UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2005

Commission File No. 0-27288

EGL, INC.

(Exact name of registrant as specified in its charter)

|Texas                           |  | 76-0094895         
|------------------------------- |  | -------------------
|(State or other jurisdiction of |  | (I.R.S. Employer   
|incorporation or organization)  |  | Identification No.)
|15350 Vickery Drive             |  |                    
|Houston, Texas                  |  | 77032              
|(Principal executive offices)   |  | (Zip Code)         

Registrants telephone number, including area code:

(281) 618-3100

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

Not Applicable

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

Common Stock, $.001 par value

Rights to Purchase Series A Preferred Stock

(title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes [ X ]    No  [   ]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes [   ]    No [ X ]

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.  Large accelerated filer [ X ]    Accelerated filer  [   ]    Non-accelerated filer  [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes [   ]    No [X]

As of June 30, 2005, the aggregate market value of the registrants common stock held by non-affiliates of the registrant was $775.7 million, based on the last reported sale price of the common stock on the NASDAQ Stock Market.

As of March 3, 2006, the number of outstanding shares of the registrants Common Stock was 40,109,368 (net of 5,805,123 treasury shares).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the Registrants 2006 Annual Meeting of Shareholders is incorporated by reference in Part III of this Form 10-K.





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TABLE OF CONTENTS

|PART I   |                                                                                                       | 1 
|-------- | ----------------------------------------------------------------------------------------------------- | --
|ITEM 1.  | Business                                                                                              | 1 
|ITEM 1A. | Risk Factors                                                                                          | 15
|ITEM 1B. | Unresolved Staff Comments                                                                             | 22
|ITEM 2.  | Properties                                                                                            | 22
|ITEM 3.  | Legal Proceedings                                                                                     | 22
|ITEM 4.  | Submission of Matters to a Vote of Security Holders                                                   | 24
|         |                                                                                                       |   
|PART II  |                                                                                                       | 25
|ITEM 5.  | Market for Registrants Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 25
|ITEM 6.  | Selected Financial Data                                                                               | 26
|ITEM 7.  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 | 27
|ITEM 7A. | Quantitative and Qualitative Disclosures about Market Risk                                            | 47
|ITEM 8.  | Financial Statements and Supplementary Data                                                           | 47
|ITEM 9.  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                  | 48
|ITEM 9A. | Controls and Procedures                                                                               | 48
|ITEM 9B. | Other Information                                                                                     | 49
|         |                                                                                                       |   
|PART III |                                                                                                       | 49
|ITEM 10. | Directors and Executive Officers of the Registrant                                                    | 49
|ITEM 11. | Executive Compensation                                                                                | 50
|ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters        | 50
|ITEM 13. | Certain Relationships and Related Transactions                                                        | 50
|ITEM 14. | Principal Accountant Fees and Services                                                                | 50
|         |                                                                                                       |   
|PART IV  |                                                                                                       | 51
|ITEM 15. | Exhibits and Financial Statement Schedules                                                            | 51





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PART I

ITEM 1.

Business

General

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

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

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

Available Information

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

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

Industry Overview

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



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

Most air freight forwarders, like EGL, focus on heavier cargo and do not generally compete with integrated shippers of primarily smaller parcels, including FedEx Corporation.  Several integrated carriers, like United Parcel Service (UPS) and Deutsche Post AG, operating under the brand name and referred to herein as DHL, do focus on shipments of heavy cargo in competition with forwarders.  On occasion, integrated shippers serve as a source of cargo space to forwarders.  Additionally, most air freight forwarders do not generally compete with the major commercial airlines, which, to some extent, depend on forwarders to procure shipments and supply freight to fill cargo space on their scheduled flights.

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

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

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outsourcing of logistics functions;

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globalization of demand and supply chains; and

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increased complexity of supply chains.

Our Competitive Advantages

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

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



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Global presence with North American infrastructure.  Our global infrastructure enables us to provide a closed-loop logistics chain to our customers worldwide.  Within North America, our infrastructure consists of our pick up and delivery network, air and ground networks, and logistics and warehousing capabilities.  Our ground and pick up and delivery networks enable us to service the growing time-definite deferred forwarding market while providing the domestic service for international shipments once they reach North America.  In addition, we believe our heavyweight air network provides for the lowest available costs on shipments, as we have no dedicated charters or leases and can capitalize on available capacity in the market to move our customers goods.  Lastly, we have adequate warehouse and dock space available to leverage our North America infrastructure for future growth and/or to provide such space to our customers for their logistics needs.

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

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

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

Air Freight Forwarding and Consolidation Services

Our air freight forwarding operations include international and domestic air freight forwarding. Our total air freight forwarding revenues in 2005 were $2.0 billion, of which 25% were derived from domestic air freight forwarding within the United States and 75% were derived from international air freight forwarding.  Our air freight forwarding and related logistics services include the following:

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domestic freight forwarding;

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international freight forwarding;

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

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cargo assembly;

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export packing and vendor shipment consolidation;

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

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charter arrangement and handling;

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electronic transmittal of logistics documentation;

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electronic purchase order/shipment tracking;



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expedited document delivery to overseas destinations for customs clearance; and

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procurement of cargo insurance.

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

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

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

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

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

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

Our air freight forwarding business is not dependent on any one customer or industry.  We provide services to global or multinational customers as well as regional customers.  In 2005, approximately 59% of our net revenues were attributable to air freight forwarding.

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



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Domestic local delivery services

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

As of December 31, 2005, local delivery services were offered in 77 of the 88 cities in the United States and Canada in which our terminals were located.  In all other cities, we have arrangements with agents to handle pick up and delivery services.  On-demand pick up and delivery services are available 24 hours a day, seven days a week.  In most locations, delivery drivers are independent contractors who operate their own vehicles.  Our Austin, Texas, Nashville, Tennessee and Atlanta, Georgia operations include a number of company-owned or leased trailers, trucks and other ground equipment primarily to service specific customer accounts.

Local pick up and delivery revenues were $334.8 million during 2005 and $289.8 million during 2004.  Approximately $188.3 million of these revenues during 2005 and $166.7 million of these revenues during 2004 were attributable to our air freight forwarding operations and were eliminated upon consolidation.  The remaining pick up and delivery revenues were attributable to local delivery services for third-party, non-forwarding business.  A substantial majority of the total cost of providing for local pick up and delivery of our freight forwarding shipments in 2005 and 2004 was attributable to our own local pick up and delivery services.  Revenues from domestic local delivery services, net of intercompany revenues, are included in air freight forwarding revenues.

Domestic truck brokerage services

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

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

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



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International Ocean Freight Forwarding and Consolidation

As a global ocean freight forwarder, we arrange for the shipment of freight by ocean carriers and act as the agent of the shipper or the importer.  Our ocean freight forwarding and related logistics services include inland transportation from point of origin to distribution facility or port of export, cargo assembly, packing and consolidation, warehousing, electronic transmittal of documentation and shipment tracking, expedited document delivery, pre-alert consignee notification and cargo insurance.

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

Our compensation for ocean freight forwarding services is derived principally from commissions paid by shipping lines and from forwarding and documentation fees paid by customers, who are either shippers or consignees.  In 2005, approximately 3% of our net revenues were attributable to international ocean freight forwarding, including commissions, forwarding fees and associated ancillary services.

Our global operations as an indirect ocean carrier or NVOCC (non-vessel operating common carrier) are similar in some respects to our air freight consolidation operations.  We procure customer freight, consolidate shipments bound for a particular destination, determine the routing, select the ocean carrier or charter a ship and tender each consolidated lot as a single shipment to the direct carrier for transportation to a distribution point.  As a NVOCC, we generally derive our revenues from the spread between the rate charged to our customer and the ocean carriers charge to us for carrying the shipment, in addition to charging for other ancillary services related to the movement of the freight.  Because of the volume of freight we control and consolidate, we are generally able to obtain lower rates from ocean carriers than the rate the shipper would be able to procure going directly to the carrier.  In 2005, ocean freight consolidation and associated ancillary services contributed approximately 6% of our net revenues.

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

Customs Brokerage

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

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



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interface with customs agencies speeds freight release and provides nationwide control of clearances at multiple ports and airports of entry.

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

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electronic document preparation;

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

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foreign trade zone utilization;

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bonded warehousing;

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distribution of the cleared cargo to inland locations; and

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trade compliance consulting.

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

As a customs broker operating in the United States, we are licensed by the U.S. Department of Homeland Security and regulated by the CBP.  Our fees for acting as a customs broker in the United States are not regulated, and we do not have a fixed fee schedule for customs brokerage services.  Instead, fees are generally based on the volume of business transacted for a particular customer, and the type, number and complexity of services provided.  In addition to fees, we bill the importer for amounts that we have paid on the importers behalf, including duties, collect freight charges and similar payments.  In 2005, approximately 16% of our net revenues were attributable to customs brokerage services.

We are committed to helping our customers secure their global supply chains from the global threat of terror.  As such, we have actively engaged in all U.S. government initiatives in the post September 2001 market.  We are a validated participant in the Customs - Trade Partnership Against Terrorism (CTPAT) and a member of the Business Anti-Smuggling Coalition (BASC).  We meet the requirements of the Trade Act of 2002 and, pursuant to regulations established by the U.S. CBP, transmit advanced shipment information for all U.S. import and transit shipments regardless of mode of transport.  Further, we continually review and update our processes and procedures to ensure compliance with all new government agency requirements, such as the record keeping requirements related to the U.S. Food and Drug Administrations implementation of the Bio Terrorism Act.  We are also preparing for similar supply chain security initiatives in other jurisdictions outside of the U.S. that we believe will be the outgrowth of the World Customs Organizations Framework of Standards.  As a result, we believe our customs brokerage strengths include the following:

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

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ISO certified desk level processes for consistency and compliance;

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infrastructure of licensed professionals;



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

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

Logistics and Other Services

Customers increasingly demand more than the movement of freight from their transportation suppliers.  To meet these needs, suppliers seek to extend the services offered by their logistics partners, by, among other things, providing information on the status of materials, components and finished goods throughout the logistics supply chain and service performance reports on and proof of delivery for each shipment.  They also look for the physical distribution expertise associated with the physical distribution and warehouse management of their valuable merchandise.  We provide a range of logistics services, distribution and materials management services, international insurance services, global project management services and trade facilitation services.  In 2005, approximately 16% of our net revenues were attributable to logistics and other services.

Logistics services

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

Distribution and materials management services

We offer a wide range of customized inbound logistics and distribution management of our customers inventory.  We often provide these materials management services in conjunction with the transportation of cargo.  These services are provided in a number of our owned and leased logistics facilities in many locations throughout the world.  During 2005, we continued our program of improving existing facilities to meet customer needs.  Our distribution and materials management services include inventory control, vendor managed inventory (VMI) services, order processing, import and export freight staging, protective and specialized packing and crating, pick-and-pack operations, containerization, consolidation and deconsolidation and special handling for perishables, hazardous materials and heavy-lift equipment.  For import shipments, we provide bonded warehouse services and, in certain locations, Free Trade Zone services.  These warehouse and distribution services complement our other transportation services, including the information systems tools that are the enabler of the integrated logistics solutions we offer to customers.

Trade facilitation services

We provide procurement, financial and distribution management services to certain multinational customers.  We purchase both raw materials for manufacturing and finished goods for distribution, then coordinate their global deployment, as directed by the customer.  We deliver services through custom-designed Vendor and Distribution Hub programs.  We are able to coordinate a customers procurement, logistics, transportation and distribution activities within a single supply chain program.  This enables us to optimize customer supply chains by streamlining the material, information and financial flows through integration of the specific supply chain processes and elimination of redundant transactions.



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Insurance

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

Information Systems

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

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

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

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

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

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

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

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

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



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Currently our Information Technology strategic initiatives include:

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

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

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

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

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

Sales and Marketing

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

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

Customers

Our customers are manufacturers and distributors of a vast array of goods in many different industries including, but not limited to, electronic and high-technology, automotive, oil and gas, energy, retail, pharmaceutical and health care, machinery, printed matter, trade show materials and aerospace.  We also continue to expand our business with government agencies and defense entities globally.  In 2005, no customer accounted for more than 5% of our revenues.  Despite this healthy diversification of customers, adverse conditions in some of our larger business sectors could have an impact on our



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business should there be a significant decrease in our customers volumes.  We expect that demand for our services, and consequently results of operations will continue to be sensitive to domestic and global economic conditions and other factors we cannot directly control.  As such, our focus will remain on expanding lines of business with current customers and adding new accounts through our field and global sales teams.

In 2005, our principal customers included shippers of:

-

computers and other electronic and high-technology equipment;

-

automotive and aerospace components;

-

governmental and military equipment;

-

retail goods;

-

fashion/apparel;

-

trade show exhibit materials;

-

telecommunications equipment;

-

pharmaceuticals;

-

printed and publishing materials;

-

oil and gas equipment; and

-

construction and heavy equipment.

Regulation

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

Air freight forwarding

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

Domestic local delivery services and domestic truck brokerage services

Our delivery operations are subject to various state and local regulations and, in many instances, require permits and licenses from state authorities.  In addition, some of our delivery operations are regulated by the Surface Transportation Board of the U.S. Department of Transportation.  These federal, state and local authorities have broad powers, including the power to approve specified mergers, consolidations and acquisitions and to regulate the delivery of some types of shipments and operations



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within particular geographic areas.  The Surface Transportation Board has the power to regulate motor carrier operations, to approve some rates, charges and accounting systems and to require periodic financial reporting.  Interstate motor carrier operations are also subject to safety requirements prescribed by the U.S. Department of Transportation.  In some potential locations for our delivery operations, state and local permits and licenses may be difficult to obtain.  Our truck brokerage operations subject us to regulation as a property broker by the Surface Transportation Board, and we have obtained a property broker license and surety bond.

Ocean freight forwarding

The Federal Maritime Commission, or FMC, regulates our ocean forwarding operations.  The FMC licenses ocean freight forwarders.  Indirect ocean carriers (non-vessel operating common carriers) are subject to FMC regulation, under the FMC tariff filing and surety bond requirements, and under the Shipping Act of 1984, particularly those terms proscribing rebating practices.

Customs brokerage

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

Security

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

Logistics and other services

Some portions of our warehouse operations require:

-

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

-

authorizations and bonds by the U.S. Treasury;

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

-

approvals by the U.S. Customs Service.



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Environmental

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

Employees

We had over 10,500 employees at December 31, 2005, including approximately 550 sales personnel.  None of our employees are currently covered by a collective bargaining agreement.  We have experienced no work stoppages and consider our relations with employees to be good.  Our owned or leased vehicles were driven by approximately 130 of our employees as of December 31, 2005.

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

Independent contractors

We also had contracts with approximately 1,900 independent owner/operators of local delivery services as of December 31, 2005.  The independent owner/operators own, operate and maintain the vehicles they use in their work for us and may employ qualified drivers of their choice.

Executive Officers of the Registrant

The following table sets forth certain information concerning our executive officers as of March 8, 2006:



| | Name             | Age | Position                                                      
| | ---------------- | --- | --------------------------------------------------------------
| | James R. Crane   | 52  | Chairman of the Board of Directors and Chief Executive Officer
| |                  |     |                                                               
| | E. Joseph Bento  | 43  | Chief Marketing Officer and President of
North America        
| |                  |     |                                                               
| | Ronald E. Talley | 54  | Chief Operating Officer                                       
| |                  |     |                                                               
| | Vittorio Favati  | 47  | Executive Vice President  Asia Pacific                       
| |                  |     |                                                               
| | Dana A. Carabin  | 38  | General Counsel, Secretary, and Chief Compliance Officer      



James R. Crane.  Mr. Crane has served as our Chief Executive Officer and Chairman of the Board of Directors since he founded EGL in March 1984.  Mr. Crane has a total of 24 years experience in the transportation industry.  Mr. Crane is a member of the Compensation Committee and of the Governance / Nominating Committee.  Mr. Crane is a Director of the Houston Museum of Natural Science.



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

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

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

Dana A. Carabin.Ms. Carabin has served as our General Counsel and Secretary since October 2005.  She has also served as our Chief Compliance Officer since March 2006.  Prior to joining EGL, she served as General Counsel and Secretary of Quanta Services, Inc., a publicly traded utility services company, since 2001.  Ms. Carabin holds a J.D. degree.

Forward-Looking Statements

The statements contained in this document (including the portion, if any, appended to this Form 10-K or incorporated by reference) that are not historical facts are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act.  Such forward-looking statements include, but are not limited to, those relating to (i) projections of revenues, income or loss, earnings or loss per share, capital expenditures, dividends, capital structure or other financial items; (ii) plans and objectives of management for future operations, including plans or objectives relating to EGLs service offerings; (iii) future economic performance; (iv) assumptions underlying or relating to any of the matters in clauses (i) through (iii); and (v) other statements that include expectations, intentions, projections, developments, future events, expected performance, underlying assumptions, and other statements which are other than statements of historical facts.



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



|-
anticipate, | -
intend,    
|--------------- | ---------------
|-
believe,    | -
may,       
|-
budget,     | -
might,     
|-
could,      | -
plan,      
|-
estimate,   | -
predict,   
|-
expect,     | -
project and
|-
forecast,   | -
should.    





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

ITEM 1A.

Risk Factors

Factors That May Affect Future Results and Financial Condition

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



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

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

-

existing and emerging competition;

-

ability to open new terminals;

-

ability to operate profitably in the face of competitive pressures;

-

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

-

the strength of demand for our services;

-

the availability of capital to support our growth; and

-

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

Acquisitions involve risks, including those relating to:

-

the integration of acquired businesses, including different information systems;

-

the retention of prior levels of business;

-

the retention of employees;

-

the diversion of management attention;

-

the amortization of acquired intangible assets; and

-

unexpected liabilities.

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



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

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

-

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

-

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

-

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

-

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

-

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

-

difficulties in staffing and managing foreign operations;

-

the imposition of additional taxes in foreign jurisdictions;

-

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

-

difficulties in collecting accounts receivable.

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

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

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

-

economic and political conditions in the United States and abroad;

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major work stoppages;

-

difficulties in managing overseeing foreign operations;

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exchange controls and currency fluctuations;



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-

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

-

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

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

As a U.S. government contractor, we are subject to a number of procurement and other rules and regulations.



To do business with government agencies, either directly as a contractor or indirectly as a subcontractor, we must comply with and are affected by many laws and regulations, including those relating to the formation, administration and performance of U.S. government contracts. These laws and regulations, among other things:

-

require, in some cases, certification and disclosure of all cost and pricing data in connection with contract negotiations;

-

impose accounting rules that define allowable costs and otherwise govern our right to reimbursement under certain cost-based U.S. government contracts; and

-

restrict the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.

These laws and regulations affect how we do business with our customers and, in some instances, impose added costs on our business. A violation of these laws and regulations could result in the imposition of fines and penalties or the termination of our contracts.  In addition, the violation of certain other generally applicable laws and regulations could result in our suspension or debarment as a government contractor.

Fuel shortages and price volatility could adversely affect our business and operations.



Our suppliers generally pass on increases in the price of fuel to us and we generally pass these price increases on to our customers through the imposition of a surcharge.  We sometimes bear a portion of price increases over the short-term. There can be no assurance that we will be able to continue to impose such surcharges in the future.  In addition, if fuel costs increase significantly, our customers may reduce the volume and frequency of cargo shipments or find other less costly alternatives for cargo delivery.

The price of fuel is directly influenced by the price of crude oil and to a lesser extent by refining capacity relative to demand, which are influenced by a wide variety of macroeconomic and geopolitical events and is completely beyond our control. Additionally, hostilities in the Middle East and terrorist attacks in the U.S. and abroad could cause significant disruptions in the supply of crude oil and have had a significant impact on the price and availability of fuel.

Our business is subject to seasonal trends.

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



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

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

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

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

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

As a global company, we generate taxable income in different countries throughout the world, with different effective income tax rates.  Our future effective income tax rate will be impacted by a number of factors, including the geographical composition of our worldwide taxable income.  If the United States or foreign tax authorities were to change applicable tax laws or successfully challenge the manner in which our income taxes are currently recognized, our effective income tax rate could increase, which would adversely impact our cash flow and profitability.

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

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

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

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



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

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



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

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

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

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

We may lose business to competitors.

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

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



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

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

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

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

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

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

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

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

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



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

We are subject to a broad range of foreign and domestic (including state and local) environmental, health and safety and criminal laws and regulations, including those governing discharges into the air and water, the storage, handling and disposal of solid and hazardous waste and the shipment of explosive or illegal substances.  In the course of our operations, we may be asked to arrange for the storage or transportation of substances defined as hazardous under applicable laws.  As is the case with any such operation, if a release of hazardous substances occurs on or from our facilities or from the transporter, we may be required to participate in the remedy of, or otherwise bear liability for, such release or be subject to claims from third parties whose property or person is injured by the release.  In addition, if our employees arrange for the storage or transportation of hazardous, explosive or illegal materials in violation of applicable laws or regulations, we may face civil or criminal fines or penalties, including bans on making future shipments in particular geographic areas.  In the event we are found to not be in compliance with applicable environmental, health and safety laws and regulations or there is a future finding that our policies and procedures fail to satisfy requisite minimum safeguards or otherwise do not comply with applicable laws or regulations, we could be subject to large fines, penalties or lawsuits.

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

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

Our chairman beneficially owns approximately 21.7% of our outstanding common stock and has the greatest influence of any of our stockholders.

James R. Crane beneficially owns approximately 21.7% of our outstanding common stock.  Based on the ownership positions of our current stockholders, his ability to influence matters submitted to a vote of stockholders is greater than any other stockholder.

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

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

-

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

-

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



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-

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

-

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

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

ITEM 1B.

Unresolved Staff Comments

None

ITEM 2.

Properties

The properties used in our domestic and foreign operations consist principally of air and ocean freight forwarding offices, customs brokerage offices and warehouse and distribution facilities.  Our freight forwarding terminal locations are typically located at or near major metropolitan airports and occupy between 1,000 and 509,000 square feet of leased or owned space and typically consist of offices, warehouse space, bays for loading and unloading and facilities for packing.  Terminals are managed by a station manager who is assisted by operation managers.  We also have locations that are limited to sales and administrative activities.  The leased terminals are under noncancelable leases that expire on various dates through 2025.  From time to time, we may expand or relocate terminals to accommodate growth.

The following table sets forth certain information as of December 31, 2005 concerning the number of our domestic and foreign facilities and freight handling terminals:



|                       |  | Owned |  | Leased |  | Total
|---------------------- |  | ----- |  | ------ |  | -----
|North America          |  | 2     |  | 131    |  | 133  
|South America          |  | 5     |  | 28     |  | 33   
|Europe and Middle East |  | 10    |  | 101    |  | 111  
|Asia and South Pacific |  | 17    |  | 102    |  | 119  
|Total                  |  | 34    |  | 362    |  | 396  



As of December 31, 2005, our corporate office, which occupies approximately 149,000 square feet of space, is a leased facility located in Houston, Texas.

For further information regarding our lease commitments, see note 16 of the notes to our consolidated financial statements.

ITEM 3.

Legal Proceedings

In December 1997, the U.S. Equal Employment Opportunity Commission (EEOC) issued a Commissioners Charge alleging violations under Title VII, the Age Discrimination in Employment Act, and the Equal Pay Act.  In May through July 2000, eight individuals filed suit against us in the United States District Court for the Eastern District of Pennsylvania in Philadelphia, alleging gender, race and national origin discrimination, as well as sexual harassment.  The individual plaintiffs sought to certify a class of approximately 1,000 of our current and former employees and applicants.  The case was eventually transferred to the United States District Court for the Southern District of Texas  Houston Division.





22



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On October 2, 2001, we and the EEOC announced the filing of a Consent Decree settlement, under which we agreed to pay $8.5 million into a fund to compensate individuals who claim to have experienced discrimination (Settlement Fund).  In addition, we agreed to contribute $500,000 to establish a Leadership Development Program (LDP).  The Consent Decree expired on October 3, 2005, with  the Claims administration process under the Consent Decree completed by EGL and the EEOC in early 2005.  Of the 2,073 claims received, only 203 were deemed to be eligible for a monetary distribution totaling $903,000.  On February 10, 2005, upon motion by EGL and the EEOC, the Court entered an Order directing that EGL recapture $6.0 million plus accrued interest from the Settlement Fund, which release of such funds resulted in $6.0 million in income in the first quarter of 2005.  The Court also approved the parties agreement to transfer $1.4 million to the LDP.  From that amount, EGL has reimbursed itself $582,000 for corporate funds previously expended on LDP expenses.  The Court further approved the parties agreement to retain $1.1 million in the Settlement Fund for the payment of eligible claims.



Through March 13, 2006, 176 eligible Claimants have been sent settlement checks totaling $825,000.  Only two Claimants have opted out of the settlement.  Eligible claimants also had the option of objecting to an award, but to do so they must have notified the Claims Administrator within thirty days of the date of their eligibility notice.  To date, all objections have been resolved by agreement between the EEOC and counsel for EGL.  If any funds remain in the Settlement Fund after payment of all claims, the remainder shall be deposited in the LDP.



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



During 2003 and 2004, EGL acted as a logistics subcontractor in the Middle East to Kellogg Brown & Root, Inc. (KBR), which as general contractor provided various services to the U.S. Department of Defense (DOD) and other U.S. government agencies.  In 2004, we received an administrative subpoena from the Office of Inspector General of the DOD requesting documents relating to the billing of war risk surcharges by EGL on certain shipments of KBR freight in the period from late 2003 to mid-2004.  EGL cooperated fully with the governments request and its investigation.  In the course of our internal investigation of the matter, we reviewed documents related to the imposition of war risk surcharges on EGL by transportation providers.  EGL uncovered evidence suggesting that certain documents related to the imposition of war risk surcharges on EGL, that were then charged to KBR, were false and the charges were not warranted.  Following this discovery, and with approval from the government, we engaged auditors to conduct a forensic analysis of war risk surcharges charged by EGL.  This analysis concluded that approximately $1.1 million of war risk surcharges charged by EGL were not actually imposed on EGL by transportation providers.  We provided the results of this investigation to the government and promptly terminated two employees for violation of EGLs Code of Conduct.



