. This guidance, which affects the accounting for our ARS portfolio, was adoptedduring the quarter ended June 30, 2009.  Other-than-temporary impairments are now reflected in our Condensed Consolidated Statements of Operations as “Impairment charges on investments.”

***            Amortization of debt discount ***decreased $4.5 million due to our adoption of the Debt with Conversion Options Subtopic and itsretroactive application to all periods presented.  As a result, the financial statements for the nine months ended September 30, 2008 were adjusted to reflect an additional $6.9 million in amortization of debt discount related to our Original 4.25% ConvertibleNotes due 2023 and our 11.25% Convertible Secured Notes due 2023 to the $1.5 million in amortization of debt discount originally reported for the period.  The $3.9 million in amortization of debt discount for the nine months ended September 30, 2009, is relatedto debt discount on our 11.25% Convertible Secured Notes due 2023.

***            Interest income ***decreased primarily due to decreases in the volume of cash invested, the rate of interest earned and spendingrelated to capital projects.

**Certain Operational Information**

The following statistical information for the periods indicated is helpful in understanding our financial results:

**For the Three Months Ended September 30,**
****
**2009**

**2008**

**Change**

**%**
****************
**Operating Statistics:**

 

 

 

 

Revenue passenger miles (millions) (1)

 

2,212

2,439

(227

)

(9.3

%)

Available seat miles (millions) (2)

2,779

3,164

(385

)

(12.2

%)

Passenger load factor (3)

79.6

%

77.1

%

2.5

pts

3.2

%

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

6.74

9.21

(2.47

)

(26.8

%)

Block hours (5)

177,649

204,810

(27,161

)

(13.3

%)

Operating cost per block hour (dollars) (6)

1,055

1,422

(367

)

(25.8

%)

Departures

97,920

108,520

(10,600

)

(9.8

%)

Average length of aircraft flight (miles)

569

597

(28

)

(4.7

%)

Average daily utilization of each aircraft (hours) (7)

7.91

8.12

(0.21

)

(2.6

%)

Completion factor

99.2

%

96.9

%

2.3

pts

2.4

%

Revenue passengers (thousands)

3,744

3,939

(195

)

(4.9

%)

Actual aircraft in fleet at end of period

244

274

(30

)

(10.9

%)
**
**Table of Contents**

**For the Nine Months Ended September 30,**
****
**2009**

**2008**

**Change**

**%**
****************
**Operating Statistics:**

 

 

 

 

Revenue passenger miles (millions) (1)

 

6,005

7,742

(1,737

)

(22.4

%)

Available seat miles (millions) (2)

7,836

10,195

(2,359

)

(23.1

%)

Passenger load factor (3)

76.6

%

75.9

%

0.7

pts

0.9

%

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

7.01

12.41

(5.40

)

(43.5

%)

Block hours (5)

507,317

669,943

(162,626

)

(24.3

%)

Operating cost per block hour (dollars) (6)

1,083

1,889

(806

)

(42.7

%)

Departures

272,275

350,685

(78,410

)

(22.4

%)

Average length of aircraft flight (miles)

577

596

(19

)

(3.1

%)

Average daily utilization of each aircraft (hours) (7)

7.62

8.92

(1.30

)

(14.5

%)

Completion factor

98.3

%

97.3

%

1.0

pts

1.0

%

Revenue passengers (thousands)

10,047

12,612

(2,565

)

(20.3

%)

Actual aircraft in fleet at end of period

244

274

(30

)

(10.9

%)

(1) 

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

(2) 

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

(3) 

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

(4) 

Operating cost per available seat mile is operating costs divided by available seat miles.  The reimbursable expenses are different under the terms of the Amended Continental CPA versus the Original Continental CPA, and thereforecosts are inconsistent with prior periods, beginning July 2008.

