UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2004

Commission No. 0-27288

EGL, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(281) 618-3100

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

Not Applicable

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

Common Stock, $.001 par value

Rights to Purchase Series A Preferred Stock

(title of class)

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 the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES   X      NO ____

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  YES   X      NO ____

The aggregate value of the voting stock held by non-affiliates of the registrant as of June 30, 2004 was $930.3 million, based on the last reported sale price of common stock on the last business day of the registrant’s most recently completed second fiscal quarter.

At March 15, 2005, the number of shares outstanding of registrant’s Common Stock was 52,198,063 (net of 926,157 treasury shares).

DOCUMENTS INCORPORATED BY REFERENCE

The definitive proxy statement for the Registrant’s 2005 Annual Meeting of Shareholders is incorporated by reference in Part III of this Form 10-K.  Such definitive proxy statement will be filed with the Securities and Exchange Commission not later than 120 days subsequent to the Registrant’s fiscal year end of December 31, 2004.

TABLE OF CONTENTS

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PART I

ITEM 1.

Business

General

EGL, Inc. is a leading global transportation, supply chain management and information services company dedicated to providing flexible logistics solutions on a price competitive basis.  Our services include air and ocean freight forwarding, customs brokerage, local pick up and delivery service, materials management, warehousing, trade facilitation and procurement and integrated logistics and supply chain management services.  We provide value-added services in addition to those customarily provided by traditional air freight forwarders, ocean freight forwarders and customs brokers.  These services are designed to provide global logistics solutions for customers in order to streamline their supply chain, reduce their inventories, improve their logistics information and provide them with more efficient and effective domestic and international distribution s trategies in order to enhance their profitability.

We believe we are one of the largest forwarders of domestic and international air freight based in the United States.  We have a network of approximately 400 facilities, agents and distribution centers located in over 100 countries on six continents featuring advanced information systems designed to maximize cargo management efficiency and customer satisfaction.  Each of our facilities is linked by a real-time, online communications tool that speeds the two-way flow of shipment data and related logistics information between origins and destinations around the world.

We trade on the NASDAQ Stock Market under the symbol “EAGL” and were incorporated in Texas in 1984.

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”).  You may read and copy any document we file with the SEC at the SEC’s public reference room at 450 Fifth Street, NW, Washington, D.C. 20549.  Please call the SEC at 1-800-SEC-0330 for information on the public reference room.  The SEC maintains a website that contains annual, quarterly and current reports, proxy statements and other information that issuers (including EGL, Inc.) file electronically with the SEC.  The SEC’s website is http://www.sec.gov.

Our website is http://www.eaglegl.com.  We make available free of charge through our internet site, via a link to the SEC’s website, our annual reports on Form 10-K; quarterly reports on Form 10-Q; current reports on Form 8-K; and any amendments to those reports filed or furnished pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC.  We also make available on our website our Corporate Governance Guidelines and information about our Board of Directors, including committee charters.  The information on our website is not incorporated by reference into and is not a part of this report.

Industry Overview

As business requirements for efficient and cost-effective distribution services have increased, so have the importance and complexity of effective supply chain management.  Businesses increasingly strive to minimize inventory levels with just-in-time processes, perform manufacturing and assembly operations in multiple locations and distribute products to numerous destinations.  As a result, companies frequently want expedited or time-definite shipment services.  Time-definite shipments are delivered at a specific time and are typically not expedited, which results in a lower rate than for an expedited shipment.

Customers have two principal freight forwarding alternatives:  an air freight forwarder or a fully-integrated carrier.  An air freight forwarder procures shipments from customers and arranges

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transportation of the cargo on a carrier.  An air freight forwarder may also arrange pick up from the shipper to the carrier and delivery of the shipment from the carrier to the recipient.  Air freight forwarders often tailor shipment routing to meet the customer’s price and service requirements.  Fully-integrated carriers provide pick up and delivery service, primarily through their own captive fleets of trucks and aircraft.  Because air freight forwarders select from various transportation options in routing customer shipments, they are often able to serve customers less expensively and with greater flexibility than integrated carriers.  In addition to the high fixed expenses associated with owning, operating and maintaining fleets of aircraft, trucks and related equipment, integrated carriers often impose significant restrictions on delivery schedules and shipment weight, size and type.  Air freight forwarders, however, generally handle shipments of any size and can offer a variety of customized shipping options.

Most air freight forwarders, like EGL, focus on heavier cargo and do not generally compete with integrated shippers of primarily smaller parcels, including FedEx Corporation and DHL Worldwide Express, Inc. Several integrated carriers, like United Parcel Service (“UPS”) and BAX Global, Inc. (“BAX”), do focus on shipments of heavy cargo in competition with forwarders.  On occasion, integrated shippers serve as a source of cargo space to forwarders.  Additionally, most air freight forwarders do not generally compete with the major commercial airlines, which, to some extent, depend on forwarders to procure shipments and supply freight to fill cargo space on their scheduled flights.

The air freight forwarding industry is highly fragmented.  Many companies in the industry are able to meet only a portion of their customers’ required transportation service needs.  Some national domestic air freight forwarders rely on networks of terminals operated by franchisees or agents.  We believe that the development and operation of company-owned terminals and staff under the supervision of our management have enabled us to maintain a greater degree of financial and operational control and service quality than franchise-based networks.

We believe there are several factors that are increasing demand for global logistics solutions.  These factors include:

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outsourcing of logistics functions;

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globalization of demand and supply chains and

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increased complexity of supply chains.

Our Competitive Advantages

As a global transportation, supply chain management and information services company, we believe that we are well-positioned to provide cost-effective and efficient solutions to address the demand in the marketplace for transportation and logistics services.  We believe that the most important competitive factors in our industry are quality of service (including reliability, responsiveness, expertise and convenience), scope of operations, geographic coverage, information technology and price.  We believe our primary competitive advantages are:  (i) our low cost non-asset based business model; (ii) our global infrastructure; (iii) our information technology resources and (iv) our diverse customer base.

Non-asset based business model.  With relatively no dedicated or fixed operating costs, we are able to leverage our network and offer competitive pricing and flexible solutions to our customers.  Moreover, our balanced product offering provides us with revenue streams from multiple sources and enables us to retain customers even as they shift from priority to deferred shipments of their products.  We believe our model allows us to provide low-cost solutions to our customers while also generating revenues from multiple modes of transportation and logistics services.

Global presence with North American infrastructure.  Our global infrastructure enables us to provide a closed-loop logistics chain to our customers worldwide.  Within North America, our infrastructure consists of our pick up and delivery network, ground and air networks, and logistics and

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warehousing capabilities.  Our ground and pick up and delivery networks enable us to service the growing deferred forwarding market while providing the domestic connectivity for international shipments once they reach North America.  In addition, we believe our heavyweight air network provides for lowest available costs on shipments, as we have no dedicated charters or leases and can capitalize on available capacity in the market to move our customers’ goods.  Lastly, we have enough warehouse and dock space available to leverage our North America infrastructure for future growth and/or to provide such space to our customers for their logistics needs.

Information technology resources.  A primary component of our business strategy is the continued development of advanced information systems to continually provide accurate and timely information to our management and customers.  Our customer delivery tools enable connectivity with our customers’ and trading partners’ systems, which leads to more accurate and up-to-date information on the status of shipments.

Diverse customer base.  While computers and other high-technology equipment manufacturers and retailers continue to comprise a significant portion of our customer base, our customer base has increasingly diversified into a variety of sectors including the retail, pharmaceutical and the oil and gas industries.  As such, we continue to focus on expanding lines of business with current customers and adding new accounts in similar and new categories of shippers.

As a global transportation, supply chain management and information services company, our revenues are generated from a number of services, including air freight forwarding, ocean freight forwarding, customs brokerage, logistics and other services.

Air Freight Forwarding and Consolidation Services

Our air freight forwarding operations include international and domestic air freight forwarding. Our total air freight forwarding revenues in 2004 were $1.8 billion, of which 26% were derived from domestic air freight forwarding within the United States and 74% were derived from international air freight forwarding.  Our air freight forwarding and related logistics services include the following:

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domestic freight forwarding,

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global freight forwarding,

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inland transportation of freight from point of origin to distribution center or the carrier’s cargo terminal and from our terminal in the destination city to the recipient (pick up and delivery),

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cargo assembly,

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export packing and vendor shipment consolidation,

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receiving and breaking down consolidated air freight shipments and arranging for distribution of the individual shipments,

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charter arrangement and handling,

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electronic transmittal of logistics documentation,

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electronic purchase order/shipment tracking,

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expedited document delivery to overseas destinations for customs clearance, and

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procurement of cargo insurance.

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We neither own nor operate any aircraft and, consequently, are not limited to specific delivery schedules or shipment sizes.  We arrange for transportation of our customers’ shipments via commercial airlines, air cargo carriers, third-party truck brokers, trucking companies and independent owner-operators of trucks and trailers.  We select the carrier for a shipment based on route, service capability, available cargo capacity and cost.  We charter cargo aircraft from time to time depending upon seasonality, freight volumes and other factors.

We generate air freight forwarding revenues by acting primarily as an indirect air carrier and, to a lesser extent, as an authorized cargo sales agent.  As an indirect air carrier, we obtain shipments from our customers, consolidate shipments bound for a particular destination, determine the best means to transport the shipment to its destination, select the direct carrier (an airline) on which the consolidated lot is to move and tender each consolidated lot as a single shipment to the direct carrier for transportation to a destination.  At the destination, we or our agent receive the consolidated lot, break it into its component shipments and distribute the individual shipments to the consignees.

Our rates are based on a charge per pound/kilogram.  We ordinarily charge the shipper a rate less than the rate that the shipper would be charged by an airline.  Due to the high volume of freight we manage, we generally obtain lower rates per pound/kilogram from airlines than the rates we charge our customers for individual shipments.  This rate differential is the primary source of our air freight forwarding net revenues.  Our practice is to make prompt adjustments in our rates to match changes in airline rates.

As an authorized cargo sales agent of most airlines worldwide, we also arrange for the transportation of individual shipments and receive a commission from the airline for arranging the shipments.  In addition, we provide the shipper with ancillary services, such as export documentation, for which we receive a separate fee.  When acting in this capacity, we do not consolidate shipments or have responsibility for shipments once they have been tendered to the airline.  We conduct our agency air freight forwarding operations from the same facilities as our indirect carrier operations and serve the same regions of the world.

Local transportation services are performed either by independent cartage companies or, in the United States and Canada, primarily by our local pick up and delivery operations.  See Domestic Local Delivery Services.  If delivery schedules permit, we will typically use lower-cost, overland truck transportation services, including those obtained through our domestic truck brokerage operations.  See Domestic Truck Brokerage Services.

We draw on our logistical expertise to provide forwarding services that are tailored to meet customer needs and, in addition to regularly scheduled service, we offer customized schedules.  Our services are customized to address each client’s individual shipping requirements, generally without restrictions on shipment weight, size or type.  Once the customer’s requirements for an individual shipment have been established, we proactively manage the execution of the shipment to ensure satisfaction of the customer’s requirements.

Our air freight forwarding business is not dependent on any one customer or industry.  We provide services to global or multinational customers as well as regional customers.  In 2004, approximately 59% of our net revenues were attributable to air freight forwarding.

We have an ongoing relationship with DHL Airways in which DHL provides us capacity in their North American air system.  This provides broad coverage into key markets.

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Domestic local delivery services

In the United States and Canada, we provide same-day local pick up and delivery services, both for shipments where we are acting as an air freight forwarder as well as for third-party customers requiring pick up and delivery within the same metropolitan area.  We believe that these services provide an important complement to our air freight forwarding services by allowing for quality control over the critical pick up and delivery segments of the transportation process as well as allowing for prompt, updated information on the status of a customer’s shipment at each step in the shipment process.  We focus on providing local pick up and delivery services to accounts with a relatively high volume of business, which we believe provides a greater potential for profitability than a broader base of small, infrequent customers.

As of December 31, 2004, local delivery services were offered in 78 of the 88 cities in the United States and Canada in which our terminals were located.  In all other cities, we have arrangements with agents to handle pick up and delivery services.  On-demand pick up and delivery services are available 24 hours a day, seven days a week.  In most locations, delivery drivers are independent contractors who operate their own vehicles.  Our Houston, Texas operations include a number of company-owned or leased trailers, trucks and other ground equipment primarily to service specific customer accounts.

Local pick up and delivery revenues were $289.8 million during 2004 and $254.5 million during 2003.  Approximately $166.7 million of these revenues during 2004 and $144.9 million of these revenues during 2003 were attributable to our air freight forwarding operations and were eliminated upon consolidation.  The remaining pick up and delivery revenues were attributable to local delivery services for third-party, non-forwarding business.  A substantial majority of the total cost of providing for local pick up and delivery of our freight forwarding shipments in 2004 and 2003 was attributable to our own local pick up and delivery services.  Revenues from domestic local delivery services, net of intercompany revenues, are included in air freight forwarding revenues.

Domestic truck brokerage services

We have established truck brokerage operations in the United States, Europe and China to provide logistical support to our forwarding operations and, to a lesser extent, to provide truckload service to selected customers.  In the United States, our truck brokerage operations operate under the Select Carrier Group (SCG) name.  Our truck brokerage services locate and secure capacity when overland transportation is the most efficient means of meeting customer delivery requirements, especially in cases of air freight customers choosing the economy delivery option.  We use internal truck brokerage operations to meet delivery requirements without having to rely on third-party truck brokerage services.  

Additionally, by providing for our own truck brokerage, we have been able to achieve greater efficiencies and utilize purchasing power over transportation providers.  We do not own a significant number of the trucks used in our truck brokerage operations and, instead, primarily use carriers or independent owner-operators of trucks and trailers on an as-needed basis.  We use our relationships with a number of independent trucking companies to obtain truck and trailer space.

As with local pick up and delivery services, we view our truck brokerage services primarily as a means of maintaining quality control and enhancing customer service of our core air freight forwarding business, as well as a means of capturing a portion of profits that would otherwise be earned by third parties.  Revenues from domestic truck brokerage, net of intercompany revenues, are included in air freight forwarding revenues.

International Ocean Freight Forwarding and Consolidation

As a global ocean freight forwarder, we arrange for the shipment of freight by ocean carriers and act as the agent of the shipper or the importer.  Our ocean freight forwarding and related logistics services include inland transportation from point of origin to distribution facility or port of export, cargo assembly,

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packing and consolidation, warehousing, electronic transmittal of documentation and shipment tracking, expedited document delivery, pre-alert consignee notification and cargo insurance.

A number of our facilities provide protective cargo packing, crating and specialized handling services for retail goods, government-specification cargo, consumer goods, hazardous cargo, heavy machinery and assemblies and perishable cargo.  Other facilities are equipped to handle equipment and material from multiple origins to overseas “turn-key” projects, such as manufacturing facilities or government installations.  We do not own or operate ships or assume carrier responsibility, preferring to retain the flexibility to tailor logistics, services and options to customer requirements.

Our compensation for ocean freight forwarding services is derived principally from commissions paid by shipping lines and from forwarding and documentation fees paid by customers, who are either shippers or consignees.  In 2004, approximately 3% of our net revenues were attributable to international ocean freight forwarding, including commissions, forwarding fees and associated ancillary services.

Our global operations as an indirect ocean carrier or NVOCC (non-vessel operating common carrier) are similar in some respects to our air freight consolidation operations.  We procure customer freight, consolidate shipments bound for a particular destination, determine the routing, select the ocean carrier or charter a ship and tender each consolidated lot as a single shipment to the direct carrier for transportation to a distribution point.  As a NVOCC, we generally derive our revenues from the spread between the rate charged to our customer and the ocean carrier’s charge to us for carrying the shipment, in addition to charging for other ancillary services related to the movement of the freight.  Because of the volume of freight we control and consolidate, we are generally able to obtain lower rates from ocean carriers than the rate the shipper woul d be able to procure.  In 2004, ocean freight consolidation and associated ancillary services contributed approximately 6% of our net revenues.

As a third party logistics provider (3PL), we assist our customers in the management and fulfillment of their purchase orders down to the part or stock keeping unit (sku) level.  We work closely with our customer’s suppliers to coordinate and arrange for the movement of the goods from the manufacturing line to the ports and ultimately to the destination distribution center or directly to their customers.

Customs Brokerage

We function as a customs broker at approximately 50 locations in the United States and in over 300 international locations through our network of offices and agents.  In our capacity as a customs broker, we prepare and file all formal documentation required for clearance through customs agencies, obtain customs bonds, in many cases facilitate the payment of import duties on behalf of the importer, arrange for payment of collect freight charges and assist the importer in obtaining the most advantageous commodity classifications and in qualifying for duty drawback refunds.  Our customs brokers and support staff have substantial knowledge of the complex tariff laws and customs regulations governing the payment of duty, as wel l as valuation and import restrictions in their respective countries.  Within the United States, we employ a significant number of personnel holding individual customs broker licenses.

We rely both on company-designed and third-party computer technology for customs brokerage activities performed on behalf of our clients.  We utilize the Automated Brokerage Interface information system, providing an online link with the Bureau of U.S. Customs and Border Protection (CBP).  In several global trading centers, in addition to the United States, our offices are connected electronically to customs agencies for expedited pre-clearance of goods and centralized import management.  Such online interface with customs agencies speeds freight release and provides nationwide control of clearances at multiple ports and airports of entry.

We work with importers to design cost-effective import programs that utilize our distribution and logistics services and computer technology.  Such services include:

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electronic document preparation,

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cargo routing from overseas origins to ports and airports of entry,

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foreign trade zone utilization,

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bonded warehousing,

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distribution of the cleared cargo to inland locations and

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duty drawback.

In many United States and overseas locations, our bonded warehouses enable importers to defer payment of customs duties and coordinate release of cargo with their production or distribution schedules.  Goods are stored under customs service supervision until the importer is ready to withdraw or re-export them.  We receive storage charges for these in-transit goods and fees for related ancillary services.  We also offer Foreign Trade Zone management and duty drawback services to provide customers with additional tools to maintain cost-effective import programs.

As a customs broker operating in the United States, we are licensed by the U.S. Treasury and regulated by the CBP.  Our fees for acting as a customs broker in the United States are not regulated, and we do not have a fixed fee schedule for customs brokerage services.  Instead, fees are generally based on the volume of business transacted for a particular customer, and the type, number and complexity of services provided.  In addition to fees, we bill the importer for amounts that we have paid on the importer’s behalf, including duties, collect freight charges and similar payments.  In 2004, approximately 16% of our net revenues were attributable to customs brokerage services.

We are committed to helping our customers secure their global supply chains from the global threat of terror.  As such, we have actively engaged in all U.S. government initiatives in the post September 2001 market.  We are transmitting advanced ocean shipment information to CBP via its Ocean Automated Manifest System (AMS).  We are prepared to meet the requirements of the Trade Act of 2002 and, pursuant to regulations established by the CBP, transmit advanced shipment information for all import and export shipments regardless of mode of transport.  In December 2003, we began the Prior Notice reporting of human and animal food shipments as required by the U.S. Food and Drug Administration BioTerrorism Act.  Further, all of our facilities have been registered with the U.S. Food and Drug Administration as required by the BioTerrorism Act to ensure that we can meet the global transportation needs of our customers.  We are also anticipating and preparing for similar security initiatives in other jurisdictions outside of the U.S.  As a result, we believe our customs brokerage strengths include the following:

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over 100 years of experience in importing goods into the United States;

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ISO certified desk level processes;

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infrastructure of licensed professionals;

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Customs-Trade Partners Against Terrorism, or C-TPAT, partner engaged in supply chain security; and

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formal on-going training programs to ensure our expertise in U.S. import laws and regulations.

Logistics and Other Services

Customers increasingly demand more than the movement of freight from their transportation suppliers.  To meet these needs, suppliers seek to customize their services, by, among other things,

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providing information on the status of materials, components and finished goods throughout the logistics pipeline and performance reports on and proof of delivery for each shipment.  We provide a range of logistics services, distribution and materials management services, international insurance services, global project management services and trade facilitation services.  In 2004, approximately 16% of our net revenues were attributable to logistics and other services.

Logistics services

We use our logistics expertise to maximize the efficiency and performance of our customers’ supply chains by providing solutions tailored to their specific needs.  We provide logistics services to our clients that are transactional or commodity based, have pricing models that are contractual (fixed or variable) where we focus mainly on reducing our customers’ cost structure and providing specialized services (e.g., order processing, product configuration).  In addition, we provide transportation consulting services and make our expertise and resources available to assist customers in balancing their transportation needs against budgetary constraints by developing logistics plans.  We staff and manage the shipping departments of some of our customers that outsource their transportation management function.  We also provide other ancillary se rvices, including electronic data interchange, customized shipping reports, computerized tracking of shipments, air charters, cargo assembly and protective packing and crating.