As a result of discussions with the government, we received a letter from the United States Attorneys Office of the Eastern District of Texas on December 12, 2005 offering to settle the war risk surcharge issue for the sum of $4.0 million.  Of the $4.0 million, $1.1 million reimburses the government for war risk surcharges (the full amount of which had been previously reserved in EGLs financial statements), and the remaining $2.9 million represents penalties for improper billings.  EGL has agreed to reimburse the $1.1 million in war risk surcharges, and expects to reach agreement with the government promptly on the timing and final amount of the penalties.  Recognizing EGLs cooperation in and assistance with the governments review, as part of the settlement, the United States Attorneys Office and the Defense Criminal Investigative Service is expected to agree to waive all investigatory expenses and make no recommendation to the DOD for debarment of EGL from future DOD contracts.  In addition, the



23



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United States Attorneys Office of the Eastern District of Texas is not expected to recommend to the DOD or the Department of Justice any criminal indictment of EGL related to the war risk surcharges.  In December 2005, EGL recorded a charge of $2.9 million (approximately $0.06 per share) for this penalty.



In February 2006, we were notified by the U.S. Armys Office of Suspension and Debarment that we were temporarily suspended from doing business with the government as a direct contractor or sub-contractor effective February 27, 2006.  The basis of the suspension was the guilty plea entered by one of the two employees EGL terminated related to the war risk surcharge investigation.  This suspension does not include business previously awarded with a signed contract, business using tenders, tariffs or quotes, or sub-contractors less than $25,000.  This action was taken despite the settlement offer by the United States Attorneys Office of the Eastern District of Texas in which it offered not to recommend that EGL be debarred from future DOD contracts.  The suspension is pending an appeal to the U.S. Armys Suspension and Debarment Officer.



At the request of the government, EGL limited its internal investigation and its public statements on these matters so as not to interfere with the governments broader investigation.



One former and two current independent contractor pickup and delivery (P&D) drivers filed a complaint in California state court on September 12, 2005, on behalf of themselves and similarly situated drivers in California alleging various causes of action based on their theory that the drivers are employees and not independent contractors.  The complaint requests (i) the matter be designated as a class action on behalf of all independent contractor P&D drivers working for EGL in California; (ii) a declaratory judgment that EGL has violated the law; (iii) an equitable accounting and an unspecified amount of damages; and (iv) restitution in the form of business expenses, unpaid overtime, meal period compensation, unlawful deductions from wages, statutory penalties, interest, attorneys fees and costs. We removed the case to federal district court for the Northern District of California, and the parties have agreed to focus only on the individual claims of the three named defendants in the first phase of the proceedings.  In the event one or more of the plaintiffs claims survive the summary judgment phase, the next phase would focus on whether the action is maintainable as a class action.  We intend to vigorously defend this lawsuit and believe that plaintiffs are properly classified as independent contractors.



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



ITEM 4.

Submission of Matters To a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of our fiscal year ended December 31, 2005.



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PART II

ITEM 5.

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

Our common stock trades on the NASDAQ National Market tier of The NASDAQ Stock Market under the symbol EAGL.  The following table sets forth the quarterly high and low sales prices for each indicated quarter of 2004 and 2005.



|Quarter Ended      | High    |  | Low    
|------------------ | ------- |  | -------
|March 31, 2004     | $
18.25 |  | $
14.72
|June 30, 2004      | 26.60   |  | 17.88  
|September 30, 2004 | 30.68   |  | 22.51  
|December 31, 2004  | 35.00   |  | 28.11  
|                   |         |  |        
|March 31, 2005     | $
32.98 |  | $
22.30
|June 30, 2005      | 23.29   |  | 16.20  
|September 30, 2005 | 27.70   |  | 19.06  
|December 31, 2005  | 39.19   |  | 24.97  



There were approximately 308 stockholders of record (excluding brokerage firms and other nominees) of our common stock as of March 3, 2006.

Dividends

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



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ITEM 6.

Selected Financial Data

The following table sets forth selected financial data that have been derived from our consolidated financial statements.  The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and notes thereto, included elsewhere in this report.



|                                                                  | Year Ended December 31,
|----------------------------------------------------------------- | -----------------------
|                                                                  | 2005                   
|                                                                  |                        
|Statement of Income Data:                                         |                        
|Revenues                                                          | $
3,096,516            
|Net revenues (1)                                                  | 948,474                
|Operating income (loss) (2) (3) (4) (5)                           | 95,410                 
|Net income (loss) (6) (7)                                         | 58,160                 
|Basic earnings (loss) per share                                   | $
1.23                 
|Basic weighted average shares outstanding                         | 47,442                 
|Diluted earnings (loss) per share                                 | $
1.22                 
|Diluted weighted average shares outstanding                       | 47,832                 
|                                                                  |                        
|Balance Sheet Data (at year end):                                 |                        
|Working capital                                                   | $
245,954              
|Total assets                                                      | 1,089,241              
|Long-term indebtedness and capital leases, net of current portion | 215,616                
|Stockholders equity                                              | 321,728                



(1)

2003 includes a charge of $2.3 million or $1.4 million net of tax ($0.03 per diluted share) for settlement of the claim by Kitty Hawk.  See note 16 of the notes to our consolidated financial statements.

(2)

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

(3)

2001 includes a charge of $10.1 million or $6.2 million net of tax ($0.13 per diluted share) related to the EEOC legal settlement.  2003 includes a credit of $1.4 million or $870,000 net of tax ($0.02 per diluted share) for reversal of a portion of the EEOC legal settlement accrual recorded in 2001.  2005 includes a credit of $6.0 million or $3.5 million net of tax ($0.07 per diluted share) as a result of the final settlement of the EEOC matter.  See note 15 of the notes to our consolidated financial statements.

(4)

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

(5)

2005 includes a $2.9 million ($0.06 per diluted share) nondeductible penalty for improper government billings.  See note 16 of the notes to our consolidated financial statements.

(6)

2002 includes a charge of $7.4 million or $4.5 million net of tax ($0.10 per diluted share) for impairment of our investment in Miami Air and accrual for our exposure on a standby letter of credit related to our investments.  2003 includes a credit of $1.3 million or $800,000 net of tax ($0.02 per diluted share) for reversal of the accrual for our exposure on the standby letter of credit related to our investment in Miami Air.  See note 6 of the notes to our consolidated financial statements.



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(7)

2004 includes $12.6 million or $7.3 million net of tax ($0.14 per diluted share) in gains on the sale of our investments in TDS Logistics, Inc. and Miami Air.  2005 includes $4.0 million or $2.4 million net of tax ($0.05 per diluted share) in gains on the sale of our investment in TDS Logistics, Inc.  See note 6 of the notes to our consolidated financial statements.

ITEM 7.

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

The following managements discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this report.  In addition, for information on our critical accounting policies and the judgment made in their application, please read Critical Accounting Policies and Estimates beginning on page 43.

Overview

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

We achieved revenues of $3.10 billion for the year ended December 31, 2005, a 13% increase over revenues of $2.74 billion in 2004.  Our financial position was strengthened by record gross and net revenues throughout 2005.  Despite growth in our business, we remain committed to leveraging our infrastructure by seeking to contain our operating expenses and improving our yield management in 2006.

Our results of operations in 2005 were impacted by, among other things, the following:

-

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



-

improved volumes in the North America forwarding market;



-

high effective tax rate due to fully reserved deferred tax benefits for foreign net operating losses;



-

foreign exchange gains of $2.5 million;



-

recapture of $6.0 million plus accrued interest of the EEOC Settlement Fund;



-

$2.9 million penalty for improper government billings;



-

a pre-tax charge of $1.6 million for workforce reductions, mainly in certain European and USA locations;



-

$4.0 million gain from the receipt of escrow proceeds from the 2004 sale of our investment in TDS Logistics, Inc.;



-

the repurchase of 5.0 million shares for $94.3 million under our share repurchase program;



-

the repurchase of 8.1 million shares of our common stock at an aggregate cost of $26.00 per share pursuant to our self-tender offer;



-

entered into an amended $300 million five-year secured revolving credit facility;





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-

issuance of $100 million floating rate, senior secured notes;



-

warehouse fire in our U.K. operations;



-

$4.0 million in insurance claims activity;



-

improved working capital management to increase cash flows from operating activities; and



-

continuing the deployment of information technology systems globally.



Leveraging our global network.  In 2005, we leveraged our global network and our ability to cross-sell services to increase volumes for all of our service offerings in all geographic divisions.  In addition, our balanced product offering enabled us to provide flexible solutions to our customers both domestically and internationally.  In 2005, we continued to leverage our low cost North America network and customer base, as customers increasingly moved products from overseas manufacturing facilities directly to U.S. distribution and retail centers.

North America forwarding market.  Deferred shipment (third through fifth day) volumes increased by 19.0% in 2005 versus an increase of 3.0% in 2004 and priority (next flight out, next day or second day) volumes decreased 8.6% in 2005 versus an increase of 1.9% in 2004.  In addition, U.S. imports and exports continue to increase, reflecting the strength of the U.S. economy and the continued shift of production overseas. The improvement in domestic shipment volumes added significantly to our increase in gross revenues during the year and improved results of operations.  Our 2005 results continue to highlight the ability of our low cost domestic model to generate domestic growth with a mix of priority and deferred shipments.

Income tax.  The effective tax rate for 2005 was 42.2%, due to fully reserved deferred tax benefits for foreign net operating losses.  Our effective tax rates fluctuate due to changes in the level of pre-tax income in foreign countries that have different rates and certain income and/or expenses that are permanently non-taxable or non-deductible in certain jurisdictions.

Foreign exchange impact on results of operations.  Our cash flows and net income are subject to fluctuations due to changes in exchange rates. We provide services to customers in locations throughout the world and, as a result, operate with many currencies, including the key currencies of North America, South America, Asia, the South Pacific and Europe.  In 2005, we recognized $2.5 million of net foreign exchange gains primarily due to gains in Brazil and European countries.

Recapture of EEOC Settlement Fund.  In February 2005, in response to a joint motion filed by EGL and the EEOC, a U.S. District Court ordered the return of $6.0 million to us of $8.5 million previously held in a fund to resolve potential claims in connection with a 2001 consent decree (see note 15 of the notes to our consolidated financial statements).  The joint motion and subsequent order resulted in $6.0 million in income in the first quarter of 2005.

Government billings.  In the fourth quarter of 2005, we recorded a $2.9 million penalty for improper war risk surcharge billings to Kellogg Brown & Root, Inc. (KBR).



Workforce reductions.In the second quarter of 2005, we eliminated approximately 350 full-time, part-time and contractor positions primarily in the United States and Europe as part of a cost reduction plan.  The workforce reduction resulted in a pre-tax charge of approximately $1.6 million during the second quarter of 2005 for termination benefits.  All amounts were paid by the end of the third quarter of 2005 and there are no remaining liabilities under this plan.

Gain from sale of TDS Logistics, Inc.  In 2005, we recorded a gain of $4.0 million related to our 2004 sale of TDS Logistics, Inc. following the resolution of certain contingencies held in escrow.



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Share repurchase program.  In 2005, we repurchased 5.0 million shares at an average price of $18.98 per share for approximately $94.3 million.

Self-tender offer.  In 2005, we repurchased 8.1 million shares at $26.00 per share for approximately $211.0 million.

Amended credit facility.  In September 2005, we entered into a new, five-year secured $300 million credit facility.  Under our new credit facility, we have increased borrowing capacity for permitted acquisitions, working capital and capital expenditures and other general corporate purposes.  As of December 31, 2005, we had borrowings of $93.8 million, $17.0 million in letters of credit outstanding and unused borrowing capacity of $189.2 million under the new credit facility.

Issuance of senior, secured notes.  On October 12, 2005, we entered into a note purchase agreement providing for the issuance and sale of $100 million aggregate principal amount of floating rate, senior secured notes due October 12, 2012.

Warehouse fire in U.K. operations.  On January 9, 2005, our London (Thurrock) warehouse and all contents were destroyed by fire.  We incurred $1.2 million of operating losses in the first quarter of 2005 as a result of the fire and received an interim payment totaling $928,000 during the second quarter of 2005 on our business interruption claim submitted to our insurance carriers.  In addition, we also accrued a liability $823,000 for estimated cargo claims in excess of policy limits and incurred a lease surrender charge of $1.6 million.

Claims activity.  We incurred $4.0 million of increased claims activity in the fourth quarter, excluding the warehouse fire in the U.K., for vehicle and workers compensation matters.

Cash flows from operations.  Cash flows from operations during the year ended December 31, 2005 were $156.1 million, reflecting improved management of our working capital, particularly through continued focus on our collection of trade receivables.

Global deployment of information technology systems.  In 2005, we continued the global deployment of our EGL Vision Suite of Technologies  Logistics Vision, Financial Vision and People Vision.  Logistics Vision is the freight forwarding system that allows a seamless flow of data across the globe, eliminating duplicate data entry on multiple systems.  Financial Vision is the Oracle-based financial system that allows global visibility of financial results, streamlined financial reporting and the ability to automate intercompany accounting and settlements.  People Vision is the Oracle-based human resources application that allows global visibility to employee tracking, training and development.  Management continues to believe that successful deployment of systems remains a critical component of improving operational efficiencies and effectively growing the business.  The global deployment of EGL Vision will continue into 2006.

We plan in 2006 to work towards continued revenue growth within our existing network and continued improvement of working capital management plus improving yields and operational efficiencies.



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Results of Operations

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



|                                                   | Year Ended December 31,           
|-------------------------------------------------- | ----------------------------------
|                                                   | 2005                              
|                                                   |                                   
|                                                   | Amount                            
|                                                   | (in thousands, except percentages)
|Revenues:                                          |                                   
|Air freight forwarding                             | $
2,035,020                       
|Ocean freight forwarding                           | 443,769                           
|Customs brokerage and other                        | 617,727                           
|Revenues                                           | $
3,096,516                       
|                                                   |                                   
|                                                   |                                   
|                                                   | Amount                            
|Net revenues:                                      |                                   
|Air freight forwarding                             | $
558,142                         
|Ocean freight forwarding                           | 89,939                            
|Customs brokerage and other                        | 300,393                           
|Net revenues                                       | $
948,474                         
|                                                   |                                   
|                                                   |                                   
|                                                   |                                   
|Operating expenses:                                |                                   
|Personnel costs                                    | 522,015                           
|Other selling, general and administrative expenses | 337,024                           
|EEOC legal settlement                              | (5,975)                           
|Operating income                                   | 95,410                            
|Nonoperating income (expense), net                 | 5,147                             
|Income before provision for income taxes           | 100,557                           
|Provision for income taxes                         | 42,397                            
|Net income                                         | $
58,160                          



2005 Compared to 2004

Revenues.  Revenues increased $355.1 million, or 13.0%, to $3,096.5 million in 2005, compared to $2,741.4 million in 2004, due to an increase in air freight forwarding revenues of $236.0 million, an increase in ocean freight forwarding revenues of $52.2 million and an increase in customs brokerage and other revenues of $66.8 million.  Net revenues, which represent revenues less freight transportation costs, increased $83.1 million, or 9.6%, to $948.5 million in 2005, compared to $865.4 million in 2004.  Net revenue margins (net revenues as a percentage of revenues) declined by 100 basis points in 2005 to 30.6%, as compared to 31.6% in 2004.  The decrease in margins reflects rising fuel costs and the continued acceleration of growth in international air and ocean products which carry a lower net revenue margin but higher net revenue per shipment. Our international revenues and costs also increased slightly over the prior year due to the effects of translating amounts to the U.S. dollar.



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Air freight forwarding revenues.  Air freight forwarding revenues increased $236.0 million, or 13.1%, to $2,035.0 million in 2005, compared to $1,799.0 million in 2004, primarily due to continuing volume and shipment increases in Asia Pacific and volume increases in North America.

Air freight forwarding net revenues increased $50.0 million, or 9.8%, to $558.1 million in 2005, compared to $508.1 million in 2004.  Air freight forwarding net revenues increased primarily in North America followed by Asia Pacific and Europe/Middle East.  The air freight forwarding margin (net revenues as a percentage of revenues) decreased to 27.4% for 2005, as compared to 28.2% for 2004, primarily due to declines in Asia Pacific resulting from the pass through of rising fuel costs to our customers which increased gross revenues without corresponding increases in net revenues.

Ocean freight forwarding revenues.  Ocean freight forwarding revenues increased $52.2 million, or 13.3%, to $443.8 million in 2005, compared to $391.6 million in 2004 primarily due to volume increases in Asia Pacific, Europe/Middle East and North America due to our increased focus on the ocean market and our customers continued shift toward a lower cost deferred product.

Ocean freight forwarding net revenues increased $13.7 million, or 18.0%, to $89.9 million in 2005, compared to $76.2 million in 2004, while the ocean freight forwarding margin increased to 20.3% for 2005, compared to 19.5% for 2004.  Ocean freight forwarding margins steadily declined throughout 2004 due to higher carrier rates and increased volumes of business in the competitive transpacific east-bound and Asia to Europe tradelanes.  Margins have begun to increase in 2005 from improved margins on ocean exports out of North America due to more available capacity introduced by ocean carriers.

Customs brokerage and other revenues.  Customs brokerage and other revenues, which include imports, warehousing, distribution and other logistics services, increased $66.8 million, or 12.1%, to $617.7 million in 2005, compared to $550.9 million in 2004.  Customs brokerage revenues increased primarily due to growth in Europe/Middle East and North America trade activity.  Warehousing and logistics revenues increased due to growth in all geographic divisions.

Customs brokerage and other net revenues increased $19.4 million, or 6.9%, to $300.4 million in 2005, compared to $281.0 million in 2004.  Customs brokerage and other margins, however, decreased to 48.6% for 2005, compared to 51.0% for 2004 primarily due to lower margins in Europe/Middle East and North America resulting from termination or completion of several high margin logistics projects.

Personnel costs.  Personnel costs include all compensation expenses, including those relating to sales commissions, incentive programs and salaries and to headquarters employees and executive officers.  Personnel costs increased $40.7 million, or 8.5%, to $522.0 million in 2005, compared to $481.3 million in 2004.  The increase in personnel costs was due primarily to increased hiring as a result of the increase in business activity and salary adjustments.  In addition, during the year ended December 31, 2005, we recorded charges of $1.6 million for workforce reductions, mainly in certain European and U.S. locations.  We have historically maintained incentive bonus, profit sharing and sales commission compensation plans to reward attainment of targets.  Our incentive bonus and profit sharing compensation plans include a combination of target achievements related to total company financial performance, business unit financial performance and individual goals and objectives.  For 2005, more challenging financial performance targets were introduced which have resulted in a lower level of incentive compensation expense in 2005.  As a percentage of net revenues, personnel costs decreased to 55.0% in 2005, compared to 55.6% in 2004.

Other selling, general and administrative expenses.Other selling, general and administrative expenses increased $34.3 million, or 11.3%, to $337.0 million in 2005, compared to $302.7 million in 2004.  As a percentage of net revenues, other selling, general and administrative expenses were 35.5% in 2005, compared to 35.0% in 2004.  The increase is due primarily to the $2.9 million penalty for improper government billings, increased fees for the continued deployment of our Vision suite of technologies  freight forwarding, accounting and human resources systems  as well as increased accounting and tax



31



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fees and increased insurance costs due to higher claims activity in the U.S. and cargo claims accruals relating to the warehouse fire in the U.K.

EEOC legal settlement.  During 2005, we recaptured $6.0 million of the $8.5 million previously held in a fund to resolve potential claims in connection with a 2001 consent decree with the EEOC, resulting primarily from a significantly lower number of qualified claimants than originally projected.

Nonoperating income (expense), net.  Nonoperating income (expense), net includes interest expense, interest income, minority interest expense, equity in earnings (losses) from affiliates, foreign exchange gains (losses) and other nonoperating income (expenses).  Nonoperating income was $5.1 million in 2005 as compared to nonoperating income of $7.3 million in 2004.  In 2005, we had foreign exchange gains of $2.5 million, as compared to foreign exchange losses of $1.4 million in 2004.  In 2004, we sold our investment in Miami Air and realized a gain of approximately $6.7 million.  We sold our investment in TDS in 2004 for approximately $51.4 million in cash.  We received approximately $45.3 million of the sale proceeds in August 2004.  In 2004, the TDS sale resulted in a gain of approximately $5.9 million, which excludes the proceeds held in escrow.  In 2005, we recorded a gain of $4.0 million following the resolution of certain contingencies.  See note 6 of the notes to our consolidated financial statements.  Additionally, we incurred interest expense, net of $2.7 million in 2005, compared to $6.2 million in 2004, and had equity losses of affiliates of $85,000 in 2005, compared to earnings of $1.7 million in 2004.

Effective tax rate.  Our effective tax rate for 2005 was 42.2% compared to 42.6% for 2004.  Our effective tax rates fluctuate due to changes in the level of pre-tax income in foreign countries that have different rates and certain income and/or expenses that are permanently non-taxable or non-deductible in certain jurisdictions including the U.S.  The penalty related to the KBR war surcharge is non-deductible for U.S. tax purposes.

2004 Compared to 2003

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

Air freight forwarding revenues.  Air freight forwarding revenues increased $389.3 million, or 27.6%, to $1,799.0 million in 2004, compared to $1,409.7 million in 2003 due to volume increases in all geographic divisions, particularly Asia Pacific, North America and Europe/Middle East.  This growth is primarily from improvements in shipment volumes and international charter activity.

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



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increases in air freight forwarding margins in Europe/Middle East primarily due to an increase in higher margin direct air shipments relative to consolidated shipments.

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

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

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

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

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

Other selling, general and administrative expenses.  Other selling, general and administrative expenses increased $32.8 million, or 12.2%, to $302.7 million in 2004, compared to $269.9 million in 2003.  As a percentage of net revenues, other selling, general and administrative expenses were 35.0% in 2004, compared to 36.7% in 2003.  The increase in other selling, general and administrative expenses is primarily due to an increase in facility expense.  The increase is mainly associated with additional or larger replacement facilities to accommodate increased operations.  A portion of the increase in facility expense is due to a $3.8 million net increase in facility accruals mainly covering North America.  In North America, we consolidated three facilities into our new facility in Miami, which was completed in late 2003.  We subleased one of the North American facilities for less than our remaining obligation and accrued the net amount of lease payments we expect to pay over the remaining lease term.  During the year, we accrued additional lease expense in North America and Europe on two vacant facilities due to unfavorable market conditions near the facilities. We subsequently released these accruals as we decided to utilize the North America facility for increased operations and the facility in Europe was subleased earlier than assumed in the previous accrual.  We also released a $1.6 million accrual originally recorded in prior years for a facility in Houston, Texas as we decided to utilize this facility for increased operations. Other selling, general and administrative expenses have also increased due to higher professional fees and communications costs related to systems implementations and preparations for internal controls testing required by the Sarbanes-Oxley Act of 2002 and foreign exchange effects.



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

Nonoperating income (expense), net.  Nonoperating income (expense), net includes interest expense, interest income, minority interest expense, equity in earnings (losses) from affiliates, foreign exchange gains (losses) and other nonoperating income (expenses).  Nonoperating income, net was $7.3 million in 2004, as compared to nonoperating expense of $6.2 million in 2003.  In 2004, we sold our investment in Miami Air and realized a gain of approximately $6.7 million.  We had previously written off our investment in Miami Air in 2002.  We sold our investment in TDS Logistics, Inc. (TDS) in 2004 for approximately $51.4 million in cash.  We received approximately $45.3 million of the sale proceeds in August 2004 and an additional $557,000 in January 2005.  The remaining $5.5 million of the TDS sale proceeds are being held in escrow subject to the resolution of certain contingencies and time periods.  The TDS sale resulted in a gain of approximately $5.9 million, which excludes the proceeds held in escrow.  See note 6 of the notes to our consolidated financial statements.  Additionally, we incurred interest expense, net of $6.2 million in 2004, compared to $4.9 million in 2003, and had equity earnings of affiliates of $1.7 million in 2004, compared to losses of $199,000 in 2003.

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

Liquidity and Capital Resources

General

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

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

As primarily a non-asset based freight forwarder, we do not have the same level of capital expenditures that would be required of an asset based forwarder.  We believe our anticipated capital expenditures for 2006 will be in the range of $45 to $50 million, including approximately $32 to $37 million expected on information systems expenditures.  Based on current plans, we believe that our existing capital resources, including $111.5 million of cash and cash equivalents and $189.2 million of available borrowing capacity on our credit facility, will be sufficient to meet working capital requirements through December 31, 2006.  However, future changes in our business could cause us to consume available resources before that time.  Additionally, funds may not be available when needed and even if available, additional funds may be raised through financing arrangements and/or the issuance of preferred



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or common stock or convertible securities on terms and prices significantly more favorable than those of the currently outstanding common stock, which could have the effect of diluting or adversely affecting the holdings or rights of our existing stockholders.  If adequate funds are unavailable, we may be required to delay, scale back or eliminate some of our operating activities, including, without limitation, the timing and extent of our marketing programs, and the extent and timing of hiring additional personnel.  We cannot provide assurance that additional financing will be available to us on acceptable terms, or at all.

2005 Compared to 2004

Net cash provided by operating activities.  Net cash provided by operating activities was $156.1 million in 2005, compared to $32.1 million in 2004.  The increase in 2005 was primarily due to an increase in net income and a $49.4 million net increase in cash from changes in working capital for 2005, compared to $61.4 million net decrease for 2004.  The increase in cash from changes in working capital is due to a $20.2 million decrease in trade receivables due to improved collection efforts as evidenced by a 13% decrease in days sales outstanding from 70 days at December 31, 2004 to 61 days at December 31, 2005.  In addition to the decrease in trade receivables, there was a $29.5 million increase in payables and other accrued liabilities, compared with a $79.8 million increase in 2004.

