UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2007

OR

For the transition period from          to

Commission File Number: 0-13468

EXPEDITORS INTERNATIONAL OF WASHINGTON, INC.

(Exact name of registrant as specified in its charter)

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 o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. 

Yes o 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 o No  x

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

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

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

At June 30, 2007, the aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant was approximately $8,664,390,065.

At February 26, 2008 the number of shares outstanding of registrant’s Common Stock was 213,147,126.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the Registrant’s 2008 Annual Meeting of Shareholders to be held on May 7, 2008 are incorporated by reference into Part III of this Form 10-K.

Forward-Looking Statements

In accordance with the provisions of the Litigation Reform Act, the Company is making readers aware that forward-looking statements, because they relate to future events, are by their very nature subject to many important risk factors which could cause actual results to differ materially from those contained in the forward-looking statements.  For additional information about forward-looking statements and for an identification of risk factors and their potential significance, see “Safe Harbor for Forward-Looking Statements Under Securities Litigation Reform Act of 1995; Certain Cautionary Statements” immediately preceding Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report.

PART I

ITEM 1—BUSINESS

Expeditors International of Washington, Inc. is engaged in the business of providing global logistics services.  The Company offers its customers a seamless international network supporting the movement and strategic positioning of goods.  The Company’s services include the consolidation or forwarding of air and ocean freight.  In each United States office, and in many overseas offices, the Company acts as a customs broker.  The Company also provides additional services including distribution management, vendor consolidation, cargo insurance, purchase order management and customized logistics information.  The Company does not compete for domestic freight, overnight courier or small parcel business and does not own aircraft or steamships.

The Company, including its majority-owned subsidiaries, operates full service offices (·) in the cities identified below.  Full service offices have also been established in locations where the Company maintains unilateral control over assets and operations and where the existence of the parent-subsidiary relationship is maintained by means other than record ownership of voting stock (#).  In other cities, the Company contracts with independent agents to provide required services and has established approximately 51 such relationships world-wide.  Locations where Company employees perform sales and customer service functions are identified below as international service centers (*).  Wholly-owned locations operating under the supervision and control of another full service office are identified as satellite offices (+).  In each case, the opening date for the full service office, international service center or satellite office is set forth in parenthesis.

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The Company was incorporated in the State of Washington in May 1979.  Its executive offices are located at 1015 Third Avenue, 12^th Floor, Seattle, Washington, and its telephone number is (206) 674-3400.

The Company’s internet address is http://www.expeditors.com.  The Company makes available free of charge through its internet website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC).

For information concerning the amount of revenues, net revenues, operating income, identifiable assets, capital expenditures and depreciation and amortization attributable to the geographic areas in which the Company conducts its business, see Note 8 to the consolidated financial statements.

Beginning in 1981, the Company’s primary business focus was on airfreight shipments from Asia to the United States and related customs brokerage and other services.  In the mid-1980’s, the Company began to expand its service capabilities in export airfreight, ocean freight and distribution services.  Today the Company offers a complete range of global logistics services to a diversified group of customers, both in terms of industry specialization and geographic location.  As opportunities for profitable growth arise, the Company plans to create new offices.  While the Company has historically expanded through organic growth, the Company has also been open to growth through acquisition of, or establishing joint ventures with, existing agents or others within the industry.

Airfreight Services

Airfreight services accounted for approximately 36, 36, and 37 percent of the Company’s 2007, 2006, and 2005 consolidated revenues net of freight consolidation expenses (“net revenues”), respectively.  When performing airfreight services, the Company typically acts either as a freight consolidator or as an agent for the airline which carries the shipment.  When acting as a freight consolidator, the Company purchases cargo space from airlines on a volume basis and resells that space to its customers at lower rates than the customers could obtain directly from airlines.  When moving shipments between points where the volume of business does not facilitate consolidation, the Company receives and forwards individual shipments as the agent of the airline which carries the shipment. Whether acting as an agent or consolidator, the Company offers its customers knowledge of optimum routing, familiarity with local business practices, knowledge of export and import documentation and procedures, the ability to arrange for ancillary services, and assistance with space availability in periods of peak demand.

In its airfreight forwarding operations, the Company procures shipments from its customers, determines the routing, consolidates shipments bound for a particular airport distribution point, and selects the airline for transportation to the distribution point.  At the distribution point, the Company or its agent arranges for the consolidated lot to be broken down into its component shipments and for the transportation of the individual shipments to their final destinations.

The Company estimates its average airfreight consolidation weighs approximately 3,500 pounds and a typical consolidation includes merchandise from several shippers.  Because shipment by air is relatively expensive compared with ocean transportation, air shipments are generally characterized by a high value-to-weight ratio, the need for rapid delivery, or both.

The Company typically delivers shipments from a Company warehouse at the origin to the airline after consolidating the freight into containers or onto pallets.  Shipments normally arrive at the destination distribution point within forty-eight hours after such delivery.  During peak shipment periods, cargo space available from the scheduled air carriers can be limited and backlogs of freight shipments may occur.  When these conditions exist, the Company may charter aircraft to meet customer demand.

The Company consolidates individual shipments based on weight and volume characteristics in cost-effective combinations. Typically, as the weight or volume of a shipment increases, the cost per pound/kilo or cubic inch/centimeter charged by the Company decreases.  The rates charged by airlines to forwarders and others also generally decrease as the weight or volume of the shipment increases.  As a result, by aggregating shipments and presenting them to an airline as a single shipment, the Company is able to obtain a lower rate per pound/kilo or cubic inch/centimeter than that which it charges to its customers for the individual shipment, while generally offering the customer a lower rate than could be obtained from the airline for an unconsolidated shipment.

The Company’s net airfreight forwarding revenues from a consolidated shipment include the differential between the rate charged to the Company by an airline and the rate which the Company charges to its customers, commissions paid to the Company by the airline carrying the freight and fees for ancillary services.  Such ancillary services provided by the Company include preparation of shipping and customs documentation, packing, crating and insurance services, negotiation of letters of credit, and preparation of documentation to comply with local export laws.  When the Company acts as an agent for an airline handling an unconsolidated shipment, its net revenues are primarily derived from commissions paid by the airline and fees for ancillary services paid by the customer.

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The Company does not own aircraft and does not plan to do so.  Management believes that the ownership of aircraft would subject the Company to undue business risks, including large capital outlays, increased fixed operating expenses, problems of fully utilizing aircraft and competition with airlines.  Because the Company relies on commercial airlines to transport its shipments, changes in carrier policies and practices such as pricing, payment terms, scheduling, and frequency of service may affect its business.

The Company also performs breakbulk services which involve receiving and breaking down consolidated airfreight lots and arranging for distribution of the individual shipments.  Breakbulk service revenues also include commissions from agents for airfreight shipments.

Ocean Freight and Ocean Services

Ocean freight services accounted for approximately 24, 25, and 25 percent of the Company’s 2007, 2006, and 2005 consolidated net revenues, respectively.  The Company’s revenues as an ocean freight forwarder are derived from commissions paid by the carrier and revenues from fees charged to customers for ancillary services which the Company may provide, such as preparing documentation, procuring insurance, arranging for packing and crating services, and providing consultation.  The Company operates Expeditors International Ocean (“EIO”) an Ocean Transportation Intermediary, sometimes referred to as, a Non-Vessel Operating Common Carrier (“NVOCC”) specializing in ocean freight consolidation from Asia to the United States.  EIO also provides service, on a smaller scale, to and from any location where the Company has an office or agent.  As an NVOCC, EIO contracts with ocean shipping lines to obtain transportation for a fixed number of containers between various points during a specified time period at an agreed rate.  EIO solicits Less-than Container Load (“LCL”) freight to fill the containers and charges lower rates than those available directly from shipping lines.  EIO also handles full container loads for customers that do not have annual shipping volumes sufficient to negotiate comparable contracts directly with the ocean carriers.  The Company does not own vessels and generally does not physically handle the cargo.