Distribution and materials management services

We offer a wide range of customized inbound logistics and distribution management of our customers’ inventory.  We offer these materials management services primarily in conjunction with the transportation of cargo.  These services are provided in a number of our owned and leased logistics facilities in many locations throughout the world.  During 2004, we continued our program of improving existing facilities to meet customer needs.  Our distribution and materials management services include inventory control, order processing, import and export freight staging, protective and specialized packing and crating, pick-and-pack operations, containerization, consolidation and deconsolidation and special handling for perishables, hazardous materials and heavy-lift equipment.  For import shipments, we provide bonded warehouse services and, in cert ain locations, Free Trade Zone services.  These warehouse and distribution services complement our other transportation services, including the information systems tools that are the enabler of the integrated logistics solutions we offer to customers.

Trade facilitation services

Our EGL Trade Services, Inc. subsidiary specializes in providing procurement, financial and distribution management services to multinational customers.  EGL Trade Services purchases both raw materials for manufacturing and finished goods for distribution, then coordinates their global deployment, as directed by the customer.  EGL Trade Services delivers its services through custom-designed Vendor and Distribution Hub programs.  Through EGL Trade Services, we are able to coordinate a customer’s procurement, logistics, transportation and distribution activities within a single supply chain program.  This enables us to optimize customer supply chains by streamlining the material, information and financial flows through integration of the specific supply chain processes and elimination of redundant transactions.

Insurance

We arrange international insurance for our customers in connection with our air freight and ocean freight forwarding operations.  Insurance coverage is frequently tailored to a customer’s shipping program and is procured for the customer as a component of our integrated logistics.  We also arrange for surety bonds for importers as part of our customs brokerage activities.  We report insurance revenues in air freight forwarding, ocean freight forwarding or customs brokerage and other revenues based on the nature of the insured shipment.

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Information Systems

A primary component of our business strategy is the continued development of advanced information systems.  We have invested substantial management and financial resources in the development of our information systems in an effort to provide accurate and timely information to our management and customers.  We believe that our systems have been instrumental in the productivity of our personnel, tracking of revenues and costs and the quality of our operations and service, and have resulted in substantial reductions in paperwork, and expedited the entry, processing, retrieval and internal dissemination of critical information.  These systems also enable us to provide customers with accurate and up-to-date information on the status of their shipments through a wide range of media, which has become increasingly important.

We continue to expand our product offering to provide air, ocean and ground transportation services, warehousing and inventory management, customs and purchase order processing.  Each of the services is supported by specific computer applications that facilitate the operational processes.  In addition, we image many of the documents to support proof of delivery, compliance and retention.

We continue to invest in our information systems technology in order to provide a flexible, scalable information system environment that provides a seamless flow of data across the globe, improves our ability to manage customer expectations, and increases operational efficiencies throughout our organization.  

We have organized our computer applications to support the supply chain process.  These applications are grouped into four broad categories as follows:

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Transportation Management Systems, which include our traditional freight forwarding and consolidation systems, our pick up and delivery systems for dispatching our owner operated vehicles and route optimization systems for our dedicated fleet of vehicles.

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Regulatory Management Systems, which support our export and import processing.  These are country specific to comply with local regulatory and reporting requirements.

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Material Management Systems, for our logistics, warehouse management and distribution operations.

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Financial Management Systems, for our global accounting, intercompany settlement, receivables and payable management, consolidation, and internal and external financial reporting.

Some of these applications are linked together through our data repositories or data warehouse to enable us to deliver information and provide visibility both internally and externally.

Currently our Information Technology strategic initiatives include:

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continuing to focus on operating efficiencies and the integration of our service applications to further expand and enhance the value of our supply chain management programs, eliminating duplicate data entry on multiple systems;

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developing customer oriented information delivery tools using extranets and data marts, which provide our customers direct access to information associated with their transportation, inventory and logistics activity;

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continuing to use the Internet to provide easy access to this information using web-based tools;

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upgrading our financial management, human resources and international operational systems on a global basis; and

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continuing to expand our business connectivity with our customers’ systems.  This includes, but is not limited to, receiving shipment requests, advance shipment notices, commercial invoices and other data electronically from our customers and providing status information electronically back to our customers.

Sales and Marketing

We market services and supply chain solutions through a global organization of nearly 550 full-time sales people.  Our sales organization continues to be one of our differentiating factors in the marketplace.  All of our leaders, from senior management down to the station managers, support our sales people with an active and targeted selling approach.  Our managers at each station are responsible for customer service and the daily execution of customer requirements focusing on a level of service that we believe will exceed customer expectations.  This includes proactively managing existing customer requirements for accounts with national and global scope as well as coordinating and communicating requirements for local customers or national/global account affiliates.  Our station managers are responsible for the overall results of their facility and are empowered to make decisions to support our customers and return a fair profit.  In addition, our divisional and regional managers are responsible for the financial performance of the assigned stations within their division or region.  Our employees are available 24 hours a day, seven days a week to respond to our customers.

Customer retention and strengthening current relationships to participate in new business opportunities is important to us, and we emphasize this throughout our organization.  Our logistics or “non-transportation” revenues have grown at a greater rate than our transportation revenue, and we will continue to market, design and execute supply chain solutions aimed at reducing our customer’s delivery costs and strengthening our customer alliances.  We continue to emphasize the development of national and global accounts while aggressively targeting local accounts where we can leverage our array of services and North America network.  The larger, more complex accounts typically have many requirements ranging from very detailed standard operating procedures on international opportunities to customized information technology requirements.  O ur global network allows us to provide one-stop shopping solutions for these multi-national organizations.  We believe our recent growth and cost optimization has enabled us to more effectively compete for and obtain many new accounts.

Customers

Our customers are manufacturers and distributors of a vast array of goods in many different industries including, but not limited to, electronic and high-technology, automotive, oil and gas, energy, retail, pharmaceutical and health care, machinery, printed matter, trade show materials and aerospace.  We also continue to expand our business with government agencies and defense entities globally.  In 2004, no customer accounted for more than 5% of our revenues.  Despite this healthy diversification of customers, adverse conditions in some of our larger business sectors could have an impact on our business should there be a significant decrease in our customers’ volumes.  We expect that demand for our services, and consequently results of operations will continue to be sensitive to domestic and global economic conditions and other factors we canno t directly control.  As such, our focus will remain on expanding lines of business with current customers and adding new accounts through our field and global sales teams.

In 2004, our principal customers included shippers of:

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computers and other electronic and high-technology equipment,

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automotive and aerospace components,

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governmental and military equipment,

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retail goods,

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fashion/apparel,

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trade show exhibit materials,

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telecommunications equipment,

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pharmaceuticals,

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printed and publishing materials,

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oil and gas equipment and

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construction and heavy equipment.

Regulation

Failure to comply with the applicable regulations or to maintain required permits or licenses could result in substantial fines or revocation of our permits or authorities.  We cannot give assurance as to the degree or cost of future regulations on our business.  Some of the regulations affecting our operations are described below.

Air freight forwarding

Our business is subject to regulation as an indirect air cargo carrier under the Federal Aviation Act by the U.S. Department of Transportation, although air freight forwarders are exempted from most of the Federal Aviation Act’s requirements by the Economic Aviation Regulations.  We are also regulated by the Transportation Security Administration and the Department of Homeland Security.  Our foreign air freight forwarding operations are subject to similar regulation by the regulatory authorities of the respective foreign jurisdictions.  The air freight forwarding industry is subject to regulatory and legislative changes that can affect the economics of the industry by requiring changes in operating practices or influencing the demand for, and the costs of providing, services to customers.

Domestic local delivery services and domestic truck brokerage services

Our delivery operations are subject to various state and local regulations and, in many instances, require permits and licenses from state authorities.  In addition, some of our delivery operations are regulated by the Surface Transportation Board of the U.S. Department of Transportation.  These federal, state and local authorities have broad powers, including the power to approve specified mergers, consolidations and acquisitions and to regulate the delivery of some types of shipments and operations within particular geographic areas.  The Surface Transportation Board has the power to regulate motor carrier operations, to approve some rates, charges and accounting systems and to require periodic financial reporting.  Interstate motor carrier operations are also subject to safety requirements prescribed by the U.S. Department of Transportation.   ;In some potential locations for our delivery operations, state and local permits and licenses may be difficult to obtain.  Our truck brokerage operations subject us to regulation as a property broker by the Surface Transportation Board, and we have obtained a property broker license and surety bond.

Ocean freight forwarding

The Federal Maritime Commission, or FMC, regulates our ocean forwarding operations.  The FMC licenses ocean freight forwarders.  Indirect ocean carriers (non-vessel operating common carriers)

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are subject to FMC regulation, under the FMC tariff filing and surety bond requirements, and under the Shipping Act of 1984, particularly those terms proscribing rebating practices.

Customs brokerage

Our United States customs brokerage operations are subject to the licensing requirements of the U.S. Department of Homeland Security and are regulated by the U.S. Customs and Border Protection (CBP).  We have received our customs brokerage license from the CBP and additional related government approvals to conduct customs business in the U.S.  Our foreign customs brokerage operations are licensed in and subject to the regulations of their respective countries.

Security

As security measures have increased around the globe and the United States focuses more heavily on import security, we have adopted certain measures to be well-positioned for the new U.S. government focus on security.  The U.S. Department of Homeland Security and the CBP have certified us as a member of the C-TPAT.  Further we were one of the first 100 members of C-TPAT to have our security procedures, standards and technology validated by CBP in 2003.  As part of our layered approach to supply chain security, we have also been certified as a member of the Business Anti Smuggling Coalition (BASC).  In December 2003, we began the Prior Notice reporting of human and animal food shipments as required by the U.S. Food and Drug Administration BioTerrorism Act.  Further all of our facilities have been registered with the U.S. Food and Drug Administrat ion as required by the BioTerrorism Act to ensure that we can meet the global transportation needs of our customers.  We are also anticipating and preparing for similar security initiatives outside the U.S.

Logistics and other services

Some portions of our warehouse operations require:

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registration under the Gambling Act of 1962 and a license or registration by the U.S. Department of Justice,

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authorizations and bonds by the U.S. Treasury,

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a license by the Bureau of Alcohol, Tobacco & Firearms of the U.S. Treasury and

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approvals by the U.S. Customs Service.

Environmental

In the United States, we are subject to federal, state and local provisions relating to the discharge of materials into the environment or otherwise for the protection of the environment.  Similar laws apply in many foreign jurisdictions where we operate or may operate in the future.  Although current operations have not been significantly affected by compliance with these environmental laws, governments are becoming increasingly sensitive to environmental issues, and we cannot predict what impact future environmental regulations may have on our business.  We do not anticipate making any material capital expenditures for environmental control purposes.

Employees

We had over 10,200 employees at December 31, 2004, including approximately 550 sales personnel.  None of our employees are currently covered by a collective bargaining agreement.  We have experienced no work stoppages and consider our relations with employees to be good.  Our owned or leased vehicles were driven by approximately 130 of our employees as of December 31, 2004.

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We pay our entire sales force and most of our operations personnel what we believe is significantly more than the industry average through the use of incentive and commission programs.  We offer a broad-based compensation plan to these employees.  Sales personnel are paid a gross commission based on the net revenues of shipments sold.  Operations personnel and management are paid bonuses based on the profitability of their locations as well as on our overall profitability.

Independent contractors

We also had contracts with approximately 1,950 independent owner/operators of local delivery services as of December 31, 2004.  The independent owner/operators own, operate and maintain the vehicles they use in their work for us and may employ qualified drivers of their choice.

Executive Officers of the Registrant

The following table sets forth certain information concerning our executive officers as of March 8, 2005:

James R. Crane.  Mr. Crane has served as our Chief Executive Officer and Chairman of the Board of Directors since he founded EGL in March 1984.

Elijio V. Serrano.  Mr. Serrano joined us as Chief Financial Officer in October 1999 and has served as a director since 2000.  From 1998 to 1999, he served as Vice President and General Manager for a Geco-Prakla business unit at Schlumberger Limited, an international oilfield services company.  From 1992 to 1998, Mr. Serrano served as controller for various Schlumberger business units.  From 1982 to 1992, he served in various financial management positions within the Schlumberger organization.

E. Joseph Bento.  Mr. Bento was appointed President of North America in July 2002 and Chief Marketing Officer in September 2000.  He joined us in February 1992 as an account executive.  From March 1994 to December 1994, he served as a sales manager in Los Angeles, and from January 1995 to September 1997, he served as Regional Sales Manager (West Coast).  From June 1994 to May 1995, he also served as station manager in Los Angeles.  Prior to assuming his current position, Mr. Bento held the position of Executive Vice President of Sales and Marketing from March 1999 to August 2000 and Vice President of Sales and Marketing from October 1997 to February 1999.

Ronald E. Talley.  Mr. Talley was appointed Chief Operating Officer in March 2005.  Mr. Talley has also served as President of Select Carrier Group, a wholly owned subsidiary of EGL since July 2002.  He served as Chief Operating Officer, Domestic from December 1997 to June 2002.  He joined us in 1990 as a station manager and later served as a regional manager.  In 1996, he served as a Senior Vice President of Eagle Freight Services, and our truck brokerage and charter operations, and most recently, he has served as Senior Vice President of our air and truck operations.  Prior to joining us, Mr. Talley served as a station manager at Holmes Freight Lines from 1982 to 1990.  From 1979 to 1982, Mr. Talley held a variety of management positions with Trans Con Freight Lines.  From 1969 to 1979, Mr. Talley served in several manage ment positions at Roadway Express.

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Vittorio Favati.  Mr. Favati has been the Executive Vice President of Asia Pacific since 2001.  Mr. Favati has been with us since 1987, serving in various roles throughout the organization.  Mr. Favati received his Bachelors Degree of Business from Western Illinois University in 1983.

Forward-Looking Statements

The statements contained in this document (including the portion, if any, appended to this Form 10-K or incorporated by reference) that are not historical facts are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act.  Such forward-looking statements include, but are not limited to, those relating to the following:

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Forward-looking statements in this Form 10-K (including the portion, if any, appended to the Form 10-K or incorporated by reference) are also identifiable by use of the following words and other similar expressions, among others:

Our actual results may differ significantly from the results discussed in the forward-looking statements.  Such statements involve risks and uncertainties, including, but not limited to, the matters discussed in the subsection entitled “Factors That May Affect Future Results and Financial Condition” below, as well as elsewhere in this document and in our other filings with the Securities and Exchange Commission.  If one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may vary materially from those indicated.  We undertake no responsibility to update for changes related to these or any other factors that may occur subsequent to this filing for any reason.

Factors That May Affect Future Results and Financial Condition

You should read carefully the following factors and all other information contained in this report.  If any of the risks and uncertainties described below or elsewhere in this report actually occur, our business, financial condition or results of operations could be materially adversely affected.  In that case, the trading price of our common stock could decline, and an investor may lose all or part of his investment.

We may not be successful in growing either internally or through acquisitions.

Our growth strategy primarily focuses on internal growth in domestic and international freight forwarding, local pick up and delivery, customs brokerage and truck brokerage and, to a lesser extent, on acquisitions.  Our ability to grow will depend on a number of factors, including:

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existing and emerging competition,

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ability to open new terminals,

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ability to operate profitably in the face of competitive pressures,

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the recruitment, training and retention of operating and management employees,

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the strength of demand for our services,

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the availability of capital to support our growth and

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the ability to identify, negotiate and fund acquisitions when appropriate.

Acquisitions involve risks, including those relating to:

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the integration of acquired businesses, including different information systems,

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the retention of prior levels of business,

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the retention of employees,

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the diversion of management attention,

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the amortization of acquired intangible assets and

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unexpected liabilities.

We cannot assure you that we will be successful in implementing any of our business strategies or plans for future growth.

Risks associated with operating in international markets could restrict our ability to expand globally and harm our business and prospects.

We market and sell our services in the United States and internationally.  We anticipate that international sales will continue to account for a significant portion of our total revenues for the foreseeable future.  We presently conduct our international sales in the following geographic areas:  North America, Europe, Asia, Middle East, India, Africa, South America and South Pacific.  Economic conditions, including those resulting from wars, civil unrest, acts of terrorism and other conflicts may adversely affect the global economy, our customers and their ability to pay for our services.  There are numerous risks inherent in conducting our business internationally, including:

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general political and economic instability in international markets, including heightened security measures, which could impede our ability to deliver our services to customers and adversely affect our results of operations,

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changes in regulatory requirements, which could restrict our ability to deliver services to our international customers,

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export restrictions, tariffs, licenses and other trade barriers, which could prevent us from adequately equipping our facilities worldwide,

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differing technology standards across countries, which may impede our ability to integrate our services across international borders,

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increased expenses associated with marketing services in foreign countries, which could affect our ability to compete,

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difficulties in staffing and managing foreign operations,

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the imposition of additional taxes in foreign jurisdictions,

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complex foreign laws and treaties, which could adversely affect our ability to operate our business profitably, and

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difficulties in collecting accounts receivable.

These and other risks could impede our ability to manage our international operations effectively, limit the future growth of our business, increase our costs and require significant management attention.

Events impacting the volume of international trade and international operations could adversely affect our international operations.

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Our international operations are directly related to and dependent on the volume of international trade, particularly trade between the United States and foreign nations.  This trade, as well as our international operations, are influenced by many factors, including:

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economic and political conditions in the United States and abroad,

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major work stoppages,

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difficulties in managing overseeing foreign operations,

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exchange controls and currency fluctuations,

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wars, civil unrest, acts of terrorism and other conflicts, and

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United States and foreign laws relating to tariffs, trade restrictions, foreign investment and taxation.

Trade-related events beyond our control, such as a failure of various nations to reach or adopt international trade agreements or an increase in bilateral or multilateral trade restrictions, could have a material adverse effect on our international operations.

Our business is subject to seasonal trends.

Historically, our operating results have been subject to seasonal trends, when measured on a quarterly basis.  Typically, our first fiscal quarter is weaker when compared to our other fiscal quarters of the corresponding year.  The seasonality of our business is a result of a variety of factors, including holiday seasons, consumer demand, economic conditions and other factors beyond our control.  As we cannot predict or influence these factors, we cannot be certain that the seasonal trends will continue in future periods as they have in our historical operating patterns.

Currency devaluations in the foreign markets in which we operate could decrease demand for our services.

We denominate some of our foreign sales in U.S. dollars.  Consequently, decreases in the value of local currencies relative to the U.S. dollar in the markets in which we operate could adversely affect the demand for our services by increasing the price of our services in the currencies of the countries in which they are sold.

Currency fluctuations in the foreign markets in which we operate could result in currency translation exchange gains or losses or could increase or decrease the book value of our net assets.

Appreciation or depreciation in the value of local currencies relative to the U.S. dollar in the markets in which we operate will result in currency translation exchange gains or losses, which, if the appreciation or depreciation is significant, could be material.  Additionally, the revenues, expenses, assets and liabilities of our international operations are denominated in each country’s local currency.  As such, when the value of those revenues, expenses, assets and liabilities are translated into U.S. dollars, foreign currency exchange rates may adversely affect our results of operations and the book value of our net assets.

Our effective income tax rate will impact our results of operations, our cash flows and our profitability.

As a global company, we generate taxable income in different countries throughout the world, with different effective income tax rates.  Our future effective income tax rate will be impacted by a

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number of factors, including the geographical composition of our worldwide taxable income.  If the United States or foreign tax authorities were to change applicable tax laws or successfully challenge the manner in which our income taxes are currently recognized, our effective income tax rate could increase, which would adversely impact our cash flow and profitability.

If we fail to develop, deploy and integrate financial and operational information technology systems or if we fail to upgrade or replace our information technology systems to handle increased volumes and levels of complexity, meet the demands of our customers and protect against disruptions of our operations, our business may be seriously harmed.

We are undertaking various initiatives to upgrade the information technology systems supporting our services in order to improve operational efficiencies and increase connectivity with our customers’ and trading partners’ systems in a timely and cost-effective manner.  The failure of the hardware or software that supports our information technology systems, the loss of data contained in the systems, or the inability to access or interact with our customers electronically through our web site could significantly disrupt our operations, prevent customers from placing orders or cause us to lose customers.  If our information technology systems are unable to manage additional volume for our operations as our business grows, our service levels and operating efficiency could decline.  If we fail to hire and retain qualified personnel to implement, mai ntain and protect our information technology systems, or if we fail to upgrade our systems to meet demands of our customers, our business could be seriously harmed.

If we fail to protect our confidential information, including our intellectual property rights, we may lose market share and our financial condition may be materially adversely affected.

We rely on a combination of copyright, trademark and trade secret laws and confidentiality procedures to protect our intellectual property rights and other confidential information.  These protections may not be sufficient, and they do not prevent independent third parties from developing competitive products and services.  A failure to protect our confidential information from unauthorized use or disclosure could diminish the value of our confidential information and our financial condition may be materially adversely affected.

Heightened security measures as a result of terrorist threats have created economic, political and regulatory uncertainties, some of which may materially harm our business and prospects and our ability to conduct business.

