**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

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**Form 10-K**

**ANNUAL REPORTSPURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**
| (Mark One) |       |                                                                                                     |
|------------|------------|----------------------------------------------------------------------------------------------------------|
| þ     |       | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**      |
|       |       | **For the fiscal year ended:  July 31, 2007**                                                       |
| ** ** | ** ** | **OR**                                                                                                   |
| o          |       | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|       |       | **For  the transition period  from           to** |

 

**Commission file number 0-23255**

**Copart, Inc.**

(Exact name ofregistrant as specified in its charter)

| **California**                                                    |   | **94-2867490**                             |
|-------------------------------------------------------------------|--------|--------------------------------------------|
| *(State or other jurisdiction of  incorporation or organization)* |   | *(I.R.S. Employer  Identification Number)* |
| **4665 Business Center Drive Fairfield, California**              |   | **94534**                                  |
| *(Address of principal executive offices)*                        |   | *(Zip code)*                               |

 

**Registrant’s telephone number, including area code:**

**(707) 639-5000**

**Securities registered pursuant to Section 12(b) ofthe Act:**

|                                                | **Title of Each Class** | ** **                     |   | ** ** | **Name of each exchange on which registered** | ** ** |
|------------------------------------------------|-------------------------|--------------------------------|--------|------------|-----------------------------------------------|------------|
| Common Stock, no par value                     |                    | The NASDAQ Stock Market LLC    |
| (Including  associated Preferred Stock Rights) |                    | (NASDAQ  Global Select Market) |

 

**Securities registered pursuant to Section 12(g) ofthe Act:  None**

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Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  þ   No  o

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes  o   No  þ

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

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined in the Exchange Act Rule 12b-2).

| Large Accelerated Filer þ | Accelerated Filer o | Non-Accelerated  Filer o |
|--------------------------------|---------------------|--------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o  No þ

The aggregate market value of the voting and non-votingCommon Stock held by non-affiliates of the registrant as of January 31,2007 (the last business day of the registrant’s most recently completed secondfiscal quarter) was $1,607,905,000 based upon the closing sales price reportedfor such date on the NASDAQ Global Select Market (formerly the NASDAQ NationalMarket). For purposes of this disclosure, shares of Common Stock held by personswho hold more than 5% of the outstanding shares of Common Stock and shares heldby officers and directors of the registrant have been excluded in that suchpersons may be deemed to be affiliates. This determination of affiliate statusis not necessarily conclusive for other purposes.

At September 27, 2007, registrant had 88,357,359outstanding shares of Common Stock.

**DOCUMENTS INCORPORATED BY REFERENCE**

Items10, 11, 12, 13, and 14 of Part III incorporate certain information byreference from the registrant’s definitive proxy statement for its 2007 AnnualMeeting of Shareholders (“Proxy Statement”) to be filed pursuant to Regulation14A within 120 days after the registrant’s fiscal year end of July 31,2007. Except with respect to the information specifically incorporated byreference, the Proxy Statement is not deemed to be filed as a part hereof.

 

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**TABLE OF CONTENTS**

|                                                                       | ** ** | ** **                                                                                                         | ** ** | **Page** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| Information concerning forward-looking statements used in this report |       | 2                                                                                                                  |
| **PART I**                                                       | ** ** | ** **                                                                                                         |
| Item 1.                                                               |       | Business                                                                                                           |       | 3        |
|                                                                  |       | General                                                                                                            |       | 3        |
|                                                                  |       | Industry  Overview                                                                                                 |       | 5        |
|                                                                  |       | Operating and Growth Strategy                                                                                      |       | 7        |
|                                                                  |       | Our  Competitive Advantages                                                                                        |       | 9        |
|                                                                  |       | Our  Service Offerings                                                                                             |       | 11       |
|                                                                  |       | Supply Arrangements and Supplier Marketing                                                                         |       | 14       |
|                                                                  |       | Buyers                                                                                                             |       | 14       |
|                                                                  |       | Competition                                                                                                        |       | 15       |
|                                                                  |       | Management Information Systems                                                                                     |       | 15       |
|                                                                  |       | Employees                                                                                                          |       | 15       |
|                                                                  |       | Environmental  Matters                                                                                             |       | 16       |
|                                                                  |       | Governmental  Regulations                                                                                          |       | 17       |
|                                                                  |       | Legal  Proceedings                                                                                                 |       | 17       |
|                                                                  |       | Intellectual Property and Proprietary  Rights                                                                      |       | 18       |
| Item  1A.                                                             |       | Risk  Factors                                                                                                      |       | 19       |
|                                                                  |       | Executive Officers of the Registrant                                                                               |       | 30       |
| Item 1B.                                                              |       | Unresolved Staff Comments                                                                                          |       | 32       |
| Item  2.                                                              |       | Properties                                                                                                         |       | 32       |
| Item  3.                                                              |       | Legal  Proceedings                                                                                                 |       | 33       |
| Item 4.                                                               |       | Submission of Matters to a Vote of Security Holders                                                                |       | 33       |
| **PART II**                                                      | ** ** | ** **                                                                                                         |
| Item 5.                                                               |       | Market for Registrant’s Common Equity, Related Shareholder Matters  and Issuer Purchases of Equity Securities |       | 34       |
| Item 6.                                                               |       | Selected Financial Data                                                                                            |       | 37       |
| Item 7.                                                               |       | Management’s Discussion and Analysis of Financial Condition and  Results of  Operations                       |       | 38       |
| Item 7A.                                                              |       | Quantitative and Qualitative Disclosures About Market Risk                                                         |       | 52       |
| Item 8.                                                               |       | Financial Statements and Supplementary Data                                                                        |       | 53       |
| Item 9.                                                               |       | Changes in and Disagreements With Accountants on Accounting and  Financial  Disclosure                             |       | 53       |
| Item 9A.                                                              |       | Controls and Procedures                                                                                            |       | 53       |
| Item  9B.                                                             |       | Other  Information                                                                                                 |       | 57       |
| **PART III**                                                     | ** ** | ** **                                                                                                         |
| Item 10.                                                              |       | Directors, Executive Officers and Corporate Governance                                                             |       | 58       |
| Item 11.                                                              |       | Executive Compensation                                                                                             |       | 58       |
| Item 12.                                                              |       | Security Ownership of Certain Beneficial Owners and Management and  Related Shareholder Matters                    |       | 59       |
| Item 13.                                                              |       | Certain Relationships and Related Transactions, and Director  Independence                                         |       | 59       |
| Item 14.                                                              |       | Principal Accountant Fees and Services                                                                             |       | 59       |
| **PART IV**                                                      | ** ** | ** **                                                                                                         |
| Item 15.                                                              |       | Exhibits and Financial Statement Schedules                                                                         |       | 60       |

 

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**SPECIAL NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

*This annual report on Form 10-K,including the information incorporated by reference herein, containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended (the “Securities Act”), and Section 21Eof the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Insome cases, you can identify forward-looking statements by terms such as “may,”“will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,”“estimate,” “predict,” “potential,” “continue” or the negative of these termsor other comparable terminology. The forward-looking statements contained inthis report involve known and unknown risks, uncertainties and situations that maycause our or our industry’s actual results, level of activity, performance orachievements to be materially different from any future results, levels ofactivity, performance or achievements expressed or implied by these statements.These factors include those listed in Item 1A Business under the captionentitled “Risk Factors” beginning on page 19 of this annual report on Form 10-Kand those discussed elsewhere in this annual report on Form 10-K. Weencourage investors to review these factors carefully together with the othermatters referred to herein, as well as in the other documents we file with theSecurities and Exchange Commission (the “SEC”). We may from time to time makeadditional written and oral forward-looking statements, including statements c**ontained in the Company’s filingswith the SEC. We do not undertake to update any forward-looking statement thatmay be made from time to time by or on behalf of the Company.*

*Although we believe that, based oninformation currently available to Copart and its management, the expectationsreflected in the forward-looking statements are reasonable, we cannot guaranteefuture results, levels of activity, performance or achievements. You should notplace undue reliance on these forward-looking statements.*

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**PART I**

**Item 1.****                    *****Business***

**General**

Copart, Inc.is a leading provider of vehicle remarketing services in the United States (US)and the United Kingdom (UK).

We providevehicle suppliers, primarily insurance companies, with a full range ofremarketing services to process and sell salvage vehicles primarily over theInternet through our Virtual Bidding Second Generation Internet auction-stylesales technology, which we refer to as VB2. We sell principally to licensed vehicledismantlers, rebuilders, repair licensees, used vehicle dealers and exporters.Salvage vehicles are either damaged vehicles deemed a total loss or noteconomically repairable by the insurance companies or are recovered stolenvehicles for which an insurance settlement with the vehicle owner has alreadybeen made. We offer vehicle suppliers a full range of remarketing services thatexpedite each stage of the salvage vehicle sales process and minimizeadministrative and processing costs. In the US we sell vehicles primarily as anagent and derive revenue primarily from sales transaction fees paid by vehiclesuppliers and vehicle buyers as well as related fees for services such astowing and storage. In the UK we operate primarily on a principal basis,purchasing the salvage vehicle outright from the insurance companies andreselling the vehicle to buyers through a combination of live auctions andInternet sales. We intend to implement VB2 at our UKfacilities where appropriate during fiscal 2008.

We have grownour salvage business through a combination of acquisitions, the development ofnew facilities and also by increasing our buyer base and implementingadditional value-added services for both buyers and suppliers. For fiscal year2007, which ended July 31, 2007, our revenues were approximately $560.7million and our operating income was approximately $203.1 million. On June 14,2007, we acquired Universal Salvage plc, or Universal. Universal, based in theUK, operates seven salvage yards in the UK and is a leading provider of vehicleremarketing services to the motor insurance and automotive industries.Universal specializes in the disposal of accident-damaged, End-of-Life,fee-based non-salvage vehicles. On August 1, 2007, we acquired CenturySalvage Sales Limited, or Century, in the UK. Century operates three salvageyards in the UK. During the fiscal year ended July 31, 2007, we openedthree new salvage vehicle storage facilities located in Baltimore, Maryland;Woodburn, Oregon and Punta Gorda, Florida. During the year we also closed onefacility, located in Grand Island, Nebraska. As of July 31, 2007, we had123 facilities in the US, 1 facility in Canada and 7 facilities in the UK.

During fiscal2004, we converted all of our North American salvage vehicle storage facilitiesto an Internet based auction-style model using VB2. This second generationtechnology combines two bidding processes. An open Preliminary Bidding featureallows a buyer to enter bids either at a bidding station at the storagefacility during the preview days or over the Internet. To improve theeffectiveness of bidding, the VB2 system lets a buyer see the current high bidon the vehicle they want to purchase. The preliminary bidding phase is an opensales format. Buyers enter the maximum price they are willing to pay for avehicle and VB2’sBID4U feature will 

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incrementally bid the vehicle on their behalf. Preliminary bidding endsone hour prior to the start of an Internet-only virtual sale. BID4U willrepresent the high preliminary bidder at the Internet-only virtual sale. Thisfeature allows bidders the opportunity to bid against each other and the highpreliminary bidder. The bidders enter bids via the Internet in a real timeformat. BID4U submits bids for the high preliminary bidder, up to their maximumbid. When bidding stops, a countdown is initiated. If no bids are receivedduring the countdown, the vehicle sells to the highest bidder. VB2 opens our sales process to registered buyersanywhere in the world who have Internet access.

We believe theimplementation of VB2 across our NorthAmerican salvage operations has increased the pool of available buyers for eachsale and the added competition has increased the amount buyers are willing topay for vehicles from us. We also believe that it has improved the efficiency ofour operations by eliminating the expense and capital requirements associatedwith live auctions. For fiscal 2007, sales of North American vehicles, on aunit basis, to buyers outside the state where the vehicle is located accountedfor 50.8% of total vehicles sold (25.1% of salvage vehicles were sold to out ofstate buyers and 25.7% were sold to out of country buyers, based onregistration). As we integrate our recent UK acquisitions we intend toimplement VB2 at our UK facilities where appropriate. We cannot predict whether the implementation of VB2 in the UK will have the same favorableimpact on our buyer base and operating efficiencies that we experienced in theUS.

We believe that we offer the highest level ofservice in the salvage vehicle sales and remarketing industry and haveestablished our leading market position by:

·        providingcoverage that facilitates supplier access to buyers around the world, reducingtowing and third-party storage expenses, offering a local presence for vehicleinspection stations, and providing prompt response to catastrophes and naturaldisasters by specially-trained teams;

·        providinga comprehensive range of customer services that include merchandising services,efficient title processing, timely pick-up and delivery of vehicles andInternet sales;

·        establishingand efficiently integrating new facilities and acquisitions;

·        increasingthe number of bidders that can participate at each sale through the ease andconvenience of Internet bidding;

·        applyingtechnology to enhance operating efficiency through Internet bidding, web-basedorder processing, salvage value quotes, electronic communication with buyersand sellers, vehicle imaging and an electronic used vehicle parts locatorservice; and

·        providingthe venue for insurance customers through our Virtual Insured Exchange “VIX”product to enter a vehicle into a live virtual sale to establish its truevalue,  allowing the insurance customerto avoid dealing with estimated values when negotiating with owners who wish toretain their damaged vehicles.

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We adopted aformal plan in fiscal 2006 to discontinue the operations of Motors AuctionGroup, or MAG, a wholly owned subsidiary, and dispose of the related assets orconvert them to our salvage business. We operated six public automobile salesfacilities located in Detroit, Michigan; Chesapeake, Virginia; New Castle,Delaware; Greencastle, Pennsylvania; Pittsburgh, Pennsylvania and Richmond,Virginia. We sold the businesses located in Chesapeake, New Castle andGreencastle prior to the end of fiscal 2006. We converted Detroit, Pittsburghand Richmond into salvage facilities. As of the end of fiscal 2006, no MAGoperations remained.

We were incorporated in California in 1982 and became a public companyin 1994. Our principal executive offices are located at 4665 Business CenterDrive, Fairfield, California 94534, and our telephone number at that address is(707) 639-5000. We maintain a website, *http://www.copart.com*,where we make available, free of charge, our code of ethics, other corporateinformation, and our SEC filings, including our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K,and all amendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Exchange Act, as soon as reasonably practicable after weelectronically file such material with, or furnish it to, the Securities andExchange Commission. We are providing the address to our website solely for theinformation of investors. Information contained on our website is notincorporated by reference herein and our web address is included as an inactivetextual reference only.

**Industry Overview**

The salvagevehicle industry provides a venue for salvage vehicle suppliers to liquidatetotal loss vehicles. In the United States and Canada, salvage vehicle salescompanies generally auction or sell salvage vehicles on consignment either fora fixed fee or a percentage of the sales price. On occasion in the US andCanada and on a primary basis in the UK, salvage sales companies will purchasevehicles from vehicle suppliers at a formula-based price, based usually eitheron a percentage of the vehicles’ estimated pre-loss actual cash value and/orbased on the extent of damage and sell the vehicles for their own account.Salvage vehicle sales companies typically operate from one or more salvagefacilities where vehicles are processed, viewed, stored and sold. However, inthe United States and Canada, Copart, through the introduction of VB2, eliminated local live auctions,and we now sell all of our salvage vehicles over the Internet. In the UK,Copart sells vehicles though a combination of live auctions and Internet sales.

Although thereare other suppliers of salvage vehicles, such as financial institutions,vehicle leasing companies, automobile rental companies, charities andautomobile dealers, the primary source of salvage vehicles is insurancecompanies.

Automobilemanufacturers are incorporating new standard features, including unibodyconstruction, passenger safety cages with surrounding crumple zones to absorbimpacts, plastic components, airbags, xenon lights, computer systems, heatedseats and navigation systems. We believe that one effect of these additionalfeatures is that newer vehicles involved in accidents are more costly to repairand, accordingly, more likely to be deemed a total loss for insurance purposes.This could result in an increasing supply of total loss salvage vehicles in thefuture.

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The primarybuyers of salvage vehicles are vehicle dismantlers, rebuilders, repairlicensees, used vehicle dealers and exporters. Vehicle dismantlers, which webelieve are the largest group of salvage vehicle buyers, either dismantle avehicle and sell parts individually or sell the entire vehicle to rebuilders,used vehicle dealers or the public. Vehicle rebuilders and vehicle repairlicensees generally purchase salvage vehicles to repair and resell. Usedvehicle dealers generally purchase recovered stolen or slightly damagedvehicles for resale.

Following anaccident involving an insured vehicle, the damaged vehicle is generally towedto a storage facility or a vehicle repair facility for temporary storagepending insurance company examination. The vehicle is inspected by theinsurance company’s adjuster, who estimates the costs of repairing the vehicleand gathers information regarding the damaged vehicle’s mileage, options andcondition in order to estimate its actual cash value (fair market value). Theadjuster determines whether to pay for repairs or to classify the vehicle as atotal loss based upon the adjuster’s estimate of repair costs and the vehicle’ssalvage value, as well as customer service considerations. If the cost ofrepair is greater than the actual cash value less the estimated salvage value,the insurance company generally will classify the vehicle as a total loss. Theinsurance company will thereafter assign the vehicle to a salvage vehicle salescompany, settle with the insured vehicle owner and receive title to thevehicle.

We believe the primary factors that vehiclesuppliers consider when selecting a salvage vehicle sales company include:

·        theanticipated percentage return on salvage (i.e., gross salvage proceeds, minusvehicle handling and selling expenses, divided by the actual cash value);

·        theservices provided by the salvage vehicle sales company and the degree to whichsuch services reduce administrative costs and expenses;

·        theprice the salvage vehicle sales company charges for its services;

·        nationalcoverage and ability to respond on a national scale;

·        theability to generate custom seller reports; and

·        inthe UK, the percentage of the actual cash value paid for the vehicle.

In the UK,insurance companies generally tender periodic contracts for the purchase ofsalvaged vehicles. The salvage company that is willing to pay the highest pricefor the vehicles will generally be awarded the contract.

Generally, uponreceipt of the pick up order (the assignment), the salvage vehicle salescompany arranges for the transport of a vehicle to a facility. In NorthAmerica, as a service to the vehicle supplier, the salvage vehicle salescompany will customarily pay advance charges (reimbursable charges paid onbehalf of vehicle suppliers) to obtain the subject vehicle’s release from atowing company or vehicle repair facility. Typically, advance charges paid onbehalf of the vehicle supplier are recovered upon sale of the salvage vehicle.

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The vehicle then remains in storage at our facility until ownershipdocuments are transferred from the insured vehicle owner and the title to thevehicle is cleared through the appropriate state’s motor vehicle regulatoryagency, or DMV. Generally total loss vehicles may be sold in most states onlyafter obtaining a salvage title from the DMV. Upon receipt of the appropriatedocumentation from the DMV, which is generally received within 45 to 60 days ofvehicle pick-up, the vehicle is sold either on behalf of the insurance companyof for our own account, depending on the terms of the contract. In the UK, uponrelease of interest by the vehicle owner, the insurance company notifies usthat the vehicle is available for sale.

**Operating and Growth Strategy**

Our growthstrategy is to increase our revenues and profitability by, among other things (i) acquiringand developing new salvage vehicle storage facilities in key markets includingforeign markets, (ii) pursuing national and regional vehicle supplyagreements, (iii) expanding our remarketing service offerings to suppliersand buyers and (iv) expanding the application of VB2 into new markets. In addition, to maximizegross sales proceeds and cost efficiencies at each of our acquired facilitieswe introduce our (i) pricing structure, (ii) selling processes, (iii) operationalprocedures, (iv) management information systems and, when necessary, (v) redeployexisting personnel.

As part of our overall expansion strategy, our objective is to increaseour revenues, operating profits and market share in the vehicle sales industry.To implement our growth strategy, we intend to continue to do the following:

***Acquire and Develop New Salvage VehicleStorage Facilities in Key Markets Including Foreign Markets***

Our strategy isto offer integrated services to vehicle suppliers on a national or regionalbasis by acquiring or developing salvage facilities in new and existingmarkets. When appropriate we integrate our new acquisitions into our globalnetwork and capitalize on certain operating efficiencies resulting from, amongother things, the reduction of duplicative overhead and the implementation ofour operating procedures.

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The following table sets forth facilitiesthat we have acquired or opened from August 1, 2004 through July 31,2007.

| **Salvage Locations**      | ** ** | ** **          | ** ** | **Acquisition/  Opening Date**            | ** ** | **Geographic Service Area** |
|----------------------------|------------|---------------------|------------|-------------------------------------------|------------|-----------------------------|
| Strongsville, Ohio         |       | January 2005   |       | Northwest Ohio                            |
| Ocala, Florida             |       | February 2005  |       | Central Florida                           |
| Knoxville, Tennessee       |       | February 2005  |       | Eastern Tennessee                         |
| Lexington, Kentucky        |       | April 2005     |       | Northern and Central Kentucky             |
| Loganville, Georgia        |       | April 2005     |       | Central Georgia                           |
| Spokane, Washington        |       | July 2005      |       | Eastern Washington and Northern Idaho     |
| Tallahassee, Florida       |       | July 2005      |       | Gulf Region                               |
| Hialeah, Florida           |       | July 2005      |       | Southeast Florida                         |
| Columbia, Missouri         |       | July 2005      |       | Central Missouri                          |
| Honolulu, Hawaii           |       | August 2005    |       | Hawaii                                    |
| Greenwood, Nebraska        |       | September 2005 |       | Eastern Nebraska                          |
| Grand Island, Nebraska     |       | September 2005 |       | Eastern Nebraska                          |
| York Haven, Pennsylvania   |       | November 2005  |       | Southern Pennsylvania                     |
| Chambersburg, Pennsylvania |       | November 2005  |       | Southern Pennsylvania                     |
| Altoona, Pennsylvania      |       | November 2005  |       | Central Pennsylvania                      |
| Fruitland, Maryland        |       | November 2005  |       | Eastern Maryland                          |
| Lansing, Michigan          |       | December 2005  |       | Central Michigan                          |
| Billings, Montana          |       | March 2006     |       | Central Montana                           |
| Dover, Florida             |       | July 2006      |       | Western Florida                           |
| Jacksonville, Florida      |       | July 2006      |       | Northeast Florida                         |
| Baltimore Maryland         |       | November 2006  |       | Central Maryland                          |
| Woodburn, Oregon           |       | January 2007   |       | Central Oregon                            |
| Sandy, England             |       | June 2007      |       | East England and Midlands                 |
| Sandtoft, England          |       | June 2007      |       | Northern England                          |
| Sandwich, England          |       | June 2007      |       | London and South East United Kingdom      |
| Westbury, England          |       | June 2007      |       | South Wales and South West United Kingdom |
| Chester, England           |       | June 2007      |       | North Wales and North West England        |
| Denny, Scotland            |       | June 2007      |       | Scotland                                  |
| Wootton, England           |       | June 2007      |       | Central United Kingdom                    |
| Punta Gorda, Florida       |       | July 2007      |       | Southwest  Florida                        |

 

***Pursue Nationaland Regional Vehicle Supply Agreements***

Our broad national presence enhances our ability to enter into local,regional or national supply agreements with vehicle suppliers. We actively seekto establish national and regional supply agreements with insurance companiesby promoting our ability to achieve high net returns and broader access tobuyers through our national coverage and electronic commerce capabilities. Byutilizing our existing insurance company supplier relationships, we are able tobuild new supplier relationships and pursue additional supply agreements inexisting and new markets.

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***Expand OurService Offerings to Suppliers and Buyers***

Over the past several years, we have expanded our available service offeringsto vehicle suppliers and buyers. The primary focus of these new remarketingservice offerings is to maximize returns to our suppliers and maximize productvalue to our buyers. Recent service enhancements include, for our suppliers,real-time access to sales data over the Internet and, for our buyers, theimplementation of VB2 real-time biddingat all of our North American facilities, permitting buyers at any locationworldwide to participate in the sales at all of our yards in North America.We plan to continue to refine and expand our remarketing services, includingoffering software that can assist our suppliers in expediting claims andsalvage management tools that help suppliers integrate their systems with ours.

**Our Competitive Advantages**

We believe that the following attributes and the services that we offerposition us to take advantage of many opportunities in the salvage vehicleremarketing service industry.

***NationalCoverage and Ability to Respond on a National Scale***

Since our inception in 1982, we have expandedfrom a single facility in Vallejo, California to an integrated network of 131facilities located in the United States, Canada and the United Kingdom as of July 31,2007. We are able to offer integrated services to our vehicle suppliers, whichallows us to respond to the needs of our suppliers and buyers with maximumefficiency. Our coverage provides our suppliers with key advantages, including:

·        a reduction inadministrative time and effort;

·        a reduction in overallvehicle towing costs;

·        convenient localfacilities;

·        improved access to buyersthroughout the world;

·        a prompt response in theevent of a natural disaster or other catastrophe; and

·        consistencyin remarketing of salvage vehicles.

***Value-AddedServices***

We believe that we offer the mostcomprehensive range of remarketing services in our industry, including:

·        Internet bidding, Internetproxy bidding and virtual sales powered by VB2, which enhance the competitive biddingprocess;

·        online paymentcapabilities via our ePay product;

·        e-mail notifications topotential buyers of salvage vehicles that match desired characteristics;

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·        sophisticated vehicleprocessing at storage sites, including ten-view digital imaging of each vehicleand the scanning of each vehicle’s title and other significant documents suchas body shop invoices, all of which are available from us through the Internet;

·        CoPartfinder, ourInternet-based used vehicle parts locator that provides vehicle dismantlerswith greater resale opportunities for their salvage purchases;

·        Specialty sales, whichallow buyers the opportunity to focus on select types of vehicles: i.e.motorcycles, heavy equipment, boats, recreational vehicles and rental cars; and

·        InteractiveOnline Counter Bidding, which allows sellers who have placed a minimum bid or abid to be approved on a vehicle to directly counter bid the current highbidder.

***Proven Abilityto Acquire and Integrate Acquisitions***

We have a proven track record of successfullyacquiring and integrating salvage vehicle storage facilities. Since becoming apublic company in 1994, we have completed the acquisition of 74 salvage vehiclestorage facilities both in North America and the UK. As part of our acquisitionand integration strategy, we seek to:

·        expand our globalpresence;

·        strengthen our networksand access new markets;

·        utilize our existingcorporate and technology infrastructure over a larger base of operations; and

·        introduce ourcomprehensive services and operational expertise.

We strive to integrate all new facilities, when appropriate, into ourexisting network without disruption of service to vehicle suppliers. We workwith new suppliers to implement our fee structures and new service programs. Wetypically retain existing employees at acquired facilities in order to retainknowledge about, and respond to, the local market. We also assign a specialintegration team to help convert newly acquired facilities to our ownmanagement information and proprietary software systems, enabling us to ensurea smooth and consistent transition to our business operating and sales systems.

***Technology toEnhance and Expand Our Business***

We have developed management information and proprietary softwaresystems that allow us to deliver a fully integrated service offering. Ourproprietary software programs provide vehicle suppliers with online access todata and reports regarding their salvage vehicles being processed at any of ourfacilities. This technology allows vehicle suppliers to monitor each stage ofour salvage vehicle sales process, from pick up to sale and settlement by thebuyer. Our full range of Internet services allows us to expedite each stage ofthe salvage vehicle sales process and minimizes the administrative andprocessing costs for us as well as our suppliers. We believe that ourintegrated technology systems generate improved capacity and financial returnsfor our clients, resulting in high client retention, and allow us to expand ournational supply contracts.

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**Our Service Offerings**

We offer vehicle suppliers a full range of vehicle remarketingservices, which expedite each stage of the salvage vehicle sales process,maximizing proceeds and minimizing costs. Not all service offerings areavailable in all markets.

***Online SupplierAccess***

Through Copart Access, our Internet-based service for vehiclesuppliers, we enable suppliers to assign vehicles for sale, check salescalendars, view vehicle images and history, view and reprint body shop invoicesand towing receipts and view the historical performance of the vehicles sold atour sales.

***SalvageEstimation Services***

We offer Copart ProQuote, a proprietary service that assists suppliersin the vehicle claims evaluation process by providing online salvage valueestimates, which helps suppliers determine whether to repair a particularvehicle or deem it a total loss.

***EstimatingServices***

We offer vehicle suppliers in the UK estimating services for vehiclestaken to our sites. Estimating services provide our insurance company suppliersrepair estimates which allows the insurance company to determine if the vehicleis a total loss vehicle. If the vehicle is determined to be a total loss, it isassigned to inventory.

***End-of-LifeVehicle Processing***

In the UK, Universal is an authorized treatment facility, or ATF, forthe disposal of End-of-Life vehicles, or ELVs.

***Virtual InsuredExchange (VIX)***

We provide the venue for insurance customers to enter a vehicle into alive virtual auction-style sale to establish its true value, thereby allowingthe insurance customer to avoid dealing with estimated values when negotiatingwith owners who wish to retain their damaged vehicles.

***TransportationServices***

We maintain contracts with third-party vehicle transport companies,which enables us to pick up most of our suppliers’ vehicles within 24 hours.Our national network and transportation capabilities provides cost and timesavings to our vehicle suppliers and ensures on-time vehicle pick up and promptresponse to catastrophes and natural disasters in North America. In the UK, weperform transportation services primarily utilizing our employees and our fleetof over 100 vehicles.

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***VehicleInspection Stations***

We offer certain of our major insurance company suppliers office andyard space to house vehicle inspection stations on-site at our storagefacilities. We have over 30 vehicle inspection stations at our facilities. Anon-site vehicle inspection station provides our insurance company supplierswith a central location to inspect potential total loss vehicles, which reducesstorage charges that otherwise may be incurred at the initial storage or repairfacility.

***On-DemandReporting***

We provide vehicle suppliers with on-demand reports online, via fax ore-mail that summarize data on salvage vehicles that we process for theparticular supplier. These reports track our vehicle suppliers’ gross and netreturns on each vehicle, service charges, and other data that enable ourvehicle suppliers to more easily administer and monitor the salvage vehicledisposition process. In addition, we have developed a database containing over240 fields of real-time and historical information accessible by our insurancecustomers allowing for their generation of custom ad hoc reports and customerspecific analysis.

***DMV Processing***

We have extensive expertise in DMV document and title processing forsalvage vehicles. We have developed a computer system which provides a directlink to the DMV computer systems of several states. This allows us to expeditethe processing of vehicle title paperwork.

***FlexibleVehicle Processing Programs***

At the electionof the vehicle supplier, we sell vehicles pursuant to our Percentage IncentiveProgram (PIP), Consignment Program or Purchase Program.

*Percentage Fee Consignment.**  *Our Percentage Incentive Program is an innovativeprocessing program designed to broadly serve the needs of vehicle suppliers.Under PIP, we agree to sell all of the salvage vehicles of a vehicle supplierin a specified market, usually for a predetermined percentage of the vehiclesales price. Because our revenues under PIP are directly linked to the vehicle’ssale price, we have an incentive to actively merchandise those vehicles tomaximize the net return on salvage vehicles. We provide the vehicle supplier,at our expense, with transport of the vehicle to our nearest facility, storagefor up to 90 days and DMV document and title processing. In addition, weprovide merchandising services such as covering or taping openings to protectvehicle interiors from weather, washing vehicle exteriors, vacuuming vehicleinteriors, cleaning and polishing dashboards and tires, making keys fordrivable vehicles and identifying drivable vehicles. We believe ourmerchandising efforts increase the sales prices of salvage vehicles, therebyincreasing the return on salvage vehicles to both vehicle suppliers and us.

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*Consignment Program.**  *Under our consignment program, we sell vehicles for afixed consignment fee. Although sometimes included in the consignment fee, wemay also charge additional fees for the cost of transporting the vehicle to ourfacility, storage of the vehicle, and other incidental costs.

*Purchase Program.  **Under*the purchaseprogram, we purchase vehicles from a vehicle supplier at a formula price, basedon a percentage of the vehicles’ estimated pre-accident value (PAV), or “actualcash value” (ACV), and sell the vehicles for our own account.

***Buyer Network***

We maintain a database of thousands of registered buyers of salvagevehicles in the vehicle dismantling, rebuilding, repair, resale and exportingbusinesses. Our database includes each buyer’s vehicle preference andpurchasing history. This data enables us to notify via e-mail prospectivebuyers throughout the world of salvage vehicles available for bidding thatmatch their vehicle preferences. Listings of salvage vehicles to be sold on aparticular day and location are also made available on the Internet.