Order Management (previously referred to as ECMS or Expeditors Cargo Management System) provides origin consolidation, vendor management, container management, document management, destination management and PO/SKU visibility through a web based and server based application.  Customers have the ability to monitor and report against real time status of purchase orders from the date of creation through final delivery.  Item quantities, required ship dates, commodity descriptions, estimated vs. actual ex factory dates, container utilization, vendor performance and document visibility are many of the managed functions that are visible and reportable via the web.  Order Management is available for various modes of transportation including ocean, air, truck and rail.  Order Management revenues are derived from services provided to the shipper as well as management fees associated with managing purchase order execution against customer specific rules.  One basic function of Order Management involves the taking of cargo from many vendors in a particular origin and “consolidating” these shipments into the fewest possible number of containers to maximize space and minimize cost.  Through origin consolidation customers can reduce the number of containers shipped by putting more product in larger and fewer containers.  Data integrity is an increasingly critical function of Order Management.  Efficient data management is a by-product of our operational process.

Customs Brokerage and Other Services

Customs brokerage and other services accounted for approximately 40, 39 and 38 percent of the Company’s 2007, 2006, and 2005 consolidated net revenues, respectively.  As a customs broker, the Company assists importers to clear shipments through customs by preparing required documentation, calculating and providing for payment of duties on behalf of the importer, arranging for any required inspections by governmental agencies, and arranging for delivery.  The Company also provides other value added services at destination such as warehousing and product distribution, time definite transportation and inventory management.  None of these other services are currently individually significant to the Company’s net revenues.

The Company provides customs clearance services in connection with many of the shipments it handles as a freight forwarder.  However, substantial customs brokerage revenues are derived from customers that elect to use a competing forwarder.  Conversely, shipments handled by the Company as a forwarder may be processed by another customs broker selected by the customer.

The Company also provides custom clearances for goods moving by rail and truck between the United States, Canada and/or Mexico.  The commodities being cleared and the time sensitive nature of the border brokerage business require the Company to continue to make enhancements to its systems in order to provide competitive service.

The Company’s wholly-owned subsidiary, Expeditors Tradewin, L.L.C., responds to customer driven requests for high-end customs consulting services.  Fees for these non-transactional services are based upon hourly billing rates and bids for mutually agreed projects.

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Marketing and Customers

The Company provides flexible service and seeks to understand the needs of the customers from points of origin to ultimate destinations.  Although the domestic importer usually designates the logistics company and the services that will be required, the foreign shipper may also participate in this selection process.  Therefore, the Company coordinates its marketing program to reach both domestic importers and their overseas suppliers.

The Company’s marketing efforts are focused primarily on the traffic, shipping and purchasing departments of existing and potential customers.  The district manager of each office is responsible for marketing, sales coordination, and implementation in the area in which he or she is located.  All employees are responsible for customer service and relations.

The Company staffs its offices largely with managers and other key personnel who are citizens of the nations in which they operate and who have extensive experience in global logistics.  Marketing and customer service staffs are responsible for marketing the Company’s services directly to local shippers and traffic managers who may select or influence the selection of the logistics vendor and for ensuring that customers receive timely and efficient service.  The Company believes that its expertise in supplying solutions customized to the needs of its customers, its emphasis on coordinating its origin and destination customer service and marketing activities, and the incentives it gives to its managers have been important elements of its success.

The goods handled by the Company are generally a function of the products which dominate international trade between any particular origin and destination.  Shipments of computer components, other electronic equipment, housewares, sporting goods, machine parts, and toys, comprise a significant percentage of the Company’s business.  Typical import customers include computer retailers and distributors of consumer electronics, department store chains, clothing and shoe wholesalers, manufacturers and catalogue stores.  Historically, no single customer has accounted for five percent or more of the Company’s net revenues.

Competition

The global logistics services industry is intensely competitive and is expected to remain so for the foreseeable future.  There are a large number of companies competing in one or more segments of the industry, but the number of firms with a global network that offer a full complement of logistics services is more limited.  Depending on the location of the shipper and the importer, the Company must compete against both the niche players and larger entities.  While there is currently a marked trend within the industry toward consolidation into larger firms striving for immediate multinational and multi-service networks, the regional and local competitors maintain a strong market presence.

Historically, the primary competitive factors in the global logistics services industry have been price and quality of service, including reliability, responsiveness, expertise, convenience, and scope of operations.  The Company emphasizes quality service and believes that its prices are competitive with the prices of others in the industry.  Larger customers utilize more sophisticated and efficient procedures for the management of their logistics supply chains by embracing strategies such as just-in-time inventory management.  Accordingly, computerized customer service capabilities are a significant factor in attracting and retaining customers.  These computerized customer service capabilities include customized Electronic Data Interchange, (“EDI”), and on-line freight tracing and tracking applications.  The customized EDI applications allow the transfer of key information between the customers’ systems and the Company’s systems.  Freight tracing and tracking applications provide customers with real time visibility to the location, transit time and estimated delivery time of inventory in transit.

Management believes that the ability to develop and deliver innovative solutions to meet customers’ increasingly sophisticated information requirements is a critical factor in the ongoing success of the Company.  The Company devotes a significant amount of resources towards the maintenance and enhancement of systems that will meet these customer demands.  Management believes that the Company’s existing systems are competitive with the systems currently in use by other logistics services companies with which it competes.

Unlike many of its competitors, who have tended to grow by merger and acquisition, the Company operates the same accounting and transportation computer software, running on a common hardware platform, in all of its full-service locations.  Small and middle-tier competitors, in general, do not have the resources available to develop these customized systems.  As a result, there is a significant amount of consolidation currently taking place in the industry.  Management expects that this trend toward consolidation will continue for the short- to medium-term.  Historically, growth through aggressive acquisition has proven to be a challenge for many of the Company’s competitors and typically involves the purchase of significant “goodwill.”  As a result, the Company has pursued a strategy emphasizing organic growth supplemented by certain strategic acquisitions.

The Company’s ability to attract, retain, and motivate highly qualified personnel with experience in global logistics services is an essential, if not the most important, element of its ability to compete in the industry.  To this end, the Company has adopted incentive compensation programs which make percentages of branch revenues or profits available to managers for distribution among key personnel.  The Company believes that these incentive compensation programs, combined with its experienced personnel and its ability to coordinate global marketing efforts, provide it with a distinct competitive advantage and account for historical growth that competitors have generally matched only through acquisition.

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Currency and Other Risk Factors

The nature of the Company’s worldwide operations necessitate the Company dealing with a multitude of currencies other than the U.S. dollar.  This results in the Company being exposed to the inherent risks of the international currency markets and governmental interference.  Many of the countries where the Company maintains offices and/or agency relationships have strict currency control regulations which influence the Company’s ability to hedge foreign currency exposure.  The Company tries to compensate for these exposures by accelerating international currency settlements among these offices or agents.

In addition, the Company’s ability to provide service to its customers is highly dependent on good working relationships with a variety of entities including airlines, steamship lines and governmental agencies.  The Company considers its current working relationships with these entities to be good.  However, changes in space allotments available from carriers, governmental deregulation efforts, “modernization” of the regulations governing customs clearance, and/or changes in governmental quota restrictions could affect the Company’s business in unpredictable ways.

Seasonality

Historically, the Company’s operating results have been subject to seasonal trends when measured on a quarterly basis.  The first quarter has traditionally been the weakest and the third and fourth quarters have traditionally been the strongest.  This pattern has been the result of, or influenced by, numerous factors including climate, national holidays, consumer demand, economic conditions and a myriad of other similar and subtle forces.  In addition, this historical quarterly trend has been influenced by the growth and diversification of the Company’s international network and service offerings.  The Company cannot accurately forecast many of these factors, nor can the Company estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns will continue in future periods.