The national and global responses to terrorist threats, including heightened security measures, may materially and adversely affect us in ways we cannot currently predict.  Some of the possible future effects include reduced business activity by our customers, changes in security measures or regulatory requirements for air travel and reductions in available commercial flights that may increase our costs or make it more difficult for us to arrange for the transport of our customers’ freight and increased credit and business risk for customers in industries affected by heightened security measures and threats of additional terrorist attacks.

Our ability to serve our customers depends on the availability of cargo space from other parties.

Our ability to serve our customers depends on the availability of air and sea cargo space, including space on passenger and cargo airlines and ocean carriers that service the transportation lanes that we use.  Shortages of cargo space are most likely to develop during holidays (with increased consumer spending) and in especially heavy transportation lanes (such as in Asia).  In addition, available cargo space could be reduced as a result of decreases in the number of passenger airlines or ocean carriers serving particular transportation lanes at particular times.  This could occur as a result of economic conditions, transportation strikes, regulatory changes and other factors beyond our control.  Our future operating results could be adversely affected by significant shortages of suitable cargo space and associated changes in policies such as increas es in rates and the cost of fuel, taxes and labor charged by passenger airlines or ocean carriers for cargo space.

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We are subject to market pricing by our suppliers (airlines, steamships, and trucking companies).  If we are not able to pass these costs on to our customers, our profitability will be impacted.

“Sell” rates to our major customers are normally agreed upon for the term of the contract, with provisions allowing for fuel, war and security surcharges.  The prices we pay for cargo space with our major suppliers is dependent on our volumes and relationships with our suppliers.  If our relationships deteriorate or there are changes in management with our suppliers or with us that negatively impact such relationships, we may be unable to negotiate similar rates with our suppliers for such cargo space.

We may lose business to competitors.

Competition within the freight industry is intense.  We compete in North America primarily with fully integrated carriers and smaller freight-forwarders.  Internationally, we compete primarily with the major European based freight forwarders, Expeditors International, BAX, UPS and other freight forwarders.  We expect to encounter continued competition from those forwarders that have a predominantly international focus and have established international networks, including those based in the United States and Europe.  We also expect to continue to encounter competition from other forwarders with nationwide networks, regional and local forwarders, passenger and cargo air carriers, trucking companies, cargo sales agents and brokers, and carriers and associations of shippers organized for the purpose of consolidating their members’ shipments to obta in lower freight rates from carriers.  As a customs broker and ocean freight forwarder, we encounter strong competition in every port in which we do business, often competing with large domestic and foreign firms as well as local and regional firms.  Our inability to compete successfully in our industry could cause us to lose customers or lower the volume of our shipments.

Our industry is consolidating and if we are unable to gain sufficient market presence in our industry, we may not be able to compete successfully against larger, global companies in our industry.

There has been an increasing trend in our industry toward consolidation of the niche players and larger companies, which are attempting to increase their global operations through the acquisition of freight forwarders and contract logistics providers.  If we are unable to gain sufficient market share in our industry through internal growth, we may not be able to compete successfully against larger, global companies in our industry.

If we are unable to remediate material weaknesses within our internal control over financial reporting, our results of operation could be materially adversely affected.

Based on our assessment of the effectiveness of our internal control over financial reporting, management concluded that, as of December 31, 2004, we did not maintain effective internal control over our financial reporting due to material weaknesses in our accounting for income taxes and account reconciliation processes, procedures and controls.  See “Item 9A – Controls and Procedures.”  Our inability to remediate material weaknesses in our internal control over financial reporting could result in material misstatements in our financial statements, which could result in additional restatements or impact our ability to timely file our financial statements in the future.

Our success depends on the efforts of our founder and other key managers and personnel.

Our founder, James R. Crane, continues to serve as Chief Executive Officer and Chairman of the Board of Directors.  We believe that our success is highly dependent on the continuing efforts of Mr. Crane and other executive officers and key employees, as well as our ability to attract and retain other skilled managers and personnel.  The loss of the services of any of our key personnel could have a material adverse effect on us.

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If we are unable to limit our exposure for customers’ claims through contract terms and insurance coverage, we could be required to pay large amounts as compensation for their claims and our results of operations could be materially adversely affected.

Typically, we limit our liability in contracts with our customers for loss or damage to their goods.  However, as a freight forwarder, the airline or ocean carriers that we use generally assume the same responsibility to us as we assume to our customers.  When we act in the capacity of an authorized agent for an air or ocean carrier, the carrier, rather than us, assumes liability for the safe delivery of the customer’s cargo to its ultimate destination.  We have, from time to time, made payments to customers for claims related to our services.  Should we experience an increase in the number of such claims or an increase in liability pursuant to claims or unfavorable resolution of claims, our results could be adversely affected.  There can be no assurance that our insurance coverage will provide us with adequate coverage for such claims or t hat the maximum amount for which we are liable in connection with our services will not change in the future.  In addition, significant increases in insurance costs as a result of claims arising from our services could reduce our profitability.

We are subject to claims arising from our pick up and delivery operations.

We use the services of thousands of drivers in connection with our local pick up and delivery operations.  From time to time, these drivers are involved in accidents.  Although most of these drivers are independent contractors, we could be held liable for their actions.  Claims against us may exceed the amount of insurance coverage.  A material increase in the frequency or severity of accidents, liability claims or workers’ compensation claims, or unfavorable resolutions of claims, could materially adversely affect us.  In addition, significant increases in insurance costs as a result of these claims could reduce our profitability.

We could incur additional expenses or taxes if the independent owner/operators we use in connection with our local pick up and delivery operations are found to be “employees” rather than “independent contractors.”

The Internal Revenue Service, state authorities and other third parties have at times successfully asserted that independent owner/operators in the transportation industry, including those of the type we use in connection with our local pick up and delivery operations, are “employees” rather than “independent contractors.”  Although we believe that the independent owner/operators we use are not employees, and have tailored our program specifically to avoid this categorization, the IRS, state authorities or others could challenge this position, and federal and state tax or other applicable laws, or interpretations of applicable laws, could change.  If they do, we could incur additional employee benefit-related expenses and could be liable for additional taxes, penalties and interest for prior periods and additional taxes for future periods.< /P>

The failure of our policies and procedures which are designed to prevent the unlawful transportation or storage of hazardous, explosive or illegal materials could subject us to large fines, penalties or lawsuits.

We are subject to a broad range of foreign and domestic (including state and local) environmental, health and safety and criminal laws and regulations, including those governing discharges into the air and water, the storage, handling and disposal of solid and hazardous waste and the shipment of explosive or illegal substances.  In the course of our operations, we may be asked to arrange for the storage or transportation of substances defined as hazardous under applicable laws.  As is the case with any such operation, if a release of hazardous substances occurs on or from our facilities or from the transporter, we may be required to participate in the remedy of, or otherwise bear liability for, such release or be subject to claims from third parties whose property or person is injured by the release.  In addition, if our employees arrange for the storage or transportation of hazardous, explosive or illegal materials in violation of applicable laws or regulations, we may face civil or criminal fines or penalties, including bans on making future shipments in particular geographic areas.  In the event we are found to

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not be in compliance with applicable environmental, health and safety laws and regulations or there is a future finding that our policies and procedures fail to satisfy requisite minimum safeguards or otherwise do not comply with applicable laws or regulations, we could be subject to large fines, penalties or lawsuits.

Our failure to comply with governmental permit and licensing requirements could results in substantial fines or revocation of our operating authorities, and changes in these requirements could adversely affect us.

Our operations are subject to various state, local, federal and foreign regulations that in many instances require permits and licenses.  Moreover, costs for security as a result of governmental regulations that have been and will be adopted in response to terrorist activities and potential terrorist activities, government deregulation efforts, “modernization” of the regulations governing customs clearance and changes in the international trade and tariff environment could require material expenditures or otherwise adversely affect us.  We may not be able to pass these increased costs on to our customers in the form of rate increases or surcharges.  We cannot predict what impact future regulations may have on our business.  Our failure to maintain required permits or licenses, or to comply with applicable regulations, could result in substa ntial fines or revocation of our operating authorities.

Our chairman beneficially owns approximately 16.4% of our outstanding common stock and has the greatest influence of any of our stockholders.

James R. Crane beneficially owns approximately 16.4% of our outstanding common stock.  Based on the ownership positions of our current stockholders, his ability to influence matters submitted to a vote of stockholders is greater than any other stockholder.

Provisions of our charter, bylaws and shareholder rights plan and of Texas law may delay or prevent transactions that would benefit stockholders.

Our articles of incorporation and bylaws and Texas law contain provisions that may have the effect of delaying, deferring or preventing a change of control.  These provisions, among other things:

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authorize our Board of Directors to set the terms of preferred stock,

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provide that any stockholder who wishes to propose any business or to nominate a person or persons for the election as director at any meeting of stockholders may do so only if advance notice is given to our corporate secretary,

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restrict the ability of stockholders to take action by written consent and

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restrict our ability to engage in transactions with some 20% stockholders.

Because of these provisions, persons considering unsolicited tender offers or other unilateral takeover proposals may be more likely to negotiate with our board of directors rather than pursue non-negotiated takeover attempts.  In addition, we have adopted a shareholder rights plan that will cause substantial dilution to any person or group that attempts to acquire us without the approval of our board of directors.  The provisions of our charter, bylaws and shareholder rights plan may make it more difficult for our stockholders to benefit from transactions that are opposed by an incumbent board of directors.

ITEM 2.

Properties

The properties used in our domestic and foreign operations consist principally of air and ocean freight forwarding offices, customs brokerage offices and warehouse and distribution facilities.  Our freight forwarding terminal locations are typically located at or near major metropolitan airports and occupy between 1,000 and 509,000 square feet of leased or owned space and typically consist of offices,

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warehouse space, bays for loading and unloading and facilities for packing.  Terminals are managed by a station manager who is assisted by operation managers.  We also have locations that are limited to sales and administrative activities.  The leased terminals are under noncancelable leases that expire on various dates through 2025.  From time to time, we may expand or relocate terminals to accommodate growth.

The following table sets forth certain information as of December 31, 2004 concerning the number of our domestic and foreign facilities and freight handling terminals:

As of December 31, 2004, we leased our corporate office which occupied approximately 149,000 square feet of space in a facility located in Houston, Texas.

For further information regarding our lease commitments, see note 18 of the notes to our consolidated financial statements.

ITEM 3.

Legal Proceedings

In December 1997, the U.S. Equal Employment Opportunity Commission (“EEOC”) issued a Commissioner’s Charge pursuant to Sections 706 and 707 of Title VII of the Civil Rights Act of 1964, as amended (“Title VII”).  In the Commissioner’s Charge, the EEOC charged us and certain of our subsidiaries with violations of Section 703 of Title VII, as amended, the Age Discrimination in Employment Act of 1967, and the Equal Pay Act of 1963.

In May through July 2000, eight individuals filed suit against us in the United States District Court for the Eastern District of Pennsylvania in Philadelphia, alleging gender, race and national origin discrimination, as well as sexual harassment.  The individual plaintiffs sought to certify a class of approximately 1,000 of our current and former employees and applicants.

On December 29, 2000, the EEOC filed a Motion to Intervene in the Philadelphia litigation, which was granted by the Court in Philadelphia on January 31, 2001.  In addition, the Philadelphia Court also granted our motion that the case be transferred to the United States District Court for the Southern District of Texas – Houston Division where we had previously initiated litigation against the EEOC due to what we believed to have been inappropriate practices by the EEOC in the issuance of the Commissioner’s Charge and in the subsequent investigation.

On October 2, 2001, we and the EEOC announced the filing of a Consent Decree settlement. Under the Consent Decree, we agreed to pay $8.5 million into a fund to compensate individuals who claim to have experienced discrimination (“Settlement Fund”).  In addition, we agreed to contribute $500,000 to establish a Leadership Development Program (LDP).  In entering the Consent Decree, we made no admission of liability or wrongdoing.  The Consent Decree was approved by the District Court in Houston on October 1, 2001 and became effective on October 3, 2002 following the dismissal of all appeals related to the Decree.

The Claims administration process under the Consent Decree was completed by EGL and the EEOC in early 2005.  Of the 2,073 claims received, only 203 were deemed to be eligible for a monetary distribution from the Settlement Fund.  The total distribution amount for these 203 claims is approximately $903,000.  EGL and the EEOC submitted a proposed agreement to the Court in February 2005 regarding disbursements of the excess funds in the Settlement Fund.  On February 10, 2005 the

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Court entered an Order directing that EGL recapture $6.0 million plus accrued interest from the Settlement Fund.  Release of these funds is expected to result in $6.0 million in income in the first quarter of 2005.  The Court also approved the parties’ agreement to transfer $1.4 million to the LDP.  From that amount, EGL has reimbursed itself $582,000 for corporate funds previously expended on LDP expenses.  The Court further approved the parties’ agreement to retain $1.1 million in the Settlement Fund for the payment of eligible claims.  Notices are being sent currently to eligible claimants who will have a forty-five day period to accept a monetary distribution or “opt out” of the Consent Decree settlement.  Eligible claimants may also object to an award, but to do so they must notify the Claims Administrator within thirty days of the d ate of their eligibility notice.  To the extent any additional claims are determined to be eligible as a result of the objection process, any additional monetary distributions will be drawn from the $1.1 million reserved in the Settlement Fund.  If any funds remain in the Settlement Fund after payment of all claims, the remainder shall be deposited in the LDP.

To the extent any of the individual plaintiffs or any other persons who might otherwise be covered by the settlement opt out of the settlement, we intend to continue to vigorously defend against their allegations.  We currently expect to prevail in our defense of any remaining individual claims.  There can be no assurance as to what amount of time it will take to resolve any other lawsuits and related issues or the degree of any adverse affect these matters may have on our financial condition and results of operations.  A substantial settlement payment or judgment could result in a significant decrease in our working capital and liquidity and recognition of a loss in our consolidated statement of operations.

In July 2002, Kitty Hawk, Inc., a provider of air transportation services, filed a demand for binding arbitration against us with the American Arbitration Association to resolve its claim for freight transportation services rendered to us.  In response, we asserted certain counterclaims.  In July 2002, we recorded a liability of $1.5 million for our estimated exposure for Kitty Hawk’s claim.  Arbitration hearings were held during June 2003 and the parties submitted their final post-hearing briefs.  In August 2003, the arbitrators ruled in favor of Kitty Hawk, awarding Kitty Hawk $3.8 million.  We filed a motion to modify and correct the award, which was denied by the arbitrators in September 2003 and, therefore, we increased our liability to $3.8 million.  We paid Kitty Hawk $2.0 million in 2003 and the remaining balance of $1.8 millio n was paid during 2004.

In addition, we are party to routine litigation incidental to our business, which primarily involves other employment matters or claims for goods lost or damaged in transit or improperly shipped.  Many of the other lawsuits to which we are a party are covered by insurance and are being defended by our insurance carriers.  We have established accruals for these other matters and it is management’s opinion that resolution of such litigation will not have a material adverse effect on our consolidated financial position.  However, a substantial settlement payment or judgment in excess of our accruals could have a material adverse effect on our consolidated results of operations or cash flows.

ITEM 4.

Submission of Matters To a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of our fiscal year ended December 31, 2004.

PART II

ITEM 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock trades on the NASDAQ National Market tier of The NASDAQ Stock Market under the symbol EAGL.  The following table sets forth the quarterly high and low sales prices for each indicated quarter of 2003 and 2004.

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The closing price for our common stock was $24.81 on March 15, 2005.  There were approximately 329 stockholders of record (excluding brokerage firms and other nominees) of our common stock as of March 15, 2005.

Dividends

Since our initial public offering in November 1995, EGL has not paid cash dividends on our common stock.  It is the current intention of our management to retain earnings to finance the growth of our business in lieu of paying dividends.  Our credit facility contains covenants that restrict our ability to pay dividends unless we maintain certain leverage ratios.  See Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources for a discussion of our credit facility.

Convertible Subordinated Notes

As of December 17, 2004, all of the note holders of the entire $100 million aggregate principal amount of 5% convertible subordinated notes due December 15, 2006 converted their notes into an aggregate of 5,736,074 shares of common stock pursuant to the terms of the note and the indenture, dated as of December 7, 2001.  We received no consideration upon conversion of the notes into shares of our common stock.  The issuance of the shares into our common stock upon conversion of the notes is exempt from registration pursuant to Section 3(a)(9) of the Securities Act of 1933, as amended.  No commission or other remuneration was paid or given, directly or indirectly, by us in connection with the exchange of notes for common stock.

ITEM 6.

Selected Financial Data

The following table sets forth selected financial data that have been derived from our consolidated financial statements.  The 2003 and 2002 balance sheet data and 2001 statement of operations and balance sheet data have been restated to reflect adjustments that are further discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in note 2 of the notes to our consolidated financial statements.  The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto, included elsewhere in this report.

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(1)

2003 includes a charge of $2.3 million or $1.4 million net of tax ($0.03 per diluted share) for settlement of the claim by Kitty Hawk.  See note 18 of the notes to our consolidated financial statements.

(2)

2002, 2001 and 2000 include transaction, integration and restructuring charges related to the merger with Circle totaling $5.7 million or $3.5 million net of tax ($0.07 per diluted share), $14.0 million or $8.5 million net of tax ($0.18 per diluted share) and $67.4 million or $49.9 million net of tax ($1.07 per diluted share), respectively.

(3)

2001 includes a charge of $10.1 million or $6.2 million net of tax ($0.13 per diluted share) related to the EEOC legal settlement.  2003 includes a credit of $1.4 million or $870,000 net of tax ($0.02 per diluted share) for reversal of a portion of the EEOC legal settlement accrual recorded in 2001.  See note 17 of the notes to our consolidated financial statements.

(4)

2002 includes grant proceeds of $8.9 million or $5.4 million net of tax ($0.11 per diluted share) received in the third quarter of 2002 from the United States Department of Transportation under the Air Transportation Safety and System Stabilization Act signed into law on September 22, 2001.  See note 3 of the notes to our consolidated financial statements.

(5)

2002 includes a charge of $7.4 million or $4.5 million net of tax ($0.10 per diluted share) for impairment of our investment in Miami Air and accrual for our exposure on a standby letter of credit related to our investments.  2003 includes a credit of $1.3 million or $800,000 net of tax ($0.02 per diluted share) for reversal of the accrual for our exposure on the standby letter of credit related to our investment in Miami Air.  See note 8 of the notes to our consolidated financial statements.

(6)

2004 includes $12.6 million or $7.3 million net of tax ($0.14 per diluted share) in gains on the sale of our investments in TDS Logistics, Inc. and Miami Air.  See note 8 of the notes to our consolidated financial statements.

ITEM 7.

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

The following management’s discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this report.  In addition, for information on our critical accounting policies and the

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judgment made in their application, please read “Critical Accounting Policies and Estimates” beginning on page 42.

Restatement of Previously Issued Financial Statements

We have restated our historical financial statements for 2002, 2003 and the first three quarters of 2004.  The adjustments reflected in our restated financial statements are comprised primarily of the following items:

Deferred income taxes for unrepatriated earnings of certain foreign entities.  We determined that we had understated deferred tax expense related to unrepatriated earnings of certain foreign operations for periods prior to January 1, 2002.  We had previously disclosed in a current report on Form 8-K on March 8, 2005, that these adjustments reduced retained earnings as of January 1, 2002 by $4.0 million.  However, further analysis led to an additional adjustment of $2.6 million.  These adjustments in total reduced retained earnings as of January 1, 2002 by $6.6 million and increased noncurrent deferred income tax liabilities for each of the periods restated.

Recognition of straight-line rent expense when the lease term in a real estate operating lease contains a period where there are free or reduced rents (commonly referred to as “rent holidays”) and scheduled rent increases.  We historically had not been recognizing the rent expense on a straight-line basis over the term of the operating lease for certain of our facility leases.  These adjustments reduced retained earnings as of January 1, 2002 by $0.9 million, increased net income for the nine months ended September 30, 2004 by $0.5 million and increased accrued selling, general and administrative expenses and other liabilities by $1.5 million as of December 31, 2002 and 2003 and by $775,000, $690,000 and $664,000 as of March 31, 2004, June 30, 2004 and September 30, 2004, respectively.

Reconciliation of various account balances.  

With respect to our operations in Mexico, account reconciliation adjustments for errors reduced retained earnings as of January 1, 2002 by $1.6 million, cash and cash equivalents by $1.8 million and other receivables by $620,000 and increased accrued salaries and related costs by $59,000 and accrued selling, general and administrative expenses and other liabilities by $104,000.  Other than Mexico, adjustments to correct account balances increased net income for the nine months ended September 30, 2004 by $1.3 million and affected various accounts within our consolidated balance sheets as detailed in the tables within note 2 of the notes to our consolidated financial statements.