***Sales Process***

We offer a flexible and unique sales process designed to maximize thesale prices of the vehicles. We utilize VB2, an auction-style sales methodology thatwe developed. This second generation technology combines two bidding processes.An open Preliminary Bidding feature allows a buyer to enter bids either at abidding station at the storage facility during the three preview days or overthe Internet. To improve the effectiveness of bidding, the VB2 system lets a buyer see the current high bidon the vehicle they want to purchase. The preliminary bidding phase is an opensales format. Buyers enter the maximum price they are willing to pay for avehicle and our BID4U feature will incrementally bid the vehicle on theirbehalf. Preliminary bidding ends one hour prior to the start of anInternet-only virtual sale. BID4U will represent the high preliminary bidder atthe Internet-only virtual sale. This feature allows bidders the opportunity tobid against each other and the high preliminary bidder. The bidders enter bidsvia the Internet in a real time format. BID4U submits bids for the highpreliminary bidder, up to their maximum bid. When bidding stops, a countdown isinitiated. If no bids are received during the countdown, the vehicle sells tothe highest bidder. VB2 opens our sales process to registered buyersanywhere in the world who have Internet access.

***CoPartfinder***

CoPartfinder is our unique Internet “search engine” that enables usersto locate used vehicle parts quickly and efficiently. CoPartfinder isaccessible by the public through a Copart-sponsored website. CoPartfinder listsvehicles recently sold through VB2 andidentifies certain purchasers. This allows vehicle dismantlers and otherresellers to streamline their parts sale process and access a large pool ofpotential buyers. Parts buyers can use CoPartfinder to search for specificvehicle makes and models and view digital images of vehicles that meet theirrequirements. Once a specific parts supplier is identified for a specific partrequirement, buyers have the option 

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to call, fax, or e-mail thedismantler/supplier. We believe that CoPartfinder provides an incentive forvehicle dismantlers to purchase their salvage vehicles through our salesprocess.

**Supply Arrangements and Supplier Marketing**

We obtainsalvage vehicles from hundreds of different vehicle suppliers. State FarmInsurance Company accounted for 11%, 14% and 12% of our revenues for fiscalyears 2007, 2006 and 2005, respectively. Of the total number of vehicles thatwe processed in fiscal years 2007, 2006 and 2005, we obtained approximately83%, 83% and 79%, respectively, from insurance company suppliers. Ourarrangements with our suppliers are typically subject to cancellation by eitherparty upon 30 to 90 days notice.

We typicallycontract with the regional or branch office of an insurance company or othervehicle suppliers. The agreements are customized to each vehicle supplier’sparticular needs and often provide for the disposition of different types ofsalvage vehicles by differing methods. Our arrangements generally provide thatwe will sell total loss and recovered stolen vehicles generated by the vehiclesupplier in a designated geographic area.

We market our services to vehicle suppliers through an in-house salesforce that utilizes a variety of sales techniques, including targeted mailingof our sales literature, telemarketing, follow-up personal sales calls, andparticipation in trade shows and vehicle and insurance industry conventions.Based upon our historical data on salvage vehicles and vehicle informationsupplied by vehicle suppliers, our marketing personnel will provide vehiclesuppliers with detailed analysis of the net return on salvage vehicles and aproposal setting forth ways in which we believe that we can improve net returnson salvage vehicles and reduce administrative costs and expenses.

**Buyers**

We maintain a database of thousands of registered buyers of salvagevehicles in the vehicle dismantling, rebuilding, repair, resale and exportbusinesses. We believe that we have established a broad international anddomestic buyer base by providing buyers of salvage vehicles with a variety ofprograms and services. To gain admission to one of our sales and become aregistered buyer, prospective buyers must first pay an initial registration feeand an annual fee, provide requested personal and business information andhave, in most states, a vehicle dismantler’s, dealer’s, resale, repair orexport license. In certain venues we may sell to the public. Registrationentitles a buyer to transact business at any of our sales subject to locallicensing and permitting requirements. A buyer may also bring guests to afacility for a fee to preview vehicles for sale. Strict admission proceduresare intended to prevent frivolous bids that would invalidate the sale. Wemarket to buyers on the Internet and via e-mail notifications, sales notices,telemarketing and participation in trade show events.

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**Competition**

We face significant competition for the supply of salvage vehicles andfor the buyers of those vehicles. We believe our principal competitors includevehicle auction and sales companies and vehicle dismantlers. These national,regional and local competitors may have established relationships with vehiclesuppliers and buyers and may have financial resources that are greater thanours. The largest national or regional vehicle auctioneers in North Americainclude the ADESA Corporation; Auction Broadcasting Company; Insurance AutoAuctions, Inc.; Manheim Auctions and SADISCO. The largest nationaldismantlers include Greenleaf and LKQ Corporation. These national dismantlers,in addition to trade groups of dismantlers such as the American Recycling Associationand the United Recyclers Group, may purchase salvage vehicles directly frominsurance companies, thereby bypassing vehicle sales companies entirely,including us. In the UK, our principal competitors are privately heldindependent salvage companies.

**Management Information Systems**

Our primarymanagement information system consists of an IBM AS/400 mainframe computersystem, integrated computer interfaces and proprietary business operatingsoftware that we developed and which tracks salvage sales vehicles throughoutthe sales process. We have implemented our proprietary business operatingsoftware at all of our North American salvage storage facilities. In addition,we have integrated our mainframe computer system with Internet and Intranetsystems in order to provide secure access to our data and images in a varietyof formats.

Ourauction-style service product, VB2, is served by an array of identicalhigh-density, high-performance servers. Each individual sale is configured torun on an available server in the array and can be rapidly provisioned to anyother available server in the array as required. Our sale, Internet and imagingservices are load balanced across different geographical data centers.

We haveinvested in a production data center that is designed to run the business inthe event of an emergency. The facility’s electrical and mechanical systems arecontinually monitored. This facility is located in an area considered to befree of weather-related disasters and earthquakes.

The management information systems employed in the UK are a combinationof proprietary and licensed software and are independent and separate fromthose in North America.

**Employees**

As of July 31, 2007, we had 2,536 full-time employees, of whomapproximately 381 were engaged in general and administrative functions andapproximately 2,155 were engaged in yard operations. As of July 31, 2007,we had 2,198 and 338 employees located in North America and the UK,respectively. We are not currently subject to any collective bargainingagreements and believe our relationships with our employees are good.

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**Environmental Matters**

Our operationsinside and outside the US are subject to various laws and regulations regardingthe protection of the environment. In the salvage vehicle remarketing industry,large numbers of wrecked vehicles are stored at facilities and, during thattime, spills of fuel, motor oils and other fluids may occur, resulting in soil,surface water or groundwater contamination. Certain of our facilities store petroleumproducts and other hazardous materials in above-ground containment tanks andsome of our facilities generate waste materials such as solvents or used oilsthat must be disposed of as non-hazardous or hazardous waste, as appropriate.We have implemented procedures to reduce the amount of soil contamination thatmay occur at our facilities, and we have initiated safety programs and trainingof personnel on the safe storage and handling of hazardous materials. Webelieve that we are in compliance, in all material respects, with allapplicable environmental regulations and we do not anticipate any materialcapital expenditures to remain in environmental compliance. If additional ormore stringent requirements are imposed on us in the future, we could incur additionalcapital expenditures.

In connectionwith the acquisition of our Dallas, Texas facility in 1994, we set aside $3.0million to cover the costs of environmental remediation, stabilization andrelated consulting expenses for a six-acre portion of the facility thatcontained elevated levels of lead due to the activities of the formeroperators. We began the stabilization process in 1996 and completed it in 1999.We paid all remediation and related costs from the $3.0 million fund and,in accordance with the acquisition agreement, distributed the remainder of thefund to the seller of the Dallas facility, less $0.2 million which was heldback to cover the costs of obtaining the no-further-action letter.In September 2002, our environmental engineering consultant issued areport, which concludes that the soil stabilization has effectively stabilizedthe lead-impacted soil, and that the concrete cap should prevent impact tostorm water and subsequent surface water impact. Our consultant thereaftersubmitted an Operations and Maintenance Plan (“Plan”) to the Texas Commissionon Environmental Quality (“TCEQ”) providing for a two-year inspection andmaintenance plan for the concrete cap, and a two-year ground and surface watermonitoring plan. In January of 2003, the TCEQ approved the Plan, subjectto the additions of upstream (background) surface water samples from theintermittent stream adjacent to the facility and documentation of any repairsto the concrete cap during the post closure-monitoring period. The firstsemi-annual water sampling was conducted in April 2003, which reflectedthat the lead-impacted, stabilized soil is not impacting the ground and/orsurface water. The second round of semi-annual water samples collected in October andNovember 2003 reported concentration of lead in one storm water and onesurface water sample in excess of the established upstream criteria for lead.In correspondence, which we received in July 2004, the TCEQ approved withcomment our water monitoring report dated February 24, 2004. The TCEQinstructed us to continue with post-closure monitoring and maintenanceactivities and submit the next report in accordance with the approvedschedules. In February 2005, a report from our environmental engineeringconsultant was transmitted to the TCEQ containing the results of annualmonitoring activities consisting of two (2) semi-annual sampling eventswhich occurred in April/June 2004 and October/November 2004.Laboratory analytical results indicated no lead concentrations exceeding thetarget concentration level set in the Corrective Measures Study 

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for the site, but some results were in excess of Texas surface waterquality standards. The Company’s environmental engineering consultant concludedin the February 2005 report to the TECQ that it is unlikely that leadconcentrations detected in the storm water runoff samples are attributable tothe lead impacted soils. Based on the results of the 2004 samplings, werequested that no further action be taken and that a closure letter be issuedby the TCEQ. In September 2007, the TCEQ notified us that they did notconcur with our consultant’s conclusions and recommendations. The TCEQ said itwould not provide a closure letter until additional sampling of surface wateris performed which reflects concentrations of lead below Texas surface waterquality standards. This sampling is anticipated to be performed in September orOctober, 2007. We are not assured of receiving the no-further-action letter andwe may incur further liabilities if the stabilization process provesineffective, or if later testing of surface or ground water reflectsconcentrations of lead which exceed Texas surface or ground water qualitystandards. In addition, in 1994, we detected a small quantity of two hazardoussubstances in a temporary groundwater monitoring well at the Dallas facility.Our environmental consultants concluded that both substances arose from anoff-site source and no further action was recommended.

We do not believe that any of the above environmental matters will,either individually or in the aggregate, have a material adverse effect on ourfinancial position, results of operations or cash flows.

**Governmental Regulations**

Our operations are subject to regulation, supervision and licensingunder various federal, national, international, provincial, state and localstatutes, ordinances and regulations. The acquisition and sale of damaged andrecovered stolen vehicles is regulated by various state, provincial andinternational motor vehicle departments. In addition to the regulation of salesand acquisitions of vehicles, we are also subject to various local zoningrequirements with regard to the location of our storage facilities. Thesezoning requirements vary from location to location. At various times, we may beinvolved in disputes with local governmental officials regarding thedevelopment and/or operation of our business facilities. We believe that we arein compliance in all material respects with applicable regulatory requirements.We may be subject to similar types of regulations by federal, national,international, provincial, state, and local governmental agencies in newmarkets.

**Legal Proceedings**

We are involvedin litigation and damage claims arising in the ordinary course of business,such as actions related to injuries, property damage, and handling or disposalof vehicles. This litigation includes the following matters:

On September 16,2005, Richard M. Gray filed suit against Copart of Connecticut, Inc. andA. Safrin, in the State Court for the County of Chatham, State of Georgia,alleging a class action for unreasonable amounts claimed for storage liens byus, and related claims. Relief sought includes class certification, damages,fees, costs and expenses. Our motion for summary judgment was heard on January 31,2007 and was denied. We believe the claim is without merit, and are defendingthe lawsuit vigorously.

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On July 28,2006, Foreign Car Sales and Service LLC (“FCS”) filed suit against Copart inthe United States District Court for the Middle District of Louisiana,originally alleging antitrust violations and unfair trade practices. Reliefsought originally included class certification based on both unfair tradepractices and Sherman Act violations, damages, fees, costs and expenses. On January 5,2007, the Magistrate required FCS to amend its complaint. A First AmendedComplaint was rejected, and a Second Amended Complaint was submitted February 16,2007, in which FCS abandoned its unfair trade practices claims, and now reliessimply on breach of contract claims. FCS continues to seek certificationof a class based upon violations of the Sherman Act. Plaintiff is in *pro se* and is demanding a total award of 51%of our issued stock, as well as approximately $97,000 in damages arising fromdamages to vehicles. We filed a motion to dismiss based on lack of subjectmatter jurisdiction, improper venue, and failure to state a claim. We believethe claims are without merit, and are defending the lawsuit vigorously.

On August 7,2006, Kimberly and Jason Green filed suit against Copart in the Superior Courtof the State of California, County of Sacramento, making allegations pursuantto a California consumer protection statute similar to a class action forunreasonable amounts claimed for storage liens by us, and related claims.Relief sought includes class certification, damages, fees, costs and expenses.We filed an answer on September 1, 2006 denying the claim. On July 2,2007, the parties entered into a settlement agreement terminating the lawsuit.

We accrue for costs relating to these matters when a loss is probableand the amount can be reasonably estimated. The effect of the outcome of thesematters on our future results of operations cannot be predicted because anysuch effect depends on future results of operations, the amount and timing ofthe resolution of such matters. We believe that any ultimate liability will nothave a material effect on our financial position, results of operations or cashflows. However, the amount of the liabilities associated with these claims, ifany, cannot be determined with certainty.

**Intellectual Property and Proprietary Rights**

In June 2003,we filed a provisional US patent application on VB2 in the United States. This provisional patentapplication was followed by a US utility application filed in July 2003and a concurrent international application that has since been nationalized andis pending in Canada, Australia, China, the European Union, Mexico and Japan.Generally, patents issued in the US are effective for 20 years from theearliest asserted filing date of the patent application. The duration offoreign patents varies in accordance with the provisions of applicable locallaw. We are not dependent upon any single patent application and there can beno assurance that any patents will be issued from pending applications or thatany patents that are issued will provide meaningful protection or othercommercial advantages to us.

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We also rely on a combination of trade secret, copyright and trademarklaws, as well as contractual agreements to safeguard our proprietary rights intechnology and products. In seeking to limit access to sensitive information tothe greatest practical extent, we routinely enter into confidentiality andassignment of invention agreements with each of our employees and consultantsand nondisclosure agreements with our key customers and vendors.

**Item 1A.**             *Risk Factors*

*Investing inour common stock involves a high degree of risk. You should consider carefullythe risks and uncertainties described below before making an investmentdecision. Our business could be harmed if any of these risks as well as otherrisks not currently known to us or that we currently deem immaterial,materialized. The trading price of our common stock could decline due to theoccurrence of any of these risks, and you may lose all or part of yourinvestment. In assessing the risks described below, you should also refer tothe other information contained in this Form 10-K, including ourconsolidated financial statements and the related notes and schedule, and otherfilings with the SEC before deciding to purchase any shares of our commonstock.*

**We depend on alimited number of major suppliers of salvage vehicles. The loss of one or moreof these major suppliers could adversely affect our results of operations andfinancial condition, and an inability to increase our sources of vehicle supplycould adversely affect our growth rates.**

Historically, a limited number of vehicle suppliers have accounted fora substantial portion of our revenues. In fiscal 2007, vehicles supplied by ourlargest supplier accounted for approximately 11% of our revenues. Supplierarrangements are either written or oral agreements typically subject tocancellation by either party upon 30 to 90 days notice. Vehicle suppliers haveterminated agreements with us in the past in particular markets, which hasaffected the pricing for sales services in those markets. There can be noassurance that our existing agreements will not be cancelled. Furthermore,there can be no assurance that we will be able to enter into future agreementswith vehicle suppliers or that we will be able to retain our existing supply ofsalvage vehicles. A reduction in vehicles from a significant vehicle supplieror any material changes in the terms of an arrangement with a substantialvehicle supplier could have a material adverse effect on our results ofoperations and financial condition. In addition, a failure to increase oursources of vehicle supply could adversely affect our earnings and revenuegrowth rates.

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**Our UnitedKingdom acquisition of Universal Salvage plc on June 14, 2007 and oursubsequent acquisition of Century Salvage Sales Limited on August 1, 2007will expose us to risks arising from the acquisitions and risks associated withoperating in markets outside North America. We may acquire additional companiesin the United Kingdom or Europe or seek to establish new yards or facilities tocomplement the acquired companies’ operations. We have no prior experienceoperating outside North America, and any failure to integrate these recentlyacquired companies or future UK or European acquisitions into our operationssuccessfully could have an adverse effect on our financial position, results ofoperations or cash flows.**

During fiscal2007, we announced the acquisition of Universal Salvage plc, or Universal, ourfirst acquisition in the UK. Subsequently, in August 2007, we announcedthe acquisition of Century Salvage Sales Limited, or Century, also in the UK. Wemay acquire additional companies or operations in the UK or Europe or may seekto establish new yards or operations in the UK or Europe now that we haveestablished a presence in these markets. We have no experience operating ourbusiness outside North America, which presents numerous strategic, operating,and financial risks to us.

Our recentacquisitions in the UK and continued expansion of our operations outside NorthAmerica pose substantial risks and uncertainties that could have an adverseeffect on our future operating results. In particular, we may not be successfulin realizing anticipated synergies from these acquisitions, or we mayexperience unanticipated costs or expenses integrating the acquired operationsinto our existing business. We may also incur substantial expenses establishingnew yards or operations in the UK or Europe. Among other things, we intend toeventually deploy our VB2 vehicle remarketing technologies atall of our operations in the UK, where appropriate, and we cannot predictwhether this deployment will be successful or will result in increases in therevenues or operating efficiencies of any acquired companies relative to theirhistoric operating performance. Integration of our respective operations,including information technology integration and integration of financial andadministrative functions, may not proceed as we currently anticipate and couldresult in presently unanticipated costs or expenses (including unanticipatedcapital expenditures) that could have an adverse effect on our future operatingresults. We cannot provide any assurances that we will achieve our business andfinancial objectives in connection with these acquisitions or our strategicdecision to expand our operations internationally.

We have noexperience operating our business outside North America and lack familiaritywith local laws, regulations and business practices. We will need to developpolicies and procedures to manage our business on a global scale.Operationally, the businesses of Universal and Century have depended on keycustomer and supplier relationships, and we will need to maintain those. If wefail to maintain those relationships it would have an adverse effect on ouroperating objectives for the UK and could have an adverse effect on our future operatingresults.

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In addition, we anticipate our internationaloperations will subject us to a variety of risks associated with operating onan international basis, including:

·        the difficulty of managingand staffing foreign offices and the increased travel, infrastructure and legalcompliance costs associated with multiple international locations;

·        the need to localize ourproduct offerings, particularly with respect to VB2;

·        tariffs and trade barriersand other regulatory or contractual limitations on our ability to operate incertain foreign markets; and

·        exposure to foreigncurrency exchange rate risk, which we have not been previously subject to inany material amounts.

As we continueto expand our business globally, our success will depend, in large part, on ourability to anticipate and effectively manage these and other risks associatedwith our international operations. Our failure to manage any of these riskssuccessfully could harm our international operations and have an adverse effecton our operating results.

The period-to-period comparability of our operating results andfinancial condition is substantially affected by business acquisitions duringsuch periods. In particular, the UK acquisition, because of its size and, also,because the UK operates primarily on the principal model versus the agencymodel employed in the US, will have a significant impact on the comparabilityof revenues, margins and margin percentages in future periods. Furtheroperating on a principal basis will have a negative impact on our futureconsolidated gross margins.

**In the UK weoperate primarily on a principal basis, purchasing the salvage vehicle outrightfrom the insurance companies and reselling the vehicle to buyers. This exposesus to inventory risks including:**

·        loss from theft or damage;

·        loss from devaluation; and

·        lossfrom obsolescence.

**Our strategic shift from live salvage salesto an entirely Internet-based sales model presents new risks, includingsubstantial technology risks.**

In fiscal 2004, we converted all our NorthAmerican salvage sales from a live auction process to an entirelyInternet-based auction-style model based on technology developed internally byus. The conversion represents a significant change in the way we conductbusiness and presents numerous risks, including our increased reliance on theavailability and reliability of our network systems. In particular, we believethe conversion presents the following risks, among others:

·        Our operating results in aparticular period could be adversely affected in the event our networks are notoperable for an extended period of time for any reason, as a result of Internetviruses, or as a result of any other technological circumstance that makes usunable to conduct our virtual sales.

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·        Our business isincreasingly reliant on internally developed technology, and we have limitedhistoric experience developing technologies or systems for large-scaleimplementation and use.

·        Our general andadministrative expenses have tended to increase as a percentage of revenue asour information technology payroll has increased.

·        The change in our businessmodel may make it more difficult for management, investment analysts, andinvestors to model or predict our future operating results until sufficienthistoric data is available to evaluate the effect of the VB2 implementation over a longer period of timeand in different economic environments.

·        Ourincreasing reliance on proprietary technology subjects us to intellectualproperty risks, including the risk of third party infringement claims or therisk that we cannot establish or protect intellectual property rights in ourtechnologies. We have filed patent applications for VB2 inthe United States, the Netherlands, and Europe, but we cannot provide anyassurances that the patents will actually be issued, or if issued that thepatents would not later be found to be unenforceable or invalid.

**Our results of operations may not continue tobenefit from the implementation of VB**2 tothe extent we have experienced in recent periods.

We believe that the implementation of our proprietary VB2 sales technologies across our North Americasalvage operations has had a favorable impact on our results of operations byincreasing the size and geographic scope of our buyer base and increasing theaverage selling price for vehicles sold through our sales. VB2 wasimplemented across all our salvage yards beginning in the third quarter offiscal 2004. We do not believe, however, that we will continue to experienceimprovements in our results of operations at the same relative rates we haveexperienced in the last few years. In addition, we cannot predict whether wewill experience the same initial benefits from the implementation of VB2 in the UK market, or in future markets we mayenter, that we experienced in North America.

**Failure to have sufficient capacity to acceptadditional cars at one or more of our salvage yards could adversely affect ourrelationships with insurance companies or other suppliers of salvage vehicles.**

Capacity at our salvage yards varies from period to period and fromregion to region. For example, following adverse weather conditions in aparticular area, our yards in that area may fill and limit our ability toaccept additional salvage vehicles while we process existing inventories. Asdiscussed below, Hurricanes Katrina and Rita had an adverse effect on ouroperating results, in part because of yard capacity constraints in the GulfCoast area. We regularly evaluate our capacity in all our markets and, whereappropriate, seek to increase capacity through the acquisition of additionalland and yards. We may not be able to reach agreements to purchase independentsalvage yards in markets where we have limited excess capacity, and zoningrestrictions or difficulties obtaining use permits may limit our ability toexpand our capacity through acquisitions of new land. Failure to havesufficient capacity at one or more of our yards could adversely affect ourrelationships with insurance companies or other suppliers of salvage vehicles,which could have an adverse effect on our operating results.

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**Factors such as mild weather conditions canhave an adverse effect on our revenues and operating results as well as ourrevenue and earnings growth rates by reducing the available supply of salvagevehicles. Conversely, extreme weather conditions can result in an oversupply ofsalvage vehicles that requires us to incur abnormal expenses to respond tomarket demands.**

Mild weather conditions tend to result in a decrease in the availablesupply of salvage vehicles because traffic accidents decrease and fewerautomobiles are damaged. Accordingly, mild weather can have an adverse effecton our salvage vehicle inventories, which would be expected to have an adverseeffect on our revenue and operating results and related growth rates.Conversely, our inventories will tend to increase in poor weather such as aharsh winter or as a result of adverse weather-related conditions such asflooding. During periods of mild weather conditions, our ability to increaseour revenues and improve our operating results and related growth will beincreasingly dependent on our ability to obtain additional vehicle suppliersand to compete more effectively in the market, each of which is subject to theother risks and uncertainties described in these sections. In addition, extremeweather conditions, although they increase the available supply of salvagecars, can have an adverse effect on our operating results. For example, duringthe year ended July 31, 2006, we recognized substantial additional costsassociated with the impact of Hurricanes Katrina and Rita in Gulf Coast states.These additional costs, characterized as “abnormal” under Statement ofFinancial Accounting Standards 151, were recognized during the year endedJuly 31, 2006, and included the additional subhauling, payroll, equipmentand facilities expenses directly related to the operating conditions created bythe hurricanes. In the event that we were to again experience extremely adverseweather or other anomalous conditions that result in an abnormally high numberof salvage vehicles in one or more of our markets, those conditions could havean adverse effect on our future operating results.

**High fuelprices may have an adverse effect on our revenues and operating results as wellas our earnings growth rates.**

Significant increases in the cost of fuel could lead to a reduction inmiles driven per car and a reduction in accident rates. A material reduction inaccident rates could have a material impact on revenue growth. In addition,under our percentage incentive program contracts, or PIP, the cost of towingthe vehicle to one of our facilities is included in the PIP fee. We may incurincreased fees, which we will not be able to pass on to our suppliers ofsalvage vehicles. A material increase in tow rates could have a material impacton our operating results.

**The salvage vehicle sales industry is highlycompetitive and we may not be able to compete successfully.**

We facesignificant competition for the supply of salvage vehicles and for the buyersof those vehicles. We believe our principal competitors include other vehicleremarketing companies with whom we compete directly in obtaining vehicles frominsurance companies and other suppliers, and large vehicle dismantlers, who maybuy salvage vehicles directly from insurance companies, bypassing the salvagesales process. Many of the insurance companies have established relationshipswith competitive remarketing companies and large 

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dismantlers. Certain of our competitors may have greater financialresources than us. Due to the limited number of vehicle suppliers, particularlyin the UK, the absence of long-term contractual commitments between us and oursuppliers and the increasingly competitive market environment, there can be noassurance that our competitors will not gain market share at our expense.

We may also encounter significant competition for local, regional andnational supply agreements with vehicle suppliers. There can be no assurancethat the existence of other local, regional or national contracts entered intoby our competitors will not have a material adverse effect on our business orour expansion plans. Furthermore, we are likely to face competition from majorcompetitors in the acquisition of salvage vehicle remarketing facilities, whichcould significantly increase the cost of such acquisitions and therebymaterially impede our expansion objectives or have a material adverse effect onour results of operations. These potential new competitors may includeconsolidators of automobile dismantling businesses, organized salvage vehiclebuying groups, automobile manufacturers, automobile auctioneers and softwarecompanies. While most vehicle suppliers have abandoned or reduced efforts tosell salvage vehicles directly without the use of service providers such as us,there can be no assurance that this trend will continue, which could adverselyaffect our market share, results of operations and financial condition.Additionally, existing or new competitors may be significantly larger and havegreater financial and marketing resources than us; therefore, there can be noassurance that we will be able to compete successfully in the future.

**Because thegrowth of our business has been due in large part to acquisitions anddevelopment of new salvage vehicle facilities, the rate of growth of ourbusiness and revenues may decline if we are not able to successfully completeacquisitions and develop new facilities.**

We seek to increase our sales andprofitability through the acquisition of other salvage vehicle facilities andthe development of new salvage vehicle facilities. There can be no assurancethat we will be able to:

·        continue to acquireadditional facilities on favorable terms;

·        expand existing facilitiesin no-growth regulatory environments;

·        increase revenues andprofitability at acquired and new facilities;

·        maintain the historicalrevenue and earnings growth rates we have been able to obtain through facilityopenings and strategic acquisitions; or

·        createnew salvage vehicle storage facilities that meet our current revenue andprofitability requirements.

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**As we continue to expand our operations, our failure to manage growthcould harm our business and adversely affect our results of operations andfinancial condition.**

Our ability to manage growth is not onlydependent on our ability to successfully integrate new facilities, but also onour ability to:

·        hire, train and manageadditional qualified personnel;

·        establish new relationshipsor expand existing relationships with vehicle suppliers;

·        identify and acquire orlease suitable premises on competitive terms;

·        secure adequate capital;and

·        maintain the supply ofvehicles from vehicle suppliers.

Our inability to control or manage these growth factors effectivelycould have a material adverse effect on our financial position, results ofoperations, or cash flows.

**Our annual and quarterly performance mayfluctuate, causing the price of our stock to decline.**

Our revenues and operating results havefluctuated in the past and can be expected to continue to fluctuate in thefuture on a quarterly and annual basis as a result of a number of factors, manyof which are beyond our control. Factors that may affect our operating resultsinclude, but are not limited to, the following:

·        fluctuations in the marketvalue of salvage and used vehicles;

·        as a result of ourrecently acquired companies in the UK, the impact of foreign exchange gain andloss;

·        our ability tosuccessfully integrate our newly acquired operations in the UK and anyadditional international markets we may enter;

·        the availability ofsalvage vehicles;

·        variations in vehicleaccident rates;

·        buyer participation in theInternet bidding process;

·        delays or changes in statetitle processing;

·        changes in international,state or federal laws or regulations affecting salvage vehicles;

·        changes in local lawsaffecting who may purchase salvage vehicles;

·        our ability to integrateand manage our acquisitions successfully;

·        the timing and size of ournew facility openings;

·        the announcement of newvehicle supply agreements by us or our competitors;

·        severity of weather andseasonality of weather patterns;

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·        the amount and timing ofoperating costs and capital expenditures relating to the maintenance andexpansion of our business, operations and infrastructure;

·        the availability and costof general business insurance;

·        labor costs and collectivebargaining;

·        availability of subhaulersat competitive rates;

·        acceptance of buyers andsellers of our Internet-based model deploying VB2, a proprietary Internet auction-stylesales technology, including in the UK market where we still sell salvagevehicles using live auctions;

·        changes in the currentlevels of out of state and foreign demand for salvage vehicles;

·        the introduction of asimilar Internet product by a competitor; and

·        the ability to obtainnecessary permits to operate salvage storage facilities.

Due to the foregoing factors, our operating results in one or morefuture periods can be expected to fluctuate. As a result, we believe thatperiod-to-period comparisons of our results of operations are not necessarilymeaningful and should not be relied upon as any indication of futureperformance. In the event such fluctuations result in our financial performancebeing below the expectations of public market analysts and investors, the priceof our common stock could decline substantially.

**Our strategic shift to an Internet-basedsales model has increased the relative importance of intellectual propertyassets to our business, and any inability to protect those rights could have amaterial adverse effect on our business, financial condition, or results ofoperations.**

Implementation of VB2 across our North American salvage operationshas increased the relative importance of intellectual property rights to ourbusiness. Our intellectual property rights include pending patent applicationsfor VB2 aswell as trademarks, trade secrets, copyrights and other intellectual propertyrights. We are in the process of prosecuting an initial patent applicationrelating to VB2 andcannot predict whether a patent will actually issue from that application. Evenif a patent is issued, the scope of the protection gained may be insufficientor any issued patent could subsequently be deemed invalid or unenforceable. Inaddition, we are increasingly entering into agreements with third partiesregarding the license or other use of our intellectual property in foreignjurisdictions. Effective intellectual property protection may not be availablein every country in which our products and services are distributed, deployed,or made available. We seek to maintain certain intellectual property rights astrade secrets. The secrecy could be compromised by third parties, orintentionally or accidentally by our employees, which would cause us to losethe competitive advantage resulting from those trade secrets. Any significantimpairment of our intellectual property rights, or any inability to protect ourintellectual property rights, could have a material adverse effect on ourfinancial position, results of operations, or cash flows.

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**We have in the past been and may in thefuture be subject to intellectual property rights claims, which are costly todefend, could require us to pay damages, and could limit our ability to usecertain technologies in the future.**

Litigation based on allegations of infringement or other violations ofintellectual property rights are common among companies who rely heavily onintellectual property rights. Our reliance on intellectual property rights hasincreased significantly in recent years as we have implemented our VB2 auction-stylesales technologies across our business and ceased conducting live auctions inour North American operations. As we face increasing competition, thepossibility of intellectual property rights claims against us grows. Litigationand any other intellectual property claims, whether with or without merit, canbe time-consuming, expensive to litigate and settle, and can divert managementresources and attention from our core business. An adverse determination incurrent or future litigation could prevent us from offering our products andservices in the manner currently conducted. We may also have to pay damages orseek a license for the technology, which may not be available on reasonableterms and which may significantly increase our operating expenses, if it isavailable for us to license at all. We could also be required to developalternative non-infringing technology, which could require significant effortand expense.