A significant portion of the Company’s revenues are derived from customers in industries whose shipping patterns are tied closely to consumer demand and from customers in industries whose shipping patterns are dependent upon just-in-time production schedules. Therefore, the timing of the Company’s revenues are, to a large degree, impacted by factors out of the Company’s control, such as shifting consumer demand for retail goods and manufacturing production delays.  Additionally, many customers ship a significant portion of their goods at or near the end of a quarter, and therefore, the Company may not learn of a shortfall in revenues until late in a quarter.  To the extent that a shortfall in revenues or earnings was not expected by securities analysts, any such shortfall from levels predicted by securities analysts could have an immediate and adverse effect on the trading price of the Company’s stock.

Environmental

In the United States, the Company is subject to Federal, state and local provisions regulating the discharge of materials into the environment or otherwise for the protection of the environment.  Similar laws apply in many other jurisdictions in which the Company operates.  Although current operations have not been significantly affected by compliance with these environmental laws, governments are becoming increasingly sensitive to environmental issues, and the Company cannot predict what impact future environmental regulations may have on its business.  The Company does not anticipate making any material capital expenditures for environmental control purposes during the remainder of the current or succeeding fiscal years.

Employees

At January 31, 2008, the Company employed approximately 12,310 people, 4,460 in the United States and 760 in the balance of North America, 630 in South America, 1,640 in Europe, 3,580 in Asia & Australasia, 950 in the Near/Middle East and 290 in Africa.  Approximately 1,720 of the Company’s employees are engaged principally in sales and marketing and customer service, 7,420 in operations and 3,170 in finance and administration.  The Company is not a party to any collective bargaining agreement and considers its relations with its employees to be satisfactory.

In order to retain the services of highly qualified, experienced, and motivated employees, the Company places considerable emphasis on its non-equity incentive compensation programs and stock option plans.

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Executive Officers of the Registrant

The following table sets forth the names, ages, and positions of current executive officers of the Company.

Peter J. Rose has served as a director and Vice President of the Company since July 1981.  Mr. Rose was elected a Senior Vice President of the Company in May 1986, Executive Vice President in May 1987, President and Chief Executive Officer in October 1988, and Chairman and Chief Executive Officer in May 1991.

James L.K. Wang has served as a director and the Managing Director of Expeditors International Taiwan Ltd., the Company’s former exclusive Taiwan agent, since September 1981.  In 1991, Mr. Wang’s employment agreement was assigned to E.I. Freight (Taiwan), Ltd., the Company's exclusive Taiwan agent through 2004.  Mr. Wang's contract is now assigned to ECI Taiwan Co. Ltd., a wholly-owned subsidiary of the Company.  In October 1988, Mr. Wang became a director of the Company and its Director-Far East, and Executive Vice President in January 1996.  In May 2000, Mr. Wang was elected President-Asia.

R. Jordan Gates joined the Company as its Controller-Europe in February 1991.  Mr. Gates was elected Chief Financial Officer and Treasurer of the Company in August 1994 and Senior Vice President-Chief Financial Officer and Treasurer in January 1998.  In May 2000, Mr. Gates was elected Executive Vice President-Chief Financial Officer and Treasurer.  Mr. Gates was also elected as a director in May 2000.  Effective January 1, 2008, Mr. Gates assumed the role of President and Chief Operating Officer.  He will remain as acting Chief Financial Officer until a replacement is announced.

Rommel C. Saber joined the Company as Director-Near/Middle East in February 1990 and was elected Senior Vice President-Sales and Marketing in January 1993.  Mr. Saber was elected Senior Vice President-Air Export in September 1993.  In July 1997, Mr. Saber was elected Senior Vice President Near/Middle East and Indian Subcontinent and Executive Vice President-Europe, Africa and Near/Middle East in August 2000.  In February 2006, Mr. Saber was elected President-Europe, Africa, Near/Middle East and Indian Subcontinent.

Robert L. Villanueva joined the Company as Regional Vice President Northwest U.S. Region in April 1994.  In September 1999, he was elected Executive Vice President-The Americas and President-The Americas in May 2004.

Sandy K.Y. Liu became Chief Operating Officer-Asia of the Company in January 2001.  From 1969 through 2000, Mr. Liu was employed in various positions by China Airlines.  In November 1998, Mr. Liu was appointed President of China Airlines.

Timothy C. Barber joined the Company in May 1986.  Mr. Barber was promoted to District Manager of the Seattle office in January 1987 and Regional Vice President in January 1993.  Mr. Barber was elected Vice President-Sales and Marketing in September 1993 and Senior Vice President-Sales and Marketing in January 1998.  In September 1999, Mr. Barber was elected Executive Vice President-Global Sales.  Effective January 1, 2008, Mr. Barber assumed the role of President-Global Sales and Marketing.

Rosanne Esposito joined the Company as its Director-U.S. Import Services in January 1996.  Ms. Esposito was promoted to Vice President in May 1997 and Senior Vice President-Global Customs in May 2001.  In May 2004, Ms. Esposito was promoted to Executive Vice President-Global Customs.

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Eugene K. Alger joined the Company in October 1982.  Mr. Alger was promoted to District Manager and Regional Vice President of the Los Angeles office in May 1983.  He was elected Regional Vice President-Southwestern U.S. and Mexico Region in January 1992, and Senior Vice President of North America in September 1999.

Jean Claude Carcaillet joined the Company as Managing Director-Australasia in August 1988.  Mr. Carcaillet was elected Senior Vice President-Australasia in September 1997.

Philip M. Coughlin joined the Company in October 1985.  In August 1986, Mr. Coughlin was promoted to District Manager. 
Mr. Coughlin was elected Regional Manager for New England and Canada in January 1991, Regional Vice President-Northeastern U.S. and Northern Border in January 1992, and Senior Vice President of North America in September 1999.

Roger A. Idiart joined the Company as its Manager of Gateway Operations in December 1995.  Mr. Idiart was elected Vice President-Global Air Cargo in January 1998, and Senior Vice President-Air Cargo in May 2001.

Charles J. Lynch joined the Company in September 1984.  Mr. Lynch was promoted to Assistant Controller in July 1985 and Controller-Domestic Operations in January 1989.  Mr. Lynch was elected Corporate Controller in January 1991 and Vice President-Corporate Controller in January 1998.  In May 2002, Mr. Lynch was elected Senior Vice President-Corporate Controller.

Jeffrey S. Musser joined the Company in February 1983.  Mr. Musser was promoted to District Manager in October 1989 and Regional Vice President in September 1999.  Mr. Musser was elected Senior Vice President-Chief Information Officer in January 2005.

Daniel R. Wall joined the Company in March 1987.  Mr. Wall was promoted to District Manager in May 1992 and Global Director-Account Management in March 2002.  Mr. Wall was elected Vice President-ECMS in January 2004 and Senior Vice President-Ocean Services in September 2004.

Amy J. Tangeman joined the Company in January 1997.  Ms. Tangeman was promoted to Assistant General Counsel in November 2001.  In October 2006, Ms. Tangeman was elected Vice-President-General Counsel and Secretary.

Regulation and Security

With respect to the Company’s activities in the air transportation industry in the United States, it is subject to regulation by the Transportation Security Administration of the Department of Homeland Security as an indirect air carrier.  The Company’s overseas offices and agents are licensed as airfreight forwarders in their respective countries of operation.  The Company is licensed in each of its offices, or in the case of its newer offices, has made application for a license as an airfreight forwarder by the International Air Transport Association (“IATA”).  IATA is a voluntary association of airlines and air transport related entities which prescribes certain operating procedures for airfreight forwarders acting as agents for its members.  The majority of the Company’s airfreight forwarding business is conducted with airlines which are IATA members.