Reclassification adjustments.  We determined certain revenues and costs of transportation presentations within the US and certain international locations were not in accordance with our revenue recognition policy with regards to reporting revenues when we act as an indirect carrier versus an authorized cargo sales agent.  For 2002 and 2003, our revenues and costs of transportation were reduced by $26.4 million and $28.3 million, respectively.  For the nine months ended September 30, 2004, revenues and costs of transportation were reduced by $5.4 million.  The reclassification had no effect on net revenues, operating income or net income.  In addition, certain amounts were reclassified on the consolidated balance sheets as of December 31, 2002 and 2003 and March 31, 2004 related to reclassifying minority interest payable to goodwill for ou r buyout of a minority interest partner in Thailand completed in 2001, netting of income tax receivables by tax jurisdictions and reclassifying current and long-term portions of certain liabilities.

The cumulative effect of the adjustments reduced retained earnings as of January 1, 2002 by $9.1 million and increased net income for the nine months ended September 30, 2004 by $1.8 million.  Net income for 2002 and 2003 remain unchanged.  The $1.8 million adjustment to net income for the nine months ended September 30, 2004 resulted from an increase in first quarter net income of $1.3 million, an increase in second quarter net income of $1.4 million and a reduction in third quarter net income of $0.9 million.

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All applicable amounts relating to these restatements have been reflected in the consolidated financial statements.  The following discussion gives effect to these corrections.  See note 2 of the notes to our consolidated financial statements.

Overview

The primary macroeconomic growth indicators of our business include general growth in the economy, international trade, particularly out of Asia, the level of high-tech spending and the increase in outsourcing of logistics projects.  Business drivers that we control and focus on internally are our ability to:  (i) link transportation services with our logistics services, (ii) cross-sell our services to existing and prospective customers and (iii) collaborate with our customers to provide flexible, cost-effective and profitable supply chain solutions.

We achieved revenues of $2.74 billion for the year ended December 31, 2004, a 28% increase over revenues of $2.14 billion in 2003.  Our financial position was strengthened by record gross and net revenues throughout 2004.  Despite growth in our business, we remain committed to leveraging our infrastructure by containing our operating expenses and improving our yield management in 2005.

Our results of operations in 2004 were impacted by, among other things, the following:

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leveraging our global network to increase volumes across all service offerings and geographic divisions;

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improved volumes in North America forwarding market;

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the divestiture of non-core investments (Miami Air and TDS Logistics) and buyout of joint ventures in France, Spain and Portugal to focus on our core competencies;

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the faster rate of growth in lower margin (but higher net revenue per shipment) service offerings (international air and ocean) coupled with escalating ocean and airline rates and fuel surcharges;

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costs associated with compliance efforts with Section 404 of the Sarbanes-Oxley Act;

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our effective tax rate;

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the repurchase of 3.4 million shares of our common stock at an aggregate cost of $17.37 per share pursuant to our stock repurchase program;

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the issuance of 5.7 million shares of our common stock upon the conversion of all outstanding $100 million 5% convertible subordinated notes;

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entering into a new, $150 million unsecured revolving credit facility;

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improved operational efficiencies which contributed to an increase in operating income by 82% compared to 2003; and

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continuing the deployment of information technology systems globally.

Leveraging our global network.  In 2004, we leveraged our global network and our ability to cross-sell services to increase volumes for all of our service offerings in all geographic divisions.  In addition, our balanced product offering enabled us to provide flexible solutions to our customers both domestically and internationally.  In 2004, we continued to leverage our low cost North America network and customer base, as customers increasingly moved products overseas directly to U.S. distribution and retail centers.

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North America forwarding market.  Deferred shipment (third through fifth day) volumes increased by 3.0% in 2004 versus a decline of 23.8% in 2003 and priority (next flight out, next day or second day) volumes showed an increase of 1.9% in 2004 versus a decline of 5.9% in 2003.  In addition, U.S. imports and exports continue to increase, reflecting the strength of the U.S. economy and the continued shift of production overseas. The improvement in domestic shipment volumes added significantly to our increase in gross revenues during the year and improved results of operations.  Our 2004 results highlight the ability of our low cost domestic model to generate domestic growth with a mix of priority and deferred shipments.

Divestitures of non-core investments and buyout of joint venture interests.  In 2004, we eliminated non-core investments and joint venture interests in order to focus on our core competencies for our customers.  In May 2004, we sold our investment in Miami Air in exchange for approximately $6.7 million in cash.  As a result of the sale, we were released as guarantor of Miami Air’s letter of credit and terminated the $3.0 million standby letter of credit for Miami Air.  We no longer have a relationship with Miami Air.  In August 2004, TDS Logistics, Inc., in which we held a 40% interest, was sold to an unrelated party.  As a result, we eliminated an interest in a non-core business and recorded a $5.9 million gain in non-operating income for our investment and cash proceeds of approximately $45.3 million, excluding approximately $ 5.5 million of our sale proceeds held in escrow.  In addition, we acquired the remaining interests in joint ventures in France, Spain and Portugal (the latter two from the former chief executive officer of Circle) during the first half of 2004.  As a result, we eliminated the joint venture structure in Europe that was a remnant of the merger with Circle and will retain 100% of the profits in France, Spain and Portugal going forward.

Net revenue margins.  As we were able to cross-sell our services to our customers, our net revenues in 2004 were impacted by the growth of service offerings with different margins – our ocean and international air service offerings with lower net revenue margins but higher net revenue per shipment grew at faster rates than our domestic offerings.  For example, increases in ocean and international shipments increase our gross revenues, but they have a lower margin, which causes our overall margins to decrease.  In addition, the traditional peak season rates (beginning in the third quarter and extending into the fourth quarter), together with higher fuel and security surcharges (second half of 2004) and tighter capacity (year long), continued to impact our air and ocean margins.  Management believes that as we improve our ability to address the global factors affecting rates for our service offerings, including, but not limited to, ensuring that our customers absorb traditional pass-through costs and effective management of contract rates during peak seasons, our margins should improve across all geographic divisions and service offerings.

Costs associated with compliance efforts with Section 404 of the Sarbanes-Oxley Act.  In 2004, we incurred expenses of $4.3 million for consulting and audit fees as a result of compliance efforts with respect to Section 404 of Sarbanes-Oxley.  Of the $4.3 million, $2.5 million ($1.4 million after tax, or $0.03 per share) was incurred in the fourth quarter.

Effective tax rate.  Our effective tax rate for 2004 was 42.6% compared to 37.8% for 2003.  The effective tax rate was higher than 2003 mainly related to additional deferred income tax expense on foreign operations for which additional tax reserves were recorded.  Our effective tax rates fluctuate due to changes in the level of pre-tax income in foreign countries that have different rates and certain income and/or expenses that are permanently non-taxable or non-deductible in certain jurisdictions.

Share repurchase program.  In 2004, we repurchased 3.4 million shares at an average price of $17.37 per share for approximately $59.1 million.

Convertible notes.  As of December 17, 2004, all of the note holders of the entire $100 million aggregate principal amount of 5% convertible subordinated notes due December 15, 2006 converted their notes into an aggregate of 5,736,074 shares of common stock pursuant to the terms of the note and the

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indenture, dated as of December 7, 2001.  We received no consideration upon conversion of the notes into shares of our common stock.

New credit facility.  In September 2004, we entered into a new, unsecured $150 million credit facility, which replaced a $100 million secured credit facility that was to mature in December 2004.  Under our new credit facility, we have increased borrowing capacity for, among other things permitted acquisitions, working capital and capital expenditures and other general corporate purposes.  As of December 31, 2004, we had $21.4 million in letters of credit outstanding and unused borrowing capacity of $128.6 million under the new credit facility.

Improving operational efficiencies.  During 2004, we continued initiatives to improve operating efficiencies, which contributed to an increase in operating income by 81.5%, or $36.5 million, from 2003.  Operating income as a percent of net revenue increased from 6.1% in 2003 to 9.4% in 2004.  We have launched further initiatives to measure the key drivers of our business and continue to drive profitability through operational efficiencies in 2005.

Global deployment of information technology systems.  In 2004, we continued the global deployment of our EGL Vision Suite of Technologies – Logistics Vision, Financial Vision and People Vision.  “Logistics Vision” is the freight forwarding system that allows a seamless flow of data across the globe, eliminating duplicate data entry on multiple systems.  “Financial Vision” is the Oracle-based financial system that allows global visibility of financial results, streamlined financial reporting and the ability to automate intercompany accounting and settlements.  “People Vision” is the Oracle-based human resources application that allows global visibility to employee tracking, training and development.  Management continues to believe that successful deployment of systems remains a critical component of impr oving operational efficiencies and effectively growing the business.  The global deployment of EGL Vision will continue into 2005.

Our focus in 2005 will be to improve operational efficiencies, streamline processes through our global deployment of our financial and operational information technology systems (see “Business – Information Systems”) and continue to leverage our North America infrastructure.

Results of Operations

Our principal services are air freight forwarding, ocean freight forwarding, customs brokerage and other value-added logistics services.  Revenues for air freight and ocean freight consolidations (indirect shipments) include reimbursements from customers for the cost of transporting such freight.  Revenues for air freight and ocean freight agency or direct shipments, customs brokerage and other services, include only the fees or commissions for these services.  We believe that a comparison of gross revenues by product best measures the relative importance of our principal services, while a comparison of net revenue margins (net revenues as a percent of gross revenues) best measures the performance of each product line.  A comparison of operating expenses as a percent of net revenues considers the relationship between operating expenses and operating revenues.  The foll owing table provides certain statement of operations data attributable to our principal services during the periods indicated.

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2004 Compared to 2003

Revenues.  Revenues increased $598.0 million, or 27.9%, to $2,741.4 million in 2004 compared to $2,143.4 million in 2003 primarily due to an increase in air freight forwarding revenues of $389.3 million, an increase in ocean freight forwarding revenues of $101.1 million and an increase in customs brokerage and other revenues of $107.7 million.  Net revenues, which represent revenues less freight transportation costs, increased $130.1 million, or 17.7%, to $865.4 million in 2004 compared to $735.3 million in 2003.  Net revenue margins (net revenues as a percentage of revenues) declined by 270 basis points in 2004 to 31.6% as compared to 34.3% in 2003.  The decrease in margins reflects (i) higher transportation and fuel costs due to capacity constraints, mainly from Asia; (ii) fuel surcharges absorbed by the business; (iii) an acceleration of gr owth in international air and ocean products which carry a lower net revenue margin but higher net revenue per shipment; and (iv) pass-through of certain fuel and security surcharges, which increased gross revenues without corresponding increases in net revenues.  Our international revenues and costs also increased slightly over the prior year due to the effects of translating amounts to the U.S. dollar.

Air freight forwarding revenues.  Air freight forwarding revenues increased $389.3 million, or 27.6%, to $1,799.0 million in 2004 compared to $1,409.7 million in 2003 due to volume increases in all

30

geographic divisions, particularly Asia/South Pacific, North America and Europe/Middle East.  This growth is primarily from improvements in shipment volumes and international charter activity.

Air freight forwarding net revenues increased $82.1 million, or 19.3%, to $508.1 million in 2004 compared to $426.0 million in 2003.  Air freight forwarding net revenues increased primarily in North America followed by Europe/Middle East and Asia/South Pacific.  The air freight forwarding margin (net revenues as a percentage of revenues) decreased to 28.2% for 2004 as compared to 30.2% for 2003 primarily due to declines in North America and Asia/South Pacific resulting from higher volume levels in certain trade lanes that carry a lower margin, higher fuel surcharges from carriers and increases in international charter activity which typically carries a lower margin.  These decreases were offset by increases in air freight forwarding margins in Europe/Middle East primarily due to an increase in higher margin direct air shipments relative to consolidated sh ipments.

Ocean freight forwarding revenues.  Ocean freight forwarding revenues increased $101.1 million, or 34.8%, to $391.6 million in 2004 compared to $290.5 million in 2003.  The increase in revenues was principally due to volume increases in all geographic divisions due to our increased focus on the ocean market and our customers’ continued shift toward a lower cost deferred product.

Ocean freight forwarding net revenues increased $12.3 million, or 19.2%, to $76.2 million in 2004 compared to $63.9 million in 2003 while the ocean freight forwarding margin decreased to 19.5% for 2004 compared to 22.0% for 2003.  The ocean freight forwarding margins decreased due to continued rising transportation costs and shipping capacity constraints, particularly between Asia and North America.

Customs brokerage and other revenues.  Customs brokerage and other revenues, which include imports, warehousing, distribution and other logistics services, increased $107.7 million, or 24.3%, to $550.9 million in 2004 compared to $443.2 million in 2003.  Customs brokerage revenues increased in 2004 compared to 2003 due to growth in Europe/Middle East trade activity and U.S. imports.  The increase is also due to higher warehousing, distribution and other logistics revenues resulting from multiple new logistics projects in North America and a $2.8 million termination fee for a logistics project in Europe.

Customs brokerage and other net revenues increased $35.6 million, or 14.5%, to $281.0 million in 2004 compared to $245.4 million in 2003.  Customs brokerage and other margins, however, decreased to 51.0% for 2004 compared to 55.4% for 2003 primarily due to lower margins in Europe/Middle East, Asia/South Pacific and North America resulting from termination or completion of several higher margin projects.

Personnel costs.  Personnel costs include all compensation expenses, including those relating to sales commissions and salaries and to headquarters employees and executive officers.  Personnel costs increased $59.3 million, or 14.1%, to $481.3 million in 2004 compared to $422.0 million in 2003.  As a percentage of net revenues, personnel costs were 55.6% in 2004 compared to 57.4% in 2003.  The increase in personnel costs was primarily due to the increase in business activity and foreign exchange translation effects.

Other selling, general and administrative expenses.  Other selling, general and administrative expenses increased $32.8 million, or 12.2%, to $302.7 million in 2004 compared to $269.9 million in 2003.  As a percentage of net revenues, other selling, general and administrative expenses were 35.0% in 2004 compared to 36.7% in 2003.  The increase in other selling, general and administrative expenses is primarily due to an increase in facility expense.  The increase is mainly associated with additional or larger replacement facilities to accommodate increased operations.  A portion of the increase in facility expense is due to a $3.8 million net increase in facility accruals mainly covering North America.  In North America, we consolidated three facilities into our new facility in Miami, which was completed in late 2003.  We subleas ed one of the North American facilities for less than our remaining obligation and accrued the net amount of lease payments we expect to pay over the remaining lease term.  During the

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year, we accrued additional lease expense in North America and Europe on two vacant facilities due to unfavorable market conditions near the facilities. We subsequently released these accruals as we decided to utilize the North America facility for increased operations and the facility in Europe was subleased earlier than assumed in the previous accrual.  We also released a $1.6 million accrual originally recorded in prior years for a facility in Houston, Texas as we decided to utilize this facility for increased operations. Other selling, general and administrative expenses have also increased due to higher professional fees and communications costs related to systems implementations and preparations for internal controls testing required by the Sarbanes-Oxley Act of 2002 and foreign exchange effects.

EEOC legal settlement.  During 2003, we reversed $1.4 million of the EEOC accrual for certain administrative functions completed in 2003 in which actual costs were less than amounts accrued and payroll taxes we will not be required to pay.

Nonoperating income (expense), net.  Nonoperating income (expense), net includes interest expense, interest income, minority interest expense, equity in earnings (losses) from affiliates, foreign exchange gains (losses) and other nonoperating income (expenses).  Nonoperating income, net was $7.3 million in 2004 as compared to nonoperating expense of $6.2 million in 2003.  In 2004, we sold our investment in Miami Air and realized a gain of approximately $6.7 million.  We had previously written off our investment in Miami Air in 2002.  We sold our investment in TDS Logistics, Inc. (TDS) in 2004 for approximately $51.4 million in cash.  We received approximately $45.3 million of the sale proceeds in August 2004 and an additional $557,000 in January 2005.  The remaining $5.5 million of the TDS sale proceeds are being held in escrow subject to the resolution of certain contingencies and time periods.  The TDS sale resulted in a gain of approximately $5.9 million, which excludes the proceeds held in escrow.  See note 8 of the notes to our consolidated financial statements.  Additionally, we incurred interest expense, net of $6.2 million in 2004 compared to $4.9 million in 2003 and had equity earnings of affiliates of $1.7 million in 2004 compared to losses of $199,000 in 2003.

Effective tax rate.  Our effective tax rate for 2004 was 42.6% compared to 37.8% for 2003.  The effective tax rate was higher than 2003 mainly related to additional deferred income tax expense on foreign operations for which additional tax reserves were recorded, as well as lower than expected earnings from certain European countries.  Our effective tax rates fluctuate due to changes in the level of pre-tax income in foreign countries that have different rates and certain income and/or expenses that are permanently non-taxable or non-deductible in certain jurisdictions.

2003 Compared to 2002

Revenues.  Revenues increased $300.5 million, or 16.3%, to $2,143.4 million in 2003 compared to $1,842.9 million in 2002 primarily due to an increase in air freight forwarding revenues of $153.8 million, an increase in ocean freight forwarding revenues of $74.5 million and an increase in customs brokerage and other revenues of $72.2 million.  Net revenues, which represent revenues less freight transportation costs, increased $63.2 million, or 9.4%, to $735.3 million in 2003 compared to $672.1 million in 2002.  Net revenue margins declined on pricing pressures out of Asia to the U.S.

Air freight forwarding revenues.  Air freight forwarding revenues increased $153.8 million, or 12.2%, to $1,409.7 million in 2003 compared to $1,255.9 million in 2002.  Air freight forwarding revenues increased in Asia/South Pacific, followed by Europe/Middle East, North America and South America.  Revenue increases were primarily driven by volume increases resulting from new large customer contracts and incremental increases in existing air freight business, particularly in exports from Asia and the U.S., offset by the weakening market for domestic shipments within the U.S.

Air freight forwarding net revenues increased $20.0 million, or 4.9%, to $426.0 million in 2003 compared to $406.0 million in 2002.  Air freight forwarding net revenues for 2003 increased primarily in Europe/Middle East followed by North America.  The air freight forwarding margin (net revenues as a percentage of revenues) decreased to 30.2% for 2003 as compared to 32.3% for 2002.  Air freight forwarding net revenue margins declined in all geographic divisions, primarily due to airline rate

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increases we were not able to recover through comparable price increases to our customers and the shift from priority to deferred shipments in the U.S, which generally have a lower margin.  Air freight forwarding net revenue margins were also negatively impacted by an unfavorable settlement with Kitty Hawk, Inc., a wholesale transportation provider, stemming from a dispute in 2001.  The dispute was resolved by an arbitration panel during the third quarter of 2003 and we recorded a charge of $2.3 million in air freight forwarding cost of transportation.  In addition, direct shipments, which have higher margins, declined in 2003, given the comparison to 2002 revenues and net revenues, which included the impact of the U.S. West Coast port strike in which we chartered 42 dedicated planes to move product from Asia to North America.

Ocean freight forwarding revenues.  Ocean freight forwarding revenues increased $74.5 million, or 34.5%, to $290.5 million in 2003 compared to $216.0 million in 2002 primarily as a result of volume increases in all geographic divisions due to our customers’ focus on shifting their shipments from air to ocean to realize cost savings.  Ocean freight forwarding net revenues increased $5.8 million, or 10.0%, to $63.9 million in 2003 compared to $58.1 million in 2002, while the ocean freight forwarding margin decreased to 22.0% for 2003 compared to 26.9% for 2002.  The ocean freight forwarding margin decreased due to rate increases from ocean carriers and aggressive pricing with customers to improve market share.

Customs brokerage and other revenues.  Customs brokerage and other revenues, which include imports, warehousing, distribution and other logistics services, increased $72.2 million, or 19.5%, to $443.2 million in 2003 compared to $371.0 million in 2002.  The increase was due to higher warehousing, distribution and other logistics revenues resulting from new warehousing customers and the expansion of existing warehousing business in Europe and North America.  Customs brokerage revenues increased in 2003 compared to 2002 reflecting the growth in U.S. imports.

Customs brokerage and other net revenues increased $37.4 million, or 18.0%, to $245.4 million in 2003 compared to $208.0 million in 2002.  Net revenue margins on warehousing, distribution and other logistics revenues increased slightly as a result of new logistics projects, primarily in the U.S. and Europe, while net revenue margins on customs brokerage decreased slightly as a result of pricing pressures on imports to the U.S. and Europe due to rate increases from air and ocean carriers.

Personnel costs.  Personnel costs include all compensation expenses, including those relating to sales commissions and salaries and to headquarters employees and executive officers.  Personnel costs increased $46.6 million, or 12.4%, to $422.0 million in 2003 compared to $375.4 million in 2002.  As a percentage of net revenues, personnel costs were 57.4% in 2003 compared to 55.9% in 2002.  The increase in personnel costs was a result of an increase in headcount throughout 2003 to support increased volumes and new logistics projects in Europe and North America.  Personnel costs also increased due to a temporary salary reduction for five pay periods implemented in the U.S. during the first quarter of 2002.