**New accounting pronouncements or new interpretations of existingstandards could require us to make changes or adjustments in our accountingpolicies and procedures that could adversely affect our financial statements.**

The Financial Accounting Standards Board, the SEC, or otheraccounting organizations or governmental entities issue new pronouncements ornew interpretations of existing accounting standards that may require us tochange our accounting policies and procedures. To date, we do not believe anynew pronouncements or interpretations have had an adverse effect on ourfinancial condition or results of operations, but future pronouncements orinterpretations could require us to change our policies or procedures.Moreover, we continually review our critical accounting policies in light ofthe accounting literature and changes in our operations.

**Government regulation of the salvage vehiclesales industry may impair our operations, increase our costs of doing businessand create potential liability.**

Participants in the salvage vehicle sales industry are subject to, andmay be required to expend funds to ensure compliance with a variety ofgovernmental, regulatory and administrative rules, regulations, land useordinances, licensure requirements and procedures, including those governingvehicle registration, the environment, zoning and land use. Failure to complywith present or future regulations or changes in interpretations of existingregulations may result in impairment of our operations and the imposition ofpenalties and other liabilities. At various times, we may be involved indisputes with local governmental officials regarding the development and/oroperation of our business facilities. We believe that we are in compliance inall material respects with applicable regulatory requirements. We may besubject to similar types 

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of regulations by federal, national,international, provincial, state, and local governmental agencies in newmarkets. In addition, new regulatory requirements or changes in existingrequirements may delay or increase the cost of opening new facilities, maylimit our base of salvage vehicle buyers and may decrease demand for ourvehicles.

**The operation of our storage facilities posescertain environmental risks, which could adversely affect our financialposition, results of operations or cash flows.**

Our operations are subject to federal, state, national, provincial and local laws and regulations regardingthe protection of the environment in the countries which we have storagefacilities. In the salvage vehicle remarketing industry, large numbers ofwrecked vehicles are stored at storage facilities and, during that time, spillsof fuel, motor oil and other fluids may occur, resulting in soil, surface wateror groundwater contamination. In addition, certain of our facilities generateand/or store petroleum products and other hazardous materials, including wastesolvents and used oil. In the UK, we provide vehicle de-pollution and crushingservices for End-of-Life program vehicles. We could incur substantialexpenditures for preventative, investigative or remedial action and could beexposed to liability arising from our operations, contamination by previoususers of certain of our acquired facilities, or the disposal of our waste atoff-site locations. Environmental laws and regulations could become morestringent over time and there can be no assurance that we or our operationswill not be subject to significant costs in the future. Although we haveobtained indemnification for pre-existing environmental liabilities from manyof the persons and entities from whom we have acquired facilities, there can beno assurance that such indemnifications will be adequate. Any such expendituresor liabilities could have a material adverse effect on our results ofoperations and financial condition.

**If we experience problems with our providersof fleet operations, our business could be harmed.**

We rely solely upon independent subhaulers to pick up and delivervehicles to and from our North American storage facilities. Our failure topick up and deliver vehicles in a timely and accurate manner could harm ourreputation and brand, which could have a material adverse effect on ourbusiness. Further, an increase in fuel cost may lead to increased pricescharged by our independent subhaulers, which may significantly increase ourcost. We may not be able to pass these costs on to our sellers or buyers.

**If we experience problems with our UKtrucking fleet operations, our business could be harmed.**

We use a fleet of company owned trucks to pick up and deliver vehiclesto and from our UK storage facilities. We are subject to the risks associatedwith providing trucking services, including inclement weather, disruptions intransportation infrastructure, availability and price of fuel, any of whichcould result in an increase in our operating expenses and reduction in our netincome.

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**We are partially self-insured for certain losses.**

We are partially self-insured for certain losses related to medicalinsurance, general liability, workers’ compensation and auto liability. Our liabilityrepresents an estimate of the ultimate cost of claims incurred as of thebalance sheet date. The estimated liability is not discounted and isestablished based upon analysis of historical data and actuarial estimates.While we believe these estimates are reasonable based on the informationcurrently available, if actual trends, including the severity of claims andmedical cost inflation, differ from our estimates, our results of operationscould be impacted. Further, we rely on independent actuaries to assist us inestablishing the proper amount of reserves for anticipated payouts associatedwith these self-insured exposures.

**Our executive officers, directors and theiraffiliates hold a large percentage of our stock and their interests may differfrom other shareholders.**

Our executive officers, directors and their affiliates beneficiallyown, in the aggregate, approximately 20% of our common stock as of July 31,2007. If they were to act together, these shareholders would have significantinfluence over most matters requiring approval by shareholders, including theelection of directors, any amendments to our articles of incorporation andcertain significant corporate transactions, including potential merger oracquisition transactions. In addition, without the consent of theseshareholders, we could be delayed or prevented from entering into transactionsthat could be beneficial to us or our other investors. These shareholders maytake these actions even if they are opposed by our other investors.

**We have a shareholder rights plan, or poisonpill, which could affect the price of our common stock and make it moredifficult for a potential acquirer to purchase a large portion of oursecurities, to initiate a tender offer or a proxy contest, or to acquire us.**

In March 2003, our board of directors adopted a shareholder rightsplan, commonly known as a poison pill. The poison pill may discourage, delay,or prevent a third party from acquiring a large portion of our securities,initiating a tender offer or proxy contest, or acquiring us through anacquisition, merger, or similar transaction. Such an acquirer could beprevented from consummating one of these transactions even if our shareholdersmight receive a premium for their shares over then-current market prices.

**If we lose key management or are unable toattract and retain the talent required for our business, we may not be able tosuccessfully manage our business or achieve our objectives.**

Our future success depends in large part upon the leadership and performanceof our executive management team, all of whom are employed on an at-will basisand none of whom are subject to any agreements not to compete. If we lose theservice of one or more of our executive officers or key employees, inparticular Willis J. Johnson, our Chief Executive Officer, and A. Jayson Adair,our President, or if one or more of them decides to join a competitor orotherwise compete directly or indirectly with us, we may not be able tosuccessfully manage our business or achieve our business objectives.

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***ExecutiveOfficers of the Registrant***

**Executive Officers**

Our executive officers and their ages as of July 31,2007 were as follows:

| **Name**             | ** ** | ** ** | ** ** | **Age**                                                                        | ** ** | **Position** |
|----------------------|------------|------------|------------|--------------------------------------------------------------------------------|------------|--------------|
| Willis J. Johnson    |       | 60         |       | Chairman of the Board, Chief Executive Officer and Director                    |
| A. Jayson Adair      |       | 37         |       | President and Director                                                         |
| James E. Meeks       |       | 57         |       | Executive Vice President, Chief Operating Officer and Director                 |
| William E. Franklin  |       | 51         |       | Senior Vice President and Chief Financial Officer                              |
| Paul A. Styer        |       | 51         |       | Senior Vice President, General Counsel and Secretary                           |
| Vincent W. Mitz      |       | 44         |       | Senior Vice President of Marketing                                             |
| David L. Bauer       |       | 46         |       | Senior Vice President of Information Technology and Chief Information  Officer |
| Russell D. Lowy      |       | 48         |       | Senior Vice President of Operations                                            |
| Thomas E. Wylie      |       | 56         |       | Senior Vice President of Human Resources                                       |
| Robert H. Vannuccini |       | 40         |       | Vice President of National Accounts                                            |
| Simon E. Rote        |       | 35         |       | Vice  President of Finance                                                     |

 

**Willis J. Johnson****, our founder, has served as ourChairman of the Board since 2004, Chief Executive Officer since 1986 and as adirector since 1982. Mr. Johnson served as our President from 1986 until May 1995.Mr. Johnson was an officer and director of U-Pull-It, Inc., or UPI, aself-service auto dismantler which he co-founded in 1982, from 1982 through September 1994.Mr. Johnson sold his entire interest in UPI in September 1994. Mr. Johnsonhas over 30 years of experience in owning and operating auto dismantlingcompanies.**

**A. Jayson Adair**has served as our President since November 1996 and as a director since September 1992.From April 1995 until October 1996, Mr. Adair served as ourExecutive Vice President. From August 1990 until April 1995, Mr. Adairserved as our Vice President of Sales and Operations and from June 1989 toAugust 1990, Mr. Adair served as our Manager of Operations.

**James E. Meeks****has served as our Vice President andChief Operating Officer since September 1992 when he joined us concurrentwith our purchase of South Bay Salvage Pool, our San Martin operation. Mr. Meekshas served as our Executive Vice President and director since October 1996and as Senior Vice President since April 1995. From April 1986 to September 1992,Mr. Meeks, together with his family, owned and operated the San Martinoperation. Mr. Meeks was also an officer, director and part owner of Cas &Meeks, Inc., a towing and subhauling service company, which he operatedfrom 1991 to March 2001. Mr. Meeks has over 30 years of experience inthe vehicle dismantling business. Effective December 31, 2007, Mr. Meekswill retire. Effective August 1, 2007, Mr. Meeks relinquished hisoperational responsibilities as Chief Operating Officer but will remain withthe Company in an advisory capacity until his retirement. Mr. Meeks willalso continue as a member of our Board of Directors.**

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**William E. Franklin**has served as our Senior Vice President and Chief Financial Officer since March 2004.Mr. Franklin has over 20 years of international finance and executivemanagement experience. From October 2001 to March 2004, he served asthe Chief Financial Officer of Ptek Holdings, Inc., an internationaltelecommunications company. Prior to that he was the President and CEO ofClifford Electronics, an international consumer electronics company. Mr. Franklinreceived a Master’s degree in Business Administration from the University ofSouthern California and his Bachelor’s of Science degree in Finance fromCalifornia State University, Bakersfield. Mr. Franklin is a CertifiedPublic Accountant.

**Paul A. Styer**has served as our General Counsel since September 1992, served as ourSenior Vice President since April 1995 and as our Vice President from September 1992until April 1995. Mr. Styer served as one of our directors from September 1992until October 1993. Mr. Styer has served as our Secretary since October 1993.From August 1990 to September 1992, Mr. Styer conducted anindependent law practice. Mr. Styer received a B.A. from the University ofCalifornia, Davis and a J.D. from the University of the Pacific. Mr. Styeris a member of the California State Bar Association.

**Vincent W. Mitz**has served as our Senior Vice President of Marketing since May 1995. Priorthereto, Mr. Mitz was employed by NER Auction Systems from 1981 until itsacquisition by Copart in 1995. At NER, Mr. Mitz held numerous positionsculminating as Vice President of Sales and Operations for NER’s New York regionfrom 1990 to 1993 and Vice President of Sales & Marketing from1993 to 1995. On August 1, 2007, Mr. Mitz relinquished the title andresponsibilities of Senior Vice President of Marketing and assumed the titleand responsibilities of Executive Vice President.

**David L. Bauer**has served as our Senior Vice President of Information Technology and ChiefInformation Officer since joining Copart in December 1995. Prior thereto, Mr. Bauerwas an independent systems consultant from 1987 to 1995. Prior to workingindependently, Mr. Bauer spent 1983 to 1987 working in Arthur Andersen &Company’s Management Information Consulting Division, leaving in 1987 as aConsulting Manager. Mr. Bauer earned a B.A. in Economics from theUniversity of California, San Diego in 1981 and an MBA from University ofCalifornia, Davis in 1983.

**Russell D. Lowy**has served as our Senior Vice President of Operations since July 2002. Mr. Lowyserved as Vice President of Operations, Eastern Division from December 1999to July 2002. From December 1998 to December 1999, Mr. Lowyserved as Director of Training and Auditing. Mr. Lowy served as AssistantVice President of Operations from 1996 to 1997, Regional Manager of NorthernCalifornia from 1995 to 1996 and Marketing Manager from 1993 to 1994. Prior tojoining us, Mr. Lowy spent nine years with ADP—Claims Solutions Group. Mr. Lowyreceived a B.S. in Business Administration from California State University,Chico in 1982. On August 1, 2007, Mr. Lowy relinquished the title ofSenior Vice President of Operations and assumed the title and responsibilitiesof Chief Operating Officer.

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**Thomas E. Wylie**has served as our Senior Vice President of Human Resources since September 2003.Mr. Wylie has over 25 years of human resources and organizational changemanagement experience. From January 2001 to November 2003 he servedas Vice President, Human Resources, Systems and Administration for theCalifornia Division of Kaiser Permanente, a health care organizationheadquartered in Oakland, California. Prior to that he was the Vice Presidentof Human Resources for Global Business Services, a division of HoneywellInternational in Morristown, New Jersey. He held several other positions withHoneywell starting in 1979. Mr. Wylie received a bachelor’s degree fromHamline University in St. Paul, Minnesota.

**Robert H. Vannuccini**was promoted to Senior Vice President of Marketing on August 1, 2007. Priorthereto, Mr. Vannuccini served as our Vice President of National Accountsfrom 1999 to 2007 and our Midwest regional Account Manager from 1995 to 1999.Prior to that, Mr. Vannuccini was employed by NER as the Midwest RegionalAccount Manager from 1994 until its acquisition by Copart in 1995. Prior to hisexperience at NER, Mr. Vannuccini was an Assistant Vice President withFleet Financial Group from 1991 to 1994. Mr. Vannuccini received hisBachelor of Business Administration degree in Banking and Finance from HofstraUniversity, Hempstead, New York in 1988.

**Simon E. Rote**has served as our Vice President of Finance since March 2003. Priorthereto, Mr. Rote served as our Controller from December 1998 to March 2003,and as our Assistant Controller from December 1997 to December 1998. Mr. Rotewas an auditor with KPMG LLP from 1994 to 1997. Mr. Rote received a B.S.in Accounting from St. Mary’s College in 1994.

Our executive officers are elected by our board of directors and serveat the discretion of the board. There are no family relationships among any ofour directors or executive officers, except that A. Jayson Adair is theson-in-law of Willis J. Johnson.

**Item 1B.**             *Unresolved Staff Comments*

Not Applicable.

**Item 2.****                    *****Properties***

Our corporate headquarters are located in Fairfield, California. Thisfacility consists of approximately 100,000 square feet of office space owned byCopart. We also own or lease an additional 131 operating facilities. In the US,we have facilities in every state except Delaware, New Hampshire, North Dakota,Rhode Island, South Dakota, Vermont and Wyoming. In Canada we are only in theprovince of Ontario. In the UK, as of July 31, 2007, we owned or leased 7operating facilities. We believe that our existing facilities are adequate tomeet current requirements and that suitable additional or substitute space willbe available as needed to accommodate any expansion of operations andadditional offices.

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**Item 3.****                    *****Legal Proceedings***

We are involvedin litigation and damage claims arising in the ordinary course of business,such as actions related to injuries, property damage, and handling or disposalof vehicles. This litigation includes the following matters:

On September 16,2005, Richard M. Gray filed suit against Copart of Connecticut, Inc. andA. Safrin, in the State Court of the County of Chatham, State of Georgia,alleging a class action for unreasonable amounts claimed for storage liens byus, and related claims. Relief sought includes class certification, damages,fees, costs and expenses. Our motion for summary judgment was heard on January 31,2007 and was denied. We believe the claim is without merit, and are defendingthe lawsuit vigorously.

On July 28,2006, Foreign Car Sales and Service LLC (“FCS”) filed suit against Copart inthe United States District Court for the Middle District of Louisiana,originally alleging antitrust violations and unfair trade practices. Reliefsought originally included class certification based on both unfair tradepractices and Sherman Act violations, damages, fees, costs and expenses. On January 5,2007, the Magistrate required FCS to amend its complaint. A First AmendedComplaint was rejected, and a Second Amended Complaint was submitted February 16,2007, in which FCS abandoned its unfair trade practices claims, and now reliessimply on breach of contract claims. FCS continues to seek certificationof a class based upon violations of the Sherman Act. Plaintiff is*pro se* and is demanding a total award of 51% of our issuedstock, as well as $97,000 in damages arising form damages to vehicles. We fileda motion to dismiss based on lack of subject matter jurisdiction, impropervenue, and failure to state a claim. We believe the claims are without merit,and are defending the lawsuit vigorously.

On August 7,2006, Kimberly and Jason Green filed suit against Copart in the Superior Courtof the State of California, County of Sacramento, making allegations pursuantto a California consumer protection statute similar to a class action forunreasonable amounts claimed for storage liens by us, and related claims.Relief sought included class certification, damages, fees, costs and expenses.We filed an answer on September 1, 2006 denying the claim. On July 2,2007, the parties entered into a settlement agreement terminating the lawsuit.

We accrue for costs relating to these matters when a loss is probableand the amount can be reasonably estimated. The effect of the outcome of thesematters on our future results of operations cannot be predicted because anysuch effect depends on future results of operations, the amount and timing ofthe resolution of such matters. We believe that any ultimate liability will nothave a material effect on our financial position, results of operations or cashflows. However, the amount of the liabilities associated with these claims, ifany, cannot be determined with certainty.

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

We did notsubmit any matters to a vote of our shareholders during the fourth quarter ofour 2007 fiscal year.

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**PART II**

**Item 5.****                    *****Market for Registrant’s CommonEquity, Related Shareholder Matters and Issuer Purchases of Equity Securities***

**MarketInformation**

The following table summarizes the high andlow sales prices per share of our common stock for each quarter during the lasttwo fiscal years. As of July 31, 2007, there were 88,333,677 sharesoutstanding. Our common stock has been quoted on the Nasdaq under the symbol “CPRT”since March 17, 1994. As of July 31, 2007, we had 1,561 shareholdersof record.

| **Fiscal Year 2007** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------|------------|------------|------------|----------|------------|---------|------------|
| Fourth  Quarter                |       | 31.42      |       | 28.11    |       |
| Third Quarter                  |       | 30.45      |       | 27.36    |       |
| Second  Quarter                |       | 31.42      |       | 28.52    |       |
| First Quarter                  |       | 30.39      |       | 26.31    |       |

 

| **Fiscal Year 2006** | ** ** | ** ** | ** ** | **High** | ** ** | **Low** | ** ** |
|--------------------------------|------------|------------|------------|----------|------------|---------|------------|
| Fourth  Quarter                |       | 27.92      |       | 23.51    |       |
| Third Quarter                  |       | 27.86      |       | 24.70    |       |
| Second  Quarter                |       | 25.80      |       | 21.14    |       |
| First Quarter                  |       | 25.50      |       | 22.00    |       |

 

**DividendPolicies**

We have notpaid a cash dividend since becoming a public company in 1994. We currentlyintend to retain any earnings for use in our business.

We expect to continue to use cash flows from operations to finance ourworking capital needs and to develop and grow our business. In addition to ourstock repurchase, we are considering a variety of alternative potential usesfor our remaining cash balances and our cash flow from operations. These alternativepotential uses include additional stock repurchases, the payment of dividendsand acquisitions.

**Stock Repurchase**

In February 2003,our Board of Directors authorized us to repurchase up to 9.0 million shares ofour common stock. The repurchases may be effected through solicited orunsolicited transactions in the open market or in privately negotiatedtransactions. No time limit has been placed on the duration of the sharerepurchase program. The repurchases will be made at such times and in such amountsas we deem appropriate and may be discontinued at any time. For the year ended July 31,2007, we repurchased 2,995,405 shares at a weighted average price of $29.91.For the year ended July 31, 2006, we repurchased 366,000 shares at aweighted average price of $24.24. For the year ended July 31, 2005, we didnot repurchase any shares. The total 

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number of shares repurchased under the program as of July 31, 2007is 7,033,705 million, leaving 1,966,295 million available under the repurchaseprogram.

The number and average price of sharespurchased in each fiscal year are set forth in the table below:

| **Period**      | ** ** | ** ** | ** ** | **Total  Number  of Shares  Purchased** | ** ** | **Average  Price Paid  Per Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced Program** | ** ** | **Maximum Number  of Shares That May  Yet Be Purchased  Under the Program** | ** ** |
|-----------------|------------|------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
| *Fiscal 2007*   |       |       |       |                                         |       |                                         |       |                                                                                                             |       |                                                                                                                |       |   |   |   |   |
| First Quarter   |       | —     |       |                                         | —     |                                         |       |                                                                                                             | —     |                                                                                                                |       |   | — |   |   |
| Second  Quarter |       | —     |       |                                         | —     |                                         |       |                                                                                                             | —     |                                                                                                                |       |   | — |   |   |
| Third Quarter   |       | —     |       |                                         | —     |                                         |       |                                                                                                             | —     |                                                                                                                |       |   | — |   |   |
| Fourth  Quarter |       | 2,995,405  |       |                                         | $          | 29.91                                        |       |                                                                                                             |       | 7,033,705                                                                                                           |       |   |   | 1,966,295 |   |   |
| *Fiscal 2006*   |       |       |       |                                         |       |                                         |       |                                                                                                             |       |                                                                                                                |       |   |   |   |   |
| First Quarter   |       | —     |       |                                         | —     |                                         |       |                                                                                                             | —     |                                                                                                                |       |   | — |   |   |
| Second  Quarter |       | 366,000    |       |                                         | $          | 24.24                                        |       |                                                                                                             |       | 4,038,300                                                                                                           |       |   |   | 4,961,700 |   |   |
| Third Quarter   |       | —     |       |                                         | —     |                                         |       |                                                                                                             | —     |                                                                                                                |       |   | — |   |   |
| Fourth Quarter  |       | —     |       |                                         | —     |                                         |       |                                                                                                             | —     |                                                                                                                |       |   | — |   |   |

 

**Issuances of Unregistered Securities**

There were no issuances of unregistered securities in the quarter endedJuly 31, 2007.

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**Performance** Graph

*Notwithstanding any statement to the contraryin any of our previous or future filings with the SEC, the followinginformation relating to the price performance of our common stock shall not bedeemed “filed” with the SEC or “Soliciting Material” under the Exchange Act, orsubject to Regulation 14A or 14C, or to liabilities of Section 18 of theExchange Act except to the extent we specifically request that such informationbe treated as soliciting material or to the extent we specifically request thatsuch information be treated as soliciting material or to the extent wespecifically incorporate this information by reference.*

**COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among Copart, Inc., The NASDAQ Composite IndexAnd A Peer Group**

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**Item 6.****                    *****Selected Financial Data***

The following selected operating and balancesheet data, as of and for the years ended July 31, 2007, 2006, and 2005have been derived from the audited consolidated financial statements of theCompany. The following selected operating and balance sheet data, as of and forthe years ended July 31, 2004 and 2003 have been derived from audited andunaudited consolidated financial statements of the Company, respectively. Theselected consolidated financial data should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe Company’s consolidated financial statements and the notes thereto.

| ** **                                                                  | ** ** | **Fiscal Year Ending July 31,**                              | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2007**                                                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                  | ** ** | **(In 000s except per share and other data)** | ** ** |
| **Operating Data**                                                          |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Revenues                                                                    |       | $                                                                                | 560,680    |   | $ | 528,571 |   | $ | 447,731 |   | $ | 391,014 |   | $ | 335,407 |   |
| Operating  Income                                                           |       | 203,145                                                                          |       | 171,562 |   | 156,436 |   | 124,461 |   | 90,638 |   |
| Income from  continuing operations  before income taxes                     |       | 217,421                                                                          |       | 174,522 |   | 164,595 |   | 129,921 |   | 93,994 |   |
| Income tax  expense                                                         |       | (81,083                                                                          | )          | (61,862 | ) | (62,772 | ) | (50,929 | ) | (36,877 | ) |
| Income from  continuing operations                                          |       | 136,338                                                                          |       | 112,660 |   | 101,823 |   | 78,992 |   | 57,117 |   |
| Income (loss)  from discontinued operations, net of income tax effects |       | —                                                                           |       | (15,713 | ) | 293 |   | 228 |   | 105 |   |
| Net income                                                                  |       | 136,338                                                                          |       | 96,947 |   | 102,116 |   | 79,220 |   | 57,222 |   |
| Basic per share amounts:                                                    |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Income from  continuing operations                                          |       | $                                                                                | 1.50       |   | $ | 1.24 |   | $ | 1.13 |   | $ | 0.89 |   | $ | 0.63 |   |
| Discontinued  operations                                                    |       | $                                                                                | —     |   | $ | (0.17 | ) | $ | — |   | $ | — |   | $ | — |   |
| Net income  per share                                                       |       | $                                                                                | 1.50       |   | $ | 1.07 |   | $ | 1.13 |   | $ | 0.89 |   | $ | 0.63 |   |
| Weighted  average shares                                                    |       | 90,651                                                                           |       | 90,372 |   | 90,162 |   | 89,457 |   | 91,408 |   |
| Diluted per share amounts:                                                  |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Income from  continuing operations                                          |       | $                                                                                | 1.46       |   | $ | 1.21 |   | $ | 1.10 |   | $ | 0.87 |   | $ | 0.62 |   |
| Discontinued  operations                                                    |       | $                                                                                | —     |   | $ | (0.17 | ) | $ | — |   | $ | — |   | $ | — |   |
| Net income  per share                                                       |       | $                                                                                | 1.46       |   | $ | 1.04 |   | $ | 1.10 |   | $ | 0.87 |   | $ | 0.62 |   |
| Weighted  average shares                                                    |       | 93,455                                                                           |       | 92,925 |   | 92,984 |   | 91,537 |   | 93,018 |   |
| **Balance Sheet Data**                                                      |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Cash, cash  equivalents and short-term investments                          |       | $                                                                                | 200,990    |   | $ | 275,315 |   | $ | 252,548 |   | $ | 178,320 |   | $ | 116,746 |   |
| Working  capital                                                            |       | $                                                                                | 247,850    |   | $ | 328,017 |   | $ | 293,696 |   | $ | 228,535 |   | $ | 166,746 |   |
| Total assets                                                                |       | $                                                                                | 1,005,344  |   | $ | 894,705 |   | $ | 793,528 |   | $ | 673,023 |   | $ | 587,100 |   |
| Total debt                                                                  |       | $                                                                                | 2,793      |   | $ | — |   | $ | — |   | $ | 16 |   | $ | 107 |   |
| Shareholders’  equity                                                  |       | $                                                                                | 880,866    |   | $ | 809,970 |   | $ | 709,379 |   | $ | 602,263 |   | $ | 525,640 |   |
| **Other Data**                                                              |       |                                                                             |       |   |   |   |   |   |   |   |   |
| Number of storage facilities                                                |       | 131                                                                              |       | 122 |   | 117 |   | 107 |   | 102 |   |

 

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**Item 7.****                    ***Management’s**********Discussion and Analysis of Financial Condition and Results ofOperations***

**SPECIAL NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

*This annual report on Form 10-K,including the information incorporated by reference herein, contains forward-lookingstatements within the meaning of Section 27A of the Securities Act of1933, as amended (the “Securities Act”), and Section 21E of the SecuritiesExchange Act of 1934, as amended, (the “Exchange Act”). All statements otherthan statements of historical facts are statements that could be deemedforward-looking statements. In some cases, you can identify forward-lookingstatements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,”“forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue”or the negative of these terms or other comparable terminology. Theforward-looking statements contained in this report involve known and unknownrisks, uncertainties and situations that may cause our or our industry’s actualresults, level of activity, performance or achievements to be materiallydifferent from any future results, levels of activity, performance orachievements expressed or implied by these statements. These factors includethose listed in Part I, Item 1A. —“Risk Factors” beginning on page 19of this annual report on Form 10-K and those discussed elsewhere inthis annual report on Form 10-K. We encourage investors to reviewthese factors carefully together with the other matters referred to herein, aswell as in the other documents we file with the Securities and ExchangeCommission (the “SEC”). The Company may from time to time make additionalwritten and oral forward-looking statements, including statements contained inthe Company’s filings with the SEC. The Company does not undertake to updateany forward-looking statement that may be made from time to time by or onbehalf of the Company.*

*Although webelieve that, based on information currently available to the Company and itsmanagement, the expectations reflected in the forward-looking statements arereasonable, we cannot guarantee future results, levels of activity, performanceor achievements. You should not place undue reliance on these forward-lookingstatements.*

**Overview**

We providevehicle suppliers, primarily insurance companies, with a full range ofremarketing services to process and sell vehicles primarily over the Internetthrough our Virtual Bidding Second Generation, or VB2, Internet auction-style salestechnology. In the United Kingdom, or UK, we sell salvage vehicles through acombination of live auctions and Internet bidding. We sell principally tolicensed vehicle dismantlers, rebuilders, repair licensees, used vehicledealers and exporters. Salvage vehicles are either damaged vehicles deemed a totalloss or not economically repairable by the insurance companies or are recoveredstolen vehicles for which an insurance settlement with the vehicle owner hasalready been made. We offer vehicle suppliers a full range of remarketingservices that expedite each stage of the salvage vehicle sales process andminimize administrative and processing costs. In the United States, or US, wesell vehicles primarily as an agent and derive revenue primarily from fees paidby vehicle suppliers and vehicle buyers as well as related fees for servicessuch as towing and storage. In the United Kingdom, we operate primarily on aprincipal basis, 

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purchasing the salvage vehicle outright from the insurance companiesand reselling the vehicle for our own account to buyers through a combinationof live auctions and Internet sales.

Our revenuesconsist of salvage fees charged to vehicle suppliers and vehicle buyers,transportation revenue and purchased vehicle revenues. Consignment revenuesfrom suppliers are generally generated either on a fixed fee contract basiswhere we collect a fixed amount for selling the vehicles regardless of theselling price of the vehicle or, under our Percentage Incentive Program, or PIPprogram, our fees are generally based on a predetermined percentage of thevehicle sales price. Under the fixed fee program, we generally charge anadditional fee for title processing and special preparation. Although sometimesincluded in the consignment fee, we may also charge additional fees for thecost of transporting the vehicle to our facility, storage of the vehicle, andother incidental costs. Under the consignment programs, only the feesassociated with vehicle processing are recorded in revenue, not the actualsales price (gross proceeds). Salvage fees also include fees charged to vehiclebuyers for purchasing vehicles, storage and annual registration. Transportationrevenue includes charges to suppliers for towing vehicles under certaincontracts. Transportation revenue also includes towing charges assessed tobuyers for delivering vehicles. Purchased vehicle revenue, includes the grosssales price of the vehicle which we have purchased or are otherwise consideredto own and primarily generated in the UK.

Operating costsconsist primarily of operating personnel (which includes yard management,clerical and yard employees), rent, contract vehicle towing, insurance, fuel,equipment maintenance and repair, and costs of vehicles we sold under purchasecontracts. Because we operate as a principal in the UK, purchasing andreselling salvaged vehicles for our own account, we expect operating costs toincrease as a percentage of revenue in future periods. Costs associated withgeneral and administrative expenses consist primarily of executive management,accounting, data processing, sales personnel, human resources, professionalfees, research and development and marketing expenses.

During fiscal2004, we converted all of our North American vehicle remarketing facilities toan Internet-based auction-style model using our VB2 Internet sales technology. This processemploys a two-step bidding process. The first step, called the preliminary bid,allows buyers to submit bids up to one hour before a real time virtual actionbegins. The second step allows buyers to bid against each other, and the highbidder from the preliminary bidding process, in a real-time process over theInternet.

During the second quarter of fiscal 2006, we adopted a formal plan todiscontinue the operations of our public auction business Motors Auction Group,or MAG, and dispose of or convert the related assets. The MAG yards convertedinto salvage facilities will continue to be included in the results ofcontinuing operations on the income statements.

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**Acquisitionsand New Operations**

We haveexperienced significant growth as we have acquired sixteen vehicle storagefacilities and established fourteen new facilities since the beginning offiscal 2005. All of these acquisitions have been accounted for using thepurchase method of accounting.