The Company is licensed as a customs broker by Customs and Border Protection (“CBP”) of the Department of Homeland Security in each U.S. customs district in which it does business.  All United States customs brokers are required to maintain prescribed records and are subject to periodic audits by CBP.  In other jurisdictions in which the Company performs clearance services, the Company is licensed by the appropriate governmental authority.  The Company participates in various governmental supply chain security programs, such as the Customs-Trade Partnership Against Terrorism (“C-TPAT”) in the United States and additional security initiatives as they continue to be enacted by different governments.  In other jurisdictions in which the Company performs clearance services, the Company is licensed by the appropriate governmental authority.

The Company is registered as an Ocean Transportation Intermediary (“OTI”) (sometimes referred to as NVOCC-Non-Vessel Owned Common Carrier) by the Federal Maritime Commission (“FMC”).  The FMC has established certain qualifications for shipping agents, including certain surety bonding requirements.  The FMC is also responsible for the economic regulation of OTI/NVOCC activity originating or terminating in the United States.  To comply with these economic regulations, vessel operators and NVOCCs, such as EIO, are required to file tariffs electronically which establish the rates to be charged for the movement of specified commodities into and out of the United States.  The FMC has the power to enforce these regulations by assessing penalties.

The Company does not believe that current United States and foreign governmental regulations impose significant economic restraint upon its business operations.  In general, the Company conducts its business activities in each country through a majority-owned subsidiary corporation that is organized and existing under the laws of that country.  However, the regulations of foreign governments can impose barriers to the Company’s ability to provide the full range of its business activities in a wholly or majority United States-owned subsidiary.  For example, foreign ownership of a customs brokerage business is prohibited in some jurisdictions and less frequently the ownership of the licenses required for freight forwarding and/or freight consolidation is restricted to local entities.  When the Company encounters this sort of governmental restriction, it works to establish a legal structure that meets the

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requirements of the local regulations while also giving the Company the substantive operating and economic advantages that would be available in the absence of such regulation. This can be accomplished by creating a joint venture or exclusive agency relationship with a qualified local entity that holds the required license.  In cases where the Company has unilateral control over the assets and operations of the local entity, notwithstanding the lack of technical majority ownership of common stock, the Company consolidates the accounts of the local entity.  In such cases, consolidation is necessary to fairly present the financial position and results of operations of the Company because of the existence of the parent-subsidiary relationship by means other than record ownership of voting common stock.

The war on terror and governments’ overriding concern for the safety of passengers and citizens who import and/or export goods into and out of their respective countries has resulted in a proliferation of cargo security regulations over the past several years.  While these cargo regulations have already created a marked difference in the security arrangements required to move shipments around the globe, regulations are expected to become more stringent in the future.  As governments look for ways to minimize the exposure of their citizens to potential terror related incidents, the Company and its competitors in the transportation business may be required to incorporate security procedures within their scope of services to a far greater degree than has been required in the past.  The Company feels that increased security requirements may involve further investments in technology and more sophisticated screening procedures being applied to potential customers, vendors and employees.  While many of these regulations have not been finalized at this time, it is the Company’s position that much of the increased costs of compliance with security regulations will need to be passed through to those who are beneficiaries of the Company’s services.

Cargo Liability

When acting as an airfreight consolidator, the Company assumes a carrier’s liability for lost or damaged shipments. This legal liability is typically limited by contract to the lower of the transaction value or the released value (17 Special Drawing Rights per kilo unless the customer declares a higher value and pays a surcharge), except if the loss or damage is caused by willful misconduct or in the absence of an appropriate airway bill.  The airline which the Company utilizes to make the actual shipment is generally liable to the Company in the same manner and to the same extent.  When acting solely as the agent of the airline or shipper, the Company does not assume any contractual liability for loss or damage to shipments tendered to the airline.

When acting as an ocean freight consolidator, the Company assumes a carrier’s liability for lost or damaged shipments.  This liability is typically limited by contract to the lower of the transaction value or the released value ($500 per package or customary freight unit unless the customer declares a higher value and pays a surcharge).  The steamship line which the Company utilizes to make the actual shipment is generally liable to the Company in the same manner and to the same extent.  In its ocean freight forwarding and customs clearance operations, the Company does not assume cargo liability.

When providing warehouse and distribution services, the Company limits its legal liability by contract and tariff to an amount generally equal to the lower of fair value or $0.50 per pound with a maximum of $50 per “lot” — which is defined as the smallest unit that the warehouse is required to track.  Upon payment of a surcharge for warehouse and distribution services, the Company will assume additional liability.

The Company maintains marine cargo insurance covering claims for losses attributable to missing or damaged shipments for which it is legally liable.  The Company also maintains insurance coverage for the property of others which is stored in Company warehouse facilities.  This insurance coverage is provided by a Vermont based insurance entity wholly owned by the Company.  The coverage is fronted and reinsured by a global insurance company.  The total risk retained by the Company in 2007 was approximately $4 million, although actual and estimated losses are expected to be less.  In addition, the Company is licensed as an insurance broker through its subsidiary, Expeditors Cargo Insurance Brokers, Inc. and places stand alone insurance coverage for other customers.

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ITEM 1A — RISK FACTORS

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ITEM 1B — UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2 — PROPERTIES

The Company owns the following properties:

*Company directly owns 50% with Cargo Ventures, LLC, a private, non-affiliated real estate development company.

The Company leases and maintains 69 additional offices and satellite locations in the United States and 361 leased locations throughout the world, each located close to an airport, ocean port, or on an important border crossing.  The majority of these facilities contain warehouse facilities.  Lease terms are either on a month-to-month basis or terminate at various times through 2019.  See Note 6 to the Company’s consolidated financial statements for lease commitments.  As an office matures, the Company will investigate the possibility of building or buying suitable facilities.  The Company believes that current leases can be extended and that suitable alternative facilities are available in the vicinity of each present facility should extensions be unavailable at the conclusion of current leases.

ITEM 3 — LEGAL PROCEEDINGS

On October 10, 2007, the U. S. Department of Justice (DOJ) issued a subpoena ordering the Company to produce certain information and records relating to an investigation of alleged anti-competitive behavior amongst air cargo freight forwarders.  The Company has retained the services of a law firm to assist in complying with the DOJ’s subpoena. They are also assisting management in conducting a very rigorous self-review.  As part of this process, the Company has met with and continues to co-operate with the DOJ.  As of December 31, 2007, the Company had incurred approximately $3.7 million of legal and associated costs.  The Company expects to incur additional costs during the course of this ongoing investigation, which could include fines and/or penalties if the DOJ concludes that the Company has engaged in anti-competitive behavior.

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On January 3, 2008, the Company was named as a defendant, with seven other of the largest European and North American-based global logistics providers, in a Federal antitrust class action lawsuit filed in New York.  The complaint, which purports to be brought on behalf of a class of customers (and has not yet been certified), alleges that the defendants engaged in various forms of anti-competitive practices.  The Company believes that these allegations are without merit and intends to vigorously defend itself.

The Company is involved in other claims and lawsuits which arise in the ordinary course of business, none of which currently, in management’s opinion, will have a significant effect on the Company’s operations or financial position.

ITEM 4 — SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5 — MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The following table sets forth the high and low sale prices in the over-the-counter market for the Company’s Common Stock as reported by The NASDAQ Global Select Market under the symbol EXPD.

         There were 6,731 shareholders of record as of February 7, 2008.  Management estimates that there were approximately 133,635 beneficial shareholders at that date.