Other selling, general and administrative expenses.  Other selling, general and administrative expenses decreased $6.1 million, or 2.2%, to $269.9 million in 2003 compared to $276.0 million in 2002.  As a percentage of net revenues, other selling, general and administrative expenses were 36.7% in 2003 compared to 41.0% in 2002.  This decrease is primarily due to management initiatives on costs savings.  Other selling, general and administrative expenses also decreased as a result of a $1.4 million gain on the sale of our facility in Boston in September 2003 and a $500,000 charge recorded during the third quarter of 2002 related to a management decision not to use certain architectural design plans for a proposed building in Canada.  These cost savings were partially offset by an increase in facility costs, insurance premiums and depreciat ion expense.  Although we completed the consolidation of many of our facilities, our facility costs increased by approximately $10.2 million because we are leasing more space than in the previous year for our expanded warehousing and logistics services primarily in Europe and North America, expansion of several stations in the U.S. and the acquisition of Miami International Forwarders (MIF) in April 2003.  The increase in depreciation expense was largely related to increases in computer software and office equipment depreciation.  Additionally, during 2002, we recorded charges related to

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our merger with Circle of $5.7 million, or $3.5 million after tax, including a charge of $5.9 million for future lease obligations due to revisions of estimates and a credit of $251,000 due to favorable settlement of terminated joint venture/agency agreements.  The additional charge for future lease obligations was due to revised estimates for future recoveries from actual or expected sublease agreements that were or are expected to be less favorable than anticipated due to the weakened U.S. economy.

EEOC legal settlement.  During 2003, we reversed $1.4 million of the EEOC accrual for certain administrative functions completed in 2003 in which actual costs were less than amounts accrued and payroll taxes we will not be required to pay.

Air Transportation Safety and System Stabilization Act grant.  During the third quarter 2002, we received a total of $8.9 million related to the Air Transportation Safety and System Stabilization Act, which was signed into law on September 22, 2001.  See note 3 of the notes to our consolidated financial statements.

Nonoperating expense, net.  Nonoperating expense, net includes interest expense, interest income, minority interest expense, equity in earnings (losses) from affiliates, foreign exchange gains (losses) and other nonoperating income (expenses).  Nonoperating expense, net was $6.2 million in 2003 as compared to $14.6 million in 2002.  The $8.4 million decrease was primarily due to an impairment charge of approximately $6.7 million for our investment in Miami Air and a $1.3 million reserve established for our guarantee of Miami Air’s outstanding letters of credit recorded in 2002.  This $1.3 million reserve was reversed in 2003 as our exposure on Miami Air’s outstanding letters of credit was eliminated.  See note 8 of the notes to our consolidated financial statements.  In addition, earnings from an unconsolidated affiliate, T DS Logistics, Inc. (TDS) decreased from approximately $304,000 of income in 2002 to a $1.5 million loss in 2003.  TDS reported operating losses in 2003, partially due to a valuation allowance recorded for deferred tax assets resulting from unfavorable results from TDS’s operations in Belgium.  Nonoperating expense, net also decreased due to lower interest cost from our interest rate swap, which expired in April 2003, and higher income from our jet fuel swap entered into during November 2002.  Additionally, we incurred net foreign exchange losses of $1.5 million in 2003 compared to net foreign exchange gains of $366,000 in 2002, primarily due to deterioration of the U.S. dollar.

Effective tax rate.  The effective tax rate for 2003 was 37.8% compared to 39.0% for 2002.  Our overall effective tax rate fluctuates primarily due to changes in the level of pre-tax income in foreign countries that have different rates and certain income and/or expenses that are permanently non-taxable or non-deductible in certain jurisdictions.

Liquidity and Capital Resources

General

Our ability to satisfy our debt obligations, fund working capital and make capital expenditures depends upon our future performance, which is subject to general economic conditions and other factors, some of which are beyond our control.  If we achieve significant near-term revenue growth, we may experience a need for increased working capital financing as a result of the difference between our collection cycles and the timing of our payments to vendors.  Historically we have generated cash flow from operations in the first half of the year higher than in the second half of the year reflecting the seasonality of our business.

We make significant disbursements on behalf of our customers for transportation costs (primarily ocean) and customs duties for which the customer is the primary obligor.  The billings to customers for these disbursements, which are several times the amount of revenues and fees derived from these transactions, are not recorded as revenues and expense on our statement of operations; rather, they are reflected in our trade receivables and trade payables.  Growth in the level of this activity or lengthening of the period of time between incurring these costs and being reimbursed by our customers for these costs may negatively affect our liquidity.

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As primarily a non-asset based freight forwarder, we do not have the same level of capital expenditures that would be required of an asset based forwarder.  We believe our anticipated capital expenditures for 2005 will be in the range of $48 to $52 million, including approximately $26 to $30 million expected on information systems expenditures.  Based on current plans, we believe that our existing capital resources, including $92.9 million of cash and cash equivalents and $128.6 million of available borrowing capacity on our credit facility, will be sufficient to meet working capital requirements through December 31, 2005.  However, future changes in our business could cause us to consume available resources before that time.  Additionally, funds may not be available when needed and even if available, additional funds may be raised through financing arrangements and/or the issuance of preferred or common stock or convertible securities on terms and prices significantly more favorable than those of the currently outstanding common stock, which could have the effect of diluting or adversely affecting the holdings or rights of our existing stockholders.  If adequate funds are unavailable, we may be required to delay, scale back or eliminate some of our operating activities, including, without limitation, the timing and extent of our marketing programs, and the extent and timing of hiring additional personnel.  We cannot provide assurance that additional financing will be available to us on acceptable terms, or at all.

2004 Compared to 2003

Net cash provided by operating activities.  Net cash provided by operating activities was $28.7 million in 2004 compared to $33.4 million in 2003.  The decrease in 2004 was primarily due to a $61.5 million net decrease in cash from changes in working capital for 2004 compared to $30.0 million net decrease for 2003 offset by an increase in net income.  The decrease in cash from changes in working capital is due to a significant increase in gross revenues during the month of December 2004 compared to December 2003, resulting in an increase in trade receivables and a 4% increase in days sales outstanding from 67 days at December 31, 2003 to 70 days at December 31, 2004.  The increase in trade receivables was offset by an increase in payables and other accrued liabilities.

Net cash used in investing activities.  Net cash used in investing activities in 2004 was $3.6 million compared to $44.2 million in 2003.  Capital expenditures were $38.2 million during 2004 compared to $26.0 million during 2003, a $12.2 million increase.  The expenditures in 2004 were mainly due to the implementation of our operational and financial systems, other software expenditures and equipment purchases.  During 2004, we received proceeds of $6.7 million for the sale of our interest in an unconsolidated affiliate, Miami Air, to an unrelated party and proceeds of $45.3 million for the sale of our interest in an unconsolidated affiliate, TDS, to an unrelated party.

During the second quarter of 2004, we acquired the outside ownership of our consolidated affiliates in France, Spain and Portugal for aggregate consideration of $16.2 million in cash.  During the same period, we also made a $3.2 million earnout payment to the former owners of MIF due to achievement of post-acquisition performance criteria specified in the April 2003 purchase and sale agreement.  During the second quarter of 2003, we completed several acquisitions with aggregate cash consideration of $21.1 million.  In April 2003, we acquired MIF for $13.7 million in cash and we purchased from one of our joint venture partners a 26% interest in our operating subsidiary in Singapore for approximately $5.7 million in cash.  In 2003, we also completed an acquisition of an international freight forwarder and customs broker in France for approximately $1.1 million, net of cash acquired and made a $600,000 earnout payment related to an acquisition completed in a prior year.

During 2004 and 2003, we received proceeds of $1.1 million and $4.2 million, respectively, from sales of other assets and a sale-lease back transaction.

Net cash used in financing activities.  Net cash used in financing activities in 2004 was $22.6 million compared to $4.8 million in 2003.  The cash used in financing activities in 2004 consists of $6.4 million of repayment of financed insurance premiums, $59.1 in cash payments for the repurchase of 3.4 million shares of our outstanding common stock and $1.1 million in payments of financing fees related to our new Credit Facility, offset by $39.9 million in proceeds from the exercise of 2.1 million stock options

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and $791,000 in proceeds from the issuance of 42,000 shares of common stock from our Employee Stock Purchase Plan and $4.3 million issuance of debt, net of repayments.  Cash used in financing activities in 2003 consisted of $9.3 million for repayment of debt and financed insurance premiums and $214,000 in cash payments to our minority interest partners, offset by $4.1 million in proceeds from the exercise of 324,000 stock options and $540,000 in proceeds from the issuance of 43,000 shares of common stock from our Employee Stock Purchase Plan.

2003 Compared to 2002

Net cash provided by operating activities.  Net cash provided by operating activities was $33.4 million in 2003 compared to $64.6 million in 2002.  The decrease in 2003 was primarily due to a significant increase in gross revenues during the month of December 2003 compared to December 2002, resulting in an increase in trade receivables and other receivables and an increase in days sales outstanding from 64 days at December 31, 2002 to 67 days at December 31, 2003.  The increase in trade and other receivables was offset by increases in net income and accounts payable, accrued transportation costs and other accrued liabilities.

Net cash used in investing activities.  Net cash used in investing activities in 2003 was $44.2 million compared to $24.2 million in 2002.  Capital expenditures were $26.0 million during 2003 compared to $41.4 million during 2002, a $15.4 million decrease.  The expenditures in 2003 were mainly due to the implementation of our operational and financial information systems, other software expenditures and equipment purchases.  Net cash used in acquisitions was $21.1 million during 2003 compared to $1.1 million in 2002.  The 2003 acquisitions were primarily Miami International Forwarders, a privately held international freight forwarder and customs broker based in Miami, Florida; Transimpex, SA, an international freight forwarder and customs broker based in France; the purchase of our outside partners’ interest in our subsidiary in Sing apore and an earnout payment for a prior year acquisition in Chile.  The 2002 acquisitions included purchases of our outside partners’ interest in our subsidiary in Argentina and earnout payments for prior year acquisitions in Chile and Canada.  The sale and sale-leaseback of real estate and the sale of other assets resulted in cash proceeds of $4.2 million in 2003 compared to $26.0 million in 2002.

Net cash used in financing activities.  Net cash used in financing activities in 2003 was $4.8 million compared to $9.4 million in 2002.  The cash used in financing activities in 2003 consists of $9.3 million of repayment of notes and financed insurance premiums and $214,000 in cash payments to our minority interest partners, offset by $4.1 million in proceeds from the exercise of 324,000 stock options and $540,000 in proceeds from the issuance of 43,000 shares of common stock from our Employee Stock Purchase Plan.  Cash used in financing activities in 2002 consisted of $10.0 million from the repurchase of our common stock and $1.4 million for net repayments of debt, offset by $1.0 million in proceeds from the issuance of 85,000 shares of common stock from our Employee Stock Purchase Plan, $687,000 in proceeds from the exercise of 72,000 stock opti ons and $301,000 in cash received from our minority interest partners.

Other factors affecting our liquidity and capital resources

Convertible subordinated notes.  In December 2001, we issued $100 million aggregate principal amount of 5% convertible subordinated notes due December 15, 2006.  On November 30, 2004 we issued a redemption notice indicating that we were exercising our right to redeem on December 20, 2004 all of the outstanding notes.  The redemption price was equal to 101.25% of the outstanding principal amount on the redemption date, plus accrued interest up to but not including the redemption date.

Holders of the notes had the option of converting their notes into shares of EGL common stock, par value $0.001 per share, at a conversion price of $17.4335 per share, subject to certain adjustments.

As of December 17, 2004, the holders of all of the $100 million aggregate principal amount of notes had converted their notes into an aggregate of 5,736,074 shares of common stock, pursuant to the

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terms of the note and the indenture.  We received no consideration upon conversion of the notes into shares of our common stock.  Unamortized deferred financing fees of $781,000 (net of $526,000 tax benefit) were converted to equity upon conversion in December 2004.

Credit Facility.  Effective September 16, 2004, we entered into a new unsecured $150 million revolving credit facility (Credit Facility).  The Credit Facility is with a syndicate of six financial institutions, with Bank of America, N.A. (the Bank) as collateral and administrative agent for the lenders, and matures on September 15, 2009.  The Credit Facility replaces a $100 million credit facility (Prior Credit Facility) that was to mature in December 2004.  Borrowings under the Credit Facility may be used to make dividends or share repurchases, working capital and capital expenditures, make permitted acquisitions and for general corporate purposes.  The Credit Facility contains a $75 million sub-facility for letters of credit.  We had $21.4 million in letters of credit outstanding and unused borrowing capacity of $128.6 million under the New Facility as of December 31, 2004.  Under the terms of the Credit Facility, we are not required to pledge assets as collateral.

Amounts outstanding under the Credit Facility are subject to varying rates of interest (using either the “LIBOR rate” or the “base rate,” each defined below) based on (i) the leverage ratio of consolidated net funded debt to EBITDA (as defined in the Credit Facility) and (ii) whether the loan is a Eurodollar loan or a base rate loan.  The “LIBOR rate” is equal to the rate determined by Bank of America, N.A. to be the British Bankers Association interest rate for deposits in U.S. dollars for a similar interest period (either one, two, three or six months, as selected by us).  The “base rate” is calculated as the higher of (i) the federal funds effective rate plus 0.5% and (ii) the annual rate of interest announced by Bank of America, N.A. as its “prime rate.”  We may borrow at the “prime rate” plu s an applicable margin of up to 0.25% or at the “LIBOR rate” plus an applicable margin of 0.75% to 1.25%.

The Credit Facility contains covenants that are similar to, but generally more favorable to us than, the covenants in our Prior Credit Facility.  These covenants include, among others:

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a limitation on liens, mergers, consolidations, sales of assets, and incurrence of secured indebtedness, subject to permitted exceptions;

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restrictions on the use of proceeds, investments, transactions with affiliates, and changing our principal business;

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a limitation on paying dividends or purchasing or redeeming capital stock or prepaying indebtedness, subject to permitted exceptions;

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a requirement that we maintain on a rolling four quarter basis a ratio of Net Funded Debt (as defined in the Credit Facility) to consolidated EBITDA (as defined in the Credit Facility) of not greater than 3.0 to 1.0 and

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a requirement that we maintain on a rolling four quarter basis a ratio of consolidated EBIT (as defined in the Credit Facility) to consolidated interest charges of not less than 3.0 to 1.0.

The Credit Facility contains customary events of default.  If a default occurs and is continuing, we must repay all amounts outstanding under the Credit Facility.  We were in compliance with the restrictions of the Credit Facility as of December 31, 2004.

The Prior Credit Facility with Bank of America, N.A. was terminated by us on September 15, 2004 in advance of its stated termination date without any early termination penalties.  Deferred financing fees of $1.3 million including $546,000 from the Prior Credit Facility are being amortized over five years as a component of interest expense.

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Release of restricted cash.  In February 2005, in response to a joint motion filed by EGL and the EEOC, a U.S. District Court ordered the return of $6.0 million to us of $8.5 million previously held in an established fund to resolve potential claims in connection with a 2001 consent decree (see note 17 of the notes to our consolidated financial statements).  The joint motion and subsequent order resulted primarily from a significantly lower number of qualified claimants than originally projected and the aggregate amount expected to be paid for all claims is less than $1.0 million.  Release of these funds is expected to result in $6.0 million in income in the first quarter of 2005.

Other guarantees.  Several of our foreign operations guarantee amounts associated with our international freight forwarding services.  These include IATA (International Air Transportation Association) guarantees, customs bonds and other working capital credit facilities issued in the normal course of business.  As of December 31, 2004, guarantees and credit facilities totaled $84.3 million and we had $52.2 million of guarantees, customs bonds and borrowings against facilities outstanding, including guarantees of our trade payables and accrued transportation costs and borrowings against our international credit facilities of $17.5 million which were recorded as liabilities on our consolidated balance sheet.

Synthetic lease agreements.  Entering 2002, EGL was the lessee in two synthetic lease agreements with special purpose entities.  Both of these lease agreements were terminated during 2002 as a result of the expiration of the original lease terms as further discussed below.

In November 2002, our $20 million master operating synthetic lease agreement expired.  This lease facility financed the acquisition, construction and development of five terminal and warehouse facilities throughout the United States.  Upon termination of this agreement, we purchased the five properties leased under this agreement for $14.1 million which was the amount of the outstanding lease balance at the time of termination.  Three of these terminal facilities were then sold and leased back from an unrelated party in the fourth quarter of 2002 and the fourth facility was sold and leased back in May 2003 as discussed below.  The remaining terminal facility, with a book value of approximately $3.4 million, was retained by us and is leased to an unrelated party under a lease to purchase agreement that requires the lessor to purchase the property by O ctober 2005.

In December 2002, we were required to pay the lease balance and related interest of $15.5 million under a second synthetic lease agreement entered into during 1998 by Circle.  This lease facility financed the acquisition, construction and development of a terminal facility located in New York, New York.  The land leased under this agreement was accounted for as a synthetic operating lease and the building and improvements were accounted for as a capital lease.  As of December 31, 2004 and 2003, the carrying value of the land and property is included in property and equipment on the consolidated balance sheet and the building is being depreciated over its useful life.

As a result of the above two lease expirations, we are no longer a party to any lease agreements with special purpose entities as of December 31, 2004 or 2003.

Sale-leaseback agreements.  In May 2003, we sold our terminal and warehouse facility located in Connecticut to an unrelated party for $1.2 million, net of related closing costs.  One of our subsidiaries then leased this property for a term of 11 years, with options to extend the initial term for up to 20 years.  Under the terms of the lease agreements, the monthly lease payments average approximately $12,000 for this facility.  This facility was constructed under our master operating synthetic lease agreement, which became due in November 2002.  The net book value of this facility was $1.2 million.  As a result, a loss of $37,000 on the sale of the property was recognized in 2003 and is included in nonoperating expense in the consolidated statement of operations.

In the fourth quarter of 2002, we completed transactions to sell three of our terminal and warehouse facilities located in Grapevine, Texas, Austin, Texas and South Bend, Indiana to an unrelated party for $14.1 million, net of related closing costs.  One of our subsidiaries then leased these properties for a term of 11 years, with options to extend the initial term for up to 20 years.  Under the terms of the

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lease agreements, the monthly lease payments average approximately $141,000 in total for these facilities.  These facilities were constructed under our master operating synthetic lease agreement, which became due in November 2002.  The sale-leaseback transactions were completed in conjunction with paying the master operating synthetic lease balance for two of the facilities.  The third facility was completed in December 2002.  The lease payment for these facilities and related closing costs was $10.5 million resulting in a gain of $3.6 million on the sale of the properties.  The gain was deferred and is being recognized over the term of the lease agreements.

In December 2002, we entered into agreements to sell land in Miami, Florida and Toronto, Canada to developers who will build-to-suit terminal warehouse facilities and lease them back to us upon completion of the facilities.  The purchase price of the Miami land was $9.8 million, which equaled its carrying value.  The Miami land was originally purchased by EGL from James R. Crane, Chief Executive Officer of EGL.  See “Certain Relationships and Related Party Transactions” and note 20 of the notes to our consolidated financial statements.  The Miami facility was completed in November 2003.  The terms of the Miami lease agreement include average monthly lease payments of $196,000 for 125 months with options to extend the initial term for up to an additional 120 months.  The purchase price of the Toronto land was $4.8 million and the c arrying value was $4.4 million resulting in a gain of $358,000, which was deferred and is being recognized over the term of the lease agreement.  In the third quarter of 2002, we recorded an impairment charge of $500,000 related to a management decision not to use certain architectural design plans for the proposed Toronto building.  The Toronto facility was completed in March 2004.  The terms of the Toronto lease agreement include average monthly lease payments of approximately $110,000 for 185 months with options to extend the initial term for up to an additional 120 months.

On March 31, 2002, we entered into a transaction whereby we sold our San Antonio, Texas property with a net book value of $2.5 million to an unrelated party for $2.5 million, net of closing costs.  One of our subsidiaries subsequently leased the property for a term of 10 years, with options to extend the initial term for up to 23 years.  Under the terms of the lease agreement, the quarterly lease payment is approximately $85,000, which amount is subject to escalation based on increases in the Consumer Price Index.  A loss of $42,000 on the sale of this property was recognized in the first quarter of 2002.

Capital expenditures.  We are in the process of developing and implementing computer system solutions for operational, human resources and financial systems.  Our capital expenditures were approximately $18.5 million related to the development of these systems during both 2004 and 2003.  Our expected capital expenditures for 2005 are approximately $48 to $52 million, including approximately $26 to $30 million for information technology development and upgrades.

TDS Logistics, Inc.  In August 2004, we sold our investment in TDS Logistics, Inc. (TDS) to an unrelated party for approximately $51.4 million in cash.  We received approximately $45.3 million of the sale proceeds in August 2004 and an additional $557,000 in January 2005.  The remaining $5.5 million of the sale proceeds are being held in escrow subject to the resolution of certain contingencies and time periods.  The sale resulted in a gain of approximately $5.9 million, which is included in non-operating income in our condensed consolidated statement of operations and excludes the sale of proceeds held in escrow.  As a result of the sale, we were released as guarantor of a letter of credit and terminated a $2.0 million standby letter of credit for TDS.