As part of ouroverall expansion strategy of offering integrated services to vehiclesuppliers, we anticipate acquiring and developing facilities in new regions, aswell as the regions currently served by our facilities. As part of thisstrategy, in fiscal 2007 we acquired seven new facilities in the UK located inSandy; Sandtoft, Sandwich, Westbury, Chester, Denny; and Wootton and in NorthAmerica we opened new facilities in Baltimore, Maryland, Woodburn, Oregon andPunta Gorda, Florida. In fiscal 2006 we acquired new facilities in or nearGreenwood, Nebraska; Grand Island, Nebraska; York Haven, Pennsylvania;Chambersburg, Pennsylvania; Altoona, Pennsylvania; Fruitland, Maryland;Billings, Montana and opened new facilities in or near Honolulu, Hawaii;Lansing, Michigan; Dover, Florida and Jacksonville, Florida. In fiscal 2005 weacquired new facilities in or near Lexington, Kentucky and Columbia, Missouriand opened new facilities in Strongsville, Ohio; Ocala, Florida; Knoxville,Tennessee; Loganville, Georgia; Spokane, Washington; Tallahassee, Florida andHialeah, Florida. We believe that these acquisitions and openings strengthenour coverage as we have 131 facilities located in North America and the UnitedKingdom and are able to provide national coverage for our suppliers.

On June 14,2007, we acquired all the issued share capital of Universal Salvage plc, orUniversal, for £2.00 per share (approximately $3.94 based on currency exchangerates on June 14, 2007). Universal, based in the UK and operatingexclusively within the UK, is a service provider to the motor insurance andautomotive industries. The aggregate acquisition consideration paid by ustotaled approximately £60.7 million (approximately $120.0 million based oncurrency exchange rates on June 14, 2007) and was funded from ouravailable cash resources. We also assumed outstanding indebtedness of Universaltotaling approximately £2.3 million ($4.5 million as of June 14, 2007).The acquisition marks our first acquisition outside North America and includesthe seven facilities discussed above.

Theperiod-to-period comparability of our operating results and financial conditionis substantially affected by business acquisitions, new openings, weather andproduct introductions during such periods. In particular, the UK acquisition,because of its size and, also, because the UK operates primarily on theprincipal model versus the agency model employed in the United States, willhave a significant impact on the comparability of revenues and gross marginpercentages in future periods.

In addition to growth through acquisitions, we seek to increaserevenues and profitability by, among other things, (i) acquiring anddeveloping new salvage vehicle storage facilities in key markets, (ii) pursuingnational and regional vehicle supply agreements, (iii) expanding ourservice offerings to suppliers and buyers, and (iv) expanding theapplication of VB2 into new markets. In addition, we implementour pricing structure and merchandising procedures and attempt to effect costefficiencies at each of our acquired facilities by implementing our operationalprocedures, integrating our management information systems and redeployingpersonnel, when necessary.

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**Results of Operations**

The following table sets forth for the periods indicated below, certaininformation derived from our consolidated statements of income presented inabsolute dollars and as a percentage of revenues. There can be no assurancethat any trend in operating results will continue in the future.

***Fiscal 2007Compared to Fiscal 2006***

**Revenues**

The following sets forth information oncustomer revenue by geographic region based on the location of the sellingentity (in thousands, except percentages):

| ** **      | ** ** | ** ** | ** ** | **Percentage of** | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
|-----------------|------------|------------|------------|------------------------|------------|------------|------------|------------------------|------------|
| ** **      | ** ** | **2007**   | ** ** | **Revenue**            | ** ** | **2006**   | ** ** | **Revenue**            | ** ** |
| North America   |       | $          | 545,861    |                   |       | 97         | %          |                   | $          | 528,571 |   |   | 100 | % |   |
| United  Kingdom |       | 14,819     |       |                   | 3          | %          |       | —                 |       |   | — |   |   |
|            |       | $          | 560,680    |                   |       | 100        | %          |                   | $          | 528,571 |   |   | 100 | % |   |

 

Revenues fromcontinuing operations were approximately $560,680 million during fiscal 2007,an increase of approximately $32.1 million, or 6% over fiscal 2006. Revenuegrowth from same store sales in North America, those opened before August 1,2006, was approximately $15.1 million. Revenue growth from new facilities,those opened after August 1, 2006, including facilities in or nearBaltimore, Maryland; Woodburn, Oregon; and Punta Gorda, Florida wasapproximately $2.2 million. Of the increase in revenues in fiscal 2007 ascompared to fiscal 2006, $14.8 million was attributable to revenues generatedin the UK from June 14, 2007, the date of acquisition.

**Yard OperationExpenses.  **Yard operation expenses fromcontinuing operations were approximately $293.9 million during fiscal 2007, adecrease of approximately $4.1 million, or 1.4%, over fiscal 2006. Included inyard expenses is depreciation expense of $30.7 million, an increase of $3.8million over fiscal 2006. Yard operation expenses decreased to 52.4% ofrevenues during fiscal 2007, as compared to 56.4% of revenues during fiscal2006. The decreases in yard expenses, excluding depreciation, were primarilyattributable to the decrease in incremental abnormal costs incurred as a resultof Hurricanes Katrina and Rita during fiscal 2006. These additionalinventory-type costs were approximately $14.1 million during fiscal 2006 ascompared to $0.5 million during the fiscal 2007, and were charged to yardoperations in accordance with Statement of Financial Accounting Standards(SFAS) No. 151. These costs include the additional subhauling, payroll,equipment and facilities expenses directly related to the operating conditionscreated by the hurricanes. These costs do not include normal expensesassociated with the increased unit volume created by the hurricanes, which aredeferred until the sale of the units and are recognized as vehicle poolingcosts on the balance sheet. As of July 31, 2007, all of the incrementalsalvage vehicles received as a result of the hurricanes Katrina and Rita have 

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been sold. In addition, yard operation expenses include costsattributable to the UK of $10.4 million. The UK operates primarily on aprincipal basis and, accordingly has a lower gross margin percentage.

The following sets forth information on grossmargin, defined as revenue less yard operation expenses, and gross marginpercentage by geographic region (in thousands, except percentages):

| ** **      | ** ** | **2007** | ** ** | ** ** | ** ** | **2006** | ** ** | ** ** | ** ** |
|-----------------|------------|----------|------------|------------|------------|----------|------------|------------|------------|
| North America   |       | $        | 262,402    |       | 48.1       | %        | $          | 230,548    |       | 43.6 | % |
| United  Kingdom |       | 4,380    |       | 29.6       | %          | —   |       | —     |       |
|            |       | $        | 266,782    |       | 47.6       | %        | $          | 230,548    |       | 43.6 | % |

 

**General and Administrative.  **Generaland administrative expenses from continuing operations were approximately $63.6million for fiscal 2007, an increase of approximately $4.7 million, or 7.9%,over fiscal 2006. Included in general and administrative expenses isdepreciation of $5.7 million an increase of $1.2 million over fiscal 2006. Alsoincluded are $2.2 million in general and administrative costs, other thandepreciation attributable to the UK operations. Finally the remaining increasewas due to increased payroll costs, professional services, and generalcorporate expansion. These increases were offset by decreased operating leasecosts on computer equipment leases, which were bought out during the year and areduction in legal costs. General and administrative expenses increasedslightly to 11.3% of revenues during fiscal 2007, as compared to 11.2% ofrevenues during fiscal 2006. Of the increase in general and administrativeexpense, $3.0 million was attributable to general and administrative expensesincurred in the UK. General and administrative expenses in the UK includeamortization expense relating to the Universal acquisition.

The following sets forth information ongeneral and administrative expenses and shown as a percentage of revenue bygeographic region (in thousands except percentages):

| ** **      | ** ** | ** ** | ** ** | **Percentage of** | ** ** | ** ** | ** ** | **Percentage of** | ** ** |
|-----------------|------------|------------|------------|------------------------|------------|------------|------------|------------------------|------------|
| ** **      | ** ** | **2007**   | ** ** | **Revenue**            | ** ** | **2006**   | ** ** | **Revenue**            | ** ** |
| North America   |       | $          | 60,645     |                   |       | 11.1       | %          |                   | $          | 58,986 |   |   | 11.2 | % |   |
| United  Kingdom |       | 2,992      |       |                   | 20.2       | %          |       | —                 |       |   | — |   |   |
|            |       | $          | 63,637     |                   |       | 11.3       | %          |                   | $          | 58,986 |   |   | 11.2 | % |   |

 

**Other Income.****  **Total other income was approximately$14.3 million during fiscal 2007, an increase of approximately $11.3 millionfrom fiscal 2006. The increase is due primarily to a $5.5 million increase ininterest income due to higher interest rates and a higher average cash andinvestments balance and a decrease of $4.6 million in losses from an equityinvestment in Lanelogic Corporation (“Lanelogic”). Other income, which consistsprimarily of rental income and gain on the sales of assets, increasedapproximately $1.2 million.

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**Income Taxes.**   Oureffective income tax rates for fiscal 2007 and 2006 were approximately 37.3%and 35.4%, respectively. The increase in the effective tax rate is primarilythe result of fiscal 2006 including a non-recurring $1.8 million out-of-periodreduction, to deferred tax liabilities and income tax expense originatingprimarily in 2001 and prior years.

**Discontinued Operations.****  **Discontinued operations declined $15.7 million fromfiscal 2007 to fiscal 2006 as we discontinued our MAG operations and disposedof or converted all the related assets during fiscal 2006. There were no suchdisposals in fiscal 2007.

**Net Income.****  **Due to the foregoing factors, we realized net income ofapproximately $136.3 million for fiscal 2007, compared to net income ofapproximately $96.9 million for fiscal 2006.

***Fiscal2006 Compared to Fiscal 2005***

**Revenues.****  **Revenues from continuing operationswere approximately $528.6 million during fiscal 2006, an increase ofapproximately $80.8 million, or 18.1%, over fiscal 2005. The increase was dueprimarily to increased vehicle unit volume driven by the additional salvagevehicles associated with hurricanes Katrina and Rita, growth in vehiclesprocessed at existing yards and vehicles processed from new yards opened oracquired in fiscal 2006. Existing facilities contributed approximately $71.3million of the revenue growth and new facilities in or near Honolulu, Hawaii;Greenwood, Nebraska; Grand Island, Nebraska; York Haven, Pennsylvania;Chambersburg, Pennsylvania; Altoona, Pennsylvania; Fruitland, Maryland;Lansing, Michigan and Billings, Montana contributed approximately $9.5 millionof new revenue growth.

**Yard Operation Expenses.****  **Yard operation expenses fromcontinuing operations were approximately $298.0 million during fiscal 2006, anincrease of approximately $52.4 million, or 21.3%, over fiscal 2005. Includedin yard expenses is depreciation expense of $26.9 million, an increase of $0.3million over fiscal 2005. Yard operation expenses increased to 56.4% ofrevenues during fiscal 2006, as compared to 54.9% of revenues during fiscal2005. The increases in yard expenses were primarily attributable to the cost ofhandling increased volume, a general increase in subhauling costs and theincremental abnormal costs incurred as a result of hurricanes Katrina and Rita.These additional inventory-type costs were approximately $14.1 million infiscal 2006 and were charged to yard operations in accordance with SFAS 151.These costs include the additional subhauling, payroll, equipment and facilitiesexpenses directly related to the operating conditions created by thehurricanes. These costs do not include normal expenses associated with theincreased unit volume created by the hurricanes, which are deferred until thesale of the units and are recognized as vehicle pooling costs on the balancesheet. At the end of fiscal 2006, approximately 28% of the incremental salvagevehicles received as a result of the hurricanes remained unsold and ininventory and were subsequently disposed of in fiscal 2007. The processing ofthe hurricane vehicles has had and may continue to have a negative impacton gross and operating margin percentages.

**General and Administrative.****  **General and administrative expenses from continuingoperations were approximately $59.0 million during fiscal 2006, an increase ofapproximately $13.4 million, or 29.3%, over 

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fiscal 2005. The increase was primarily due to increases intelecommunication costs, information technology payroll costs, costs relatingto Sarbanes-Oxley compliance, SFAS 123(R) stock compensation costs andoutside legal expense associated with a patent litigation matter that wassettled during fiscal 2006 and other pending litigation and general corporateexpansion. General and administrative expenses increased to 11.2% of revenuesduring fiscal 2006, as compared to 10.2% of revenues during fiscal 2005. Theincrease in general and administrative expenses as a percentage of total revenuesreflects in part changes in the nature of our business. In particular, theintroduction of VB2 resulted in areduction in certain yard operation expenses relating to conducting liveauctions but increased our general and administrative expenses as we continuedto make technology infrastructure investments and hire additional personnel toenhance and maintain VB2 and other products for use in our auctions.

**Other income.**   Totalother income was approximately $3.0 million during fiscal 2006, a decrease ofapproximately $5.2 million, from fiscal 2005. The decrease was due primarily toa $6.8 million loss recognized from an equity investment in an unconsolidatedprivately-held entity. This loss was offset by an increase in interest incomeof approximately $3.3 million due to higher interest rates and a higher averagecash and investments balance. Other income, which consists primarily of rentalincome and gain on the sales of non-fleet assets, decreased approximately $1.7million, resulting from losses on disposals of fixed assets.

**Income Taxes.****  **Our effective combined federal,state and local income tax rates for fiscal 2006 and 2005 was approximately35.4% and 38.1%, respectively. The decrease in effective tax rate is primarilythe result of recording a non-recurring $1.8 million out-of-period reduction todeferred tax liabilities and income tax expense originating primarily in 2001and adjustments to our state tax reserves based on the favorable outcome of anaudit.

**Discontinued Operations.****  **During the second quarter of fiscal 2006, we adopteda formal plan to discontinue the operations of our public auction businessMotors Auction Group, MAG, and dispose of or convert the related assets. TheMAG yards to be converted into salvage facilities will continue to be includedin the results of continuing operations on the income statements.

UnderSFAS No 142, “Goodwill and Other Intangible Assets,” goodwill is subjectto at least an annual assessment for impairment by applying a fair value-basedtest or on an interim basis if certain indicators are present. Thediscontinuation of an operating segment is one of those indicators.Accordingly, goodwill was tested for impairment in accordance with theprovisions of SFAS No. 142 as of the second quarter of 2006. We useda combination of valuation techniques, which included consideration ofmarket-based approaches and an income approach, in determining the fair valueof our applicable reporting unit in the interim impairment test of goodwill.

In fiscal 2006,the impairment test indicated that the carrying value of the MAG goodwillexceeded its implied fair value. The corresponding write-down of goodwill of$21.8 million to its fair value was reported as a component of discontinuedoperations in the accompanying consolidated statements of income. We alsodetermined that the value of the remaining MAG covenants not to compete wereimpaired and recorded an 

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impairment expense in the amount of $0.5 million. This write-downof covenants not to compete is also reported as a component of discontinuedoperations in the accompanying consolidated statements of income.

During thesecond quarter of fiscal 2006, we sold the business and related assets of oneof the MAG locations for approximately $0.1 million. During the third quarterof fiscal 2006, we sold the business and related assets including the realestate of one of the MAG locations. We received a $12 million promissory notefrom the buyer as purchase consideration. The promissory note bears interest at7% per annum. Interest only payments on the note are due monthly until maturityon May 28, 2011, at which time the balance of the note is due in full. Thenote receivable is collateralized by the real estate and is personallyguaranteed by the buyer. The consideration was allocated to the real estate,based on an appraisal, and to the business in proportion to their estimatedfair values. The portion of the consideration allocated to the real estate saletotaled $7.1 million. We deferred a gain on the sale of the real estate ofapproximately $2.5 million that will be recognized upon payment of theprincipal balance of the note receivable. The remaining consideration of $4.9million is allocated to the sale of the business. We recognized a gain on thesale of the business of approximately $3.0 million, which is included in theresults of the discontinued operations. During the fourth quarter of fiscal2006, we sold the business and related assets excluding the real estate ofanother MAG location. We received a $1.2 million promissory note and $0.2million in cash from the buyer as purchase consideration. We recognized a gainon the sale of the business of approximately $1.3 million which is included inthe results of discontinued operations. As of July 31, 2006, no MAGlocations remained. Three of the original six MAG locations were sold and threewere converted into salvage facilities.

**Net Income.****  **Due to the foregoing factors, we realized net income ofapproximately $96.9 million for fiscal 2006, compared to net income ofapproximately $102.1 million for fiscal 2005.

**Liquidity and Capital Resources**

Historically,we have financed our growth through cash generated from operations, publicofferings of common stock, the equity issued in conjunction with certainacquisitions and debt financing. Cash and cash equivalents, combined withshort-term investments decreased by approximately $74.3 million from July 31,2006 to July 31, 2007, primarily as a result of cash used for theacquisition of Universal, purchases of property and equipment and repurchasesof common stock which was offset by cash generated from continuing operations.During the winter months, most of our facilities process 10% to 30% morevehicles than at other times of the year. This increased seasonal volumerequires the increased use of our cash to pay out advances and handling costsof the additional business. Our primary source of cash generated by operationsis from the collection of sellers’ fees, buyers’ fees and reimbursable advancesfrom the proceeds of sold vehicles.

As of July 31,2007, we had working capital of approximately $247.9 million, including cash,cash equivalents and short-term investments of approximately $201.0 million.During the course of the year, we invest substantially all of our cash balancesin AAA rated auction rate securities. Auction rate securities are principallyvariable rate securities tied to short-term interest rates with maturities onthe face of the securities in excess of 90 days. Auction rate securities haveinterest rate resets through a modified Dutch auction, at 

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predetermined short-term intervals, usually every 7, 28 or 35 days.They trade at par and are callable at par on any interest payment date at theoption of the issuer. Interest paid during a given period is based upon theinterest rate determined during the prior auction. Although these instrumentsare issued and rated as long-term securities, they are priced and traded asshort-term securities because of the liquidity provided through the interestrate reset.

We believe that our currently available cash, cash equivalents andshort-term investments and cash generated from operations will be sufficient tosatisfy our operating and working capital requirements for at least the next 12months. However, if we experience significant growth in the future, wemay be required to raise additional cash through the issuance of new debtor additional equity.

***OperatingActivities***

Net cashprovided by operating activities increased by approximately $40.1 million to$182.1 million during fiscal 2007 when compared to fiscal 2006, due to theincrease in net income which was offset in part to the timing of routinechanges in working capital items. The increase in net income is primarily theresult of increased revenue in fiscal 2007 and the loss on discontinuedoperations in the amount of $17.9 million in fiscal 2006, which did not recurin fiscal 2007.

Net cash providedby operating activities increased by approximately $6.0 million to $141.9million during fiscal 2006 when compared to fiscal 2005. During fiscal 2006 weconsumed cash through the growth in accounts receivable and vehicle poolingcosts and we generated cash through the growth in deferred revenue. Themovements in these accounts are driven primarily by the significant growth invehicles held for sale which was impacted by hurricanes Katrina and Rita. Thedecrease in net income is primarily a result of the loss on discontinuedoperations in the amount of $17.9 million, which was offset in part byincreased revenue.

Net cash provided by operating activities increased by approximately$20.9 million to $136.0 million during fiscal 2005 when compared to fiscal2004, primarily due to the increase in net income, which was offset in part tothe timing of routine changes in working capital items.

***InvestingActivities***

During thefiscal years ended July 31, 2007, 2006 and 2005, we purchasedapproximately $921.8 million, $717.1 million and $755.4 million, respectivelyof short-term investments, which were offset by the sale of $967.9 million,$568.4 million, $928.0 million, respectively of short-term investments. Wetypically invest our cash in auction rate notes with ratings of AAA.

Capitalexpenditures related to continuing operations (excluding those associated withproperty and equipment attributable to acquisitions) were approximately $76.8million, $97.0 million and $66.2 million for fiscal 2007, 2006 and 2005,respectively. Our capital expenditures are primarily related to opening andimproving facilities and acquiring yard equipment.

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During thefiscal year ended July 31, 2007, we used approximately $120.0 million incash for the acquisition of Universal which includes the following sevenlocations in the UK: Sandy, Sandtoft, Sandwich, Westbury, Chester, Denny, andWootton. During the fiscal year ended July 31, 2006, we used cash for theacquisition of facilities in or near Billings, Montana; Fruitland, Maryland;Altoona, Pennsylvania; Chambersburg, Pennsylvania; York Haven, Pennsylvania;Greenwood, Nebraska and Grand Island, Nebraska, which had an aggregate cashcost of approximately $23.0 million. During the fiscal year ended July 31,2005, we used cash for the acquisition of operations in Lexington, Kentucky andColumbia, Missouri, which had an aggregate cash cost of approximately $4.5million.

During the yearended July 31, 2006, we invested approximately $9.0 million for a 50%equity interest in Lanelogic, a Delaware limited liability corporation (“Lanelogic”).We have no further contractual funding commitment. Based on our evaluation ofLanelogic and the related agreements, management believes that Lanelogic doesnot constitute a Variable Interest Entity as defined in FIN No. 46, *Consolidation of Variable Interest Entities*.As a result, our investment has been accounted for under the equity methodprescribed by APB No. 18, *The EquityMethod of Accounting for Investments in Common Stock*.

During thesecond quarter of fiscal 2007, our Chairman and CEO, made a personal unsecuredloan to Lanelogic to prevent a restriction of working capital from disruptingits business as Lanelogic sought additional equity financing. The loan wasrepaid during the second quarter ended January 31, 2007. We have concludedthat the personal unsecured loan did not cause a change in the accounting ofLanelogic as an equity method investment. During the second quarter ended January 31,2007, Lanelogic received a strategic equity investment totaling approximately$10 million from two new investment groups as well as Lanelogic’s founder. Wedid not participate in this additional equity financing into Lanelogic. Inaddition, Lanelogic converted from a limited liability company to a DelawareCorporation, of which we are now a stockholder.

On August 15, 2007, subsequent to the end of our fiscal year, ourChairman and CEO provided a personal guaranty in favor of Dealer ServicesCorporation as a condition for providing a credit facility to Lanelogic, Inc.a Corporation in which we have a less than controlling interest. The guarantywas approved by our Audit Committee. We have concluded that the personalguaranty does not cause a change in the accounting of Lanelogic as an equitymethod investment.

***FinancingActivities***

In fiscal 2007,2006 and 2005, we generated approximately $10.9 million, $5.4 million and $1.8million, respectively, through the exercise of stock options.

In fiscal 2007,2006 and 2005, we generated approximately $1.5 million, $1.6 million and $1.4million, respectively, through the issuance of shares under the employee stockpurchase program.

In February 2003, our Board of Directors authorized us to repurchaseup to 9.0 million shares of our common stock. The repurchases may beeffected through solicited or unsolicited transactions in the open market or inprivately negotiated transactions. No time limit has been placed on theduration of the share 

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repurchase program. The repurchases will bemade at such times and in such amounts as we deem appropriate and may bediscontinued at any time. For the year ended July 31, 2007, we repurchased2,995,405 shares at a weighted average price of $29.91. For the year ended July 31,2006, we repurchased 366,000 shares at a weighted average price of $24.24. Noshares were repurchased in fiscal 2005. We accounted for the repurchase of ourcommon stock in the years ended July 31, 2007 and 2006 by reducing commonstock by $89.6 million and $8.9 million, respectively. During the period from February 2003through July 31, 2007, we repurchased a total of 7,033,705 shares at aweighted average price of $18.41.

***ContractualObligations***

The following table summarizes our significantcontractual obligations and commercial commitments as of July 31, 2007 (inthousands): 

| **Payments Due By Period**  | ** ** |
|--------------------------------------------|------------|
| **Contractual Obligations**           | ** ** | ** ** | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
| Operating  leases(1)                       |       | $ | 118,365 |   |   | $ | 20,330 |   |   |   | $ | 34,206 |   |   |   | $ | 25,931 |   |   |   | $ | 37,898 |   |   |
| Capital  leases(1)                         |       | 3,588 |   |   | 635 |   |   |   | 1,270 |   |   |   | 898 |   |   |   | 785 |   |   |
| Pending  acquisition of Century Salvage(2) |       | 9,148 |   |   | 9,148 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Total  contractual obligations             |       | $ | 131,101 |   |   | $ | 30,113 |   |   |   | $ | 35,476 |   |   |   | $ | 26,829 |   |   |   | $ | 38,683 |   |   |

 

| **Amount of Commitment Expiration Per Period** |       |
|-------------------------------------------------------------------------|------------|
| **Commercial Commitments(3)**                                      | ** ** | ** ** | ** ** | **Total** | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
| Letters of  credit                                                      |       | $ | 11,763 |   |   | $ | 11,559 |   |   |   | $ | 204 |   |   |   | — |   |   |   | — |   |   |
|                                                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)            Contractualobligations consist of future non-cancelable minimum lease payments undercapital and operating leases, used in the normal course of business.

(2)            OnJuly 20, 2007, we entered into a definitive agreement to acquire CenturySalvage Sales Limited, a vehicle salvage disposal company with three facilitieslocated in the United Kingdom. The transaction closed on August 1, 2007.

(3)            Commercialcommitments include primarily letters of credit provided for insurance programsand certain business transactions.

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***CreditFacilities***

On February 23,2001, we entered into a credit facility with our existing banking syndicate.The facility provided by Wells Fargo Bank, Fleet National Bank and U.S. BankNational Association consists of an unsecured revolving reducing line of creditin the amount of approximately $10.6 million. On May 8, 2006, the line ofcredit was reduced to zero and the line of credit was terminated in accordancewith its terms.

On November 13, 2006, Universal Salvage, our wholly ownedsubsidiary purchased on June 14, 2007, entered into three creditfacilities with National Westminster Bank Plc. The first facility providesapproximately $8.0 million in overdraft protection and working capital. Thesecond and third facilities of approximately $6.0 and $10.0 million,respectively, provide liquidity for acquisitions and investments. Each of thesefacilities carries an interest rate of the bank’s index, which was 5.75% at July 31,2007, plus .75% and is collateralize by real property. At July 31, 2007there were no amounts borrowed under these facilities.

**Off-Balance Sheet Arrangements**

As of July 31, 2007, we did not have any off-balance sheetarrangements (as defined in item 303(a)(4)(ii) of Regulation S-K).

**Critical Accounting Policies and Estimates**

The preparationof consolidated financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and the related disclosure of contingent assets and liabilities. Onan ongoing basis, we evaluate our estimates, including those related to vehiclepooling costs, allowance for doubtful accounts, goodwill, income taxes,long-lived assets and self insured liabilities. We base our estimates onhistorical experience and on various other assumptions that we believe arereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from these estimatesunder different assumptions or conditions.

Management has discussed the selection of critical accounting policiesand estimates with the Audit Committee of the Board of Directors and the AuditCommittee has reviewed our disclosure relating to critical accounting policiesand estimates in this annual report on Form 10-K. Our significantaccounting policies are described in Note 1 to our consolidated financialstatements for fiscal 2007. The following is a summary of the more significantjudgments and estimates used in the preparation of our consolidated financialstatements:

**Revenue Recognition**

We provide aportfolio of services to our sellers and buyers that facilitate the sale anddelivery of a vehicle from seller to buyer. These services include the abilityto use our Internet sales technology and vehicle delivery, loading, titleprocessing, preparation and storage. We evaluate multiple-element arrangementsrelative to our buyer and seller agreements in accordance with Emerging IssuesTask Force Issue No. 00-21,*Revenue*

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*Arrangements with Multiple Deliverables*(“EITF 00-21”), which addresses accounting for multiple-elementarrangements, and Staff Accounting Bulletin No. 104,*Revenue Recognition* (“SAB 104”), whichaddresses revenue recognition for units of accounting.

The services weprovide to the seller of a vehicle involve disposing of a vehicle on the seller’sbehalf and under most of our current North American contracts, collecting theproceeds from the buyer. We are not entitled to any such seller fees until wehave collected the sales proceeds from the buyer for the seller and,accordingly, we recognize revenue for seller services after service deliveryand cash collection.

Vehicle sales,where we purchase and remarket vehicles on our own behalf are recognized inaccordance with SAB 104 on the sale date, which is typically the point of highbid acceptance. Upon high bid acceptance, a legal binding contract is formedwith the buyer, and we record the gross sales price as revenue.

In certaincases, seller fees are not contingent upon collection of the seller proceedsfrom the buyer. However, we determined that we are not able to separate theservices into separate units of accounting because we do not have fair valuefor undelivered items. As a result, we do not recognize seller fees until thefinal seller service has been delivered, which generally occurs upon collectionof the sales proceeds from the buyer for the seller.

We provide anumber of services to the buyer of the vehicle, charging a separate fee foreach service. Each of these services has been assessed under the criteria ofEITF 00-21 to determine whether we have met the requirements toseparate them into units of accounting within a multi-element arrangement. Wehave concluded that the sale and the post-sale services are separate units ofaccounting. The fees for sale services are recognized upon completion of thesale, and the fees for the post-sale services are recognized upon successfulcompletion of those services using the residual method.

We also charge buyers an annual registration fee for the right toparticipate in our vehicle sales program, which is recognized ratably over theterm of the arrangement, and relist and late-payment fees, which are recognizedupon receipt of payment by the buyer. No provision for returns has beenestablished, as all sales are final with no right of return, although weprovide for bad debt expense in the case of non-performance by our buyers andsellers.

**Vehicle Pooling Costs**

We defer invehicle pooling costs certain yard operation expenses associated with vehiclesconsigned to and received by us, but not sold as of the balance sheet date. Wequantify the deferred costs using a calculation that includes the number ofvehicles at our facilities at the beginning and end of the period, the numberof vehicles sold during the period and an allocation of certain yard operationexpenses of the period. The primary expenses allocated and deferred are certainfacility costs, labor, transportation, and vehicle processing. If ourallocation factors change, then yard operation expenses could increase ordecrease correspondingly in the future. These costs are expensed as vehiclesare sold in the subsequent periods on an average cost basis.

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We apply the provisions of Statement of Financial Accounting Standards(“SFAS”), No. 151, *Inventory Costs*(“SFAS 151”) to our vehicle pooling costs. SFAS 151 requires that itemssuch as idle facility expense, excessive spoilage, double freight andrehandling costs be recognized as current-period charges regardless of whetherthey meet the criteria of “so abnormal” as provided in Accounting ResearchBulletin No. 43, Chapter 4, *InventoryPricing*. In addition, SFAS 151 requires that the allocation offixed production overheads to the costs of conversion be based on the normalcapacity of production facilities.

**Allowance forDoubtful Accounts**

We maintain an allowance for doubtful accounts in order to provide forestimated losses resulting from disputed amounts billed to suppliers or buyers andthe inability of our suppliers or buyers to make required payments. If billingdisputes exceed expectations and/or if the financial condition of our suppliersor buyers were to deteriorate, additional allowances may be required.

**Valuation ofGoodwill**

We evaluate the impairment of goodwill of our salvage sales operatingsegment, annually (or on an interim basis if certain indicators are present) bycomparing the fair value of the operating segment to its carrying value. Futureadverse changes in market conditions or poor operating results of the operatingsegment could result in an inability to recover the carrying value of theinvestment, thereby requiring impairment charges in the future.

**Income Taxesand Deferred Tax Assets**

We are required to estimate income tax provisions and amountsultimately payable or recoverable in numerous jurisdictions. Such estimatesinvolve significant interpretations of regulations and are inherently verycomplex. Resolution of income tax treatments in individual jurisdictions maynot be known for many years after completion of any fiscal year.

We evaluate the realizability of our deferred tax assets on an ongoingbasis. U.S. generally accepted accounting principles require the assessment ofour performance and other relevant factors when determining the need for avaluation allowance with respect to these deferred tax assets. Our ability torealize deferred tax assets is dependent on the Company’s ability to generatefuture taxable income. Accordingly, we have established a valuation allowancewhen, in certain taxable jurisdictions, the utilization of the tax asset isuncertain. Additional timing differences, future earning trends and/or taxstrategies may occur which could warrant a need for establishing an additionalvaluation allowance or a reserve.

**Long-livedAsset Valuation, including Intangible Assets**

We evaluate long-lived assets, including property and equipment andcertain identifiable intangibles for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets is measured by a comparing the carryingamount of an asset to the 

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estimated undiscounted future cash flowsexpected to be generated by the use of the asset. If the estimated undiscountedcash flows change in the future, we may be required to reduce the carryingamount of an asset.

**Stock-Based Compensation**

We account for our stock-based awards to employees and non-employeesusing the fair value method as required by SFAS No. 123(R), *Share-Based Payment*. SFAS No. 123(R) requiresthat the compensation cost related to share-based payment transactions,measured based on the fair value of the equity or liability instruments issued,be recognized in the financial statements. Determining the fair value ofoptions using the Black-Scholes model, or other currently accepted optionvaluation models, requires highly subjective assumptions, including futurestock price volatility and expected time until exercise, which greatly affectthe calculated fair value on the grant date. If actual results are notconsistent with our assumptions and judgments used in estimating the keyassumptions, we may be required to record additional compensation or income taxexpense, which could have a material impact on financial position and resultsof operations.