Net cash used in investing activities.  Net cash used in investing activities in 2005 was $29.4 million, compared to $7.0 million in 2004.  Capital expenditures were $41.2 million during 2005, compared to $38.2 million during 2004, a $3.0 million increase.  The expenditures in 2005 were mainly due to the implementation of our operational and financial systems, other software expenditures and equipment purchases.  $12.5 million of the capital expenditures in 2005 relate to the purchase of a corporate plane.  Restricted cash decreased by $5.3 million in 2005 as compared to an increase of $3.4 million in 2004.  During 2005 and 2004, in connection with our acquisition of Miami International Forwarders in 2003 and the buyout of a minority interest partner in Thailand in 2001, we made earnout payments totaling $4.4 million and $3.3 million, respectively.  During 2004, we received proceeds of $6.7 million for the sale of our interest in an unconsolidated affiliate, Miami Air, to an unrelated party and proceeds of $45.3 million for the sale of our interest in an unconsolidated affiliate, TDS, to an unrelated party.  During the second quarter of 2004, we acquired the outside ownership of our consolidated affiliates in France, Spain and Portugal for aggregate consideration of $16.2 million in cash.  In 2005 and 2004, we received proceeds of $4.3 million and $1.1 million, respectively, from sales of other property and equipment.

Net cash used in financing activities.  Net cash used in financing activities in 2005 was $107.7 million, compared to $22.6 million in 2004.  The cash used in financing activities in 2005 consists of $309.3 million in repayments of debt, $211.0 million in cash payments for the repurchase of 8.1 million shares of our outstanding common stock from our tender offer, $94.3 million in cash payments for the repurchase of 5.0 million shares of our outstanding common stock, $3.5 million in payments of financing fees related to our new Amended and Restated Credit Facility, $3.4 million of repayment of financed insurance premiums, $2.7 million from the repayment of short-term debt, net of issuances and $2.2 million in payments of capital lease obligations, offset by $495.6 million in proceeds from the issuance of debt, $21.2 million in proceeds from the exercise of 1.0 million stock options and $1.1 million in proceeds from the issuance of 66,000 shares of common stock from our Employee Stock Purchase Plan (ESPP).  The cash used in financing activities in 2004 consists of $6.4 million of repayment of financed insurance premiums, $59.1 million in cash payments for the repurchase of 3.4 million shares of our outstanding common stock, $218.8 million in repayments of debt and $1.1 million in payments of financing fees related to our new Credit Facility, offset by $39.9 million in proceeds from the exercise of 2.1 million stock options, $211.0 million proceeds from the issuance of debt and $791,000 in proceeds from the issuance of 42,000 shares of common stock from our ESPP.



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2004 Compared to 2003

Net cash provided by operating activities.  Net cash provided by operating activities was $32.1 million in 2004, compared to $39.0 million in 2003.  The decrease in 2004 was primarily due to a $61.4 million net decrease in cash from changes in working capital for 2004, compared to $30.0 million net decrease for 2003, offset by an increase in net income.  The decrease in cash from changes in working capital is due to a significant increase in gross revenues during the month of December 2004, compared to December 2003, resulting in an increase in trade receivables and a 4% increase in days sales outstanding from 67 days at December 31, 2003 to 70 days at December 31, 2004.  The increase in trade receivables was offset by an increase in payables and other accrued liabilities.

Net cash used in investing activities.  Net cash used in investing activities in 2004 was $7.0 million compared to $49.8 million in 2003.  Capital expenditures were $38.2 million during 2004, compared to $26.0 million during 2003, a $12.2 million increase.  The expenditures in 2004 were mainly due to the implementation of our operational and financial systems, other software expenditures and equipment purchases.  During 2004, we received proceeds of $6.7 million for the sale of our interest in an unconsolidated affiliate, Miami Air, to an unrelated party and proceeds of $45.3 million for the sale of our interest in an unconsolidated affiliate, TDS, to an unrelated party.

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

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

Net cash used in financing activities.  Net cash used in financing activities in 2004 was $22.6 million, compared to $4.8 million in 2003.  The cash used in financing activities in 2004 consists of $6.4 million in repayment of financed insurance premiums, $59.1 million in cash payments for the repurchase of 3.4 million shares of our outstanding common stock, $218.8 million in repayments of debt and $1.1 million in payments of financing fees related to our new Credit Facility, offset by $39.9 million in proceeds from the exercise of 2.1 million stock options, $211.0 million in proceeds from the issuance of debt and $791,000 in proceeds from the issuance of 42,000 shares of common stock from our ESPP.  Cash used in financing activities in 2003 consisted of $9.1 million for repayment of financed insurance premiums and $214,000 in cash payments to our minority interest partners, offset by $4.1 million in proceeds from the exercise of 324,000 stock options and $540,000 in proceeds from the issuance of 43,000 shares of common stock from our ESPP.

Other factors affecting our liquidity and capital resources

Amended and Restated Credit Agreement. We entered into an agreement dated as of September 30, 2005 establishing a $300 million, senior secured revolving credit facility (the Amended and Restated Credit Agreement).  The Amended and Restated Credit Agreement amends and restates our prior revolving credit agreement dated as of September 15, 2004, as previously amended (the Prior Credit Agreement).  The Amended and Restated Credit Agreement is with a syndicate of 13 financial institutions with Bank of America, N.A., as lender and administrative agent and matures on September 30, 2010.



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We may use borrowings under the Amended and Restated Credit Agreement for working capital, capital expenditures and other lawful corporate purposes, to make permitted acquisitions and investments, to pay dividends and to repurchase our common stock.

Amounts borrowed under the Amended and Restated Credit Agreement are guaranteed by all of our existing and future direct and indirect domestic subsidiaries and secured equally and ratably by:

-

all of our present and future shares of capital stock of (or other ownership or profit interests in) each of our present and future subsidiaries (limited, in the case of certain material first-tier foreign subsidiaries, to a pledge of 65% of the capital stock of such subsidiaries);



-

all of our and each of our domestic subsidiaries present and future property and assets; and



-

all proceeds and products of the property and assets described above.



Loans under the Amended and Restated Credit Agreement will bear interest initially at a rate per annum equal to either, at our option, (1) LIBOR plus 1.25% or (2) the Base Rate (defined as the higher of Bank of America, N.A.s prime rate or 0.50% over the Federal Funds rate).  In addition, we are required to pay a commitment fee of 0.30% on the undrawn amounts under the Amended and Restated Credit Agreement.  Interest rates and commitment fees under the Amended and Restated Credit Agreement are subject to increase or decrease as a function of the ratio of our Consolidated Net Funded Indebtedness to Consolidated EBITDA (each as defined in the Amended and Restated Credit Agreement).  We may select interest periods of one, two, three or six months for LIBOR loans, subject to availability.  Interest will be payable at the end of the selected interest period, but no less frequently than quarterly.

Under the Amended and Restated Credit Agreement, we are subject to various covenants, including, among others, the following:

-

a requirement that we maintain, on a rolling four-quarter basis, a ratio of Consolidated Net Funded Indebtedness to Consolidated EBITDA (each as defined in the Amended and Restated Credit Agreement) of not greater than 3.5 to 1.0 through December 31, 2006, and decreasing to 3.0 to 1.0 thereafter;



-

a requirement that, on a rolling four-quarter basis, we have a ratio of Consolidated EBIT to Consolidated Interest Charges (each as defined in the Amended and Restated Credit Agreement) of at least 2.5 to 1.0 through December 31, 2006, and increasing to 3.0 to 1.0 thereafter;



-

a requirement that, at the end of each fiscal quarter, we have a ratio of book accounts receivable by us and our subsidiaries to Consolidated Net Funded Indebtedness (as defined in the Amended and Restated Credit Agreement) of at least 1.1 to 1.0; and



-

limitations on, among other things, liens indebtedness, asset sales, dividends and stock redemptions, investments and acquisitions, transactions with affiliates and consolidations, mergers and sales of all or a substantial part of our consolidated assets.



The Amended and Restated Credit Agreement contains events of default customary for an agreement of this type.  The occurrence of certain specified internal control events that could reasonably be expected to have a material adverse effect on us also constitutes an event of default under the Amended and Restated Credit Agreement.  If a default occurs and is continuing, the administrative agent may, among other things, declare all outstanding principle amounts immediately due and payable.



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The Amended and Restated Credit Agreement contains a $75 million sub-facility for letters of credit.  On October 4, 2005, we borrowed approximately $95.8 million under the Amended and Restated Credit Agreement to partially fund the purchase of shares of our common stock in connection with the tender offer (see note 11 of the notes to our consolidated financial statements).  At December 31, 2005, we had borrowings of $93.8 million, $17.0 million in letters of credit outstanding and unused borrowing capacity of $189.2 million under the Amended and Restated Credit Agreement.

Note Purchase Agreement. On October 12, 2005, we entered into a note purchase agreement (the Note Purchase Agreement) providing for the issuance and sale of $100 million aggregate principal amount of floating rate, senior secured notes due October 12, 2012 (the Notes) to the purchasers named therein.  Banc of America Securities LLC acted as placement agent for this offering.  The issuance and sale of the Notes by us, and the resale of the Notes by Banc of America Securities LLC was made pursuant to one or more exemptions from the registration requirements of the Securities Act of 1933.

We  used the proceeds from the sale of the Notes to repay the amounts outstanding under our $100 million bridge loan facility established by an agreement (the Bridge Loan Agreement) dated as of September 30, 2005, among EGL and the other parties thereto.  The Bridge Loan Agreement was entered into in connection with the tender offer.  The Bridge Loan Agreement was terminated upon repayment.

The Notes are guaranteed by all of our existing and future direct and indirect domestic subsidiaries and are secured by:

-

all of our present and future shares of capital stock of (or other ownership or profit interests in) each of our present and future subsidiaries (limited, in the case of certain material first-tier foreign subsidiaries, to a pledge of 65% of the capital stock of such subsidiaries);



-

all of our and each of our domestic subsidiaries present and future property and assets; and



-

all proceeds and products of the property and assets described above.



The Notes rank pari passu in right of payment with our obligations under our Amended and Restated Credit Agreement and the obligations of our guarantor subsidiaries to guarantee our obligations under the Note Purchase Agreement rank pari passu in right of payment with their guarantees in respect of the Amended and Restated Credit Agreement.

Interest on the Notes will accrue at a floating rate per annum equal to LIBOR plus 1.65% for the applicable interest period. Interest periods are defined as the three month period commencing on the closing date and each successive three month period thereafter.  Interest on the Notes is payable quarterly in arrears on the last day of each interest period.

Under the Note Purchase Agreement, we are subject to various covenants, including, among others, the following:

-

a requirement that we maintain, on a rolling four-quarter basis, a ratio of Consolidated Net Debt to Consolidated EBITDA (each as defined in the Note Purchase Agreement) of not greater than 3.5 to 1.0;



-

a requirement that we maintain, on a rolling four-quarter basis, a ratio of Consolidated EBIT to Consolidated Interest Expense (each as defined in the Note Purchase Agreement) of at least 2.5 to 1.0;



-

a requirement that we have, at all times, a ratio of (x) book accounts receivable of the Company and certain subsidiaries to (y) Consolidated Net Debt (as defined in the Note Purchase Agreement) of at least 1.1 to 1.0;



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-

a requirement that we not, at any time, permit the aggregate amount of all Priority Debt (as defined in the Note Purchase Agreement) to exceed 10% of its Consolidated Net Worth (as defined in the Note Purchase Agreement) as of the most recently ended fiscal quarter; and



-

limitations on, among other things, liens asset sales, dividends and stock redemptions, investments and acquisitions, transactions with affiliates and consolidations and mergers.



The Note Purchase Agreement contains customary events of default.  If a default occurs and is continuing, the Notes then outstanding shall (either automatically or by declaration of the holders of more than 50% of the principal amount of Notes then outstanding, depending upon the circumstances resulting in the default) become immediately due and payable.  If an event of default occurs and is continuing because we failed to pay principal, interest or other amounts due and payable on the Notes, then any Note holder may declare all of the Notes held by it to be immediately due and payable.

Release of restricted cash.  In February 2005, in response to a joint motion filed by EGL and the EEOC, a U.S. District Court ordered the return of $6.0 million to us of $8.5 million previously held in an established fund to resolve potential claims in connection with a 2001 consent decree (see note 15 of the notes to our consolidated financial statements).  The joint motion and subsequent order resulted in $6.0 million in income in the first quarter of 2005.

Capital expenditures.  We are in the process of developing and implementing computer system solutions for operational, human resources and financial systems.  Our capital expenditures were approximately $10.1 million and $18.5 million related to the development of these systems during 2005 and 2004, respectively.  Our expected capital expenditures for 2006 are approximately $45 to $50 million, including approximately $32 to $37 million for information technology development and upgrades.

TDS Logistics, Inc.  In August 2004, we sold our investment in TDS Logistics, Inc. (TDS) to an unrelated party for approximately $51.4 million in cash.  We received approximately $45.3 million of the sale proceeds in August 2004, with additional payments totaling $3.3 million in 2005 and $1.3 million in January 2006.  The remaining $1.5 million of the sale proceeds are held in escrow subject to the resolution of certain contingencies and time periods.  The sale resulted in an initial gain of $5.9 million in 2004 and an additional gain of $4.0 million in 2005 when certain funds were released out of escrow.  These amounts are included in non-operating income in our consolidated statement of income.

Share repurchase program.  On April 4, 2005, our Board of Directors adopted a stock repurchase program to repurchase up to $60 million in value of our outstanding common stock depending on market conditions and other factors with an expiration date of August 4, 2005.  On May 31, 2005, the Board of Directors approved an increase in the maximum dollar amount of shares to be repurchased from $60 million to $120 million and extended the expiration date to September 28, 2005.  As of September 28, 2005, we had repurchased a total of 5.0 million shares at an average price of $18.98 per share for approximately $94.3 million.

On August 29, 2005, the Board of Directors authorized a modified Dutch Auction self-tender offer to purchase up to 9,615,000 shares (up to $250 million) of its common stock, representing approximately 20% of its approximately 47.2 million outstanding shares as of August 24, 2005.  The tender offer commenced on Tuesday, August 30, 2005 and expired on Wednesday, September 28, 2005.  In the tender offer, shareholders had the opportunity to tender some or all of their shares at a price not less than $22.50 per share or more than $26.00 per share, net to the seller in cash, without interest.

On October 4, 2005, we announced the final results of the tender offer.  An aggregate of 8,085,958 shares were properly tendered and not withdrawn at or below a price of $26.00.  Because shareholders tendered less than 9,615,000 shares, there was no proration of tendered shares.  We financed the tender offer with the use of cash on hand and borrowings of $196.0 million under both the new $300.0



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million line of credit facility and the $100.0 million bridge loan that was refinanced by the issuance of $100.0 million of floating rate senior secured notes due in October 2012 (see note 8 of the notes to our consolidated financial statements).  As a result, we accepted for purchase and paid approximately $211.0 million for all 8,085,958 shares at a price of $26.00 per share.  Any shares received in the tender offer that were not tendered properly were returned to the tendering shareholders.  The shares purchased pursuant to the tender offer represented approximately 17.1% of EGLs outstanding shares as of September 30, 2005.

In February and March 2004, our Board of Directors authorized the repurchase of up to $65 million in value of our outstanding common stock depending on market conditions and other factors.  During the program, which expired in July 2004, we repurchased approximately 3.4 million shares of our common stock at an average price of $17.37 per share for approximately $59.1 million.

Stock options.  As of December 31, 2005, we had outstanding non-qualified stock options to purchase an aggregate of 3.1 million shares of common stock at exercise prices equal to the fair market value of the underlying common stock on the dates of grant (prices ranging from $8.88 to $37.29).  At the time a non-qualified stock option is exercised, we will generally be entitled to a deduction for federal and state income tax purposes equal to the difference between the fair market value of the common stock on the date of exercise and the option price.  As a result of non-qualified stock option exercises in 2005 and 2004 to purchase an aggregate of 1.0 million and 2.1 million shares of common stock, we are entitled to a federal and state income tax deduction of approximately $12.1 million and $19.2 million, respectively.  We have recognized a reduction of our federal and state income tax obligations of approximately $5.0 million and $7.8 million in 2005 and 2004, respectively.  Accordingly, we recorded an increase to additional paid-in capital and a reduction to current taxes payable.  Any exercises of non-qualified stock options in the future at exercise prices below the then fair market value of the common stock may also result in tax deductions equal to the difference between those amounts.  There is uncertainty as to whether the exercises will occur, the amount of any deductions, and our ability to fully utilize any tax deductions.

Off-Balance Sheet Arrangements



As is common in our industry, we have entered into certain off-balance sheet arrangements in the ordinary course of business that result in risks not directly reflected in our balance sheets.  Our significant off-balance sheet arrangements include liabilities associated with guarantees secured by letters of credit, surety bonds and security time deposits and non-cancelable operating leases.  We have not engaged in any off-balance sheet financing arrangements through special purpose entities.

Guarantees.  We guarantee certain financial liabilities, the majority of which relate to our freight forwarding operations.  In the normal course of our business, we are required to guarantee certain amounts related to customs bonds and services received from airlines.  These types of guarantees are usual and customary in the freight forwarding industry.  We operate as a customs broker and prepare and file all formal documentation required for clearance through customs agencies, obtain customs bonds, facilitate the payment of import duties on behalf of the importer and arrange for payment of collect freight charges.  We also assist the importer in obtaining the most advantageous commodity classifications, qualifying for duty drawback refunds and arranges for surety bonds for importers.

We secure these guarantees primarily by three methods:  a $75 million standby letter of credit sub-facility included within our Amended and Restated Credit Agreement, surety bonds and security time deposits.  Security time deposits are restricted as to withdrawal for a specified timeframe and are classified on our balance sheet as restricted cash.  As of December 31, 2005, we had $17.0 million in letters of credit outstanding.

We also issue IATA (International Air Transportation Association) related guarantees, customs bonds and other working capital credit line guarantees in the normal course of business.  IATA related guarantees and customs bonds are issued to facilitate the movement and clearance of freight.  Working capital credit line guarantees include, but are not limited to, guarantees associated with insurance



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requirements and certain potential tax obligations.  Generally, guarantees have one-year or two-year terms and are renewed upon expiration.  As of December 31, 2005, total IATA related guarantees, customs bonds and other working capital credit line guarantees were approximately $85.4 million.  Approximately $52.4 million of guarantees, customs bonds and borrowings against credit line guarantees were outstanding, including guarantees of our trade payables and accrued transportation costs and borrowings against our international credit facilities of $13.4 million, which were recorded as liabilities on our consolidated balance sheet.

Leases.  We enter into operating lease agreements, principally for freight operation facilities and office space.  These leases are non-cancelable and expire on various dates through 2025.  Certain of  our lease agreements contain renewal options and rent escalation clauses.  These leases allow us to conserve cash by paying a monthly lease payment for use of facilities, rather than purchasing the facilities.  Rent expense for operating leases was $80.8 million, $86.9 million and $77.5 million for the years ended December 31, 2005, 2004 and 2003, respectively, which is net of sublease income of $3.7 million, $4.5 million and $3.6 million, respectively.  Please refer to Note 16 to our consolidated financial statements for more details regarding our outstanding leases.

Disclosures About Contractual Obligations and Commercial Commitments

A summary of payments due by period of our contractual obligations and commercial commitments as of December 31, 2005 are shown in the table below (in thousands).  A more complete description of these obligations and commitments is included in the notes to our consolidated financial statements.



|Contractual Obligations              |  | Total     |  | Less than
1 Year |  | 1  3
Years |  | 4  5
Years |  | After 5
Years
|------------------------------------ |  | --------- |  | ---------------- |  | ----------- |  | ----------- |  | -------------
|Long-term debt including interest    |  | $
304,719 |  | $
29,753         |  | $
38,990    |  | $
124,300   |  | $
111,676    
|Other liabilities (Note 7)           |  | 97,769    |  | 91,917           |  | 2,028       |  | 1,179       |  | 2,645        
|Benefit plan contributions (Note 12) |  | 1,550     |  | 1,550            |  | -           |  | -           |  | -            
|Interest rate swap                   |  | 207       |  | 69               |  | 138         |  | -           |  | -            
|Capital lease obligations
 (Note 16) |  | 3,071     |  | 1,981            |  | 1,052       |  | 38          |  | -            
|Operating leases (Note 16)           |  | 427,091   |  | 69,838           |  | 103,750     |  | 80,972      |  | 172,531      
|Total contractual obligations        |  | $
834,407 |  | $
195,108        |  | $
145,958   |  | $
206,489   |  | $
286,852    



In addition to the contractual obligations above, as of December 31, 2005, we have payments of up to $200,000 contingently payable during 2006 related to business acquisitions.  See note 8 of the notes to the consolidated financial statements.

Certain Relationships and Related Party Transactions

Aircraft usage payments

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

On July 18, 2005, the Compensation Committee of the Board of Directors of EGL approved, in lieu of incremental cash compensation, an arrangement to provide Mr. Crane, or his designees, with up to



41



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an aggregate of 150 hours per year of personal use of our aircraft without reimbursement by Mr. Crane.  Mr. Crane actually used 158.7 hours in 2005.  On March 15, 2006, the Compensation Committee of the Board of Directors approved the 8.7 hours of overage and reduced the amount allowed for personal usage in 2006 by 8.7 hours to 141.3 hours.  We intend to include usage of 158.7 hours in Mr. Cranes taxable income for 2005 as required by current U.S. federal income tax regulations.  The U.S. federal income tax regulations also restrict the amount of corporate tax deductions for operating costs and tax depreciation attributable to personal use of the company plane.  The amount of non-deductible personal use expense is reduced by the imputed income recognized by the employee.  On August 5, 2005, the Board of Directors of EGL approved, in lieu of additional director cash compensation that would make the existing compensation package more competitive, an arrangement to provide the independent members of the Board of Directors with limited personal usage of our aircraft, without reimbursement by the directors.  Personal usage of the aircraft by the directors is subject to availability, with priority given to our usage, and the cumulative number of hours allowed for all directors may not exceed 100 hours per year.  We will record the number of hours utilized by each director and include in such directors yearly taxable income the amount required by then current U.S. federal income tax regulations.  In 2005, the directors did not utilize the company plane.

Shared employees

Certain of our employees also perform services for companies owned by Mr. Crane.  We are reimbursed for these services based upon an allocation percentage of total salaries agreed to by us and Mr. Crane.  We received reimbursements of $136,000, $135,000 and $62,000 for 2005, 2004 and 2003, respectively.  Amounts billed but not received as of December 31, 2005 were $72,000 and are included in other receivables on the consolidated balance sheets.

Relatives of EGL Executive Officers and Directors

Robert Kelley is the brother of Neil Kelley, a member of our Board of Directors.  Robert Kelley is a logistics manager for our company and receives an annual salary of $76,000 per year.  Patrick Bento is the brother of E. Joseph Bento, our President of North America and CMO.  Patrick Bento is a global account director for our company and receives an annual salary of $125,000 per year.  Dan Getty is the brother-in-law of E. Joseph Bento, our President of North America and CMO.  Dan Getty is the managing director of one of our stations and receives an annual salary of $146,000 per year.

Seasonality

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



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Critical Accounting Policies and Estimates

Use of estimates

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

-

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

-

managements understanding of the companys business  both historical results and expected future results;

-

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

-

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

-

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

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

Revenue recognition

Domestic revenues and most domestic operating costs are recognized when shipments are picked up from the customer.  International revenues and freight consolidation costs are recognized in the period when shipments are tendered to a carrier for transport to a foreign destination.  This is one of the permissible methods under Emerging Issues Task Force (EITF) Issue No. 91-9, Revenue and Expense Recognition for Freight Services in Process.  This method generally results in recognition of revenues and gross profit earlier than methods that do not recognize revenues until a proof of delivery is received.  This method of revenue and cost recognition does not result in a material difference than if revenues and costs were recognized upon delivery.  Customs brokerage and other revenues are recognized upon completing the documents necessary for customs clearance or completing other fee-based services.  Revenues recognized as an indirect air carrier or an ocean freight consolidator include the direct carriers charges to EGL for carrying the shipment.  Revenues recognized in other capacities include only the commissions and fees received.  We report the costs of certain reimbursed incidental activities on a gross basis in revenues and cost of transportation.



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



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

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

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

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

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

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

Allowance for doubtful accounts

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



44



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transactions, the inability to collect such amounts could result in losses greater than the revenues recognized when such billings were recorded.  If circumstances related to customers change, our estimates of the allowance for doubtful accounts would be further adjusted.

Computer software

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

We have incurred substantial costs during the periods presented related to a number of information systems projects that were being developed over that time period.  Inherent in the capitalization of those projects are the assumptions that after considering the technological and business issues related to their development, such development efforts will be successfully completed and that benefits to be provided by the completed projects will exceed the costs capitalized to develop the systems.  Management believes that all projects capitalized at December 31, 2005 will be successfully completed and will result in benefits recoverable in future periods.

Goodwill and other intangibles

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

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



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Impairment of assets

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

Merger and restructuring

We have engaged in merger and restructuring actions that require our management to utilize significant estimates related to future lease obligations for duplicate facilities, expenses for severance and other employee separation costs and costs for termination of joint venture/agency agreements.  Management makes significant estimates, including the amount of sublease income we will recover for future lease obligations on duplicate facilities.  Should the actual amounts differ from our estimates, the amount of the restructuring charges could be materially impacted.  See note 16 of the notes to the consolidated financial statements.

Taxes on earnings

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

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

As discussed in note 10 of the notes to our consolidated financial statements, EGLs U.S. federal income tax returns from fiscal years 2000 to 2001 have been audited by the IRS with the case currently at the Appeals division for resolution.  The IRS has proposed, among other items, to disallow various merger transaction costs and various software research and development expenditures taken as tax deductions.  If the proposed adjustments are upheld, we would be required to pay a total of approximately $14 million in cash taxes, of which approximately $6.5 million would impact the consolidated statement of income, plus accrued interest of approximately $4.9 million through December 31, 2005.  We are protesting the proposed adjustments to the Appeals office of the IRS.  We believe our U.S. federal income



46



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tax returns were completed in accordance with applicable laws and regulations and do not believe material adjustments to our tax returns are probable.  However, there is no assurance that the final outcome will not result in material adjustments which would have a material adverse impact on our results of operations and cash flows.

Other critical accounting policies

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

New accounting pronouncements

We discuss new accounting pronouncements in note 1 of the notes to our consolidated financial statements.

ITEM 7A.

Quantitative and Qualitative Disclosures about Market Risk

Our cash flows and net income are subject to fluctuations due to changes in exchange rates.  We attempt to limit our exposure to changing foreign exchange rates through operational actions.  We provide services to customers in locations throughout the world and, as a result, operate with many functional currencies including the key currencies of North America, Latin America, Asia, the South Pacific and Europe.  This diverse base of local currency costs serves to partially counterbalance the effect of potential changes in the value of our local currency denominated revenues and expenses.  Short-term exposures to changing foreign currency exchange rates are related primarily to intercompany transactions.  The duration of these exposures is minimized through the use of an intercompany netting and settlement system that settles the majority of intercompany obligations two times per month.  We use short-term foreign exchange forward contracts on a limited basis to minimize exposures to exchange rates on recorded receivables and payables.  The value of foreign exchange forward contracts was not significant at December 31, 2005 or 2004.

In October 2005, we issued $100 million of floating rate, senior secured notes due in October 2012.  The notes have a variable LIBOR-based interest rate.  See notes 8 of the notes to our consolidated financial statements.  As of December 31, 2005, we had approximately $93.8 million outstanding under our line of credit.  Our lease payments on certain financed facilities are tied to market interest rates.  At December 31, 2005, a 10% rise in the base rate for these financing arrangements would not have a material impact on operating income in 2006.

We have not purchased any material futures contracts nor have we purchased or held any material derivative financial instruments for trading purposes during 2005.  In November 2005, we entered into a three-year interest rate swap agreement, which was designated as a cash flow hedge, to reduce our exposure to fluctuations in interest rates on our $300 million of our LIBOR-based revolving credit facility or any substitutive debt agreements we enter into.  The fair value of the interest rate swap at December 31, 2005 was a loss of $301,000, of which $94,000 has been recognized as interest expense.  The interest rate swap expires in January 2009.

ITEM 8.

Financial Statements and Supplementary Data

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



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ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A.

Controls and Procedures



Disclosure Controls and Procedures

Management, with the participation and supervision of the Chief Executive Officer and the Principal Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report.  Based on this evaluation, the Chief Executive Officer and the Principal Financial Officer concluded that the disclosure controls and procedures were effective as of December 31, 2005.

Managements Report on Internal Control Over Financial Reporting

The management of EGL, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined by Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934.  The Companys internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

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

Management, under the supervision of and with participation from the Chief Executive Officer and the Principal Financial Officer, has conducted an evaluation of the effectiveness of the design and operation of its internal control over financial reporting based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Based on this evaluation, management concluded that that the Company maintained effective internal control over financial reporting as of December 31, 2005.

The Companys independent registered public accounting firm has audited managements assessment of the effectiveness of the Companys internal control over financial reporting as of December 31, 2005 as stated in their report on page F-2.

Changes in Internal Control Over Financial Reporting

In its 2004 Annual Report on Form 10-K, the Company disclosed the following two material weaknesses internal control over financial reporting as of December 31, 2004.  The Company continued to disclose these material weaknesses during the first three quarters of 2005 and took the following steps to remediate them during 2005.

Determination of income tax account balances

The Companys took the following remediation steps during the year to remediate the material weakness related to the determination of income tax account balances:

-

engaged tax specialists to analyze the deferred tax assets and liabilities for foreign locations;



-

developed a comprehensive tax supplemental reporting package to gather relevant data from the foreign locations for reporting tax information on a U.S. GAAP basis;



48



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-

engaged tax specialists to review the data for accuracy and completeness with respect to differences between statutory accounting and U.S. GAAP tax accounting; and



-

augmented the Companys tax team with a Senior Vice President of Tax to manage the overall remediation process.



General ledger account reconciliations and the monitoring and review of general ledger accounts

The Company took the following remediation steps during the year to remediate the material weakness related to general ledger account reconciliations and the monitoring and review of general ledger accounts:

-

improved the organizational structure to achieve the proper levels and quality of our accounting, finance and internal audit personnel;



-

strengthened the procedures for timely preparation and review of account reconciliations including detailed documentary support; and



-

implemented monitoring controls on the status of account reconciliations and unresolved reconciling items.



During the quarter ended December 31, 2005, we completed our testing of the design and operating effectiveness of the above remediated controls and have concluded that the previously reported material weaknesses described above have been remediated.

Except for the changes in connection with the remediation of material weaknesses as described above, there have been no changes in the Companys internal control over financial reporting during the quarter ended December 31, 2005, that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



ITEM 9B.

Other Information

None

PART III

ITEM 10.

Directors and Executive Officers of the Registrant

The information required by this item is incorporated by reference to information under the caption Proposal 1Election of Directors and to the information under the caption Section 16(a) Reporting Delinquencies in our definitive Proxy Statement (the 2006 Proxy Statement) for our 2006 annual meeting of shareholders.



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Code of Ethics

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

EGL, Inc.

Attention: Investor Relations

15350 Vickery Drive

Houston, TX 77032

(281) 618-3100

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

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

ITEM 11.

Executive Compensation

The information required by this item is incorporated herein by reference to the 2006 Proxy Statement.

ITEM 12.

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

The information required by this item is incorporated herein by reference to the 2006 Proxy Statement.

ITEM 13.

Certain Relationships and Related Transactions

The information required by this item is incorporated herein by reference to the 2006 Proxy Statement.

ITEM 14.

Principal Accountant Fees and Services

The information required by this item is incorporated by reference to the 2006 Proxy Statement.



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PART IV

ITEM 15.

Exhibits and Financial Statement Schedules

(a)

1) Financial Statements

Item

Page

Index

F-1

Report of Independent Registered Public Accounting Firm

F-2

Consolidated Balance Sheets as of December 31, 2005 and 2004

F-4

Consolidated Statements of Income for the Years Ended

December 31, 2005, 2004 and 2003

F-5

Consolidated Statements of Cash Flows for the Years Ended

December 31, 2005, 2004 and 2003

F-6

Consolidated Statements of Stockholders Equity for the Years Ended

December 31, 2005, 2004 and 2003

F-8

Notes to Consolidated Financial Statements

F-9

2) Financial Statement Schedules

Schedule II Valuation and Qualifying Accounts for the Years Ended

December 31, 2005, 2004 and 2003

S-1



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



(b)

Exhibits



|Exhibit Number | Description                                                                                                                                                                                                                                                                                                                                                                             
|-------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*3.1           | Second Amended and Restated Articles of Incorporation of EGL, as amended (filed as Exhibit 3(i) to EGLs Form 8-A/A filed with the Securities and Exchange Commission on September 29, 2000 and incorporated herein by reference).                                                                                                                                                      
|*3.2           | Statement of Resolutions Establishing the Series A Junior Participating Preferred Stock of EGL (filed as Exhibit 3(ii) to EGLs Form 10-Q for the fiscal quarter ended June 30, 2001 and incorporated herein by reference).                                                                                                                                                             
|*3.3           | Amended and Restated Bylaws of EGL, as amended (filed as Exhibit 3(ii) to EGLs Form 10-Q for the fiscal quarter ended June 30, 2000 and incorporated herein by reference).                                                                                                                                                                                                             
|*4.1           | Rights Agreement dated as of May 23, 2001 between EGL, Inc. and Computershare Investor Services, L.L.C., as Rights Agent, which includes as Exhibit B the form of Rights Certificate and as Exhibit C the Summary of Rights to Purchase Common Stock (filed as Exhibit 4.1 to the EGLs Form 10-Q for the fiscal quarter ended September 30, 2001 and incorporated herein by reference).
|*10.1         | Long-Term Incentive Plan, as amended and restated effective July 26, 2000 (filed as Exhibit 10(ii) to EGLs Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference).                                                                                                                                                               
|10.3          | Form of Restricted Stock Agreement (3-year Time Vesting) pursuant to Long-Term Incentive Plan (filed herewith).                                                                                                                                                                                                                                                                         
|10.4          | Form of Restricted Stock Agreement (5-year Time Vesting) pursuant to Long-Term Incentive Plan (filed herewith).                                                                                                                                                                                                                                                                         



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|10.5   | Form of Nonqualified Stock Option Agreement (3-year Time Vesting) pursuant to Long-Term Incentive Plan (filed herewith).                                                                                                                                                                                          
|------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.6   | Form of Nonqualified Stock Option Agreement (Time and Performance Award) pursuant to Long-Term Incentive Plan (filed herewith).                                                                                                                                                                                   
|*10.7  | Amended and Restated Nonemployee Director Stock Plan (filed as Exhibit 10.1 to EGLs Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2004 and incorporated herein by reference).                                                                                                              
|10.8   | Form of Restricted Share Award Agreement pursuant to Nonemployee Director Stock Plan (filed herewith).                                                                                                                                                                                                            
|*10.9  | 401(k) Profit Sharing Plan (filed as Exhibit 10.3 to EGLs Registration Statement on Form S-1, Registration No. 33-97606 and incorporated herein by reference).                                                                                                                                                   
|*10.10 | Circle International Group, Inc. 1994 Omnibus Equity Incentive Plan (filed as Exhibit 10.11 to Annual Report on Form 10-K of Circle (SEC File No. 0-8664) for the fiscal year ended December 31, 1993 and incorporated herein by reference).                                                                      
|*10.11 | Amendment No. 1 to Circle International Group, Inc. 1994 Omnibus Equity Incentive Plan (filed as Exhibit 10.11.1 to Annual Report on Form 10-K of Circle (SEC File No. 9-8664) for the fiscal year ended December 31, 1995 and incorporated herein by reference).                                                 
|*10.12 | Circle International Group, Inc. Employee Stock Purchase Plan (filed as Exhibit 99.1 to the Registration Statement on Form S-8 of Circle (SEC Registration No. 333-78747) filed on May 19, 1999 and incorporated herein by reference).                                                                            
|*10.13 | Circle International Group, Inc. 1999 Stock Option Plan (filed as Exhibit 99.1 to the Form S-8 Registration Statement of Circle (SEC Registration No. 333-85807) filed on August 24, 1999 and incorporated herein by reference).                                                                                  
|*10.14 | Form of Nonqualified Stock Option Agreement for Circle International Group, Inc. 2000 Stock Option Plan (filed as Exhibit 4.8 to Post-Effective Amendment No. 1 on Form S-8 to Registration Statement on Form S-4 (SEC Registration No. 333-42310) filed on October 2, 2000 and incorporated herein by reference).
|*10.15 | Employment Agreement dated as of October 1, 1996 between EGL and James R. Crane (filed as Exhibit 10.7 to EGLs Annual Report on Form 10-K for the fiscal year ended September 30, 1996 and incorporated herein by reference).                                                                                    
|*10.16 | Employment Agreement dated as of May 19, 1998 between EGL and Ronald E. Talley (filed as Exhibit 10.10 to EGLs Annual Report on Form 10-K for the fiscal year ended September 30, 1998 and incorporated herein by reference).                                                                                    
|*10.17 | Employment Agreement dated as of October 19, 1999 between EGL and Elijio Serrano (filed as Exhibit 10.11 to EGLs Annual Report on Form 10-K for the fiscal year ended September 30, 1999 and incorporated herein by reference).                                                                                  
|*10.18 | Employee Stock Purchase Plan, as amended and restated effective July 26, 2000 (filed as Exhibit 10(iii) to EGLs Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 and incorporated herein by reference).                                                                                    
|*10.19 | Executive Deferred Compensation Plan (filed as Exhibit 10.2 to EGLs Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference).                                                                                                                                
|10.20  | 2005 Incentive Bonus Plan (filed herewith).                                                                                                                                                                                                                                                                       



52



---



|*10.21 | Form of Retention Agreement between EGL and certain executive officers (filed as Exhibit 10.29 to EGLs Annual Report on Form 10-K for the fiscal year ended December 31, 2003 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                              
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*10.22 | Letter of Assignment, effective as of July 30, 2001, as amended, by and between EGL and Vittorio M. Favati (filed as Exhibit 10.29 to EGLs Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and incorporated herein by reference).                                                                                                                                                                                                                                                                                          
|*10.23  | Shareholders Agreement dated as of October 1, 1994 among EGL and Messrs. Crane, Swannie, Seckel and Roberts (filed as Exhibit 10.4 to EGLs Registration Statement on Form S-1, Registration No. 33-97606 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                  
|*10.24  | Form of Indemnification Agreement (filed as Exhibit 10.6 to EGLs Registration Statement on Form S-1, Registration No. 33-97606 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                                                             
|*10.25  | First Amended and Restated Credit Agreement dated as of September 30, 2005, among EGL, Inc., as Borrower; Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer; Wachovia Bank, National Association, as Syndication Agent; JPMorgan Chase Bank, N.A. and Harris N.A., as Co-Documentation Agents; Banc of America Securities LLC, as Sole Lead Arranger and Sole Book Manager; and Other Lenders party thereto (filed as Exhibit 10.1 to EGLs Form 8-K filed on October 5, 2005 and incorporated herein by reference).
|*10.26  | Bridge Term Loan Credit Agreement dated as of September 30, 2005, among EGL, Inc., as Borrower; Bank of America Mezzanine Capital, LLC as Administrative Agent and lender; and Other Lenders party thereto (filed as Exhibit 10.2 to EGLs Form 8-K filed on October 5, 2005 and incorporated herein by reference).                                                                                                                                                                                                                                
|*10.27  | Note Purchase Agreement dated as of October 12, 2005, among EGL, Inc., and the purchasers named therein (filed as Exhibit 10.1 to EGLs Form 8-K filed on October 13, 2005 and incorporated herein by reference).                                                                                                                                                                                                                                                                                                                                  
|*10.28  | Lease Agreement dated as of December 31, 2001 between iStar Eagle LP, as landlord, and EGL Eagle Global Logistics, LP, as tenant (filed as Exhibit 10.17A to EGLs Annual Report on Form 10-K for the fiscal year ended December 31, 2001 and incorporated herein by reference).                                                                                                                                                                                                                                                                   
|*10.29  | Guaranty dated as of December 31, 2001 among iStar Eagle LP, EGL Eagle Global Logistics, LP and EGL, Inc. (filed as Exhibit 10.17B to EGLs Annual Report on Form 10-K for the fiscal year ended December 31, 2001 and incorporated herein by reference).                                                                                                                                                                                                                                                                                          
|21      | Subsidiaries of EGL (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|23.1    | Consent of PricewaterhouseCoopers LLP (filed herewith).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|31.1    | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                         
|31.2    | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                             
|32      | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                                                                                                                                                                                                           



*

Incorporated by reference as indicated.



Management contract or compensatory plan or arrangement.





53



---



SIGNATURES

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

EGL, INC.

By:  /s/ James R. Crane

James R. Crane

Chairman and

Chief Executive Officer

Date:

March 16, 2006

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



|Name                   |  | Capacity                                     |  | Date          
|---------------------- |  | -------------------------------------------- |  | --------------
|/s/ James R. Crane     |  | Chairman and Chief Executive Officer         |  | March 16, 2006
|James R. Crane         |  | (Principal Executive Officer)                |  |               
|/s/ Janice Kerti       |  | Chief Accounting Officer                     |  | March 16, 2006
|Janice Kerti           |  | (Principal Financial and Accounting Officer) |  |               
|/s/ Elijio V. Serrano  |  | Director                                     |  | March 16, 2006
|Elijio V. Serrano      |  |                                              |  |               
|/s/ Michael Jhin       |  | Director                                     |  | March 16, 2006
|Michael Jhin           |  |                                              |  |               
|/s/ Frank J. Hevrdejs  |  | Director                                     |  | March 16, 2006
|Frank J. Hevrdejs      |  |                                              |  |               
|/s/ Neil E. Kelley     |  | Director                                     |  | March 16, 2006
|Neil E. Kelley         |  |                                              |  |               
|/s/ Paul William Hobby |  | Director                                     |  | March 16, 2006
|Paul William Hobby     |  |                                              |  |               
|/s/ James C. Flagg     |  | Director                                     |  | March 16, 2006
|James C. Flagg         |  |                                              |  |               
|/s/ Milton Carroll     |  | Director                                     |  | March 16, 2006
|Milton Carroll         |  |                                              |  |               





54



---



EGL, Inc.

Index to Consolidated Financial Statements



|                                                                    | Page
|------------------------------------------------------------------- | ----
|Report of Independent Registered Public Accounting Firm             | F-2 
|Consolidated Balance Sheets as of December 31, 2005 and 2004        | F-4 
|Consolidated Statements of Income for the Years Ended               |     
|December 31, 2005, 2004 and 2003                                    | F-5 
|Consolidated Statements of Cash Flows for the Years Ended           |     
|December 31, 2005, 2004 and 2003                                    | F-6 
|Consolidated Statements of Stockholders Equity for the Years Ended | F-8 
|December 31, 2005, 2004 and 2003                                    |     
|Notes to Consolidated Financial Statements                          | F-9 



F-1



---



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders

of EGL, Inc.:



We have completed integrated audits of EGL, Inc.s 2005 and 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2005, and an audit of its 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Our opinions, based on our audits, are presented below.



Consolidated financial statements and financial statement schedule



In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of EGL, Inc. and its subsidiaries at December 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.  In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.  These financial statements and financial statement schedule are the responsibility of the Companys management.  Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.  We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.



Internal control over financial reporting



Also, in our opinion, managements assessment, included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of December 31, 2005 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control - Integrated Framework issued by the COSO.  The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting.  Our responsibility is to express opinions on managements assessment and on the effectiveness of the Companys internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal



F-2



---



control over financial reporting was maintained in all material respects.  An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances.  We believe that our audit provides a reasonable basis for our opinions.



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



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







PricewaterhouseCoopers LLP



Houston, Texas

March 16, 2006







F-3



---

EGL, INC.

Consolidated Balance Sheets

December 31, 2005 and 2004











|                                                                                                                                 | 2005                              |  | 2004       
|-------------------------------------------------------------------------------------------------------------------------------- | --------------------------------- |  | -----------
|ASSETS                                                                                                                           | (in thousands, except par values)
|Current assets:                                                                                                                  |                                   |  |            
|Cash and cash equivalents                                                                                                        | $
111,507                         |  | $
92,918   
|Restricted cash                                                                                                                  | 11,702                            |  | 17,004     
|Trade receivables, net of allowance of $12,566 and $14,069                                                                       | 560,954                           |  | 611,594    
|Other receivables                                                                                                                | 30,237                            |  | 21,147     
|Income tax receivable                                                                                                            | 4,367                             |  | 20         
|Deferred income taxes                                                                                                            | 10,626                            |  | 10,106     
|Other currents assets                                                                                                            | 25,045                            |  | 25,348     
|Total current assets                                                                                                             | 754,438                           |  | 778,137    
|Property and equipment, net                                                                                                      | 185,906                           |  | 178,218    
|Goodwill                                                                                                                         | 113,048                           |  | 108,470    
|Deferred income taxes                                                                                                            | -                                 |  | 648        
|Other assets, net                                                                                                                | 35,849                            |  | 29,390     
|Total assets                                                                                                                     | $
1,089,241                       |  | $
1,094,863
|                                                                                                                                 |                                   |  |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                             |                                   |  |            
|Current liabilities:                                                                                                             |                                   |  |            
|Trade payables and accrued transportation costs                                                                                  | $
342,351                         |  | $
337,137  
|Accrued salaries and related costs                                                                                               | 51,541                            |  | 46,465     
|Current portion of long-term debt                                                                                                | 15,967                            |  | 19,426     
|Income taxes payable                                                                                                             | 5,215                             |  | 4,716      
|Accrued selling, general and administrative expenses 
and other liabilities                                                      | 93,410                            |  | 82,926     
|Total current liabilities                                                                                                        | 508,484                           |  | 490,670    
|Deferred income taxes                                                                                                            | 22,736                            |  | 19,421     
|Long-term debt                                                                                                                   | 214,555                           |  | 12,752     
|Other noncurrent liabilities                                                                                                     | 20,122                            |  | 18,786     
|Total liabilities                                                                                                                | 765,897                           |  | 541,629    
|Minority interests                                                                                                               | 1,616                             |  | 802        
|Commitments and contingencies (Notes 9, 10, 15 and 16)                                                                           |                                   |  |            
|Stockholders equity:                                                                                                            |                                   |  |            
|Preferred stock, $0.001 par value, 10,000 shares authorized, no shares issued                                                    |                                   |  |            
|Common stock, $0.001 par value, 200,000 shares authorized; 45,771 and 52,841 shares issued; 39,966 and 51,915 shares outstanding | 46                                |  | 53         
|Additional paid-in capital                                                                                                       | 56,405                            |  | 241,117    
|Retained earnings                                                                                                                | 398,036                           |  | 339,876    
|Accumulated other comprehensive loss                                                                                             | (23,902)                          |  | (12,625)   
|Unearned compensation                                                                                                            | (376)                             |  | (124)      
|Treasury stock, 5,805 and 926 shares held                                                                                        | (108,481)                         |  | (15,865)   
|Total stockholders equity                                                                                                       | 321,728                           |  | 552,432    
|Total liabilities and stockholders equity                                                                                       | $
1,089,241                       |  | $
1,094,863
|                                                                                                                                
|                                                                                                                                
|The accompanying notes are in integral part of these financial statements.                                                      



F-4



---

EGL, INC.

Consolidated Statements of Income

Years Ended December 31, 2005, 2004 and 2003









|                                                                           | 2005                                     |  | 2004        |  | 2003       
|-------------------------------------------------------------------------- | ---------------------------------------- |  | ----------- |  | -----------
|                                                                           | (in thousands, except per share amounts)
|Revenues                                                                   | $
3,096,516                              |  | $
2,741,392 |  | $
2,143,419
|Cost of transportation                                                     | 2,148,042                                |  | 1,876,026   |  | 1,408,167  
|Net revenues                                                               | 948,474                                  |  | 865,366     |  | 735,252    
|Operating expenses:                                                        |                                          |  |             |  |            
|Personnel costs                                                            | 522,015                                  |  | 481,320     |  | 422,015    
|Other selling, general and administrative expenses                         | 337,024                                  |  | 302,722     |  | 269,887    
|EEOC legal settlement                                                      | (5,975)                                  |  | -           |  | (1,415)    
|Operating income                                                           | 95,410                                   |  | 81,324      |  | 44,765     
|Nonoperating income (expense), net                                         | 5,147                                    |  | 7,259       |  | (6,249)    
|Income before provision for income taxes                                   | 100,557                                  |  | 88,583      |  | 38,516     
|Provision for income taxes                                                 | 42,397                                   |  | 37,705      |  | 14,571     
|Net income                                                                 | $
58,160                                 |  | $
50,878    |  | $
23,945   
|                                                                           |                                          |  |             |  |            
|Earnings per share:                                                        |                                          |  |             |  |            
|Basic                                                                      | $
1.23                                   |  | $
1.11      |  | $
0.51     
|Diluted                                                                    | 1.22                                     |  | 1.05        |  | 0.50       
|                                                                           |                                          |  |             |  |            
|Weighted-average common shares outstanding                                 |                                          |  |             |  |            
|Basic                                                                      | 47,442                                   |  | 45,813      |  | 47,204     
|Diluted                                                                    | 47,832                                   |  | 51,914      |  | 47,481     
|                                                                           |                                          |  |             |  |            
|                                                                          
|The accompanying notes are an integral part of these financial statements.



F-5



---

EGL, INC.

Consolidated Statements of Cash Flows

Years Ended December 31, 2005, 2004 and 2003









|                                                                                  | 2005           |  | 2004      |  | 2003    
|--------------------------------------------------------------------------------- | -------------- |  | --------- |  | --------
|                                                                                  | (in thousands)
|Cash flows from operating activities:                                             |                |  |           |  |         
|Net income                                                                        | $
58,160       |  | $
50,878  |  | $
23,945
|Adjustments to reconcile net income to net cash provided by operating activities: |                |  |           |  |         
|Depreciation and amortization                                                     | 35,932         |  | 35,109    |  | 31,190  
|Bad debt expense                                                                  | 8,630          |  | 6,672     |  | 7,162   
|Amortization of unearned compensation                                             | 298            |  | 479       |  | 29      
|Deferred income tax expense                                                       | 1,162          |  | 5,945     |  | 4,531   
|Amortization of debt issuance costs                                               | 452            |  | 2,106     |  | 2,243   
|Tax benefits from employee stock plans                                            | 5,090          |  | 7,765     |  | 474     
|(Gain) loss on sales of assets                                                    | 467            |  | (570)     |  | (1,824) 
|Gain on sale of unconsolidated affiliates                                         | (4,041)        |  | (12,648)  |  | -       
|Equity in (earnings) losses of unconsolidated affiliates                          | 85             |  | (1,676)   |  | 1,533   
|Minority interests                                                                | 2              |  | 600       |  | 1,248   
|Other                                                                             | 483            |  | (1,079)   |  | (1,513) 
|Changes in assets and liabilities, excluding business combinations:               |                |  |           |  |         
|(Increase) decrease in trade receivables                                          | 20,183         |  | (147,637) |  | (50,848)
|Increase in other receivables                                                     | (1,448)        |  | (14)      |  | (4,245) 
|Decrease in other assets and liabilities                                          | 1,123          |  | 6,377     |  | 12,004  
|Increase in payables and other accrued liabilities                                | 29,516         |  | 79,826    |  | 13,106  
|Net cash provided by operating activities                                         | 156,094        |  | 32,133    |  | 39,035  
|Cash flows from investing activities:                                             |                |  |           |  |         
|Capital expenditures                                                              | (41,160)       |  | (38,163)  |  | (25,954)
|Purchase of short-term investments                                                | -              |  | (44)      |  | (540)   
|(Increase) decrease in restricted cash                                            | 5,322          |  | (3,426)   |  | (5,654) 
|Proceeds from sales/maturities of marketable securities                           | 542            |  | -         |  | 10      
|Proceeds from sale-leaseback transactions                                         | -              |  | -         |  | 1,158   
|Proceeds from sales of property and equipment                                     | 4,327          |  | 1,106     |  | 2,997   
|Proceeds from property insurance                                                  | 673            |  | -         |  | -       
|Acquisitions of businesses, net of cash acquired                                  | (56)           |  | (16,216)  |  | (20,476)
|Earnout payments                                                                  | (4,404)        |  | (3,291)   |  | (600)   
|Collection of notes receivables                                                   | 2,606          |  | 906       |  | -       
|Cash received from sales of unconsolidated affiliates                             | 2,787          |  | 52,123    |  | -       
|Investment in an unconsolidated affiliate                                         | -              |  | -         |  | (750)   
|Net cash used in investing activities                                             | (29,363)       |  | (7,005)   |  | (49,809)
|                                                                                 
|                                                                                 
|The accompanying notes are an integral part of these financial statements.       







F-6



---

EGL, INC.

Consolidated Statements of Cash Flows

Years Ended December 31, 2005, 2004 and 2003









|(continued)                                                                            |                |  |           |  |         
|-------------------------------------------------------------------------------------- | -------------- |  | --------- |  | --------
|                                                                                       | 2005           |  | 2004      |  | 2003    
|                                                                                       | (in thousands)
|Cash flows from financing activities:                                                  |                |  |           |  |         
|Proceeds from issuance of debt                                                         | $
495,597      |  | $
211,029 |  | $
1,384 
|Repayment of debt                                                                      | (309,297)      |  | (218,778) |  | (3,595) 
|Issuance (repayment) of short-term debt with maturities of less than three months, net | (2,744)        |  | 12,078    |  | 2,086   
|Payment of financing fees                                                              | (3,454)        |  | (1,097)   |  | -       
|Payments of financed insurance and software maintenance agreements                     | (3,364)        |  | (6,417)   |  | (9,128) 
|Payments on capital lease obligations                                                  | (2,245)        |  | (937)     |  | -       
|Issuance of common stock for employee stock purchase plan                              | 1,135          |  | 791       |  | 540     
|Proceeds from exercise of stock options                                                | 21,176         |  | 39,899    |  | 4,102   
|Repurchases of common stock                                                            | (305,318)      |  | (59,079)  |  | -       
|Other                                                                                  | 802            |  | (120)     |  | (214)   
|Net cash used in financing activities                                                  | (107,712)      |  | (22,631)  |  | (4,825) 
|                                                                                       |                |  |           |  |         
|Effect of exchange rate changes on cash                                                | (430)          |  | (3,678)   |  | 38      
|Increase (decrease) in cash and cash equivalents                                       | 18,589         |  | (1,181)   |  | (15,561)
|Cash and cash equivalents, beginning of the year                                       | 92,918         |  | 94,099    |  | 109,660 
|Cash and cash equivalents, end of the year                                             | $
111,507      |  | $
92,918  |  | $
94,099
|                                                                                       |                |  |           |  |         
|                                                                                       |                |  |           |  |         
|Supplemental cash flow information:                                                    |                |  |           |  |         
|Cash paid for interest                                                                 | $
6,528        |  | $
6,008   |  | $
7,321 
|Cash paid for income taxes                                                             | 42,040         |  | 15,387    |  | 12,145  
|Cash received from income tax refund                                                   | 5,540          |  | 1,577     |  | 536     
|Noncash financing and investing transactions:                                          |                |  |           |  |         
|Issuance of notes payable for acquisitions                                             | -              |  | -         |  | 10,127  
|Issuance of notes payable for equipment                                                | 11,012         |  | 9,511     |  | 2,633   
|Issuance of shares from conversion of debt, net of tax benefit                         | -              |  | 99,220    |  | -       
|Financing of insurance premiums                                                        | 2,117          |  | 453       |  | 1,682   
|Capital equipment leases initiated as lessee                                           | 2,765          |  | 1,143     |  | 891     
|Capital equipment leases initiated as lessor                                           | 8,630          |  | 9,552     |  | 898     
|                                                                                      
|                                                                                      
|The accompanying notes are an integral part of these financial statements.            



F-7



---

EGL, INC.

Consolidated Statements of Stockholders Equity

Years Ended December 31, 2005, 2004 and 2003









|                                                                                           | Common stock   |  |        |  |                             |  |                   |  |                            
|------------------------------------------------------------------------------------------ | -------------- |  | ------ |  | --------------------------- |  | ----------------- |  | ---------------------------
|                                                                                           | Shares         |  | Amount |  | Additional 
paid-in capital |  | Retained earnings |  | Comprehensive income (loss)
|                                                                                           | (in thousands)
|Balance at December 31, 2002                                                               | 48,091         |  | $
48   |  | $
148,682                   |  | $
265,053         |  |                            
|Comprehensive income:                                                                      |                |  |        |  |                             |  |                   |  |                            
|Net income                                                                                 | -              |  | -      |  | -                           |  | 23,945            |  | $
23,945                   
|Recognition in earnings of net deferred loss on swaps                                      | -              |  | -      |  | -                           |  | -                 |  | 85                         
|Minimum pension liability adjustment, net of tax                                           | -              |  | -      |  | -                           |  | -                 |  | (3,362)                    
|Foreign currency translation adjustments                                                   | -              |  | -      |  | -                           |  | -                 |  | 12,191                     
|Comprehensive income                                                                       |                |  |        |  |                             |  |                   |  | $
32,859                   
|Issuance of shares under employee stock purchase plan                                      | -              |  | -      |  | (199)                       |  | -                 |  |                            
|Exercise of stock options and issuance of restricted stock awards with related tax benefit | 324            |  | -      |  | 4,568                       |  | -                 |  |                            
|Amortization of unearned compensation                                                      | -              |  | -      |  | -                           |  | -                 |  |                            
|Balance at December 31, 2003                                                               | 48,415         |  | 48     |  | 153,051                     |  | 288,998           |  |                            
|Comprehensive income:                                                                      |                |  |        |  |                             |  |                   |  |                            
|Net income                                                                                 | -              |  | -      |  | -                           |  | 50,878            |  | $
50,878                   
|Change in value of marketable securities, net of tax                                       | -              |  | -      |  | -                           |  | -                 |  | 30                         
|Minimum pension liability adjustment, net of tax                                           | -              |  | -      |  | -                           |  | -                 |  | 1,392                      
|Foreign currency translation adjustments                                                   | -              |  | -      |  | -                           |  | -                 |  | 5,605                      
|Comprehensive income                                                                       |                |  |        |  |                             |  |                   |  | $
57,905                   
|Issuance of shares from conversion of debt                                                 | 5,736          |  | 6      |  | 99,214                      |  | -                 |  |                            
|Issuance of shares under employee stock purchase plan                                      | -              |  | -      |  | 88                          |  | -                 |  |                            
|Exercise of stock options and issuance of restricted stock awards with related tax benefit | 2,092          |  | 2      |  | 47,708                      |  | -                 |  |                            
|Repurchase and retirement of common  stock                                                 | (3,402)        |  | (3)    |  | (59,076)                    |  | -                 |  |                            
|Amortization of unearned compensation                                                      | -              |  | -      |  | 132                         |  | -                 |  |                            
|Balance at December 31, 2004                                                               | 52,841         |  | 53     |  | 241,117                     |  | 339,876           |  |                            
|Comprehensive income:                                                                      |                |  |        |  |                             |  |                   |  |                            
|Net income                                                                                 | -              |  | -      |  | -                           |  | 58,160            |  | $
58,160                   
|Change in fair value of cash flow hedge, net of tax                                        | -              |  | -      |  | -                           |  | -                 |  | (134)                      
|Change in value of marketable securities, net of tax                                       | -              |  | -      |  | -                           |  | -                 |  | 7                          
|Minimum pension liability adjustment, net of tax                                           | -              |  | -      |  | -                           |  | -                 |  | 864                        
|Foreign currency translation adjustments                                                   | -              |  | -      |  | -                           |  | -                 |  | (12,014)                   
|Comprehensive income                                                                       |                |  |        |  |                             |  |                   |  | $
46,883                   
|Issuance of shares under employee stock purchase plan                                      | -              |  | -      |  | (38)                        |  | -                 |  |                            
|Exercise of stock options and issuance of restricted stock awards with related tax benefit | 1,016          |  | 1      |  | 26,343                      |  | -                 |  |                            
|Purchase of treasury stock                                                                 | -              |  | -      |  | -                           |  | -                 |  |                            
|Repurchase and retirement of common stock                                                  | (8,086)        |  | (8)    |  | (211,017)                   |  | -                 |  |                            
|Amortization of unearned compensation                                                      | -              |  | -      |  | -                           |  | -                 |  |                            
|Balance at December 31, 2005                                                               | 45,771         |  | $
46   |  | $
56,405                    |  | $
398,036         |  |                            
|                                                                                          
|The accompanying notes are an integral part of these financial statements.                



F-8



---

EGL, INC.

Consolidated Statements of Stockholders Equity

Years Ended December 31, 2005, 2004 and 2003









|                                                                                           |  |                       |  | Treasury stock |  |            
|------------------------------------------------------------------------------------------ |  | --------------------- |  | -------------- |  | -----------
|                                                                                           |  | Unearned compensation |  | Shares         |  | Amount     
|                                                                                           |  | (in thousands)       
|Balance at December 31, 2002                                                               |  | $
-                   |  | (1,037)        |  | $
(17,769) 
|Comprehensive income:                                                                      |  |                       |  |                |  |            
|Net income                                                                                 |  | -                     |  | -              |  | -          
|Recognition in earnings of net deferred loss on swaps                                      |  | -                     |  | -              |  | -          
|Minimum pension liability adjustment, net of tax                                           |  | -                     |  | -              |  | -          
|Foreign currency translation adjustments                                                   |  | -                     |  | -              |  | -          
|Comprehensive income                                                                       |  |                       |  |                |  |            
|Issuance of shares under employee stock purchase plan                                      |  | -                     |  | 43             |  | 739        
|Exercise of stock options and issuance of restricted stock awards with related tax benefit |  | (185)                 |  | 11             |  | 193        
|Amortization of unearned compensation                                                      |  | 29                    |  | -              |  | -          
|Balance at December 31, 2003                                                               |  | (156)                 |  | (983)          |  | (16,837)   
|Comprehensive income:                                                                      |  |                       |  |                |  |            
|Net income                                                                                 |  | -                     |  | -              |  | -          
|Change in value of marketable securities, net of tax                                       |  | -                     |  | -              |  | -          
|Minimum pension liability adjustment, net of tax                                           |  | -                     |  | -              |  | -          
|Foreign currency translation adjustments                                                   |  | -                     |  | -              |  | -          
|Comprehensive income                                                                       |  |                       |  |                |  |            
|Issuance of shares from conversion of debt                                                 |  | -                     |  | -              |  | -          
|Issuance of shares under employee stock purchase plan                                      |  | -                     |  | 43             |  | 726        
|Exercise of stock options and issuance of restricted stock awards with related tax benefit |  | (315)                 |  | 14             |  | 246        
|Repurchase and retirement of common stock                                                  |  | -                     |  | -              |  | -          
|Amortization of unearned compensation                                                      |  | 347                   |  | -              |  | -          
|Balance at December 31, 2004                                                               |  | (124)                 |  | (926)          |  | (15,865)   
|Comprehensive income:                                                                      |  |                       |  |                |  |            
|Net income                                                                                 |  | -                     |  | -              |  | -          
|Change in fair value of cash flow hedge, net of tax                                        |  | -                     |  | -              |  | -          
|Change in value of marketable securities, net of tax                                       |  | -                     |  | -              |  | -          
|Minimum pension liability adjustment, net of tax                                           |  | -                     |  | -              |  | -          
|Foreign currency translation adjustments                                                   |  | -                     |  | -              |  | -          
|Comprehensive income                                                                       |  |                       |  |                |  |            
|Issuance of shares under employee stock purchase plan                                      |  | -                     |  | 66             |  | 1,229      
|Exercise of stock options and issuance of restricted stock awards with related tax benefit |  | (550)                 |  | 24             |  | 448        
|Purchase of treasury stock                                                                 |  | -                     |  | (4,969)        |  | (94,293)   
|Repurchase and retirement of common stock                                                  |  | -                     |  | -              |  | -          
|Amortization of unearned compensation                                                      |  | 298                   |  | -              |  | -          
|Balance at December 31, 2005                                                               |  | $
(376)               |  | (5,805)        |  | $
(108,481)
|                                                                                           |  |                       |  |                |  |            
|The accompanying notes are an integral part of these financial statements                 







F-8



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







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

EGL, Inc. (EGL or the Company) is a leading global transportation, supply chain management and information services company dedicated to providing flexible logistics solutions on a price competitive basis.  The Companys services include air and ocean freight forwarding, customs brokerage, local pick up and delivery service, materials management, warehousing, trade facilitation and procurement and integrated logistics and supply chain management services.  The Company provides services through offices around the world as well as through its worldwide network of exclusive and nonexclusive agents.  The principal markets for all lines of business are North America, Europe and Asia with significant operations in the Middle East, South America and South Pacific (see Note 19).

Basis of presentation and principles of consolidation

The accompanying consolidated financial statements include EGL, all of its wholly-owned subsidiaries and investees that the Company controls, through majority ownership or other variable interests.  All significant intercompany balances and transactions have been eliminated in consolidation.  Investments in 50% or less owned affiliates, over which the Company has significant influence, are accounted for by the equity method.  The Company has reclassified certain prior year amounts to conform to the current year presentation.  Cash flows from changes in restricted cash have been reclassified from operating activities to investing activities in the statement of cash flows.

Use of estimates

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



F-9



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Cash and cash equivalents

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents.  Cash equivalents are carried at cost, which approximates market value.  Cash overdrafts were $7.3 million and $8.5 million at December 31, 2005 and 2004, respectively, and were classified as trade payables on the Companys consolidated balance sheet and as a part of short-term debt in the Companys statement of cash flows.

Restricted cash

As part of the settlement with the U.S. Equal Employment Opportunity Commission (EEOC), the Company is required to place certain amounts on deposit in a financial institution for the Class Fund and Leadership Development Fund.  The total amount included in restricted cash related to the settlement with the EEOC was $10,000 as of December 31, 2005 (see Note 15).  Separately, the Company has certain requirements related to security deposits for IATA guarantees and customs bonds that are restricted from withdrawal for a specified timeframe and therefore are classified as restricted cash (see Note 9).

Trade receivables

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

Property and equipment

Property and equipment are stated at cost.  The cost of property held under capital leases is equal to the lower of the net present value of the minimum lease payments or the fair value of the leased property at the inception of the lease.  Depreciation is computed principally by the straight-line method at rates based on the estimated useful lives of the various classes of property.  Estimates of useful lives are based upon a variety of factors including durability of the asset, the amount of usage that is expected from the asset, the rate of technological change and the Companys business plans for the asset.  Should the Company change its plans with respect to the use and productivity of property and equipment, it may require a change in the useful life of the asset or the Company may incur a charge to reflect the difference between the carrying value of the asset and the proceeds expected to be realized upon the assets sale or abandonment.  Expenditures for maintenance and repairs are expensed as incurred and significant major improvements are capitalized.



F-10



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Computer software

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

The Company has incurred substantial costs during 2005, 2004 and 2003 related to a number of information systems projects that were being developed during that time period.  Inherent in the capitalization of those projects are the assumptions that after considering the technological and business issues related to their development, such development efforts will be successfully completed and that benefits to be provided by the completed projects will exceed the costs capitalized to develop the systems.  Management believes that all projects capitalized at December 31, 2005 will be successfully completed and will result in benefits recoverable in future periods.

Interest capitalization

The Company is in the process of developing several computer systems for future use.  Interest associated with these assets is capitalized and included in the cost of the asset.  The amount capitalized is calculated based upon the Companys current incremental borrowing rate and was $692,000, $1.1 million and $1.5 million for the years ended December 31, 2005, 2004 and 2003, respectively.

Financing receivables

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

Real estate leases

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

Debt issuance costs

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



F-11



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Goodwill and other intangibles

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

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

The Companys required assessments of goodwill performed annually in the fourth quarter related to each of its reporting units under step one of SFAS 142 did not indicate an impairment in any of the periods presented therefore step two was not required at any of the testing dates.  The estimated fair value calculated and referred to above is an estimate based upon a number of assumptions.  The actual fair value of each reporting unit may vary significantly from its estimated fair value.

Impairment of assets

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

Foreign currency translation

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



F-12



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Revenue recognition

Domestic revenues and most domestic operating costs are recognized when shipments are picked up from the customer.  International revenues and freight consolidation costs are recognized in the period when shipments are tendered to a carrier for transport to a foreign destination.  This is one of the permissible methods under Emerging Issues Task Force (EITF) Issue No. 91-9, Revenue and Expense Recognition for Freight Services in Process.  This method generally results in recognition of revenues and gross profit earlier than methods that do not recognize revenues until a proof of delivery is received.  This method of revenue and cost recognition does not result in a material difference than if revenue and costs were recognized upon delivery.  Customs brokerage and other revenues are recognized upon completing the documents necessary for customs clearance or completing other fee-based services.  Revenues recognized as an indirect air carrier or an ocean freight consolidator include the direct carriers charges to EGL for carrying the shipment.  Revenues recognized in other capacities include only the commissions and fees received.  The Company reports the costs of certain reimbursed incidental activities on a gross basis in revenues and cost of transportation.

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

Air and Ocean Freight Forwarding

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

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

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

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



F-13



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







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

Customs Brokerage and Other Services

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

Stock-based compensation

At December 31, 2005, the Company has five stock-based employee compensation plans under which stock-based awards have been granted.  The Company accounts for stock-based awards to employees and non-employee directors using the intrinsic value method prescribed in Accounting Principles Board No. 25, Accounting for Stock Issued to Employees, (APB 25) and related interpretations.  The intrinsic value method used by the Company generally results in no compensation expense being recorded related to stock option grants made by the Company because those grants are typically made with option exercise prices equal to fair market value at the date of option grant.  The application of the alternative fair value method under SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123), which estimates the fair value of the option awarded to the employee, would result in compensation expense being recognized over the period of time that the employees rights in the options vest.  The following table illustrates the pro forma effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation.



|                                                                                                                                    |  | Twelve Months Ended December 31,
|----------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------
|                                                                                                                                    |  | 2005                            
|                                                                                                                                    |  | (in thousands)                  
|Net income as reported                                                                                                              |  | $
58,160                        
|Add:  Total stock-based compensation expense
included in net income                                                                 |  | 191                             
|Deduct:  Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects |  | (2,084)                         
|Pro forma net income                                                                                                                |  | $
56,267                        
|                                                                                                                                    |  |                                 
|Earnings per share:                                                                                                                 |  |                                 
|Basic  as reported                                                                                                                 |  | $
1.23                          
|Basic  pro forma                                                                                                                   |  | 1.19                            
|Diluted  as reported                                                                                                               |  | 1.22                            
|Diluted  pro forma                                                                                                                 |  | 1.19                            





F-14



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







The weighted-average fair values of options granted during 2005, 2004 and 2003 were $15.97, $17.69 and $5.47, respectively.  The fair value of each option granted is estimated on the date of grant using the Black-Scholes model with no assumed dividend yield and the following weighted average assumptions used for grants:



|                                | Twelve Months Ended December 31,
|------------------------------- | --------------------------------
|                                | 2005                            
|Expected volatility             | 45.00%                          
|Risk-free interest rate         | 4.35%                           
|Expected life of option (years) | 4.50                            



Provision for income taxes

The Company accounts for income taxes using the asset and liability method as required by SFAS 109, Accounting for Income Taxes.  Deferred tax liabilities and assets are determined based on temporary differences between the basis of assets and liabilities for income tax and financial reporting purposes.  The deferred tax assets and liabilities are classified according to the financial statement classification of the assets and liabilities generating the differences.  Valuation allowances are established when necessary based upon the judgment of management to reduce deferred tax assets to the amount expected to be realized and could be based upon estimates of future profitability and expenditure levels over specific time horizons in particular tax jurisdictions.

Comprehensive income (loss)

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

Accumulated other comprehensive loss consists of the following:



|                                                     | As of December 31,
|---------------------------------------------------- | ------------------
|                                                     | 2005              
|                                                     | (in thousands)    
|Cumulative foreign currency translation adjustment   | $
(22,699)        
|Minimum pension liability adjustment, net of tax     | (1,106)           
|Fair value of cash flow hedge, net of tax            | (134)             
|Unrealized gain on marketable securities, net of tax | 37                
|                                                     | $
(23,902)        



Fair value of financial instruments

The fair values presented throughout these financial statements have been estimated using appropriate valuation methodologies and market information available at December 31, 2005 and 2004.  However, ready trading markets do not exist for all of these items and considerable judgment is required in interpreting market data to develop estimates of fair value and the estimates presented are not necessarily indicative of the amounts that EGL could realize in a current market exchange.  The use of



F-15



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







different market assumptions or estimation methodologies could have a material effect on the estimated fair values.  Additionally, the fair values presented throughout these financial statements have not been estimated since December 31, 2005.  Current estimates of fair value may differ significantly from the amounts presented.  The following method and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

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

Debt.  The Companys debt approximates fair value as most of the Companys notes payable have variable interest rates or are repaid over a very short maturity schedule.

Interest rate swap.  The fair value of the interest rate swap is the estimated amount that the Company would expect to pay to terminate the swap agreement at the reporting date, taking into account current interest rates.

Foreign currency forward contracts.  The fair value is estimated based on the U.S. dollar equivalent at the contract exchange rate.  Any gain or loss is largely offset by a change in the value of the underlying transaction, and is recorded as an unrealized foreign exchange gain or loss until the contract maturity date.  The fair value of foreign currency forward contracts as of December 31, 2005 and 2004 is insignificant.

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



|                                                 | Carrying Amount as of
December 31, |  | Estimated Fair Value as of
December 31,
|------------------------------------------------ | ---------------------------------- |  | ---------------------------------------
|                                                 | 2005                               |  | 2004                                   
|                                                 |                                    |  | (in thousands)                         
|Cash and cash equivalents                        | $
111,507                          |  | $
92,918                               
|Restricted cash                                  | 11,702                             |  | 17,004                                 
|Short-term investments and marketable
securities | 45                                 |  | 587                                    
|Interest rate swap liability                     | 207                                |  | -                                      
|Debt                                             | 230,522                            |  | 32,178                                 



Risks and uncertainties

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



F-16



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Concentration of credit risk

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

Derivative instruments

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

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

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



F-17



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







New accounting pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees.  SFAS 123R, as amended in April 2005, requires all share-based payments to employees, including grants of employee stock options and employee stock purchase plans, to be recognized in the financial statements based on their fair values, beginning with the first interim or annual period beginning after January 1, 2006.  In addition, SFAS 123R will cause unrecognized expense (based on the amount in the Companys pro forma footnote disclosure) related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period.  Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption.  The transition alternatives include the modified prospective and modified retrospective adoption methods.  The modified prospective method requires that compensation expense be recorded for all unvested stock options and share awards as of the beginning of the first quarter of adoption of SFAS 123R, while the modified retrospective method would record compensation expense for all unvested stock options and share awards beginning with the first period restated.

The Company will implement SFAS 123R and related interpretations as of January 1, 2006 using the modified prospective method.  The Company expects the impact of the adoption to result in approximately $8.5 million of stock-based compensation expense in 2006 based on awards granted through December 31, 2005 and expected to be granted in March 2006.  The incremental expense related to future stock option and employee stock purchase plan grants is difficult to predict because the expense will depend on the number of awards granted, the grant date stock price, volatility of the stock price and other factors.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No. 154).  SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle.  The Company is required to adopt SFAS No. 154 for accounting changes and error corrections that occur after the beginning of 2006.  The Companys results of operations and financial condition will only be impacted by SFAS No. 154 if it implements changes in accounting principles that are addressed by the standard or discovers errors in future periods that require correction.

Note 2  Business combinations

In 2004 and 2003, the Company purchased certain freight forwarders to expand business or enter new markets and bought out minority interests to obtain full control of its subsidiaries.  The Company had no acquisitions in 2005.

2004 acquisitions

The Company acquired the outside ownership of one of its affiliates in France effective January 1, 2004.  Prior to the acquisition, the Company owned 50.7% of this entity and consolidated it for financial reporting purposes.  The purchase consideration for the interest the Company did not previously own consisted of approximately $10.2 million in cash, which included approximately $3.2 million to settle the minority interest liability and approximately $480,000 for a trademark license agreement,



F-18



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







$951,000 for a non-compete agreement and $830,000 for an exclusive agency agreement, effective through April 2007.

In June 2004, the Company acquired the outside ownership of its affiliates in Spain and Portugal from the former Chief Executive Officer of Circle International Group, Inc. (Circle).  Prior to the acquisition, the Company owned 51% of these entities and consolidated them for financial reporting purposes.  The purchase consideration for the interest the Company did not previously own consisted of approximately $6.0 million in cash, which included approximately $1.9 million to settle the minority interest liability and $705,000 for a non-compete agreement.

The Company recognized $8.1 million in goodwill and $3.0 million in intangible assets in connection with these acquisitions.

The Company recorded each of the acquisitions above using the purchase method of accounting, with the related results of operations being included in the Companys consolidated financial statements from the date of acquisition forward.  The pro forma effect on revenues and net income of the Company assuming these acquisitions were consummated at January 1, 2003 would have been immaterial.

2003 acquisitions

In January 2003, the Company acquired Transimpex, SA, an international freight forwarder and customs broker based in France, for approximately $1.1 million, net of cash acquired.  During the fourth quarter of 2003, the Company acquired the 50% outside ownership in its subsidiary in Turkey in exchange for forgiving approximately $137,000 in receivables from the former partner.  Prior to the acquisition, the Company owned 50% of this entity and accounted for it under the equity method for financial reporting purposes.  These acquisitions added to the Companys consolidated balance sheet approximately $333,000 in goodwill and $818,000 in identifiable intangible assets.

In April 2003, the Company acquired substantially all of the operating assets of Miami International Forwarders (MIF), a privately held international freight forwarder and customs broker based in Miami, Florida.  Aggregate consideration for the acquisition totaled $23.7 million, comprised of $13.7 million in cash and notes payable of $10.0 million in the aggregate.  The first installment of $5.0 million was paid in April 2004 and the final installment of $5.0 million was paid in April 2005.  The purchase agreement for the acquisition provided for additional contingent two-year earnout payments of up to $8.0 million in the aggregate if certain post-acquisition performance criteria are achieved.  The acquisition added to the Companys consolidated balance sheet approximately $11.8 million in identifiable intangible assets, $11.7 million in goodwill and $288,000 in net tangible assets.

In April 2003, the Company purchased from one of its partners a 26% interest in the Companys operating subsidiary in Singapore.  Prior to the acquisition, the Company owned 74% of this entity and consolidated it for financial reporting purposes.  The purchase consideration for the interest the Company did not previously own consisted of approximately $5.7 million in cash, which included $3.7 million to settle the minority interest liability at the acquisition date.  The acquisition added to the Companys consolidated balance sheet approximately $891,000 of identifiable intangible assets and $1.1 million of other long-term assets.



F-19



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Earnout payments

During the years ended December 31, 2005, 2004 and 2003, the Company made earnout payments totaling $4.4 million, $3.3 million and $600,000, respectively, for acquisitions completed in prior years.  Contingent payments for acquisitions are accounted for as adjustments to goodwill and are recorded at the time that the amounts of the payments are determinable by the Company.

Note 3  Property and equipment

Property and equipment consist of the following:



|                                | Estimated useful lives |      | As of December 31,
|------------------------------- | ---------------------- | ---- | ------------------
|2005                            |                        | 2004
|                                |                        |      | (in thousands)    
|Land                            |                        |      | $
12,985          
|Information systems             | 1 to 8 years           |      | 118,338           
|Buildings and improvements      | 5 to 39 years          |      | 94,026            
|Equipment and furniture         | 3 to 7 years           |      | 147,736           
|                                |                        |      | 373,085           
|Less  accumulated depreciation |                        |      | 187,179           
|                                |                        |      | $
185,906         



Depreciation expense for 2005, 2004 and 2003 was $32.8 million, $32.0 million and $29.4 million, respectively.

The Company is in the process of developing and implementing replacement computer system solutions for its operational, human resources and financial systems.  As of December 31, 2005 and 2004, the information systems balances above include approximately $39.5 million and $33.4 million, respectively, of capitalized costs for software not placed in service.  During the year ended December 31, 2005, the Company capitalized $10.1 million of internally-developed software and placed $4.1 million of internally-developed software in service.  Software development costs are not depreciated until the software is placed into service.  Accumulated depreciation for information systems as of December 31, 2005 and 2004 was $42.9 million and $39.0 million, respectively.

Note 4  Financing receivables

The Company is currently one of four partners in Ashton Leasing Company (Ashton), which is a limited liability company.  Ashton allows the Company to facilitate the procurement of truck leases for third party owner/operators, who could not readily obtain a lease on their own.  In addition to owner/operators referred by the Company, Ashton also deals with owner/operators that work with third party trucking companies.  During the fourth quarter of 2003, the Company began consolidating Ashtons financial results due to the adoption of FASB Interpretation No. 46R, Consolidation of Variable Interest Entities (FIN 46R).  FIN 46R provides that if an entity is the primary beneficiary of a Variable Interest Entity (VIE), the assets, liabilities, and results of operations of the VIE should be consolidated in the entitys financial statements.  Based on the guidance in FIN 46R, the Company concluded that Ashton is a VIE and the Company is the primary beneficiary of Ashtons expected cash flows.  Prior to consolidating Ashtons financial results, the Companys investment in Ashton was accounted for under the equity method because the Company historically did not exercise control over Ashton.  Accordingly, the consolidation of Ashton had no impact on the Companys net income or earnings per share.



F-20



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







For the year ended December 31, 2003 the related results of Ashton had been considered immaterial to the Companys overall financial results and as such were incorporated without separate disclosures.  As the volume of Ashtons leasing activities increased throughout 2004, separate disclosures have been made.

The financing receivables represent sales-type and direct-financing leases resulting from the marketing of trucks obtained from third party manufacturers.  These receivables typically have terms from three to five years and are usually collateralized by a security interest in the underlying assets. Financing receivables also include billed receivables from operating leases.  The components of net financing receivables, which are included in other current receivables and other assets, were as follows:

|                                      | As of December 31,
|------------------------------------- | ------------------
|                                      | 2005              
|                                      | (in thousands)    
|Minimum lease payments receivable     | $
22,078          
|Unearned income                       | (8,173)           
|Reserve for estimated driver defaults | (299)             
|Financing receivables, net            | 13,606            
|                                      |                   
|Less current portion                 | (3,285)           
|Amounts due after one year            | $
10,321          



Scheduled maturities of Ashtons minimum lease payments receivable are as follows at December 31, 2005:

|Years Ending
December 31, |                | Minimum lease payments receivable
|------------------------- | -------------- | ---------------------------------
|                          | (in thousands)
|2006                      |                | $
6,008                          
|2007                      |                | 5,809                            
|2008                      |                | 5,309                            
|2009                      |                | 3,812                            
|2010                      |                | 1,140                            
|Total                     |                | $
22,078                         



Equipment leased to customers under operating leases are offset by comparable operating leases with third party manufacturers. Minimum future rentals on non-cancelable operating leases related to leased equipment are as follows at December 31, 2005:



|Years Ending
December 31, |                | Minimum future rentals on non-cancelable operating leases
|------------------------- | -------------- | ---------------------------------------------------------
|                          | (in thousands)
|2006                      |                | $
394                                                    
|2007                      |                | 142                                                      
|2008                      |                | -                                                        
|2009                      |                | -                                                        
|2010                      |                | -                                                        
|Total                     |                | $
536                                                    





F-21



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Note 5  Goodwill and other intangible assets

The carrying amounts of goodwill by geographic division as of December 31, 2005 and 2004 and changes in goodwill during the years ended December 31, 2005 and 2004 are as follows:



|                                            | North
America  |  | South
America |  | Europe &
Middle
East |  | Asia &
South
Pacific |  | Consolidated
|------------------------------------------- | -------------- |  | ------------- |  | -------------------- |  | -------------------- |  | ------------
|                                            | (in thousands)
|Balance at January 1, 2004                  | $
62,022       |  | $
2,423       |  | $
10,764             |  | $
19,793             |  | $
95,002    
|Goodwill acquired during the year           | 3,200          |  | -             |  | 8,054                |  | 91                   |  | 11,345      
|Effect of exchange rate changes on goodwill | 39             |  | 163           |  | 1,493                |  | 428                  |  | 2,123       
|Balance at December 31, 2004                | 65,261         |  | 2,586         |  | 20,311               |  | 20,312               |  | 108,470     
|                                            |                |  |               |  |                      |  |                      |  |             
|Goodwill acquired during the year           | 4,000          |  | 119           |  | 1,753                |  | 404                  |  | 6,276       
|Effect of exchange rate changes on goodwill | 18             |  | 208           |  | (1,737)              |  | (187)                |  | (1,698)     
|Balance at December 31, 2005                | $
69,279       |  | $
2,913       |  | $
20,327             |  | $
20,529             |  | $
113,048   



The Company adopted SFAS 141 and SFAS 142 effective January 1, 2002.  SFAS 142 requires the suspension of the amortization of goodwill and certain identifiable intangible assets with an indefinite useful life.  The Company suspended amortization of goodwill effective January 1, 2002 and has one identifiable intangible asset that has an indefinite useful life.

At December 31, 2005 and 2004, the carrying amount of accumulated amortization of goodwill was $17.0 million and $17.6 million, respectively.  The change in the balance in accumulated amortization from 2004 to 2005 is solely due to exchange rate changes.

Intangible assets are included in other assets, net on the consolidated balance sheets.  Intangible assets are as follows:



|                                              |  |                        |  | As of December 31, 2005 |  | As of December 31, 2004 
|--------------------------------------------- |  | ---------------------- |  | ----------------------- |  | ------------------------
|                                              |  | Estimated useful lives |  | Gross carrying amount   |  | Accumulated amortization
|                                              |  |                        |  | (in thousands)         
|Intangible assets subject to amortization:    |  |                        |  |                         |  |                         
|Customer lists                                |  | 7 years                |  | $
8,035                 |  | $
(3,398)               
|Noncompetition agreements                     |  | 4 years                |  | 5,144                   |  | (4,140)                 
|Exclusive agency agreement                    |  | 3 years                |  | 734                     |  | (441)                   
|Trademark license                             |  | 3 years                |  | 474                     |  | (264)                   
|Proprietary software                          |  | 2 years                |  | 69                      |  | (69)                    
|Agent network                                 |  | 5 years                |  | 1,400                   |  | (770)                   
|Total                                         |  | 5 years                |  | 15,856                  |  | (9,082)                 
|Intangible asset not subject to amortization: |  |                        |  |                         |  |                         
|Trade name                                    |  |                        |  | 3,300                   |  | -                       
|Total                                         |  |                        |  | $
19,156                |  | $
(9,082)               





F-22



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Aggregate amortization expense for 2005, 2004 and 2003 was $3.1 million, $3.1 million and $1.8 million, respectively.  The following table shows the estimated future amortization expense for the next five years:



|Years Ending
December 31, |  | Estimated Future Expense
|------------------------- |  | ------------------------
|(in thousands)           
|2006                      |  | $
2,432                 
|2007                      |  | 1,882                   
|2008                      |  | 1,173                   
|2009                      |  | 1,062                   
|2010                      |  | 225                     
|Thereafter                |  | -                       
|                          |  | $
6,774                 



Note 6  Investments in unconsolidated affiliates

TDS

In August 2004, the Company sold its noncontrolling equity investment in TDS Logistics, Inc. (TDS) to an unrelated party for approximately $51.4 million in cash.  The Company received approximately $45.3 million of the sale proceeds in August 2004, with additional payments totaling $3.3 million in 2005 and $1.3 million in January 2006.  The remaining $1.5 million of the sale proceeds is held in escrow subject to the resolution of certain contingencies.  The sale resulted in a gain of approximately $5.9 million in 2004 and an additional gain of $4.0 million in 2005 when certain funds were released out of escrow.  These amounts are included in non-operating income in the Companys consolidated statements of income.

Miami Air

In May 2004, the Company sold its noncontrolling equity investment in Miami Air to an unrelated party for approximately $6.7 million in cash.  The sale resulted in a gain of $6.7 million, which is included in nonoperating income in the consolidated statements of income.  As a result of the sale, the Company was released as guarantor of Miami Airs letter of credit and terminated a $3.0 million standby letter of credit for Miami Air.  The Company no longer has a relationship with Miami Air.



Note 7  Accrued selling, general and administrative expenses and other liabilities

Accrued selling, general and administrative expenses and other liabilities consist of the following amounts:



|                                            | As of December 31,
|------------------------------------------- | ------------------
|                                            | 2005              
|                                            | (in thousands)    
|General and administrative expense accruals | $
30,321          
|Insurance payable                           | 18,609            
|Accrued professional fees                   | 16,623            
|Other current liabilities                   | 16,134            
|Other accrued taxes                         | 7,205             
|Vacant facilities accruals                  | 2,267             
|Accrued interest                            | 2,251             
|Total                                       | $
93,410          





F-23



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Note 8  Debt

Debt consists of the following amounts:



|                                              | As of December 31,
|--------------------------------------------- | ------------------
|                                              | 2005              
|                                              | (in thousands)    
|Senior floating rate secured notes            | $
100,000         
|Borrowings on revolving line of credit        | 93,800            
|Financed vehicles                             | 18,012            
|Borrowings on international credit facilities | 7,347             
|Mortgage payable                              | 2,040             
|Financed software licenses and maintenance    | 1,859             
|Financed insurance premiums                   | 1,740             
|Notes payable to sellers                      | 400               
|Other debt                                    | 5,324             
|Total debt                                    | 230,522           
|                                              |                   
|Current portion of debt                       | 15,967            
|Long-term debt                                | $
214,555         



Future scheduled principal payments on debt are as follows (in thousands):



|2006                |  | $
15,967 
|------------------- |  | ---------
|2007                |  | 7,951    
|2008                |  | 4,838    
|2009                |  | 4,482    
|2010 and thereafter |  | 197,284  
|                    |  |          
|Total               |  | $
230,522



Amended and Restated Credit Agreement



The Company entered into an agreement dated as of September 30, 2005 establishing a $300 million, senior secured revolving credit facility (the Amended and Restated Credit Agreement).  The Amended and Restated Credit Agreement amends and restates the Companys prior revolving credit agreement dated as of September 15, 2004, as previously amended (the Prior Credit Agreement).  The Amended and Restated Credit Agreement is with a syndicate of 13 financial institutions with Bank of America, N.A., as lender and administrative agent and matures on September 30, 2010.

The Company may use borrowings under the Amended and Restated Credit Agreement for working capital, capital expenditures and other lawful corporate purposes, to make permitted acquisitions and investments, to pay dividends and to repurchase its common stock.

Amounts borrowed under the Amended and Restated Credit Agreement are guaranteed by all of the Companys existing and future direct and indirect domestic subsidiaries and secured equally and ratably by:



F-24



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







-

all of the Companys present and future shares of capital stock of (or other ownership or profit interests in) each of its present and future subsidiaries (limited, in the case of certain material first-tier foreign subsidiaries, to a pledge of 65% of the capital stock of such subsidiaries);



-

all of the Companys and each of its domestic subsidiaries present and future property and assets; and



-

all proceeds and products of the property and assets described above.



Loans under the Amended and Restated Credit Agreement will initially bear interest at a rate per annum equal to either, at the Companys option, (1) LIBOR plus 1.25% or (2) the Base Rate (defined as the higher of Bank of America, N.A.s prime rate or 0.50% over the Federal Funds rate).  In addition, the Company is initially required to pay a commitment fee of 0.30% on the undrawn amounts under the Amended and Restated Credit Agreement.  Interest rates and commitment fees under the Amended and Restated Credit Agreement are subject to increase or decrease as a function of the ratio of the Companys Consolidated Net Funded Indebtedness to Consolidated EBITDA (each as defined in the Amended and Restated Credit Agreement).  The Company may select interest periods of one, two, three or six months for LIBOR loans, subject to availability.  Interest will be payable at the end of the selected interest period, but no less frequently than quarterly.

Under the Amended and Restated Credit Agreement, the Company is subject to various covenants, including, among others, the following:

-

a requirement that the Company maintain, on a rolling four-quarter basis, a ratio of Consolidated Net Funded Indebtedness to Consolidated EBITDA (each as defined in the Amended and Restated Credit Agreement) of not greater than 3.5 to 1.0 through December 31, 2006, and decreasing to 3.0 to 1.0 thereafter;



-

a requirement that, on a rolling four-quarter basis, the Company have a ratio of Consolidated EBIT to Consolidated Interest Charges (each as defined in the Amended and Restated Credit Agreement) of at least 2.5 to 1.0 through December 31, 2006 and increasing to 3.0 to 1.0 thereafter;



-

a requirement that, at the end of each fiscal quarter, the Company have a ratio of book accounts receivable by the Company and its subsidiaries to Consolidated Net Funded Indebtedness (as defined in the Amended and Restated Credit Agreement) of at least 1.1 to 1.0; and



-

limitations on, among other things, liens indebtedness, asset sales, dividends and stock redemptions, investments and acquisitions, transactions with affiliates and consolidations, mergers and sales of all or a substantial part of the Companys consolidated assets.



The Amended and Restated Credit Agreement contains events of default customary for an agreement of this type.  The occurrence of certain specified internal control events that could reasonably be expected to have a material adverse effect on the Company also constitutes an event of default under the Amended and Restated Credit Agreement.  If a default occurs and is continuing, the administrative agent may, among other things, declare all outstanding principal amounts immediately due and payable.



F-25



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







The Amended and Restated Credit Agreement contains a $75 million sub-facility for letters of credit.  On October 4, 2005, the Company borrowed approximately $95.8 million under the Amended and Restated Credit Agreement to partially fund the purchase of shares of our common stock in connection with the tender offer (see Note 11).  At December 31, 2005, the Company had borrowings of $93.8 million, $17.0 million in letters of credit outstanding and unused borrowing capacity of $189.2 million under the Amended and Restated Credit Agreement.

Note Purchase Agreement

On October 12, 2005, the Company entered into a note purchase agreement (the Note Purchase Agreement) providing for the issuance and sale of $100 million aggregate principal amount of floating rate, senior secured notes due October 12, 2012 (the Notes) to the purchasers named therein.  Banc of America Securities LLC acted as placement agent for this offering.  The issuance and sale of the Notes by the Company, and the resale of the Notes by Banc of America Securities LLC was made pursuant to one or more exemptions from the registration requirements of the Securities Act of 1933.

The Company used the proceeds from the sale of the Notes to repay the amounts outstanding under its $100 million bridge loan facility established by an agreement (the Bridge Loan Agreement) dated as of September 30, 2005, among the Company and the other parties thereto.  The Bridge Loan Agreement was entered into in connection with the tender offer.  The Bridge Loan Agreement was terminated upon repayment.

The Notes are guaranteed by all of the Companys existing and future direct and indirect domestic subsidiaries and are secured by:

-

all of the Companys present and future shares of capital stock of (or other ownership or profit interests in) each of its present and future subsidiaries (limited, in the case of certain material first-tier foreign subsidiaries, to a pledge of 65% of the capital stock of such subsidiaries);



-

all of the Companys and each of its domestic subsidiaries present and future property and assets; and



-

all proceeds and products of the property and assets described above.



The Notes rank pari passu in right of payment with the Companys obligations under its Amended and Restated Credit Agreement and the obligations of the Companys guarantor subsidiaries to guarantee the Companys obligations under the Note Purchase Agreement rank pari passu in right of payment with their guarantees in respect of the Amended and Restated Credit Agreement.

Interest on the Notes will accrue at a floating rate per annum equal to LIBOR plus 1.65% for the applicable interest period. Interest periods are defined as the three month period commencing on the closing date and each successive three month period thereafter.  Interest on the Notes is payable quarterly in arrears on the last day of each interest period.

Under the Note Purchase Agreement, the Company is subject to various covenants, including, among others, the following:

-

a requirement that the Company maintain, on a rolling four-quarter basis, a ratio of Consolidated Net Debt to Consolidated EBITDA (each as defined in the Note Purchase Agreement) of not greater than 3.5 to 1.0;



F-26



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004









-

a requirement that the Company maintain, on a rolling four-quarter basis, a ratio of Consolidated EBIT to Consolidated Interest Expense (each as defined in the Note Purchase Agreement) of at least 2.5 to 1.0;



-

a requirement that the Company have, at all times, a ratio of (x) book accounts receivable of the Company and certain subsidiaries to (y) Consolidated Net Debt (as defined in the Note Purchase Agreement) of at least 1.1 to 1.0;



-

a requirement that the Company not, at any time, permit the aggregate amount of all Priority Debt (as defined in the Note Purchase Agreement) to exceed 10% of its Consolidated Net Worth (as defined in the Note Purchase Agreement) as of the most recently ended fiscal quarter; and



-

limitations on, among other things, liens asset sales, dividends and stock redemptions, investments and acquisitions, transactions with affiliates and consolidations and mergers.



The Note Purchase Agreement contains customary events of default.  If a default occurs and is continuing, the Notes then outstanding shall (either automatically or by declaration of the holders of more than 50% of the principal amount of Notes then outstanding, depending upon the circumstances resulting in the default) become immediately due and payable.  If an event of default occurs and is continuing because the Company failed to pay principal, interest or other amounts due and payable on the Notes, then any Note holder may declare all of the Notes held by it to be immediately due and payable.

Convertible subordinated notes

In December 2001, the Company issued $100 million aggregate principal amount of 5% convertible subordinated notes due December 15, 2006.  Holders of the notes had the option of converting their notes into shares of common stock, par value $0.001 per share of the Company at a conversion price of $17.4335 per share, subject to certain adjustments.  In December 2004, all of the note holders converted their notes into an aggregate of 5,736,074 shares of common stock.  The Company received no consideration upon conversion of the notes into shares of the Companys common stock.  Unamortized deferred financing fees of $781,000 (net of $526,000 tax benefit) were converted to equity upon the conversion in December 2004.

International credit facilities and other debt

As of December 31, 2005, the Company had $18.7 million capacity on international credit facilities and $7.3 million outstanding against those facilities.  Borrowings under international bank lines of credit are generally renewed upon expiration.  The notes payable to seller is composed of a note payable to the former owners of the Companys operations in Thailand, which is payable in annual installments of $200,000 through 2008.  As of December 31, 2005, the Company has $1.7 million outstanding under financed insurance premiums payable in monthly installments of approximately $193,000 through September 2006.  Financed software licenses and maintenance are payable in quarterly installments of approximately $599,000 and $735,000 in March and June 2006, respectively, and $175,000 each quarter thereafter through March 2007.  Loans for financed vehicles are payable in monthly payments totaling approximately $249,000 through December 2010 and have implied interest rates averaging 6.9%.



F-27



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Note 9  Guarantees

The Company guarantees certain financial liabilities, the majority of which relate to the Companys freight forwarding operations.  The Company, in the normal course of business, is required to guarantee certain amounts related to customs bonds and services received from airlines.  These types of guarantees are usual and customary in the freight forwarding industry.  The Company operates as a customs broker and prepares and files all formal documentation required for clearance through customs agencies, obtains customs bonds, facilitates the payment of import duties on behalf of the importer and arranges for payment of collect freight charges.  The Company also assists the importer in obtaining the most advantageous commodity classifications, qualifying for duty drawback refunds and arranges for surety bonds for importers.

The Company secures guarantees primarily by three methods:  a $75 million standby letter of credit subfacility discussed in Note 8, surety bonds and security time deposits, which are restricted as to withdrawal for a specified timeframe and are classified on the Companys balance sheet as restricted cash.

The Company issues IATA (International Air Transportation Association) related guarantees, customs bonds and other working capital credit line guarantees issued in the normal course of business.  IATA related guarantees and customs bonds are issued to facilitate the movement and clearance of freight.  Working capital credit line guarantees include, but are not limited to, guarantees associated with insurance requirements and certain potential tax obligations.  Generally, guarantees have one-year or two-year terms and are renewed upon expiration.  As of December 31, 2005, total IATA related guarantees, customs bonds and other working capital credit line guarantees were approximately $85.4 million.  Approximately $52.4 million of guarantees, customs bonds and borrowings against credit line guarantees were outstanding, including guarantees of the Companys trade payables and accrued transportation costs and borrowings against its international credit facilities of $13.4 million which were recorded as liabilities on the Companys consolidated balance sheet.

Note 10  Income taxes

Sources of pretax income are summarized as follows:



|         | Twelve Months Ended December 31,
|-------- | --------------------------------
|         | 2005                            
|         | (in thousands)                  
|Domestic | $
54,597                        
|Foreign  | 45,960                          
|Total    | $
100,557                       





F-28



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Provision (benefit) for income taxes includes the following:



|                                       | Twelve Months Ended December 31,
|-------------------------------------- | --------------------------------
|                                       | 2005                            
|                                       | (in thousands)                  
|Current income tax expense (benefit):  |                                 
|U.S. federal                           | $
21,954                        
|U.S. state                             | 447                             
|Foreign                                | 17,424                          
|                                       | 39,825                          
|                                       |                                 
|Deferred income tax expense (benefit): |                                 
|U.S. federal                           | 1,895                           
|U.S. state                             | 698                             
|Foreign                                | (21)                            
|                                       | 2,572                           
|Total provision                        | $
42,397                        





Taxes on income were different than the amount computed by applying the statutory income tax rate.  Such differences are summarized as follows:



|                                                        | Twelve Months Ended December 31,
|------------------------------------------------------- | --------------------------------
|                                                        | 2005                            
|                                                        | (in thousands)                  
|Tax computed at statutory rate                          | $
35,195                        
|Increases (decreases) resulting from:                   |                                 
|Foreign taxes                                           | (1,901)                         
|Valuation allowance                                     | 2,385                           
|Other nondeductible items                               | 2,650                           
|State taxes on income, net of federal income tax effect | 2,199                           
|Other                                                   | 1,869                           
|Total provision                                         | $
42,397                        





F-29



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Significant components of the Companys deferred tax assets (liabilities) are as follows:



|                                                                     | As of December 31, 2005 |  | As of December 31, 2004
|-------------------------------------------------------------------- | ----------------------- |  | -----------------------
|                                                                     | Assets                  |  | Liabilities            
|                                                                     | (in thousands)         
|Undistributed earnings of foreign subsidiaries and equity affiliates | $
-                     |  | $
(5,966)              
|Depreciation and amortization                                        | -                       |  | (20,812)               
|Foreign tax credits and other federal credits                        | 899                     |  | -                      
|Foreign net operating losses                                         | 11,784                  |  | -                      
|State net operating losses                                           | 3,104                   |  | -                      
|Bad debts                                                            | 1,457                   |  | -                      
|Accrued liabilities                                                  | 10,539                  |  | -                      
|Other                                                                | 392                     |  | -                      
|Gross deferred tax assets (liabilities)                              | 28,175                  |  | (26,778)               
|Less:  valuation allowance                                           | (13,507)                |  | -                      
|Net deferred tax assets (liabilities)                                | 14,668                  |  | (26,778)               
|Reclassification, principally netting by tax jurisdiction            | (4,042)                 |  | 4,042                  
|Net total deferred tax assets (liabilities)                          | 10,626                  |  | (22,736)               
|Net current deferred tax assets                                      | 10,626                  |  | -                      
|Net noncurrent deferred tax assets (liabilities)                     | $
-                     |  | $
(22,736)             



Taxes on income include deferred income taxes on undistributed earnings (not considered permanently reinvested) of consolidated foreign subsidiaries, net of applicable foreign tax credits.  The Company does not provide for United States income taxes on certain specific foreign subsidiaries undistributed earnings intended to be permanently reinvested in foreign operations.  At December 31, 2005, cumulative earnings of consolidated foreign subsidiaries designated as permanently reinvested were approximately $78.3 million for which the related federal tax impact would approximate $6.1 million.

The Company also has generated excess foreign tax credits of approximately $899,000 that expire in 2011 and 2012.  There was no valuation allowance established at December 31, 2005 for foreign tax credits, as management believes the foreign tax credits are more likely than not to be fully realized in the future based on current year utilization of foreign tax credits and managements outlook for future utilization.

The Company has generated state and foreign net operating losses resulting in a deferred tax asset of approximately $14.9 million and $10.8 million as of December 31, 2005 and December 31, 2004, respectively.  These losses relate to various state and foreign jurisdictions and expire over a period of 1 to 16 years for state jurisdictions and an indefinite period for foreign jurisdictions.  The Company recorded tax valuation allowances for deferred tax assets related to state and foreign net operating loss carryforwards in the amount of $13.5 million and $8.8 million in 2005 and 2004, respectively.  The Company generated additional foreign net operating losses of approximately $9.9 million of which the tax effect is approximately $2.9 million.  The Company considered its historical performance, forecasted taxable income and other factors in determining the sufficiency of its valuation allowance.  Objective factors, such as current year and previous year net operating loss utilization, were given substantially more weight than managements outlook for future utilization.  For net operating losses without valuation allowances, management believes the Company should generate sufficient taxable income to utilize a substantial portion of its net operating loss carryforwards before their expiration.



F-30



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







As a result of stock option exercises for the years ended December 31, 2005, 2004 and 2003 of non-qualified stock options to purchase an aggregate of 1.0 million, 2.1 million and 324,000 shares of common stock, respectively, the Company is entitled to a federal and state income tax deduction of approximately $12.1 million, $19.2 million and $1.4 million, respectively, with a related reduction in its federal and state tax obligations of approximately $5.0 million, $7.8 million and $474,000, respectively.  Accordingly, the Company recorded an increase to additional paid-in capital and a reduction in current taxes payable.  Any exercises of non-qualified stock options in the future at exercise prices below the then fair market value of the common stock may also result in tax deductions equal to the difference between such amounts, although there can be no assurance as to whether or not such exercises will occur, the amount of any deductions or the Companys ability to fully utilize such tax deductions.

The Companys U.S. federal income tax returns from fiscal years 2000 to 2001 are currently subject to examination by the Internal Revenue Service (IRS).  On April 8, 2005, the Company received a Revenue Agent Report from the IRS field examination team for which the Company was required to respond by May 16, 2005.  On May 16th, the Company responded with a protest in response to the Agents Report contesting the proposed adjustments.  On June 8th, the IRS prepared a rebuttal report to the Companys protest for which no issues were resolved and the IRS examination team subsequently forwarded the case to the Appeals division of the IRS for resolution.  The Company attended an exparte conference with the IRS examination and appeals teams on November 15, 2005, officially beginning the appeals process.  The Company submitted additional technical arguments for its return positions to the appeals team on January 10, 2006.  No meetings with Appeals have occurred to date.  The income tax returns that are under audit are the income tax returns filed by EGL for fiscal years ended September 30, 2000, September 30, 2001, December 31, 2001, and the final income tax return filed by Circle International Group, Inc., a subsidiary of EGL, Inc., for the fiscal year ended October 2, 2000, when it was a separate company prior to the merger with EGL, Inc.

Specifically, the IRS is proposing to disallow various merger transaction costs taken as tax deductions related to the merger of EGL and Circle, and to allocate certain merger and selling, general and administrative expenses to all of its foreign affiliates which were taken as tax deductions on the 2000 and 2001 fiscal return years for both EGL and Circle.  The IRS is also proposing to disallow the deduction of various software research and development expenditures that were taken as tax deductions on the 2000 and 2001 fiscal tax returns for EGL.

If the proposed adjustments were upheld, the Company would be required to pay a total amount of approximately $14 million in cash taxes, of which approximately $6.5 million would impact the consolidated statement of income, plus accrued interest of approximately $4.9 million through December 31, 2005.  No penalties have been proposed by the IRS as part of this examination.  Interest will continue to accrue until the matters are resolved.  The Company believes that the matters raised by the IRS were properly reported on its U.S. federal income tax returns in accordance with applicable laws and regulations in effect during the tax periods involved and is challenging these adjustments vigorously.  While the outcome of proceedings for these matters cannot be predicted with certainty, the Company believes that its U.S. federal income tax returns were completed in accordance with applicable laws and regulations and does not believe material adjustments to its tax returns are probable at this time.  However there is no assurance that the final outcome of the future proceedings with the IRS will not result in material adjustments which would have a material adverse impact on the Companys results of operations, financial position and cash flows.

The Company is also subject to tax audits in certain of its foreign and domestic jurisdictions and management believes such returns have been filed in accordance with tax laws in effect at the time.  However, there is no assurance that such audits will not result in future adjustments.



F-31



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004









Note 11  Stockholders equity

Share repurchase program

On February 25, 2004, the Companys Board of Directors authorized the repurchase and retirement of up to $15 million of its outstanding common stock over the 120 days following adoption of the repurchase program (the Program).  On March 5, 2004, the Board of Directors approved an increase in the maximum value of shares to be repurchased from $15 million to up to $65 million and extended the Program to July 3, 2004.  The Company repurchased and retired 3.4 million shares at an average price of $17.37 per share for approximately $59.1 million under this authorization.

On April 4, 2005, the Companys Board of Directors adopted a stock repurchase program to repurchase up to $60 million of the Companys outstanding common stock depending on market conditions and other factors with an expiration date of August 4, 2005.  On May 31, 2005, the Board of Directors approved an increase in the maximum dollar amount of shares to be repurchased from $60 million to $120 million and extended the expiration date to September 28, 2005.  As of September 28, 2005, the Company has repurchased a total of 5.0 million shares at an average price of $18.98 per share for approximately $94.3 million.

On August 29, 2005, the Companys Board of Directors authorized a modified Dutch Auction self-tender offer to purchase up to 9,615,000 shares (up to $250 million) of its common stock, representing approximately 20% of its approximately 47.2 million outstanding shares as of August 24, 2005.  The tender offer commenced on Tuesday, August 30, 2005 and expired on Wednesday, September 28, 2005.  In the tender offer, shareholders had the opportunity to tender some or all of their shares at a price not less than $22.50 per share or more than $26.00 per share, net to the seller in cash, without interest.

On October 4, 2005, the Company announced the final results of the tender offer.  An aggregate of 8,085,958 shares were properly tendered and not withdrawn at or below a price of $26.00.  Because shareholders tendered less than 9,615,000 shares, there was no proration of tendered shares.  The Company financed the tender offer with the use of cash on hand and borrowings of $196.0 million under both the new $300.0 million line of credit facility and the $100.0 million bridge loan that was refinanced by the issuance of $100.0 million of floating rate senior secured notes due in October 2012 (See Note 8).  As a result, EGL accepted for purchase and paid approximately $211.0 million for all 8,085,958 shares at a price of $26.00 per share.  Any shares received in the tender offer that were not tendered properly were returned to the tendering shareholders.  The shares purchased pursuant to the tender offer represented approximately 17.1% of EGLs outstanding shares as of September 30, 2005.

Treasury stock

During 2005, 2004 and 2003, 90,000, 57,000 and 54,000 shares, respectively, were reissued to satisfy obligations to issue common shares relating to the Companys Employee Stock Purchase Plan (Note 12) and restricted stock awards.  As of December 31, 2005 and 2004, 5.8 million and 926,000 shares, respectively, were held in treasury.  The Company accounts for treasury stock using the cost method.



F-32



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Restricted stock

In June 2005, May 2004 and November 2003, the Company issued 14,000 shares, 14,000 shares and 11,000 shares, respectively, of restricted common stock to certain members of its Board of Directors.  The Company recorded these shares as unearned compensation of $270,000, $315,000 and $185,000, respectively, at the date of the awards based on the quoted fair market value of the shares at the time the awards were granted.  These amounts are amortized over the twelve-month vesting period of the awards.

In December 2004, the Company agreed to issue up to 75,000 shares of restricted common stock to its executive officers and other key employees contingent upon the Company achieving certain annual earnings per share (EPS) targets for 2005.  The minimum EPS target was not met for 2005; therefore, no shares were issued under this award.  In March 2006, the Company expects to issue 38,000 shares of restricted common stock to certain executive officers and other key employees.  One-fifth of the restricted shares will vest in March 2006.  The remaining restricted shares will then vest in four equal installments in December of the years 2006 through 2009.  Upon vesting, the shares of common stock of the Company awarded as set forth above shall have no further restrictions.   The Company also issued 10,000 shares of restricted common stock to an employee as of October 31, 2005.  Unearned compensation expense of $280,000 was recorded at the date of the award based on the quoted fair market value of the shares and is being amortized over the three-year vesting period of the award.

Preferred stock rights

On May 23, 2001, the Companys Board of Directors declared a dividend of one right to purchase preferred stock (Right) for each outstanding share of the Companys common stock to shareholders of record at the close of business on June 4, 2001.  Each Right initially entitles the registered holder to purchase from the Company a fractional share consisting of one one-thousandth of a share of Series A Junior Participating Preferred Stock, par value $0.001 per share, at a purchase price of $120 per fractional share, subject to adjustment.  The Rights generally will not become exercisable until ten days after a public announcement that a person or group has acquired 15% or more of the Companys common stock (thereby becoming an Acquiring Person) or the commencement of a tender or exchange offer that would result in an Acquiring Person (the earlier of such dates being called the Distribution Date).  James R. Crane, Chairman of the Board and Chief Executive Officer of EGL, will not become an Acquiring Person unless and until he and his affiliates become the beneficial owner of 49% or more of the common stock.  Rights will be issued with all shares of the Companys common stock issued from the record date to the Distribution Date.  Until the Distribution Date, the Rights will be evidenced by the certificates representing the Companys common stock and will be transferable only with the common stock.  Generally, if any person or group becomes an Acquiring Person, each Right, other than Rights beneficially owned by the Acquiring Person (which will thereupon become void), will thereafter entitle its holder to purchase, at the Rights then current exercise price, shares of the Companys common stock having a market value of two times the exercise price of the Right.  If, after there is an Acquiring Person, and the Company or a majority of its assets is acquired in certain transactions, each Right not owned by an Acquiring Person will entitle its holder to purchase, at a discount, shares of common stock of the acquiring entity (or its parent) in the transaction.  At any time until ten days after a public announcement that the rights have been triggered, the Company will generally be entitled to redeem the Rights for $0.01 and to amend the rights in any manner other than to change the redemption price.  Certain subsequent amendments are also permitted.  The Rights expire on June 4, 2011.



F-33



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Note 12  Employee benefit and stock option plans

Defined contribution plan

The Company maintains the EGL, Inc. 401(k) Plan (the EGL Plan) pursuant to which the Company provides up to dollar for dollar discretionary matching of employee tax-deferred savings up to a maximum of 5% of eligible compensation for employees in the United States.  Each participant vests in the Companys contribution over the course of five years at a vesting rate of 20% per year.  During the years ended December 31, 2005 and 2004, the Company recorded charges of $2.0 million and $800,000, respectively, each year related to discretionary contributions to this plan.  No charges were recorded for the EGL Plan during the year ended December 31, 2003 due to use of forfeitures.

Additionally, certain of the Companys international subsidiaries have governmental or discretionary defined contribution plans with contribution rates ranging from 2.00% to 17.32% of eligible compensation.  For the years ended December 31, 2005, 2004 and 2003, the Company recorded charges of $2.2 million, $1.8 million and $1.6 million, respectively, related to discretionary and mandatory contributions to these plans.

Defined benefit plans

Certain of the Companys international subsidiaries sponsor defined benefit pension plans covering certain full-time employees.  Benefits are based on the employees years of service and compensation.  The Companys plans are funded in conformity with the funding requirements of applicable government regulations of the country in which the plans are located.  These foreign plans are not subject to the United States Employee Retirement Income Security Act of 1974.  Information for the Companys defined benefit plans is provided below.

Benefit costs related to these plans consisted of the following:



|                                                           | Year Ended December 31,
|---------------------------------------------------------- | -----------------------
|                                                           | 2005                   
|                                                           | (in thousands)         
|Service cost                                               | $
1,891                
|Interest cost                                              | 2,069                  
|Expected return on plan assets                             | (1,986)                
|Net pension enhancement and curtailment/settlement expense | -                      
|Amortization of unrecognized transition obligation/(asset) | (17)                   
|Amortization of actuarial loss and prior service cost      | 370                    
|Net benefit cost                                           | $
2,327                





F-34



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Changes in the projected benefit obligations were as follows:



|                                        | Year Ended December 31,
|--------------------------------------- | -----------------------
|                                        | 2005                   
|                                        | (in thousands)         
|Benefit obligation, beginning of period | $
42,385               
|Service cost                            | 1,891                  
|Interest cost                           | 2,069                  
|Actuarial loss                          | 3,939                  
|Payments to participants                | (670)                  
|Plan amendments                         | -                      
|Foreign exchange rate changes           | (4,722)                
|Other                                   | 445                    
|Benefit obligation, end of period       | $
45,337               



Changes in benefit plan assets were as follows:



|                                | Year Ended December 31,
|------------------------------- | -----------------------
|                                | 2005                   
|                                | (in thousands)         
|Fair value, beginning of period | $
31,242               
|Actual return on plan assets    | 5,522                  
|Contributions by employer       | 1,923                  
|Payments to participants        | (670)                  
|Foreign exchange rate changes   | (3,512)                
|Other                           | 445                    
|Fair value, end of period       | $
34,950               



Accumulated benefit obligations in excess of plan assets were as follows:



|                                     | Year Ended December 31,
|------------------------------------ | -----------------------
|                                     | 2005                   
|                                     | (in thousands)         
|Balance at December 31               | $
10,387               
|Unrecognized net transition asset    | 206                    
|Unrecognized net actuarial loss      | (8,847)                
|Minimum pension liability adjustment | 880                    
|Accrued benefit cost                 | $
2,626                



Amounts recognized in consolidated balance sheets:



|                                       | As of December 31,
|-------------------------------------- | ------------------
|                                       | 2005              
|                                       | (in thousands)    
|Prepaid benefit cost                   | $
877             
|Accrued benefit liability              | 2,984             
|Accumulated other comprehensive income | (1,106)           





F-35



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Weighted average assumptions used included the following:



|                                               | Year Ended December 31,
|---------------------------------------------- | -----------------------
|                                               | 2005                   
|                                               | (in thousands)         
|Discount rate                                  | 4.8%                   
|Long-term rate of compensation increase        | 4.7%                   
|Long-term rate of return on funded plan assets | 6.3%                   



Information for pension plans with an accumulated benefit obligation in excess of plan assets:



|                               | As of December 31,
|------------------------------ | ------------------
|                               | 2005              
|                               | (in thousands)    
|Projected benefit obligation   | $
43,161          
|Accumulated benefit obligation | 36,058            
|Fair value of plan assets      | 34,950            



Information for unfunded pension plans:



|                               | As of December 31,
|------------------------------ | ------------------
|                               | 2005              
|                               | (in thousands)    
|Projected benefit obligation   | $
2,172           
|Accumulated benefit obligation | 1,996             



Asset allocations by category were as follows:



|                  | As of December 31,
|----------------- | ------------------
|                  | 2005              
|Equity securities | 68.9%             
|Debt securities   | 14.9%             
|Other             | 16.2%             
|Total             | 100.0%            



The Companys policy is to invest its pension assets in debt and equity securities.  The plans assets are managed by outside investment advisors.  The allocation of plan assets is determined based on plan liabilities and funded status.

The Company plans to contribute $1.6 million to the international defined benefit plans in 2006.  As of December 31, 2005, the Company expects that benefits to be paid in each of the next five fiscal years after 2005 and for the next five fiscal years thereafter will be as follows (in thousands):



|2006      | $
472
|--------- | -----
|2007      | 520  
|2008      | 669  
|2009      | 725  
|2010      | 846  
|2011-2015 | 6,427





F-36



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Stock purchase plan

In 1999, the Company initiated an employee stock purchase plan in order to provide eligible employees of the Company and its participating subsidiaries, including subsidiaries based outside of the United States, with the opportunity to purchase the Companys common stock through payroll deductions.  Employees may purchase common stock under this plan during a six-month offering period based on a formula provided in the plan document, which generally allows the Companys employees to purchase common stock at 85% of quoted fair market value.  Under this plan, 550,000 shares are authorized for purchase.  During 2005, 2004 and 2003, 66,000, 42,000 and 43,000 shares of common stock were purchased under this plan at an average price of $17.25, $18.66 and $12.52 per share, respectively.

Stock option plans

The Company has four option plans whereby certain officers, directors, and employees may be granted options, appreciation rights or awards related to the Companys common stock.  As of December 31, 2005, 1.9 million shares are authorized for issuance under the Companys stock option plans.

Circle Stock Option Plans

The 1994 Omnibus Equity Incentive Plan and the 1999 Stock Option Plan were plans created by Circle prior to the merger with EGL.  Options outstanding pursuant to these plans are exercisable in shares of EGL common stock and were automatically accelerated upon consummation of the merger with EGL.  No new options were granted under these plans.

EGL Plan

The Long-Term Incentive Plan permits the grant of stock options at an exercise price equal to the fair market value of the common stock on the date of grant.  The plan is authorized for a maximum of 12.2 million shares.  Options granted under the plan generally vest ratably over a three-year, five-year or seven-year period from date of grant (or 100% upon death).  Vested options granted to date generally terminate seven years from date of grant.

Additional awards may be granted under the Long-Term Incentive Plan in the form of cash, stock, or stock appreciation rights.  The stock appreciation right awards may consist of the right to receive payment in cash or common stock.  Any such award may be subject to certain conditions, including continuous service with the Company or achievement of certain business objectives.  There have been no awards of this kind issued under the Long-Term Incentive Plan.

In December 2005, the Company granted options to purchase 1.4 million shares to certain of its employees and executive officers with the number of options to be exercisable contingent upon satisfying performance vesting and time vesting criteria.  The performance vesting of the option shares is determined based upon the Companys earnings per share (EPS) for the year ending December 31, 2006.  Any portion of the option shares that do not satisfy the performance vesting criteria will terminate upon determining the EPS for 2006.  The portion of the options that satisfy the performance criteria will vest over a three year period with one third vesting in March 2007 upon determination of the EPS for 2006 with the remaining shares vesting in two equal installments in December 2007 and 2008.  The Company believes it is probable that 1.0 million of the shares will vest based upon meeting the performance criteria.  There was no compensation expense in 2005 for these stock-based awards.



F-37



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







EGL Director Plan

The Director Plan provides for automatic restricted stock awards to non-employee directors at the time they join the Board and annually thereafter.  These awards vest within one year from the date of grant and terminate ten years from date of grant.  The plan was authorized for a maximum of 400,000 shares.

Transaction Summary

A summary of stock option transactions for each of the three years ended December 31, 2005 is as follows:



|                                 | Options        |  | Weighted-Average Option Price
|-------------------------------- | -------------- |  | -----------------------------
|                                 | (in thousands) |  |                              
|Outstanding at January 1, 2003   | 5,701          |  | $
19.34                      
|Granted                          | 395            |  | 16.37                        
|Exercised                        | (324)          |  | 12.67                        
|Cancelled                        | (465)          |  | 18.88                        
|Outstanding at December 31, 2003 | 5,307          |  | 19.67                        
|Granted                          | 116            |  | 28.55                        
|Exercised                        | (2,092)        |  | 19.07                        
|Cancelled                        | (467)          |  | 19.84                        
|Outstanding at December 31, 2004 | 2,864          |  | 20.42                        
|Granted                          | 1,463          |  | 37.29                        
|Exercised                        | (1,016)        |  | 20.84                        
|Cancelled                        | (221)          |  | 19.89                        
|Outstanding at December 31, 2005 | 3,090          |  | $
28.27                      



Options vested at December 31, 2005, 2004 and 2003 totaled 1.1 million, 1.9 million and 3.8 million shares, respectively.

The following table summarizes information about stock options outstanding at December 31, 2005:



|                         |  | Outstanding                                                    |  | Exercisable                    
|------------------------ |  | -------------------------------------------------------------- |  | -------------------------------
|Range of
exercise prices |  | Options                                                        |  | Average remaining life in years
|                         |  | (in thousands, except option price and average remaining life)
|$
8.88
-
$10.79          |  | 342                                                            |  | 2.94                           
|$
12.08
-
$17.94         |  | 303                                                            |  | 4.63                           
|$
18.24
-
$26.63         |  | 665                                                            |  | 1.95                           
|$
28.55
-
$37.29         |  | 1,780                                                          |  | 6.26                           
|$
8.88
-
$37.29          |  | 3,090                                                          |  | 4.95                           





F-38



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Note 13  Earnings per share

Basic earnings per common share excludes dilution and is computed by dividing income available to common shareholders by the weighted average number of shares outstanding for the period.  Diluted earnings per common share includes potential dilution that could occur if stock options were exercised or convertible debt was exchanged for common stock.  The convertible notes were converted into 5,736,074 shares of the Companys common stock as of December 17, 2004.  These shares have been included in basic earnings per share upon conversion and when dilutive, in diluted earnings per share prior to conversion.

The table below indicates the potential common shares issuable, which were included for purposes of computing diluted earnings per common share:



|                                                                                                                 | Year Ended December 31,
|---------------------------------------------------------------------------------------------------------------- | -----------------------
|                                                                                                                 | 2005                   
|                                                                                                                 | (in thousands)         
|Net income  used in basic earnings per common 
share                                                            | $
58,160               
|Interest expense and deferred financing fee amortization on convertible notes, net of tax                        | -                      
|Net income  used in diluted earnings per common 
share                                                          | $
58,160               
|                                                                                                                 |                        
|Weighted average common shares outstanding  used
 in basic earnings per common share                            | 47,442                 
|Net dilutive potential common shares issuable on exercise of options                                             | 390                    
|Net dilutive potential common shares issuable on conversion of convertible notes                                 | -                      
|Weighted average common shares and dilutive 
potential common shares  used in diluted earnings per common share | 47,832                 



The table below indicates the potential common shares issuable which were excluded from diluted potential common shares as their effect would be anti-dilutive:



|                                                                                                                                 | Year Ended December 31,
|-------------------------------------------------------------------------------------------------------------------------------- | -----------------------
|                                                                                                                                 | 2005                   
|                                                                                                                                 | (in thousands)         
|Net dilutive potential common shares issuable:                                                                                   |                        
|On exercise of options  exercise price greater 
than average market value during period or shares anti-dilutive due to net loss | 486                    
|On conversion of convertible senior notes                                                                                        | -                      



In addition, up to 719,000 shares associated with the December 30, 2005 grant of contingently vesting options have been excluded from the basic and diluted earnings per share calculation as the contingency has not been met.





F-39



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Note 14  Nonoperating income (expense), net

Nonoperating income (expense), net, consists of the following:



|                                                                 | Twelve Months Ended December 31,
|---------------------------------------------------------------- | --------------------------------
|                                                                 | 2005                            
|                                                                 | (in thousands)                  
|Interest income                                                  | $
1,781                         
|Interest expense, net of capitalized                             | (4,497)                         
|Equity and earnings (losses) from unconsolidated affiliates, net | (85)                            
|Estimated  exposures on guarantees for unconsolidated affiliate  | -                               
|Minority interests                                               | (2)                             
|Gains on sales of unconsolidated affiliates                      | 4,041                           
|Foreign exchange gains (losses), net                             | 2,532                           
|Other                                                            | 1,377                           
|Total                                                            | $
5,147                         



Note 15  EEOC legal settlement

In December 1997, the U.S. Equal Employment Opportunity Commission (EEOC) issued a Commissioners Charge alleging violations under Title VII, the Age Discrimination in Employment Act, and the Equal Pay Act.  In May through July 2000, eight individuals filed suit against the Company in the United States District Court for the Eastern District of Pennsylvania in Philadelphia, alleging gender, race and national origin discrimination, as well as sexual harassment.  The individual plaintiffs sought to certify a class of approximately 1,000 of the Companys current and former employees and applicants.  The case was eventually transferred to the United States District Court for the Southern District of Texas  Houston Division.



On October 2, 2001, the Company and the EEOC announced the filing of a Consent Decree settlement, under which the Company agreed to pay $8.5 million into a fund to compensate individuals who claim to have experienced discrimination (Settlement Fund).  In addition, the Company agreed to contribute $500,000 to establish a Leadership Development Program (LDP).  The Consent Decree expired on October 3, 2005, with the Claims administration process under the Consent Decree completed by the Company and the EEOC in early 2005.  Of the 2,073 claims received, only 203 were deemed to be eligible for a monetary distribution totaling $903,000.  On February 10, 2005, upon motion by the Company and the EEOC, the Court entered an Order directing that the Company recapture $6.0 million plus Company accrued interest from the Settlement Fund.  Reversal of the related accrued liability resulted in $6.0 million in income in the first quarter of 2005.  The Court also approved the parties agreement to transfer $1.4 million to the LDP.  From that amount, the Company has reimbursed itself $582,000 for corporate funds previously expended on LDP expenses.  The Court further approved the parties agreement to retain $1.1 million in the Settlement Fund for the payment of eligible claims.



Through March 13, 2006, 176 eligible Claimants have been sent settlement checks totaling $825,000.  Only two Claimants have opted out of the settlement.  Eligible claimants also had the option of objecting to an award, but to do so they must have notified the Claims Administrator within thirty days of the date of their eligibility notice.  To date, all objections have been resolved by agreement between the EEOC and counsel for the Company.  If any funds remain in the Settlement Fund after payment of all claims, the remainder shall be deposited in the LDP.





F-40



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







To the extent any of the individual plaintiffs or any other persons who have opted out of the settlement pursue individual claims, the Company intends to continue to vigorously defend against their allegations.  The Company currently expects to prevail in the Companys defense of any remaining individual claims.  There can be no assurance as to what amount of time it will take to resolve any other lawsuits and related issues or the degree of any adverse affect these matters may have on the Companys financial condition and results of operations.  A substantial settlement payment or judgment could result in a significant decrease in the Companys working capital and liquidity and recognition of a loss in the Companys consolidated statement of income.



Note 16  Commitments and contingencies

Leases

The Company has operating lease agreements, principally for freight operation facilities and office space.  These leases are non-cancelable and expire on various dates through 2025.  Certain of the Companys lease agreements contain renewal options and rent escalation clauses.  The following is a summary of future minimum payment obligations under non-cancelable leases with remaining lease terms in excess of one year as of December 31, 2005:



|                                            | Capital
Leases |  | Operating
Leases
|------------------------------------------- | -------------- |  | ----------------
|                                            | (in thousands)
|2006                                        | $
1,981        |  | $
69,838        
|2007                                        | 859            |  | 56,790          
|2008                                        | 193            |  | 46,960          
|2009                                        | 35             |  | 42,831          
|2010 and thereafter                         | 3              |  | 210,672         
|Total future minimum lease payments         | 3,071          |  | $
427,091       
|Less  amounts representing interest        | 116            |  |                 
|Present value of net minimum lease payments | 2,955          |  |                 
|Less  current obligations                  | 1,894          |  |                 
|Noncurrent obligations                      | $
1,061        |  |                 



Included in the above summary of minimum future lease payment obligations are leases on freight operations facilities and office space.  The obligations related to certain of these facilities has been accrued in the Companys vacant facilities accrual as of December 31, 2005.

Future lease obligation accruals

The Company maintains facility accruals for its remaining lease obligations under noncancelable operating leases at domestic and international locations that the Company has vacated and consolidated due to excess capacity resulting from the Company having multiple facilities in certain locations after the merger with Circle in 2000 and changing business needs.  All lease costs for facilities being consolidated were charged to operations until the date that the Company vacated each facility.  These facility accruals are included in other current and non-current liabilities on the consolidated balance sheets.  The changes in these accruals during the years ended December 31, 2005, 2004 and 2003 and the remaining unpaid accrued charges as of December 31, 2005 and 2004 are as follows:





F-41



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







|                                       |  | Future lease obligations, net of subleasing income
|-------------------------------------- |  | --------------------------------------------------
|                                       |  | (in thousands)                                    
|Accrued liability at January 1, 2003   |  | $
8,026                                           
|Payments                               |  | (2,226)                                           
|Accrued liability at December 31, 2003 |  | 5,800                                             
|New charges                            |  | 4,876                                             
|Revisions to estimates                 |  | (1,098)                                           
|Payments                               |  | (3,002)                                           
|Accrued liability at December 31, 2004 |  | 6,576                                             
|Revisions to estimates                 |  | 1,309                                             
|Payments                               |  | (2,819)                                           
|Accrued liability at December 31, 2005 |  | $
5,066                                           



Amounts recorded for future lease obligations are net of approximately $17.7 million in anticipated future recoveries from actual sublease agreements and $8.5 million from expected sublease agreements as of December 31, 2005.  Sublease income has been anticipated only in locations where sublease agreements have been executed as of December 31, 2005 or are deemed probable of execution and collection.  The Companys lease agreements for these facilities expire from 2006 to 2025 and sublease agreements expire from 2006 to 2012.  There is a risk that subleasing transactions will not occur within the same timing or pricing assumptions made by the Company, or at all, which could result in future revisions to these estimates.

Rent expense for operating leases was $80.8 million, $86.9 million and $77.5 million for the years ended December 31, 2005, 2004 and 2003, respectively, which is net of sublease income of $3.7 million, $4.5 million and $3.6 million, respectively.

U.K. fire damage

On January 9, 2005, the Companys London (Thurrock) warehouse and all contents were destroyed by fire.  At the time of the fire, the Company maintained insurance coverage for damaged property, business interruption and cargo losses with insurance limits of $35 million for damaged property and business interruption and $10 million for cargo losses.

During the first quarter of 2005, the Company recorded a loss and recognized an insurance recovery of $721,000 for property destroyed in the fire.  In February 2005, the Company received an interim payment on its property claim of $673,000.  The Company incurred $1.2 million of pre-tax operating losses in the first quarter of 2005 as a result of the fire.  A preliminary business interruption claim related to the fire has been submitted to our insurance carriers with a $928,000 initial payment received in May 2005, of which $567,000, $163,000 and $198,000 are recorded in revenues, personnel costs and other selling, general and administrative expenses, respectively, in the accompanying consolidated statement of income.  In addition, during the fourth quarter, we incurred a $1.6 million lease surrender charge.  As of December 31, 2005, $4.4 million of cargo claims have been settled under the Companys insurance policy.  An additional estimated $6.4 million of claims remain open of which $5.6 million is deemed probable of recovery under the Companys insurance policy.  The Company recorded a liability of $823,000 for the estimated claims in excess of its insurance policy limits.  At December 31, 2005, a $5.6 million insurance receivable and a $6.4 million insurance liability for these estimated cargo losses was included in the Companys consolidated balance sheet.  However, existing claims could be settled in excess of the Companys insurance limits, which could have a material impact on its financial position, cash flows and results of operations.



F-42



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







U.S. Government billing

During 2003 and 2004, the Company acted as a logistics subcontractor in the Middle East to Kellogg Brown & Root, Inc. (KBR), which as general contractor provided various services to the U.S. Department of Defense (DOD) and other U.S. government agencies.  In 2004, the Company received an administrative subpoena from the Office of Inspector General of the DOD requesting documents relating to the billing of war risk surcharges by the Company on certain shipments of KBR freight in the period from late 2003 to mid-2004.  The Company has cooperated fully with the governments request and its investigation.  In the course of its internal investigation of the matter, the Company reviewed documents related to the imposition of war risk surcharges on it by transportation providers.  The Company uncovered evidence suggesting that certain documents related to the imposition of war risk surcharges on the Company, that were then charged to KBR, were false and the charges were not warranted.  Following this discovery, and with approval from the government, the Company engaged auditors to conduct a forensic analysis of war risk surcharges charged by the Company.  This analysis concluded that approximately $1.1 million of war risk surcharges charged by the Company were not actually imposed on the Company by transportation providers.  The Company provided the results of this investigation to the government and promptly terminated two employees for violation of the Companys Code of Conduct.

As a result of discussions with the government, the Company received a letter from the United States Attorneys Office of the Eastern District of Texas on December 12, 2005 offering to settle the war risk surcharge issue for the sum of $4.0 million.  Of the $4.0 million, $1.1 million reimburses the government for war risk surcharges (the full amount of which had been previously reserved in the Companys financial statements), and the remaining $2.9 million represents penalties for improper billings.  The Company has agreed to reimburse the $1.1 million in war risk surcharges, and expects to reach agreement with the government promptly on the timing and final amount of the penalties.  Recognizing the Companys cooperation in and assistance with the governments review, as part of the settlement, the United States Attorneys Office and the Defense Criminal Investigative Service is expected to agree to waive all investigatory expenses and make no recommendation to the DOD for debarment of the Company from future DOD contracts.  In addition, the United States Attorneys Office of the Eastern District of Texas is not expected to recommend to the DOD or the Department of Justice any criminal indictment of the Company related to the war risk surcharges.  In December 2005, the Company recorded a charge of $2.9 million (approximately $0.06 per share) for this penalty.

In February 2006, the Company was notified by the U.S. Armys Office of Suspension and Debarment that the Company was temporarily suspended from doing business with the government as a direct contractor or sub-contractor effective February 27, 2006.  The basis of the suspension was the guilty plea entered by one of the two employees the Company terminated related to the war risk surcharge investigation.  This suspension does not include business previously awarded with a signed contract, business using tenders, tariffs or quotes, or sub-contractors less than $25,000.  This action was taken despite the settlement offer by the United States Attorneys Office of the Eastern District of Texas in which it offered not to recommend that the Company be debarred from future DOD contracts.  The suspension is pending an appeal to the U.S. Armys Suspension and Debarment Officer.

At the request of the government, the Company limited its internal investigation and its public statements on these matters so as not to interfere with the governments broader investigation.



F-43



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Litigation

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

One former and two current independent contractor pickup and delivery (P&D) drivers filed a complaint in California state court on September 12, 2005, on behalf of themselves and similarly situated drivers in California alleging various causes of action based on their theory that the drivers are employees and not independent contractors.  The complaint requests (i) that the matter be designated as a class action on behalf of all independent contractor P&D drivers working for the Company in California; (ii) a declaratory judgment that the Company has violated the law; (iii) an equitable accounting; and (iv) an unspecified amount of damages and restitution in the form of business expenses, unpaid overtime, meal period compensation, unlawful deductions from wages, statutory penalties, interest, attorneys fees and costs. The Company removed the case to federal district court for the Northern District of California, and the parties have agreed to focus only on the individual claims of the three named defendants in the first phase of the proceedings.  In the event one or more of the plaintiffs claims survive the summary judgment phase, the next phase would focus on whether the action is maintainable as a class action.  The Company intends to vigorously defend this lawsuit and believes that plaintiffs are properly classified as independent contractors.

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

Note 17  Restructuring

In June 2005, the Company announced that it was eliminating approximately 350 full-time, part-time and contractor positions in connection with a cost reduction plan.  The reductions were primarily in the United States and Europe.  The Company incurred a pre-tax charge of approximately $1.6 million in connection with the reductions in workforce in the second quarter of 2005.  In Europe, the Middle East and Africa, North America and South America, the charges incurred in the second quarter of 2005 were approximately $1.1 million, $392,000 and $97,000, respectively.  Of this amount, approximately $537,000 was paid in the second quarter of 2005 and the remainder was paid in the third quarter of 2005.  There were no amounts outstanding under this plan as of December 31, 2005.





F-44



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Note 18  Related party transactions

Shared employees

Certain of the Companys employees also perform services for unaffiliated companies owned by James R. Crane.  The Company is reimbursed for these services based upon an allocation percentage of total salaries agreed to by the Company and Mr. Crane.  The Company received reimbursements of $136,000, $135,000 and $62,000 for 2005, 2004 and 2003, respectively.  Amounts billed but not received as of December 31, 2005 were $72,000 and are included in other receivables on the consolidated balance sheets.

Source One Spares

Mr. Crane is a director and significant shareholder of Source One Spares, Inc. (Source One), a company specializing in the just-in-time delivery of overhauled components to commercial aircraft operators.  During all periods presented, transactions with Source One were immaterial.

Aircraft usage payments

During 2004 and 2003, the Company periodically utilized aircraft owned or leased by entities that are controlled by Mr. Crane.  The Company was charged for actual usage of the aircraft on an hourly basis at market rates and was billed on a periodic basis.  The Company reimbursed Mr. Crane for $1.2 million and $621,000 during 2004 and 2003, respectively, for actual hourly usage of the aircraft.  In January 2005, the Company purchased from an unrelated third party an aircraft that was previously leased by an entity controlled by Mr. Crane for $12.5 million to be utilized for business travel, eliminating the use of Mr. Cranes aircraft and reimbursement thereof.



On July 18, 2005, the Compensation Committee of the Board of Directors of the Company approved, in lieu of incremental cash compensation, an arrangement to provide Mr. Crane, or his designees, with up to an aggregate of 150 hours per year of personal use of the Companys aircraft without reimbursement by Mr. Crane.  Mr. Crane actually used 158.7 hours in 2005.  On March 15, 2006, the Compensation Committee of the Board of Directors approved the 8.7 hours of overage and reduced the amount allowed for personal usage in 2006 by 8.7 hours to 141.3 hours.  The Company intends to include usage of 158.7 hours in Mr. Cranes taxable income as required by current U.S. federal income tax regulations.  The U.S. federal income tax regulations also restrict the amount of corporate tax deductions for operating costs and tax depreciation attributable to personal use of the company plane.  The amount of non-deductible personal use expense is reduced by the imputed income recognized by the employee.  On August 5, 2005, the Board of Directors of the Company approved, in lieu of additional director cash compensation that would make the existing compensation package more competitive, an arrangement to provide the independent members of the Board of Directors with limited personal usage of the Companys aircraft, without reimbursement by the directors.  Personal usage of the aircraft by the directors is subject to availability, with priority given to the Companys usage, and the cumulative number of hours allowed for all directors may not exceed 100 hours per year.  The Company will record the number of hours utilized by each director and include in such directors yearly taxable income the amount required by then current U.S. federal income tax regulations.  In 2005, the directors did not utilize the company plane.





F-45



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004









Note 19  Geographic and services information

The Company is organized functionally in geographic operating segments.  Accordingly, management focuses its attention on revenues, net revenues, income before taxes, identifiable assets, capital expenditures and depreciation and amortization in each of these geographical divisions when evaluating the effectiveness of geographic management.  During the second quarter of 2005, the Companys India operations were transferred from the Europe, Middle East and Africa division to the Asia and South Pacific division.  The financial information regarding the Companys operations by geographic division has been revised to reflect this change for all periods presented.



F-46



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004









|                                      |  | North America  |  | South
America |  | Europe & Middle East |  | Asia & South Pacific |  | Eliminations |  | Consolidated
|------------------------------------- |  | -------------- |  | ------------- |  | -------------------- |  | -------------------- |  | ------------ |  | ------------
|                                      |  | (in thousands)
|Year ended December 31, 2005:         |  |                |  |               |  |                      |  |                      |  |              |  |             
|Total revenues                        |  | $
1,401,950    |  | $
104,338     |  | $
646,379            |  | $
1,013,079          |  | $
(69,230)   |  | $
3,096,516 
|Interdivision revenues                |  | (22,884)       |  | (5,827)       |  | (18,389)             |  | (22,130)             |  | 69,230       |  | -           
|Revenues from external customers      |  | $
1,379,066    |  | $
98,511      |  | $
627,990            |  | $
990,949            |  | $
-          |  | $
3,096,516 
|Total net revenues                    |  | $
574,522      |  | $
27,693      |  | $
199,646            |  | $
146,613            |  | $
-          |  | $
948,474   
|Intercompany (income) expense         |  | 956            |  | (3,177)       |  | (5,018)              |  | 7,239                |  | -            |  | -           
|Net revenues                          |  | $
575,478      |  | $
24,516      |  | $
194,628            |  | $
153,852            |  | $
-          |  | $
948,474   
|Income before taxes                   |  | $
58,948       |  | $
1,257       |  | $
11,112             |  | $
27,574             |  |              |  | $
98,891    
|Capital expenditures                  |  | $
19,907       |  | $
905         |  | $
2,594              |  | $
4,108              |  |              |  | $
27,514    
|Depreciation and amortization expense |  | $
20,761       |  | $
639         |  | $
4,273              |  | $
4,270              |  |              |  | $
29,943    
|Identifiable assets                   |  | $
582,525      |  | $
42,861      |  | $
240,107            |  | $
223,748            |  |              |  | $
1,089,241 
|                                      |  |                |  |               |  |                      |  |                      |  |              |  |             
|Year ended December 31, 2004:         |  |                |  |               |  |                      |  |                      |  |              |  |             
|Total revenues                        |  | $
1,312,260    |  | $
95,231      |  | $
587,251            |  | $
811,065            |  | $
(64,415)   |  | $
2,741,392 
|Interdivision revenues                |  | (20,208)       |  | (5,799)       |  | (18,278)             |  | (20,130)             |  | 64,415       |  | -           
|Revenues from external customers      |  | $
1,292,052    |  | $
89,432      |  | $
568,973            |  | $
790,935            |  | $
-          |  | $
2,741,392 
|Total net revenues                    |  | $
534,002      |  | $
20,407      |  | $
186,122            |  | $
124,835            |  | $
-          |  | $
865,366   
|Intercompany (income) expense         |  | 7,481          |  | (3,256)       |  | (7,200)              |  | 2,975                |  | -            |  | -           
|Net revenues                          |  | $
541,483      |  | $
17,151      |  | $
178,922            |  | $
127,810            |  | $
-          |  | $
865,366   
|Income before taxes                   |  | $
48,879       |  | $
1,930       |  | $
3,147              |  | $
23,886             |  |              |  | $
77,842    
|Capital expenditures                  |  | $
29,268       |  | $
652         |  | $
4,042              |  | $
3,995              |  |              |  | $
37,957    
|Depreciation and amortization expense |  | $
20,654       |  | $
467         |  | $
5,621              |  | $
4,146              |  |              |  | $
30,888    
|Identifiable assets                   |  | $
611,476      |  | $
38,900      |  | $
243,549            |  | $
200,938            |  |              |  | $
1,094,863 
|                                      |  |                |  |               |  |                      |  |                      |  |              |  |             
|Year ended December 31, 2003:         |  |                |  |               |  |                      |  |                      |  |              |  |             
|Total revenues                        |  | $
1,124,887    |  | $
65,559      |  | $
452,441            |  | $
551,543            |  | $
(51,011)   |  | $
2,143,419 
|Interdivision revenues                |  | (13,924)       |  | (5,754)       |  | (15,464)             |  | (15,869)             |  | 51,011       |  | -           
|Revenues from external customers      |  | $
1,110,963    |  | $
59,805      |  | $
436,977            |  | $
535,674            |  | $
-          |  | $
2,143,419 
|Total net revenues                    |  | $
468,139      |  | $
15,791      |  | $
152,569            |  | $
98,753             |  | $
-          |  | $
735,252   
|Intercompany (income) expense         |  | 11,302         |  | (4,043)       |  | (6,633)              |  | (626)                |  | -            |  | -           
|Net revenues                          |  | $
479,441      |  | $
11,748      |  | $
145,936            |  | $
98,127             |  | $
-          |  | $
735,252   
|Income (loss) before taxes            |  | $
15,759       |  | $
1,013       |  | $
(1,893)            |  | $
18,204             |  |              |  | $
33,083    
|Capital expenditures                  |  | $
20,895       |  | $
150         |  | $
2,203              |  | $
2,463              |  |              |  | $
25,711    
|Depreciation and amortization expense |  | $
20,533       |  | $
420         |  | $
4,604              |  | $
3,371              |  |              |  | $
28,928    
|Identifiable assets                   |  | $
556,466      |  | $
28,534      |  | $
189,647            |  | $
166,910            |  |              |  | $
941,557   





F-47



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







Revenues from transfers between divisions represent approximate amounts that would be charged if an unaffiliated company provided the services.  Revenues and expenses for geographic divisions include 100 percent of amounts for unconsolidated affiliates directly involved in freight forwarding activities.  Total divisional revenues are reconciled with total consolidated revenues by eliminating inter-divisional revenues and revenues and expenses for unconsolidated affiliates.  Income (loss) before taxes includes profits (losses) on intercompany transactions.  Net revenues by division for the year ended December 31, 2003 were restated in 2004 to exclude intercompany profits and losses.  These reclassifications had no impact on consolidated net revenues.



Performance measurement and resource allocation for the reportable segments are based on many factors.  The primary financial measures used by management to evaluate the operating performance of the Companys segments include the revenues, costs and expenses directly controlled by each reportable segment and exclude the following:

-

certain costs related to general corporate functions and



-

interest and certain other miscellaneous nonoperating income and expenses not directly used in assessing the performance of the operating segments.



The Company does not maintain a corporate balance sheet, therefore segment asset information monitored by management includes general corporate assets, as applicable, in the respective operating segments.

The reconciliation between income before taxes, capital expenditures and depreciation and amortization for reportable segments to consolidated amounts is as follows:

|                                                                                                    |  | Year Ended December 31,
|--------------------------------------------------------------------------------------------------- |  | -----------------------
|                                                                                                    |  | 2005                   
|                                                                                                    |  | (in thousands)         
|Income before taxes for reportable segments                                                         |  | $
98,891               
|Interest, corporate administrative expenses 
and other miscellaneous nonoperating 
income (expense) |  | 1,666                  
|Income before taxes                                                                                 |  | $
100,557              
|                                                                                                    |  |                        
|Capital expenditures for reportable segments                                                        |  | $
27,514               
|Capital expenditures not allocated to segments                                                      |  | 13,646                 
|Capital expenditures                                                                                |  | $
41,160               
|                                                                                                    |  |                        
|Depreciation and amortization for reportable 
segments                                              |  | $
29,943               
|Depreciation and amortization not allocated to
segments                                             |  | 5,989                  
|Depreciation and amortization                                                                       |  | $
35,932               



The Company is domiciled in the U.S. and had revenues from external customers in the U.S. of $1,244 million, $1,164 million and $1,009 million for the years ended December 31, 2005, 2004 and 2003, respectively.  The U.S. had long lived assets of $197 million and $179 million as of December 31, 2005 and 2004, respectively.



F-48



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







The Company charges its subsidiaries and affiliates for management and overhead services rendered in the United States on a cost recovery basis.

The following tables show revenues and net revenues attributable to the Companys principal services:



|                            | Year Ended December 31,
|--------------------------- | -----------------------
|                            | 2005                   
|                            | (in thousands)         
|Revenues:                   |                        
|Air freight forwarding      | $
2,035,020            
|Ocean freight forwarding    | 443,769                
|Customs brokerage and other | 617,727                
|Total                       | $
3,096,516            
|                            |                        
|Net revenues:               |                        
|Air freight forwarding      | $
558,142              
|Ocean freight forwarding    | 89,939                 
|Customs brokerage and other | 300,393                
|Total                       | $
948,474              



Note 20  Quarterly financial information (unaudited)



|                                         | Three Months Ended                      
|---------------------------------------- | ----------------------------------------
|                                         | March 31,
2005                          
|                                         | (in thousands, except per share amounts)
|Revenues                                 | $
700,666                               
|Net revenues                             | 213,432                                 
|Operating income                         | 13,723
(1)                              
|Income before provision for income taxes | 13,320
(1)                              
|Net income                               | 7,165
(1)                               
|Basic earnings per share                 | 0.14                                    
|Diluted earnings per share               | 0.14                                    



(1)

Includes $6.0 million recapture of funds from EEOC settlement.  See Note 15.

(2)

Includes $4.0 million gain on sale of TDS Logistics, Inc.  See Note 6.

(3)

Includes $2.9 million penalty for improper government billings.  See Note 16.



F-49



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004











|                                         | Three Months Ended                      
|---------------------------------------- | ----------------------------------------
|                                         | March 31,
2004                          
|                                         | (in thousands, except per share amounts)
|Revenues                                 | $
584,555                               
|Net revenues                             | 200,741                                 
|Operating income                         | 13,603                                  
|Income before provision for income taxes | 12,661                                  
|Net income                               | 7,292                                   
|Basic earnings per share                 | 0.15                                    
|Diluted earnings per share               | 0.15                                    



(1)

Includes $6.7 million gain on sale of Miami Air.  See Note 6.

(2)

Includes $5.9 million gain on sale of TDS Logistics, Inc.  See Note 6.





F-50



---

EGL, INC.

Notes to Consolidated Financial Statements

December 31, 2005 and 2004







SCHEDULE II

EGL, INC.

VALUATION AND QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003



|                                           |  |                              |  | Additions                     |  |         |  |                      
|------------------------------------------ |  | ---------------------------- |  | ----------------------------- |  | ------- |  | ---------------------
|Description                                |  | Balance at beginning of year |  | Charged to costs and expenses |  | Other   |  | Deductions write-offs
|                                           |  | (in thousands)              
|Allowance for doubtful accounts receivable |  |                              |  |                               |  |         |  |                      
|                                           |  |                              |  |                               |  |         |  |                      
|2005                                       |  | $
14,069                     |  | $
8,630                       |  | $
-     |  | $
10,133             
|                                           |  |                              |  |                               |  |         |  |                      
|2004                                       |  | 12,342                       |  | 6,672                         |  | -       |  | 4,945                
|                                           |  |                              |  |                               |  |         |  |                      
|2003                                       |  | 13,717                       |  | 7,162                         |  | -       |  | 8,537                
|                                           |  |                              |  |                               |  |         |  |                      
|Deferred tax valuation allowance           |  |                              |  |                               |  |         |  |                      
|                                           |  |                              |  |                               |  |         |  |                      
|2005                                       |  | $
8,824                      |  | $
2,385                       |  | $
2,298 |  | $
-                  
|                                           |  |                              |  |                               |  |         |  |                      
|2004                                       |  | 8,627                        |  | 2,824                         |  | -       |  | 2,627                
|                                           |  |                              |  |                               |  |         |  |                      
|2003                                       |  | -                            |  | 8,627                         |  | -       |  | -                    











S-1