Share repurchase program.  In August 2002, our Board of Directors authorized the repurchase of up to $15.0 million in value of our outstanding common stock.  Under this authorization, which expired on December 8, 2002, we repurchased 920,200 shares for a total of $10.0 million.  In February and March 2004, our Board of Directors authorized the repurchase of up to $65 million in value of our outstanding common stock depending on market conditions and other factors.  During the program, which expired in July 2004, we repurchased approximately 3.4 million shares of our common stock at an average price of $17.37 per share for approximately $59.1 million.

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Stock options.  As of December 31, 2004, we had outstanding non-qualified stock options to purchase an aggregate of 2.9 million shares of common stock at exercise prices equal to the fair market value of the underlying common stock on the dates of grant (prices ranging from $8.88 to $33.81).  At the time a non-qualified stock option is exercised, we will generally be entitled to a deduction for federal and state income tax purposes equal to the difference between the fair market value of the common stock on the date of exercise and the option price.  As a result of non-qualified stock option exercises in 2004 and 2003 to purchase an aggregate of 2.1 million and 324,000 shares of common stock, we are entitled to a federal income tax deduction of approximately $19.2 million and $1.4 million, respectively.  We have recognized a reduction of our f ederal and state income tax liability of approximately $6.7 million and $474,000 in 2004 and 2003, respectively.  Accordingly, we recorded an increase to additional paid-in capital and a reduction to current taxes payable.  Any exercises of non-qualified stock options in the future at exercise prices below the then fair market value of the common stock may also result in tax deductions equal to the difference between those amounts.  There is uncertainty as to whether the exercises will occur, the amount of any deductions, and our ability to fully utilize any tax deductions.

Disclosures About Contractual Obligations and Commercial Commitments

A summary of payments due by period of our contractual obligations and commercial commitments as of December 31, 2004 are shown in the table below (in thousands).  A more complete description of these obligations and commitments is included in the notes to our consolidated financial statements.

In addition to the contractual obligations above, as of December 31, 2004, we have payments of up to $4.0 million contingently payable during 2005 related to business acquisitions.  See note 4 of the notes to the consolidated financial statements.

Certain Relationships and Related Party Transactions

Aircraft usage payments

James R. Crane, our Chairman of the Board and Chief Executive Officer, held interests in two entities (one of which is 50% owned and one of which is wholly owned by Mr. Crane) that lease passenger aircraft to us.  From time to time, our employees use these aircraft in connection with travel associated with our business, for which we make payments to those entities.  During the years ended December 31, 2004, 2003 and 2002, we reimbursed Mr. Crane $1.2 million, $621,000 and $1.2 million, respectively, for actual hourly usage of the aircraft.  In January 2005, we purchased from an unrelated third party an aircraft that was previously leased by an entity controlled by Mr. Crane for $12.5 million to be utilized for business travel, eliminating the use of Mr. Crane’s aircraft and reimbursement thereof.  

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Investment in Miami Air International, Inc.

In July 2000, we purchased 24.5% of the outstanding common stock of Miami Air International, Inc., a privately held domestic and international passenger charter airline headquartered in Miami, Florida, for approximately $6.3 million in cash.  Our primary objective for engaging in the transaction was to develop a business relationship with Miami Air in order to obtain access to an additional source of reliable freight charter capacity.  In the transaction, certain stockholders of Miami Air sold 82% of the aggregate number of outstanding shares of Miami Air common stock to private investors, including EGL, James R. Crane and Frank J. Hevrdejs, a member of our Board of Directors.  Mr. Crane purchased 19.2% of the outstanding common stock for approximately $4.7 million in cash and Mr. Hevrdejs purchased 6.0% of the outstanding common stock for approximately $ 1.5 million in cash.

In connection with the Miami Air investment, Miami Air and EGL entered into an aircraft charter agreement whereby Miami Air agreed to convert certain of its passenger aircraft to cargo aircraft and to provide aircraft charter services to us for a three-year term.  In addition, we caused a standby letter of credit to be issued in favor of certain creditors for Miami Air to assist Miami Air in financing the conversion of its aircraft.  Miami Air agreed to pay us an annual fee equal to 3.0% of the face amount of the letter of credit and to reimburse us for any payments made by us in respect to the letter of credit.

There were previously four aircraft subject to the aircraft charter agreement.  During 2001, we paid Miami Air approximately $11.8 million under the aircraft charter agreement for use of four 727 cargo airplanes under an aircraft, crew, maintenance and insurance, or ACMI, agreement.  The payments were based on market rates in effect at the time the lease was entered into.  In late February 2002, EGL and Miami Air mutually agreed to ground one of these aircraft because of the need for maintenance on that plane.  During the first four months of 2002, there were three aircraft subject to the aircraft charter agreement and we paid approximately $6.1 million related to this agreement.  In May 2002, EGL and Miami Air mutually agreed to cancel the aircraft charter agreement for the three planes as of May 9, 2002 and we agreed to pay $450,000 for servic es rendered in May 2002 and aircraft repositioning costs.

In May 2004, we sold our investment in Miami Air to an unrelated party for approximately $6.7 million in cash.  In conjunction with Miami Air’s deteriorating financial condition and liquidity issues, we had written off our investment in Miami Air in the first quarter of 2002.  The sale resulted in a gain of $6.7 million, which is included in nonoperating income in the condensed consolidated statement of operations.  As a result of the sale, we were released as guarantor of Miami Air’s letter of credit and terminated the $3.0 million standby letter of credit for Miami Air.

Miami land purchase

Our operations in Miami, Florida were located in three different facilities.  In order to increase operational efficiencies, we acquired land to be used as the site for a new facility to consolidate our Miami operations.  We acquired the land in August 2002 from a related party entity controlled by Mr. Crane for $9.8 million in cash, including acquisition costs of $131,000.  This parcel of land had been previously identified by us as the most advantageous property on which to consolidate our Miami operations.  We entered into negotiations on the land and reached agreement with the seller on terms.  However, given the downturn in the economy and our weakening financial condition at that point in time, we elected to delay purchasing this property until our financial condition improved.  On July 10, 2001, Mr. Crane purchased the land in antici pation of reselling the land to EGL.  Our Audit Committee, consisting of four independent directors, engaged in an analysis and discussion regarding whether it was in the best interest of EGL to enter into a purchase agreement to purchase this particular tract of land from Mr. Crane.  The Audit Committee’s analysis included, but was not limited to, obtaining an independent appraisal of the land, reviewing a comparative properties analysis performed by an outside independent real estate company and performing a cost benefit analysis for several different alternatives.  Based upon the data obtained from the analysis, the Audit Committee determined the best alternative for EGL, in its opinion, was for us to purchase the property from Mr. Crane.  The Audit Committee then made a

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recommendation to our Board of Directors, which includes six independent directors, to purchase this land at Mr. Crane’s purchase price plus carrying costs, which was lower than the current market value.  In August 2002, our Board of Directors unanimously approved the purchase, with Mr. Crane abstaining from the vote.  Construction of the new Miami facility was completed in November 2003 and we consolidated our Miami operations at the new facility.

EGL Subsidiaries Spain and Portugal

In April 1999, Circle sold a 49% interest in its two previously wholly-owned subsidiaries in Spain and Portugal for $1.3 million to Peter Gibert.  Mr. Gibert was one of our directors in 2000 and 2001 and resigned from the Board of Directors in May 2002.  In June 2004, we purchased the interest back from Mr. Gibert under the purchase option provisions of the original agreement (see note 4 of the notes to the consolidated financial statements).

Shared employees

Certain of our employees also perform services for companies owned by Mr. Crane.  We are reimbursed for these services based upon an allocation percentage of total salaries agreed to by us and Mr. Crane.  We received reimbursements of $135,000, $62,000 and $100,000 for 2004, 2003 and 2002, respectively.  Amounts billed but not received as of December 31, 2004 was $78,000 and is included in other receivables on the consolidated balance sheets.

Source One Spares

Mr. Crane is a director and 24.9% shareholder of Source One Spares, Inc., a company specializing in the just-in-time delivery of overhauled flight control, actuation and other rotable airframe components to commercial aircraft operators around the world.  In May 1999, we began subleasing a portion of our warehouse space in Houston, Texas and London, England to Source One Spares pursuant to a five-year sublease, which was terminated in early 2002.  Following termination of the sublease, we subleased the warehouse to Source One on a month to month basis.  This arrangement ended in 2003.  Rental income was approximately $95,000 for the year ended December 31, 2003.  During 2003, we billed Source One Spares approximately $7,000 for freight forwarding services.

Seasonality

Historically, our operating results have been subject to a limited degree to seasonal trends when measured on a quarterly basis.  Typically, our first fiscal quarter is weaker when compared to our other fiscal quarters of the corresponding year.  The seasonality of our business is a result of a variety of factors, including holiday seasons, consumer demand, economic conditions and other factors beyond our control.  We cannot accurately forecast many of these factors, nor can we estimate accurately the relative influence of any particular factor.  As a result, there can be no assurance that historical patterns, if any, will continue in future periods.

Critical Accounting Policies and Estimates

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates that affect the amounts reported in the financial statements and accompanying notes.  Management considers many factors in selecting appropriate operational and financial accounting policies and controls, and in developing the assumptions that are used in the preparation of these financial statements.  Management must apply significant judgment in this process.  Among the factors, but not fully inclusive of all factors that may be considered by management in these processes are:

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the range of accounting policies permitted by accounting principles generally accepted in the United States of America,

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management’s understanding of the company’s business – both historical results and expected future results,

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the extent to which operational controls exist that provide high degrees of assurance that all desired information to assist in the estimation is available and reliable or whether there is greater uncertainty in the information that is available upon which to base the estimate,

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expectations of the future performance of the economy – domestically, globally and within various sectors that serve our principal customers and suppliers of goods and services,

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expected rates of change, sensitivity and volatility associated with the assumptions used in developing estimates and

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whether historical trends are expected to be representative of future trends.

The estimation process often times may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that lies within that range of reasonable estimates – which may result in the selection of estimates that may be viewed as conservative or aggressive by others – based upon the quantity, quality and risks associated with the variability that might be expected from the future outcome and the factors considered in developing the estimate.  Management attempts to use its business and financial accounting judgment in selecting the most appropriate estimate, however, actual amounts could and will differ from those estimates.

Revenue recognition

Domestic revenues and most domestic operating costs are recognized when shipments are picked up from the customer.  International revenues and freight consolidation costs are recognized in the period when shipments are tendered to a carrier for transport to a foreign destination.  This is one of the permissible methods under Emerging Issues Task Force (EITF) Issue No. 91-9, “Revenue and Expense Recognition for Freight Services in Process.”  This method generally results in recognition of revenues and gross profit earlier than methods that do not recognize revenues until a proof of delivery is received.  Customs brokerage and other revenues are recognized upon completing the documents necessary for customs clearance or completing other fee-based services.  Revenues recognized as an indirect air carrier or an ocean freight consolidator includes the direct carri er’s charges to EGL for carrying the shipment.  Revenues recognized in other capacities include only the commission and fees received.  In January 2002, EITF Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out of Pocket’ Expenses Incurred” was effective for EGL.  This issue clarified certain provisions of EITF No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” and among other things established when reimbursements are required to be shown gross as opposed to net.  We report the costs of certain reimbursed incidental activities on a gross basis in revenues and cost of transportation.

We derive our revenues from three principal sources:  air freight forwarding, ocean freight forwarding, and customs brokerage, import and logistics services.

Air and ocean freight forwarding.  As primarily a non-asset based carrier, we do not own transportation assets.  Instead, we generate the majority of our air and ocean freight revenues by purchasing transportation services from direct (asset-based) carriers and reselling those services to our customers as an indirect carrier.  Additionally, we generate air freight and ocean freight forwarding revenues to a lesser extent as an authorized cargo sales agent.

As an indirect carrier, we obtain shipments from our customers, consolidate shipments bound for a particular destination, determine the routing, select the direct carrier and tender each consolidated lot as

43

a single shipment to the direct carrier for transportation to a distribution point.  We issue a House Airway Bill (HAWB) or a House Ocean Bill of Lading (HOBL) to customers as the contract of carriage.  In turn, when the freight is physically tendered to a direct carrier, we receive a contract of carriage known as a Master Airway Bill for air freight shipments and a Master Ocean Bill of Lading for ocean shipments.  We are the direct point of contact for service fulfillment and resolving any service failures or claims for lost or damaged freight resulting from either our or the direct carriers’ actions.  In addition, if we do not collect from our customers, we are still responsible for paying the direct carrier.

Due to the high volume of freight we manage, we generally obtain lower rates from the direct carriers than the rates we charge our customers for individual shipments.  This rate differential is the primary source of our air and ocean freight net revenues.  We have complete discretion in selecting the means, route and procedures to be followed in the handling, transportation and delivery of freight.  We select the direct carrier that will provide the most economical routing in an effort to maximize net revenues.

Revenues related to shipments where we act as an indirect carrier are reported based on the gross amount billed to the customer and include the charges for carrying the shipments.  Based upon the terms in the contract of carriage, revenues are recognized at the time the freight is tendered to the direct carrier at origin.  Costs related to the shipments are also recognized at this time.

As an authorized cargo sales agent of most airlines and ocean shipping lines, we also arrange for transportation of individual shipments and receive a commission from the airline or ocean shipping line for arranging the shipments.  When acting in this capacity, we do not consolidate shipments or have responsibility for shipments once they have been tendered to the carrier.  Therefore, revenues include only the commissions and fees received.  These revenues are recognized upon completion of the services.

Customs brokerage and other services.  Customs brokerage and import services involve providing services at destinations, such as helping customers clear shipments through customs by preparing required documentation, calculating and providing for payment of duties and other taxes on behalf of the customers as well as arranging for any required inspections by governmental agencies and arranging for delivery.  We also offer a range of logistics services, distribution and materials management services, international insurance services, global project management services and trade facilitation services.  Revenues include the fees received for these services and are recognized upon completion of the services.

Allowance for doubtful accounts

Our allowance for doubtful accounts is determined using a combination of factors based on the expected ultimate recovery of trade receivables.  We maintain a bad debt reserve for all customers based on a variety of factors, including the length of time receivables are past due, general and specific economic trends, significant one-time events and historical customer collection experience.  Also, we record additional reserves for individual accounts when we become aware of a customer’s inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position.  Trade receivables include disbursements made by us on behalf of our customers for transportation costs and customs duties.  As the billings to customers for these disbursements may be several times the amount of revenues and fees derived from these transactions, the inability to collect such amounts could result in losses greater than the revenues recognized when such billings were recorded.  If circumstances related to customers change, our estimates of the allowance for doubtful accounts would be further adjusted.

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Computer software

Certain costs related to the development or purchase of internal-use software during the application development stage are capitalized and amortized over the estimated useful life of the software.  The following types of costs incurred during the application development stage are capitalized: (a) external direct costs of materials and services consumed in developing or obtaining internal-use software, (b) payroll and payroll related costs for employees who are directly associated with and who devote time to the internal-use software project, (c) interest costs incurred in developing software for internal use, and (d) costs to develop or obtain software that allows for access or conversion of old data into new systems.  Costs related to the preliminary project stage, data conversion and the post-implementation/operation stage of a software development project a re expensed as incurred.  On retirement or sale of assets, the cost of such assets and accumulated depreciation are removed from the accounts and the gain or loss, if any, is credited or charged to income.

We have incurred substantial costs during the periods presented related to a number of information systems projects that were being developed over that time period.  Inherent in the capitalization of those projects are the assumptions that after considering the technological and business issues related to their development, such development efforts will be successfully completed and that benefits to be provided by the completed projects will exceed the costs capitalized to develop the systems.  Management believes that all projects capitalized at December 31, 2004 will be successfully completed and will result in benefits recoverable in future periods.

Goodwill and other intangibles

Goodwill represents the excess of purchase price over the fair value of net assets acquired.  Goodwill is a residual amount and is determined after numerous estimates are made regarding the fair value of assets and liabilities included in a business combination, and therefore, indirectly affected by management’s estimates and judgments.  We review goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.”  The provisions of SFAS No. 142 require that a two-step impairment test be performed on goodwill.  In the first step, we compare the fair value of each reporting unit to its carrying value.  We determine the fair value of our reporting units based on the present value of est imated future cash flows.  If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and we are not required to perform further testing.  If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then we must perform the second step in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill.  If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then we must record an impairment loss equal to the difference.

The income approach, which we use to estimate the fair value of our reporting units is dependent on a number of factors including estimates of future market growth and trends; forecasted revenue, costs, cash flows and capital expenditures, and the timing thereof; appropriate discount rates; tax rates and other variables.  We base our fair value estimates on assumptions we believe to be reasonable, but which are unpredictable and inherently uncertain.  Actual future results may differ from those estimates.  In addition, we make certain assumptions to allocate shared assets, liabilities and overhead costs to calculate the carrying values for each of our reporting units.

Impairment of assets

Substantial judgment is necessary in the determination as to whether an event or circumstance has occurred that may trigger an impairment analysis and in determination of the related cash flows from the asset.  Estimating cash flows related to long-lived assets is a difficult and subjective process that applies historical experience and future business expectations to revenues and related operating costs of assets.  Should impairment appear to be necessary, subjective judgment must be applied to estimate the fair value

45

of the asset, for which there may be no ready market, which oftentimes results in the use of discounted cash flow analysis and judgmental selection of discount rates to be used in the discounting process.  If we determine an asset has been impaired based on the projected undiscounted cash flows of the related asset or the business unit over the remaining amortization period, and if the cash flow analysis indicates that the carrying amount of an asset exceeds related undiscounted cash flows, the carrying value is reduced to the estimated fair value of the asset or the present value of the expected future cash flows.

Merger and restructuring

We have engaged in merger and restructuring actions which require our management to utilize significant estimates related to future lease obligations for duplicate facilities, expenses for severance and other employee separation costs and costs for termination of joint venture/agency agreements.  Management makes significant estimates, including the amount of sublease income we will recover for future lease obligations on duplicate facilities.  Should the actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted.  See note 18 of the notes to the consolidated financial statements.

Taxes on earnings

Our effective tax rate includes the impact of certain undistributed foreign earnings for which no U.S. taxes have been provided because such earnings are planned to be reinvested indefinitely outside the United States.  Material changes in our estimates of cash, working capital and long-term investment requirements could impact our effective tax rate.

We reversed half of the valuation allowance that was fully reserved for our state net operating losses during the fourth quarter.  We also recorded valuation allowances to fully reserve deferred tax assets generated from certain foreign jurisdictions.  We considered our historical performance, forecasted taxable income and other factors in determining the sufficiency of our valuation allowance.  Objective factors such as current year and previous year net operating loss utilization were given more weight than our outlook for future realization of the losses.  We believe we should generate sufficient taxable income to utilize a substantial portion of our net operating loss carryforwards before their expiration.  We also have deferred tax assets for certain foreign and federal tax credits which management believes will be fully realized in the fut ure based on current year utilization of foreign tax credits and our outlook for future utilization.  In order to realize our deferred tax assets, we must be able to generate sufficient taxable income in the specific tax jurisdictions to offset the deferred tax assets.  In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period such determination is made.  If we later determine or are able to realize the deferred tax assets for the state or foreign net operating losses our valuation allowance could be reversed.

Our federal income tax returns from fiscal years 2000 to 2001 are currently subject to audit by the Internal Revenue Service.  Management believes it has filed such returns in accordance with applicable tax laws in effect at the time.  However, there is no assurance that such audits will not result in future adjustments.

Other critical accounting policies

See note 1 of the notes to our consolidated financial statements for further information on our critical accounting policies and the judgment made in their application.

New accounting pronouncements

In December 2003, the FASB revised Statement of Financial Accounting Standards No. 132R, “Employers’ Disclosures about Pensions and Other Postretirement Benefits – an amendment of FASB Statements No. 87, 88 and 106” (SFAS 132R).  SFAS 132R expanded the disclosure requirements for

46

benefit plans to include information describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods.  Most of the additional disclosures required by SFAS 132R were effective for annual periods ending after December 31, 2003 and interim periods beginning after December 31, 2003, except for annual disclosures for foreign plans, in which annual disclosures were effective for periods ending after June 15, 2004.  All of our defined benefit plans are foreign plans and, accordingly, we have included disclosures required by SFAS 132R in these consolidated financial statements.