(5) 

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

(6) 

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

(7) 

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

**Future Costs**

            Even after successful implementation of our cost saving initiatives, including headcount reductions, wage concessions and third-party vendor concessions, we need toremain committed to providing competitively priced services by controlling our costs.  We believe that our costs may still increase in the future due to:

   • 

changes in wages, salaries and related fringe benefit costs, including utilization of our self-insured medical and workers compensation plans;

• 

changes in wages related to average seniority increases as a result of low employee attrition;

• 

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

• 

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

• 

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

• 

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

            In the long term, failure to control our costs would prevent us from remaining competitive and reduce our ability to limit losses including the opportunities to attractadditional corporate customers or to survive economic downturns.
**
**Table of Contents**

**Liquidity, Capital Resources and Financial Position**

            **Sources and Uses of Cash**

**

           As of September 30, 2009, our cash balance (including restricted cash and short-term investments) was $105.40 million, net of fair-value discountsapplied to our short-term investments.  Our primary source of liquidity is cash flow provided from our operations.  For the nine monthsended September 30, 2009 and 2008, our operations used $12.3 million and $44.4 million,respectively.  As of September 30, 2009 and December 31, 2008, we had $19.5 million and $20.5 million of restricted cash, respectively, which is comprised of collateral for our workers’ compensation coverage, customer deposits for future charter flightsand letters of credit.  

            For the nine months ended September 30, 2009 and 2008, we spent $3.9 million and $9.1 million, respectively, on capital expenditures.  We anticipate capitalexpenditures for the remainder of 2009 to be approximately $1.8 million primarily related to technology for our charter operation and flight equipment.

            In light of the ongoing challenges faced by the airline industry and the global economic recession, we believe controlling costs and preserving cash are crucial tosustain our liquidity and meet our financial obligations over the next year.

            Our 2009 cash flows have included $10.2 million of proceeds from the sale of certain assets and a $5.0 million revolving line of credit (the “Citigroup CreditFacility”) with Citigroup Global Markets Inc. (“Citigroup”) outside of normal operating revenues.  We believe that our existing liquidity and projected 2009 cash flows, including the incremental sources of liquidity noted above, and theimplementation of cost saving initiatives, if needed, will be sufficient to fund current operations and our financial obligations through the twelve months ending September 30, 2010.  However, as noted above, factors beyond our control may dictate that we alterour current plans and expectations and could have a material adverse impact on our ability to sustain operations over the long term.

****

**Debt**

            As of September 30, 2009, total debt, including current maturities, totaled $48.9 million net of a discount of $15.1 million.  Our debt consisted of the 11.25%Convertible Secured Notes due 2023, the Citigroup Credit Facility and the secured debt owed under the EDC Loans.

            Our August2008 tender offer resulted in a gain on extinguishment of our Original 4.25% Convertible Notes due 2023, based on theaccounting guidance in the Debt with Conversion Options Subtopic.  In accordance with the accounting literature, the gain on extinguishment was calculated based on an allocation of the fair value of the consideration issued between the liability and equitycomponents as compared to book value.  The total fair value of the consideration issued in the tender offer was $100.4 million based on $59.7 million in shares and the estimated fair value of the 11.25% Convertible Secured Notes due 2023 of $40.7 million. Based on the estimated fair value of the liability component of the Original 4.25% Convertible Notes due 2023 immediately prior the tender offer in 2008, this consideration was accounted for as an extinguishment of a $128.2 million liability for $100.4 million,resulting in the gain of $27.8 million.  Because the issuance of our 11.25% Convertible Secured Notes due 2023 occurred at or around the tender offer, the equity component was deemed to have no value, therefore the proceeds of $100.4 million were assigned to theliability component.  In addition, we recognized extinguishment gains of $2.1 million in 2008 related to repurchases of our Original 4.25% Convertible Notes due 2023 prior to the tender offer.  Given the credit environment at the time of this transaction,including our own liquidity, our debt was trading at a significant discount, resulting in these gains.  The fair value of the liability component of the 11.25% Convertible Secured Notes due 2023 was based on current market data of our convertible notes,considering interest rates for stand alone debt given the disruption in the credit markets and our own
**
**Table of Contents**

credit rating.  The net carrying value of the 11.25% Convertible Secured Notes due 2023 outstanding as of September 30, 2009 was $37.0 million.

            We estimated fair value of the 11.25% Convertible Secured Notes due 2023 based on an average of market trading activity for the convertible notes subsequent to theexchange in August 2008.

            Pursuant to the terms of the amended indenture governing the 11.25% Convertible Secured Notes due 2023, we are required to deliver a certificate to the trustee from athird-party appraiser dated no later than 15 business days after January 1 of each year certifying the value of the pledged collateral for the notes as of January 1 or such later date.  We delivered a certificate from our independent appraiser in January 2009indicating the previously appraised value of $180.4 million has not changed materially from the initial appraisal as of the amendment date.  Based on the principal amount of notes remaining outstanding as of September 30, 2009, the pledged collateral requirementunder the 11.25% Convertible Secured Notes due 2023 is approximately $39.2 million in spare parts and $34.5 million in spare engines.