The Board of Directors declared semi-annual dividends during the two most recent fiscal years as follows:

ISSUER PURCHASES OF EQUITY SECURITIES

In November 1993, the Company’s Board of Directors authorized a Non-Discretionary Stock Repurchase Plan.  This plan was amended in February 2001 to increase the authorization to repurchase up to 20,000,000 shares of the Company’s common stock.  This authorization has no expiration date.  This plan was disclosed in the Company’s report on Form 10-K filed March 31, 1995.  In the fourth quarter of 2007, 114,718 shares were repurchased under the Non-Discretionary Stock Repurchase Plan.

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In November 2001, under a Discretionary Stock Repurchase Plan, the Company’s Board of Directors authorized the repurchase of such shares as may be necessary to reduce the issued and outstanding stock to 200,000,000 shares of common stock.  The maximum number of shares available for repurchase under this plan will increase as the total number of outstanding shares increase.  This authorization has no expiration date.  This plan was announced on November 13, 2001.  In the fourth quarter of 2007, 333,513 shares were repurchased under the Discretionary Stock Repurchase Plan.  These discretionary repurchases were made to limit the growth in the number of issued and outstanding shares as a result of stock option exercises.

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ITEM 6 — SELECTED FINANCIAL DATA

Financial Highlights

In thousands except per share data

All share and per share information have been adjusted to reflect a 2-for-1 stock split effected in June, 2006.

Certain amounts for the years 2003 through 2005 have been restated as required by the modified retrospective method in connection with the implementation in 2006 of Statement of Financial Accounting Standard No. 123R (Revised 2004), “Share-Based Payment” (SFAS 123R).

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER SECURITIES

LITIGATION REFORM ACT OF 1995; CERTAIN CAUTIONARY STATEMENTS

From time to time, the Company or its representatives have made or may make forward-looking statements, orally or in writing.  Such forward-looking statements may be included in, but not limited to, press releases, oral statements made with the approval of an authorized executive officer or in various filings made by the Company with the Securities and Exchange Commission. The words or phrases “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Securities Litigation Reform Act.  Such statements are qualified in their entirety by reference to and are accompanied by the discussion in Item 1A of certain important factors that could cause actual results to differ materially from such forward-looking statements.

The risks included in Item 1A are not exhaustive.  Furthermore, reference is also made to other sections of this report which include additional factors which could adversely impact the Company’s business and financial performance.  Moreover, the Company operates in a very competitive and rapidly changing environment.  New risk factors emerge from time to time and it is not possible for management to predict all of such risk factors, nor can it assess the impact of all of such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  Accordingly, forward-looking statements cannot be relied upon as a guarantee of actual results.

Shareholders should be aware that while the Company does, from time to time, communicate with securities analysts, it is against the Company’s policy to disclose to such analysts any material non-public information or other confidential commercial information.  Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of such statement or report. Furthermore, the Company has a policy against issuing financial forecasts or projections or confirming the accuracy of forecasts or projections issued by others.  Accordingly, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of the Company.

ITEM 7 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Summary

Expeditors International of Washington, Inc. is engaged in the business of global logistics management, including international freight forwarding and consolidation, for both air and ocean freight.  The Company acts as a customs broker in all domestic offices, and in many of its international offices.  The Company also provides additional services for its customers including value-added distribution, purchase order management, vendor consolidation and other logistics solutions.  The Company does not compete for overnight courier or small parcel business.  The Company does not own or operate aircraft or steamships.

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International trade is influenced by many factors, including economic and political conditions in the United States and abroad, currency exchange rates, and United States and foreign laws and policies relating to tariffs, trade restrictions, foreign investments, taxation, regional and global conflicts.  Periodically, governments consider a variety of changes to current tariffs and trade restrictions.  The Company cannot predict which, if any, of these proposals may be adopted, nor can the Company predict the effects the adoption of any such proposal will have on the Company’s business.  Doing business in foreign locations also subjects the Company to a variety of risks and considerations not normally encountered by domestic enterprises.  In addition to being influenced by governmental policies concerning international trade, the Company’s business may also be affected by political developments and changes in government personnel or policies in the nations in which it does business.

The Company derives its revenues from three principal sources:  1) airfreight, 2) ocean freight, and 3) customs brokerage and other services.  These are the revenue categories presented in the financial statements.

The Company is managed along four geographic areas of responsibility:  The Americas; Asia; Europe, Africa, Near/Middle East and Indian Subcontinent (EMAIR); and Australasia.  Each area is divided into sub-regions which are composed of operating units with individual profit and loss responsibility.  The Company’s business involves shipments between operating units and typically touches more than one geographic area.  The nature of the international logistics business necessitates a high degree of communication and cooperation among operating units.  Because of this inter-relationship between operating units, it is very difficult to look at one geographic area and draw meaningful conclusions as to its contribution to the Company’s overall success on a stand-alone basis.

The Company’s operating units share revenue using the same arms-length pricing methodologies the Company uses when its offices transact business with independent agents.  The Company’s strategy closely links compensation with operating unit profitability.  Individual success likely involves cooperation with other operating units.

As a non-asset based carrier, the Company does not own transportation assets.  Rather, the Company generates the major portion of its air and ocean freight revenues by purchasing transportation services from direct (asset-based) carriers and reselling those services to its customers.   The difference between the rate billed to customers (the sell rate), and the rate paid to the carrier (the buy rate) is termed “net revenue” or “yield.”  By consolidating shipments from multiple customers and concentrating its buying power, the Company is able to negotiate favorable buy rates from the direct carriers, while at the same time offering lower sell rates than customers would otherwise be able to negotiate themselves.

Customs brokerage and other services involves 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.   This is a complicated function requiring technical knowledge of customs rules and regulations in the multitude of countries in which the Company has offices.

The Company’s ability to provide services to its customers is highly dependent on good working relationships with a variety of entities including airlines, ocean steamship lines, and governmental agencies.  The significance of maintaining acceptable working relationships with governmental agencies and asset-based providers involved in global trade has gained increased importance as a result of ongoing concern over terrorism.  As each carrier labors to comply with governmental regulations implementing security policies and procedures, inherent conflicts emerge which can and do affect global trade to some degree.  A good reputation helps to develop practical working understandings that will effectively meet security requirements while minimizing potential international trade obstacles.  The Company considers its current working relationships with these entities to be satisfactory.  However, changes in space allotments available from carriers, governmental deregulation efforts, “modernization” of the regulations governing customs brokerage, and/or changes in governmental quota restrictions could affect the Company’s business in unpredictable ways.

Historically, the Company’s operating results have been subject to a seasonal trend when measured on a quarterly basis.  The first quarter has traditionally been the weakest and the third and fourth quarters have traditionally been the strongest.  This pattern is the result of, or is influenced by, numerous factors including climate, national holidays, consumer demand, economic conditions and a myriad of other similar and subtle forces.  In addition, this historical quarterly trend has been influenced by the growth and diversification of the Company’s international network and service offerings.  The Company cannot accurately forecast many of these factors nor can the Company estimate accurately the relative influence of any particular factor and, as a result, there can be no assurance that historical patterns, if any, will continue in future periods.

A significant portion of the Company’s revenues are derived from customers in retail industries whose shipping patterns are tied closely to consumer demand, and from customers in industries whose shipping patterns are dependent upon just-in-time production schedules.  Therefore, the timing of the Company’s revenues are, to a large degree, impacted by factors out of the Company’s control, such as a sudden change in consumer demand for retail goods and/or manufacturing production delays.  Additionally, many customers ship a significant portion of their goods at or near the end of a quarter, and therefore, the Company may not learn of a shortfall in revenues until late in a quarter.  To the extent that a shortfall in revenues or earnings was not expected by securities analysts, any such shortfall from levels predicted by securities analysts could have an immediate and adverse effect on the trading price of the Company’s stock.