In March 2004, the Emerging Issues Task Force issued Statement No. 03-06, or EITF 03-06, "Participating Securities and the Two-Class Method under Financial Accounting Standards Board Statement No. 128, Earnings Per Share." EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The Statement also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings t o such a security. EITF 03-06 was effective for fiscal periods beginning after March 31, 2004.  The adoption of EITF 03-06 did not have an impact on our computation of earnings per share.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation.” (SFAS 123) and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”  SFAS 123R requires all share-based payments to employees, including grants of employee stock options and employee stock purchase plans, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period beginning after June 15, 2005, with early adoption encouraged.  In addition, SFAS 123R will cause unrecognized expense (based on the amount in our pro forma footnote disclosure) related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting p eriod.  We are required to adopt SFAS 123R in the third quarter of 2005, beginning July 1, 2005.  Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption.  The transition alternatives include prospective and retrospective adoption methods, prior periods may be restated either as the beginning of the year of adoption or for all periods presented.  The prospective method requires that compensation expense be recorded for all unvested stock options and share awards as of the beginning of the first quarter of adoption of SFAS 123R, while the retrospective methods would record compensation expense for all unvested stock options and share awards beginning with the first period restated.  We are evaluating the requirements of SFAS 123R and expect the adoption of SFAS 123R will have a material impact on the consolidated results of operations, earnings per share and consolidated statement of cash flows.  We have not determined the method of adoption or the effect of adopting SFAS 123R.

In December 2004, the FASB issued FASB Staff Position No. 109–2 (FSP 109–2), “Accounting and Disclosure Guidance for the Foreign Repatriation Provision within the American Jobs Creation Act of 2004”, which provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the Act on a company’s income tax expense and deferred tax liability. FSP 109–2 states that a company is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earnings for pur poses of applying SFAS No. 109.  We have not yet determined if we intend to repatriate foreign earnings under the provisions in the Act.  Thus, our consolidated financial statements do not reflect a provision for taxes related to this election.  Any such repatriation under the Act must occur by December 31, 2005.  The range of any reasonable amount of repatriation is not available at this time.  The maximum amount as prescribed in the Act is $500 million.  Our evaluation of the effect of the election is expected to be completed by the end of the second quarter of 2005.

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ITEM 7A.

Quantitative and Qualitative Disclosures about Market Risk

Our cash flows and net income are subject to fluctuations due to changes in exchange rates.  We attempt to limit our exposure to changing foreign exchange rates through operational actions.  We provide services to customers in locations throughout the world and, as a result, operate with many functional currencies including the key currencies of North America, Latin America, Asia, the South Pacific and Europe.  This diverse base of local currency costs serves to partially counterbalance the effect of potential changes in the value of our local currency denominated revenues and expenses.  Short-term exposures to changing foreign currency exchange rates are related primarily to intercompany transactions.  The duration of these exposures is minimized through the use of an intercompany netting and settlement system that settles the majority of inter company obligations two times per month.  We use short term foreign exchange forward contracts on a limited basis to minimize exposures to exchange rates on recorded receivables and payables.  The value of foreign exchange forward contracts was not significant at December 31, 2004 or 2003.

As of December 31, 2004, we had no amounts outstanding under our line of credit.  Our lease payments on certain financed facilities are tied to market interest rates.  At December 31, 2004, a 10% rise in the base rate for these financing arrangements would not have a material impact on operating income in 2005.

We have not purchased any material futures contracts nor have we purchased or held any material derivative financial instruments for trading purposes during 2004.  

ITEM 8.

Financial Statements and Supplementary Data

The financial statements and supplementary information specified by this Item are presented following Item 15 of this report.

ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A.

Controls and Procedures

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this annual report.  In the course of this evaluation, management considered the material weaknesses in our internal control over financial reporting discussed below.  Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weaknesses discussed below, our disclosure controls and procedures were not effective, as of December 31, 2004, with respect to the recording, processing, summarizing and reporting, within the time periods specified in the SEC’s rules and forms, of information required to be disclosed by us in the reports that we file or submit under the Exchange Act.  In light of the material weaknesses, we performed additional analyses and other post-closing procedures in an effort to ensure our consolidated financial statements included in this annual report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial position, results of operations and cash flows for the periods presented.

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Management’s Report on Internal Control Over Financial Reporting

The management of EGL, Inc. and its subsidiaries (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act and for our assessment of the effectiveness of internal control over financial reporting.  The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

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

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004.  In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control-Integrated Framework.”  Our assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.  As of December 31, 2004, we have concluded that the Company did not maintain effective controls over the determination of income tax account balances and certain general ledger account reconciliations as described below.  

1.

Lack of effective controls over the determination of  income tax account balances

The Company did not maintain effective controls over the determination of income tax account balances.  Specifically, the Company did not maintain effective controls over: (i) the calculation of the income tax provision, (ii) the proper recording of deferred tax assets and related valuation allowances, (iii) the monitoring of its current and deferred income tax accounts on a worldwide basis, and (iv) reconciliation of the differences between the tax basis and book basis of each component of the Company’s balance sheet with the deferred tax asset and liability accounts.  This control deficiency resulted in the restatement of the Company’s consolidated financial statements for 2002, 2003 and the first three quarters of 2004, as well as audit adjustments to the fourth quarter 2004 financial statements.  Additionally, this control deficiency could result in a misstatement of income taxes pa yable, deferred income tax assets and liabilities and the related income tax provisions that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.  Accordingly, management determined that this control deficiency constitutes a material weakness.  

2.

Lack of effective controls over certain general ledger account reconciliations and the monitoring and review of general ledger accounts

The Company did not maintain effective controls over certain general ledger account reconciliations and the monitoring and review of general ledger accounts.  Specifically, general ledger account reconciliations involving cash, receivables, income taxes, property and equipment, other current and noncurrent assets, payables, accrued expenses, notes payable and other noncurrent liabilities in the United States, Mexico and United Kingdom were not properly performed on a timely basis and reconciling items were not timely resolved and adjusted as well as a lack of monitoring and review of these general ledger accounts.  This control deficiency resulted in the restatement of the Company’s consolidated financial statements for 2002, 2003 and the first three quarters of 2004 as well as audit adjustments to the fourth quarter 2004 financial statements.  Additionally, this control deficiency could res ult in a misstatement of the aforementioned account balances that would result in a material misstatement to the annual or interim

49

consolidated financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency constitutes a material weakness.

Because of these material weaknesses, we have concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2004, based on criteria in “Internal Control-Integrated Framework” issued by the COSO.

Management’s assessment of the effectiveness of the Company’s internal control over financial reporting has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

Remediation Efforts Related to Material Weaknesses

1.

Remediation efforts related to income taxes

The material weakness related to the calculation of the income tax provision, ineffective income tax reconciliation procedures, the proper recording of deferred tax assets and related valuation allowances for foreign operations, and the management of all of its income tax accounts on a worldwide basis will be addressed as described below:

Management has initiated and will be taking additional steps to remediate the deficiencies by (1) hiring additional qualified and experienced staff to manage the income tax accounting function, (2) augmenting the staff with the support of an outside firm with international tax expertise to recommend enhancements to the tax accounting function and to provide ongoing assistance and support in complex areas, (3) implementing a global financial training program to address the complexities in accounting for current and deferred taxes under United States generally accepted accounting procedures, (4) implementing more automated and formal controls to replace current manual controls, and (5) using additional technology resources to help assist in managing the complex income tax accounting function.

During the year, management had implemented additional controls to address some of the complexity and control deficiencies and engaged an outside accounting firm to review the income tax accounting function, and while improvement was noted, these were not enough to overcome the conclusion that controls in accounting for income tax was ineffective.  Management performed additional procedures relating to the taxes payable, deferred taxes and tax provision.  Due to these additional procedures performed, management believes that the 2004 consolidated financial statements as well as the financial statements for each quarter in 2004 (after the restatements described above) are fairly stated in all material respects.

2.

Remediation efforts related to general ledger account reconciliations and the monitoring and review of general ledger accounts

The material weakness related to general ledger account reconciliations was a result of ineffectiveness in timely reconciling certain general ledger accounts and the lack of monitoring and review of these general ledger accounts.  

Management has initiated and will be taking additional steps to remediate any deficiencies by (1) improving the organizational structure to achieve the proper levels of quantity and quality of our accounting, finance and internal audit personnel, (2) strengthening the procedures for specific account reconciliations through written policies and procedures to ensure amounts recorded are supported by detailed and documentary support for the period covered, (3) implementing monitoring controls on the status of account reconciliations, monthly deadlines for completing the reconciliation and management review on a monthly or quarterly basis depending on the type of account, and (4) improving processes, especially for two subsidiaries providing materials procurement and vehicle leasing services, by automating and integrating linkages between operational transactions and the accounting system.

50

All significant accounts impacted by the control deficiencies described above have been properly reconciled as of December 31, 2004.

Changes in Internal Control over Financial Reporting

Other than as described above, there have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.

Other Information

None

PART III

ITEM 10.

Directors and Executive Officers of the Registrant

The information required by this item is incorporated by reference to information under the caption “Proposal 1—Election of Directors” and to the information under the caption “Section 16(a) Reporting Delinquencies” in our definitive Proxy Statement (the “2005 Proxy Statement”) for our 2005 annual meeting of shareholders.

Code of Ethics

We have adopted a code of business conduct and ethics for directors, officers (including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer) and employees, known as the Code of Conduct.  Anyone may, without charge, upon request, receive a copy of the Code of Conduct from:

EGL, Inc.

Attention: Investor Relations

15350 Vickery Drive

Houston, TX 77032

(281) 618-3100

In the event that we make changes in, or provide waivers from, the provisions of our code of business conduct and ethics that the SEC or the NASDAQ Stock Market require us to disclose, we intend to disclose these events on our website.

Pursuant to Item 401(b) of Regulation S-K, the information required by this item with respect to our executive officers is set forth in Part I of this report.

ITEM 11.

Executive Compensation

The information required by this item is incorporated herein by reference to the 2005 Proxy Statement.

ITEM 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated herein by reference to the 2005 Proxy Statement.

Equity Compensation Plans

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The following table sets forth information about EGL’s common stock that may be issued under all of our existing equity compensation plans as of December 31, 2004 (shares in thousands):

(1)

These plans include the EGL Long-Term Incentive Plan, the EGL Employee Stock Purchase Plan and the EGL 1995 Non-Employee Director Stock Plan.

(2)

Includes 110,460 shares of EGL common stock to be issued upon the exercise of outstanding options assumed in connection with the acquisition of Circle International Group, Inc. at a weighted average exercise price of $22.50, which options were originally issued under one of the following Circle plans:  the 1982 Stock Option Plan, the 1990 Stock Option Plan, the 1994 Omnibus Equity Incentive Plan, the 1999 Stock Option Plan and the Employee Stock Purchase Plan.  No additional awards may be granted under the Circle plans.  Also excludes shares of EGL common stock issuable under the EGL Employee Stock Purchase Plan.

(3)

Excludes restricted stock.

(4)

Includes 355,000 shares of EGL common stock remaining available for future issuance under the EGL Employee Stock Purchase Plan and excludes securities to be issued upon exercise of outstanding options, warrants and rights.

ITEM 13.

Certain Relationships and Related Transactions

The information required by this item is incorporated herein by reference to the 2005 Proxy Statement.

ITEM 14.

Principal Accountant Fees and Services

The information required by this item is incorporated by reference to the 2005 Proxy Statement.

52

PART IV

ITEM 15.

Exhibits and Financial Statement Schedules

(a)

1) Financial Statements

Item

Page

Index

F-1

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets as of December 31, 2004 and 2003

F-5

Consolidated Statements of Operations for the Years Ended

December 31, 2004, 2003 and 2002

F-6

Consolidated Statements of Cash Flows for the Years Ended

December 31, 2004, 2003 and 2002

F-7

Consolidated Statements of Stockholders’ Equity for the Years Ended

December 31, 2004, 2003 and 2002

F-9

Notes to Consolidated Financial Statements

F-10

2) Financial Statement Schedules

Schedule II Valuation and Qualifying Accounts for the Years Ended

December 31, 2004, 2003 and 2002

S-1

Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto.

(b)Exhibits

53

54

55

*

Incorporated by reference as indicated.

†

Management contract or compensatory plan or arrangement.

56

SIGNATURES

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

EGL, INC.

By:  /s/ James R. Crane

James R. Crane

Chairman and

Chief Executive Officer

Date:  

March 31, 2005

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

57

EGL, Inc.

Index to Consolidated Financial Statements

F-1

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

of EGL, Inc.:

We have completed an integrated audit of EGL, Inc.’s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Our opinions, based on our audits, are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of EGL, Inc. and its subsidiaries (the Company) at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  These financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company’s 2003 and 2002 consolidated financial statements have been restated.

Internal control over financial reporting

Also, we have audited management's assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A, that EGL, Inc. did not maintain effective internal control over financial reporting as of December 31, 2004, because the Company did not maintain effective controls over the determination of income tax account balances and over certain general ledger account reconciliations and the monitoring and review of general ledger accounts, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express opinions on manageme nt's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.  An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal

F-2

control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.  The following material weaknesses as of December 31, 2004 have been identified and included in management's assessment.

1.

Lack of effective controls over the determination of  income tax account balances

The Company did not maintain effective controls over the determination of income tax account balances.  Specifically, the Company did not maintain effective controls over: (i) the calculation of the income tax provision, (ii) the proper recording of deferred tax assets and related valuation allowances, (iii) the monitoring of its current and deferred income tax accounts on a worldwide basis, and (iv) reconciliation of the differences between the tax basis and book basis of each component of the Company’s balance sheet with the deferred tax asset and liability accounts.  This control deficiency resulted in the restatement of the Company’s consolidated financial statements for 2002, 2003 and the first three quarters of 2004, as well as audit adjustments to the fourth quarter 2004 financial statements.  Additionally, this control deficiency could result in a misstatement of income taxes pa yable, deferred income tax assets and liabilities and the related income tax provisions that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.  Accordingly, management determined that this control deficiency constitutes a material weakness.  

2.

Lack of effective controls over certain general ledger account reconciliations and the monitoring and review of general ledger accounts

The Company did not maintain effective controls over certain general ledger account reconciliations and the monitoring and review of general ledger accounts.  Specifically, general ledger account reconciliations involving cash, receivables, income taxes, property and equipment, other current and noncurrent assets, payables, accrued expenses, notes payable and other noncurrent liabilities in the United States, Mexico and United Kingdom were not properly performed on a timely basis and reconciling items were not timely resolved and adjusted as well as a lack of monitoring and review of these general ledger accounts.  This control deficiency resulted in the restatement of the Company’s consolidated financial statements for 2002, 2003 and the first three quarters of 2004 as well as audit adjustments to the fourth quarter 2004 financial statements.  Additionally, this control deficiency could res ult in a misstatement of the aforementioned account balances that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency constitutes a material weakness.

F-3

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2004 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

In our opinion, management's assessment that EGL, Inc. did not maintain effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on criteria established in Internal Control - Integrated Framework issued by the COSO.  Also, in our opinion, because of the effects of the material weaknesses described above on the achievement of the objectives of the control criteria, EGL, Inc. has not maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the COSO.

/s/ PricewaterhouseCoopers LLP

Houston, Texas

March 31, 2005

F-4

EGL, INC.

Consolidated Balance Sheets

December 31, 2004 and 2003

F-5

EGL, INC.

Consolidated Statements of Operations

Years Ended December 31, 2004, 2003 and 2002

F-6

EGL, INC.

Consolidated Statements of Cash Flows

Years Ended December 31, 2004, 2003 and 2002

F-7

EGL, INC.

Consolidated Statements of Cash Flows

Years Ended December 31, 2004, 2003 and 2002

F-8

EGL, INC.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2004, 2003 and 2002

F-9

EGL, INC.

Consolidated Statements of Stockholders’ Equity

Years Ended December 31, 2004, 2003 and 2002

F-9

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

Note 1 – Organization, basis of presentation and summary of significant accounting policies

EGL, Inc. (EGL or the Company) is a leading global transportation, supply chain management and information services company dedicated to providing flexible logistics solutions on a price competitive basis.  The Company’s services include air and ocean freight forwarding, customs brokerage, local pick up and delivery service, materials management, warehousing, trade facilitation and procurement and integrated logistics and supply chain management services.  The Company provides services through offices around the world as well as through its worldwide network of exclusive and nonexclusive agents.  In October 2000, the Company merged with Circle International Group, Inc. (Circle) and expanded its operations to over 100 countries on six continents.  The principal markets for all lines of business are North America, Europe and Asia with significant operations in the Middle East, South America and South Pacific (see Note 21).

Basis of presentation and principles of consolidation

The accompanying consolidated financial statements include EGL, all of its wholly-owned subsidiaries and investees that the Company controls, through majority ownership or other variable interests.  All significant intercompany balances and transactions have been eliminated in consolidation.  Investments in 50% or less owned affiliates, over which the Company has significant influence, are accounted for by the equity method.  The Company has reclassified certain prior year amounts to conform to the current year presentation.  In addition, the Company has restated its historical financial statements for 2002, 2003 and the first three quarters of 2004 (see Note 2).

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates that affect the amounts reported in the financial statements and accompanying notes.  Management considers many factors in selecting appropriate operational and financial accounting policies and controls, and in developing the assumptions that are used in the preparation of these financial statements.  Management must apply significant judgment in this process.  Among the factors, but not fully inclusive of all factors that may be considered by management in these processes are:  the range of accounting policies permitted by accounting principles generally accepted in the United States of America; management’s understanding of the Company’s business – both historical results and expected future resul ts; the extent to which operational controls exist that provide high degrees of assurance that all desired information to assist in the estimation is available and reliable or whether there is greater uncertainty in the information that is available upon which to base the estimate; expectations of the future performance of the economy, both domestically and globally, within various areas that serve the Company’s principal customers and suppliers of goods and services; expected rates of change, sensitivity and volatility associated with the assumptions used in developing estimates; and whether historical trends are expected to be representative of future trends.  The estimation process often times may yield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that lies within that range of reasonable estimates based upon the quantity, quality and risks associated with the variability that might be expected from the future outcome and the fa ctors considered in developing the estimate.  This estimation process may result in the selection of estimates which could be viewed as conservative or aggressive by others.  Management attempts to use its business and financial accounting judgment in selecting the most appropriate estimate however, actual amounts could and will differ from those estimates.

F-10

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

Cash and cash equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.  Cash equivalents are carried at cost, which approximates market value.  Cash overdrafts were $8.5 million and $3.8 million at December 31, 2004 and 2003, respectively, and were classified as trade payables on the Company’s consolidated balance sheet.

Restricted cash

As part of the settlement with the U.S. Equal Employment Opportunity Commission (“EEOC”), the Company is required to place certain amounts on deposit in a financial institution for the Class Fund and Leadership Development Fund.  The total amount included in restricted cash related to the settlement with the EEOC was $8.7 million as of December 31, 2004 (see Note 17).  Additionally, the Company has certain requirements related to security deposits that are restricted from withdrawal for a specified timeframe and therefore are classified as restricted cash (see Note 11).

Short-term investments and marketable securities

At December 31, 2004 and 2003, the Company had short-term investments in commercial paper, certificates of deposits, U.S. Treasury Bills and tax exempt municipal bonds with a carrying value of $587,000 and $543,000, respectively.  All outstanding securities at December 31, 2004 mature in less than one year.  The Company invests primarily in high-grade marketable securities.  All marketable securities are designated as available-for-sale securities.  Unrealized holding gains or temporary losses have been recorded by the Company as a component of other comprehensive income and loss at each balance sheet date.  As such, changes in the fair value of available for sale securities, net of deferred taxes, are excluded from income and presented in the stockholders’ equity section of the balance sheet as a component of accumulated other comprehensiv e loss.  As of December 31, 2004 and 2003, these investments are stated at cost, which approximates fair value.

Trade receivables

Management establishes an allowance for doubtful accounts on trade receivables based on the expected ultimate recovery of these receivables.  Management considers many factors, including historical customer collection experience, general and specific economic trends and known specific issues related to individual customers, sectors and transactions that might impact collectibility.  Trade receivables include disbursements made by EGL on behalf of its customers for transportation costs and customs duties.  As the billings to customers for these disbursements may be several times the amount of revenues and fees derived from these transactions and are not recorded as revenues and expenses on the Company’s statement of operations, the inability to collect such amounts could result in losses greater than the revenues recognized when such amounts were beli eved to be collectible.  The Company does not charge interest on its trade receivables.  Trade receivables are written off after all collection efforts have been exhausted.  

Property and equipment

Property and equipment are stated at cost.  The cost of property held under capital leases is equal to the lower of the net present value of the minimum lease payments or the fair value of the leased property at the inception of the lease.  Depreciation is computed principally by the straight-line method at rates based on the estimated useful lives of the various classes of property.  Estimates of useful lives are based upon a variety of factors including durability of the asset, the amount of usage that is expected from

F-11

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

the asset, the rate of technological change and the Company’s business plans for the asset.  Should the Company change its plans with respect to the use and productivity of property and equipment, it may require a change in the useful life of the asset or the Company may incur a charge to reflect the difference between the carrying value of the asset and the proceeds expected to be realized upon the asset’s sale or abandonment.  Expenditures for maintenance and repairs are expensed as incurred and significant major improvements are capitalized.

Computer software

Certain costs related to the development or purchase of internal-use software during the application development stage are capitalized and amortized over the estimated useful life of the software.  The following types of costs incurred during the application development stage are capitalized: (a) external direct costs of materials and services consumed in developing or obtaining internal-use software, (b) payroll and payroll related costs for employees who are directly associated with and who devote time to the internal-use software project, (c) interest costs incurred in developing software for internal use, and (d) costs to develop or obtain software that allows for access or conversion of old data into new systems.  Costs related to the preliminary project stage, data conversion and the post-implementation/operation stage of a software development project a re expensed as incurred.  Upon retirement or sale of assets, the cost of such assets and accumulated depreciation are removed from the accounts and the gain or loss, if any, is credited or charged to income.

The Company has incurred substantial costs during 2004, 2003 and 2002 related to a number of information systems projects that were being developed during that time period.  Inherent in the capitalization of those projects are the assumptions that after considering the technological and business issues related to their development, such development efforts will be successfully completed and that benefits to be provided by the completed projects will exceed the costs capitalized to develop the systems.  Management believes that all projects capitalized at December 31, 2004 will be successfully completed and will result in benefits recoverable in future periods.

Interest capitalization

The Company is in the process of developing several computer systems for future use.  Interest associated with these assets is capitalized and included in the cost of the asset.  The amount capitalized is calculated based upon the Company’s current incremental borrowing rate and was $1.1 million, $1.5 million and $986,000 for the years ended December 31, 2004, 2003 and 2002, respectively.

Financing receivables

The Company, through one of its subsidiaries, leases trucks obtained from third party manufacturers to its owner operators and other third parties.  The financing receivables represent sales-type or direct-financing leases with terms from three to five years generally collateralized by a security interest in the underlying asset.  Income produced by sales-type and direct-financing leases is recognized on the accrual basis under the effective interest method.

Real estate leases

The Company leases facilities and office space under operating leases.  Certain lease agreements contain rent holiday and/or rent escalation clauses.  For scheduled rent escalation clauses and rent holidays during the lease terms, the Company records minimum rental expenses on a straight-line basis over the terms of the leases.

F-12

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

Debt issuance costs

The Company capitalizes direct costs incurred to issue debt or modify debt agreements.  These costs are deferred and amortized to interest expense over the term of the related debt or credit facility agreement.

Goodwill and other intangibles

Goodwill represents the excess of purchase price over the fair value of net assets acquired.  Goodwill is a residual amount and is determined after numerous estimates are made regarding the fair value of assets and liabilities included in a business combination, and therefore, indirectly affected by management’s estimates and judgments.  In 2002, the Company adopted the provisions of SFAS No. 141, “Business Combinations” (SFAS 141), and SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142).  Effective January 1, 2002, the Company no longer amortizes goodwill and indefinite lived intangible assets but instead tests for impairment at least annually or whenever circumstances indicate a possible impairment.  Finite-lived intangible assets are amortized over the period of expected benefit.

SFAS 142 requires that goodwill be tested for impairment using a two-step approach; annually and when certain circumstances occur.  The first step is used to identify potential impairment by calculating a “fair value” of the reporting unit.  The Company’s reporting units for the purpose of SFAS 142 are its geographic divisions which are:  North America, Europe and Middle East, South America and Asia and South Pacific.  The calculated fair value amount in step one is then compared to the carrying amount of the reporting unit including goodwill.  If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired and the second step is not required.  If the estimated fair value is less than the carrying value of the assets, a prescribed step two calculation is required to determine t he amount of impairment to be recorded in the Company’s statement of operations.

The Company performed the step one analysis under SFAS 142 to test for goodwill impairment in the second quarter of 2002 for its initial test and selected October 31 for its annual test date.  The Company’s required assessments of goodwill related to each of its reporting units under step one of SFAS 142 did not indicate an impairment as of the initial test date, October 31, 2004 or 2003; therefore step two was not required at any of the testing dates.  The estimated fair value calculated and referred to above is an estimate based upon a number of assumptions.  The actual fair value of each reporting unit may vary significantly from its estimated fair value.

Impairment of assets

The Company evaluates fixed assets for impairment if an event or circumstance occurs that triggers an impairment test.  Substantial judgment is necessary in the determination as to whether an event or circumstance has occurred that may trigger an impairment analysis and in the determination of the related cash flows from the asset.  Estimating cash flows related to long-lived assets is a difficult and subjective process that applies historical experience and future business expectations to revenues and related operating costs of assets.  Should impairment appear to be necessary, subjective judgment must be applied to estimate the fair value of the asset, for which there may be no ready market, which oftentimes results in the use of discounted cash flow analysis and substantial judgment in the selection of discount rates to be used in the discounting proce ss.  If the Company determines an asset has been impaired based on the projected undiscounted cash flows of the related asset or the business unit over the remaining amortization period, and if the cash flow analysis indicates that the carrying amount of an asset exceeds related undiscounted cash flows, the carrying value is reduced to the estimated fair value of the asset or the present value of the expected future cash flows.

F-13

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

Foreign currency translation

Assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at year-end rates of exchange and income and expenses are translated at average exchange rates during the year.  Adjustments resulting from translating financial statements into U.S. dollars are reported as cumulative translation adjustments and are shown as a separate component of other comprehensive income (loss).  Gains and losses from foreign currency transactions are included in net income.

Revenue recognition

Domestic revenues and most domestic operating costs are recognized when shipments are picked up from the customer.  International revenues and freight consolidation costs are recognized in the period when shipments are tendered to a carrier for transport to a foreign destination.  This is one of the permissible methods under Emerging Issues Task Force (EITF) Issue No. 91-9, “Revenue and Expense Recognition for Freight Services in Process.”  This method generally results in recognition of revenues and gross profit earlier than methods that do not recognize revenues until a proof of delivery is received.  Customs brokerage and other revenues are recognized upon completing the documents necessary for customs clearance or completing other fee-based services.  Revenues recognized as an indirect air carrier or an ocean freight consolidator i ncludes the direct carrier’s charges to EGL for carrying the shipment.  Revenues recognized in other capacities includes only the commission and fees received.  In January 2002, EITF Issue No. 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out of Pocket’ Expenses Incurred” was effective for EGL.  This issue clarified certain provisions of EITF No. 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent,” and among other things established when reimbursements are required to be shown gross as opposed to net.  The Company reports the costs of certain reimbursed incidental activities on a gross basis in revenues and cost of transportation.

The Company derives its revenues from three principal sources:  air freight forwarding, ocean freight forwarding, and customs brokerage, import and logistics services.

Air and Ocean Freight Forwarding

As primarily a non-asset based carrier, the Company does not own transportation assets.  Instead, the Company generates the majority of its air and ocean freight revenues by purchasing transportation services from direct (asset-based) carriers and reselling those services to its customers as an indirect carrier.  Additionally, the Company generates air freight and ocean freight forwarding revenues to a lesser extent as an authorized cargo sales agent.

As an indirect carrier, the Company obtains shipments from its customers, consolidates shipments bound for a particular destination, determines the routing, selects the direct carrier and tenders each consolidated lot as a single shipment to the direct carrier for transportation to a distribution point.  The Company issues a House Airway Bill (HAWB) or a House Ocean Bill of Lading (HOBL) to customers as the contract of carriage.  In turn, when the freight is physically tendered to a direct carrier, the Company receives a contract of carriage known as a Master Airway Bill for air freight shipments and a Master Ocean Bill of Lading for ocean shipments.  The Company is the direct point of contact for service fulfillment and resolving any service failures or claims for lost or damaged freight resulting from either the Company’s or the direct carriers 6; actions.  In addition, if the Company does not collect from its customers, it is still responsible for paying the direct carrier.

F-14

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

Due to the high volume of freight the Company manages, it generally obtains lower rates from the direct carriers than the rates the Company charges its customers for individual shipments.  This rate differential is the primary source of the Company’s air and ocean freight net revenues.  The Company has complete discretion in selecting the means, route and procedures to be followed in the handling, transportation and delivery of freight.  The Company selects the direct carrier that will provide the most economical routing in an effort to maximize net revenues.

Revenues related to shipments where the Company acts as an indirect carrier are reported based on the gross amount billed to the customer and include the charges to the Company for carrying the shipments.  Based upon the terms in the contract of carriage, revenues are recognized at the time the freight is tendered to the direct carrier at origin.  Costs related to the shipments are also recognized at this time.

As an authorized cargo sales agent of most airlines and ocean shipping lines, the Company also arranges for transportation of individual shipments and receives a commission from the airline or ocean shipping line for arranging the shipments.  When acting in this capacity, the Company does not consolidate shipments or have responsibility for shipments once they have been tendered to the carrier.  Therefore, revenues include only the commissions and fees received.  These revenues are recognized upon completion of the services.

Customs Brokerage and Other Services

Customs brokerage and import services involve providing services at destination, such as helping customers clear shipments through customs by preparing required documentation, calculating and providing for payment of duties and other taxes on behalf of the customers as well as arranging for any required inspections by governmental agencies and arranging for delivery.  The Company also offers a range of logistics services, distribution and materials management services, international insurance services, global project management services and trade facilitation services.  Revenues include the fees received for these services and are recognized upon completion of the services.

Stock-based compensation

At December 31, 2004, the Company has seven stock-based employee compensation plans under which stock-based awards have been granted.  The Company accounts for stock-based awards to employees and non-employee directors using the intrinsic value method prescribed in Accounting Principles Board No. 25, “Accounting for Stock Issued to Employees,” (APB 25) and related interpretations.  The intrinsic value method used by the Company generally results in no compensation expense being recorded related to stock option grants made by the Company because those grants are typically made with option exercise prices equal to fair market value at the date of option grant.  The application of the alternative fair value method under SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), which estimates the fair value of the option awarded to the employee, would result in compensation expense being recognized over the period of time that the employee’s rights in the options vest.  The following table illustrates the pro forma effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.

F-15

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

The weighted-average fair values of options granted during 2004, 2003 and 2002 were $17.69, $5.47 and $5.97, respectively.  The fair value of each option granted is estimated on the date of grant using the Black-Scholes model with no assumed dividend yield and the following weighted average assumptions used for grants:

Provision for income taxes

The Company accounts for income taxes using the asset and liability method.  Deferred tax liabilities and assets are determined based on temporary differences between the basis of assets and liabilities for income tax and financial reporting purposes.  The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences.  Valuation allowances are established when necessary based upon the judgment of management to reduce deferred tax assets to the amount expected to be realized and could be necessary based upon estimates of future profitability and expenditure levels over specific time horizons in particular tax jurisdictions.

Comprehensive income (loss)

In addition to net income, comprehensive income (loss), includes, as applicable, foreign currency translation adjustments, minimum pension liability adjustments, unrealized gains and losses on certain investments in debt and equity securities, the effects of qualifying hedging activities and changes in stockholders’ equity that are not the result of transactions with stockholders.

F-16

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

Accumulated other comprehensive loss consists of the following:

Fair value of financial instruments

The fair values presented throughout these financial statements have been estimated using appropriate valuation methodologies and market information available at December 31, 2004 and 2003.  However, ready trading markets do not exist for all of these items and considerable judgment is required in interpreting market data to develop estimates of fair value and the estimates presented are not necessarily indicative of the amounts that EGL could realize in a current market exchange.  The use of different market assumptions or estimation methodologies could have a material effect on the estimated fair values.  Additionally, the fair values presented throughout these financial statements have not been estimated since December 31, 2004.  Current estimates of fair value may differ significantly from the amounts presented.  The following method and ass umptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

Cash and cash equivalents, restricted cash, short-term investments and marketable  securities.  The carrying amount approximates fair value because of the short maturity of those instruments.

Debt.  The fair value of the Company’s convertible subordinated notes was estimated based upon an indicative price quotation of the notes on the balance sheet dates.  An indicative price quotation includes a bid and offer price provided by a market maker for the purpose of evaluation or information.  The Company’s other debt approximates fair value as most of the Company’s notes payable have variable interest rates or are repaid over a very short maturity schedule.

Foreign currency forward contracts.  The fair value is estimated based on the U.S. dollar equivalent at the contract exchange rate.  Any gain or loss is largely offset by a change in the value of the underlying transaction, and is recorded as an unrealized foreign exchange gain or loss until the contract maturity date.  The fair value of foreign currency forward contracts as of December 31, 2004 and 2003 is insignificant.

F-17

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

The carrying amounts and estimated fair values of financial instruments (assets and liabilities) are as follows:

Risks and uncertainties

The Company’s operations are influenced by many factors, including the global economy, international laws and currency exchange rates.  The impact of some of these risk factors is reduced by having customers in a wide range of industries located throughout the world.  However, contractions in the more significant economies of the world (either countries or industrial sectors) could have a substantial negative impact on the rate of the Company’s growth and its profitability.  The availability and affordability of airlift and other transportation capacity could also significantly influence the Company’s operations.  Acts of war or terrorism could influence these areas of risk and the Company’s operations.  Doing business in foreign locations subjects the Company to various risks and considerations typical to foreign enterprises including, but not limited to, economic and political conditions in the United States and abroad, currency exchange rates, tax laws and other laws and trade restrictions.

Concentration of credit risk

The Company’s customers include retailing, wholesaling, manufacturing, electronics and telecommunications companies, as well as international agents throughout the world.  Management believes that concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company’s customer base and their dispersion across many different industries and geographic regions.  The Company performs ongoing credit evaluations of its customers to minimize credit risk and generally does not obtain collateral for trade receivables.  The Company’s investment policies restrict investments to low-risk, highly liquid securities and the Company performs periodic evaluations of the relative credit standing of the financial institutions with which it deals.

Derivative instruments

The Company recognizes all derivative instruments on the balance sheet at fair value.  The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship, and further, on the type of hedging relationship.  For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of the foreign currency exposure of a net investment in a foreign operation.

For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values.  For

F-18

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of the interest rate or foreign currency exposure.  For derivative instruments that are designated and qualify as a hedge of a net investment in a foreign operation currency, the gain or loss is reported in other comprehensive income as part of the cumulative translation adjustment to the extent it is effective.  For derivative instruments not desig nated as hedging instruments, the gain or loss is recognized in current earnings during the period of change.

The Company uses derivative financial instruments primarily to reduce its exposure to fluctuations in foreign currency exchange rates.  The Company formally designates and documents the financial instrument as a hedge of a specific underlying exposure when it is entered into, as well as the risk, management objectives and strategies for undertaking the hedge transaction.  Derivatives are recorded in the balance sheet at fair value in either other assets or other liabilities.  The earnings impact resulting from the derivative instruments is recorded in the same line item within the statement of operations as the underlying exposure being hedged.  The Company also formally assesses, both at inception and at least quarterly thereafter, whether the derivative instruments that are used in hedging transactions are effective at offsetting changes in either the fair value or cash flows of the related underlying exposures.  The ineffective portion of a derivative instrument’s change in fair value is recognized in earnings.

New accounting pronouncements

In December 2003, the FASB revised Statement of Financial Accounting Standards No. 132R, “Employers’ Disclosures about Pensions and Other Postretirement Benefits – an amendment of FASB Statements No. 87, 88 and 106” (SFAS 132R).  SFAS 132R expanded the disclosure requirements for benefit plans to include information describing the types of plan assets, investment strategy, measurement date(s), plan obligations, cash flows, and components of net periodic benefit cost recognized during interim periods.  Most of the additional disclosures required by SFAS 132R were effective for annual periods ending after December 31, 2003 and interim periods beginning after December 31, 2003, except for annual disclosures for foreign plans, in which annual disclosures were effective for periods ending after June 15, 2004.  All of the Company’s defi ned benefit plans are foreign plans and, accordingly, the Company has included disclosures required by SFAS 132R in these consolidated financial statements.

In March 2004, the Emerging Issues Task Force issued Statement No. 03-06, or EITF 03-06, "Participating Securities and the Two-Class Method under Financial Accounting Standards Board Statement No. 128, Earnings Per Share." EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The Statement also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings t o such a security. EITF 03-06 was effective for fiscal periods beginning after March 31, 2004.  The adoption of EITF 03-06 did not have an impact on the Company’s computation of earnings per share for any period presented.

In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation.” (SFAS 123)

F-19

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”  SFAS 123R requires all share-based payments to employees, including grants of employee stock options and employee stock purchase plans, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period beginning after June 15, 2005, with early adoption encouraged.  In addition, SFAS 123R will cause unrecognized expense (based on the amount in the Company’s pro forma footnote disclosure) related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period.  The Company is required to adopt SFAS 123R in the third quarter of 2005, beginning July 1, 2005.  Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption.  The transition alternatives include prospective and retrospective adoption methods, prior periods may be restated either as the beginning of the year of adoption or for all periods presented.  The prospective method requires that compensation expense be recorded for all unvested stock options and share awards as of the beginning of the first quarter of adoption of SFAS 123R, while the retrospective methods would record compensation expense for all unvested stock options and share awards beginning with the first period restated.  The Company is evaluating the requirements of SFAS 123R and expects the adoption of SFAS 123R will have a material impact on the consolidated results of operations, earnings per share and consolidated statement of cash flows.  The Company has not determined the method of adoption or the effect of adopting SFAS 123R.

In December 2004, the FASB issued FASB Staff Position No. 109–2 (FSP 109–2), “Accounting and Disclosure Guidance for the Foreign Repatriation Provision within the American Jobs Creation Act of 2004”, which provides guidance under SFAS No. 109 with respect to recording the potential impact of the repatriation provisions of the Act on a company’s income tax expense and deferred tax liability. FSP 109–2 states that a company is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109.  The Company has not yet determined if it intends to repatriate foreign earnings under the provisions in the Act.  Thus, the Company’s consolidated financial statements do not reflect a provision for taxes related to this election .  Any such repatriation under the Act must occur by December 31, 2005.  The range of any reasonable amount of repatriation is not available at this time.  The maximum amount as prescribed in the Act is $500 million.  The Company’s evaluation of the effect of the election is expected to be completed by the end of the second quarter of 2005.

Note 2 – Restatement of previously issued financial statements

The Company restated its historical financial statements for 2002, 2003 and the first three quarters of 2004 to reflect adjustments to retained earnings beginning January 1, 2002 and the historical financial statements for the first three quarters of 2004 to reflect adjustments to net income during each of those quarters.  The adjustments are comprised primarily of the following items:

Deferred income taxes for unrepatriated earnings of certain foreign entities.  The Company determined that it had understated deferred tax liabilities related to unrepatriated earnings of certain foreign operations for periods prior to January 1, 2002.  The Company had previously disclosed in a current report on Form 8-K on March 8, 2005, that these adjustments reduced retained earnings as of January 1, 2002 by $4.0 million.  However, further analysis led to an additional adjustment of $2.6 million.  These adjustments in total reduced retained earnings as of January 1, 2002 by $6.6 million and increased noncurrent deferred income tax liabilities for each of the periods restated.

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EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003

Recognition of straight-line rent expense when the lease term in a real estate operating lease contains a period when there are free or reduced rents (commonly referred to as “rent holidays”) and scheduled rent increases.  The Company historically had not been recognizing the rent expense on a straight-line basis over the term of the operating lease for certain of its facility leases.  These adjustments reduced retained earnings as of January 1, 2002 by $0.9 million, increased net income for the nine months ended September 30, 2004 by $0.5 million, increased accrued selling, general and administrative expenses and liabilities by $1.5 million as of December 31, 2002 and 2003 and by $775,000, $690,000 and $664,000 as of March 31, 2004, June 30, 2004 and September 30, 2004, respectively.

Reconciliation of various account balances.  With respect to the Company’s operations in Mexico, account reconciliation adjustments for errors reduced retained earnings as of January 1, 2002 by $1.6 million, cash and cash equivalents by $1.8 million, other receivables by $620,000 and increased accrued salaries and related costs by $59,000 and accrued selling, general and administrative expenses and other liabilities by $104,000.  Other than Mexico, adjustments to correct account balances increased net income for the nine months ended September 30, 2004 by $1.3 million and affected various accounts within the Company’s consolidated balance sheets as detailed in the tables below.

Reclassification adjustments.  The Company determined certain revenues and costs of transportation classifications within the U.S. and certain international locations were not in accordance with its revenue recognition policy with regards to reporting revenues and costs when the Company acts as an indirect carrier versus an authorized cargo sales agent.  For 2002 and 2003, the Company’s revenues and costs of transportation were reduced by $26.4 million and $28.3 million, respectively.  For the nine months ended September 30, 2004, revenues and costs of transportation were reduced by $5.4 million.  The reclassification had no effect on net revenues, operating income or net income.  In addition, certain amounts were reclassified on the consolidated balance sheets as of December 31, 2002 and 2003 and March 31, 2004 related to reclassifying minority interest to goodwill for the Company’s buyout of a minority interest partner in Thailand completed in 2001, netting of income tax receivables by tax jurisdictions and reclassifying current and long-term portions of certain liabilities.

The restatement had no impact on our consolidated statement of operations or net cash flows from operating, investing and financing activities in the consolidated statements of cash flows for the years ended December 31, 2002 and 2003.  The effect of the restatement on the Company’s previously reported consolidated balance sheets as of December 31, 2002 and 2003 is as follows:

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EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2004 and 2003