**Retained Insurance Liabilities**

We are partially self-insured for certain losses related to medical,general liability, workers’ compensation and auto liability. Our liabilityrepresents an estimate of the ultimate cost of claims incurred as of thebalance sheet date. The estimated liability is not discounted and isestablished based upon analysis of historical data and actuarial estimates.While we believe these estimates are reasonable based on the informationcurrently available, if actual trends, including the severity of claims andmedical cost inflation, differ from our estimates, our financial position,results of operations or cash flows could be impacted.

**Recently Issued Accounting Standards**

For a description of the new accounting standards that affect us, referto Note 1 to the Consolidated Financial Statements included in this Form 10-K.

**Item 7A.**             *Quantitative and QualitativeDisclosures About Market Risk*

Our principalexposures to financial market risk are interest rate and foreign currency risk.Our exposure to market risk for changes in interest rates relates primarily toour investment portfolio of marketable securities. As of July 31, 2007, our cash, cash equivalents and short-terminvestments consisted primarily of funds invested in money market accounts,which bear interest at a variable rate and AAA rated auction rate securities,which also bear interest at a variable rate. Due to the average maturity andnature of the Company’s investment portfolio, we believe a sudden change ininterest rates would not have a material effect on the value of our investment portfolio. As theinterest rates on a material portion of our cash, cash equivalents andshort-term investments are variable, a change in interest rates earned on ourinvestment portfolio would impact interest income along with cash flows, but would notmaterially impact the fair market value of the related underlying instruments.

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Our exposure to foreign currency risks relates to our operations inCanada and the UK. We do not hedge our exposure to the Canadian Dollar or theBritish Pound. We do not use derivative financial instruments for speculativeor trading purposes.

**Item 8.**                     *Financial Statements andSupplementary Data*

The response to this item is submitted as a separate section of thisannual report on Form 10-K in Item 15. See Part IV, Item 15(a) foran index to the financial statements and supplementary financial information.

**Item 9.**                     *Changes in and Disagreements WithAccountants on Accounting and Financial Disclosure*

None.

**Item9A.**             *Controls and Procedures*

**Evaluation of Disclosure Controls andProcedures**

We conducted anevaluation of the effectiveness of the design and operation of our disclosurecontrols and procedures, or “Disclosure Controls,” as of the end of the periodcovered by this annual report on Form 10-K. This evaluation, or “ControlsEvaluation” was performed under the supervision and with the participation ofmanagement, including our Chairman of the Board, Chief Executive Officer andDirector (our “CEO”) and our Senior Vice President and Chief Financial Officer(our “CFO”). Disclosure Controls are controls and procedures designed toprovide reasonable assurance that information required to be disclosed in ourreports filed under the Exchange Act, such as this annual report on Form 10-K,is recorded, processed, summarized and reported within the time periodsspecified in the U.S. SEC’s rules and forms. Disclosure Controls include,without limitation, controls and procedures designed to provide reasonableassurance that information required to be disclosed in our reports filed underthe Exchange Act is accumulated and communicated to our management, includingour CEO and CFO, or persons performing similar functions, as appropriate, toallow timely decisions regarding required disclosure. Our Disclosure Controlsinclude some, but not all, components of our internal control over financialreporting. Our internal control over financial reporting was also separatelyevaluated as of the end of the period covered by this annual report on Form 10-Kin connection with Management’s Report on Internal Control Over FinancialReporting which is set forth below.

Based upon theControls Evaluation, our CEO and CFO have concluded that as of the end of theperiod covered by this annual report on Form 10-K, our DisclosureControls were effective to provide reasonable assurance that informationrequired to be disclosed in our Exchange Act reports is accumulated andcommunicated to management, including the CEO and CFO, to allow timelydecisions regarding required disclosure, and that such information is recorded,processed, summarized and reported within the time periods specified by theSEC.

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**Management’s Report on Internal Control OverFinancial Reporting**

Our managementis responsible for establishing and maintaining internal control over financialreporting (as such item is defined in Exchange Act Rules 13a-15(f) and15d-15(f)) to provide reasonable assurance regarding the reliability ofour financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles.Internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that inreasonable detail accurately and fairly reflect the transactions anddispositions of our assets; (2) provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat our receipts and expenditures are being made only in accordance withauthorizations of our management and directors; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition,use or disposition of our assets that could have a material effect on thefinancial statements.

Managementassessed our internal control over financial reporting as of July 31,2007, the end of our fiscal year. Management based its assessment on criteriaestablished in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (COSO). We have excludedone acquisition, Universal Salvage, or Universal, which we made in June 2007from the scope of management’s evaluation, as the late timing of thisacquisition made it impracticable to conduct a meaningful evaluation of theacquired business’ internal control over financial reporting before the end ofthe fiscal year. Universal constituted $162.0 million and $124.7 million oftotal and net assets, respectively, as of July 31, 2007 and $14.8 millionand $1.0 million of revenues and net income, respectively, for the year thenended. Notwithstanding the exclusion of Universal from our assessment, therewas no material change to our internal control over financial reporting due tothe acquisition pursuant to Rule 15d-15 of the Exchange Act. Ourassessment on internal control over financial reporting for fiscal year 2008will include Universal. Management’s assessment included evaluation of suchelements as the design and operating effectiveness of key financial reportingcontrols, process documentation, accounting policies, and our overall controlenvironment. This assessment is supported by testing and monitoring performedby our Finance department.

Based on ourassessment, management has concluded that our internal control over financialreporting was effective as of the end of the fiscal year to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external reporting purposes in accordance withgenerally accepted accounting principles. We reviewed the results of management’sassessment with the Audit Committee of our Board of Directors.

Our independentregistered public accounting firm, Ernst & Young LLP, independentlyassessed the effectiveness of our internal control over financial reporting asof July 31, 2007. Ernst & Young LLP has issued an attestationreport which appears on the following page of this annual report on Form 10-K.

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

The Board ofDirectors and Shareholders of Copart, Inc.

We have auditedCopart, Inc.’s internal control over financial reporting as of July 31,2007, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission(the COSO criteria). Copart, Inc.’s management is responsible formaintaining effective internal control over financial reporting, and for itsassessment of the effectiveness of internal control over financial reportingincluded in the accompanying “Management’s Report on Internal Control OverFinancial Reporting”. Our responsibility is to express an opinion on theCompany’s internal control over financial reporting based on our audit.

We conductedour audit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects. Our audit included obtaining an understanding of internal controlover financial reporting, assessing the risk that a material weakness exists,testing and evaluating the design and operating effectiveness of internalcontrol based on the assessed risk, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion.

A company’sinternal control over financial reporting is a process designed to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control overfinancial reporting includes those policies and procedures that (1) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of itsinherent limitations, internal control over financial reporting may not preventor detect misstatements. Also, projections of any evaluation of effectivenessto future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

As indicated inthe accompanying “Management’s Report on Internal Control Over FinancialReporting”, management’s assessment of and conclusion on the effectiveness ofinternal control over financial reporting did not include the internal controlsof Universal Salvage, which is included in the July 31, 2007 consolidatedfinancial statements of Copart, Inc. and constituted $162.0 million and$124.7 million of total and net assets, respectively, as of July 31, 2007and $14.8 million and $1.0 million of revenues and net income, respectively, 

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for the year then ended. Our audit of internal control over financialreporting of Copart, Inc. also did not include an evaluation of theinternal control over financial reporting of Universal Salvage.

In our opinion,Copart, Inc. maintained, in all material respects, effective internalcontrol over financial reporting as of July 31, 2007 based on the COSOcriteria.

We also have audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated balancesheets of Copart, Inc. as of July 31, 2007 and 2006, and the relatedconsolidated statements of income, shareholders’ equity and comprehensiveincome, and cash flows for each of the two years in the period ended July 31,2007 of Copart, Inc. and our report dated September 25, 2007expressed an unqualified opinion thereon.

/s/ ERNST &YOUNG LLP

Sacramento,CaliforniaSeptember 25, 2007

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**Limitations on the Effectiveness of Controls**

Our management, including our CEO and CFO, does not expect that ourdisclosure controls or our internal control over financial reporting willprevent all error and all fraud. A control system, no matter how well designedand operated, can provide only reasonable, not absolute, assurance that thecontrol system’s objectives will be met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within Copart, Inc. have been detected. These inherent limitationsinclude the realities that judgments in decision-making can be faulty, and thatbreakdowns can occur because of simple error or mistake. Controls can also becircumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the controls. The design of anysystem of controls is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.Over time, controls may become inadequate because of changes in conditions ordeterioration in the degree of compliance with associated policies orprocedures. Because of the inherent limitations in a cost-effective controlsystem, misstatements due to error or fraud may occur and not be detected.

**Changes in Internal Control Over FinancialReporting**

There have not been any changes in our internal control over financialreporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) ofthe Exchange Act), during the most recent fiscal quarter that have materiallyaffected or are reasonably likely to materially affect our internal controlover financial reporting.

**Item9B.    *Other Information***

None.

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**PART III**

Certain information required by Part III is omitted from this Form 10-Kbecause we intend to file a definitive Proxy Statement for our 2007 AnnualMeeting of Shareholders (the “Proxy Statement”) not later than 120 days afterthe end of the fiscal year covered by this Annual Report on Form 10-K, andcertain information to be included therein is incorporated herein by reference.

**Item 10.**             *Directors, Executive Officers andCorporate Governance*

Informationconcerning the Board of Directors of the Company, the members of the Company’sAudit Committee, the Company’s Audit Committee Financial Expert, and compliancewith Section 16(a) of the Securities Exchange Act of 1934 isincorporated by reference to the sections entitled “Election of Directors andDirector Biographies,” “Board of Directors Information” and “General—Compliancewith Section 16(a) Beneficial Ownership Reporting Requirements” inthe Company’s Proxy Statement.

Pursuant toGeneral Instruction G(3) of Form 10-K, the information requiredby this Item regarding our executive officers is included under the caption “ExecutiveOfficers of the Registrant” in Part I of this annual report on Form 10-K.

The information required by this Item with respect to material changesto the procedures by which our shareholders may recommend nominees to our Boardof Directors is incorporated herein by reference from the information providedunder the heading “The Nominating and Governance Committee” of our ProxyStatement.

***Code of Ethics***

We have adoptedthe Copart, Inc. Code of Ethics for Principal Executive and SeniorFinancial Officers (“Code of Ethics”). The Code of Ethics applies to ourprincipal executive officer, our principal financial officer, our principalaccounting officer or controller, and persons performing similar functions andresponsibilities who shall be identified by our Audit Committee from time totime.

The Code of Ethics is available at ourwebsite, located at *http://www.copart.com*.It may be found at our website as follows:

1. From ourmain web page, click on “Investor Relations.”

2. Next, clickon “Corporate Governance.”

3. Finally,click on “Code of Ethics for Principal Executive and Senior Financial Officers.”

We intend to satisfy disclosure requirements regarding an amendment to,or waiver from, a provision of the Code of Ethics by posting such informationon our website, at the address and location specified above.

**Item 11.**             *Executive Compensation*

The information required by this Item is incorporated herein byreference from the Proxy Statement under the heading “Executive Compensation.”

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**Item 12.**             *Security Ownership of CertainBeneficial Owners and Management and Related Shareholder Matters*

The information required by this Item is incorporated herein byreference from the Proxy Statement under the headings “Security Ownership” and “EquityCompensation Plan Information.”

**Item 13.**             *Certain Relationships and RelatedTransactions, and Director Independence*

The information required by this Item is incorporated herein byreference from the Proxy Statement under the heading “Certain Transactions.”

**Item 14.**             *Principal Accountant Fees andServices*

The informationrequired by this Item is incorporated herein by reference from the sectioncaptioned “Proposal Two—Ratification of Independent Auditors” in the ProxyStatement.

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**PART IV**

**Item 15.**             *Exhibits and Financial StatementSchedules*

The following documents are filed as part ofthis annual report on Form 10-K:
|        | ** ** | ** ** | ** **   | ** **                                                                                                                                                                                                            | ** ** | **Page** |
|--------|------------|------------|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| (a)    |       | 1.         | *** *** | ***Financial Statements: *Index  to Consolidated Financial Statements**                                                                                                                                          |       |     |
|   |       |       |         | Reports of Independent Registered Public  Accounting Firms                                                                                                                                                            |       | 65       |
|   |       |       |         | Consolidated Balance Sheets at  July 31, 2007 and 2006                                                                                                                                                           |       | 67       |
|   |       |       |         | Consolidated Statements of Income for the  three years ended July 31, 2007, 2006 and 2005                                                                                                                        |       | 68       |
|   |       |       |         | Consolidated Statements of Shareholders’  Equity and Comprehensive Income for the years ended July 31, 2007,  2006 and 2005                                                                            |       | 69       |
|   |       |       |         | Consolidated Statements of Cash Flows for  the years ended July 31, 2007, 2006 and 2005                                                                                                                          |       | 70       |
|   |       |       |         | Notes to Consolidated Financial Statements                                                                                                                                                                            |       | 71       |
|   |       | 2.         | *** *** | ***Financial Statement  Schedules: ***All schedules are omitted because they  are not applicable or the required information is shown in the  consolidated financial statements or notes thereto. |
|   |       | 3.         | *** *** | ***Exhibits: *The  following Exhibits are filed as part of, or incorporated by reference into this  report.**                                                                                                    |       |     |

 
| Number     | ** ** | **Description**                                                                                                                                                                                                                                                                             |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  3.1  |       | Amended and  Restated Articles of Incorporation of the registrant(4)                                                                                                                                                                                                                        |
|  3.1b |       | Certificate of Amendment of Articles of Incorporation(4)                                                                                                                                                                                                                                    |
|  3.2  |       | Bylaws of the registrant, as amended(3)                                                                                                                                                                                                                                                     |
|  3.2b |       | Certificate of Amendment of Bylaws(12)                                                                                                                                                                                                                                                      |
|  3.3  |       | Certificate of Determination of Rights, Preferences and Privileges of  Series A Participating Preferred Stock of Copart, Inc.(8)                                                                                                                                                  |
|  3.4  |       | Certificate of Amendment of Bylaws(10)                                                                                                                                                                                                                                                      |
|  4.1  |       | Preferred Stock Rights Agreement, dated as of March 6, 2003,  between the Company and Equiserve Trust Company, N.A., including the  Certificate of Determination, the form of Rights Certificate and the Summary  of Rights attached thereto as Exhibits A, B, and C, respectively.(8) |
| 10.1*      |       | Copart, Inc. 1992 Stock Option Plan, as amended(2)                                                                                                                                                                                                                                     |
| 10.2*      |       | 1994 Employee Stock Purchase Plan (as amended December 8, 2003)  with form of Subscription Agreement(11)                                                                                                                                                                               |
| 10.3*      |       | 1994 Director Option Plan, with form of Subscription Agreement(11)                                                                                                                                                                                                                          |
| 10.4*      |       | Copart, Inc. 2001 Stock Option Plan(6)                                                                                                                                                                                                                                                 |
| 10.5       |       | Form of Indemnification Agreement, signed by Executive Officers  and Directors and the registrant(7)                                                                                                                                                                                   |
| 10.6       |       | General lease dated as of December 29, 1997 between Robert  Arthur Gomes and Robert Paul Gomes and Copart of Connecticut, Inc.(7)                                                                                                                                                 |

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| 10.7  |   | Standard Industrial/Commercial single-tenant lease-net dated as of  December 23, 1998 between Wickland Oil Martinez and the registrant(7)                                                                                                                                                                     |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8  |   | Lease agreement dated as of September 14, 2001 between Woodmich  L.L.C. and the registrant(7)                                                                                                                                                                                                                 |
| 10.10 |   | Aircraft lease dated as of April 11, 2002 between Fleet Capital  Corporation and the registrant(7)                                                                                                                                                                                                            |
| 10.11 |   | Credit Agreement among the registrant and Wells Fargo Bank, National  Association, U.S. Bank, National Association and Fleet National Bank and  Wells Fargo Bank, National Association, as Administrative Agent and Lead  Arranger and Fleet National Bank, as Syndication Agent, dated  February 23, 2001(5) |
| 10.12 |   | Amendment No. 1 dated November 1, 2004, to Stock Option  Agreement dated as of October 6, 2003 between the registrant and Marvin  L. Schmidt(13)                                                                                                                                                    |
| 14.01 |   | Code of Ethics for Principal Executive and Senior Financial Officers  (adopted September 30, 2003)(9)                                                                                                                                                                                                         |
| 14.02 |   | Copart, Inc. Code of Business Conduct (as amended June 5,  2007)(14)                                                                                                                                                                                                                                     |
| 21.1  |   | List of subsidiaries of registrant(9)                                                                                                                                                                                                                                                                              |
| 23.1  |   | Consent of Ernst & Young LLP, Independent Registered Public  Accounting Firm                                                                                                                                                                                                                              |
| 23.2  |   | Consent of KPMG LLP, Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                 |
| 24.1  |   | Power of Attorney (included on page 64)                                                                                                                                                                                                                                                                       |
| 31.1  |   | Certification of Willis J. Johnson, Chief Executive Officer, pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                       |
| 31.2  |   | Certification of William E. Franklin, Chief Financial Officer,  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                     |
| 32.1  |   | Certification of Willis J. Johnson, Chief Executive Officer, pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                       |
| 32.2  |   | Certification of William E. Franklin, Chief Financial Officer,  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                     |

----

(1)            Incorporatedby reference from exhibit to registrant’s Registration Statement on Form S-1,originally filed on January 19, 1994, as amended (File No. 33-74250).

(2)            Incorporatedby reference from exhibit to registrant’s Registration Statement on Form S-8filed with the Securities and Exchange Commission on December 31, 1999.

(3)            Incorporatedby reference from exhibit to registrant’s Form 10-K for its fiscalyear ended July 31, 1995, filed with the Securities and ExchangeCommission on October 21, 1995.

(4)            Incorporatedby reference from exhibit to registrant’s Form 10-K for its fiscalyear ended July 31, 2000, filed with the Securities and ExchangeCommission on October 26, 2000.

(5)            Incorporatedby reference from exhibit to registrant’s Form 10-Q for the quarterended January 31, 2001, filed with the Securities and Exchange Commissionon March 16, 2001.

61

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(6)            Incorporatedby reference from exhibit to registrant’s Form 10-Q for the quarterended January 31, 2002, filed with the Securities and Exchange Commissionon March 18, 2002.

(7)            Incorporatedby reference from exhibit to registrant’s Form 10-K for its fiscalyear ended July 31, 2002, filed with the Securities and ExchangeCommission on October 29, 2002.

(8)            Incorporatedby reference from exhibit to registrant’s Form 8-A12/G filed withthe Securities and Exchange Commission on March 11, 2003.

(9)            Incorporatedby reference from exhibit to registrant’s Form 10-K for its fiscalyear ended July 31, 2003, filed with the Securities and ExchangeCommission on October 17, 2003.

(10)     Incorporated by reference from exhibit to registrant’s Form 10-Qfor the quarter ended October 31, 2003, filed with the Securities andExchange Commission on December 15, 2003.

(11)     Incorporatedby reference from exhibit to registrant’s Registration Statement on Form S-8filed with the Securities and Exchange Commission on February 6, 2004.

(12)     Incorporatedby reference from exhibit to registrant’s Form 10-K for its fiscalyear ended July 31, 2004, filed with the Securities and ExchangeCommission on October 14, 2004.

(13)     Incorporatedby reference from exhibit to registrant’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on November 1, 2004.

(14)     Incorporatedby reference from exhibit to registrant’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on June 8, 2007.

*                      Denotesa compensation plan in which an executive officer participates

(b)            Exhibits.See response to Item 15(a)(3) above.

(c)              FinancialStatement Schedule. See response to Item 15(a)(2) above.

62

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**SIGNATURES**

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|        | Registrant        |
|--------|-------------------|
|   | COPART, INC. |
|   | By:               | /s/ WILLIS  J. JOHNSON |
|   | * *          | Willis J. Johnson*Chief Executive Officer* |

 
| September 28, 2007  |              |
|--------------------------|-------------------|
|                     | COPART, INC. |
|                     | By:               | /s/ WILLIAM  E. FRANKLIN |
|                     | * *          | William E. Franklin*Chief Financial Officer* |
| September 28,  2007 |              |   |

 

63

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**POWER OF ATTORNEY**

KNOWN ALLPERSONS BY THESE PRESENTS, that each person whose signature appears belowconstitutes and appoints Willis J. Johnson and William E. Franklin, and each ofthem, as his true and lawful attorneys-in-fact and agents, each with full powerof substitution and resubstitution, for him and in his name, place and stead,in any and all capacities, to sign any and all amendments to this annual reporton Form 10-K, and to file the same, with all exhibits thereto, andother documents in connection therewith, with the Securities and ExchangeCommission, granting unto said attorneys-in-fact and agents, full power andauthority to do and perform each and every act and thing requisite andnecessary to be done in connection therewith, as fully to all intents andpurposes as he might or could do in person, hereby ratifying and confirming allthat said attorney-in-fact and agent, or his substitute or substitutes, maylawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

|                         | **Signature** | ** **                                  | ** ** | ** **              | **Capacity in Which Signed** | ** ** | ** ** | ** ** | **Date** | ** ** |
|-------------------------|---------------|---------------------------------------------|------------|-------------------------|------------------------------|------------|------------|------------|----------|------------|
| /s/ WILLIS J. JOHNSON   |          | Chief Executive Officer (Principal          |       | September 28, 2007 |
| Willis J. Johnson       |          | Executive  Officer and Director)            |       |                    |
| /s/ WILLIAM E. FRANKLIN |          | Senior Vice President of Finance and Chief  |       | September 28, 2007 |
| William E. Franklin     |          | Financial  Officer (Principal Financial and |       |                    |
|                    |          | Accounting  Officer)                        |       |                    |
| /s/ A. JAYSON ADAIR     |          | President and Director                      |       | September 28, 2007 |
| A. Jayson Adair         |          |                                        |       |                    |
| /s/ JAMES E. MEEKS      |          | Executive Vice President, Chief Operating   |       | September 28, 2007 |
| James E. Meeks          |          | Officer and  Director                       |       |                    |
| /s/ STEVEN D. COHAN     |          | Director                                    |       | September 28, 2007 |
| Steven D. Cohan         |          |                                        |       |                    |
| /S/ DANIEL ENGLANDER    |          | Director                                    |       | September 28, 2007 |
| Daniel Englander        |          |                                        |       |                    |
| /s/ BARRY ROSENSTEIN    |          | Director                                    |       | September 28, 2007 |
| Barry Rosenstein        |          |                                        |       |                    |
| /s/ THOMAS W. SMITH     |          | Director                                    |       | September 28, 2007 |
| Thomas W. Smith         |          |                                        |       |                    |

 

64

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**REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM**

The Board ofDirectors and Shareholders of Copart, Inc.

We have auditedthe accompanying consolidated balance sheets of Copart, Inc. as of July 31,2007 and 2006, and the related consolidated statements of income, shareholders’equity and comprehensive income, and cash flows for each of the two years inthe period ended July 31, 2007. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

We conductedour audits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of Copart, Inc. at July 31,2007 and 2006, and the consolidated results of its operations and its cashflows for each of the two years in the period ended July 31, 2007, in conformitywith U.S. generally accepted accounting principles.

As discussed inNote 1 to the Consolidated Financial Statements, effective August 1, 2005,the Company adopted Statement of Financial Accounting Standards No. 123(revised 2004), “Share-Based Payment”.

We also haveaudited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the effectiveness of Copart, Inc.’sinternal control over financial reporting as of July 31, 2007, based on criteriaestablished in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated September 25,2007 expressed an unqualified opinion thereon.
|                          | /s/ ERNST & YOUNG  LLP |
|--------------------------|---------------------------------|
| Sacramento, California   |                            |
| September 25,  2007 |                            |

 

65

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**Report of Independent Registered Public Accounting Firm**

The Board ofDirectors and Shareholders of Copart, Inc.

We have auditedthe accompanying consolidated statements of income, shareholders’ equity andcomprehensive income, and cash flows of Copart, Inc. and subsidiaries forthe year ended July 31, 2005. These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these consolidated financial statements based on ouraudit.

We conductedour audit in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audit provides areasonable basis for our opinion.

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the results of operations and the cash flows of Copart, Inc.and subsidiaries for the year ended July 31, 2005, in conformity with U.S.generally accepted accounting principles.

/s/ KPMG LLP

San Francisco, California

October 14,2005, except as to footnote 3 as it relates to the year ended July 31,2005, which is as of October 30, 2006

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**COPART, INC. CONSOLIDATED BALANCE SHEETS(in thousands, except share amounts)**

|                                                                                                                                                                                 | ** ** | **July 31,  2007** | ** ** | **July 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                                                                      | ** ** |
| Current  assets:                                                                                                                                                                |       |                    |       |                    |       |
| Cash and cash equivalents                                                                                                                                                       |       | $                       | 98,365     |                    | $          | 126,590 |   |
| Short-term investments                                                                                                                                                          |       | 102,625                 |       | 148,725                 |       |
| Accounts receivable, net                                                                                                                                                        |       | 109,895                 |       | 99,959                  |       |
| Vehicle pooling costs                                                                                                                                                           |       | 28,842                  |       | 28,177                  |       |
| Inventories                                                                                                                                                                     |       | 5,999                   |       | 971                     |       |
| Income taxes receivable                                                                                                                                                         |       | 3,208                   |       | 2,064                   |       |
| Prepaid expenses and other  assets                                                                                                                                              |       | 5,518                   |       | 4,864                   |       |
| Total current assets                                                                                                                                                            |       | 354,452                 |       | 411,350                 |       |
| Restricted cash and  investments                                                                                                                                                |       | 9,148                   |       | —                  |       |
| Property and equipment, net                                                                                                                                                     |       | 420,664                 |       | 341,943                 |       |
| Intangibles, net                                                                                                                                                                |       | 27,442                  |       | 1,874                   |       |
| Goodwill                                                                                                                                                                        |       | 161,645                 |       | 112,291                 |       |
| Deferred income taxes                                                                                                                                                           |       | 7,785                   |       | 5,137                   |       |
| Land purchase options and other assets                                                                                                                                          |       | 24,208                  |       | 22,110                  |       |
| Total assets                                                                                                                                                                    |       | $                       | 1,005,344  |                    | $          | 894,705 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                                   | ** ** |
| Current liabilities:                                                                                                                                                            |       |                    |       |                    |       |
| Accounts payable and accrued liabilities                                                                                                                                        |       | $                       | 85,082     |                    | $          | 60,770 |   |
| Deferred revenue                                                                                                                                                                |       | 13,897                  |       | 15,372                  |       |
| Income taxes payable                                                                                                                                                            |       | 3,930                   |       | —                  |       |
| Deferred income taxes                                                                                                                                                           |       | 3,219                   |       | 7,191                   |       |
| Other current liabilities                                                                                                                                                       |       | 474                     |       | —                  |       |
| Total current liabilities                                                                                                                                                       |       | 106,602                 |       | 83,333                  |       |
| Deferred income taxes                                                                                                                                                           |       | 13,998                  |       | —                  |       |
| Other liabilities                                                                                                                                                               |       | 3,878                   |       | 1,402                   |       |
| Total liabilities                                                                                                                                                               |       | 124,478                 |       | 84,735                  |       |
| Commitments and  contingencies                                                                                                                                                  |       |                    |       |                    |       |
| Shareholders’  equity:                                                                                                                                                     |       |                    |       |                    |       |
| Common stock, no par value—180,000,000  shares authorized; 88,333,677 and 90,445,208 shares issued and  outstanding at July 31, 2007 and 2006, respectively |       | 206,126                 |       | 276,052                 |       |
| Accumulated other comprehensive income  (loss)                                                                                                                                  |       | 4,447                   |       | (37                     | )          |
| Retained earnings                                                                                                                                                               |       | 670,293                 |       | 533,955                 |       |
| Total shareholders’ equity                                                                                                                                                 |       | 880,866                 |       | 809,970                 |       |
| Total liabilities and  shareholders’ equity                                                                                                                                |       | $                       | 1,005,344  |                    | $          | 894,705 |   |

 

67

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**COPART, INC.CONSOLIDATED STATEMENTS OF INCOME(in thousands, except per share amounts)**

| ** **                                                                  | ** ** | **Years Ended July 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                  | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                                                    |       | $                                       | 560,680    |   | $ | 528,571 |   | $ | 447,731 |   |
| Operating costs and expenses:                                               |       |                                    |       |   |   |   |   |
| Yard  operations                                                            |       | 293,898                                 |       | 298,023 |   | 245,666 |   |
| General and  administrative                                                 |       | 63,637                                  |       | 58,986 |   | 45,629 |   |
| Total  operating expenses                                                   |       | 357,535                                 |       | 357,009 |   | 291,295 |   |
| Operating  income                                                           |       | 203,145                                 |       | 171,562 |   | 156,436 |   |
| Other income (expense):                                                     |       |                                    |       |   |   |   |   |
| Interest  expense                                                           |       | (83                                     | )          | (72 | ) | (62 | ) |
| Interest  income                                                            |       | 13,727                                  |       | 8,182 |   | 4,908 |   |
| Other income,  net                                                          |       | 2,848                                   |       | 1,634 |   | 3,313 |   |
| Equity in  losses of unconsolidated entity                                  |       | (2,216                                  | )          | (6,784 | ) | — |   |
| Total other  income                                                         |       | 14,276                                  |       | 2,960 |   | 8,159 |   |
| Income from  continuing operations before income taxes                      |       | 217,421                                 |       | 174,522 |   | 164,595 |   |
| Income taxes                                                                |       | 81,083                                  |       | 61,862 |   | 62,772 |   |
| Income from  continuing operations                                          |       | 136,338                                 |       | 112,660 |   | 101,823 |   |
| Discontinued operations:                                                    |       |                                    |       |   |   |   |   |
| Income (loss)  from discontinued operations, net of income tax effects |       | —                                  |       | (15,713 | ) | 293 |   |
| Net income                                                                  |       | $                                       | 136,338    |   | $ | 96,947 |   | $ | 102,116 |   |
| Earnings per share—basic                                               |       |                                    |       |   |   |   |   |
| Income from  continuing operations                                          |       | $                                       | 1.50       |   | $ | 1.24 |   | $ | 1.13 |   |
| Income (loss)  from discontinued operations                                 |       | —                                  |       | (0.17 | ) | — |   |
| Basic net  income per share                                                 |       | $                                       | 1.50       |   | $ | 1.07 |   | $ | 1.13 |   |
| Weighted  average common shares outstanding                                 |       | 90,651                                  |       | 90,372 |   | 90,162 |   |
| Earnings per share—diluted                                             |       |                                    |       |   |   |   |   |
| Income from  continuing operations                                          |       | $                                       | 1.46       |   | $ | 1.21 |   | $ | 1.10 |   |
| Income (loss)  from discontinued operations                                 |       | —                                  |       | (0.17 | ) | — |   |
| Diluted net  income per share                                               |       | $                                       | 1.46       |   | $ | 1.04 |   | $ | 1.10 |   |
| Diluted weighted average common shares  outstanding                         |       | 93,455                                  |       | 92,925 |   | 92,984 |   |

 

See accompanying notes to consolidated financial statements.