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As further discussed under liquidity and capital resources, total capital expenditures in 2008 are expected to exceed $85 million.

In terms of the opportunities, challenges and risks that management focused on in 2007, the Company operates in 61 countries throughout the world in the competitive global logistics industry and Company activities are tied directly to the global economy.  From the inception of the Company, management has believed that the elements required for a successful global service organization can only be assured through recruiting, training, and ultimately retaining superior personnel.  The Company’s greatest challenge is now and always has been perpetuating a consistent global culture which demands:

·                          Total dedication, first and foremost, to providing superior customer service;

·                           Aggressive marketing of all of the Company’s service offerings;

·                           Ongoing development of key employees and management personnel via formal and informal means;

·                          Creation of unlimited advancement opportunities for employees dedicated to hard work, personal growth and continuous improvement;

·                           Individual commitment to the identification and mentoring of successors for every key position so that when inevitable change is required, a qualified and well-trained internal candidate is ready to step forward; and

·                           Continuous identification, design and implementation of system solutions, both technological and otherwise, to meet and exceed the needs of our customers while simultaneously delivering tools to make our employees more efficient and more effective.

The Company has reinforced these values with a compensation system that rewards employees for profitably managing the things they can control.  There is no limit to how much a key manager can be compensated for success.   The Company believes in a “real world” environment in every operating unit where individuals are not sheltered from the profit implications of their decisions.  At the same time, the Company insists on continued focus on such things as accounts receivable collection, cash flow management and credit soundness in an attempt to insulate managers from the sort of catastrophic errors that might end a career.

Any failure to perpetuate this unique culture on a self-sustained basis throughout the Company, provides a greater threat to the Company’s continued success than any external force, which would be largely beyond our control.  Consequently, management spends the majority of its time focused on creating an environment where employees can learn and develop while also building systems and taking preventative action to reduce exposure to negative events.   The Company strongly believes that it is nearly impossible to predict events that, in the aggregate, could have a positive or a negative impact on future operations.  As a result our focus is on building and maintaining a global culture of well-trained employees and managers that are prepared to identify and react to subtle changes as they develop and thereby help the Company adapt and thrive as major trends emerge.

Critical Accounting Estimates

A summary of the Company’s significant accounting policies can be found in Note 1 to the consolidated financial statements in this Annual Report.

Management believes that the nature of the Company’s business is such that there are few, if any, complex challenges in accounting for operations.

While judgments and estimates are a necessary component of any system of accounting, the Company’s use of estimates is limited primarily to the following areas:

·                  accounts receivable valuation;

·                  the useful lives of long-term assets;

·                  the accrual of costs related to ancillary services the Company provides;

·                  establishment of adequate insurance liabilities for the portion of the freight related exposure which the Company has self-insured;

·                  accrual of tax expense on an interim basis; and

·                  calculation of share-based compensation expense

These estimates, other than the calculation of share-based compensation expense, are not highly uncertain and have not historically been subject to significant change.  Management believes that the methods utilized in all of these areas are non-aggressive in approach and consistent in application.  Management believes that there are limited, if any, alternative accounting principles or methods which could be applied to the Company’s transactions.  While the use of estimates means that actual future results may be different from those contemplated by the estimates, the Company believes that alternative principles and methods used for making such estimates, other than the calculation of share-based compensation expense, would not produce materially different results than those reported.

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As described in Note 1 to the consolidated financial statements in this report, the Company accounts for share-based compensation in accordance with SFAS 123R. This accounting standard requires the recognition of compensation expense based on an estimate of the fair value of options granted to employees and directors under the Company’s stock option and employee stock purchase plans.  This expense is recorded on a straight-line basis over the option vesting periods.

Determining the appropriate option pricing model to use to estimate stock compensation expense requires judgment. Any option pricing model requires assumptions that are subjective and these assumptions also require judgment. Examples include assumptions about long-term stock price volatility, employee exercise patterns, pre-vesting option forfeitures, post-vesting option cancellations, and the future interest rates and dividend yields.

The Company uses the Black-Scholes model for estimating the fair value of stock options.  Refer to Note 4E in the consolidated financial statements for the assumptions used for grants issued during the years ended December 31, 2007, 2006 and 2005.  The assumptions used by the Company for estimating the fair value of options granted under SFAS 123R were developed on a basis consistent with assumptions used for valuing previous grants.

Management believes that these assumptions are appropriate, based upon the requirements of SFAS 123R, the guidance included in Securities and Exchange Commission Staff Accounting Bulletin No. 107 (SAB 107) and the company’s historical and currently expected future experience. Looking to future events, management has been strongly influenced by historical patterns which may not be valid predictors of future developments and any future deviation may be material.

The Company’s expected volatility assumptions are based on the historical volatility of the Company’s stock. The expected life assumption is primarily based on historical employee exercise patterns and employee post-vesting termination behavior. The risk-free interest rate for the expected term of the option is based on the corresponding yield curve in effect at the time of grant for U.S. Treasury bonds having the same term as the expected life of the option, i.e. a ten year bond rate is used for valuing an option with a ten year expected life. The expected dividend yield is based on the Company’s historical experience. The forfeiture rate used to calculate compensation expense is primarily based on historical pre-vesting employee forfeiture patterns.

The use of different assumptions would result in different amounts of stock compensation expense. Keeping all other variables constant, the indicated change in each of the assumptions below increases or decreases the fair value of an option (and the resulting stock compensation expense), as follows:

The fair value of an option is more significantly impacted by changes in the expected volatility and expected life assumptions. The pre-vesting forfeitures assumption is ultimately adjusted to the actual forfeiture rate. Therefore, changes in the forfeitures assumption would not impact the total amount of expense ultimately recognized over the vesting period. Different forfeitures assumptions would only impact the timing of expense recognition over the vesting period. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), supplemented by FASB Financial Staff Position 157-1 and 2.  SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is required to and plans to adopt the provisions of SFAS 157 beginning in the first quarter of 2008, except for certain nonfinancial assets and liabilities for which it will adopt the provisions of SFAS 157 in the first quarter of 2009.  The Company does not expect the adoption of SFAS 157 to have a material impact on the Company’s consolidated financial condition or results of operations.

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In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159).  Under the provisions of SFAS 159, companies may choose to account for eligible financial instruments, warranties and insurance contracts at fair value on a contract-by-contract basis.  Changes in fair value will be recognized in earnings each reporting period.  SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  The Company is required to and plans to adopt the provisions of SFAS 159 beginning in the first quarter of 2008. The Company does not expect the adoption of SFAS 159 to have a material impact on the Company’s consolidated financial condition or results of operations.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (SFAS 160). SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 modifies the accounting for changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.  The Company is required to and plans to adopt the provisions of SFAS 160 beginning in the first quarter of 2009. While the Company is still assessing the impact of the adoption of SFAS 160, it had minority interest of $17,208 and $16,275 as of December 31, 2007 and December 31, 2006, respectively, that it expects will be reclassified to equity under the provisions of SFAS 160.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R). SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is required to and plans to adopt the provisions of SFAS 141R beginning in the first quarter of 2009. The Company is currently assessing the impact of the adoption of SFAS 141R. The impact will depend upon the acquisitions, if any, the Company consummates after the effective date.

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Results of Operations

The following table shows the consolidated net revenues (revenues less transportation expenses) attributable to the Company’s principal services and the Company’s expenses for 2007, 2006, and 2005, expressed as percentages of net revenues.  Management believes that net revenues are a better measure than total revenues of the relative importance of the Company’s principal services since total revenues earned by the Company as a freight consolidator include the carriers’ charges to the Company for carrying the shipment whereas revenues earned by the Company in its other capacities include only the commissions and fees actually earned by the Company.