            The 11.25% Convertible Secured Notes due 2023 are guaranteed by Airlines.  Except as otherwise specified in the amended indenture governing the 11.25% ConvertibleSecured Notes due 2023 were issued, there are no restrictions on Airlines’ ability to transfer funds to Holdings in the form of cash dividends, loans or advances.  General provisions of applicable state law, however, may limit the ability of any subsidiaryto pay dividends or make distributions to its parent in certain circumstances. 

           We have the right to redeem the notes for cash in whole at any time, or from time to time in part, for a price equal to 100% of the principalamount plus accrued and unpaid interest, if any.  Additionally, pursuant to the terms of the 11.25% Convertible Secured Notes, due 2023,  we can elect to use shares of common stock to repurchase any 11.25% Convertible Secured Notes due2023, the number of shares will be equal to the repurchase price divided by 97.5% of the average closing sales price of our common stock for the five consecutive trading days ending on the third business day prior to the applicable repurchase date (adjusted to takeinto account the occurrence of certain events that would require adjustment of the conversion rate).  In certain circumstances, the notes are convertible into our common stock, at a ratio of 54.9451 shares of common stock per $1,000 principal amount of notes,which was equivalent to an initial conversion price of approximately $18.20 per common share.  As a result of the reverse split of our common shares that occurred in October 2008, the ratio is now 5.49451 shares of common stock per $1,000 principal amount ofnotes, which is equivalent to a price of approximately $182.00 per common share.  The ratio is subject to adjustments if certain events take place, and holders may convert only if the closing sale price per common share exceeds 120% of the conversion price forat least 20 trading days in the 30 consecutive trading day period ending on the last trading day of the preceding calendar quarter.

            In 2003, we entered into a series of secured loan agreements (the “EDC Loans”)with Export Development Canada(“EDC”). The EDC Loans consistof $10.7 million loaned to us in May 2003 and $6.6 million loaned to us in September 2003.  During the nine months ended September 30, 2009, we made payments in theamount of $2.7 million on the EDC Loans, of which $2.4 million related to principal.  As of September 30, 2009, the outstanding principal balance of the EDC Loans was $6.9 million.

            In March 2009, we entered into and drew down fully on the Citigroup Credit Facility with Citigroup to increase our liquidity.  The Citigroup Credit Facility, whichhas a five year term and is pre-payable at any time at our election, is secured by $10 million of our ARS holdings that were purchased from Citigroup.  Since the credit facility is secured by a portion of our ARS holdings, we classified the liability as currenton our Condensed Consolidated Balance Sheet.  We anticipate that the Citigroup Credit Facility will remain outstanding until we successfully monetize the ARS purchased from Citigroup. 

            Other than our 11.25% Convertible Secured Notes due 2023, the EDC Loans and the Citigroup Credit Facility, we do not have any other material long-term borrowings oravailable lines of credit. 
**
**Table of Contents**

****

**Securities Repurchase Program**

            In July 2005, our Board of Directors authorized the expenditure of up to $30 million to repurchase shares of our common stock.  In February 2006, the Boardauthorized the inclusion of our Original 4.25% Convertible Notes due 2023 (now our 11.25% Convertible Secured Notes due 2023), within the previously announced program.  Since inception, the Board has authorized an additional $25 million for this program. Purchases have been made from time to time in the open market and in privately negotiated transactions; the timing of any repurchases under the program depends on a variety of factors, including market conditions, and may be suspended or discontinued at anytime.  As of September 30, 2009, we had a balance of $9.7 million remaining within the program for additional purchases.  See Part II, Item 2 of this report for more information about our repurchases. 

**Purchase Commitments and Contingencies**

            As September 30, 2009, we held options for 25 ERJ-145XR aircraft that may be exercised for other types of aircraft within the ERJ-145 family.  Options on 25aircraft expired unexercised on April 1, 2009 and the remaining 25 options will expire on December 1, 2009 if we do not exercise such options on or before such date.  We retain the right to exercise the unexpired options and fly these aircraft for other airlinesor under our own code, subject to certain restrictions; however, we will have to finance our acquisition of these aircraft independently.  Currently, we do not have any firm commitments for aircraft purchases. 

****

**           *****Aircraft, Simulator and Spare Engine Leases*****. **As of September30, 2009, we had significant lease and sublease obligations for aircraft, a flight training device and spare engines that are classified as operating leases, which are not reflected as assets or liabilities on our balance sheet.  These leases expire between 2015and 2022.  As of September 30, 2009, our expected total minimum rental expense for the full year 2009 under current and future firm order aircraft, simulator operating leases and spare engine operating leases is $25.2****million.  Under the AmendedContinental CPA that went into effect July 1, 2008, Continental will bear all the rent expense for aircraft operating for Continental under that arrangement.  For the 30 aircraft retained outside of the Amended Continental CPA, we incur rent expense at reducedrental rates.  As of September 30, 2009, our expected total 2009 minimum rental expense for the 30 aircraft retained outside of the Amended Continental CPA is approximately $21.9****million.  A substantial portion of our aircraft are leased directly byContinental from third parties and subleased to us by Continental.  If Continental were to default under these leases, our ability to retain access to the aircraft could be adversely affected.  Pursuant to the terms of the amended indenture governing our11.25% Convertible Secured Notes due 2023, we granted a security interest on certain of our property, including spare parts and spare aircraft engines.  We agreed that if certain collateral ratios are greater than the applicable maximum, we will pledgeadditional spare parts, spare aircraft engines and / or cash and cash equivalents. 
******
**Table of Contents**

****

**Item 3.  Quantitative and Qualitative Disclosure About Market Risk**

            We have been and are subject to market risks, including commodity price risk, such as aircraft fuel prices and interest rate risk.  See the Notes to CondensedConsolidated Financial Statements included in our Revised 2008 10-K as well as our Original 2008 10‐K for a description of our accounting policies and other information related to these financial instruments.

**Aircraft Fuel**

            Prior to July 1, 2008, Continental provided all fuel for aircraft covered by the Original Continental CPA, and we incurred fuel expense and fuel tax equal to the lowerof the actual cost of the fuel and the related taxes or agreed-upon caps of 66.0 cents and 5.2 cents per gallon, respectively.  Under the Amended Continental CPA, Continental is responsible for the cost of providing fuel for all flights and, therefore, effectiveJuly 1, 2008, fuel expense is no longer included in our Condensed Consolidated Statements of Operations for aircraft flying within this arrangement.

****

**Interest Rates**

           We estimated the fair values of our $52.1 million and $60.8 million (carrying value) 11.25% Convertible Secured Notes due2023 to be $45.2 million and $38.9 million as of September 30, 2009 and December 31, 2008, respectively, based upon quoted market prices.  Changes in the fair market value of our fixed-rate debt could be affected by a variety of factors including generalinvestor behavior, industry specific risks and interest rate risks.  Holders of this debt had the right to require that we repurchase their notes on August 1, 2008.  On that date we satisfied $59.7 million in aggregate principal of outstanding notes thathad been validly tendered. Following the completion of the tender offer, $68.5 million aggregate principal of our Original 4.25% Convertible Notes due 2023 remained outstanding.  In accordance with the Debt with Conversion Options Subtopic, we calculated thefair value of the liability component of our 11.25% Convertible Secured Notes due 2023 to be $40.7 million and the equity component and related debt discount to be $27.8.  The $27.8 million discount is being accreted to “Amortization of debtdiscount” in our Condensed Consolidated Statements of Operations and will continue until August 1, 2011.  Subsequent to repurchases made through September 30, 2009, our interest expense, calculated using the effective interest method, related to the debtdiscount will be $1.6 for the remainder of 2009, $7.8 million in 2010 and $5.7 million for the seven months ending July 31, 2011. In conjunction with the amortization of debt discount, we are currently amortizing $2.0 million of capitalized fees associated with theconvertible debt refinancing to interest expense until August 1, 2011.

            We have potential interest rate exposure with respect to our loan agreements with EDC and Citigroup.  The interest rates applicable to the variable rate notes mayrise, increasing our interest expense.  The impact of market risk is estimated using a hypothetical increase in interest rates by 100 basis points for our variable rate long-term debt.  Based on this hypothetical assumption, any additional amounts incurredin interest expense for 2009 would not be material.
**
**Table of Contents**

**Item 4.  Controls and Procedures.**

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

**           ***(b) Changes in internal control over financial reporting. *We have not identified any material weakness inour internal control over financial reporting as of September 30, 2009.