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**COPART, INC.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME(in thousands, except share amounts)**

| ** **                                                  | ** ** | ** **            | ** ** | **Accumulated** | ** ** | ** **             | ** ** | ** **   | ** ** |
|-------------------------------------------------------------|------------|-----------------------|------------|-----------------|------------|------------------------|------------|--------------|------------|
| ** **                                                  | ** ** | **Common Stock** | ** ** | **Other**       | ** ** | ** **             | ** ** | ** **   | ** ** |
| ** **                                                  | ** ** | **Outstanding**       | ** ** | ** **      | ** ** | **Comprehensive**      | ** ** | **Retained** | ** ** | **Shareholders’** | ** ** |
| ** **                                                  | ** ** | **Shares**            | ** ** | **Amount**      | ** ** | **Income (Loss)** | ** ** | **Earnings** | ** ** | **Equity** | ** ** |
| **Balances  at July 31, 2004**                         |       |                  | 90,075,843 |            |       | $                      | 267,276    |         |       | $ | 95 |   |   | $ | 334,892 |   |   | $ | 602,263 |   |   |
| Net income                                                  |       |                  | —     |            |       | —                 |       |         | —     |   |   | 102,116 |   |   | 102,116 |   |   |
| Currency translation  adjustment                            |       |                  | —     |            |       | —                 |       |         | 259        |   |   | — |   |   | 259 |   |   |
| Comprehensive income                                        |       |                  |       |            |       |                   |       |         |       |   |   |   |   |   | 102,375 |   |   |
| Exercise of stock  options, net of repurchased shares       |       |                  | 193,167    |            |       | 1,791                  |       |         | —     |   |   | — |   |   | 1,791 |   |   |
| Employee share-based  compensation  and related tax benefit |       |                  | —     |            |       | 1,506                  |       |         | —     |   |   | — |   |   | 1,506 |   |   |
| Shares issued for  Employee Stock Purchase Plan             |       |                  | 68,633     |            |       | 1,444                  |       |         | —     |   |   | — |   |   | 1,444 |   |   |
| Shares repurchased                                          |       |                  | —     |            |       | —                 |       |         | —     |   |   | — |   |   | — |   |   |
| **Balances  at July 31, 2005**                         |       |                  | 90,337,643 |            |       | 272,017                |       |         | 354        |   |   | 437,008 |   |   | 709,379 |   |   |
| Net income                                                  |       |                  | —     |            |       | —                 |       |         | —     |   |   | 96,947 |   |   | 96,947 |   |   |
| Currency translation  adjustment                            |       |                  | —     |            |       | —                 |       |         | (391       | ) |   | — |   |   | (391 | ) |   |
| Comprehensive income                                        |       |                  |       |            |       |                   |       |         |       |   |   |   |   |   | 96,556 |   |   |
| Exercise of stock  options, net of repurchased shares       |       |                  | 389,800    |            |       | 5,421                  |       |         | —     |   |   | — |   |   | 5,421 |   |   |
| Employee share-based  compensation  and related tax benefit |       |                  | —     |            |       | 5,847                  |       |         | —     |   |   | — |   |   | 5,847 |   |   |
| Shares issued for  Employee Stock Purchase Plan             |       |                  | 83,765     |            |       | 1,640                  |       |         | —     |   |   | — |   |   | 1,640 |   |   |
| Shares repurchased                                          |       |                  | (366,000   | )               |       | (8,873                 | )          |         | —     |   |   | — |   |   | (8,873 | ) |   |
| **Balances  at July 31, 2006**                         |       |                  | 90,445,208 |            |       | 276,052                |       |         | (37        | ) |   | 533,955 |   |   | 809,970 |   |   |
| Net income                                                  |       |                  | —     |            |       | —                 |       |         | —     |   |   | 136,338 |   |   | 136,338 |   |   |
| Currency translation  adjustment                            |       |                  | —     |            |       | —                 |       |         | 4,484      |   |   | — |   |   | 4,484 |   |   |
| Comprehensive income                                        |       |                  |       |            |       |                   |       |         |       |   |   |   |   |   | 140,822 |   |   |
| Exercise of stock  options, net of repurchased shares       |       |                  | 817,140    |            |       | 10,867                 |       |         | —     |   |   | — |   |   | 10,867 |   |   |
| Employee share-based  compensation  and related tax benefit |       |                  | —     |            |       | 7,244                  |       |         | —     |   |   | — |   |   | 7,244 |   |   |
| Shares issued for  Employee Stock Purchase Plan             |       |                  | 66,734     |            |       | 1,542                  |       |         | —     |   |   | — |   |   | 1,542 |   |   |
| Shares repurchased                                          |       |                  | (2,995,405 | )               |       | (89,579                | )          |         | —     |   |   | — |   |   | (89,579 | ) |   |
| **Balances  at July 31, 2007**                         |       |                  | 88,333,677 |            |       | $                      | 206,126    |         |       | $ | 4,447 |   |   | $ | 670,293 |   |   | $ | 880,866 |   |   |

 

See accompanying notes to consolidated financial statements.

69

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**COPART, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)**

| ** **                                                                                | ** ** | **Years Ended July 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Cash flows from operating activities:**                                                 |       |                                    |       |   |   |   |   |
| Net income                                                                                |       | $                                       | 136,338    |   | $ | 96,947 |   | $ | 102,116 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities:        |       |                                    |       |   |   |   |   |
| Loss (income) from  discontinued operations                                               |       | —                                  |       | 17,950 |   | (474 | ) |
| Depreciation and  amortization                                                            |       | 37,089                                  |       | 31,456 |   | 30,466 |   |
| Allowance for  doubtful accounts                                                          |       | 416                                     |       | 548 |   | (517 | ) |
| Deferred rent                                                                             |       | 161                                     |       | 242 |   | (13 | ) |
| Share-based compensation                                                                  |       | 3,424                                   |       | 3,530 |   | 411 |   |
| Loss (gain) on sale  of property and equipment                                            |       | 219                                     |       | 655 |   | (756 | ) |
| Deferred income  taxes                                                                    |       | (8,948                                  | )          | (4,120 | ) | (5,620 | ) |
| Equity in loss of  unconsolidated entity                                                  |       | 2,216                                   |       | 6,784 |   | — |   |
| Changes in operating assets  and liabilities, net of effects from acquisitions:           |       |                                    |       |   |   |   |   |
| Accounts receivable                                                                       |       | (2,416                                  | )          | (10,865 | ) | (8,764 | ) |
| Vehicle pooling  costs                                                                    |       | 1,104                                   |       | (1,840 | ) | (1,245 | ) |
| Inventories                                                                               |       | 1,361                                   |       | (419 | ) | (333 | ) |
| Prepaid expenses and  other current assets                                                |       | 1,388                                   |       | 1,463 |   | (1,050 | ) |
| Land purchase  options and other assets                                                   |       | 695                                     |       | 948 |   | 475 |   |
| Accounts payable and  accrued liabilities                                                 |       | 8,648                                   |       | 4,371 |   | 12,837 |   |
| Deferred revenue                                                                          |       | (1,799                                  | )          | 2,918 |   | 2,775 |   |
| Income taxes  receivable                                                                  |       | (875                                    | )          | (2,064 | ) | — |   |
| Income taxes payable                                                                      |       | 3,032                                   |       | (7,248 | ) | 4,523 |   |
| Net cash provided by  operating activities from continuing operations                     |       | 182,053                                 |       | 141,256 |   | 134,831 |   |
| Net cash provided by  operating activities from discontinued operations                   |       | —                                  |       | 688 |   | 1,160 |   |
| Net cash provided by  operating activities                                                |       | 182,053                                 |       | 141,944 |   | 135,991 |   |
| **Cash flows from investing activities:**                                                 |       |                                    |       |   |   |   |   |
| Purchases of  short-term investments                                                      |       | (921,750                                | )          | (717,120 | ) | (755,420 | ) |
| Sales of short-term  investments                                                          |       | 967,850                                 |       | 568,395 |   | 928,020 |   |
| Restricted cash and  purchases of short-term investments                                  |       | (9,148                                  | )          | — |   | — |   |
| Issuance of long  term notes receivable                                                   |       | (2,250                                  | )          | — |   | — |   |
| Purchases of  property and equipment                                                      |       | (76,847                                 | )          | (97,036 | ) | (66,202 | ) |
| Proceeds from sale  of property and equipment                                             |       | 26,598                                  |       | 9,556 |   | 5,649 |   |
| Purchase of assets  and liabilities in connection with acquisitions, net of cash acquired |       | (120,014                                | )          | (22,976 | ) | (4,543 | ) |
| Investment in  unconsolidated entity                                                      |       | —                                  |       | (8,892 | ) | — |   |
| Net cash (used in)  provided by investing activities from continuing operations           |       | (135,561                                | )          | (268,073 | ) | 107,504 |   |
| Net cash provided by  (used in) investing activities from discontinued operations         |       | —                                  |       | 158 |   | (56 | ) |
| Net cash (used in)  provided by investing activities                                      |       | (135,561                                | )          | (267,915 | ) | 107,448 |   |
| **Cash flows from financing activities:**                                                 |       |                                    |       |   |   |   |   |
| Proceeds from the  exercise of stock options                                              |       | 10,865                                  |       | 5,421 |   | 1,791 |   |
| Proceeds from the  issuance of Employee Stock Purchase Plan shares                        |       | 1,542                                   |       | 1,640 |   | 1,444 |   |
| Repurchases of  common stock                                                              |       | (89,579                                 | )          | (8,873 | ) | — |   |
| Excess tax benefit  from share-based payment arrangements                                 |       | 3,820                                   |       | 2,317 |   | — |   |
| Principal payments  on notes payable                                                      |       | (2,033                                  | )          | — |   | — |   |
| Net cash (used in)  provided by financing activities from continuing operations           |       | (75,385                                 | )          | 505 |   | 3,235 |   |
| Net cash provided by  financing activities from discontinued operations                   |       | —                                  |       | — |   | — |   |
| Net cash (used in) provided  by financing activities                                      |       | (75,385                                 | )          | 505 |   | 3,235 |   |
| Effect of foreign  currency translation                                                   |       | 668                                     |       | (492 | ) | 154 |   |
| Net (decrease)  increase in cash and cash equivalents                                     |       | (28,225                                 | )          | (125,958 | ) | 246,828 |   |
| Cash and cash  equivalents at beginning of period                                         |       | 126,590                                 |       | 252,548 |   | 5,720 |   |
| Cash and cash  equivalents at end of period                                               |       | $                                       | 98,365     |   | $ | 126,590 |   | $ | 252,548 |   |
| **Supplemental disclosure of cash flow  information:**                                    |       |                                    |       |   |   |   |   |
| Interest paid                                                                             |       | $                                       | 16         |   | $ | — |   | $ | 62 |   |
| Cash paid for income  taxes                                                               |       | $                                       | 84,247     |   | $ | 71,542 |   | $ | 64,670 |   |
| Non-cash notes  receivable from sales of discontinued operations                          |       | $                                       | —     |   | $ | 10,389 |   | $ | — |   |

 

See accompanying notes to consolidated financial statements.

70

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS July 31, 2007, 2006 and 2005**

**(1) Summary of Significant Accounting Policies**

***Basis ofPresentation and Description of Business***

Copart, Inc. was incorporated under the laws of the State ofCalifornia in 1982. The consolidated financial statements of Copart, Inc.(the “Company”) include the accounts of the parent company and its wholly ownedsubsidiaries, including its foreign wholly owned subsidiaries Copart Canada, Inc.(“Copart Canada”) and Copart, UK (“Copart UK”). Significant intercompanytransactions and balances have been eliminated in consolidation. Copart Canadawas incorporated in January 2003 and Copart UK was incorporated in June 2007.Copart UK’s period end is July 28, 2007, which is the Saturday nearest July 31,2007. Investments in companies in which the Company exercises significantinfluence, but the Company does not control (generally 20% to 50% ownershipinterest), are accounted for under the equity method of accounting. The Companyprovides vehicle suppliers, primarily insurance companies, with a full range ofservices to process and sell salvage vehicles primarily over the Internetthrough the Company’s Virtual Bidding Second Generation (“VB2”) Internet auction-style salestechnology. The Company sells principally to licensed vehicle dismantlers,rebuilders, repair licensees, used vehicle dealers and exporters. Salvagevehicles are either damaged vehicles deemed a total loss for insurance orbusiness purposes or are recovered stolen vehicles for which an insurancesettlement with the vehicle owner has already been made. The Company offersvehicle remarketing services that expedite each stage of the salvage vehiclesales process and minimize administrative and processing costs.

***Use ofEstimates***

The preparation of financial statements in conformity with U.S.generally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Estimates are used for, but not limited to, vehicle poolingcosts, self-insured reserves, allowance for doubtful accounts, income taxes,revenue recognition, share-based compensation, long-lived asset impairmentcalculations and contingencies. Actual results could differ from thoseestimates.

***ForeignCurrency Translation***

The CanadianDollar and the British Pound are the functional currencies of the Company’ssubsidiaries, Copart Canada, Inc. and Copart UK, respectively, as they arethe primary currencies within the economic environment in which each subsidiaryoperates. Assets and liabilities of the respective subsidiary’s operations aretranslated into U.S. dollars at period-end exchange rates, and revenues andexpenses are translated into U.S. dollars at average exchange rates in effectduring each reporting period.

71

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(1) Summary of Significant AccountingPolicies (Continued)**

Adjustments resulting from the translation of each subsidiary’sfinancial statements are reported in other comprehensive income.

***Fair Value ofFinancial Instruments***

The amounts recorded for financial instruments in the Company’sconsolidated financial statements, which include cash and cash equivalents,short-term investments, accounts receivable, accounts payable and accruedliabilities approximate their fair values as of July 31, 2007 and 2006 dueto the short-term nature of those instruments.

***RevenueRecognition***

The Companyprovides a portfolio of services to its sellers and buyers that facilitate thesale and delivery of a vehicle from seller to buyer. These vehicle remarketingservices include the ability to use its Internet sales technology and vehicledelivery, loading, title processing, preparation and storage. The Companyevaluates multiple-element arrangements relative to the Company’s buyer andseller agreements in accordance with Emerging Issues Task Force Issue No. 00-21,*Revenue Arrangements with Multiple Deliverables*(EITF 00-21), which addresses accounting for multiple-elementarrangements, and Staff Accounting Bulletin No. 104*Revenue Recognition* (SAB104), whichaddresses revenue recognition for units of accounting.

The vehicleremarketing services the Company provides to the seller of a vehicle involvedisposing of a vehicle on the seller’s behalf and under most of the Company’scurrent North American contracts, collecting the proceeds from the buyer. TheCompany is not entitled to any seller fees until the Company has collected thesales proceeds from the buyer for the seller and, accordingly, the Companyrecognizes revenue for seller services after service delivery and cashcollection.

In certaincases, seller fees are not contingent upon collection of the seller proceedsfrom the buyer. However, the Company determined that it is not able to separatethe services into separate units of accounting because the Company does nothave fair value for undelivered items. As a result, the Company does notrecognize seller fees until the final seller service has been delivered, whichoccurs upon collection of the sales proceeds from the buyer for the seller.

Vehicle sales,where the Company purchases and remarkets vehicles on its own behalf arerecognized in accordance with SAB 104 on the sale date, which is typically thepoint of high bid acceptance. Upon high bid acceptance, a legal bindingcontract is formed with the buyer, and the Company records the gross salesprice as revenue.

72

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(1) Summary of Significant AccountingPolicies (Continued)**

The Companyprovides a number of services to the buyer of the vehicle, charging a separatefee for each service. Each of these services has been assessed under thecriteria of EITF 00-21 to determine whether the Company has met therequirements to separate them into units of accounting within a multi-elementarrangement. The Company has concluded that the sale service and the post-saleservices are separate units of accounting. The fees for the auction service arerecognized upon completion of the sale, and the fees for the post-sale servicesare recognized upon successful completion of those services using the residualmethod.

The Companyalso charges buyers an annual registration fee for the right to participate inits vehicle sales program, which is recognized ratably over the term of thearrangement, and relist and late-payment fees, which are recognized uponreceipt of payment by the buyer. No provision for returns has been established,as all sales are final with no right of return, although the Company providesfor bad debt expense in the case of non-performance by its sellers.

Historically, the Company recorded revenue for most seller and buyerfees upon completion of a sale. During the fourth quarter of fiscal 2005, theCompany recorded a correction of an error to account for its services inaccordance with the policy above; the effect of which was to reduce revenue,net income and diluted earnings per share by $4.4 million,$1.5 million and $0.01, respectively for the fourth quarter and fiscalyear ended July 31, 2005.

***Yard Operations***

Yard operations consist primarily of operating personnel (whichincludes yard management, clerical and yard employees), rent, contract vehicletowing, insurance, fuel and equipment maintenance and repair.

***General andAdministrative Expenses***

General and administrative expenses consist primarily of executive,accounting and data processing, sales personnel, professional services, systemmaintenance and enhancements and marketing expenses.

***Advertising***

All advertising costs are expensed as incurred and are included ingeneral and administrative expenses on the Consolidated Statements of Income.Advertising expenses were $0.7 million, $1.8 million and $2.8 million in fiscal2007, 2006 and 2005, respectively.

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(1) Summary of Significant AccountingPolicies (Continued)**

***Other income***

Other income consists primarily of interest income, gain and lossesfrom the disposal of fixed assets, rental income and losses in anunconsolidated equity investment.

***Income Taxes***

Income taxes are accounted for under the asset and liability method.Deferred tax assets and liabilities are recognized for the estimated future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases and operating loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in income in the period that includes theenactment date.

***Net Income PerShare***

Basic net income per share amounts were computed by dividingconsolidated net income by the weighted average number of common sharesoutstanding during the period. Diluted net income per share amounts werecomputed by dividing consolidated net income by the weighted average number ofcommon shares outstanding plus dilutive potential common shares calculated forstock options outstanding during the period using the treasury stock method.

***Cash, CashEquivalents and Short-Term Investments***

The Companyconsiders all highly liquid investments purchased with original maturities ofthree months or less at the time of purchase to be cash equivalents. Cash andcash equivalents include cash held in checking and money market accounts. Short-terminvestments consist primarily of AAA rated auction rate securities with readilydeterminable fair market values and with original maturities in excess of threemonths. Auction rate securities are principally variable rate securities tiedto short-term interest rates. Auction rate securities have interest rate resetsthrough a modified Dutch auction, at predetermined short-term intervals,usually every 7, 28 or 35 days. They trade at par and are callable at par onany interest payment date at the option of the issuer. Interest paid during agiven period is based upon the interest rate determined during the priorauction. Although these instruments are issued and rated as long-termsecurities, they are priced and traded as short-term securities because of theliquidity provided through the interest rate reset.

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(1) Summary of Significant AccountingPolicies (Continued)**

Restrictedinvestments consist of AAA rated enhanced cash funds with next day liquidity. Enhancedcash funds typically invest in commercial paper, floating rate notes and fixedrate bonds which have an original maturity in excess of three months. Althoughthe funds may invest in securities with maturities in excess of three months,they are priced and traded as short-term securities as they have next dayliquidity.

The Company has classified its entire investment portfolio asavailable-for-sale. The Company views its available-for-sale securities asavailable for use in its current operations, excluding $9.1 million of enhancedcash funds that were placed in escrow as part of the agreement to acquireCentury Salvage plc (refer to Note 22), which are classified as restricted.These restricted investments are recorded as a non-current asset as of July 31,2007. The Company has classified auction rate securities as short-term, eventhough the stated maturity may be one year or more beyond the current balancesheet date. Available-for-sale securities are reported at fair value, withunrealized gains and losses reported as a component of Shareholders’ Equity andComprehensive Income. Unrealized losses are charged against income when adecline in the fair market value of an individual security is determined to beother than temporary. Realized gains and losses on investments are included ininterest income.

***Inventory***

Inventories of purchased vehicles are stated at the lower of cost orestimated realizable value. Cost includes our cost of acquiring ownership ofthe vehicle. The cost of vehicles sold are charged to yard operations as sold.

***Vehicle PoolingCosts***

The Companydefers in vehicle pooling costs certain yard and fleet expenses associated withvehicles consigned to and received by the Company but not sold as of thebalance sheet date. The Company quantifies the deferred costs using acalculation that includes the number of vehicles at its facilities at thebeginning and end of the period, the number of vehicles sold during the periodand an allocation of certain yard operation costs of the period. The primaryexpenses allocated and deferred are certain facility costs, labor,transportation, and vehicle processing. If the allocation factors change, thenyard and fleet expenses could increase or decrease correspondingly in thefuture. These costs are expensed as vehicles are sold in the subsequent periodson an average cost basis.

75

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(1) Summary of Significant Accounting Policies (Continued)**

The operatingresults for the year ended July 31, 2006 were adversely affected byincremental costs, characterized as “abnormal” in SFAS No. 151, *Inventory Costs*, incurred as a result ofhurricanes Katrina and Rita. These additional inventory-type costs,characterized as “abnormal” and charged to yard operations costs, areapproximately $0.5 million and $14.1 million for the years ended July 31,2007 and 2006, respectively. These costs include the additional subhauling,payroll, equipment and facilities expenses directly related to the operatingconditions created by the hurricanes.

These costs do not include normal expenses associated with theincreased unit volume created by the hurricanes, which are deferred until thesale of the units and are recognized as vehicle pooling costs on the balancesheet. As of July 31, 2007, all of the incremental salvage vehiclesreceived as a result of the hurricanes had been sold.

***AccountsReceivable***

Accounts receivable, which consist primarily of advance charges duefrom insurance companies and the gross sales price of the vehicle due frombuyers, are recorded when billed, advanced or accrued and represent claimsagainst third parties that will be settled in cash.

***Concentrationof Credit Risk***

Financialinstruments, which subject the Company to potential credit risk, consist of itscash and cash equivalents, short-term investments and accounts receivable. TheCompany adheres to its investment policy when placing investments. Theinvestment policy has established guidelines to limit the Company’s exposure tocredit expense by placing investments with high credit quality financialinstitutions, diversifying its investment portfolio, limiting investments inany one issuer or pooled fund and placing investments with maturities thatmaintain safety and liquidity. The Company places its cash and cash equivalentswith high credit quality financial institutions. Deposits with these financialinstitutions may exceed the amount of insurance provided; however, thesedeposits typically are redeemable upon demand and, therefore, the Companybelieves that the financial risks associated with these financial instrumentsare minimal.

The Companyperforms ongoing credit evaluations of its customers, and generally does notrequire collateral on its accounts receivable. The Company estimates itsallowances for doubtful accounts based on historical collection trends, the ageof outstanding receivables and existing economic conditions. If events orchanges in circumstances indicate that specific receivable balances may beimpaired, further consideration is given to the collectibility of thosebalances and the allowance is adjusted accordingly. Past-due account balancesare written off when the Company’s internal collection efforts have beenunsuccessful in collecting the 

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(1) Summary of Significant AccountingPolicies (Continued)**

amount due. The Company does not have off-balance sheet credit exposurerelated to its customers and to date, the Company has not experiencedsignificant credit related losses.

In fiscal 2007, 2006 and 2005, State Farm Insurance accounted for 11%,14% and 12%, respectively of the Company’s revenues. At July 31, 2007 and2006, State Farm Insurance accounted for 11% and 12% of accounts receivable,respectively. No other single customer accounted for more than 10% of ourrevenues for any period presented and at July 31, 2007 and 2006, no othersingle customer accounted for more than 10% of the Company’s trade receivables.

***Propertyand Equipment***

Property and equipment is stated at cost, less accumulated depreciationand amortization. Leasehold improvements are amortized on a straight-line basisover the shorter of the lease term or the estimated useful lives of therespective improvements, which is between 5 and 10 years. Significantimprovements, which substantially extend the useful lives of assets arecapitalized. Expenditures for maintenance and repairs are charged to expense asincurred. Depreciation and amortization is computed on a straight-line basisover the estimated useful lives of: 3 to 7 years for transportation and otherequipment; 3 to 10 years for office furniture and equipment; and 15 to 40 yearsor the lease term, whichever is shorter, for buildings and improvements.

***Impairmentof Long-Lived Assets***

The Company evaluates long-lived assets, including property andequipment for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. In accordance withStatement of Financial Standard (“SFAS”) No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*, a long-lived asset is initially measured at thelower of its carrying amount or fair value. An impairment loss is recognizedwhen the estimated undiscounted future cash flows expected to be generated fromthe use of the asset are less than the carrying amount of the asset. Theimpairment loss is then calculated by comparing the carrying amount with itsfair value, which is usually estimated using discounted cash flows expected tobe generated from the use of the asset.

***Goodwilland Other Identifiable Intangible Assets***

In accordance with SFAS No. 142, *Goodwill andOther Intangible Assets*, goodwill is not amortized but is tested forpotential impairment, at a minimum on an annual basis, or when indications ofpotential impairment exist. The Company performed its annual impairment testfor goodwill during the fourth quarter utilizing a market value approach. Theimpairment test for identifiable intangible assets not subject to amortizationis also 

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(1) Summary of Significant AccountingPolicies (Continued)**

performed annually or when impairmentindications exist, and consists of a comparison of the fair value of theintangible asset with its carrying amount. Identifiable intangible assets thatare subject to amortization are evaluated for impairment using a processsimilar to that used to evaluate other long-lived assets.

***RetainedInsurance Liabilities***

The Company is partially self-insured for certain losses related tomedical, general liability, workers’ compensation and auto liability. TheCompany’s liability represents an estimate of the ultimate cost of claimsincurred as of the balance sheet date. The estimated liability is notdiscounted and is established based upon analysis of historical data andactuarial estimates. While the Company believes these estimates are reasonablebased on the information currently available, if actual trends, including theseverity of claims and medical cost inflation, differ from the Company’sestimates, the Company’s financial position, results of operations or cashflows could be impacted.

***Share-BasedCompensation***

Effective August 1,2005, the Company adopted the provisions of SFAS No. 123 (revised 2004), *Share-Based Payment*, (“SFAS No. 123(R)”),which requires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors based on estimatedfair value. Prior to August 1, 2005, the Company accounted for theseshare-based payments using the intrinsic value method in accordance withAccounting Principals Board (“APB”) Opinion No. 25, *Accounting for Stock Issued to Employees*,and related Interpretations (“APB No. 25”), as permitted by SFAS No. 123,*Accounting for Stock-Based Compensation*andSFAS No. 148, *Accounting forStock-Based Compensation—Transition and Disclosure*, which providedthat compensation expense had only been recognized when the fair market of theCompany’s stock options granted to employees and directors was greater than theexercise price of the underlying common stock on the date of grant.

The Companyadopted SFAS No. 123(R) using the modified-prospective transitionmethod and therefore prior periods have not been restated to reflect, anddo not include, the impact of SFAS No. 123(R). Under this transitionmethod, share-based compensation cost recognized in the fiscal years ended July 31,2007 and 2006 includes share-based compensation expense for all share-basedpayment awards granted prior to, but not yet vested as of August 1, 2005,based on the grant-date fair value estimated in accordance with the originalprovisions of SFAS No. 123 *Accountingfor Stock-Based Compensation*, and share-based compensation expensefor all share-based payment awards granted subsequent to August 1, 2005,based on the grant-date fair value estimated in accordance with the provisionsof SFAS No. 123(R). SFAS No. 123(R) requires companies to 

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(1) Summary of Significant AccountingPolicies (Continued)**

estimate the fair value of share-based payment awards on the date ofgrant using an option-pricing model. The value of the portion of the award thatis ultimately expected to vest is recognized in expense over the requisiteservice periods. SFAS No. 123(R) requires forfeitures to be estimatedat the time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. In the Company’s pro forma informationrequired under SFAS No. 123 for the periods prior to fiscal 2006, the Companyaccounted for forfeitures as they occurred. For options issued subsequent to August 1,2005, the Company recognizes compensation expense for stock option awards on astraight-line basis over the requisite service period of the award. For optionsissued prior to August 1, 2005, the Company recognizes compensationexpense for stock option awards on a graded vesting basis over the requisiteservice period of the award.

The following table illustrates the effect onnet income after tax and net income per common share as if the Company hadapplied the fair value recognition provisions of SFAS No. 123 toshare-based compensation using market-based option valuation models during thefiscal year ended July 31, 2005 (in thousands, except per share amounts):

| ** **                                                                                                                                   | ** ** | **July 31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| Net income as  reported                                                                                                                      |       |                        | $          | 102,116 |   |   |
| Add: total  employee share-based compensation expense included in net income as  reported, net of related tax effects                   |       |                        | 411        |   |   |
| Deduct: total  employee share-based compensation expense determined under fair value method  for all awards, net of related tax effects |       |                        | (2,034     | ) |   |
| Pro forma net  income                                                                                                                        |       |                        | $          | 100,493 |   |   |
| Pro forma net income per share:                                                                                                              |       |                        |       |   |   |
| Basic—as  reported                                                                                                                      |       |                        | $          | 1.13 |   |   |
| Basic—pro  forma                                                                                                                        |       |                        | $          | 1.11 |   |   |
| Diluted—as  reported                                                                                                                    |       |                        | $          | 1.10 |   |   |
| Diluted—pro forma                                                                                                                       |       |                        | $          | 1.08 |   |   |

 

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(1) Summary of Significant Accounting Policies (Continued)**

Optionvaluation models require the input of highly subjective assumptions includingthe expected stock price volatility. Because the Company’s employee stockoptions have characteristics significantly different from those of tradedoptions and because changes in the input assumptions can materially affecttheir fair value estimate, it is the Company’s opinion that the existing modelsdo not necessarily provide a reliable single measure of the fair value of theemployee stock options. For purposes of pro forma disclosures, the estimatedfair value of options is amortized to expense over the vesting period of equityawards (generally five years), using the graded vesting method.

The fair value of each option was estimated on the date of grant usingthe Black-Scholes option-pricing model utilizing the following assumptions:

| ** **                                | ** ** | **July 31, 2007** | ** **     | **July 31, 2006** | ** ** | **July 31, 2005** | ** **     |
|-------------------------------------------|------------|-----------------------------|----------------|-----------------------------|------------|-----------------------------|----------------|
| Expected life  (in years)                 |       |                        | 4.7 – 6.7 |                        |       |                        | 4.9 – 6.5 |   |   |   | 5.0 |   |   |
| Risk-free  interest rate                  |       |                        | 4.6 – 4.9 | %                           |       |                        | 4.2 – 5.0 | % |   |   | 3.7 | % |   |
| Estimated  volatility factor              |       |                        | 31 – 32   | %                           |       |                        | 36% – 42  | % |   |   | 40 | % |   |
| Expected  dividends                       |       |                        | 0              | %                           |       |                        | 0              | % |   |   | 0 | % |   |
| Weighted-average fair value at grant date |       |                        | $              | 10.17                       |       |                        |           | $ | 10.74 |   |   |   | $ | 5.13 |   |   |
|                                           |            |                             |                |                             |            |                             |                |  |  |  |  |  |  |  |  |  |

 

Expected life—TheCompany’s expected life represents the period that the Company’s share-basedawards are expected to be outstanding and was determined based on historicalexperience of similar awards, giving consideration to the contractual terms ofthe share-based awards, vesting schedules and expectations of future employeebehavior as influenced by changes to the terms of its share-based awards.

Estimatedvolatility factor—The Company uses the trading history and implied volatilityof its common stock in determining an estimated volatility factor when usingthe Black-Scholes option-pricing formula to determine the fair value of optionsgranted.

Expecteddividend—The Company has not declared dividends. Therefore, the Company uses azero value for the expected dividend value factor when using the Black-Scholesoption-pricing formula to determine the fair value of options granted.

Risk-freeinterest rate—The Company bases the risk-free interest rate used in theBlack-Scholes option-pricing formula on the implied yield currently availableon U.S. Treasury zero-coupon issues with the same or substantially equivalentremaining term.

Estimatedforfeitures—When estimating forfeitures, the Company considers voluntary andinvoluntary termination behavior as well as analysis of actual option forfeitures.

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(1) Summary of Significant AccountingPolicies (Continued)**

Net cash proceeds from the exercise of stock options were approximately$10.9 million, $5.4 million and $1.8 million for the years ended July 31,2007, 2006, and 2005, respectively. The Company realized an income tax benefitof approximately $3.8 million, $2.3 million, and $1.1 million from stock optionexercises during the years ended July 31, 2007, 2006, and 2005,respectively. In accordance with SFAS 123(R), the Company presents excess tax benefitsfrom disqualifying dispositions of the exercise of incentive stock options,vested prior to August 1, 2005, if any, as financing cash flows ratherthan operating cash flows.

***ComprehensiveIncome***

Comprehensive income includes all changes in shareholders’ equityduring a period from non-shareholder sources.

***SegmentReporting***

The Company operates in a single segment providing vehicle suppliers,primarily insurance companies, with a full range of services to process andsell salvage vehicles over the Internet through its Virtual Bidding SecondGeneration (“VB2”)Internet auction-style sales technology (refer to Note 14).

***Reclassifications***

Certain previous year amounts have been reclassified to conform to thecurrent year presentation.

***Recently IssuedAccounting Standards***

In July 2006,the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48(“FIN 48”), *Accounting for Uncertainty in Income Taxes*,effective for fiscal years beginning after December 15, 2006. FIN 48prescribes a comprehensive model for how a company should recognize, measure,present, and disclose in its financial statements uncertain tax positions thatthe company has taken or expects to take on a tax return (including a decisionwhether to file or not to file a return in a particular jurisdiction). UnderFIN 48, the financial statements will reflect expected future tax consequencesof such positions presuming the taxing authorities’ full knowledge of theposition and all relevant facts, but without considering time values. TheCompany will assess all material open positions in all tax jurisdictions as ofthe adoption date and determine the appropriate amount of tax benefits that arerecognizable under FIN 48. Any difference between the amounts previouslyrecognized and the benefit determined under the new guidance, including changesin accrued interest and penalties will be recorded on the date of adoption. TheCompany adopted FIN 48 on August 1, 2007 

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(1) Summary of Significant AccountingPolicies (Continued)**

and is currently assessing the impact the adoption of FIN 48 will haveon its consolidated results of operations and financial position.

In September 2006,the Securities and Exchange Commission (SEC) issued SAB 108, *Considering the Effects of Prior Year Misstatementswhen Quantifying Misstatements in Current Year Financial Statements*(“SAB 108”)to provide guidance on the consideration of the effects of prior yearmisstatements in quantifying current year misstatements for the purpose of amateriality assessment. Under SAB 108, companies should evaluate amisstatement based on its impact on the current year income statement, as wellas the cumulative effect of correcting such misstatements that existed in prioryears existing in the current year’s ending balance sheet. The Company adoptedSAB 108 in the fiscal year ended July 31, 2007 and it did not have amaterial impact on the Company’s consolidated results of operations andfinancial position.

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, *FairValue Measurements*(“SFAS 157”). SFAS 157 defines fair value,establishes a framework for measuring fair value, and expands disclosures aboutfair value measurements. SFAS 157 is effective for fiscal years beginning afterNovember 15, 2007. The Company is currently assessing the potential impacton its consolidated results of operations and financial position.

In February 2007, the FASB issued Statement No. 159, *“The Fair Value Option for Financial Assets and Financial Liabilities—Includingan amendment of FASB Statement No. 115”* (“SFAS 159”). SFAS 159expands the use of fair value accounting but does not affect existingstandards, which require assets or liabilities to be carried at fair value.Under SFAS 159, a company may elect to use fair value to measure accounts andloans receivable, available-for-sale and held-to-maturity securities, equitymethod investments, accounts payable, guarantees and issued debt. Othereligible items include firm commitments for financial instruments thatotherwise would not be recognized at inception and non-cash warrantyobligations where a warrantor is permitted to pay a third party to provide thewarranty goods or services. If the use of fair value is elected, any upfrontcosts and fees related to the item must be recognized in earnings and cannot bedeferred, e.g., debt issue costs. The fair value election is irrevocable andgenerally made on an instrument-by-instrument basis, even if a company has similarinstruments that it elects not to measure based on fair value. At the adoptiondate, unrealized gains and losses on existing items for which fair value hasbeen elected are reported as a cumulative adjustment to beginning retainedearnings. Subsequent to the adoption of SFAS 159, changes in fair value arerecognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15,2007 and is required to be adopted by the Company in the first quarter offiscal 2009. The Company is currently determining whether fair value accountingis appropriate for any of its eligible items and cannot estimate the impact, ifany, which SFAS 159 will have on its consolidated results of operations andfinancial position.

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(2) Acquisitions**

***Fiscal 2007 Transactions***

In June 2007,the Company completed the acquisition of Universal Salvage plc (“Universal”)(the “Acquisition”). Universal, based in the UK, operates seven salvage yardsin the UK and is a leading service provider to the motor insurance and automotiveindustries. Universal specializes in the disposal of accident-damaged,End-of-Life and fee-based non-salvage vehicles. This Acquisition was completedbecause of its strategic fit with the North American business. The Acquisitionhas been accounted for using the purchase method in accordance with SFAS No. 141,*Business Combinations*, which hasresulted in the recognition of goodwill in the Company’s consolidated financialstatements. This goodwill arises because the purchase price for Universalreflects a number of factors including its future earnings and cash flowpotential; the multiple to earnings, cash flow and other factors at whichsimilar businesses have been purchased by other acquirers, the competitivenature of the process by which the Company acquired the business; and becauseof the complementary strategic fit and resulting synergies it brings toexisting operations.

In accordancewith SFAS No. 141, Universals’ net assets acquired and liabilities assumedhave been recorded at their fair value. The aggregate purchase price of £60.7million ($120.0 million based on currency exchange rates on June 14, 2007)was funded from the Company’s available cash resources. In addition, theCompany assumed liabilities of £18.7 million ($36.9 million), which includedoutstanding indebtedness of Universal totaling approximately £2.3 million ($4.5million).

83

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(2) Acquisitions (Continued)**

The accompanying consolidated financial statements reflect apreliminary allocation of the purchase price as of June 14, 2007, which issummarized as follows (in thousands):

| Tangible assets:                      |   |    |    |
|---------------------------------------|--------|---------|---------|
| Cash                                  |   | $       | 16      |   |
| Accounts  receivable                  |   | 9,834   |    |
| Inventories  and vehicle pooling cost |   | 7,914   |    |
| Property and  equipment               |   | 65,178  |    |
| Total  tangible assets                |   | 82,942  |    |
| Intangible assets:                    |   |    |    |
| Supply contracts                      |   | 21,240  |    |
| Tradename                             |   | 2,875   |    |
| Software                              |   | 1,691   |    |
| Licenses and  database                |   | 308     |    |
| Total  intangible assets              |   | 26,114  |    |
| Goodwill                              |   | 47,890  |    |
| Liabilities assumed:                  |   |    |    |
| Accounts  payable                     |   | (16,058 | )       |
| Current  maturities of long-term debt |   | (2,231  | )       |
| Long-term  debt                       |   | (2,296  | )       |
| Deferred tax  liability               |   | (16,031 | )       |
| Other                                 |   | (316    | )       |
| Total  liabilities assumed            |   | (36,932 | )       |
| Net assets acquired                   |   | $       | 120,014 |   |

 

The Company hasallocated approximately $26.1 million to identifiable intangible assets. Theintangible assets include finite lived supply contracts, tradenames,software,licenses and databases, which are being amortized over their estimated usefullives, ranging from one to ten years. Goodwill of $47.9 million recognized inthe Acquisition is not expected to be deductible for tax purposes. The Companyhas arranged to obtain additional information regarding certain assetvaluations. The Company believes the potential changes to its preliminarypurchase price allocation will not have a material impact on the Company’sconsolidated results of operations and financial position.

The Company hasincluded the operating results of Universal in its consolidated financialstatements from the date of acquisition.

84

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(2) Acquisitions (Continued)**

***Pro-formaFinancial Information***

The unaudited financial information in thetable below summarizes the combined results of operations of the Company andthe results of Universal prior to the Acquisition, on a pro forma basis, asthough the companies had been combined as of August 1, 2005 for eachperiod presented. Pro forma financial information for our other acquisitionshave not been presented, as the effects were not material to our historicalconsolidated financial statements either individually or in aggregate. The proforma financial information for all periods presented also includes thebusiness combination accounting effect on conforming Universal’s revenuerecognition policy to the Company’s, adjustments related to the fair value ofacquired inventory and fixed assets, amortization charges from acquiredintangible assets, and related tax effects of these adjustments. The followingpro forma financial information is presented for informational purposes onlyand is not indicative of the results of operations that would have beenachieved if the acquisition had taken place at the beginning of the earliestperiod presented, nor does it intend to be a projection of future results (unaudited, inthousands, except per share amounts):

| ** **                  | ** ** | **Years Ended July 31,** | ** ** |
|-----------------------------|------------|-----------------------------------------|------------|
| ** **                  | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| Total  revenues             |       | $                                       | 643,181    |   | $ | 621,501 |   |
| Operating  income           |       | $                                       | 204,930    |   | $ | 167,307 |   |
| Income before  income taxes |       | $                                       | 215,747    |   | $ | 169,546 |   |
| Net income                  |       | $                                       | 133,222    |   | $ | 94,612 |   |
| Earnings per  share         |       | $                                       | 1.47       |   | $ | 1.05 |   |
| Diluted earnings per share  |       | $                                       | 1.43       |   | $ | 1.02 |   |

 

***Fiscal 2006Transactions***

During fiscal 2006, the Company made the following three acquisitions:Auto Auction Associates of Montana, Inc., Heartland Insurance Pool, Inc.and Central Penn Sales, LLC. These three companies consisted of seven separatefacilities. The consideration paid for these acquisitions consisted of $23.0million in cash. The acquired net assets consisted of accounts and advancesreceivable, vehicle pooling costs, fixed assets, land, buildings, goodwill, andcovenants not to compete. The acquisitions were accounted for using thepurchase method of accounting, and the operating results subsequent to theacquisition dates are included in the Company’s consolidated statements ofincome. These new facilities contributed $6.9 million of revenues during fiscal2006. The excess of the purchase price over the fair market value of the netidentifiable assets acquired of $19.0 million has been recorded as goodwill.The Company estimates the entire goodwill balance relating to theseacquisitions will be deductible for tax purposes. In addition, the Company paid$1.3 million for covenants 

85

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(2) Acquisitions (Continued)**

not to compete relating to theseacquisitions, which are being amortized over five to seven years. Inconjunction with the Central Penn Sales acquisition, the Company entered intoleases for the use of these facilities at fair value.

***Fiscal 2005 Transactions***

During fiscal2005, the Company made the following two acquisitions: Kentucky Auto SalvagePool, Inc. (“KASP”) of Lexington, Kentucky and Insurance Auctions ofMissouri, Inc. of Columbia, Missouri. The consideration paid for theseacquisitions consisted of $4.5 million in cash. The acquired net assetsconsisted of accounts and advances receivable, vehicle pooling costs, fixedassets, land, buildings, goodwill, and covenants not to compete. Theacquisitions were accounted for using the purchase method of accounting, andthe operating results subsequent to the acquisition dates are included in theCompany’s consolidated statements of income. These new facilities contributed$0.7 million of revenues during fiscal 2005. The excess of the purchase priceover the fair market value of the net identifiable assets acquired of $3.7million has been recorded as goodwill. The Company estimates the entiregoodwill balance relating to these acquisitions will be deductible for taxpurposes. In addition, the Company paid $0.3 million for covenants not tocompete relating to these acquisitions, which are being amortized over five toseven years. In conjunction with the Lexington, Kentucky and Columbia,Missouri, acquisitions, the Company entered into leases for the use of thesefacilities at fair value.

Pro forma financial information for the fiscal 2006 and 2005acquisitions does not result in a significant change from actual results.

**(3) Discontinued Operations and Goodwill Impairment**

During fiscal2006, the Company adopted a formal plan to discontinue the operations of MotorsAuction Group (“MAG”) and dispose of or convert the related assets. The MAGyards to be converted into salvage facilities will continue to be included inthe results of continuing operations on the income statements.

UnderSFAS No. 142, Goodwill and Other Intangible Assets, goodwill issubject to at least an annual assessment for impairment by applying a fairvalue-based test or on an interim basis if certain indicators are present. Thediscontinuation of an operating segment is one of those indicators.Accordingly, goodwill was tested for impairment in accordance with theprovisions of SFAS No. 142 during the second quarter of 2006. TheCompany used a combination of valuation techniques, which includedconsideration of market-based approaches and an income approach, in determiningthe fair value of the Company’s applicable reporting unit in the interimimpairment test of goodwill.

86

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(3) Discontinued Operations and GoodwillImpairment (Continued)**

The impairmenttest indicated that the carrying value of the MAG goodwill exceeded its impliedfair value. The corresponding write-down of goodwill of $21.8 million to itsfair value was reported as a component of discontinued operations in theaccompanying consolidated statements of income. The Company also determinedthat the value of the remaining MAG covenants not to compete was impaired andrecorded an impairment charge in the amount of $0.5 million. This write-down ofcovenants not to compete is also reported as a component of discontinuedoperations in the accompanying consolidated statements of income.

During thesecond quarter of fiscal 2006, the Company sold the business and related assetsof one of the MAG locations for approximately $0.1 million. During the thirdquarter, the Company sold the business and related assets including the realestate of one of the MAG locations. The Company received a $12 millionpromissory note from the buyer as purchase consideration. The promissory noteis reflected in land purchase options and other assets at its net present valuein the accompanying consolidated balance sheet at July 31, 2007 and 2006.The promissory note bears interest at 7% per annum. Interest only payments onthe note are due monthly until maturity on May 28, 2011, at which time thebalance of the note is due in full. The note receivable is collateralized bythe real estate and is personally guaranteed by the buyer. The buyer is incompliance with the terms of the promissory note and the Company believes thenote amount is fully recoverable. The consideration was allocated to the realestate, based on an appraisal, and to the business in proportion to theirestimated fair values. The portion of the consideration allocated to the realestate sale totaled $7.1 million. The Company deferred a gain on the sale ofthe real estate of approximately $2.5 million that will be recognized uponpayment of the principal balance of the note receivable. The remainingconsideration of $4.9 million is allocated to the sale of the business. TheCompany recognized a gain on the sale of the business of approximately $3.0million, which is included in the results of the discontinued operations.During the fourth quarter of fiscal 2006, the Company sold the remainder of thebusiness and related assets excluding the real estate of another MAG location.The Company received a $1.2 million promissory note and $0.2 million in cashfrom the buyer as purchase consideration. The buyer is in compliance with theterms of the promissory note and the Company believes the note amount is fullyrecoverable. The promissory note is reflected in land purchase options andother assets at its net present value in the accompanying consolidated balancesheet at July 31, 2007 and 2006. The Company recognized a gain on the saleof the business of approximately $1.3 million, which is included in the resultsof discontinued operations. As of July 31, 2006, no MAG locationsremained. Three of the original six MAG locations were sold and three wereconverted into salvage facilities.

87

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(3) Discontinued Operations and GoodwillImpairment (Continued)**

Summarized results of operations for MAG is set forth below (inthousands): 

| ** **                                      | ** ** | **Years Ended July 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|
| ** **                                      | ** ** | **2007**                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues                                        |       |                     | $          | — |   |   | $ | 6,351 |   | $ | 9,380 |   |
| Income (loss)  before income taxes              |       |                     | —     |   |   | (17,950 | ) | 474 |   |
| Income tax  (expense) benefit                   |       |                     | —     |   |   | 2,237 |   | (181 | ) |
| Net income (loss) from discontinued  operations |       |                     | $          | — |   |   | $ | (15,713 | ) | $ | 293 |   |

 

The net carrying values of the assets that were sold, and the relatedgoodwill and other intangibles that were impaired, during fiscal 2006 totaledapproximately $28.7 million as of July 31, 2005. This balance consisted ofapproximately $23.1 million of goodwill, $5.0 million of property and equipmentand $0.6 million of intangibles.

**(4) Short-term Investments**

Short-term investments consist of thefollowing (in thousands):

| ** **                     | ** ** | **July 31,** | ** ** |
|--------------------------------|------------|-------------------|------------|
| ** **                     | ** ** | **2007**          | ** ** | **2006** | ** ** |
| Available-for-sale securities: |       |              |       |   |   |
| Auction rate  securities       |       | $                 | 102,625    |   | $ | 148,725 |   |
|                           |       | $                 | 102,625    |   | $ | 148,725 |   |

 

**(5) Accounts Receivable, Net**

Accounts receivable consists of the following(in thousands):

| ** **                            | ** ** | **July 31,** | ** ** |
|---------------------------------------|------------|-------------------|------------|
| ** **                            | ** ** | **2007**          | ** ** | **2006** | ** ** |
| Advance  charges receivable           |       | $                 | 72,628     |   | $ | 66,704 |   |
| Trade  accounts receivable            |       | 37,891            |       | 33,454 |   |
| Other  receivables                    |       | 1,627             |       | 1,621 |   |
|                                  |       | 112,146           |       | 101,779 |   |
| Less  allowance for doubtful accounts |       | (2,251            | )          | (1,820 | ) |
|                                  |       | $                 | 109,895    |   | $ | 99,959 |   |

 

88

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(5) Accounts Receivable, Net(Continued)**

Advance chargesreceivable represents amounts paid to third parties on behalf of insurancecompanies for which the Company will be reimbursed when the vehicle is sold.Trade accounts receivable includes fees and gross proceeds to be collected frominsurance companies and buyers.

The movements in the allowance for doubtfulaccounts is as follows (in thousands):

| **Description and Fiscal Year** | ** ** | ** ** | ** ** | **Balance at  Beginning of Year** | ** ** | **Charged to Costs  And Expenses** | ** ** | **Deductions  Applications to  Bad Debt** | ** ** | **Balance at  End of Year** | ** ** |
|------------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|---------------------------------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------|------------|
| Allowance for doubtful accounts:               |       |       |       |                                             |       |                                              |       |                                                |       |                                       |       |   |   |   |   |   |   |
| July 31,  2007                            |       |       | $          | 1,820                                            |       |                                              |       | $                                                   | 2,097      |                                       |       |   | $ | (1,666 | ) |   |   | $ | 2,251 |   |   |
| July 31,  2006                            |       |       | $          | 1,272                                            |       |                                              |       | $                                                   | 1,555      |                                       |       |   | $ | (1,007 | ) |   |   | $ | 1,820 |   |   |
| July 31, 2005                             |       |       | $          | 1,789                                            |       |                                              |       | $                                                   | 247        |                                       |       |   | $ | (764 | ) |   |   | $ | 1,272 |   |   |

 

**(6) Property and Equipment, Net**

Property and equipment consists of thefollowing (in thousands):

| ** **                                      | ** ** | **July 31,** | ** ** |
|-------------------------------------------------|------------|-------------------|------------|
| ** **                                      | ** ** | **2007**          | ** ** | **2006** | ** ** |
| Transportation  and other equipment             |       | $                 | 23,847     |   | $ | 17,059 |   |
| Office  furniture and equipment                 |       | 44,534            |       | 38,734 |   |
| Land                                            |       | 218,144           |       | 155,323 |   |
| Buildings and  leasehold improvements           |       | 296,860           |       | 263,707 |   |
|                                            |       | 583,385           |       | 474,823 |   |
| Less  accumulated depreciation and amortization |       | (162,721          | )          | (132,880 | ) |
|                                            |       | $                 | 420,664    |   | $ | 341,943 |   |

 

Depreciationexpense on property and equipment was approximately $35.0 million, $30.8million and $29.5 million for the fiscal years ended July 31, 2007, 2006and 2005 respectively.

89

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(7) Goodwill**

The change in carrying amount of goodwill isas follows (in thousands):

| Balance as of  July 31, 2005                                            |   | $       | 116,375 |   |
|------------------------------------------------------------------------------|--------|---------|---------|--------|
| Goodwill  relating to acquisitions during the period                         |   | 19,015  |    |
| Goodwill  impairment included in loss from discontinued operations           |   | (21,800 | )       |
| Divestitures                                                                 |   | (1,299  | )       |
| Balance as of  July 31, 2006                                            |   | 112,291 |    |
| Goodwill  relating to Universal acquisition during the period (refer Note 2) |   | 49,354  |    |
| Balance as of July 31, 2007                                             |   | $       | 161,645 |   |

 

In accordance with the guidance in SFAS No. 142, goodwill isnot amortized. Instead, it is tested for impairment on an annual basis or morefrequently upon the occurrence of circumstances that indicate that goodwill maybe impaired. The Company’s annual impairment tests were performed in the fourthquarter of fiscal 2007 and 2006. The annual results of these tests indicatedthat goodwill was not impaired. The assessment measured the amount by which thecarrying amount of goodwill exceeded the market value of the Company’s solereporting unit. Refer to Note 3, for additional discussion related to theimpairment of goodwill from discontinued operations recognized during fiscal2006. As of July 31, 2007, the aggregate amount of goodwill impairmentlosses recognized totaled $21.8 million

**(8) Intangibles, Net**

Intangible assets consists of the following(in thousands, except remaining useful life): 

| ** **                   | ** ** | **July 31 , 2007** | ** ** | ** **                        | ** ** |
|------------------------------|------------|-----------------------------------|------------|-----------------------------------|------------|
| ** **                   | ** ** | **Gross  carrying  Amount**       | ** ** | **Accumulated**

**amortization** | ** ** | **Weighted  Average  Remaining  Useful Life  (in years)** | ** ** |
| Amortized intangible assets: |       |                              |       |                              |       |   |   |   |   |   |   |
| Covenants not  to compete    |       | $                                 | 10,071     |                              |       | $ | (8,887 | ) |   |   | 3 |   |   |
| Supply  contracts            |       | 21,889                            |       |                              | (421       | ) |   |   | 6 |   |   |
| Tradename                    |       | 2,964                             |       |                              | (35        | ) |   |   | 10 |   |   |
| Software                     |       | 1,780                             |       |                              | (202       | ) |   |   | 1 |   |   |
| Licenses and  databases      |       | 318                               |       |                              | (35        | ) |   |   | 1 |   |   |
|                         |       | $                                 | 37,022     |                              |       | $ | (9,580 | ) |   |   |   |   |   |

 

90

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(8) Intangibles, Net(Continued)**

| ** **                   | ** ** | **July 31 , 2006** | ** ** | ** **                    | ** ** |
|------------------------------|------------|-----------------------------------|------------|-------------------------------|------------|
| ** **                   | ** ** | **Gross carrying  Amount**   | ** ** | **Accumulated  amortization** | ** ** | **Weighted  Average  Remaining  Useful Life  (in years)** | ** ** |
| Amortized intangible assets: |       |                              |       |                          |       |   |   |   |   |   |   |   |   |
| Covenants not  to compete    |       |                              | $          | 10,071                        |       |   |   | $ | (8,197 | ) |   |   | 3 |   |   |
|                         |       |                              | $          | 10,071                        |       |   |   | $ | (8,197 | ) |   |   |   |   |   |

 

Aggregate amortization expense on intangibleassets was approximately $1.4 million, $0.7 million and $1.0 million for thefiscal years ended July 31, 2007, 2006, and 2005, respectively. Intangibleamortization expense for the next five fiscal years based upon July 31,2007 intangible assets is expected to be as follows (in thousands):

| 2008 |   | $     | 6,218  |   |
|------|--------|-------|--------|--------|
| 2009 |   | 4,287 |   |
| 2010 |   | 4,250 |   |
| 2011 |   | 4,063 |   |
| 2012 |   | 3,970 |   |

 

**(9) AccountsPayable and Accrued Liabilities**

Accounts payable and accrued liabilitiesconsist of the following (in thousands):

| ** **                               | ** ** | **July 31,** | ** ** |
|------------------------------------------|------------|-------------------|------------|
| ** **                               | ** ** | **2007**          | ** ** | **2006** | ** ** |
| Trade  accounts payable                  |       | $                 | 13,392     |   | $ | 8,716 |   |
| Accounts  payable to insurance companies |       | 39,421            |       | 28,748 |   |
| Accrued  insurance                       |       | 4,312             |       | 3,235 |   |
| Accrued  compensation and benefits       |       | 16,824            |       | 13,697 |   |
| Other accrued  liabilities               |       | 11,133            |       | 6,374 |   |
|                                     |       | $                 | 85,082     |   | $ | 60,770 |   |

 

The Company is partially self-insured for certain losses related togeneral liability, workers’ compensation and auto liability. Accrued insuranceliability represents an estimate of the ultimate cost of claims incurred as of 

91

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(9) Accounts Payable and Accrued Liabilities(Continued)**

the balance sheet date. The estimatedliability is not discounted and is established based upon analysis ofhistorical data, including the severity of our frequency of claims, actuarialestimates and is reviewed periodically by management to ensure that theliability is appropriate.

**(10) Long-Term Debt**

On February 23,2001, the Company entered into a credit facility with its existing bankingsyndicate. The facility provided by Wells Fargo Bank, Fleet National Bank andU.S. Bank National Association consisted of an unsecured revolving reducingline of credit in the amount of approximately $10.6 million. On May 8,2006, the line of credit was reduced to zero and the line of credit wasterminated in accordance with its terms.

On November 13, 2006, Universal, our wholly owned subsidiarypurchased on June 14, 2007, entered into three credit facilities withNational Westminster Bank Plc. The first facility provides approximately $8.0million in overdraft protection and working capital. The second and thirdfacilities of approximately $6.0 and $10.0 million, respectively, provideliquidity for acquisitions and investments. Each of these facilities carries aninterest rate of the bank’s index, which was 5.75% at July 31, 2007, plus..75% and is collateralize by real property. At July 31, 2007, there wereno amounts borrowed under these facilities.

**(11) Shareholders’ Equity**

*General*

The Company has authorized the issuance of 180 million shares of commonstock, no par value, of which approximately 88,333,677 shares are issued andoutstanding at July 31, 2007. As of July 31, 2007 and 2006, theCompany has reserved 1,337,337 and 1,515,883 shares of common stock, respectivelyfor the issuance of options granted under the company’s stock option plans and982,626 and 1,049,360 shares of common stock, respectively for the issuance ofshares under the Copart, Inc. Employee Stock Purchase Plan (“ESPP”). TheCompany has authorized the issuance of 5 million shares of preferred stock, nopar value, none of which are issued or outstanding at July 31, 2007.

*Stock Repurchase*

In February 2003, the Company’s Board of Directors authorized theCompany to repurchase up to 9 million shares of its common stock. Therepurchases may be effected through solicited or unsolicited transactions inthe open market or in privately negotiated transactions. No time limit has beenplaced on the duration of the share repurchase program. The repurchases will bemade at such times and in such amounts as the Company deems appropriate and maybe discontinued at any time. For the year ended July 31, 2007, the Company

92

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(11) Shareholders’ Equity(Continued)**

repurchased 2,995,405 shares at a weightedaverage price of $29.91. For the year ended July 31, 2006, the Companyrepurchased 366,000 shares at a weighted average price of $24.24. For the yearended July 31, 2005, the Company did not repurchase any shares. The totalnumber of shares repurchased under the program as of July 31, 2007 was7,033,705, leaving 1,966,295 million available under the repurchase program.

*Employee Stock Purchase Plan*

The ESPP provides for the purchase of up to an aggregate of 2.5 millionshares of common stock of the Company by employees pursuant to the terms of theESPP. The Company’s ESPP was adopted by the Board of Directors and approved bythe shareholders in 1994. The ESPP was amended and restated in 2003 and againapproved by the shareholders. Under the ESPP, employees of the Company whoelect to participate have the right to purchase common stock at a15 percent discount from the lower of the market value of the common stockat the beginning or the end of each six month offering period. The ESPP permitsan enrolled employee to make contributions to purchase shares of common stockby having withheld from their salary an amount up to 10 percent of theircompensation (which amount may be increased from time to time by the Companybut may not exceed 15% of compensation). No employee may purchase more than$25,000 worth of common stock (calculated at the time the purchase right isgranted) in any calendar year. The Compensation Committee of the Board ofDirectors administers the ESPP. The number of shares of common stock issuedpursuant to the ESPP during each of fiscal 2007, 2006 and 2005 was 66,734,83,765 and 68,633, respectively. As of July 31, 2007, 1,517,375 shares ofcommon stock have been issued pursuant to the ESPP and 982,626 shares remainavailable for purchase under the ESPP.

*Stock Options*

In December 2001,the Company adopted the Copart, Inc. 2001 Stock Option Plan (“Plan”),presently covering an aggregate of 4.5 million shares of the Company’s commonstock. The Plan provides for the grant of incentive stock options to employeesand non-qualified stock options to employees, officers, directors andconsultants at prices not less than 100% and 85% of the fair market value forincentive and non-qualified stock options, respectively, as determined by theBoard of Directors at the grant date. Incentive and non-qualified stock optionsmay have terms of up to ten years and vest over periods determined by the Boardof Directors. Options generally vest ratably over a five-year period. The Planreplaced the Company’s 1992 Stock Option Plan (“1992 Plan”), which expired in August 2002.At July 31, 2007, 1,337,337 shares were available for future grant underthe Plan.

93

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(11) Shareholders’ Equity (Continued)**

The following table sets forth stock-based compensation expenseincluded in the Company’s Consolidated Statements of Income (in thousands):

| ** **                 | ** ** | **Years Ended July 31,** | ** ** |
|----------------------------|------------|--------------------------|------------|
| ** **                 | ** ** | **2007**                 | ** ** | **2006** | ** ** | **2005** | ** ** |
| Yard  operations           |       | $                        | 910        |   | $ | 700 |   | $ | 125 |   |
| General and administrative |       | 2,572                    |       | 1,600 |   | 286 |   |
|                            |            |                          |            |  |  |  |  |  |  |  |

 

There were no compensation costs capitalizedas part of the cost of an asset as of July 31, 2007 and 2006.

A summary of the status of the Company’snon-vested shares as of July 31, 2007 and changes during fiscal 2007 is asfollows:

| ** **                               | ** ** | **Number of  Shares  (000’s)** | ** ** | **Weighted  average Grant—  date Fair Value** | ** ** |
|------------------------------------------|------------|------------------------------------------|------------|-------------------------------------------------------------------|------------|
| Non-vested  shares at July 31, 2006 |       |                                     | 1,615      |                                                              |       |   | $ | 7.46 |   |   |
| Grants of  options                       |       |                                     | 216        |                                                              |       |   | $ | 10.17 |   |   |
| Vested                                   |       |                                     | (715       | )                                                                 |       |   | $ | 6.39 |   |   |
| Forfeitures  or expirations              |       |                                     | (40        | )                                                                 |       |   | $ | 9.93 |   |   |
| Non-vested shares at July 31, 2007  |       |                                     | 1,076      |                                                              |       |   | $ | 8.54 |   |   |

 

Option activity for the year ended July 31,2007 is summarized as follows:

| ** **                                         | ** ** | **Shares**         | ** ** | **Weighted-  average  Exercise Price** | ** ** | **Weighted-average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|----------------------------------------------------|------------|--------------------|------------|---------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                         | ** ** | **(in 000s)** | ** ** | ** **                                  | ** ** | ** **                                             | ** ** | **(in 000s)**              | ** ** |
| Outstanding  at July 31, 2006                 |       |               | 5,874      |                                        |       |                                                   | $          | 12.75                           |       |   |   | — |   |   |   | — |   |   |
| Grants of  options                                 |       |               | 216        |                                        |       |                                                   | $          | 28.64                           |       |   |   | — |   |   |   | — |   |   |
| Exercises                                          |       |               | (824       | )                                           |       |                                                   | $          | 13.40                           |       |   |   | — |   |   |   | — |   |   |
| Forfeitures  or expirations                        |       |               | (40        | )                                           |       |                                                   | $          | 24.30                           |       |   |   | — |   |   |   | — |   |   |
| Outstanding  at July 31, 2007                 |       |               | 5,226      |                                        |       |                                                   | $          | 13.20                           |       |   |   | 4.50 |   |   |   | $ | 78,260 |   |   |
| Exercisable  at July 31, 2007                 |       |               | 4,150      |                                        |       |                                                   | $          | 10.96                           |       |   |   | 3.65 |   |   |   | $ | 71,331 |   |   |
| Vested and expected to vest at  July 31, 2007 |       |               | 4,907      |                                        |       |                                                   | $          | 13.03                           |       |   |   | 4.45 |   |   |   | $ | 74,126 |   |   |

 

94

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(11) Shareholders’ Equity (Continued)**

As required bySFAS 123(R), the Company made an estimate of expected forfeitures and isrecognizing compensation cost only for those equity awards expected to vest.

The aggregateintrinsic value in the table above represents the total pretax intrinsic value(i.e., the difference between the Company’s closing stock price on the lasttrading day of the year ended July 31, 2007 and the exercise price, timesthe number of shares) that would have been received by the option holders hadall option holders exercised their options on July 31, 2007. The aggregateintrinsic value of options exercised was approximately $12.1 million, $4.9million and $2.9 million in the fiscal years ended July 31, 2007, 2006 and2005, respectively and represents the difference between the exercise price ofthe option and the estimated fair value of the Company’s common stock on thedates exercised. As of July 31, 2007, the total compensation cost relatedto non-vested stock-based awards granted to employees under the Company’s stockoption plans but not yet recognized was $7.1 million, net of estimatedforfeitures. This cost will be amortized on straight-line basis over a weightedaverage term of 2.55 years and will be adjusted for subsequent changes inestimated forfeitures. The fair value of options vested in fiscal 2007, 2006and 2005 is $4.4 million, $2.2 million and $2.3 million, respectively.

A summary of stock options outstanding andexercisable at July 31, 2007 follows:

| ** **                                  | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                             | ** ** |
|---------------------------------------------|------------|------------------------------|------------|----------------------------------------------------------|------------|
| **Range of Exercise Prices** | ** ** | ** **                   | ** ** | **Number  Outstanding at  July 31, 2007** | ** ** | **Weighted-  Average  Remaining  Contractual  Life** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** | **Number  Exercisable  at July 31,  2007** | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| ** **                                  | ** ** | **(in 000s)**           | ** ** | ** **                                               | ** ** | ** ** | ** ** | **(in 000s)** | ** ** | ** ** | ** ** |
| $2.90 -  $4.47                              |       |                         | 1,500      | ** **                                               |       |   | 1.08 | ** ** |   |   | $ | 3.54 | ** ** |   |   | 1,500 | ** ** |   |   | $ | 3.54 | ** ** |   |
| $7.75 -$10.99                               |       |                         | 815        | ** **                                               |       |   | 5.69 | ** ** |   |   | $ | 9.78 | ** ** |   |   | 672 | ** ** |   |   | $ | 9.89 | ** ** |   |
| $11.02 -$16.93                              |       |                         | 1,211      | ** **                                               |       |   | 3.44 | ** ** |   |   | $ | 14.18 | ** ** |   |   | 1,201 | ** ** |   |   | $ | 14.19 | ** ** |   |
| $17.16 -  $29.89                            |       |                         | 1,700      | ** **                                               |       |   | 7.70 | ** ** |   |   | $ | 22.68 | ** ** |   |   | 777 | ** ** |   |   | $ | 21.21 | ** ** |   |
|                                        |       |                         | 5,226      | ** **                                               |       |   | 4.50 | ** ** |   |   | $ | 13.20 | ** ** |   |   | 4,150 | ** ** |   |   | $ | 10.96 | ** ** |   |
|                                             |            |                              |            |                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On March 6,2003, the Company’s Board of Directors declared a dividend of one right (a “Right”)to purchase one-thousandth share of the Company’s Series A ParticipatingPreferred Stock for each outstanding share of Common Stock of the Company. EachRight entitles the registered holder to purchase from the Company oneone-thousandth of a share of Series A Preferred Stock at an exercise priceof $120.48.

95

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(11) Shareholders’ Equity (Continued)**

In general, subject to certain limited exceptions, the Rights becomeexercisable when a person or group acquires 15% or more of the Company’s commonstock or a tender offer or exchange offer for 15% or more of the Company’scommon stock is announced or commenced. After any such event, the Company’sother stockholders may purchase an additional $120.48 worth of additionalshares of the Company’s common stock at 50% of the then-current market price.The Rights will cause substantial dilution to a person or group that attemptsto acquire us on terms not approved by the Company’s Board of Directors. TheRights may be redeemed by the Company at $0.001 per Right at any time beforeany person or group acquires 15% or more of our outstanding common stock.

**(12) Income Taxes**

Income (loss) from continuing operationsbefore taxes consists of the following (in thousands):

| ** **                | ** ** | **Years ended July 31** | ** ** |
|---------------------------|------------|----------------------------------------|------------|
| ** **                | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| U.S.                      |       | $                                      | 215,538    |   | $ | 174,636 |   | $ | 165,073 |   |
| Non U.S.                  |       | 1,883                                  |       | (114 | ) | (478 | ) |
| Total income before taxes |       | $                                      | 217,421    |   | $ | 174,522 |   | $ | 164,595 |   |

 

The Company’s income tax expense (benefit)from continuing operations consists of (in thousands):

| ** ** | ** ** | **Years Ended July 31,** | ** ** |
|------------|------------|-----------------------------------------|------------|
| ** ** | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Federal:   |       |                                    |       |   |   |   |   |
| Current    |       | $                                       | 79,760     |   | $ | 62,754 |   | $ | 59,242 |   |
| Deferred   |       | (6,202                                  | )          | (4,264 | ) | (5,233 | ) |
| ** ** |       | 73,558                                  |       | 58,490 |   | 54,009 |   |
| State:     |       |                                    |       |   |   |   |   |
| Current    |       | 7,430                                   |       | 3,895 |   | 9,290 |   |
| Deferred   |       | (418                                    | )          | (523 | ) | (527 | ) |
| ** ** |       | 7,012                                   |       | 3,372 |   | 8,763 |   |
| Foreign:   |       |                                    |       |   |   |   |   |
| Current    |       | 2,331                                   |       | — |   | — |   |
| Deferred   |       | (1,818                                  | )          | — |   | — |   |
| ** ** |       | 513                                     |       | — |   | — |   |
| ** ** |       | $                                       | 81,083     |   | $ | 61,862 |   | $ | 62,772 |   |

 

96

----

**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(12) Income Taxes (Continued)**

A reconciliation by year of the expected U.S. statutory tax rate (35%of income before income taxes) to the actual effective income tax rate is asfollows:

| ** **                                             | ** ** | **Years Ended July 31,** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Federal  statutory rate                                |       |                                    | 35.0       | % |   |   | 35.0 | % |   |   | 35.0 | % |   |
| State income  taxes, net of federal income tax benefit |       |                                    | 3.3        |   |   |   | 1.9 |   |   |   | 3.5 |   |   |
| Compensation  and fringe benefits                      |       |                                    | 0.2        |   |   |   | 0.3 |   |   |   | 0.2 |   |   |
| Other  differences                                     |       |                                    | (1.2       | ) |   |   | (1.8 | ) |   |   | (0.6 | ) |   |
| Effective tax rate                                     |       |                                    | 37.3       | % |   |   | 35.4 | % |   |   | 38.1 | % |   |

 

The tax effects of temporary differences that give rise to significantportions of the deferred tax assets and deferred tax liabilities are presentedbelow, (in thousands):

| ** **                            | ** ** | **Years Ended July 31,** | ** ** |
|---------------------------------------|------------|-----------------------------------------|------------|
| ** **                            | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| Deferred tax assets:                  |       |                                    |       |   |   |
| Allowance for  doubtful accounts      |       | $                                       | 847        |   | $ | 691 |   |
| Accrued  compensation and benefits    |       | 2,149                                   |       | 1,444 |   |
| State taxes                           |       | 1,868                                   |       | 42 |   |
| Accrued other                         |       | 1,831                                   |       | 789 |   |
| Deferred  revenue                     |       | 1,847                                   |       | 1,852 |   |
| Property and  equipment               |       | 13,466                                  |       | 16,431 |   |
| State net  operating losses           |       | 819                                     |       | 378 |   |
| Foreign net  operating loss           |       | 351                                     |       | 455 |   |
| Total gross  deferred tax assets      |       | 23,178                                  |       | 22,082 |   |
| Less  valuation allowance             |       | (959                                    | )          | (786 | ) |
| Net deferred  tax assets              |       | 22,219                                  |       | 21,296 |   |
| Deferred tax liabilities:             |       |                                    |       |   |   |
| Vehicle  pooling costs                |       | (9,715                                  | )          | (10,694 | ) |
| Prepaid  insurance                    |       | (617                                    | )          | (645 | ) |
| Intangibles  and goodwill             |       | (21,319                                 | )          | (12,011 | ) |
| Total gross  deferred tax liabilities |       | (31,651                                 | )          | (23,350 | ) |
| Net deferred tax liability            |       | $                                       | (9,432     | ) | $ | (2,054 | ) |

 

97

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(12) Income Taxes (Continued)**

The above net deferred tax liability has been reflected in theaccompanying balance sheets as follows (in thousands):

| ** **                                      | ** ** | **July 31,** | ** ** |
|-------------------------------------------------|------------|--------------|------------|
| ** **                                      | ** ** | **2007**     | ** ** | **2006** | ** ** |
| North America  current liabilities              |       | $            | 3,219      |   | $ | 7,191 |   |
| North America  non-current liabilities (assets) |       | (7,785       | )          | (5,137 | ) |
| UK  non-current liabilities                     |       | 13,998       |       | — |   |
| Net deferred tax liability                      |       | $            | 9,432      |   | $ | 2,054 |   |

 

The Company’sability to realize deferred tax assets is dependent on its ability to generatefuture taxable income. Accordingly, the Company has established a valuationallowance in taxable jurisdictions where the utilization of the tax assets areuncertain. Additional timing differences or future tax losses may occur whichcould warrant a need for establishing additional valuation allowances againstcertain deferred tax assets.

The Company isunder routine income tax audits in two states for tax years between 2001 and2005. Management believes that adequate amounts have been provided for anyadjustments that may ultimately result from these examinations.

In fiscal 2007,2006 and 2005, the Company recognized a tax benefit of approximately $3.8million, $2.3 million and $1.1 million, respectively, upon the exercise ofcertain stock options which is reflected in shareholders’ equity.

The valuationallowance for the years ended July 31, 2007 and 2006 was approximately$1.0 million and $0.8 million, respectively, which is a net increase of $0.2million.

The Company hasa Canadian net operating loss of approximately $1.0 million, most of whichexpires between 2011 and 2014. In addition, the Company also has various statenet operating losses of $15.0 million, which expire between 2017 and 2027.

The Company has not provided US federal income and foreign withholdingtaxes from undistributed earnings of its foreign operations, includingUniversal, because it plans to permanently reinvest the earnings of its foreignoperations as of July 31, 2007. If these earnings were distributed, foreign taxcredits may become available under current law to reduce or eliminate theresultant US income tax liability.

98

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(13) Net Income Per Share**

The table below reconciles weighted averageshares outstanding to weighted average shares and dilutive potential shareoutstanding (in thousands):

| ** **                                          | ** ** | **Years Ended July 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| Weighted  average common shares outstanding         |       | 90,651                                  |       | 90,372 |   | 90,162 |   |
| Effect of  dilutive securities-stock options        |       | 2,804                                   |       | 2,553 |   | 2,822 |   |
| Diluted weighted average common shares  outstanding |       | 93,455                                  |       | 92,925 |   | 92,984 |   |

 

There were no adjustments to net income required in calculating dilutednet income per share. Options to purchase approximately 110,000, 42,000 and82,500 shares of our common stock at an average price of $29.76, $27.22 and$24.14 per share were outstanding at July 31, 2007, 2006 and 2005,respectively, but were not included in the computation of diluted net incomeper share because the exercise price of the options was greater than theaverage market price of the common shares.

**(14) Segments and Other Geographic Information**

Operatingsegments are defined as components of a business about which separate financialinformation is available that is evaluated regularly by the chief operatingdecision maker with respect to the allocation of resources and performance. TheCompany considers itself to operate in a single operating segment, specificallyproviding vehicle suppliers, primarily insurance companies, with a full rangeof services to process and sell salvage vehicles, primarily over the Internetthrough the Company’s Virtual Bidding Second Generation (“VB2”) Internet auction-style salestechnology.

The following geographic data is provided in accordance with SFAS No. 131.Revenues are based upon the geographic location of the selling facility and aresummarized in the following table (in thousands):

| ** **      | ** ** | **Years Ended July 31,** | ** ** |
|-----------------|------------|-----------------------------------------|------------|
| ** **      | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| United States   |       | $                                       | 541,801    |   | $ | 526,456 |   | $ | 446,930 |   |
| Canada          |       | 4,060                                   |       | 2,115 |   | 801 |   |
| North America   |       | 545,861                                 |       | 528,571 |   | 447,731 |   |
| United  Kingdom |       | 14,819                                  |       | — |   | — |   |
|            |       | $                                       | 560,680    |   | $ | 528,571 |   | $ | 447,731 |   |

 

99

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(14) Segments and Other GeographicInformation (Continued)**

Long-Lived assets based upon geographiclocation are summarized in the following table (in thousands):

| ** **      | ** ** | **July 31,** | ** ** |
|-----------------|------------|--------------|------------|
| ** **      | ** ** | **2007**     | ** ** | **2006** | ** ** |
| United States   |       | $            | 512,346    |   | $ | 479,854 |   |
| Canada          |       | 5,661        |       | 3,501 |   |
| North America   |       | 518,007      |       | 483,355 |   |
| United  Kingdom |       | 132,885      |       | — |   |
|            |       | $            | 650,892    |   | $ | 483,355 |   |

 

**(15) Commitments and Contingencies**

***Leases***

The Companyleases certain domestic and foreign facilities and certain equipment undernoncancelable operating leases. In addition to the minimum future leasecommitments presented below, the leases generally require the Company to payproperty taxes, insurance, maintenance and repair costs. Certain leases providethe Company with either a right of first refusal to acquire or an option topurchase a facility at fair value. Certain leases also contain escalationclauses and renewal option clauses calling for increased rents. Where a leasecontains an escalation clause or a concession such as a rent holiday, rentexpense is recognized on a straight-line basis over the lease term inaccordance with FASB Technical Bulletin 85-3 *Accounting for Operating Leases with Scheduled Rent Increases.*

At July 31, 2007, Future minimum lease commitments undernoncancelable operating leases with initial or remaining lease terms in excessof one year are as follows (in thousands):

| **Years Ending July 31,** | ** ** | ** ** | ** ** | **Operating  Leases** | ** ** |
|------------------------------------------|------------|------------|------------|-----------------------|------------|
| 2008                                     |       | $          | 20,330     |                  |
| 2009                                     |       | 17,936     |       |
| 2010                                     |       | 16,270     |       |
| 2011                                     |       | 14,165     |       |
| 2012                                     |       | 11,766     |       |
| Thereafter                               |       | 37,898     |       |
|                                     |       | $          | 118,365    |                  |

 

100

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(15) Commitments and Contingencies(Continued)**

Facilities rental expense for the fiscal years ended July 31,2007, 2006 and 2005 aggregated approximately $16.7 million, $18.0 million and$17.2 million, respectively. Yard operations equipment rental expense for thefiscal years ended July 31, 2007, 2006 and 2005 aggregated approximately$4.6 million, $4.4 million and $4.0 million, respectively.

***Commitments***

*Letters of Credit*

The Company had outstanding letters of credit of $11.8 million at July 31,2007. These letters of credit secure certain insurance obligations.

*Purchase Commitments*

The Company has obligations under certain UK seller contracts for the purchaseof vehicles at pre-determined prices, which typically are based upon apercentage of the pre-accident value, as defined in the contracts.

***Contingencies***

*Legal Matters*

The Company isinvolved in litigation and damage claims arising in the ordinary course ofbusiness, such as actions related to injuries, property damage, and thehandling or disposal of vehicles. Legal fees and other costs associated withsuch actions are expensed as incurred and were not material in any periodreported. In addition, the Company assesses, in conjunction with its legalcounsel, the need to record a liability for litigation and contingencies. TheCompany reserves for costs relating to these matters when a loss is probableand the amount can be reasonably estimated. The Company believes that theultimate disposition of these matters will not have a material effect on itsfinancial position, results of operations or cash flows. However, the amount offuture reserves required associated with these claims, if any, cannot bedetermined with certainty. This litigation includes the following matters:

On September 16,2005, Richard M. Gray filed suit against Copart of Connecticut, Inc. andA. Safrin, in the State Court for the County of Chatham, State of Georgia,alleging a class action for unreasonable amounts claimed for storage liens bythe Company, and related claims. Relief sought includes class certification, 

101

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(15) Commitments and Contingencies(Continued)**

damages, fees, costs and expenses. The Company’s motion for summaryjudgment was heard on January 31, 2007 and was denied. The Companybelieves the claim is without merit, and is defending the lawsuit vigorously.

On July 28,2006, Foreign Car Sales and Service LLC (“FCS”) filed suit against Copart inthe United States District Court for the Middle District of Louisiana,originally alleging antitrust violations and unfair trade practices. Reliefsought originally included class certification based on both unfair tradepractices and Sherman Act violations, damages, fees, costs and expenses. On January 5,2007, the Magistrate required FCS to amend its complaint. A First AmendedComplaint was rejected, and a Second Amended Complaint was submitted February 16,2007, in which FCS abandoned its unfair trade practices claims, and now reliessimply on breach of contract claims. FCS continues to seek certificationof a class based upon violations of the Sherman Act. Plaintiff is in *pro se* and is demanding a total awardof  51% of Copart’s issued stock, as wellas approximately $97,000 in damages arising from damages to vehicles. TheCompany filed a motion to dismiss based on lack of subject matter jurisdiction,improper venue, and failure to state a claim. The Company believes the claimsare without merit, and are defending the lawsuit vigorously.

On August 7,2006, Kimberly and Jason Green filed suit against Copart in the Superior Courtof the State of California, County of Sacramento, making allegations pursuantto a California consumer protection statute similar to a class action forunreasonable amounts claimed for storage liens by the Company, and related claims.Relief sought includes class certification, damages, fees, costs and expenses. TheCompany filed an answer on September 1, 2006 denying the claim. On July 2,2007, the parties entered into a settlement agreement terminating the lawsuit.

The Company accruesfor costs relating to these matters when a loss is probable and the amount canbe reasonably estimated. The effect of the outcome of these matters on theCompany’s future results of operations cannot be predicted because any sucheffect depends on future results of operations, the amount and timing of theresolution of such matters. The Company believes that any ultimate liabilitywill not have a material effect on its financial position, results ofoperations or cash flows. However, the amount of the liabilities associatedwith these claims, if any, cannot be determined with certainty.

102

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(15) Commitments and Contingencies (Continued)**

*Environmental Matters*

In connectionwith the acquisition of the Dallas, Texas facility in 1994, the Company setaside $3.0 million to cover the costs of environmental remediation,stabilization and related consulting expenses for a six-acre portion of thefacility that contained elevated levels of lead due to the activities of theformer operators. The Company began the stabilization process in 1996 andcompleted it in 1999. The Company paid all remediation and related costs fromthe $3.0 million fund and, in accordance with the acquisition agreement,distributed the remainder of the fund to the seller of the Dallas facility,less $0.2 million which was held back to cover the costs of obtaining theno-further-action letter. In September 2002, the Company’s environmentalengineering consultant issued a report, which concludes that the soilstabilization has effectively stabilized the lead-impacted soil, and that theconcrete cap should prevent impact to storm water and subsequent surface waterimpact. The Company’s consultant thereafter submitted an Operations andMaintenance Plan (“Plan”) to the Texas Commission on Environmental Quality (“TCEQ”)providing for a two-year inspection and maintenance plan for the concrete cap,and a two-year ground and surface water monitoring plan. In January of2003, the TCEQ approved the Plan, subject to the additions of upstream(background) surface water samples from the intermittent stream adjacent to thefacility and documentation of any repairs to the concrete cap during the postclosure-monitoring period. The first semi-annual water sampling was conductedin April 2003, which reflected that the lead-impacted, stabilized soil isnot impacting the ground and/or surface water. The second round of semi-annualwater samples collected in October and November 2003 reportedconcentration of lead in one storm water and one surface water sample in excessof the established upstream criteria for lead. In correspondence, which theCompany received in July 2004, the TCEQ approved with comment our watermonitoring report dated February 24, 2004. The TCEQ instructed the Companyto continue with post-closure monitoring and maintenance activities and submitthe next report in accordance with the approved schedules. In February 2005,a report from our environmental engineering consultant was transmitted to theTCEQ containing the results of annual monitoring activities consisting of two (2) semi-annualsampling events which occurred in April/June 2004 and October/November 2004.Laboratory analytical results indicated no lead concentrations exceeding thetarget concentration level set in the Corrective Measures Study for the site,but some results were in excess of Texas surface water quality standards. TheCompany’s environmental engineering consultant concluded in the February 2005report to the TECQ that it is unlikely that lead concentrations detected in thestorm water runoff samples are attributable to the lead impacted soils. Basedon the results of the 2004 samplings, the Company requested that no furtheraction be taken and that a closure letter be issued by the TCEQ. In September 2007,the TCEQ notified the Company that they did not concur with our consultant’sconclusions and recommendations. The TCEQ said it would not provide a closureletter until additional sampling of surface water is performed which reflectsconcentrations of lead below Texas surface 

103

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(15) Commitments and Contingencies(Continued)**

water quality standards. This sampling is anticipated to be performedin September or October, 2007. The Company is not assured of receiving theno-further-action letter and may incur further liabilities if the stabilizationprocess proves ineffective, or if later testing of surface or ground waterreflects concentrations of lead which exceed Texas surface or ground waterquality standards. In addition, in 1994, the Company detected a small quantityof two hazardous substances in a temporary groundwater monitoring well at theDallas facility. The Company’s environmental consultants concluded that bothsubstances arose from an off-site source and no further action was recommended.

The Company does not believe that any of the above environmentalmatters will, either individually or in the aggregate, have a material adverseeffect on the Company’s consolidated financial position, results of operationsor cash flows.

**(16) Guarantees—Indemnifications to Officers and Directors**

The Company has entered into indemnification agreements, a form ofwhich is incorporated by reference in the exhibits of this annual report on Form 10-K,with the members of our board of directors to indemnify them to the extentpermitted by law against any and all liabilities, costs, expenses, amounts paidin settlement and damages incurred by the directors as a result of any lawsuit,or any judicial, administrative or investigative proceeding in which thedirectors are sued as a result of their service as members of our board ofdirectors.

**(17) Related Party Transactions**

The Companyleases certain of its facilities from officers and/or directors of the Companyunder various lease agreements. Rental payments under these leases aggregatedapproximately $0.4 million for the fiscal year ended July 31, 2007 and$0.5 million for the years ended July 31, 2006 and 2005, and expire onvarious dates through 2012. The Company leases certain of its facilities fromother employees of the Company under various lease agreements. Rental paymentsunder these leases aggregated approximately $0.3 million, $0.3 million and$0.4 million for the fiscal years ended July 31, 2007, 2006 and 2005,respectively.

On July 2,2007, the Company repurchased in a private transaction 1,100,000 shares of itscommon stock held jointly by James Grosfeld, one of the Company’s directors,and his wife, and 73,000 shares of its common stock held by a charitablefoundation established by Mr. and Mrs. Grosfeld. The price paid forthe repurchased shares was $30.77 per share, the closing market price of theCompany’s common stock as quoted on the Nasdaq Global Market on July 2,2007. The repurchase of these shares was pre-approved by the Audit Committee ofour Board of Directors, with Mr. Grosfeld abstaining.

There were no amounts due or from related parties at July 31, 2007and 2006.

104

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(18) Employee Benefit Plan**

The Companysponsors a 401(k) defined contribution plan covering its eligibleemployees. The plan is available to all U.S. employees who meet minimum age andservice requirements and provides employees with tax deferred salary deductionsand alternative investment options. The Company matches 20% of employeecontributions up to 15% of employee salary deferral. The Company recognized anexpense of approximately $0.4 million, $0.3 million and $0.2 million forthe fiscal years ended July 31, 2007, 2006 and 2005, respectively relatedto this plan.

The Company also sponsors an additional defined contribution plan formost of its UK employees, which is available to all UK employees who meetminimum service requirements. The Company matches up to 5% of employeecontributions.

**(19) Investment in Unconsolidated Entity**

During the yearended July 31, 2006, the Company invested approximately $9.0 million for a50% equity interest in Lanelogic, a Delaware limited liability corporation (“Lanelogic”).The Company has no further contractual funding commitment. Based on the Company’sevaluation of Lanelogic and the related agreements, management believes thatLanelogic does not constitute a Variable Interest Entity as defined in FIN No. 46,*Consolidation of Variable Interest Entities*.As a result, the Company’s investment has been accounted for under the equitymethod prescribed by APB No. 18, *TheEquity Method of Accounting for Investments in Common Stock*.

During thesecond quarter ended January 31, 2007, the Company’s Chairman and CEO,made a personal unsecured loan to Lanelogic to prevent a restriction of workingcapital from disrupting its business as Lanelogic sought additional equityfinancing. The loan was repaid during the second quarter ended January 31,2007. The Company has concluded that the personal unsecured loan did not causea change in the accounting of Lanelogic as an equity method investment. Duringthe second quarter ended January 31, 2007, Lanelogic received a strategicequity investment totaling approximately $10 million from two new investmentgroups as well as Lanelogic’s founder. The Company did not participate in thisadditional equity financing into Lanelogic. In addition, Lanelogic convertedfrom a limited liability company to a Delaware Corporation, of which theCompany is now a stockholder.

On August 15,2007, subsequent to the end of the Company’s fiscal year, the Company’sChairman and CEO provided a personal guaranty in favor of Dealer ServicesCorporation as a condition for providing a credit facility to Lanelogic, Inc.a corporation in which Copart has non-controlling interest. The guaranty wasapproved by the Company’s Audit Committee. The Company has concluded that thepersonal guaranty does not cause a change in the accounting of Lanelogic as anequity method investment.

105

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(19) Investment in Unconsolidated Entity(Continued)**

As of July 31, 2007 and 2006, the Company’s investment inLanelogic totaled $0 and $2.1 million, respectively. The Company hasdiscontinued recording its share of the losses of Lanelogic because it has nocommitment to provide further funding.

**(20) Noncash Financing and Investing Activities**

In fiscal 2007, 2006 and 2005, the Company received 6,597, 4,378 and42,071 shares of common stock, respectively as payment for the exercise of18,462, 8,678 and 95,106 shares of common stock under the 1992 Stock OptionPlan and/or 2001 Stock Option Plan, respectively. The Company retired theseshares upon receipt.

**(21) Quarterly Information (inthousands, except per share data) (Unaudited)(1)**

| ** **                                                | ** ** | **Fiscal Quarter** | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|
| **Fiscal Year 2007**                            | ** ** | ** **              | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
| Revenues                                                  |       | $                       | 132,121    |   | $ | 128,925 |   | $ | 145,652 |   | $ | 153,982 |   |
| Operating  income                                         |       | $                       | 46,893     |   | $ | 45,164 |   | $ | 57,229 |   | $ | 53,860 |   |
| Income from  continuing operations                        |       | $                       | 48,355     |   | $ | 48,692 |   | $ | 62,025 |   | $ | 58,349 |   |
| Net income                                                |       | $                       | 30,345     |   | $ | 30,392 |   | $ | 38,867 |   | $ | 36,734 |   |
| Basic income  per share from continuing operations        |       | $                       | 0.34       |   | $ | 0.33 |   | $ | 0.43 |   | $ | 0.41 |   |
| Basic net  income per share                               |       | $                       | 0.34       |   | $ | 0.33 |   | $ | 0.43 |   | $ | 0.41 |   |
| Diluted  income per share from continuing operations |       | $                       | 0.32       |   | $ | 0.32 |   | $ | 0.41 |   | $ | 0.40 |   |
| Diluted net  income per share                             |       | $                       | 0.32       |   | $ | 0.32 |   | $ | 0.41 |   | $ | 0.40 |   |
|                                                           |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

106

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(21) Quarterly Information (in thousands,except per share data) (Unaudited)(1) (Continued)**

| **Fiscal Year 2006**                           | ** ** | ** ** | ** ** | **First** | ** ** | **Second** | ** ** | **Third** | ** ** | **Fourth** | ** ** |
|----------------------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|-----------|------------|------------|------------|
| Revenues:                                                |       |       |       |      |       |       |       |      |       |
| 2006 as  reported                                        |       | $          | 119,025    |      | $          | 125,099    |       | $         | 149,513    |       | $          | 137,220 |   |
| 2006 as  restated                                        |       | $          | 116,739    |      | N/A        |       | N/A        |      | N/A        |       |
| Operating income:                                        |       |       |       |      |       |       |       |      |       |
| 2006 as  reported                                        |       | $          | 34,226     |      | $          | 37,015     |       | $         | 53,351     |       | $          | 47,197 |   |
| 2006 as  restated                                        |       | $          | 33,999     |      | N/A        |       | N/A        |      | N/A        |       |
| Income from continuing operations:                       |       |       |       |      |       |       |       |      |       |
| 2006 as  reported                                        |       | N/A        |       | $         | 26,118     |       | $          | 33,180    |       | $          | 30,788     |   |
| 2006 as  restated                                        |       | $          | 22,574     |      | N/A        |       | N/A        |      | N/A        |       |
| Income (loss) from discontinued operations:              |       |       |       |      |       |       |       |      |       |
| 2006 as  reported                                        |       | N/A        |       | $         | (18,265    | )          | $          | 1,530     |       | $          | 785        |   |
| 2006 as  restated                                        |       | $          | 237        |      | N/A        |       | N/A        |      | N/A        |       |
| Net income:                                              |       |       |       |      |       |       |       |      |       |
| 2006 as  reported                                        |       | $          | 22,813     |      | $          | 7,852      |       | $         | 34,710     |       | $          | 31,573 |   |
| 2006 as  restated                                        |       | $          | 22,813     |      | N/A        |       | N/A        |      | N/A        |       |
| Basic income per share from continuing operations        |       |       |       |      |       |       |       |      |       |
| 2006 as  reported                                        |       | $          | 0.25       |      | $          | 0.29       |       | $         | 0.37       |       | $          | 0.34 |   |
| 2006 as  restated                                        |       | $          | 0.25       |      | N/A        |       | N/A        |      | N/A        |       |
| Basic net income per share                               |       |       |       |      |       |       |       |      |       |
| 2006 as  reported                                        |       | $          | 0.25       |      | $          | 0.09       |       | $         | 0.38       |       | $          | 0.35 |   |
| 2006 as  restated                                        |       | $          | 0.25       |      | N/A        |       | N/A        |      | N/A        |       |
| Diluted income per share from continuing operations |       |       |       |      |       |       |       |      |       |
| 2006 as  reported                                        |       | $          | 0.25       |      | $          | 0.28       |       | $         | 0.37       |       | $          | 0.33 |   |
| 2006 as  restated                                        |       | $          | 0.25       |      | N/A        |       | N/A        |      | N/A        |       |
| Diluted net income per share                             |       |       |       |      |       |       |       |      |       |
| 2006 as  reported                                        |       | $          | 0.25       |      | $          | 0.08       |       | $         | 0.37       |       | $          | 0.34 |   |
| 2006 as restated                                         |       | $          | 0.25       |      | N/A        |       | N/A        |      | N/A        |       |

 

The tablesabove restate the 2006 periods presented for the effect of the discontinuedoperations in fiscal 2006 (Refer to Note 3).

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(1)            Earnings per sharewere computed independently for each of the periods presented; therefore, thesum of the earnings per share amounts for the quarters may not equal the totalfor the year.

107

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**COPART, INC.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) July 31, 2007, 2006 and 2005**

**(22) Subsequent events**

In August 2007,the Company completed the acquisition of Century Salvage Sales Limited, avehicle salvage disposal company with three facilties located in the UK. Thetotal purchase price was approximately $9.1 million. This brings the totalnumber of facilities to ten in the UK as of September 27, 2007.

On August 21,2007, the Compensation Committee exercised its discretion pursuant to the termsof the 2001 Stock Option Plan to accelerate, effective December 31, 2007,the vesting of all unvested shares of the Company’s common stock subject tooptions held by James E. Meeks. It is expected that on December 31, 2007, Mr. Meekswill hold options to purchase approximately 68,750 unvested shares that will besubject to this acceleration.

On September 14,2007 James Grosfeld and Harold Blumenstein, who have served as members of ourboard of directors since 1993 and 1994, respectively, resigned as members topursue other business and personal interests.

In connectionwith their resignations, the board of directors exercised its discretionpursuant to the terms of the 2001 Stock Option Plan to accelerate the vestingof all unvested shares of the Company’s common stock subject to options held byMr. Grosfeld and Mr. Blumenstein. As of September 6, 2007, Mr. Grosfeldand Mr. Blumenstein each held options to acquire 86,000 shares of commonstock, of which 30,316 were otherwise unvested. In addition, the board approvedamendments to outstanding option agreements with Mr. Grosfeld and Mr. Blumensteinto extend the period in which they will be able to exercise their optionsfollowing their resignation until the earlier of September 14, 2012 or thedate the option would otherwise have terminated by its terms assuming they hadcontinued to serve as members of the board of directors.

108

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