2007 compared with 2006

Airfreight net revenues in 2007 increased 12% compared with 2006 primarily because of an increase in airfreight volumes.  Global airfreight tonnages in 2007 increased 8% compared with 2006.  Airfreight yields expanded 83 basis points (a 4% increase) as compared with 2006.  The Company’s North American export airfreight net revenues increased 7% in 2007 compared to 2006, primarily the result of increased market share attributable to focused sales activity.  Airfreight net revenues from Asia and from Europe increased 17% and 9%, respectively, for 2007 compared with 2006. These changes are the result of market pricing and tonnage increases of 9% from Asia and 3% from Europe.  Management attributes these tonnage increases to effective sales efforts.

Ocean freight volumes, measured in terms of forty-foot container equivalent units (FEUs), increased 15% over 2006 while ocean freight and ocean services net revenues increased 7% during the same period.  The difference between these two rates is a result of a year-over-year decrease in ocean freight yields of 173 basis points (an 8% decrease) which were partially offset by year-over-year increases in the Company’s fee-based order management and ocean forwarding business.  The primary reason for the decline in ocean freight yields was due to direct carrier cost increases that market conditions would not allow to be passed on in a timely manner.

The Company’s North American ocean freight net revenues increased approximately 5% in 2007 compared to 2006.  This was due to an increase in container traffic, primarily from Asia.  Increases in ocean freight net revenues were primarily a result of increases in the order management and ocean forwarding business, which were an outcome of continued marketing efforts and customer service initiatives.  Ocean freight net revenues for Asia and Europe increased 6% and 10%, respectively, in 2007 as compared to 2006.  These increases were also a result of continued marketing efforts and customer service initiatives.

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Customs brokerage and other services net revenues increased 16% in 2007 as compared with 2006.  Consolidation within the customs brokerage market has also contributed to this increase as customers seek out customs brokers with more sophisticated computerized capabilities critical to an overall logistics management program.  In addition, increased emphasis on regulatory compliance continues to benefit the Company’s customs brokerage offerings.

Salaries and related costs increased 13% in 2007 compared to 2006 as a result of (1) the Company’s increased hiring of sales, operations, and administrative personnel in existing and new offices to accommodate increases in business activity and (2) increased compensation levels.

The effect of including stock-based compensation expense in salaries and related costs for 2007 and 2006 are as follows:

Historically, the relatively consistent relationship between salaries and net revenues is the result of a compensation philosophy that has been maintained since the inception of the Company: offer a modest base salary and the opportunity to share in a fixed and determinable percentage of the operating profit of the business unit controlled by each key employee.  Using this compensation model, changes in individual compensation will occur in proportion to changes in Company profits.  Management believes that the growth in revenues, net revenues and net earnings for 2007 are a result of the incentives inherent in the Company’s compensation program.

Other overhead expenses increased 11% in 2007 as compared with 2006 as rent expense, communications expense, process improvement and training expenses, and other costs expanded to accommodate the Company’s growing operations.  Other overhead expenses as a percentage of net revenues decreased 1% in 2007 as compared with 2006.

Other income, net, increased 28% in 2007 as compared with 2006. Due to higher interest rates on higher average cash balances and short-term investments during 2007, interest income increased by $4 million for the year ended December 31, 2007.

The Company pays income taxes in the United States and other jurisdictions, as well as other taxes which are typically included in costs of operations.  The Company’s consolidated effective income tax rate in 2007 was 40.0% as compared to 40.6% for 2006.

2006 compared with 2005

Airfreight net revenues in 2006 increased 20% compared with 2005 primarily because of an increase in airfreight volumes.  Global airfreight tonnages in 2006 increased 18% compared with 2005.  Airfreight yields remained relatively constant at 21% for 2006 as compared to 2005.  The Company’s North American export airfreight net revenues increased 19% in 2006 compared to 2005, primarily the result of increased market share attributable to focused sales activity.  Airfreight net revenues from Asia and from Europe increased 22% and 18%, respectively, for 2006 compared with 2005. These changes are the result of market pricing and tonnage increases of 19% from Asia and 16% from Europe.  Management attributes these tonnage increases to effective sales efforts.

Ocean freight volumes, measured in terms of forty-foot container equivalents (FEUs), increased 20% over 2005 while ocean freight and ocean services net revenues increased 24% during the same period.  Ocean freight yields increased 2% and 21% in 2006 as compared to 2005.

The Company continued its focus of offering competitive rates to customers at the retail level, while leveraging freight volumes to obtain favorable rates from carriers at the wholesale level.  The Company’s North American ocean freight net revenues increased 28% in 2006 compared to 2005.  Ocean freight net revenues from Asia increased 24% and from Europe increased 12% for 2006 compared with 2005.  The global increases in ocean freight net revenue are primarily a result of market share expansion.

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Customs brokerage and other services net revenues increased 22% in 2006 as compared with 2005.  Management believes this increase is attributable to increased market share as a result of the Company’s reputation for providing high quality service and increased opportunities within the customs brokerage market.  These opportunities arise as customers seek out customs brokers with sophisticated computerized capabilities.  In addition, the Company’s customs brokerage offerings have benefited from increased emphasis on regulatory compliance.

Salaries and related costs increased 18% in 2006 compared to 2005 as a result of (1) the Company’s increased hiring of sales, operations, and administrative personnel in existing and new offices to accommodate increases in business activity and (2) increased compensation levels.  As previously noted, the Company adopted SFAS 123R using the modified retrospective application method and has restated all periods presented to include compensation expense for all unvested stock options and share awards beginning with the first period restated.  Accordingly, salaries and related costs for the year ended December 31, 2005 have been increased to include compensation expense for the fair value of unvested stock options.

The decline in salaries and related costs as a percentage of net revenue for 2006 as compared with the same period for 2005, can be attributed to leveraging increased business volumes with improved productivity and increasing overall efficiency through technological advances.  The effect of including stock-based compensation expense in salaries and related costs for 2006 and 2005 are as follows:

Historically, the relatively consistent relationship between salaries and net revenues is the result of a compensation philosophy that has been maintained since the inception of the Company: offer a modest base salary and the opportunity to share in a fixed and determinable percentage of the operating profit of the business unit controlled by each key employee.

Other overhead expenses increased 10% in 2006 as compared with 2005 as rent expense, communications expense, quality and training expenses, and other costs expanded to accommodate the Company’s growing operations.  Other overhead expenses as a percentage of net revenues decreased 1% in 2006 as compared with 2005.  Management believes that this was significant as it reflects the successful achievement of ongoing cost containment objectives at the branch level.

Other income, net, increased 31% in 2006 as compared with 2005. Due to higher interest rates on higher average cash balances and short-term investments during 2006, interest income increased by $7 million for the year ended December 31, 2006.

The Company pays income taxes in the United States and other jurisdictions, as well as other taxes which are typically included in costs of operations.  The Company’s consolidated effective income tax rate in 2006 of 40.6% increased when compared with the 31.2% rate in 2005.  The lower tax rate in 2005 is primarily the result of the Company adopting a plan under Internal Revenue Code (IRC) 965, which was added by the American Jobs Creation Act.  In accordance with IRC 965, the Company recorded a one-time tax benefit of $22 million in the fourth quarter of 2005.  In order to qualify for this credit, the Company adopted a plan which required qualified capital expenditures of approximately $105 million.  The Company completed the required capital expenditures during 2006.  Additionally, income tax expense in 2005 has been restated to include the tax benefit related to stock-based compensation expense recorded as a result of applying the requirements of SFAS 123R under the modified retrospective method.  Although a tax benefit related to stock-based compensation expense is recorded for non-qualified stock options at the time the related compensation expense is recognized, the tax benefit received for disqualifying dispositions of incentive stock options cannot be anticipated.  The higher consolidated effective income tax rate for 2006 as compared to 2005 is partially the result of a smaller tax benefit received for disqualifying dispositions of incentive stock options during 2006 than was realized 2005.