            No other changes in our internal control over financial reporting during our most recent fiscal quarter have materially affected or are reasonably likely to materiallyaffect, our internal control over financial reporting.

****

**PART II.  OTHER INFORMATION**

**Item 1.  Legal Proceedings.**

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**              **None.

**Item 1A.  Risk Factors.**

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            Important factors that could cause actual results to differ materially from estimates or projections contained in forward-looking statements are described in ourOriginal 2008 10-K under Part I, Item 1A, Risk Factors and subsequent quarterly and current reports filed with the SEC.  There have been no material changes in these risk factors since that report, except as discussed in “Outlook” and“Liquidity, Capital Resources and Financial Position” in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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

Issuer Purchases of Equity Securities 

**           **Since 2005, our board of directors has authorized the expenditure of up to $55 million to repurchase shares of our common stock and ourOriginal 4.25% Convertible Notes due 2023 (now our 11.25% Convertible Secured Notes due 2023).

            As of December 31, 2008, we had $10.1 million remaining within the program for purchases.  In the first quarter of 2009, we purchased 2.6 million shares of ourcommon stock and $1.8 million par value ($1.1 million book value) of our 11.25% Convertible Secured Notes due 2023 for approximately $4.0 million.  In the second quarter of 2009, we purchased 0.4 million shares of our common stock and $75,000 par value of our11.25% Convertible Secured Notes due 2023 for approximately $0.6 million.  In August 2009, we announced that our board of directors had authorized an additional $10 million for the previously announced securities repurchase program.  In the third quarter of2009, we purchased $6.8 million par value of our 11.25% Convertible Secured Notes due 2023 for approximately $5.8 million, leaving a current balance of $9.7 million within the program for additional purchases.
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**Table of Contents**

**Period**

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

**(b) Average price paid per share(1)**

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

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

 

 

July 1 to July 31, 2009

 

(3

) 

$

1.59

 

—

 

$

5.5

August 1 to August 31, 2009

20

$

1.56

—

$

10.0

September 1 to September 30, 2009

75

$

2.78

—

$

9.7

Total

92

$

2.55

—

$

9.7

(1) 

Amounts reflect total shares purchased which include those repurchased within our securities repurchase program as well as those withheld to satisfy individual employee tax obligations arising upon the vesting of restricted stockawards.  Shares withheld to satisfy individual employee tax obligations do not count against our securities repurchase program.

(2) 

Amounts shown relate to shares of our common stock repurchased within our securities repurchase program.

(3) 

Amounts shown reflect the remaining balance available for repurchases within our securities repurchase program.

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

               None.

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

               None.

**Item 5.  Other Information.**

               None.

**Table of Contents**

**Item 6.  Exhibits.**

3.1

  

Restated Certificate of Incorporation, as amended by the Certificate of Amendment dated July 1, 2008 and Certificate of Amendment dated October 1, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report onForm 10-Q for the quarter ended September 30, 2008 filed on November 12, 2008, File No. 1-31300).

 3.2

  

 Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on May 24, 2007, File No. 1-31300). 

 31.1

 Rule 13a-14(a)/15d-14(a) Certification by Chief Executive Officer.(1)

 31.2

 Rule 13a-14(a)/15d-14(a) Certification by Chief Financial Officer.(1)

 32.1

 Section 1350 Certificationby Chief Executive Officer.(2) 

 32.2

 Section 1350 Certificationby Chief Financial Officer.(2)

 

(1) Filed herewith.

(2) Furnished herewith.

**Table of Contents**

**SIGNATURES**

            Pursuant to the requirements of the Securities Exchange Act of 1934, ExpressJet Holdings, Inc. has duly caused this report to be signed on its behalf by the undersignedhereunto duly authorized.

 

                      

**EXPRESSJET HOLDINGS, INC.**(Registrant)

Date:  November 13, 2009

                       

/s/ PhungNgo-Burns                                     

       

Phung Ngo-Burns Vice President and Chief Financial Officer (Principal Financial Officer)

   

Date:  November 13, 2009

                       

/s/ RobertBickmore                                       

       

Robert Bickmore Senior Director and Controller (Principal Accounting Officer)
**