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Currency and Other Risk Factors

International air/ocean freight forwarding and customs brokerage are intensively competitive and are expected to remain so for the foreseeable future.  There are a large number of entities competing in the international logistics industry; however, the Company’s primary competition is confined to a relatively small number of companies within this group.  While there is currently a marked trend within the industry toward consolidation into large firms with multinational offices and agency networks, regional and local broker/forwarders remain a competitive force.

Historically, the primary competitive factors in the international logistics industry have been price and quality of service, including reliability, responsiveness, expertise, convenience, and scope of operations.  The Company emphasizes quality customer service and believes that its prices are competitive with those of others in the industry.  Customers have exhibited a trend towards more sophisticated and efficient procedures for the management of the logistics supply chain by embracing strategies such as just-in-time inventory management.  The Company believes that this trend has resulted in customers using fewer service providers with greater technological capacity and consistent global coverage.  Accordingly, sophisticated computerized customer service capabilities and a stable worldwide network have become significant factors in attracting and retaining customers.

Developing these systems and a worldwide network has added a considerable indirect cost to the services provided to customers.  Smaller and middle-tier competitors, in general, do not have the resources available to develop customized systems and a worldwide network.  As a result, there is a still a trend of consolidation currently taking place in the industry.  Management expects that this trend toward consolidation will continue for the short- to medium-term.

The nature of the Company’s worldwide operations necessitates the Company dealing with a multitude of currencies other than the U.S. dollar.  This results in the Company being exposed to the inherent risks of the international currency markets and governmental interference.  Some of the countries where the Company maintains offices and/or agency relationships have strict currency control regulations which influence the Company’s ability to hedge foreign currency exposure.  The Company tries to compensate for these exposures by accelerating international currency settlements among its offices or agents.  The Company enters into foreign currency hedging transactions only in limited locations where there are regulatory or commercial limitations on the Company’s ability to move money freely around the world or the short-term financial outlook in any country is such that hedging is the most time-sensitive way to avoid short-term exchange losses.  Any such hedging activity during 2007, 2006 and 2005 was insignificant.  Net foreign currency gains realized in 2007 were $1,300.  Net foreign currency losses realized in 2006 were $321.  Net foreign currency gains realized in 2005 were $862.  The Company had no foreign currency derivatives outstanding at December 31, 2007 and 2006.

Sources of Growth

During 2007, the Company opened 7 full-service offices (·) and 5 satellite offices (+), as follows:

Chongqing, People’s Republic of China (PRC) and Yantai, PRC converted from satellite offices to full-service offices during 2007.

Acquisitions - Historically, growth through aggressive acquisition has proven to be a challenge for many of the Company’s competitors and typically involves the purchase of significant “goodwill,” the value of which can be realized in large measure only by retaining the customers and profit margins of the acquired business.  As a result, the Company has pursued a strategy emphasizing organic growth supplemented by certain strategic acquisitions, where future economic benefit significantly exceeds the “goodwill” recorded in the transaction.

Internal Growth - Management believes that a comparison of “same store” growth is critical in the evaluation of the quality and extent of the Company’s internally generated growth.  This “same store” analysis isolates the financial contributions from offices that have been included in the Company’s operating results for at least one full year.  The table below presents “same store” comparisons on a year-over-year basis for the years ended December 31, 2007, 2006 and 2005.

Same store comparisons for the years ended December 31,

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Liquidity and Capital Resources

The Company’s principal source of liquidity is cash generated from operating activities.  Net cash provided by operating activities for the year ended December 31, 2007 was $313 million, as compared with $333 million for 2006.  This $20 million decrease is principally due to an increase in accounts receivable which outpaced the increase in accounts payable and increased net earnings.  Additionally, this decrease in net cash provided by operating activities was impacted by a smaller increase in taxes payable, net of prepaid taxes.

The Company’s business is subject to seasonal fluctuations.  Cash flow fluctuates as a result of this seasonality.  Historically, the first quarter shows an excess of customer collections over customer billings.  This results in positive cash flow.  The increased activity associated with peak season (typically commencing late second or early third quarter and continuing well into the fourth quarter) causes an excess of customer billings over customer collections.  This cyclical growth in customer receivables consumes available cash.

As a customs broker, the Company makes significant 5-10 business day cash advances for certain of its customers’ obligations such as the payment of duties to the Customs and Border Protection of the Department of Homeland Security.  These advances are made as an accommodation for a select group of credit-worthy customers.  Cash advances are a “pass through” and are not recorded as a component of revenue and expense.  The billings of such advances to customers are accounted for as a direct increase in accounts receivable to the customer and a corresponding increase in accounts payable to governmental customs authorities.  As a result of these “pass through” billings, the conventional Days Sales Outstanding or DSO calculation does not directly measure collection efficiency.

Cash used in investing activities for the year ended December 31, 2007 was $88 million, as compared with $143 million during the same period of 2006.  The largest use of cash in investing activities is cash paid for capital expenditures.  As a non-asset based provider of integrated logistics services, the Company does not own any physical means of transportation (i.e., airplanes, ships, trucks, etc.).  However, the Company does have need, on occasion, to purchase buildings to house staff and to facilitate the staging of customers’ freight.  The Company routinely invests in technology, office furniture and equipment and leasehold improvements. For the year ended December 31, 2007, the Company made capital expenditures of $83 million as compared with $139 million for the same period in 2006.  Capital expenditures in 2007 included $35 million for the purchase of 48,300 square feet of office space in Kowloon, Hong Kong.  Capital expenditures in 2006 included $67 million for the acquisition of real estate and office/warehouse facilities in Miami, Florida and real estate development expenditures of $22 million related to projects in Seattle, Washington and Houston, Texas.  Other capital expenditures in 2007 and 2006 related primarily to investments in technology, office furniture and equipment and leasehold improvements.  Total capital expenditures in 2008 are currently estimated to be $85 million.  This includes normal capital expenditures as noted above, plus additional real estate acquisitions and development, although to a lesser extent than in the past few years.  The Company expects to finance capital expenditures in 2008 with cash.

Cash used in financing activities for the year ended December 31, 2007 was $175 million as compared with $160 million for the same period in 2006.  The Company uses the proceeds from stock option exercises to repurchase the Company’s stock on the open market.  In 2007, the Company continued its policy of repurchasing stock to prevent growth in issued and outstanding shares as a result of stock option exercises.  The increase in cash used in financing activities for the year ended December 31, 2007 compared with the same period in 2006 is primarily the result of this policy.  During 2007 and 2006 the net use of cash in financing activities included the payment of dividends of $.28 per share and $.22 per share, respectively.

At December 31, 2007, working capital was $765 million, including cash and short-term investments of $575 million. The Company had no long-term debt at December 31, 2007.

The Company maintains international and domestic unsecured bank lines of credit.  At December 31, 2007, the United States facility totaled $50 million and the international bank lines of credit-totaled $19 million.  In addition, the Company maintains a bank facility with its U.K. bank for $14 million which is available for issuances of standby letters of credit.  At December 31, 2007, the Company had no amounts outstanding on these lines of credit, but was contingently liable for $74 million from standby letters of credit and guarantees.  The standby letters of credit and guarantees relate to obligations of the Company’s foreign subsidiaries for credit extended in the ordinary course of business by direct carriers, primarily airlines, and for duty and tax deferrals available from governmental entities responsible for customs and value-added-tax (VAT) taxation.  The total underlying amounts due and payable for transportation and governmental excises are properly recorded as obligations in the books of the respective foreign subsidiaries, and there would be no need to record additional expense in the unlikely event the parent company were to be required to perform.

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At December 31, 2007, the Company’s contractual obligations and other commitments are as follows: