FedEx Annual Report 2006

FY2006 Annual Report · FedEx

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We’re all part of something bigger.

As more of us have access to the goods,
services and ideas the world has to offer,
we gain the power to think new thoughts
and reach new horizons.

For some of us, it’s entering new markets.

For others, it’s accelerating changes
that create opportunities and
make more possible.

For many of us, it’s having a world of choices.

FedEx connects us — bringing about
advances in life and business the world
couldn’t have imagined just 30 years ago.

No matter where you see possibilities,
being connected to FedEx means having
access to innovations and solutions that
let you take full advantage of the potential.

And as the network grows, the more
others want to be connected, making
the opportunities more far-reaching
for everyone.

Financial Highlights

In millions, except earnings per share

Operating Results
Revenues
Operating income
Operating margin
Net income
Diluted earnings per common share
Average common and common equivalent shares
Capital expenditures

Financial Position
Total assets
Long-term debt, including current portion
Common stockholders’ investment

(1)

2006

(2)

2005

Percent
Change

$32,294
3,014

9.3%

1,806
5.83
310
2,518

$22,690
2,442
11,511

$29,363
2,471

8.4%

1,449
4.72
307
2,236

$20,404
2,796
9,588

10
22

25
24
1
13

11
(13
20

)

Revenues (in billions)

Diluted earnings per common share

Return on average equity

2002

2003

2004

2005

2006

2002

2003

2004

2005

(2)

(1)
(1)

2006

2002

2003

2004

2005 (2)

2006

(1)

$20.6

$22.5

$24.7

$29.4

$32.3

$2.34

$2.74

$2.76

$4.72

$5.83

11.4% 12.0% 10.9% 16.4%

17.1%

Capital expenditures (% of revenues)

Debt to total capitalization

Stock price (May 31 close)

2002

2003

2004

2005

2006

2002

2003

2004

2005

2006

2002

2003

2004

2005

2006

7.8% 6.7% 5.1% 7.6%

7.8%

21.6% 21.7% 30.9% 22.6% 17.5%

$53.95

$63.98

$73.58

$89.42

$109.27

(1) 2006 includes a $79 million ($49 million, net of tax, or $0.16 per diluted share) charge to adjust the accounting for certain facility leases, predominantly at FedEx Express.
(2) 2005 includes $48 million ($31 million, net of tax, or $0.10 per diluted share) related to the Airline Stabilization Act charge and a $12 million or $0.04 per diluted
share benefit from an income tax adjustment.

MESSAGE FROM THE CHAIRMAN

To Our Shareowners:

FedEx Corporation achieved another year of record
revenues and earnings in fiscal year 2006 through
highly effective execution of our business strategy. But
a single year’s results cannot completely capture the
positive impact we see from people’s ever-expanding
access to goods, services and information around
the globe.

In its simplest form, better access makes it easier for
people to get the things they need to improve their
lives, their businesses and their communities. The
success of FedEx reflects our increasing efficiency
in connecting our customers to what they want and
need. We combine the most comprehensive global
networks with the global mindset to tailor our solutions
to the desires and dreams of each customer. This
combination enables our customers in each of the
more than 220 countries and territories we serve to
reach more of what’s possible in the world today.

The Power of Networks
The impressive power of networks is universally
recognized today: physical networks of roads or
telecommunications cables, economic networks of
trading partners, or social networks of like-minded
Internet users. It is said that a network’s power
increases exponentially to the number of connections
added. Our experience shows that the FedEx shipping
and information networks follow that same model. In
FY06, FedEx initiatives brought better connectivity
and choice to our customers. As examples, let’s look
at two of the world’s fastest growing economies —
China and India.

Ever since we established international express
operations in China more than 20 years ago, FedEx
has played an important role in one of the greatest
economic surges in world history. In January 2006
we announced a strategic investment in the long-term
growth of China by agreeing to acquire the domestic
express network of DTW Group along with its 50
percent share in our International Priority express
joint venture. In FY06 we also broke ground on a
new Asia-Pacific hub in Guangzhou and added three
more weekly flights between China and the United
States, maintaining our long-standing leadership

position in this critical corridor. We are well positioned
to serve the emerging growth patterns of this vibrant
economy.

In FY06, we also expanded our service in India. FedEx
was the first express company to serve this important
market with direct international air routes. This
expansion connects more of India — 4,348 cities and
towns — to more of the world, faster. We inaugurated
the first overnight express flight from India to China
and doubled our capacity from Europe to Asia through
an eastbound around-the-world flight, mirroring its
westbound counterpart launched in FY05. As India’s
economy continues its rapid expansion, we have the
network to serve it.

In the United States, we are making multiple moves
to strengthen our networks. For example, FedEx
Express announced a major expansion of its
Indianapolis hub, which will increase package
processing capacity more than 30 percent.

Our FedEx Freight network’s rapid growth will be
accelerated through the planned acquisition of
Watkins Motor Lines, a leader in the long-haul
segment of the less-than-truckload market. To be
rebranded FedEx National LTL, it will dovetail with
the regional networks of FedEx Freight, to create a
comprehensive LTL solution for our customers.

Our FedEx Ground network is on track to expand
its average daily package pickup capacity to approxi-
mately five million in the next five years, with three
new hubs opened in FY06. FedEx Ground has accel-
erated transit times in more than half its lanes over
the past three years, and in June 2006 alone improved
transit times in more than 4,000 additional lanes.

All of this progress has been made under the out-
standing leadership of FedEx Ground CEO Dan
Sullivan, who will retire January 5, 2007. Dan founded
the predecessor company 21 years ago and has been
a valued member of our Strategic Management
Committee since the company’s acquisition by FedEx.
He will leave with our thanks and admiration and will
remain a consultant to FedEx. Dave Rebholz, currently

MESSAGE FROM THE CHAIRMAN

FedEx Express Executive Vice President, will succeed
Dan as FedEx Ground CEO.

FedEx Kinko’s opened its World Production Center
(WPC) in Memphis to help customers efficiently pro-
duce and distribute documents that have been sent
through our digital networks to the WPC. We have
also expanded services in 39 other commercial print
production centers and opened 35 new FedEx Kinko’s
retail locations in FY06. Major efforts to improve
training and customer satisfaction were also initiated
during the fiscal year.

What’s possible today is not just the result of shrinking
time and space. Real access is also about the ready
availability of more information. That is why we
continue to innovate in information technology. In
FY06, we significantly upgraded two important online
shipping tools to make it easier for customers,
particularly in small and medium businesses, to
simplify shipping, especially internationally. We’ve
also established the infrastructure to provide a single
source for shipment status tracking across many
FedEx operating companies, giving customers a
consistent end-to-end view of their FedEx shipments.

Customers and Communities
The common thread in all these activities? Building
customer loyalty. From our very first shipment 33
years ago, we have been consistently and positively
committed to our customers’ success. We are
fine-tuning our customer satisfaction measurement
systems to be sure we take into account everything
customers feel is important in creating an exceptional
relationship with FedEx. That is the clear purpose
shared by our 260,000 team members worldwide:
to make every FedEx experience outstanding. We
call it The Purple Promise.

That purpose extends to our interactions with the
communities where our customers and team members
work and live. In FY06, FedEx once again responded
to community needs in the wake of disaster, donating
shipping for more than two million pounds of relief

supplies to victims of Hurricane Katrina. Many FedEx
team members volunteered to help, building homes,
gathering donations, distributing supplies, working
on communication systems and assisting affected
people in many personal ways. We also responded
to other natural disasters around the globe, including
the recent earthquake in Indonesia. Our commitment
to better communities includes responsible environ-
mental practices. That is why we have ordered
additional hybrid vehicles; continued to upgrade
to a more fuel-efficient aircraft fleet; converted to a
predominantly solar-powered hub in Oakland, Calif.;
and expanded our use of recycled materials at
FedEx Kinko’s.

Growing the Power of Possibility
As more people see the possibilities that access
makes available, FedEx continues to grow. That reality
was underscored by a landmark study for FedEx by
SRI International, a well-respected research group.
The study, which is the first to define and measure
access, confirmed what we have intuitively known for
years — that open markets, open skies and open com-
munication among nations and peoples are good for
the world.

In this annual report, our customers share success
stories that prove this point. No two stories are the
same, of course, but each demonstrates how FedEx
has helped change what’s possible in their lives and
livelihoods. Enabling people to think bigger, reach
farther and accomplish more is how FedEx delivers
value to customers and shareowners alike. That is
the key to our success in the year just ended and
will be, I believe, for many years to come.

Sincerely,

Frederick W. Smith
Chairman, President and Chief Executive Officer

FedEx is a network of networks,
allowing for tailored solutions
that meet the needs and
expand the possibilities
of our customers.

Our global transportation and information
networks enable convenient, customizable
solutions: FedEx Express provides time-definite
shipping to more than 220 countries and territories.
FedEx Ground provides cost-effective, day-definite
package delivery throughout the United States
and Canada. FedEx Freight is a leading North
American less-than-truckload freight company.
FedEx Kinko’s is a leading provider of document
solutions and business services, with a global
retail network of nearly 1,500 locations.

Do whatever it takes.

Wherever we work in the world, FedEx people treat
us like we’re their number one customer.
— Andre´ Butler, Vice President for Resource Development, Heart to Heart International

Fast, reliable access to vital necessities can make all the difference in the aftermath
of a disaster. For ten years, global relief agency Heart to Heart International has
worked with FedEx to develop the systems and relationships that make life-saving
solutions possible.

There is nothing routine about disasters. Following the Indian Ocean tsunami in
December 2004, restoring drinkable water was a key concern. Heart to Heart secured
16 water purification systems, each weighing 1,600 pounds, from a manufacturer
in South Carolina. FedEx Freight and FedEx Custom Critical transported the systems
to staging areas in New York and California, where FedEx Express aircraft helped
get them to Sri Lanka.

When Southeast Asia suffered a devastating earthquake in Java in May 2006 — the
area’s third natural disaster in 18 months — Heart to Heart relied on FedEx to ensure
that seven tons of vital supplies and medicines reached the afflicted communities.

No one is resting though. To improve global preparedness, Heart to Heart and
FedEx recently established Forward Response Centers in Dubai, the Philippines
and Mexico. These centers will further improve the speed and reliability of disaster
response — something that could one day mean all the difference to thousands
of people.

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In 2005, there was an 18% increase in the number of natural disasters but a significant decrease in the number
of resulting deaths.

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40%of the valueof world trade today is shipped by air, yet barely comprises 1%of the total weight.

Increase speed while reducing
inventory carrying costs.

FedEx always has the right solution. Our customers
expect our product right when they need it, and FedEx
lets us meet their expectations.
— J. H. “Ben” Hur, Manager, PI Group, Samsung Electronics Logistics

Consumer electronics, from laptops to mobile phones, are some of today’s
most valuable goods, and they are also among the most perishable. Personal
computers alone have been estimated to lose about two percent of their value
each week after leaving the assembly plant. All the more reason for a manufacturer
like Samsung to get components exactly where they’re needed exactly when
they’re needed. FedEx Express helps Samsung ensure that supply matches
demand by operating the industry’s first direct flight between mainland China
and Europe.

The FedEx Express daily westbound around-the-world flight connects Shanghai,
China, to Frankfurt, Germany, and North America. It allows Samsung to produce
chips in China and deliver them quickly — and on short notice — to assembly
lines in key manufacturing zones, making production more efficient. For Samsung,
one of the world’s leading producers of computer memory chips, digital TVs and
mobile phones, the service helps avoid millions in inventory carrying costs.

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In 2004, the world produced more transistors than grains of rice — and at a lower cost.

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The world’s population of Internet users is likely to expand to almost 1.8 billion in the next 4 years.

Grow a better business.

We have a lot in common with FedEx — a focus on the
customer, a passion for constant improvement, a culture
of innovation and a dedication to reliability.
— John Kuehn, Senior Vice President, ProFlowers

Imagine if the flowers you bought came straight from the ground to your doorstep,
rather than passing through the multiple hands of a distributor, a wholesaler
and a retailer. You’d have the freshest flowers possible. That’s the idea that gave
birth to ProFlowers, an e-tailer that’s been growing steadily since it launched in
the late ’90s.

ProFlowers turned to FedEx to help it deliver arrangements directly to customers
from the grower. Those customers’ orders get picked, arranged and packed for
shipment right on the spot, with the help of FedEx technology installed on-site
at the farms and greenhouses.

Direct-to-consumer business models are an increasing trend. Companies like
ProFlowers give their customers not only a fresher product but also better prices.
It’s an equation that has allowed ProFlowers to break into the wedding flower
market. Customers have come to trust that every bouquet, boutonniere and
centerpiece from ProFlowers’ Wedding Collection will arrive in bloom and on
time thanks to FedEx Express.

Recently, ProFlowers has also started taking advantage of the speed, reliability
and cost savings offered by FedEx Ground. In the week leading up to Mother’s
Day this year, FedEx Ground handled more than 200,000 ProFlowers deliveries.
It’s a new arrangement that helps keep the business growing.

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Only 5 million Americans had high-speed Internet access at home in 2000. By the end of 2005, that number had
grown to 73 million.

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In 2003 alone, U.S. businesses saved an estimated $495 billion from increased supply chain efficiency and
reduced inventory costs.

Compete confidently, no matter your
company’s size.

What FedEx gives us is more than reliability, quality
and service — it gives us the ability to meet any
customer’s expectations.
— Richard Low, President, Shoemaker Manufacturing

Shoemaker, a manufacturer of specialized parts for air conditioning and heating
systems, has never let its size keep it from meeting customers’ expectations. For
nearly 20 years, FedEx has enabled Shoemaker to compete head-to-head with
larger rivals. The flexibility of FedEx Freight’s less-than-truckload service allows
Shoemaker to provide just-in-time delivery to wholesalers, helping them keep
inventory costs to a minimum. What’s more, Shoemaker can give builders the
advantage of direct purchase and shipment to the construction site, saving them
time and money.

With the increasing speed of FedEx Freight lanes, plus Shoemaker’s recent
addition of FedEx Express services, the company is poised to take its products
to customers throughout more of the continent and perhaps one day beyond
North America.

In an industry where one delivery can affect an entire construction schedule,
Shoemaker has learned that information is as important as the product itself.
The company takes advantage of FedEx technology to arrange and monitor
shipments, using FedEx Freight Advance Notice to keep customers informed.
Letting customers know ahead of time where their orders are and when they’ll
arrive is the best way to make sure everyone stays cool.

About one in nine of the 1,800 residents of Cle Elum, Wash., work for Shoemaker
— and they know they have what it takes to compete with anyone.

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Companies save up to an estimated $1.50in overall inventory and logistics costs for every $1spent on faster
and more reliable transportation.

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China and India are expected to become the world’s largest consumer markets within the next 25 years, with
total purchasing power 5 times greater than that of the United States today.

Open new markets with new solutions.

The way FedEx Kinko’s helped our company deliver training
materials to New Delhi will help us meet large-scale client
needs as we expand our business in the Netherlands, the
United Kingdom, China and Mexico.
— Peter Gray, Vice President of Operations, The Ken Blanchard Companies

As the information economy touches new parts of the globe, business faces
new opportunities — and new challenges. For The Ken Blanchard Companies,
a California-based firm specializing in leadership development in the global work-
place, moving into new markets has also meant dealing with lengthy customs
delays in shipping its customized training materials to international client sites.

Recognizing that new opportunities require new solutions, FedEx Kinko’s
approached Blanchard with an innovative and economical solution for getting
materials to a seminar in New Delhi, India.

Instead of printing the materials in California and shipping them to New Delhi,
FedEx Kinko’s sent digital versions of the documents to one of its centers in
China. There, the materials were produced and packed in a single day, then
delivered to New Delhi via FedEx Express. China’s proximity to India and the
established trade relations between the countries enabled FedEx to ship the
materials more quickly and cheaply than ever before.

Blanchard has more than 40 organizational experts (including Alan Youngblood,
pictured at right) who work with executives on leadership development, change
management and performance improvement. As these valuable experts travel
the world engaging with large international clients, the unique solution from
FedEx Kinko’s helps Blanchard further expand its business.

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The value of Chinese e-commerce grew 58% to nearly $70 billion in 2005.

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Over the past 30 years, global GDP has risen 154% and the value of world trade has grown 355%, while the
value of air cargo has climbed a remarkable 1,395%.

Turn virtual into reality.

FedEx has the services, infrastructure and technology
to meet our changing needs as we push to make
virtual shopping a mainstream reality for our customers.
— Mike Fitzsimmons, Founder and CEO, Delivery Agent, Inc.

Wouldn’t it be amazing if there was a way to find and buy the things you admire
in television shows, movies and music videos but never seem to see where you
shop? Things like the tuxedo worn by McDreamy on “Grey’s Anatomy” or the skirt
worn by Bree on “Desperate Housewives”? That’s where Delivery Agent comes in.
Using FedEx services, this innovative e-business closes the gap between the virtual
and physical worlds, proving that sometimes what you see is what you can get.

Partnering with television networks, movie studios and sports teams, Delivery
Agent offers more than 14,000 unique products from more than 50 different
entertainment programs. While some items, such as T-shirts, mugs and home
furnishings, are perennial favorites, many others — like the wardrobes and
jewelry of viewers’ favorite stars — change from week to week.

Delivery Agent relies on the FedEx portfolio of services to ensure that its sourcing
and distribution keep pace with the demands of Hollywood and with the expecta-
tions of its customers. The company uses FedEx Freight to move large shipments
from its many vendors to its central distribution center in Chicago. From there,
FedEx Ground and FedEx Home Delivery transport orders to customers, and
FedEx Express provides an expedited option for fans who want to turn what’s
virtual into reality even more quickly.

MESSAGE FROM THE CFO

To Our Shareowners:

A continuing theme in our communications with
shareowners has been the focus on our financial
goals of increased revenues, improved margins,
earnings growth, better cash flow and higher return
on capital. Equally as consistent has been our ability
to execute our business strategy and make strides in
reaching these goals. That trend continued in FY06.

I am happy to report that FedEx posted record financial
results for FY06. The strong demand for our portfolio
of services, improved productivity and cost controls
contributed to increased operating margins at each of
our transportation companies.

While we are pleased with our business results, the
management team at FedEx also exhibited a disci-
plined approach to investing in our business. We
announced two strategic acquisitions in FY06 — the
purchase of the China domestic express network of
DTW Group and its 50 percent share in our Interna-
tional Priority express joint venture and the purchase
of Watkins Motor Lines, an industry leader in the
long-haul, less-than-truckload market. We expect both
acquisitions will close in the first half of FY07. These

transactions are smart, strategic investments that are
expected to drive profitable growth for FedEx.

Our consistent performance and an ongoing focus
on our financial goals have also paid off for our
shareowners. We increased our dividend payment,
boosting our quarterly dividend by 12.5 percent to 9
cents per share on May 26, 2006. Even more signifi-
cantly, for the five-year period ending May 31, 2006,
our total cumulative return to shareowners is up 177
percent — easily outperforming the S&P 500 and the
Dow Jones Transportation Average.

Thank you for your continued support as a FedEx
shareowner. I hope you will share my enthusiasm for
the strong financial performance for this fiscal year
as well as the bright future ahead for the company.

Alan B. Graf, Jr.
Executive Vice President and Chief Financial Officer

Comparison of Five-Year Cumulative Total Return*

$ 300

$ 250

$ 200

$ 150

$ 100

$ 50

2001

2002

2003

2004

2005

2006

FedEx Corporation

S&P 500

Dow Jones Transportation Average

* Shows the value, at the end of each of the last five fiscal years, of
$100 invested in FedEx Corporation common stock or the relevant
index on May 31, 2001, and assumes reinvestment of dividends.
Fiscal year ended May 31.

FINANCIAL RESULTS

38 Management’s Discussion and Analysis

63 Management’s Report on Internal Control over Financial Reporting

64 Report of Independent Registered Public Accounting Firm

65 Consolidated Financial Statements

69 Notes to Consolidated Financial Statements

88 Report of Independent Registered Public Accounting Firm

89 Selected Financial Data

90 Board of Directors

91 Executive Officers and Senior Management

92 Corporate Information

MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

OVERVIEW OF FINANCIAL SECTION

The financial section of the FedEx Corporation (also referred to as
“FedEx”) Annual Report consists of the following Management’s
Discussion and Analysis of Results of Operations and Financial
Condition (“MD&A”), the Consolidated Financial Statements and
the notes to the Consolidated Financial Statements, and Other
Financial Information, all of which include information about our
significant accounting policies, practices and the transactions
that underlie our financial results. The following MD&A describes
the principal factors affecting the results of operations, liquidity,
capital resources, contractual cash obligations and the critical
accounting estimates of FedEx. The discussion in the financial
section should be read in conjunction with the other sections of
this Annual Report and our detailed discussion of risk factors
included in this MD&A.

ORGANIZATION OF INFORMATION
Our MD&A is comprised of three major sections: Results
of Operations, Financial Condition and Critical Accounting
Estimates. These sections include the following information:

• Results of Operations includes an overview of our consolidated
2006 results compared to 2005, and 2005 results compared to
2004. This section also includes a discussion of key actions and
events that impacted our results, as well as a discussion of our
outlook for 2007.

• The overview is followed by a financial summary and analysis
(including a discussion of both historical operating results and
our outlook for 2007) for each of our four reportable business
segments.

• Our financial condition is reviewed through an analysis of key
elements of our liquidity, capital resources and contractual cash
obligations, including a discussion of our cash flows statements
and our financial commitments.

• We conclude with a discussion of the critical accounting esti-
mates that we believe are important to understanding certain of
the material judgments and assumptions incorporated in our
reported financial results.

DESCRIPTION OF BUSINESS
FedEx provides a broad portfolio of transportation, e-commerce
and business services through companies operating indepen-
dently, competing collectively and managed collaboratively
under the respected FedEx brand. These operating companies
are primarily represented by FedEx Express, the world’s largest
express transportation company; FedEx Ground, a leading
provider of small-package ground delivery services; FedEx
Freight, a leading U.S. provider of regional less-than-truckload
(“LTL”) freight services; and FedEx Kinko’s, a leading provider of
document solutions and business services. These companies
form the core of our reportable segments. See “Reportable
Segments” for further discussion.

The key indicators necessary to understand our operating results
include:

• the overall customer demand for our various services;

• the volumes of transportation and business services provided
through our networks, primarily measured by our average daily
volume and shipment weight;

• the mix of services purchased by our customers;

• the prices we obtain for our services, primarily measured by

average price per shipment (yield);

• our ability to manage our cost structure for capital expenditures
and operating expenses and to match our cost structure to
shifting volume levels; and

• the timing and amount of fluctuations in fuel prices and our abil-
ity to recover incremental fuel costs through our supplemental
fuel surcharges.

Except as otherwise specified, references to years indicate our
fiscal year ended May 31, 2006 or ended May 31 of the year
referenced and comparisons are to the prior year. References to
our transportation segments mean, collectively, our FedEx
Express, FedEx Ground and FedEx Freight segments.

MANAGEMENT’S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS

CONSOLIDATED RESULTS
The following table compares revenues, operating income, operating margin, net income and diluted earnings per share (dollars in
millions, except per share amounts) for the years ended May 31:

Revenues
Operating income
Operating margin
Net income
Diluted earnings per share

2006 (1)

$32,294
3,014

9.3%

$ 1,806
$ 5.83

2005(2)

$29,363
2,471

8.4%

$ 1,449
$ 4.72

2004(3)

$24,710
1,440

5.8%
$
838
$ 2.76

Percent Change

2006/2005

2005/2004

10
22
90bp
25
24

19
72
260bp
73
71

(1) Operating expenses include a $79 million ($49 million, net of tax, or $0.16 per diluted share) charge to adjust the accounting for certain facility leases, predominantly at FedEx Express.
(2) Results include $48 million ($31 million, net of tax, or $0.10 per diluted share) related to the Airline Stabilization Act charge and a $12 million or $0.04 per diluted share benefit from an
income tax adjustment described below.
(3) Results include $435 million ($270 million, net of tax, or $0.89 per diluted share) of business realignment costs and a $37 million or $0.12 per diluted share benefit related to a favorable
ruling on a tax case and the reduction of our effective tax rate described below. Also see Note 12 to the accompanying consolidated financial statements.

The following table shows changes in revenues and operating income by reportable segment for 2006 compared to 2005, and 2005
compared to 2004 (in millions):

Revenues

Operating Income

Dollar Change

Percent Change

Dollar Change

Percent Change

2006/2005

2005/2004

2006/2005

2005/2004

2006/2005

2005/2004

2006/2005

2005/2004

FedEx Express segment (1) (2) (3)
FedEx Ground segment
FedEx Freight segment
FedEx Kinko’s segment(4)
Other and Eliminations

$1,961
626
428
22
(106)
$2,931

$1,988
770
528
1,545
(178)
$4,653

10
13
13
1
NM
10

11
20
20
NM
NM
19

$353
101
131
(43)
1
$543

$ 785
82
110
61
(7)
$1,031

25
17
37
(43)
NM
22

125
16
45
NM
NM
72

(1) FedEx Express 2006 operating expenses include a $75 million charge to adjust the accounting for certain facility leases, as described below.
(2) FedEx Express 2005 operating expenses include a $48 million charge related to the Airline Stabilization Act, as described below.
(3) FedEx Express 2004 operating expenses include $428 million of business realignment costs, as described below.
(4) The FedEx Kinko’s segment was formed in the fourth quarter of 2004.

The following table shows selected operating statistics (in thousands, except yield amounts) for the years ended May 31:

Average daily package volume (ADV):

FedEx Express
FedEx Ground
Total ADV

Average daily LTL shipments:

FedEx Freight

Revenue per package (yield):

FedEx Express
FedEx Ground

LTL yield (revenue per hundredweight):

FedEx Freight

2006

3,287
2,815
6,102

$21.75
7.02

$16.84

2005

2004

2006/2005

2005/2004

Percent Change

3,259
2,609
5,868

$20.10
6.68

$15.48

3,167
2,285
5,452

$18.55
6.48

$14.23

1
8
4

8
5

3
14
8

8
3

FEDEX CORPORATION

During 2006, revenue growth was primarily attributable to yield
improvement across our transportation segments, package vol-
ume growth in our International Priority (“IP”) services at FedEx
Express and volume growth at FedEx Ground and FedEx Freight.
Yields improved principally due to incremental fuel surcharges
and base rate increases. Volumes benefited from IP package
volume growth of 8% at FedEx Express and volume growth of 8%
at FedEx Ground. Package volume growth at FedEx Ground
accelerated in the second half of 2006. Revenues at FedEx Kinko’s
grew slightly, as a more competitive environment for copies
slowed growth in 2006.

Operating income increased during 2006 primarily due to rev-
enue growth and improved margins across all our transportation
segments. Yield and cost management activities, combined with
productivity gains across all transportation segments, con-
tributed to our margin growth. Operating income improvement
was partially offset by higher costs at FedEx Express to support
international volume growth, expansion costs at FedEx Ground
and reduced operating profit at FedEx Kinko’s.

While fuel costs increased substantially in 2006, fuel surcharges
more than offset the effect of higher fuel costs on our operating
results based on a static analysis of the year-over-year changes
in fuel prices compared to changes in fuel surcharges. However,
as indicated below, there are other implications that the overall
high level of fuel prices have to our businesses. For example, in
response to the significant fluctuations in jet and diesel fuel
prices during the second and third quarters of 2006, we tem-
porarily capped certain of our fuel surcharges to ensure our
services remain competitively priced in the marketplace. While
fluctuations in fuel surcharge rates can be significant from period
to period, fuel surcharges represent one of the many individual
components of our pricing structure that impact our overall
revenue and yield. Additional components include the mix of
services purchased, the base prices and other extra service
charges we obtain for these services and the level of pricing dis-
counts offered. In order to provide information about the impact
of fuel surcharges on the trend in revenue and yield growth, we
have included the comparative fuel surcharge rates in effect during
the past three years in the following discussions of each of our
transportation segments.

Salaries and employee benefits increased 5% in 2006 due largely
to increases in wage rates, pension and medical expenses.
Pension expense increased $64 million in 2006 due primarily to
a reduction in the discount rate. Purchased transportation
increased 11% in 2006 due primarily to the continued increase
in the use of contract carriers to support increasing volumes
at FedEx Ground, increased IP volumes at FedEx Express and
higher fuel surcharges from third-party transportation providers,
including our independent contractors.

Revenue growth during 2005 was attributable to volume and
yield improvements across all transportation segments and the
inclusion of FedEx Kinko’s for the full year. Combined volume

growth in our package businesses increased 8%. Yields improved
during 2005 primarily due to incremental fuel surcharges and
base rate increases.

During 2005, operating income increased primarily due to revenue
growth in all transportation segments and improved margins at
FedEx Express and FedEx Freight. FedEx Express benefited from
the realization of a full year of savings from our 2004 business
realignment programs (versus a half year in 2004), which reduced
the growth in salaries, wages and benefits.

Although our fuel costs increased significantly during 2005,
higher revenues from our jet and diesel fuel surcharges at FedEx
Express and FedEx Freight more than offset these higher fuel
costs. Salaries and employee benefits expense increased 12%
during 2005 primarily due to higher incentive compensation, a full
year of costs associated with FedEx Kinko’s and increased
medical costs. In 2005, purchased transportation increased at
a faster rate than revenue, reflecting higher fuel surcharges
from third-party transportation providers and increased use of
contract carriers to support international express and domestic
LTL volumes.

Other Income and Expense
Net interest expense decreased $35 million during 2006 due pri-
marily to the reduction in the level of outstanding debt and capital
leases as a result of scheduled payments, increased interest
income due to higher cash balances and interest rates, and
higher capitalized interest related to modification of certain air-
craft at FedEx Express. Net interest expense increased $23 million
during 2005 mainly due to the full year effect of borrowings
related to the FedEx Kinko’s acquisition and the impact on com-
parisons of the interest on a prior year favorable tax adjustment
resulting from the positive resolution of the tax case described
below. In 2005, other expense increased $14 million, primarily due
to the write down of certain individually immaterial investments
and foreign exchange transaction losses.

Income Taxes
Our effective tax rate was 37.7% in 2006, 37.4% in 2005, and 36.5%
in 2004. The 37.4% effective tax rate in 2005 was favorably
impacted by the reduction of a valuation allowance on foreign tax
credits arising from certain of our international operations as a
result of the passage of the American Jobs Creation Act of 2004
($12 million tax benefit or $0.04 per diluted share) and by a lower
effective state tax rate. The 36.5% effective tax rate in 2004 was
favorably impacted by a reduction of accruals relating to the tax
treatment of jet engine maintenance costs, stronger than antici-
pated international results and the results of tax audits during
2004. In 2004, we received a favorable ruling regarding the tax
treatment of jet engine maintenance costs. The decision was
affirmed by the appellate court in February 2005, and became
final in May 2005, when the period for appeal lapsed. As a result,
we recognized a one-time benefit of $26 million, net of tax, or
$0.08 per diluted share in 2004. These adjustments affected both
net interest expense ($30 million pretax) and income tax expense

MANAGEMENT’S DISCUSSION AND ANALYSIS

Business Acquisitions
On May 26, 2006, we announced an agreement to acquire the LTL
operations of Watkins Motor Lines (“Watkins”), a privately held
company, and certain affiliates for approximately $780 million in
cash. Watkins is a leading provider of long-haul LTL services.
Watkins will be rebranded as FedEx National LTL and will be
included in the FedEx Freight segment from the date of acquisi-
tion, which is expected to occur during the first half of 2007,
subject to customary closing conditions.

On January 24, 2006, FedEx Express entered into an agreement
with Tianjin Datian W. Group Co., Ltd. (“DTW Group”) to acquire
DTW Group’s 50% share of the FedEx-DTW International Priority
express joint venture (“FedEx-DTW”) and DTW Group’s domes-
tic express network in China for approximately $400 million in
cash. This acquisition will convert our joint venture with DTW
Group, formed in 1999 and currently accounted for under the
equity method, into a wholly owned subsidiary and increase our
presence in China in the international and domestic express busi-
nesses. The acquisition is expected to be completed in the first
half of 2007, subject to customary closing conditions. The finan-
cial results of this transaction will be included in the FedEx
Express segment from the date of acquisition.

On September 12, 2004, we acquired the assets and assumed
certain liabilities of FedEx SmartPost (formerly known as Parcel
Direct), a division of a privately held company, for $122 million in
cash. FedEx SmartPost is a leading small-parcel consolidator and
broadens our portfolio of services by allowing us to offer a cost-
effective option for delivering low-weight, less time-sensitive
packages to U.S. residences through the U.S. Postal Service. The
financial results of FedEx SmartPost are included in the FedEx
Ground segment from the date of acquisition.

On February 12, 2004, we acquired FedEx Kinko’s for approxi-
mately $2.4 billion in cash. FedEx Kinko’s is a leading provider of
document solutions and business services. Its network of world-
wide locations offers access to color printing, finishing and
presentation services, Internet access, videoconferencing, out-
sourcing, managed services, Web-based printing and document
management solutions. The results of FedEx Kinko’s are included in
our consolidated financial statements from the date of acquisition.

($7 million). For 2007, we expect our effective tax rate to be 38.0%
to 38.5%. The actual rate, however, will depend on a number of
factors, including the amount and source of operating income.

Lease Accounting Charge
Our results for 2006 included a one-time, noncash charge of $79
million ($49 million after tax or $0.16 per diluted share), which
represented the impact on prior years to adjust the accounting
for certain facility leases, predominately at FedEx Express. The
charge related primarily to rent escalations in on-airport facility
leases. The applicable accounting literature provides that rent
expense under operating leases with rent escalation clauses
should be recognized evenly, on a straight-line basis over the
lease term. During the first quarter of 2006, we determined that a
portion of our facility leases had rent escalation clauses that
were not being recognized appropriately. Because the amounts
involved were not material to our financial statements in any
individual prior period and the cumulative amount was not
material to 2006 results, we recorded the cumulative adjustment,
which increased operating expenses by $79 million, in the first
quarter of 2006.

Airline Stabilization Act Charge
During the second quarter of 2005, the United States Department
of Transportation (“DOT”) issued a final order in its administra-
tive review of the FedEx Express claim for compensation under
the Air Transportation Safety and System Stabilization Act. As a
result, we recorded a charge of $48 million in the second quarter
of 2005 ($31 million, net of tax, or $0.10 per diluted share), repre-
senting the DOT’s repayment demand of $29 million and the
write-off of a $19 million receivable.

Business Realignment Costs
During the first half of 2004, voluntary early retirement incentives
with enhanced pension and postretirement healthcare benefits
were offered to certain groups of employees at FedEx Express
who were age 50 or older. Voluntary cash severance incentives
were also offered to eligible employees at FedEx Express.
Approximately 3,600 employees accepted offers under these pro-
grams. We recognized $435 million of business realignment costs
during 2004 ($428 million at the FedEx Express segment) as a
result of these programs. No material costs for these programs
were incurred in 2006 or 2005.

Over the past few years, we have taken many steps to bring our
expense growth in line with revenue growth, particularly at FedEx
Express, while maintaining our industry-leading service levels.
The business realignment programs were another step in this
ongoing process of managing our cost structure to increase our
competitiveness, meet the future needs of our employees and
provide the expected financial returns for our shareholders.

FEDEX CORPORATION

The pilots of FedEx Express, which represent a small number of
FedEx Express total employees, are employed under a collective
bargaining agreement that became amendable on May 31, 2004.
In accordance with applicable labor law, we will continue to
operate under our current agreement while we negotiate with
our pilots. Contract negotiations with the pilots’ union began in
March 2004. These negotiations are ongoing and are being medi-
ated through the National Mediation Board. We cannot estimate
the financial impact, if any, the results of these negotiations may
have on our future results of operations.

In May 2006, the U.S. Transportation Security Administration
(“TSA”) adopted new rules enhancing many of the security
requirements for air cargo on both passenger and all-cargo
aircraft. The TSA is currently seeking comments on a draft
version of a new all-cargo aircraft security program, which
would implement the new rules. Until the required security
program is finalized, we cannot determine the effect that these
new rules will have, if any, on our cost structure or our operating
results. It is reasonably possible, however, that these rules or
future security requirements for air cargo carriers could impose
material costs on us.

Also, see “Risk Factors” for a discussion of these and other
potential risks and uncertainties that could materially affect our
future performance.

Seasonality of Business
Our businesses are seasonal in nature. Seasonal fluctuations
affect volumes, revenues and earnings. Historically, the U.S.
express package business experiences an increase in volumes in
late November and December. International business, particularly
in the Asia-to-U.S. market, peaks in October and November due
to U.S. holiday sales. Our first and third fiscal quarters, because
they are summer vacation and post winter-holiday seasons, have
historically experienced lower volumes relative to other periods.
Normally, the fall is the busiest shipping period for FedEx Ground,
while late December, June and July are the slowest periods.
For FedEx Freight, the spring and fall are the busiest periods
and the latter part of December, January and February are
the slowest periods. For FedEx Kinko’s, the summer months are
normally the slowest periods. Shipment levels, operating costs and
earnings for each of our companies can also be adversely affected
by inclement weather, particularly in our third fiscal quarter. In
addition, the transportation and business services industries are
directly affected by the state of the overall global economy.

Outlook
Our outlook for 2007 is based on an expectation of global eco-
nomic growth of 3%, which is slower than prior years and a
return to historical levels. Strong international growth is expected
to help offset moderating growth in the U.S. We believe oil prices
will continue to remain high and volatile based on world events.
While our growth is expected to moderate in comparison to our
strong results in 2006 and 2005, we expect revenue and earnings
growth across all transportation segments in 2007, driven by rev-
enue growth in high-margin services, productivity improvements
and continued focus on yield management.

At FedEx Express we anticipate strong growth in IP package
volumes and yields, driven by Asia, and a slight improvement in
U.S. domestic volumes and yields. We also anticipate year-over-
year increases in volumes and yields at FedEx Ground and FedEx
Freight, as FedEx Ground continues its multi-year capacity
expansion plan and FedEx Freight continues to grow its regional
and interregional services. FedEx Kinko’s will focus on key
strategies related to adding new locations, improving customer
service and increasing investments in employee development
and training, which we expect to result in decreased profitability
in the short term.

We expect to continue to make investments to expand our net-
works and broaden our service offerings, in part through the
integration and expansion of the businesses we agreed to acquire
in 2006.

All of our transportation businesses operate in a competitive
pricing environment, exacerbated by continuing high fuel prices.
While our fuel surcharges have been sufficient to offset increased
fuel prices, we cannot predict the impact on the overall economy
if fuel costs significantly fluctuate from current levels. Volatility in
fuel costs may also impact quarterly earnings because adjust-
ments to our fuel surcharges lag changes in actual fuel prices
paid. Therefore, the trailing impact of adjustments to FedEx
Express and FedEx Ground fuel surcharges can significantly affect
earnings in the short term.

Our management teams continue to examine additional cost
reductions and operational productivity opportunities as we
focus on optimizing our networks, improving our service offer-
ings, enhancing the customer experience and rewarding our
employees and contractors through effective compensation and
incentive programs.

In 2007, we will adopt Statement of Financial Accounting
Standards (“SFAS”) 123R, “Share-Based Payment.” The new
standard will require FedEx to record compensation expense for
stock-based awards beginning in 2007, which is expected to
negatively impact our results by approximately $0.15 per diluted
share. See our additional discussion of the adoption of SFAS 123R
under “New Accounting Pronouncements.”

MANAGEMENT’S DISCUSSION AND ANALYSIS

FedEx Services provides customer-facing sales, marketing and
information technology support, primarily for FedEx Express and
FedEx Ground. The costs for these activities are allocated based
on metrics such as relative revenues or estimated services pro-
vided. We believe these allocations approximate the cost of
providing these functions.

The operating expenses line item “Intercompany charges” on the
accompanying unaudited financial summaries of our reportable
segments includes the allocations from FedEx Services to
the respective segments. The “Intercompany charges” caption
also includes allocations for administrative services provided
between operating companies and certain other costs such as
corporate management fees related to services received for gen-
eral corporate oversight, including executive officers and certain
legal and finance functions. Management evaluates segment
financial performance based on operating income.

In addition, certain FedEx operating companies provide trans-
portation and related services for other FedEx companies outside
their reportable segment. Billings for such services are based on
negotiated rates, which we believe approximate fair value, and
are reflected as revenues of the billing segment. FedEx Kinko’s
segment revenues include package acceptance revenue, which
represents the fee received by FedEx Kinko’s from FedEx Express
and FedEx Ground for accepting and handling packages at
FedEx Kinko’s locations on behalf of these operating companies.
Package acceptance revenue does not include the external
revenue associated with the actual shipments. All shipment
revenues are reflected in the segment performing the transporta-
tion services. Such intersegment revenues and expenses are
eliminated in the consolidated results but are not separately
identified in the following segment information, as the amounts
are not material.

NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS 123R, “Share-Based Payment.” SFAS 123R
is a revision of SFAS 123 and supersedes Accounting Principles
Board Opinion No. (“APB”) 25. The new standard requires com-
panies to record compensation expense for stock-based awards
using a fair value method. Compensation expense will be
recorded over the requisite service period, which is typically the
vesting period of the award.

We will adopt this standard using the modified prospective
method as of June 1, 2006. We believe that the adoption of this
standard will result in a reduction of diluted earnings per share
of approximately $0.15 in 2007. This estimate is impacted by the
levels of share-based payments granted in the future, assump-
tions used in our fair value model and the market price of our
common stock, so the actual effect per diluted share could differ
from this estimate.

The FASB issued FASB Interpretation No. (“FIN”) 48, “Accounting
for Uncertainty in Income Taxes,” on July 13, 2006. The new rules
will most likely be effective for FedEx in 2008. At this time, we
have not completed our review and assessment of the impact of
adoption of FIN 48.

REPORTABLE SEGMENTS
FedEx Express, FedEx Ground, FedEx Freight and FedEx Kinko’s form
the core of our reportable segments. As of May 31, 2006, our
reportable segments included the following businesses:

FedEx Express Segment FedEx Express (express transportation)

FedEx Trade Networks

(global trade services)

FedEx Ground Segment FedEx Ground

(small-package ground delivery)

FedEx SmartPost

(small-parcel consolidator)
FedEx Supply Chain Services

(contract logistics)

FedEx Freight Segment FedEx Freight

(LTL freight transportation)

FedEx Custom Critical

(time-critical transportation)
Caribbean Transportation Services

(airfreight forwarding)

FedEx Kinko’s Segment FedEx Kinko’s (document solutions

and business services)

FEDEX CORPORATION

The following table compares selected statistics (in thousands,
except yield amounts) for the years ended May 31:

2006

2005

2004

Percent Change
2005/
2004

2006/
2005

Package Statistics(1)

Average daily package volume (ADV):

U.S. overnight box
U.S. overnight
envelope
U.S. deferred
Total U.S.

domestic ADV

Total ADV

Revenue per package (yield):

U.S. overnight box
U.S. overnight envelope
U.S. deferred

U.S. domestic
composite

Composite

package yield
Freight Statistics(1)

1,203

1,184

1,179

713
901

2,817
470
3,287

$20.94
10.86
12.42

15.66
58.17

680
958

2,822
437
3,259

667
925

2,771
396
3,167

$19.77
10.37
11.46

$18.49
10.00
10.99

14.69
55.07

13.94
50.75

21.75

20.10

18.55

Average daily freight pounds:

U.S.
International

9,374
2,126

8,885
1,914

8,519
2,093

Total average daily
freight pounds
Revenue per pound (yield):

U.S.
International
Composite

11,500

10,799

10,612

$ 0.93
0.80

$ 0.82
0.78

$ 0.74
0.74

freight yield

0.90

0.81

0.74

5
(6)

–
8
1

6
5
8

7
6

6
11

13
3

–

2
4

2
10
3

7
4
4

5
9

4
(9)

11
5

(1) Package and freight statistics include only the operations of FedEx Express.

FEDEX EXPRESS SEGMENT
The following table compares revenues, operating expenses,
operating income and operating margin (dollars in millions) for
the years ended May 31:

2006

2005

2004

$ 6,422

$ 5,969

$ 5,558

1,974
2,853

1,798
2,799

1,700
2,592

11,249

10,566

9,850

6,979

6,134

5,131

18,228

16,700

14,981

2,218
434

2,652
566
21,446

1,854
381

1,609
393

2,235
550
19,485

2,002
514
17,497

Revenues:
Package:

U.S. overnight box
U.S. overnight
envelope
U.S. deferred

Total U.S. domestic
package revenue

International
Priority (IP)
Total package
revenue

Freight:
U.S.
International
Total freight
revenue

Other(1)

Total revenues

Operating expenses:

Salaries and

Percent Change
2005/
2004

2006/
2005

10
2

20
14

19
3
10

6
8

15
(3)

12
7
11

employee benefits

8,033

7,704

7,403

Purchased

transportation

Rentals and

landing fees
Depreciation and
amortization

Fuel
Maintenance and

repairs

Business realignment

971

843

694

1,696

1,608

1,531

805
2,786

798
2,012

810
1,343

1,344

1,276

1,193

1
38

(1)
50

costs

–

428

NM NM

Airline Stabilization

Act charge

Intercompany charges
Other

Total operating
expenses

Operating income
Operating margin

–
1,542
2,502

48
1,509
2,273

–
1,442
2,024

NM NM
5
12

2
10

19,679(2)
$ 1,767

18,071
$ 1,414

8.2%

7.3%

16,868(3)
9
25
629
$
3.6% 90bp 370bp

7
125

(1) Other revenues includes FedEx Trade Networks.
(2) Includes a $75 million one-time, noncash charge to adjust the accounting for certain
facility leases.
(3) The $428 million of business realignment costs, described herein, reduced operating
margin by 244 basis points.

MANAGEMENT’S DISCUSSION AND ANALYSIS

FedEx Express Segment Revenues
FedEx Express segment total revenues increased in 2006, princi-
pally due to increases in IP, U.S. domestic overnight package and
freight revenues. During 2006, IP revenues grew 14% on an 8%
increase in volume and yield growth of 6%. U.S. domestic pack-
age revenues grew 6% in 2006 as a result of increased yields. In
2006, freight revenues increased 19%, primarily driven by higher
yields and growth in U.S. domestic freight volumes.

Asia experienced strong average daily volume growth in 2006,
while outbound shipments from the United States, Europe and
Latin America also increased compared to the prior year. IP and
international freight capacity has increased significantly as a
result of our two around-the-world flights, which we added in late
2005 and early 2006. This additional capacity resulted in higher
international freight volume. U.S. volumes were flat compared to
prior year, as growth in our U.S. domestic overnight services was
offset by declines in deferred volumes that resulted in part from
yield management actions.

IP yield increased during 2006 primarily due to higher fuel sur-
charges and increases in international average weight per
package and average rate per pound. U.S. domestic composite
yield increases were due to higher fuel surcharges and improved
yields on U.S. domestic deferred packages. Improvements in
U.S. domestic deferred yield resulted from our continued efforts
to improve the profitability of this service. U.S. freight yield
increases were due to an increase in average rate per pound and
higher fuel surcharges. In January 2006, we implemented an
average list price increase of 5.5% on FedEx Express U.S. domes-
tic shipments and U.S. outbound international shipments, while
we lowered our fuel surcharge index by 2%.

FedEx Express segment total revenues increased in 2005, prin-
cipally due to higher IP revenues (particularly in Asia, U.S.
outbound and Europe) and higher U.S. domestic package rev-
enues. During 2005, IP revenues experienced growth of 20% on
volume growth of 10% and a 9% increase in yield. Asia experi-
enced strong average daily volume growth during 2005, while
outbound shipments from the United States, Europe and Latin
America continued to improve. U.S. domestic volumes at FedEx
Express increased 2% in 2005.

U.S. domestic composite yield increased 5% in 2005 due to higher
fuel surcharges and increases in average weight per package
and average rate per pound. IP yield increased across all regions
during 2005 due to higher fuel surcharges, an increase in interna-
tional average weight per package and favorable exchange rate
differences, partially offset by a decline in international average
rate per pound.

Fuel surcharges increased in both 2006 and 2005 due to higher
jet fuel prices. Our fuel surcharge is indexed to the spot price for
jet fuel. Using this index, the U.S. domestic and outbound fuel
surcharge and the international fuel surcharges ranged as follows
for the years ended May 31:

U.S. Domestic and Outbound Fuel Surcharge:

Low
High
Weighted-average

International Fuel Surcharges:

Low
High
Weighted-average

2006

2005

2004

10.50% 6.00% 3.00%
13.00
20.00
9.05
13.69

6.50
4.38

10.00
20.00
12.58

3.00
13.00
8.36

2.00
6.50
3.65

In response to the significant fluctuations in jet and diesel fuel
prices during the second and third quarters of 2006, we tem-
porarily capped certain of our fuel surcharges in November
and December 2005 to ensure our services remained competi-
tively priced in the marketplace.

FedEx Express Segment Operating Income
Operating income grew significantly in 2006 as a result of strong
revenue growth and improved operating margin. Volume growth
in higher margin U.S. domestic overnight and IP services con-
tributed to yield improvements. Improved yields, combined with
productivity gains and cost containment, allowed FedEx Express to
improve operating margin in 2006. Revenue and margin growth for
2006 more than offset a one-time adjustment for leases in the first
quarter and costs associated with our two around-the-world flights.

In 2006, salaries and benefits increased primarily due to higher
pension costs and wage rates. Fuel costs were higher in 2006 pri-
marily due to a 34% increase in the average price per gallon of
jet fuel, while gallons consumed increased slightly, primarily
related to the westbound and eastbound around-the-world flights.
However, our fuel surcharges substantially mitigated the impact of
higher jet fuel prices. Purchased transportation costs increased in
2006, though at a slower rate than in 2005, driven by IP volume
growth, which required a higher utilization of contract pickup and
delivery services. Rentals and landing fees increased 5% in 2006,
primarily due to the one-time adjustment for leases of $75 million.

Operating income for the FedEx Express segment increased
significantly during 2005, as we benefited from a full year of
savings from our business realignment programs (versus a half
year in 2004). During 2005, increases in revenues, savings from
our business realignment programs, the timing of adjustments to
fuel surcharges and cost control efforts more than offset higher
fuel costs, incentive compensation, purchased transportation
and maintenance costs and the Airline Stabilization Act charge
of $48 million.

FEDEX CORPORATION

FEDEX GROUND SEGMENT
The following table compares revenues, operating expenses,
operating income and operating margin (dollars in millions) and
selected package statistics (in thousands, except yield amounts)
for the years ended May 31:

2006

2005

2004

Percent Change
2005/
2004

2006/
2005

Revenues
Operating expenses:
Salaries and

$5,306

$4,680

$3,910

employee benefits

929

845

740

Purchased

transportation

Rentals
Depreciation and
amortization

Fuel
Maintenance
and repairs

Intercompany charges
Other

Total operating
expenses

Operating income
Operating margin
Average daily

2,019
133

1,791
122

1,465
98

224
93

118
526
559

176
48

110
482
502

154
16

95
432
388

13
9

27
94

7
9
11

22
24

14
200

16
12
29

4,601
$ 705

4,076
$ 604

13.3% 12.9%

3,388
$ 522

13
17
13.4% 40bp (50)bp

20
16

package volume (1)

2,815

2,609

2,285

Revenue per

package (yield)(1)

$ 7.02

$ 6.68

$ 6.48

(1) Package statistics include only the operations of FedEx Ground.

FedEx Ground Segment Revenues
Revenues increased during 2006 due to volume increases and
yield improvement, with accelerating volume growth in the
second half of 2006. Average daily volumes increased across
all of our services, led by the continued growth of our FedEx
Home Delivery service. Yield improvement during 2006 was
primarily due to increased fuel surcharges, higher extra service
revenue (primarily on our residential, declared value and over-
size services) and the impact of general rate increases. These
increases were partially offset by higher customer discounts
and a lower average weight per package. In January 2006, we
implemented standard list rate increases averaging 3.9% and
changes to various surcharges.

Salaries and benefits were higher during 2005 due to higher
incentive compensation, increased medical benefit costs, and
wage rate increases, partially offset by savings from the busi-
ness realignment initiatives. During 2005, fuel costs were higher
due to a 47% increase in the average price per gallon of aircraft
fuel, while gallons consumed increased slightly. In 2005, pur-
chased transportation costs increased at a greater rate than
total revenues, led by IP volume growth requirements and higher
utilization of contract pickup and delivery services.

FedEx Express Segment Outlook
We expect comparatively slower overall revenue growth at FedEx
Express during 2007, due in part to more comparable fuel sur-
charge levels during the year. Revenue increases will be led by
IP, where we expect volume and yield growth, particularly in Asia
and U.S. outbound as a result of continued strong demand for our
services. We expect improved U.S. domestic revenue growth at
FedEx Express, driven by expected increases in U.S. domestic
yields and improved overnight and deferred volumes.

As described above, in January 2006 FedEx Express entered into
an agreement with DTW Group to acquire its 50% share of the
FedEx-DTW International Priority express joint venture and its
domestic express network in China. The acquisition is expected to
be completed in the first half of 2007.

For 2007, we expect operating margin will continue to improve.
We expect improved utilization of the capacity added by the
eastbound and westbound around-the-world flights, partially
offset by costs associated with capacity additions in China
and with the integration of the DTW Group business into the
FedEx Express network. The mix of services on our worldwide
network will change as we sell higher yielding traffic into the net-
work. FedEx Express will continue to focus on cost savings and
productivity enhancement opportunities. Capital expenditures at
FedEx Express are expected to be higher in 2007 due to contin-
ued investment in aircraft and sorting capacity associated with
package growth, as well as continued investments in China. In
March 2006, we broke ground on a new $150 million Asia-Pacific
hub in the southern China city of Guangzhou. This hub is planned
to be operational in 2009. We believe these investments will
enhance our growth prospects for these profitable services in
emerging markets.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Revenues increased during 2005 principally due to strong vol-
ume growth. While the rise in average daily volume was led by
continued growth of our FedEx Home Delivery service, average
daily volumes increased across virtually all of our service lines.
Yield increased during 2005 primarily due to higher extra service
revenue and general rate increases, partially offset by higher
customer discounts and a lower average weight per package.

FedEx Ground segment operating income increased 16% in 2005,
as revenue growth and field productivity more than offset higher
operating expenses. The decrease in operating margin in 2005
was primarily attributable to operating losses at FedEx SmartPost,
the increase in purchased transportation, and a one-time $10 mil-
lion charge at FedEx Supply Chain Services for the termination of
a vendor agreement.

The FedEx Ground fuel surcharge is based on a rounded average
of the national U.S. on-highway average prices for a gallon of
diesel fuel, as published by the Department of Energy. Our fuel
surcharge ranged as follows for the years ended May 31:

Low
High
Weighted-average

2006

2.50%
5.25
3.54

2005

1.80%
2.50
2.04

2004

1.30%
1.50
1.36

No fuel surcharge was in effect from January 2004 to January 2005.

The financial results of FedEx SmartPost, which was acquired in
September 2004, are included in the FedEx Ground segment
from the date of its acquisition and were not material to 2006
or 2005 results.

FedEx Ground Segment Operating Income
FedEx Ground segment operating income increased 17% in 2006,
resulting principally from revenue growth and yield improvement.
Operating margin for the segment improved in 2006 due to fuel
surcharges, general rate increases, improved productivity and
the inclusion in 2005 of a $10 million charge at FedEx Supply Chain
Services related to the termination of a vendor agreement. A por-
tion of the operating margin improvement was offset by higher
year-over-year expenses related to investments in new technol-
ogy and the opening of additional FedEx Ground facilities.

Salaries and employee benefits increased 10% in 2006 principally
due to wage rate increases and increases in staffing and facili-
ties to support volume growth. Depreciation expense in 2006
increased at a higher rate than revenue due to increased spend-
ing associated with material handling and scanning equipment.
In 2006, purchased transportation increased 13% due to increased
volumes and an increase in the cost of purchased transportation
due to higher fuel surcharges from third-party transportation
providers, including our independent contractors.

The growth in salaries and employee benefits, as well as other
operating costs, in 2005 was also due to increases in staffing and
facilities to support volume growth. Purchased transportation
increased in 2005 due to the impact of higher fuel costs on con-
tractor settlements, the acquisition of FedEx SmartPost and a
change in the mix of business at FedEx Supply Chain Services.

FedEx Ground Segment Outlook
We expect the FedEx Ground segment to have revenue growth in
2007 consistent with 2006, led by increased FedEx Home Delivery
service. FedEx Ground’s average daily volume is expected to
increase in 2007 due to increased base business and FedEx Home
Delivery volumes. FedEx SmartPost volumes are also expected to
grow, aided by the recent bankruptcy of a key competitor. Yields
for all services at FedEx Ground are expected to increase in 2007
from increases in list prices and residential and commercial
delivery area surcharges.

FedEx Ground’s operating margin in 2007 is expected to benefit
from continued cost controls, productivity gains and yield
improvements, partially offset by the impact of our network
expansion costs. Capital spending is expected to grow as we
continue with comprehensive network expansion within the
FedEx Ground segment. During 2007, the multi-phase expansion
plan includes the expansion of three hubs and relocation of 48
facilities. In addition, in 2007 we will continue to vigorously defend
challenges to the status of our owner-operators as independent
contractors, as described in “Risk Factors” and in Note 19 to the
accompanying consolidated financial statements.

FEDEX CORPORATION

FEDEX FREIGHT SEGMENT
The following table shows revenues, operating expenses, oper-
ating income and operating margin (dollars in millions) and
selected statistics for the years ended May 31:

2006

2005

2004

Percent Change
2005/
2004

2006/
2005

$3,645

$3,217

$2,689

Revenues
Operating expenses:
Salaries and

employee benefits

1,801

1,650

1,427

Purchased

transportation

Rentals and landing fees
Depreciation

and amortization

Fuel
Maintenance
and repairs

Intercompany charges
Other

298
94

120
377

120
37
313

315
99

102
257

128
26
286

254
100

92
172

116
21
263

(5)
(5)

18
47

(6)
42
9

24
(1)

11
49

10
24
9

Total operating
expenses
Operating income
Operating margin
Average daily LTL

3,160
$ 485

2,863
$ 354

13.3%

11.0%

2,445
$ 244

10
37
9.1% 230bp 190bp

17
45

shipments (in thousands)

Weight per

LTL shipment (lbs)

1,143

1,132

1,127

LTL yield (revenue

per hundredweight)

$16.84

$15.48

$14.23

–

FedEx Freight Segment Revenues
FedEx Freight segment revenues increased 13% in 2006 due to 9%
growth in LTL yield and 6% growth in average daily LTL shipments.
LTL yield grew during 2006, reflecting incremental fuel surcharges
resulting from higher fuel prices and higher rates. Average daily
LTL shipment growth was driven in part by features such as our
no-fee money-back guarantee and our advance notice service,
which continue to differentiate us in the LTL market.

FedEx Freight segment revenues increased 20% in 2005 due to
year-over-year growth in average daily LTL shipments and yield.
Market share gains, driven in part by brand awareness along
with a stronger economy, contributed to the significant increase
in average daily LTL shipments. LTL yield grew during 2005,
reflecting incremental fuel surcharges due to higher fuel prices,
higher rates, growth in our interregional freight service and a sta-
ble pricing environment.

The indexed LTL fuel surcharge is based on the average of the
national U.S. on-highway average prices for a gallon of diesel

fuel, as published by the Department of Energy. The indexed LTL
fuel surcharge ranged as follows for the years ended May 31:

Low
High
Weighted-average

2006

12.5%
20.1
16.3

2005

7.6%
14.0
10.8

2004

3.2%
8.4
5.4

FedEx Freight Segment Operating Income
FedEx Freight segment operating income increased 37% in 2006
primarily due to LTL revenue growth, as well as our ability to con-
trol costs in line with volume growth. Increased LTL yield and
productivity gains contributed to improved margins in 2006 despite
higher salaries and employee benefits, depreciation and fuel
costs. While fuel costs increased substantially in 2006, fuel sur-
charges more than offset the effect of higher fuel costs. Increased
staffing to support volume growth and higher incentive compen-
sation expense increased salaries and employee benefits in 2006.
Depreciation costs increased primarily due to investments in
operating equipment, which in some cases replaced leased
equipment. Maintenance and repairs decreased due to the pres-
ence of rebranding costs in 2005, as well as the recent increase in
the purchase of new fleet vehicles. Purchased transportation
costs decreased, due to increased utilization of company equip-
ment in our interregional freight services.

FedEx Freight segment operating income increased 45% in 2005
primarily due to LTL yield and shipment growth, as well as our
ability to manage costs during a period of substantial growth.
Higher fuel surcharges and productivity gains contributed to
improved operating margin in 2005 despite higher salaries and
employee benefits, purchased transportation and fuel costs.
Purchased transportation costs increased due to growth in our
interregional freight service, efforts to supplement our linehaul
operations and higher fuel surcharges from contract carriers.

FedEx Freight Segment Outlook
As described above, we have entered into an agreement to
acquire the LTL operations of Watkins and certain affiliates for
approximately $780 million in cash. The financial results of
Watkins will be included in the FedEx Freight segment from the
date of acquisition, which is expected to occur during the first
half of 2007.

We expect revenue growth in 2007, due to both LTL yield improve-
ment and LTL shipment growth and as a result of our pending
acquisition of Watkins. The general LTL rate increase of 5.95%
(implemented in April 2006) and a stable industry-pricing envi-
ronment are expected to contribute to LTL yield improvement.
We will continue to focus on yield management at FedEx Freight
while growing our regional and interregional services. We also
expect continued consolidation among LTL carriers and sustained

MANAGEMENT’S DISCUSSION AND ANALYSIS

positive economic conditions to provide additional opportunities for FedEx Freight to promote its regional service and other freight solu-
tions, such as FedEx Expedited Freight Service, a new one-call solution that assists customers in selecting freight services for
time-sensitive, heavyweight shipments. The acquisition of Watkins will result in costs related to rebranding and other integration
efforts; however, these expenses are not expected to have a material impact on 2007 results of operations. We anticipate increased
capital spending at FedEx Freight in 2007, largely on new and expanded facilities and information technology investments.

FEDEX KINKO’S SEGMENT
The results of operations for FedEx Kinko’s are included in our consolidated results from the date of acquisition (February 12, 2004).
The FedEx Kinko’s segment was formed in the fourth quarter of 2004. The results of operations from February 12, 2004 (the date of acqui-
sition) through February 29, 2004 were included in “Other and Eliminations” (approximately $100 million of revenue and $6 million of
operating income).

The following table shows revenues, operating expenses, operating income and operating margin (dollars in millions) for the years
ended May 31, 2006 and 2005 and for the three months ended May 31, 2006, 2005 and 2004:

Revenues
Operating expenses:

Salaries and employee benefits
Rentals
Depreciation and amortization
Maintenance and repairs
Intercompany charges
Other operating expenses:

Supplies, including paper and toner
Other

Total operating expenses

Operating income
Operating margin

Year Ended

2006

2005

$2,088

$2,066

Percent
Change

752
394
148
73
26

742
412
138
70
6

274
364
2,031
57
$
2.7%

278
320
1,966
$ 100

4.8%

1
(4)
7
4
NM

(1)
14
3
(43)
(210)bp

Three Months Ended

2006

$542

191
99
40
18
8

70
98
524
$ 18

2005

$553

189
100
38
19
1

73
92
512
$ 41

2004

$521

185
115
33
9
–

69
71
482
$ 39

3.3%

7.4%

7.5%

Percent Change

2006/2005

2005/2004

(2)

1
(1)
5
(5)
NM

2
(13)
15
111
NM

(4)
7
2
(56)
(410)bp

6
30
6
5
(10)bp

Certain prior period amounts have been reclassified to conform to the current period presentation.

FedEx Kinko’s Segment Revenues
In 2006, a year-over-year increase in package acceptance rev-
enue led to modest revenue growth. Package acceptance
revenue benefited year over year from the April 2005 conversion
of FedEx World Service Centers to FedEx Kinko’s Ship Centers.
FedEx Kinko’s experienced declines in copy product line rev-
enues in 2006 due to decreased demand for these services and a
competitive pricing environment.

Revenues in the fourth quarter of 2006 were slightly lower due to
declines in copy product revenues, partially offset by increases in
package acceptance and retail office supplies revenue. In the
fourth quarter of 2005, revenues increased due primarily to signif-
icant package acceptance revenue growth, higher international
revenue and growth in retail services and signs and graphics,
partially offset by a decline in domestic copy product line revenue.

FedEx Kinko’s Segment Operating Income
Operating income decreased in both the fourth quarter and full
year 2006 as the increase in package acceptance revenues was
more than offset by a decline in copy product line revenues. In
2006, salaries and employee benefits increased due to the addi-
tion of FedEx Kinko’s Ship Centers, higher group health insurance
costs and increased costs associated with employee training and
development programs. Increased depreciation in 2006 was
driven by center rebranding and investments in new technology
to replace legacy systems. The increase for 2006 in other oper-
ating expenses was primarily due to increased costs related to
technology, strategic and product offering initiatives.

Operating income increased slightly in the fourth quarter of 2005
as the increase in package acceptance revenue was partially
offset by integration activities, including facility rebranding
expenses, ramp-up costs associated with the offering of pack-
aging and shipping services and the centralization of FedEx
Kinko’s corporate support operations. Rebranding costs associ-
ated with the integration of FedEx Kinko’s totaled $11 million in
2005, $5 million in the fourth quarter of 2005 and $3 million in the
fourth quarter of 2004.

FEDEX CORPORATION

FedEx Kinko’s Segment Outlook
FedEx Kinko’s has initiated a multi-year network expansion pro-
gram to increase the retail locations for customer access to FedEx
Kinko’s business services and the FedEx Express and FedEx
Ground shipping network. In addition, FedEx Kinko’s will focus
on key strategies related to improving customer service and
employee training and development. The network expansion pro-
gram, combined with employee training programs, is anticipated
to result in modest revenue growth; however, profitability will be
negatively impacted by costs associated with adding new loca-
tions and expenses associated with enhancing service levels.

FINANCIAL CONDITION

LIQUIDITY
Cash and cash equivalents totaled $1.937 billion at May 31, 2006,
compared to $1.039 billion at May 31, 2005 and $1.046 billion at
May 31, 2004. The following table provides a summary of our cash
flows for the years ended May 31 (in millions):

Operating activities:

Net income
Noncash charges and credits
Changes in operating assets

and liabilities
Net cash provided

by operating activities

Investing activities:

Business acquisitions,
net of cash acquired
Capital expenditures and

2006

2005

2004

$ 1,806
1,997

$ 1,449
1,662

838
1,516

(127)

666

3,676

3,117

3,020

–

(122)

(2,410)

other investing activities

(2,454)

(2,226)

(1,252)

Net cash used in

investing activities

Financing activities:

Proceeds from debt issuances
Principal payments on debt
Repurchase of treasury stock
Dividends paid
Other financing activities
Net cash (used in) provided
by financing activities

Net increase (decrease)
in cash and cash
equivalents

(2,454)

(2,348)

(3,662)

–
(369)
–
(97)
142

(324)

–
(791)
–
(84)
99

1,599
(319)
(179)
(66)
115

(776)

1,150

$ 898

(7)

508

Cash Provided by Operating Activities.The $559 million increase
in cash flows from operating activities in 2006 was principally due
to increased earnings. The $97 million increase in cash flows
from operating activities in 2005 was largely attributable to
increased earnings and improvement in accounts receivable col-
lections, partially offset by a $140 million increase in voluntary
contributions to our U.S. domestic pension plans and a decrease
in the growth of operating liabilities.

Pension Contributions.Net cash provided by operating activities
reflect voluntary U.S. domestic pension plan contributions of $456
million during 2006, compared to $460 million during 2005 and $320
million during 2004.

Cash Used for Business Acquisitions.During the second quarter
of 2005, we acquired FedEx SmartPost for $122 million in cash. In
the third quarter of 2004, we acquired all of the common stock of
FedEx Kinko’s for approximately $2.4 billion in cash. See “Debt
Financing Activities” for further discussion of the FedEx Kinko’s
acquisition. See Note 3 of the accompanying audited financial
statements for further discussion of these acquisitions.

Cash Used for Capital Investments. Capital expenditures were
higher in 2006 primarily due to expenditures associated with vehi-
cle acquisitions at FedEx Express and FedEx Freight, facility
expansion at FedEx Ground and information technology invest-
ments at FedEx Services. In 2005, capital expenditures increased
due to planned aircraft expenditures at FedEx Express. See
“Capital Resources” for further discussion.

Debt Financing Activities. During 2006, $250 million of senior
unsecured notes matured and were repaid. During 2005, $600 mil-
lion of senior unsecured notes matured and were repaid and $45
million in tax exempt bonds were called and prepaid.

A new $1.0 billion five-year revolving credit facility was executed
in the first quarter of 2006, which replaced our prior revolving
credit facilities. The revolving credit facility is available to finance
our operations and other cash flow needs and to provide support
for the issuance of commercial paper. Any commercial paper bor-
rowings reduce the amount available under the revolving credit
facility. At both May 31, 2006 and 2005, no commercial paper was
outstanding and the entire $1.0 billion under the revolving credit
facility was available for future borrowings. Borrowings under the
revolving credit facility will bear interest at short-term interest
rates (based on the London Interbank Offered Rate (“LIBOR”), the
Prime Rate or the Federal Funds Rate) plus a margin dependent
upon our senior unsecured long-term debt ratings.

Our revolving credit agreement contains a financial covenant
that requires us to maintain a leverage ratio of adjusted debt
(long-term debt, including the current portion of such debt, plus
six times rentals and landing fees) to capital (adjusted debt plus
total common stockholders’ investment) that does not exceed 0.7
to 1.0. Throughout 2006, we were in compliance with this and all
other restrictive covenants of our revolving credit agreement and
do not expect the covenants to significantly affect our operations.
For more information on our credit facility, see Note 7 of the
accompanying consolidated financial statements.

We also use capital and operating leases to finance a portion of
our aircraft, facility, vehicles and equipment needs. In addition,
we have a $1.0 billion shelf registration statement filed with the
SEC to provide flexibility and efficiency when obtaining certain
financing. Under this shelf registration statement we may issue,
in one or more offerings, unsecured debt securities, common
stock or a combination of such instruments. The entire $1.0 billion
is available for future financings.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Cash Used for Share Repurchases.We did not repurchase any
shares in 2006 or 2005. During the first half of 2004, we repur-
chased 2.6 million shares at an average price of $68.14 per share,
which decreased cash flows by approximately $179 million.
Based on our current financing strategy, we are issuing new
shares in connection with our equity compensation programs
rather than utilizing treasury shares. A total of 5.75 million shares
remain under existing share repurchase authorizations.

Dividends. Dividends paid were $97 million in 2006, $84 million
in 2005 and $66 million in 2004. On May 26, 2006, our Board of
Directors declared a dividend of $0.09 per share of common
stock, an increase of $0.01 to our quarterly dividend. The divi-
dend was paid on July 3, 2006 to stockholders of record as of
the close of business on June 12, 2006. Each quarterly dividend
payment is subject to review and approval by our Board of
Directors, and we intend to evaluate our dividend payment
amount on an annual basis at the end of each fiscal year.

Other Liquidity Information.We believe that our existing cash and
cash equivalents, cash flow from operations, our commercial
paper program, revolving bank credit facility and shelf registration
statement with the SEC will adequately meet our working capital
and capital expenditure needs for the foreseeable future and
finance our pending acquisitions. In the future, other forms of
secured financing may be used to obtain capital assets if we
determine that they best suit our needs. We have been successful
in obtaining investment capital, both domestic and international,
although the marketplace for such capital can become restricted
depending on a variety of economic factors. We believe the capi-
tal resources available to us provide flexibility to access the most
efficient markets for financing capital acquisitions, including air-
craft, and are adequate for our future capital needs.

We have a senior unsecured debt credit rating from Standard &
Poor’s of BBB and a commercial paper rating of A-2. Moody’s
Investors Service has assigned us a senior unsecured debt
credit rating of Baa2 and a commercial paper rating of P-2.
Moody’s characterizes our ratings outlook as “stable,” while
Standard & Poor’s characterizes our ratings outlook as “positive.”
If our credit ratings drop, our interest expense may increase. If our
commercial paper ratings drop below current levels, we may have
difficulty utilizing the commercial paper market. If our senior
unsecured debt ratings drop below investment grade, our access
to financing may become more limited.

CAPITAL RESOURCES
Our operations are capital intensive, characterized by significant
investments in aircraft, vehicles, technology, package handling
facilities and sort equipment. The amount and timing of capital
additions depend on various factors, including pre-existing con-
tractual commitments, anticipated volume growth, domestic
and international economic conditions, new or enhanced services,
geographical expansion of services, competition, availability of
satisfactory financing and actions of regulatory authorities.

The following table compares capital expenditures by asset
category and reportable segment for the years ended May 31
(in millions):

2006

2005

2004

Percent Change
2005/
2004

2006/
2005

Aircraft and related

equipment
Facilities and

sort equipment

Vehicles
Information and

technology investments

Other equipment
Total capital

expenditures

FedEx Express segment
FedEx Ground segment
FedEx Freight segment
FedEx Kinko’s segment
Other, principally
FedEx Services
Total capital

$1,033

$ 990

$ 372

166

507
413

394
171

496
261

331
158

332
212

249
106

$2,518
$1,408
487
274
94

$2,236
$1,195
456
217
152

$1,271
$ 592
314
130
36

255

216

199

2
58

19
8

49
23

33
49

76
13
102
18
45
7
67
26
(38) NM

expenditures

$2,518

$2,236

$1,271

Capital expenditures during 2006 were higher than the prior year
primarily due to the purchase of vehicles at FedEx Express and
FedEx Freight and information technology investments at FedEx
Services. In addition, investments were made in the FedEx Ground
and FedEx Freight networks to support growth in customer
demand. Capital expenditures were 76% higher in 2005, with the
year-over-year increase due to planned aircraft expenditures at
FedEx Express to support IP volume growth and FedEx Kinko’s
rebranding costs. Capital expenditures during 2005 included a full
year of FedEx Kinko’s.

Our capital expenditures are expected to be approximately $2.9
billion in 2007, with much of the year-over-year increase due to
facility expansions at FedEx Express, network expansions at
FedEx Kinko’s and vehicle expenditures at FedEx Ground to
support network expansions and replacement needs. We also
continue to invest in productivity-enhancing technologies and the
multi-year capacity expansion of the FedEx Ground network. We
currently expect to fund our 2007 capital requirements with cash
generated from operations.

Because of substantial lead times associated with the manufac-
ture or modification of aircraft, we must generally plan our aircraft
orders or modifications three to eight years in advance. While we
also pursue market opportunities to purchase aircraft when they
become available, we must make commitments regarding our
airlift requirements years before aircraft are actually needed.
We are closely managing our capital spending based on current
and anticipated volume levels and will defer or limit capital addi-
tions where economically feasible, while continuing to invest
strategically in growing service lines.

FEDEX CORPORATION

CONTRACTUAL CASH OBLIGATIONS
The following table sets forth a summary of our contractual cash obligations as of May 31, 2006. Certain of these contractual obligations
are reflected in our balance sheet, while others are disclosed as future obligations under accounting principles generally accepted in
the United States. Except for the current portion of long-term debt and capital lease obligations, this table does not include amounts
already recorded in our balance sheet as current liabilities at May 31, 2006. Accordingly, this table is not meant to represent a forecast
of our total cash expenditures for any of the periods presented.

(In millions)

2007

2008

2009

2010

2011

Thereafter

Total

Payments Due by Fiscal Year

Amounts reflected in Balance Sheet:

Long-term debt
Capital lease obligations(1)

Other cash obligations not reflected in Balance Sheet:

Unconditional purchase obligations(2)
Interest on long-term debt
Operating leases

Total

(1) Capital lease obligations represent principal and interest payments.
(2) See Note 18 to the accompanying consolidated financial statements.

$ 844
24

1,182
110
1,672
$3,832

–
100

674
83
1,478
$2,335

$ 500
12

613
83
1,290
$2,498

–
96

791
65
1,120
$2,072

$ 249
8

582
65
984
$1,888

$ 539
144

383
1,599
6,780
$9,445

$ 2,132
384

4,225
2,005
13,324
$22,070

We have certain contingent liabilities that are not accrued in our
balance sheets in accordance with accounting principles gener-
ally accepted in the United States. These contingent liabilities are
not included in the table above.

Amounts Reflected in Balance Sheet
We have certain financial instruments representing potential
commitments, not reflected in the table above, that were incurred
in the normal course of business to support our operations,
including surety bonds and standby letters of credit. These instru-
ments are generally required under certain U.S. self-insurance
programs and are also used in the normal course of international
operations. While the notional amounts of these instruments are
material, there are no additional contingent liabilities associated
with them because the underlying liabilities are already reflected
in our balance sheet.

We have other long-term liabilities reflected in our balance sheet,
including deferred income taxes, nonqualified pension and postre-
tirement healthcare liabilities and other self-insurance accruals.
The payment obligations associated with these liabilities are not
reflected in the table above due to the absence of scheduled
maturities. Therefore, the timing of these payments cannot be
determined, except for amounts estimated to be payable within
twelve months that are included in current liabilities.

Other Cash Obligations Not Reflected in Balance Sheet
The amounts reflected in the table above for purchase commit-
ments represent noncancelable agreements to purchase goods
or services. Such contracts include those for certain purchases
of aircraft, aircraft modifications, vehicles, facilities, computers,
printing and other equipment and advertising and promotions con-
tracts. In addition, we have committed to modify our DC10 aircraft
for passenger-to-freighter and two-man cockpit configurations,
which is reflected in the table above. Commitments to purchase
aircraft in passenger configuration do not include the attendant

costs to modify these aircraft for cargo transport unless we have
entered into a noncancelable commitment. Open purchase orders
that are cancelable are not considered unconditional purchase
obligations for financial reporting purposes and are not included
in the table above. Such purchase orders often represent author-
izations to purchase rather than binding agreements.

The amounts reflected in the table above for interest on long-term
debt represent future interest payments due on our long-term
debt, which are primarily fixed rate.

The amounts reflected in the table above for operating leases
represent future minimum lease payments under noncancelable
operating leases (principally aircraft and facilities) with an initial
or remaining term in excess of one year at May 31, 2006. In the
past, we financed a significant portion of our aircraft needs (and
certain other equipment needs) using operating leases (a type of
“off-balance sheet financing”). At the time that the decision to
lease was made, we determined that these operating leases
would provide economic benefits favorable to ownership with
respect to market values, liquidity or after-tax cash flows.

In accordance with accounting principles generally accepted in
the United States, our operating leases are not recorded in our
balance sheet. Credit rating agencies routinely use information
concerning minimum lease payments required for our operating
leases to calculate our debt capacity. In addition, we have guar-
antees under certain operating leases, amounting to $34 million
as of May 31, 2006, for the residual values of vehicles and facili-
ties at the end of the respective operating lease periods.
Although some of these leased assets may have a residual value
at the end of the lease term that is less than the value specified in
the related operating lease agreement, we do not believe it is
probable that we will be required to fund material amounts under
the terms of these guarantee arrangements. Accordingly, no
material accruals have been recognized for these guarantees.

MANAGEMENT’S DISCUSSION AND ANALYSIS

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with
accounting principles generally accepted in the United States
requires management to make significant judgments and esti-
mates to develop amounts reflected and disclosed in the financial
statements. In many cases, there are alternative policies or esti-
mation techniques that could be used. We maintain a thorough
process to review the application of our accounting policies and
to evaluate the appropriateness of the many estimates that are
required to prepare the financial statements of a large, global cor-
poration. However, even under optimal circumstances, estimates
routinely require adjustment based on changing circumstances
and new or better information.

The estimates discussed below include the financial statement
elements that are either the most judgmental or involve the selec-
tion or application of alternative accounting policies and are
material to our financial statements. Management has discussed
the development and selection of these critical accounting esti-
mates with the Audit Committee of our Board of Directors and
with our independent registered public accounting firm.

PENSIONS
We sponsor defined benefit pension plans covering a majority of
our employees. The accounting for pension benefits is determined
by accounting and actuarial methods that include numerous esti-
mates, including: discount rates; expected long-term investment
returns on plan assets; future salary increases; employee
turnover; mortality; and retirement ages.

The determination of our annual pension cost is highly sensitive
to changes in these estimates because we have a large active
workforce, a significant amount of assets in the pension plans,
and the payout of pension benefits will occur over an extended
period in the future. For example, only 7% of the participants
covered under our principal pension plan are retired and cur-
rently receiving benefits and the average remaining service life
of our employees approximates 13 years. Total pension cost
increased approximately $64 million in 2006, $18 million in 2005
and $115 million in 2004, primarily due to changes to these esti-
mates. Pension cost in 2007 is expected to be approximately $456
million, an increase of $31 million from 2006. Pension cost is
included in the salaries and employee benefits caption in our
consolidated income statements.

Following are the components of pension cost recognized in our
income statements (in millions):

Service cost
Interest cost
Expected return on plan assets
Recognized actuarial losses
Amortization of transitional obligation
Amortization of prior service cost

2006

$ 473
642
(811)
110
(1)
12
$ 425

2005

$ 417
579
(707)
60
–
12
$ 361

2004

$ 376
490
(597)
62
–
12
$ 343

Certain of the assumptions used to measure our pension obliga-
tions and cost are reset every year based on current facts and
circumstances (such as the discount rate). Others are more long-
term, forward-looking assumptions that are evaluated annually
to determine whether they continue to be appropriate. For our
February 28, 2006 actuarial measurement of our qualified domestic
pension plans, we updated the following long-term assumptions:

• The estimated rate of salary increases was revised from 3.15% to
3.46% based on recent actual experience. The salary increase
assumption is discussed further below.

• An updated mortality table was used for the 2006 actuarial
measurement to reflect current trends in mortality experience
for non-insured pension plans. As approximately 72% of our
employees have blue collar job classifications, we employed the
blue collar mortality table.

• Our retirement rate assumption was updated to reflect recent
trends in retirements and our expectations for the future in light
of the impact of continuing increases in retiree healthcare costs
and the cap that exists in our retiree medical coverage. As a
result of the update to this assumption, our weighted-average
retirement age increased from 62.0 years old to 63.8 years old.

• Turnover rates were updated to reflect more recent experience

wherein actual turnover has increased.

Some of the adjustments to these long-term assumptions increased
our liabilities and future expenses and some decreased them. On a
net basis, the impact of these assumption changes (in particular,
the increase in the retirement age assumption) partially offset the
effect of a decline in the discount rate described below.

Following is a discussion of the key estimates we consider in
determining our pension costs:

Discount Rate.This is the interest rate used to discount the esti-
mated future benefit payments that have been earned to date (the
projected benefit obligation and the accumulated benefit obliga-
tion) to their net present value. The discount rate is determined
each year at the plan measurement date (February 28) and affects
the succeeding year’s pension cost. A decrease in the discount
rate increases pension expense.

This assumption is highly sensitive, as the following table illustrates:

2007
2006
2005
2004

Discount

Rate(1)

n/a
5.912%
6.285%
6.780%

Sensitivity (in millions)(2)

Expense

$2.5
2.1
1.8
1.7

ABO

n/a
$16
14
11

(1) The discount rate in effect at the end of a given fiscal year affects the current year’s
accumulated benefit obligation (ABO) and the succeeding year’s pension expense.
(2) Sensitivities show the impact on expense and the ABO of a one-basis-point change in
the discount rate.

FEDEX CORPORATION

We determine the discount rate (which is required to be the rate
at which the projected benefit obligation could be effectively
settled as of the measurement date) with the assistance of
actuaries, who calculate the yield on a theoretical portfolio of
high-grade corporate bonds (rated Aa or better) with cash flows
that generally match our expected benefit payments. This bond
modeling technique allows for the use of certain callable bonds
that meet a screening criteria that implies a low probability of call.
We believe this low call probability results in a bond yield with
a market presumption that the bond will not be called. In our
February 28, 2006 measurement date actuarial valuation, we
further refined our screens and assumed the callable bonds
would be redeemed at the earliest call date with no call
premium. To the extent scheduled bond proceeds exceed the
estimated benefit payments in a given period, the yield calcula-
tion assumes those excess proceeds are reinvested at the
one-year forward rates implied by the Citigroup Pension
Discount Curve. The continuing trend of declines in the discount
rate negatively affected our primary domestic pension plan
expense by $20 million in 2004, $32 million in 2005 and $101 million
in 2006. Pension cost will be negatively affected in 2007 by
approximately $89 million due to the continuing decline in the
discount rate.

Plan Assets. Pension plan assets are invested primarily in listed
securities. Our pension plans hold only a minimal investment in
FedEx common stock that is entirely at the discretion of third-
party pension fund investment managers. The estimated average
rate of return on plan assets is a long-term, forward-looking
assumption that also materially affects our pension cost. It is
required to be the expected future long-term rate of earnings on
plan assets. At February 28, 2006, with approximately $10 billion of
plan assets, a one-basis-point change in this assumption for our
domestic pension plans affects pension cost by approximately
$1 million (a decrease in the assumed expected long-term rate of
return increases pension expense). We have assumed a 9.10%
compound geometric long-term rate of return on our principal
U.S. domestic pension plan assets since 2004 and anticipate
using the same assumption for 2007.

Establishing the expected future rate of investment return on our
pension assets is a judgmental matter. Management considers
the following factors in determining this assumption:

• the duration of our pension plan liabilities, which drives the
investment strategy we can employ with our pension plan assets;

• the types of investment classes in which we invest our pension
plan assets and the expected compound geometric return we
can reasonably expect those investment classes to earn over
the next 10- to 15-year time period (or such other time period
that may be appropriate); and

• the investment returns we can reasonably expect our active
investment management program to achieve in excess of the
returns we could expect if investments were made strictly in
indexed funds.

We review the expected long-term rate of return on an annual
basis and revise it as appropriate. Also, we periodically commis-
sion asset/liability studies performed by third-party professional
investment advisors and actuaries to assist us in our reviews.
These studies project our estimated future pension payments and
evaluate the efficiency of the allocation of our pension plan assets
into various investment categories. These studies also generate
probability-adjusted expected future returns on those assets.

We last performed a detailed asset/liability study for 2004 in
connection with the introduction of the Portable Pension Account
(discussed below), which will reduce our liability duration over
time. That study supported management’s estimate of our long-
term rate of return on plan assets of 9.10%. The results of this
study were reaffirmed for 2005 and 2006 by our third-party pro-
fessional investment advisors and actuaries and support our
current asset allocation strategy, which is summarized below:

Asset Class
Domestic equities
International equities
Private equities
Total equities
Long duration fixed
income securities

Other fixed income securities

Percent of Plan Assets at Measurement Date

2006

2005

Actual

Target

Actual

Target

54%
20
3
77

14
9

53%
17
5
75

15
10

100% 100%

53%
20
2
75

53%
17
5
75

15
10

15
10
100% 100%

The actual historical return on our pension plan assets, calculated
on a compound geometric basis, was 10.0%, net of investment
manager fees, for the 15-year period ended February 28, 2006. In
addition, our actual return on plan assets exceeded the estimated
return in each of the past three fiscal years.

Pension expense is also affected by the accounting policy used
to determine the value of plan assets at the measurement date.
We use a calculated-value method to determine the value of
plan assets, which helps mitigate short-term volatility in market
performance (both increases and decreases). Another method
used in practice applies the market value of plan assets at the
measurement date. The application of the calculated-value
method reduced 2004 pension cost by approximately $106
million. The application of the calculated-value method approxi-
mated the result from applying the market-value method for both
2006 and 2005.

Salary Increases. The assumed future increase in salaries
and wages is also a key estimate in determining pension cost.
Generally, we correlate changes in estimated future salary
increases to changes in the discount rate (since that is an
indicator of general inflation and cost of living adjustments) and
general estimated levels of profitability (since most incentive
compensation is a component of pensionable wages). Due to pay
structure trends and our improving financial performance, the
average future salary increases based on age, were adjusted

MANAGEMENT’S DISCUSSION AND ANALYSIS

upward to 3.46% for our 2006 measurement date, up from 3.15%
over the last three fiscal years. Our primary domestic pension
plan expense will be negatively affected for 2007 by approximately
$73 million due to changes in the average rate and timing of future
salary increases. A one-basis-point across the board change in
the rate of estimated future salary increases affects pension costs
by approximately $1.3 million. Approximately $40 million of the
increase is due to a change in rate. The remainder of the increase
is due to changes in the distribution of salary increases by age and
to changes in the assumed average ages of hire and retirement.

Following is information concerning the funded status of our pen-
sion plans as of May 31, 2006 and 2005 (in millions):

Funded Status of Plans:
Accumulated benefit obligation (ABO):
Qualified U.S. domestic plans
Other plans
Total ABO

Projected benefit obligation (PBO)
Fair value of plan assets
PBO in excess of plan assets
Unrecognized actuarial losses,
principally due to changes in
discount rate and investments

Unamortized prior service cost and other
Amounts included in balance sheets

2006

2005

$ 9,591
499
$10,090
$12,153
10,130
(2,023)

$ 8,534
399
$ 8,933
$10,401
8,826
(1,575)

3,026
93
$ 1,096

2,500
100
$ 1,025

Components of Amounts Included in Balance Sheets:
Prepaid pension cost
Accrued pension liability
Minimum pension liability
Accumulated other comprehensive income
Intangible asset and other
Net amounts recognized in balance sheets

$ 1,349
(253)
(122)
112
10
$ 1,096

$ 1,272
(247)
(63)
52
11
$ 1,025

Cash Amounts:
Cash contributions during the year
Benefit payments during the year

$
$

492
228

$
$

489
194

The funded status of the plans reflects a snapshot of the state
of our long-term pension liabilities at the plan measurement
date. However, our plans remain adequately funded to provide
benefits to our employees as they come due and current benefit
payments are nominal compared to our total plan assets (benefit
payments for 2006 were approximately 2% of plan assets).
Furthermore, our plan assets were sufficient to fully fund the
accumulated benefit obligation of our qualified U.S. domestic
plans at May 31, 2006 and 2005.

We made $456 million in 2006 and $460 million in 2005 in tax-
deductible voluntary contributions to our qualified U.S. domestic
pension plans. Currently, we do not expect any contributions for
2007 will be legally required. However, we currently expect to
make tax-deductible voluntary contributions to our qualified plans
in 2007 at levels approximating those in 2006.

Cumulative unrecognized actuarial losses were approximately
$3.0 billion through February 28, 2006, compared to $2.5 billion at
February 28, 2005. These unrecognized losses primarily reflect the
declining discount rate from 2002 through 2006. A portion is also
attributable to the differences between expected and actual
asset returns, which are being amortized over future periods.
These unrecognized losses may be recovered in future periods
through actuarial gains. However, unless they are below a corri-
dor amount, these unrecognized actuarial losses are required to
be amortized and recognized in future periods. For example, pro-
jected U.S. domestic plan pension expense for 2007 includes $136
million of amortization of these actuarial losses versus $107 million
in 2006, $60 million in 2005 and $62 million in 2004.

The net amounts reflected in our balance sheets related to
pension items include a substantial prepaid pension asset. This
results from excess cash contributions to the plans over amounts
that are recognized as pension expense for financial accounting
purposes. Amounts accrued as liabilities (including minimum
pension liabilities) relate primarily to unfunded nonqualified
plans and international pension plans where additional funding
may not provide a current tax deduction or where such funding
would be deemed current compensation to plan participants.

Effective in 2004, we amended the FedEx Corporation Employees’
Pension Plan to add a cash balance feature, which we call the
Portable Pension Account. We expect the Portable Pension
Account will help reduce the long-term growth of our pension
liabilities. All employees hired after May 31, 2003 accrue benefits
under the Portable Pension Account formula. Eligible employees
as of May 31, 2003 were able to choose between continuing
to accrue benefits under the traditional pension benefit formula
or accruing future benefits under the Portable Pension
Account formula. The election was entirely optional. There was
no conversion of existing accrued benefits to a cash balance.
All benefits accrued through May 31, 2003, including those
applicable to employees electing the Portable Pension Account,
will be determined under a traditional pension plan formula.
Accordingly, it will be several years before the impact of the
lower benefit provided under this formula has a significant impact
on our total pension liabilities and costs.

Under the Portable Pension Account, the retirement benefit is
expressed as a dollar amount in a notional account that grows
with annual credits based on pay, age and years of credited ser-
vice and interest on the notional account balance. An employee’s
pay credits are determined each year under a graded formula
that combines age with years of service for points. The plan inter-
est credit rate will vary from year to year based on the selected
U.S. Treasury index, with a 4% minimum and a maximum based
on a government rate. Employees are fully vested on completion
of five years of service.

FEDEX CORPORATION

In 2006, the FASB added a project to its technical agenda to
reconsider the accounting for pensions and other postretirement
employee benefits. The FASB intends to address this project in
two phases. An Exposure Draft on the first phase was issued in
March 2006.

In addition to the FASB project, both the U.S. Senate and House
of Representatives are currently working on bills concerning
defined benefit plan reform. These bills vary in certain respects,
but include proposals related to 401(k) plans, cash balance pen-
sion plans and pension plan funding standards. The proposed
reform related to pension plan funding standards could severely
reduce or eliminate the use of a credit balance for funding pur-
poses and could require higher minimum funding requirements.
Should these bills and the FASB proposal be enacted as currently
drafted, they could have a material impact on our required con-
tributions, balance sheet and pension expense in future years.

SELF-INSURANCE ACCRUALS
We are self-insured up to certain limits for costs associated with
workers’ compensation claims, vehicle accidents and general
business liabilities, and benefits paid under employee healthcare
and long-term disability programs. At May 31, 2006 there were
approximately $1.2 billion of self-insurance accruals reflected in
our balance sheet ($1.1 billion at May 31, 2005). In both 2006 and
2005, approximately 43% of these accruals were classified as
current liabilities.

The measurement of these costs requires the consideration of
historical cost experience, judgments about the present and
expected levels of cost per claim and retention levels. We
account for these costs primarily through actuarial methods,
which develop estimates of the undiscounted liability for claims
incurred, including those claims incurred but not reported. These
methods provide estimates of future ultimate claim costs based
on claims incurred as of the balance sheet date. We self-insure
up to certain limits that vary by operating company and type of
risk. Periodically, we evaluate the level of insurance coverage
and adjust insurance levels based on risk tolerance and pre-
mium expense. Historically, it has been infrequent that incurred
claims exceeded our self-insured limits. Other acceptable meth-
ods of accounting for these accruals include measurement of
claims outstanding and projected payments based on historical
development factors.

We believe the use of actuarial methods to account for these
liabilities provides a consistent and effective way to measure
these highly judgmental accruals. However, the use of any esti-
mation technique in this area is inherently sensitive given the
magnitude of claims involved and the length of time until the
ultimate cost is known. We believe our recorded obligations for
these expenses are consistently measured on a conservative
basis. Nevertheless, changes in healthcare costs, accident
frequency and severity, insurance retention levels and other
factors can materially affect the estimates for these liabilities.

LONG-LIVED ASSETS
Property and Equipment. Our key businesses are capital inten-
sive, with more than 45% of our total assets invested in our
transportation and information systems infrastructures. We
capitalize only those costs that meet the definition of capital
assets under accounting standards. Accordingly, repair and
maintenance costs that do not extend the useful life of an asset
or are part of the cost of acquiring the asset are expensed as
incurred. However, consistent with industry practice, we capi-
talize certain aircraft-related major maintenance costs on one
of our aircraft fleet types and amortize these costs over their
estimated service lives.

The depreciation or amortization of our capital assets over their
estimated useful lives, and the determination of any salvage
values, requires management to make judgments about future
events. Because we utilize many of our capital assets over rela-
tively long periods (the majority of aircraft costs are depreciated
over 15 to 18 years), we periodically evaluate whether adjust-
ments to our estimated service lives or salvage values are
necessary to ensure these estimates properly match the eco-
nomic use of the asset. This evaluation may result in changes in
the estimated lives and residual values used to depreciate our
aircraft and other equipment. These estimates affect the amount
of depreciation expense recognized in a period and, ultimately,
the gain or loss on the disposal of the asset. Historically, gains
and losses on operating equipment have not been material (typi-
cally less than $10 million annually). However, such amounts may
differ materially in the future due to technological obsolescence,
accident frequency, regulatory changes and other factors
beyond our control.

Because of the lengthy lead times for aircraft manufacture and
modifications, we must anticipate volume levels and plan our
fleet requirements years in advance, and make commitments for
aircraft based on those projections. These activities create risks
that asset capacity may exceed demand and that an impairment
of our assets may occur. In addition, opportunistic aircraft pur-
chases (primarily aircraft in passenger configuration) that have
not been placed in service totaled $208 million at May 31, 2006
and $348 million at May 31, 2005. We plan to modify these assets
in the future to place them into operation.

The accounting test for whether an asset held for use is impaired
involves first comparing the carrying value of the asset with its
estimated future undiscounted cash flows. If the cash flows do
not exceed the carrying value, the asset must be adjusted to its
current fair value. Because the cash flows of our transportation
networks cannot be identified to individual assets, and based on
the ongoing profitability of our operations, we have not experi-
enced any significant impairment of assets to be held and used.
However, from time to time we make decisions to remove certain
long-lived assets from service based on projections of reduced
capacity needs and those decisions may result in an impairment
charge. Assets held for disposal must be adjusted to their esti-

MANAGEMENT’S DISCUSSION AND ANALYSIS

mated fair values when the decision is made to dispose of the
asset and certain other criteria are met. There were no material
asset impairment charges recognized in 2006, 2005 or 2004.

Leases.We utilize operating leases to finance certain of our air-
craft and facilities. Such arrangements typically shift the risk of
loss on the residual value of the assets at the end of the lease
period to the lessor. As disclosed in “Contractual Cash Obligations”
and Note 8 to the accompanying consolidated financial state-
ments, at May 31, 2006 we had approximately $13 billion (on an
undiscounted basis) of future commitments for payments under
operating leases. The weighted-average remaining lease term
of all operating leases outstanding at May 31, 2006 was approx-
imately six years.

The future commitments for operating leases are not reflected as
a liability in our balance sheet because these leases do not meet
the accounting definition of capital leases. The determination of
whether a lease is accounted for as a capital lease or an operat-
ing lease requires management to make estimates primarily about
the fair value of the asset and its estimated economic useful life.
We believe we have well-defined and controlled processes for
making this evaluation, including obtaining third-party appraisals
for material transactions to assist us in making these evaluations.

Our results for 2006 included a one-time, noncash charge of $79
million ($49 million after tax or $0.16 per diluted share), which
represented the impact on prior years, to adjust the accounting
for certain facility leases, predominately at FedEx Express. The
charge related primarily to rent escalations in on-airport facility
leases. The applicable accounting literature provides that rent
expense under operating leases with rent escalation clauses
should be recognized evenly, on a straight-line basis over the
lease term. During the first quarter of 2006, we determined that a
portion of our facility leases had rent escalation clauses that
were not being recognized appropriately. Because the amounts
involved were not material to our financial statements in any
individual prior period and the cumulative amount was not mate-
rial to 2006 results, we recorded the cumulative adjustment,
which increased operating expenses by $79 million, in the first
quarter of 2006.

Goodwill. We have approximately $2.8 billion of goodwill in our
balance sheet resulting from the acquisition of businesses, which
includes approximately $1.8 billion from our acquisition of FedEx
Kinko’s in 2004. Accounting standards require that we do not
amortize goodwill but review it for impairment on at least an
annual basis.

The annual evaluation of goodwill impairment requires the use of
estimates and assumptions to determine the fair value of our
reporting units using a discounted cash flow methodology. In
particular, the following estimates used by management can sig-
nificantly affect the outcome of the impairment test: revenue
growth rates; operating margins; discount rates and expected
capital expenditures. Each year, independent of our goodwill
impairment test, we update our weighted-average cost of capital
calculation and perform a long-range planning analysis to pro-
ject expected results of operations. Using this data, we complete
a separate fair-value analysis for each of our reporting units.
Changes in forecasted operations and other assumptions could
materially affect these estimates. We compare the fair value of
our reporting units to the carrying value, including goodwill, of
each of those units. We performed our annual impairment tests in
the fourth quarter of 2006. Because the fair value of each of our
reporting units exceeded its carrying value, including goodwill,
no impairment charge was necessary.

Intangible Asset with an Indefinite Life. We have an intangible
asset of $567 million associated with the Kinko’s trade name. This
intangible asset is not amortized because it has an indefinite
remaining useful life. We must review this asset for impairment
on at least an annual basis. This annual evaluation requires the use
of estimates about the future cash flows attributable to the Kinko’s
trade name to determine the estimated fair value of the trade
name. Changes in forecasted operations and changes in discount
rates can materially affect this estimate. However, once an
impairment of this intangible asset has been recorded, it cannot be
reversed. We performed our annual impairment test in the fourth
quarter of 2006. Because the fair value of the trade name exceeded
its carrying value, no impairment charge was necessary.

While FedEx Kinko’s experienced slight revenue growth with
decreased profitability in 2006, we believe that our long-term
growth and expansion strategies support our fair value conclu-
sions. For both goodwill and recorded intangible assets at FedEx
Kinko’s, the recoverability of these amounts is dependent on exe-
cution of key initiatives related to revenue growth, location
expansion and improved profitability.

FEDEX CORPORATION

REVENUE RECOGNITION
We believe the policies adopted to recognize revenue are critical
because an understanding of the accounting applied in this area
is fundamental to assessing our overall financial performance
and because revenue and revenue growth are key measures of
financial performance in the marketplace. Our businesses are
primarily involved in the direct pickup and delivery of commercial
package and freight shipments, as well as providing document
solutions and business services. Our employees, independent
contractors and agents are involved throughout the process and
our operational, billing and accounting systems directly capture
and control all relevant information necessary to record revenue,
bill customers and collect amounts due to us. Certain of our
transportation services are provided through independent
contractors. FedEx is the principal to the transaction in most
instances and in these cases revenue from these transactions
is recognized on a gross basis. Costs associated with independent
contractor settlements are recognized as incurred and included
in the purchased transportation caption in the accompanying
income statements.

We recognize revenue upon delivery of shipments or, for our busi-
ness services, logistics and trade services businesses, upon the
completion of services. Transportation industry practice includes
four acceptable methods for revenue recognition for shipments in
process at the end of an accounting period, two of which are pre-
dominant: (1) recognize all revenue and the related delivery costs
when shipments are delivered or (2) recognize a portion of the
revenue earned for shipments that have been picked up but not
yet delivered at period end and accrue delivery costs as incurred.
We use the second method and recognize the portion of rev-
enue earned at the balance sheet date for shipments in transit
and accrue all delivery costs as incurred. We believe this
accounting policy effectively and consistently matches rev-
enue with expenses and recognizes liabilities as incurred.

Our contract logistics, global trade services and certain trans-
portation businesses engage in some transactions wherein they
act as agents. Revenue from these transactions is recorded on a
net basis. Net revenue includes billings to customers less third-
party charges, including transportation or handling costs, fees,
commissions, taxes and duties. These amounts are not material.

There are three key estimates that are included in the recogni-
tion and measurement of our revenue and related accounts
receivable under the policies described above: (1) estimates for
unbilled revenue on shipments that have been delivered; (2) esti-
mates for revenue associated with shipments in transit; and (3)
estimates for future adjustments to revenue or accounts receiv-
able for billing adjustments and bad debts.

Unbilled Revenue.There is a time lag between the completion of
a shipment and the generation of an invoice that varies by cus-
tomer and operating company. Accordingly, unbilled revenue is
recognized through estimates using actual shipment volumes and
historical trends of shipment size and length of haul. These esti-
mates are adjusted in subsequent months to the actual amounts
invoiced. Due to strong system controls and shipment visibility,
there is a low level of subjectivity inherent in these accrual
processes and the estimates have historically not varied signifi-
cantly from actual amounts subsequently invoiced.

Shipments in Process. The majority of our shipments have short
cycle times; so, less than 5% of a total month’s revenue is typically
in transit at the end of a period. We periodically perform studies to
measure the percentage of completion for shipments in process.
At month end, we estimate the amount of revenue earned on
shipments in process based on actual shipments picked up, the
scheduled day of delivery, the day of the week on which the
month ends (which affects the percentage of completion) and
current trends in our average price for the respective services.
We believe these estimates provide a reasonable approximation
of the actual revenue earned at the end of a period.

Future Adjustments to Revenue and Accounts Receivable. In
the transportation industry, pricing that is put in place may be
subsequently adjusted due to continued negotiation of contract
terms, earned discounts triggered by certain shipment volume
thresholds, and/or no-fee money-back guarantee refunds
caused by on-time service failures. We account for estimated
future revenue adjustments through a reserve against accounts
receivable that takes into consideration historical experience
and current trends.

For 2006 and 2005, revenue adjustments as a percentage of total
revenue averaged approximately 1%. Due to our reliable on-time
service, close communication with customers, strong revenue
systems and minimal volume discounts in place, we have main-
tained a consistently low revenue adjustment percentage. A
one-basis-point change in the revenue adjustment percentage
would increase or decrease revenue adjustments by approxi-
mately $3 million.

While write-offs related to bad debts do occur from time to time,
they are small compared to our total revenue and accounts
receivable balances due to the small value of individual shipping
transactions spread over a large customer base, our short credit
terms and our strong credit and collection practices. Bad debt
expense associated with credit losses has averaged approxi-
mately 0.4% in 2006 and 0.3% in 2005 of total revenue and reflects
our strong credit management processes.

MANAGEMENT’S DISCUSSION AND ANALYSIS

MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS

Interest Rates. While we currently have market risk sensitive
instruments related to interest rates, we have no significant expo-
sure to changing interest rates on our long-term debt because
the interest rates are fixed on the majority of our long-term debt.
We had approximately $118 million of outstanding floating-rate
borrowings at May 31, 2006, and $125 million of outstanding
floating-rate borrowings at May 31, 2005. We have not employed
interest rate hedging to mitigate the risks with respect to these
borrowings. A hypothetical 10% increase in the interest rate on
our outstanding floating-rate borrowings would not have a mate-
rial effect on our results of operations. As disclosed in Note 7 to
the accompanying consolidated financial statements, we had out-
standing fixed-rate, long-term debt (exclusive of capital leases) of
$2.0 billion at May 31, 2006 and $2.3 billion at May 31, 2005. Market
risk for fixed-rate, long-term debt is estimated as the potential
decrease in fair value resulting from a hypothetical 10% increase
in interest rates and amounts to approximately $42 million as of
May 31, 2006 and $44 million as of May 31, 2005. The underlying fair
values of our long-term debt were estimated based on quoted mar-
ket prices or on the current rates offered for debt with similar
terms and maturities.

Foreign Currency. While we are a global provider of transportation,
e-commerce and business services, the substantial majority of our
transactions are denominated in U.S. dollars. The distribution
of our foreign currency denominated transactions is such that
currency declines in some areas of the world are often offset
by currency gains in other areas of the world. The principal foreign
currency exchange rate risks to which we are exposed are in the
Japanese yen, Taiwan dollar, Canadian dollar and euro. During
2006 and 2005, we believe operating income was positively
impacted due to foreign currency fluctuations. However, favorable
foreign currency fluctuations also may have had an offsetting
impact on the price we obtained or the demand for our services. At
May 31, 2006, the result of a uniform 10% strengthening in the value
of the dollar relative to the currencies in which our transactions
are denominated would result in a decrease in operating income of
approximately $135 million for 2007 (the comparable amount in
the prior year was approximately $116 million). This increase is
primarily due to the strong growth of our international operations.
This theoretical calculation assumes that each exchange rate
would change in the same direction relative to the U.S. dollar.

In practice, our experience is that exchange rates in the principal
foreign markets where we have foreign currency denominated
transactions tend to have offsetting fluctuations. Therefore, the
calculation above is not indicative of our actual experience in
foreign currency transactions. In addition to the direct effects
of changes in exchange rates, fluctuations in exchange rates
also affect the volume of sales or the foreign currency sales price
as competitors’ services become more or less attractive. The
sensitivity analysis of the effects of changes in foreign currency
exchange rates does not factor in a potential change in sales
levels or local currency prices.

Commodity. We have market risk for changes in the price of jet
and diesel fuel; however, this risk is largely mitigated by our fuel
surcharges. Our fuel surcharges are closely linked to market
prices for fuel. Therefore, a hypothetical 10% change in the price
of fuel would not be expected to materially affect our earnings.
However, our fuel surcharges have a lag that exists before they
are adjusted for changes in fuel prices and fuel prices can fluctu-
ate within certain ranges before resulting in a change in our fuel
surcharges. Therefore, our operating income may be affected
should the spot price of fuel suddenly change by a significant
amount or change by amounts that do not result in a change in
our fuel surcharges.

Other. We do not purchase or hold any derivative financial instru-
ments for trading purposes.

RISK FACTORS

Our financial and operating results are subject to many risks and
uncertainties, as described below.

Our businesses depend on our strong reputation and the value
of the FedEx brand.The FedEx brand name symbolizes high-quality
service, reliability and speed. FedEx is one of the most widely
recognized, trusted and respected brands in the world, and the
FedEx brand is one of our most important and valuable assets. In
addition, we have a strong reputation among customers and the
general public for high standards of social and environmental
responsibility and corporate governance and ethics. The FedEx
brand name and our corporate reputation are powerful sales and
marketing tools, and we devote significant resources to
promoting and protecting them. Adverse publicity (whether or
not justified) relating to activities by our employees, contractors
or agents could tarnish our reputation and reduce the value of
our brand. Damage to our reputation and loss of brand equity
could reduce demand for our services and thus have an
adverse effect on our financial condition, liquidity and results of
operations, as well as require additional resources to rebuild
our reputation and restore the value of our brand.

We rely heavily on technology to operate our transportation and
business networks, and any disruption to our technology
infrastructure or the Internet could harm our operations and our
reputation among customers. Our ability to attract and retain
customers and to compete effectively depends in part upon the
sophistication and reliability of our technology network, including
our ability to provide features of service that are important to our
customers. Any disruption to the Internet or our technology
infrastructure, including those impacting our computer systems
and Web site, could adversely impact our customer service and
our volumes and result in increased costs. While we have
invested and continue to invest in technology security initiatives
and disaster recovery plans, these measures cannot fully insulate
us from technology disruptions and the resulting adverse effect
on our operations and financial results.

FEDEX CORPORATION

Our businesses are capital intensive, and we must make capital
expenditures based upon projected volume levels. We make
significant investments in aircraft, vehicles, technology, package
handling facilities, sort equipment, copy equipment and other
capital to support our transportation and business networks. We
also make significant investments to rebrand, integrate and grow
the companies that we acquire. The amount and timing of capital
investments depend on various factors, including our anticipated
volume growth. For example, we must make commitments to
purchase or modify aircraft years before the aircraft are actually
needed. We must predict volume levels and fleet requirements
and make commitments for aircraft based on those projections. If
we miss our projections, we could end up with too much or too
little capacity relative to our shipping volumes.

We face intense competition. The transportation and business
services markets are both highly competitive and sensitive to
price and service. Some of our competitors have more financial
resources than we do, or they are controlled or subsidized by
foreign governments, which enables them to raise capital more
easily. We believe we compete effectively with these companies
— for example, by providing more reliable service at compensa-
tory prices. We cannot, however, control what our competitors
charge for their services. If the pricing environment becomes irra-
tional, it could limit our ability to maintain or increase our prices
(including our fuel surcharge in response to rising fuel costs) or
to maintain or grow our market share. In addition, maintaining a
broad portfolio of services is important to keeping and attracting
customers. While we believe we compete effectively through our
current service offerings, if our competitors offer a broader range
of services or more effectively bundle their services, it could
impede our ability to maintain or grow our market share.

If we do not effectively operate, integrate, leverage and grow
acquired businesses, our financial results and reputation may
suffer.Our strategy for long-term growth, productivity and prof-
itability depends in part on our ability to make prudent strategic
acquisitions and to realize the benefits we expect when we make
those acquisitions. In furtherance of this strategy, we recently
signed agreements to acquire the LTL freight operations of
Watkins Motor Lines and to buy out our joint venture partner in
China, as well as to acquire its China domestic express network.
While we expect these acquisitions to enhance our value propo-
sition to customers and improve our long-term profitability, there
can be no assurance that we will realize our expectations within
the time frame we have established, if at all. We acquired FedEx
Kinko’s in February 2004 to expand our portfolio of business ser-
vices and enhance our ability to provide package-shipping
services to small- and medium-sized business customers through
its network of retail locations. However, FedEx Kinko’s financial
performance has not yet fully met our expectations. Accordingly,
we have undertaken key initiatives at FedEx Kinko’s relating to
revenue growth, network expansion and improved profitability.
There can be no assurance that our acquisitions will be suc-
cessful or that we can continue to support the value we allocate
to these acquired businesses, including their goodwill.

Our transportation businesses may be impacted by the price and
availability of jet and diesel fuel. We must purchase large quanti-
ties of fuel to operate our aircraft and vehicles, and the price and
availability of fuel can be unpredictable and beyond our control.
To date, we have been successful in mitigating the impact of
higher fuel costs through our indexed fuel surcharges, as the
amount of the surcharges is closely linked to the market prices
for fuel. If we are unable to maintain or increase our fuel sur-
charges because of competitive pricing pressures or some other
reason, fuel costs could adversely impact our operating results.
In addition, disruptions in the supply of fuel could have a nega-
tive impact on our ability to operate our transportation networks.

FedEx Ground relies on owner-operators to conduct its opera-
tions, and the status of these owner-operators as independent
contractors, rather than employees, is being challenged.FedEx
Ground’s use of independent contractors is well suited to the
needs of the ground delivery business and its customers. We are
involved in numerous purported class-action lawsuits and other
proceedings, however, that claim that these owner-operators
should be treated as employees and not independent contrac-
tors. We expect to incur certain costs, including legal fees,
in defending the status of FedEx Ground’s owner-operators as
independent contractors. We strongly believe that the owner-
operators are properly classified as independent contractors and
that we will prevail in our defense. Adverse determinations
in these matters, however, could, among other things, entitle
certain of our contractors to the reimbursement of certain
expenses and to the benefit of wage-and-hour laws and result
in employment and withholding tax liability for FedEx Ground.
Moreover, if FedEx Ground is compelled to convert its indepen-
dent contractors to employees, our operating costs could
increase and we could incur significant capital outlays.

Increased security requirements could impose substantial costs
on us, especially at FedEx Express. As a result of increased
concerns about global terrorism and homeland security, govern-
ments around the world are adopting or are considering adopting
stricter security requirements that will increase operating costs
for businesses, including those in the transportation industry.
For example, in May 2006, the U.S. Transportation Security
Administration (“TSA”) adopted new rules enhancing many of
the security requirements for air cargo on both passenger and
all-cargo aircraft. The TSA is currently seeking comments on a
draft version of a new all-cargo aircraft security program, which
would implement the new rules. Until the required security
program is finalized, we cannot determine the effect that these
new rules will have on our cost structure or our operating results.
It is reasonably possible, however, that these rules or other future
security requirements for air cargo carriers could impose mate-
rial costs on us.

MANAGEMENT’S DISCUSSION AND ANALYSIS

The regulatory environment for global aviation rights may impact
our air operations. Our extensive air network is critical to our
success. Our right to serve foreign points is subject to the
approval of the Department of Transportation and generally
requires a bilateral agreement between the United States and
foreign governments. In addition, we must obtain the permission
of foreign governments to provide specific flights and services.
Regulatory actions affecting global aviation rights or a failure to
obtain or maintain aviation rights in important international
markets could impair our ability to operate our air network.

• our ability to maintain good relationships with our employees
and prevent attempts by labor organizations to organize groups
of our employees, which could significantly increase our oper-
ating costs;

• a shortage of qualified labor and our ability to mitigate this
shortage through recruiting and retention efforts and productiv-
ity gains;

• increasing costs for employee benefits, especially pension and

healthcare benefits;

We are negotiating a new collective bargaining agreement with
the union that represents the pilots of FedEx Express. FedEx
Express pilots are employed under a collective bargaining agree-
ment that became amendable on May 31, 2004. In accordance
with applicable labor law, we will continue to operate under our
current agreement while we negotiate with our pilots. Contract
negotiations with the pilots’ union began in March 2004. These
negotiations are ongoing and are being mediated through the
National Mediation Board. We cannot predict the outcome of
these negotiations. The terms of any new collective bargaining
agreement could increase our operating costs and adversely
affect our ability to compete with other providers of express
delivery services. On the other hand, if we are unable to reach
agreement on a new collective bargaining agreement, we may
be subject to a strike, work stoppages or slowdowns by our
pilots, subject to the requirements of the Railway Labor Act.
These actions could have a negative impact on our ability to
operate our express transportation network and ultimately cause
us to lose customers.

We are also subject to risks and uncertainties that affect many
other businesses, including:

• economic conditions in the global markets in which we operate;

• the impact of any international conflicts or terrorist activities on
the United States and global economies in general, the trans-
portation industry or us in particular, and what effects these
events will have on our costs or the demand for our services;

• any impacts on our businesses resulting from new domestic or
international government regulation, including tax, accounting,
labor or environmental rules;

• our ability to manage our cost structure for capital expenditures
and operating expenses and match them to shifting customer
volume levels;

• changes in foreign currency exchange rates, especially in the
Japanese yen, Taiwan dollar, Canadian dollar and euro, which
can affect our sales levels and foreign currency sales prices;

• significant changes in the volumes of shipments transported
through our networks, customer demand for our various ser-
vices or the prices we obtain for our services;

• market acceptance of our new service and growth initiatives;

• any liability resulting from and the costs of defending against
class-action litigation, such as wage-and-hour and race dis-
crimination claims, and any other legal proceedings;

• the impact of technology developments on our operations and
on demand for our services (for example, the impact that low-
cost home copiers and printers are having on demand for FedEx
Kinko’s copy services);

• adverse weather conditions or natural disasters, such as earth-
quakes and hurricanes, which can damage our property, disrupt
our operations, increase fuel costs and adversely affect ship-
ment levels;

• widespread outbreak of an illness, such as avian influenza (bird
flu), severe acute respiratory syndrome (SARS) or any other
communicable disease, or any other public health crisis; and

• availability of financing on terms acceptable to us and our abil-
ity to maintain our current credit ratings, especially given the
capital intensity of our operations.

We are directly affected by the state of the economy.While the
global, or macro-economic, risks listed above apply to most
companies, we are particularly vulnerable. The transportation
industry is highly cyclical and especially susceptible to trends in
economic activity. Our primary business is to transport goods, so
our business levels are directly tied to the purchase and produc-
tion of goods — key macro-economic measurements. When
individuals and companies purchase and produce fewer goods,
we transport fewer goods. In addition, we have a relatively high
fixed-cost structure, which is difficult to adjust to match shifting
volume levels. Moreover, as we grow our international business,
we are increasingly affected by the health of the global economy.

FEDEX CORPORATION

FORWARD-LOOKING STATEMENTS

Certain statements in this report, including (but not limited to)
those contained in “Outlook (including segment outlooks),”
“Liquidity,” “Capital Resources,” “Contractual Cash Obligations”
and “Critical Accounting Estimates,” and the “Employee Benefit
Plans” note to the consolidated financial statements, are “for-
ward-looking” statements within the meaning of the Private
Securities Litigation Reform Act of 1995 with respect to our finan-
cial condition, results of operations, cash flows, plans, objectives,
future performance and business. Forward-looking statements
include those preceded by, followed by or that include the words
“may,” “could,” “would,” “should,” “believes,” “expects,” “antic-
ipates,” “plans,” “estimates,” “targets,” “projects,” “intends” or
similar expressions. These forward-looking statements involve
risks and uncertainties. Actual results may differ materially from

those contemplated (expressed or implied) by such forward-
looking statements, because of, among other things, the risk
factors identified above and the other risks and uncertainties
you can find in our press releases and other SEC filings.

As a result of these and other factors, no assurance can be
given as to our future results and achievements. Accordingly, a
forward-looking statement is neither a prediction nor a guaran-
tee of future events or circumstances and those future events or
circumstances may not occur. You should not place undue
reliance on the forward-looking statements, which speak only as
of the date of this report. We are under no obligation, and we
expressly disclaim any obligation, to update or alter any forward-
looking statements, whether as a result of new information,
future events or otherwise.

FEDEX CORPORATION

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting includes,
among other things, defined policies and procedures for conducting and governing our business, sophisticated information systems for
processing transactions and a properly staffed, professional internal audit department. Mechanisms are in place to monitor the
effectiveness of our internal control over financial reporting and actions are taken to correct deficiencies identified. Our procedures for
financial reporting include the active involvement of senior management, our Audit Committee and a staff of highly qualified financial
and legal professionals.

Management, with the participation of our principal executive and financial officers, assessed our internal control over financial
reporting as of May 31, 2006, the end of our fiscal year. Management based its assessment on criteria established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria).

Based on this assessment, management has concluded that our internal control over financial reporting was effective as of May 31, 2006.

Our independent registered public accounting firm, Ernst & Young LLP, audited management’s assessment and the effectiveness of our
internal control over financial reporting. Ernst & Young LLP has issued their report concurring with management’s assessment, which
is included in this Annual Report.

FEDEX CORPORATION

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
FedEx Corporation

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial
Reporting, that FedEx Corporation maintained effective internal control over financial reporting as of May 31, 2006, based on criteria
established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). FedEx Corporation’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 an
opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting
based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over finan-
cial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a rea-
sonable basis for our opinion.

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 account-
ing principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) 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 (3) provide reasonable assurance regarding pre-
vention 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.

In our opinion, management’s assessment that FedEx Corporation maintained effective internal control over financial reporting as of
May 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, FedEx Corporation maintained, in
all material respects, effective internal control over financial reporting as of May 31, 2006, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the con-
solidated balance sheets of FedEx Corporation as of May 31, 2006 and 2005, and related consolidated statements of income, changes in
stockholders’ investment and comprehensive income, and cash flows for each of the three years in the period ended May 31, 2006 of
FedEx Corporation and our report dated July 11, 2006 expressed an unqualified opinion thereon.

Memphis, Tennessee
July 11, 2006

FEDEX CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share amounts)

REVENUES
Operating Expenses:

Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs
Business realignment costs
Other

OPERATING INCOME
Other Income (Expense):

Interest expense
Interest income
Other, net

Income Before Income Taxes
Provision for Income Taxes
NET INCOME
BASIC EARNINGS PER COMMON SHARE
DILUTED EARNINGS PER COMMON SHARE

The accompanying notes are an integral part of these consolidated financial statements.

2006

$32,294

Years ended May 31,

2005

$29,363

12,571
3,251
2,390
1,550
3,256
1,777
–
4,485
29,280

3,014

(142)
38
(11)
(115)
2,899
1,093
$ 1,806
$ 5.94
$ 5.83

11,963
2,935
2,299
1,462
2,317
1,695
–
4,221
26,892

2,471

(160)
21
(19)
(158)
2,313
864
$ 1,449
$ 4.81
$ 4.72

2004

$24,710

10,728
2,407
1,918
1,375
1,531
1,523
435
3,353
23,270

1,440

(136)
20
(5)
(121)
1,319
481
$
838
$ 2.80
$ 2.76

FEDEX CORPORATION

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

ASSETS
Current Assets

Cash and cash equivalents
Receivables, less allowances of $144 and $125
Spare parts, supplies and fuel, less allowances of $150 and $142
Deferred income taxes
Prepaid expenses and other

Total current assets
Property and Equipment, at Cost
Aircraft and related equipment
Package handling and ground support equipment
Computer and electronic equipment
Vehicles
Facilities and other

Less accumulated depreciation and amortization

Net property and equipment

Other Long-Term Assets

Goodwill
Prepaid pension cost
Intangible and other assets

Total other long-term assets

LIABILITIES AND STOCKHOLDERS’ INVESTMENT
Current Liabilities

Current portion of long-term debt
Accrued salaries and employee benefits
Accounts payable
Accrued expenses

Total current liabilities

Long-Term Debt, Less Current Portion
Other Long-Term Liabilities
Deferred income taxes
Pension, postretirement healthcare and other benefit obligations
Self-insurance accruals
Deferred lease obligations
Deferred gains, principally related to aircraft transactions
Other liabilities

Total other long-term liabilities

Commitments and Contingencies
Common Stockholders’ Investment

Common stock, $0.10 par value; 800 million shares authorized; 306 million shares issued for 2006

and 302 million shares issued for 2005

Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss

Less deferred compensation and treasury stock, at cost

Total common stockholders’ investment

The accompanying notes are an integral part of these consolidated financial statements.

May 31,

2006

2005

$ 1,937
3,516
308
539
164
6,464

8,611
3,558
4,331
2,203
5,371
24,074
13,304
10,770

2,825
1,349
1,282
5,456
$22,690

$ 850
1,325
1,908
1,390
5,473
1,592

1,367
944
692
658
373
80
4,114

31
1,468
10,068
(24)
11,543
32
11,511
$22,690

$ 1,039
3,297
250
510
173
5,269

7,610
3,366
3,893
1,994
5,154
22,017
12,374
9,643

2,835
1,272
1,385
5,492
$20,404

$ 369
1,275
1,739
1,351
4,734
2,427

1,206
828
621
532
400
68
3,655

30
1,241
8,363
(17)
9,617
29
9,588
$20,404

FEDEX CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

OPERATING ACTIVITIES

Net income
Adjustments to reconcile net income to cash provided by operating activities:

Lease accounting charge
Depreciation and amortization
Provision for uncollectible accounts
Deferred income taxes and other noncash items
Tax benefit on the exercise of stock options
Changes in operating assets and liabilities, net of the effects of businesses acquired:

Receivables
Other current assets
Pension assets and liabilities, net
Accounts payable and other operating liabilities
Other, net

Cash provided by operating activities
INVESTING ACTIVITIES
Capital expenditures
Business acquisitions, net of cash acquired
Proceeds from asset dispositions
Other, net

Cash used in investing activities
FINANCING ACTIVITIES

Principal payments on debt
Proceeds from debt issuances
Proceeds from stock issuances
Dividends paid
Purchase of treasury stock
Other, net

Cash (used in) provided by financing activities
CASH AND CASH EQUIVALENTS
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

The accompanying notes are an integral part of these consolidated financial statements.

Years ended May 31,

2006

2005

2004

$ 1,806

$ 1,449

838

79
1,548
121
187
62

(319)
(38)
(71)
346
(45)
3,676

(2,518)
–
64
–
(2,454)

(369)
–
144
(97)
–
(2)
(324)

–
1,462
101
63
36

(235)
(26)
(118)
365
20
3,117

(2,236)
(122)
12
(2)
(2,348)

(791)
–
99
(84)
–
–
(776)

–
1,375
106
(8)
43

(307)
10
155
841
(33)
3,020

(1,271)
(2,410)
18
1
(3,662)

(319)
1,599
115
(66)
(179)
–
1,150

898
1,039
$ 1,937

(7)
1,046
$ 1,039

508
538
$ 1,046

Accumulated
Other
Comprehensive
Loss

$(30)
–

(16)

Retained
Earnings

$ 6,250
838

–

Treasury
Stock

Deferred
Compensation

$ (25)
–

–

(179)
–

204
–
–
–

–

(1)
–
(1)
–

–

$(25)
–

–

–
–

(18)
15
(28)
–

–

(16)
16
(28)
–

–

Total

$ 7,288
838

(16)
822

(179)
(87)

177
15
8,036
1,449

2
1,478
(87)

145
16
9,588
1,806

(36)
1,799
(101)

–
–

–
–
(46)
–

–

–
–
(17)
–

(36)

–

–
–
$(24)

(1)
–
$ (2)

(19)
17
$(30)

208
17
$11,511

FEDEX CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ INVESTMENT
AND COMPREHENSIVE INCOME

(In millions, except share data)

BALANCE AT MAY 31, 2003
Net income
Minimum pension liability adjustment,
net of deferred tax benefit of $12
Total comprehensive income

Purchase of treasury stock

(2,625,000 shares repurchased at an
average price of $68.14 per share)

Cash dividends declared ($0.29 per share)
Employee incentive plans and other

(4,013,182 shares issued)

Amortization of deferred compensation
BALANCE AT MAY 31, 2004
Net income
Foreign currency translation adjustment,

net of deferred taxes of $5

Minimum pension liability adjustment,

net of deferred taxes of $1

Total comprehensive income
Cash dividends declared ($0.29 per share)
Employee incentive plans and other

(2,767,257 shares issued)

Amortization of deferred compensation
BALANCE AT MAY 31, 2005
Net income
Foreign currency translation adjustment,

net of deferred taxes of $3

Minimum pension liability adjustment,

net of deferred taxes of $24

Total comprehensive income
Cash dividends declared ($0.33 per share)
Employee incentive plans and other

(3,579,766 shares issued)

Amortization of deferred compensation
BALANCE AT MAY 31, 2006

Common
Stock

$30
–

Additional
Paid-in
Capital

$1,088
–

–

–
–

–
–
30
–

–

–
–
30
–

–

–
–

(9)
–
1,079
–

–

162
–
1,241
–

–

1
–
$31

227
–
$1,468

–
(87)

–
–
7,001
1,449

–

(87)

–
–
8,363
1,806

–

(101)

–
–
$10,068

The accompanying notes are an integral part of these consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: DESCRIPTION OF BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS
FedEx Corporation (“FedEx”) provides a broad portfolio of
transportation, e-commerce and business services through
companies operating independently, competing collectively and
managed collaboratively under the respected FedEx brand.
These operating companies are primarily represented by Federal
Express Corporation (“FedEx Express”), the world’s largest
express transportation company; FedEx Ground Package System,
Inc. (“FedEx Ground”), a leading provider of small-package
ground delivery services; FedEx Freight Corporation (“FedEx
Freight”), a leading U.S. provider of regional less-than-truckload
(“LTL”) freight services; and FedEx Kinko’s Office and Print
Services, Inc. (“FedEx Kinko’s”), a leading provider of document
solutions and business services. These companies form the core
of our reportable segments.

Other business units in the FedEx portfolio are FedEx Trade
Networks, Inc. (“FedEx Trade Networks”), a global trade ser-
vices company; FedEx SmartPost, Inc. (“FedEx SmartPost”), a
small-parcel consolidator; FedEx Supply Chain Services, Inc.
(“FedEx Supply Chain Services”), a contract logistics provider;
FedEx Custom Critical, Inc. (“FedEx Custom Critical”), a critical-
shipment carrier; Caribbean Transportation Services, Inc.
(“Caribbean Transportation Services”), a provider of airfreight
forwarding services, and FedEx Corporate Services, Inc. (“FedEx
Services”), a provider of customer-facing sales, marketing and
information technology functions, primarily for FedEx Express
and FedEx Ground.

FISCAL YEARS
Except as otherwise specified, references to years indicate our
fiscal year ended May 31, 2006 or ended May 31 of the year
referenced.

PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
FedEx and its subsidiaries, substantially all of which are wholly
owned. All significant intercompany accounts and transactions
have been eliminated.

RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial
statements to conform to the current year presentation.

CREDIT RISK
We routinely grant credit to many of our customers for transporta-
tion and business services without collateral. The risk of credit loss
in our trade receivables is substantially mitigated by our credit
evaluation process, short collection terms and sales to a large

number of customers, as well as the low revenue per transaction
for most of our services. Allowances for potential credit losses are
determined based on historical experience and current evaluation
of the composition of accounts receivable. Historically, credit
losses have been within management’s expectations.

REVENUE RECOGNITION
Revenue is recognized upon delivery of shipments or the com-
pletion of the service for our office and print services, logistics
and trade services businesses. Certain of our transportation
services are provided with the use of independent contractors.
FedEx is the principal to the transaction in most instances and
in those cases revenue from these transactions is recognized on
a gross basis. Costs associated with independent contractor
settlements are recognized as incurred and included in the pur-
chased transportation caption in the accompanying income
statements. For shipments in transit, revenue is recorded based
on the percentage of service completed at the balance sheet
date. Estimates for future billing adjustments to revenue and
accounts receivable are recognized at the time of shipment for
money-back service guarantees and billing corrections. Delivery
costs are accrued as incurred.

ADVERTISING
Advertising costs are expensed as incurred and are classified in
other operating expenses. Advertising expenses were $376 mil-
lion in 2006, $326 million in 2005 and $284 million in 2004.

CASH EQUIVALENTS
Cash in excess of current operating requirements are invested in
short-term, interest-bearing instruments with maturities of three
months or less at the date of purchase and are stated at cost,
which approximates market value.

SPARE PARTS, SUPPLIES AND FUEL
Spare parts are reported at weighted-average cost. Supplies and
fuel are reported at standard cost, which approximates actual
cost on a first-in, first-out basis. Allowances for obsolescence
are provided, over the estimated useful life of the related aircraft
and engines, for spare parts expected to be on hand at the date
the aircraft are retired from service, and for spare parts currently
identified as excess or obsolete. These allowances are based on
management estimates, which are subject to change.

FEDEX CORPORATION

IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment when circum-
stances indicate the carrying value of an asset may not be
recoverable. For assets that are to be held and used, an impair-
ment is recognized when the estimated undiscounted cash flows
associated with the asset or group of assets is less than their
carrying value. If impairment exists, an adjustment is made to
write the asset down to its fair value, and a loss is recorded as
the difference between the carrying value and fair value. Fair val-
ues are determined based on quoted market values, discounted
cash flows or internal and external appraisals, as applicable.
Assets to be disposed of are carried at the lower of carrying
value or estimated net realizable value. Because the cash flows
of our transportation networks cannot be identified to individual
assets, and based on the ongoing profitability of our operations,
we have not experienced any significant impairment of assets to
be held and used.

PENSION AND POSTRETIREMENT HEALTHCARE PLANS
Our defined benefit plans are measured as of the last day of our
fiscal third quarter of each year using actuarial techniques that
reflect management’s assumptions for discount rate, rate of
return, salary increases, expected retirement, mortality, employee
turnover and future increases in healthcare costs. We determine
the discount rate (which is required to be the rate at which the
projected benefit obligation could be effectively settled as of the
measurement date) with the assistance of actuaries, who calcu-
late the yield on a theoretical portfolio of high-grade corporate
bonds (rated Aa or better) with cash flows that generally match
our expected benefit payments. A calculated-value method is
employed for purposes of determining the expected return on the
plan asset component of net periodic pension cost for our quali-
fied U.S. pension plans. Generally, we do not fund defined benefit
plans when such funding provides no current tax deduction or
when such funding would be deemed current compensation to
plan participants.

GOODWILL
Goodwill is recognized for the excess of the purchase price over
the fair value of tangible and identifiable intangible net assets of
businesses acquired. Goodwill is reviewed at least annually for
impairment by comparing the fair value of each reporting unit
with its carrying value (including attributable goodwill). Fair value
is determined using a discounted cash flow methodology and
includes management’s assumptions on revenue growth rates,
operating margins, discount rates and expected capital expendi-
tures. Unless circumstances otherwise dictate, we perform our
annual impairment testing in the fourth quarter.

PROPERTY AND EQUIPMENT
Expenditures for major additions, improvements, flight equipment
modifications and certain equipment overhaul costs are capital-
ized when such costs are determined to extend the useful life
of the asset or are part of the cost of acquiring the asset.
Maintenance and repairs are charged to expense as incurred,
except for certain aircraft-related major maintenance costs on
one of our aircraft fleet types, which are capitalized as incurred
and amortized over the estimated remaining useful lives of the
aircraft. We capitalize certain direct internal and external costs
associated with the development of internal use software.
Gains and losses on sales of property used in operations are
classified with depreciation and amortization.

For financial reporting purposes, depreciation and amortization
of property and equipment is provided on a straight-line basis
over the asset’s service life or related lease term. For income tax
purposes, depreciation is generally computed using accelerated
methods. The depreciable lives and net book value of our prop-
erty and equipment are as follows (dollars in millions):

Wide-body aircraft and
related equipment
Narrow-body and feeder

Range

Net Book Value at May 31,
2005

2006

15 to 25 years

$4,669

$3,948

aircraft and related equipment

5 to 15 years

369

Package handling and

ground support equipment

2 to 30 years

1,255

Computer and electronic

equipment

Vehicles
Facilities and other

2 to 10 years
3 to 12 years
2 to 40 years

928
743
2,806

330

938

758
718
2,951

Substantially all property and equipment have no material residual
values. The majority of aircraft costs are depreciated on a
straight-line basis over 15 to 18 years. We periodically evaluate
the estimated service lives and residual values used to depreci-
ate our property and equipment. This evaluation may result in
changes in the estimated lives and residual values. Such changes
did not materially affect depreciation expense in any period pre-
sented. Depreciation expense, excluding gains and losses on
sales of property and equipment used in operations, was $1.520
billion in 2006, $1.438 billion in 2005 and $1.361 billion in 2004.
Depreciation and amortization expense includes amortization of
assets under capital lease.

CAPITALIZED INTEREST
Interest on funds used to finance the acquisition and modifica-
tion of aircraft, construction of certain facilities and development
of certain software up to the date the asset is ready for its
intended use is capitalized and included in the cost of the asset if
the asset is actively under construction. Capitalized interest was
$33 million in 2006, $22 million in 2005 and $11 million in 2004.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

INTANGIBLE ASSETS
Amortizable intangible assets include customer relationships,
technology assets and contract-based intangibles acquired
in business combinations. Amortizable intangible assets are
amortized over periods ranging from 2 to 15 years, either on a
straight-line basis or an accelerated basis depending upon the pat-
tern in which the economic benefits are realized. Non-amortizing
intangible assets consist of the Kinko’s trade name. Non-amortizing
intangibles are reviewed at least annually for impairment. Unless
circumstances otherwise dictate, we perform our annual impair-
ment testing in the fourth quarter.

INCOME TAXES
Deferred income taxes are provided for the tax effect of tempo-
rary differences between the tax basis of assets and liabilities
and their reported amounts in the financial statements. The lia-
bility method is used to account for income taxes, which requires
deferred taxes to be recorded at the statutory rate in effect when
the taxes are paid.

We have not recognized deferred taxes for U.S. federal income
taxes on foreign subsidiaries’ earnings that are deemed to be
permanently reinvested and any related taxes associated with
such earnings are not material. Pretax earnings of foreign oper-
ations were approximately $606 million in 2006, $636 million in
2005 and $430 million in 2004, which represent only a portion of
total results associated with international shipments.

SELF-INSURANCE ACCRUALS
We are primarily self-insured for workers’ compensation claims,
vehicle accidents and general liabilities, benefits paid under
employee healthcare programs and long-term disability benefits.
Accruals are primarily based on the actuarially estimated, undis-
counted cost of claims, which includes incurred-but-not-reported
claims. Current workers’ compensation claims, vehicle and gen-
eral liability, employee healthcare claims and long-term disability
are included in accrued expenses. We self-insure up to certain lim-
its that vary by operating company and type of risk. Periodically,
we evaluate the level of insurance coverage and adjust insurance
levels based on risk tolerance and premium expense.

LEASES
Certain of our aircraft, facility and retail location leases contain
fluctuating or escalating payments and rent holiday periods. The
related rent expense is recorded on a straight-line basis over the
lease term. The cumulative excess of rent payments over rent
expense is accounted for as a deferred lease asset and recorded
in “Intangible and other assets” in the balance sheets. The cumu-
lative excess of rent expense over rent payments is accounted
for as a deferred lease obligation. In addition to minimum rental
payments, certain leases provide for contingent rentals based on
equipment usage principally related to aircraft leases at FedEx
Express and copier usage at FedEx Kinko’s. Rent expense
associated with contingent rentals is recorded as incurred. The

commencement date of all leases is the earlier of the date we
become legally obligated to make rent payments or the date we
may exercise control over the use of the property. Leasehold
improvements associated with assets utilized under capital or
operating leases are amortized over the shorter of the asset’s
useful life or the lease term.

DEFERRED GAINS
Gains on the sale and leaseback of aircraft and other property
and equipment are deferred and amortized ratably over the life
of the lease as a reduction of rent expense. Substantially all of
these deferred gains are related to aircraft transactions.

FOREIGN CURRENCY TRANSLATION
Translation gains and losses of foreign operations that use local
currencies as the functional currency are accumulated and
reported, net of applicable deferred income taxes, as a compo-
nent of accumulated other comprehensive loss within common
stockholders’ investment. Transaction gains and losses that arise
from exchange rate fluctuations on transactions denominated in
a currency other than the local currency are included in results of
operations. Cumulative net foreign currency translation gains and
(losses) in accumulated other comprehensive loss were $43 mil-
lion at May 31, 2006, $14 million at May 31, 2005 and ($13) million
at May 31, 2004.

AIRLINE STABILIZATION ACT CHARGE
During the second quarter of 2005, the United States Department
of Transportation (“DOT”) issued a final order in its administra-
tive review of the FedEx Express claim for compensation under
the Air Transportation Safety and System Stabilization Act
(“Act”). Under its interpretation of the Act, the DOT determined
that FedEx Express was entitled to $72 million of compensation.
Because we had previously received $101 million under the Act,
the DOT demanded repayment of $29 million, which was made in
December 2004. Because we could no longer conclude that col-
lection of the entire $119 million recorded in 2002 was probable,
we recorded a charge of $48 million in the second quarter of 2005,
representing the DOT’s repayment demand of $29 million and the
write-off of a $19 million receivable.

EMPLOYEES UNDER COLLECTIVE BARGAINING
ARRANGEMENTS
The pilots of FedEx Express, which represent a small number of
FedEx Express total employees, are employed under a collective
bargaining agreement that became amendable on May 31, 2004.
In accordance with applicable labor law, we will continue to
operate under our current agreement while we negotiate with
our pilots. Contract negotiations with the pilots’ union began in
March 2004. These negotiations are ongoing and are being medi-
ated through the National Mediation Board. We cannot estimate
the financial impact, if any, the results of these negotiations may
have on our future results of operations.

FEDEX CORPORATION

STOCK COMPENSATION
We currently apply Accounting Principles Board Opinion No.
(“APB”) 25, “Accounting for Stock Issued to Employees,” and its
related interpretations to measure compensation expense for
stock-based compensation plans. As a result, no compensation
expense is recorded for stock options when the exercise price is
equal to or greater than the market price of our common stock at
the date of grant. For awards of restricted stock and to deter-
mine the pro forma effects of stock options set forth below, we
recognize the fair value of the awards ratably over their explicit
service period.

If compensation cost for stock-based compensation plans had
been determined under Statement of Financial Accounting
Standards No. (“SFAS”) 123, “Accounting for Stock Based
Compensation,” stock option compensation expense, pro forma
net income and basic and diluted earnings per common share
for 2006, 2005 and 2004 assuming all options granted in 1996 and
thereafter were valued at fair value using the Black-Scholes
method, would have been as follows (in millions, except per
share amounts):

Net income, as reported
Add: Stock compensation

included in reported net income,
net of tax

Deduct: Total stock-based employee

compensation expense determined
under fair value based method for
all awards, net of tax benefit

Pro forma net income
Earnings per common share:

Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma

Years Ended May 31,

2006

2005

2004

$1,806

$1,449

$ 838

46
$1,765

$ 5.94
$ 5.81
$ 5.83
$ 5.70

40
$1,413

$ 4.81
$ 4.69
$ 4.72
$ 4.60

37
$ 811

$ 2.80
$ 2.71
$ 2.76
$ 2.68

See Note 10 for a discussion of the assumptions underlying the
pro forma calculations above.

For unvested stock options and restricted stock awards granted
prior to May 31, 2006, the terms of these awards provide for
continued vesting subsequent to the employee’s retirement.
Compensation expense associated with these awards has been
recognized on a straight-line basis over the vesting period. This
provision was removed from all stock option awards granted
subsequent to May 31, 2006. For restricted stock grants made
subsequent to May 31, 2006, compensation expense will be
accelerated for grants made to employees who are or will
become retirement eligible during the stated vesting period of
the award.

DIVIDENDS DECLARED PER COMMON SHARE
On May 26, 2006, our Board of Directors declared a dividend of
$0.09 per share of common stock. The dividend was paid on July 3,
2006 to stockholders of record as of the close of business on
June 12, 2006. Each quarterly dividend payment is subject to
review and approval by our Board of Directors, and we evaluate
our dividend payment amount on an annual basis at the end of
each fiscal year.

USE OF ESTIMATES
The preparation of our consolidated financial statements requires
the use of estimates and assumptions that affect the reported
amounts of assets and liabilities, the reported amounts of rev-
enues and expenses and the disclosure of contingent liabilities.
Management makes its best estimate of the ultimate outcome for
these items based on historical trends and other information
available when the financial statements are prepared. Changes in
estimates are recognized in accordance with the accounting
rules for the estimate, which is typically in the period when new
information becomes available to management. Areas where the
nature of the estimate makes it reasonably possible that actual
results could materially differ from amounts estimated include:
self-insurance accruals; employee retirement plan obligations;
long-term incentive accruals; tax liabilities; accounts receivable
allowances; obsolescence of spare parts; contingent liabilities;
and impairment assessments on long-lived assets (including
goodwill and indefinite lived intangible assets).

NOTE 2: RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board
(“FASB”) issued SFAS 123R, “Share-Based Payment.” The new
standard requires companies to record compensation expense
for stock-based awards using a fair value method. Compensation
expense will be recorded over the requisite service period, which
is typically the vesting period of the award.

We will adopt this standard using the modified prospective basis
as of June 1, 2006. We expect the adoption of this standard to
result in a reduction of diluted earnings per share of approxi-
mately $0.15 in 2007. This estimate is impacted by the levels of
share-based payments granted in the future, assumptions used
in the fair value calculation and the market price of our common
stock. Accordingly, the actual effect per diluted share could differ
from this estimate.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3: BUSINESS COMBINATIONS

FEDEX SMARTPOST
On September 12, 2004, we acquired the assets and assumed
certain liabilities of FedEx SmartPost (formerly known as Parcel
Direct), a division of a privately held company, for $122 million in
cash. FedEx SmartPost is a leading small-parcel consolidator and
broadens our portfolio of services by allowing us to offer a cost-
effective option for delivering low-weight, less time-sensitive
packages to U.S. residences through the U.S. Postal Service. The
financial results of FedEx SmartPost are included in the FedEx
Ground segment from the date of its acquisition and are not mate-
rial to reported or pro forma results of operations of any period.

The excess cost over the estimated fair value of the assets
acquired and liabilities assumed (approximately $20 million) has
been recorded as goodwill, which is entirely attributed to FedEx
Ground. Management relied primarily on internal estimates and
the assistance of third-party appraisals to allocate the purchase
price to the fair value of the assets acquired, liabilities assumed
and goodwill.

The purchase price was allocated as follows (in millions):

Current assets, primarily accounts receivable
Property and equipment
Intangible assets
Goodwill
Current liabilities
Total purchase price

$ 10
91
10
20
(9)
$122

FEDEX KINKO’S
On February 12, 2004, we acquired FedEx Kinko’s for approxi-
mately $2.4 billion in cash. We also assumed $39 million of
capital lease obligations. FedEx Kinko’s is a leading provider
of document solutions and business services. Its network of
worldwide locations offers access to color printing, finishing
and presentation services, Internet access, videoconferencing,
outsourcing, managed services, Web-based printing and docu-
ment management solutions.

The allocation of the purchase price to the fair value of the assets
acquired, liabilities assumed and goodwill, as well as the assign-
ment of goodwill to our reportable segments, was based primarily
on internal estimates of cash flows, supplemented by third-party
appraisals. We used third-party appraisals to assist management
in its determination of the fair value of certain assets and liabilities,
primarily property and equipment and acquired intangible assets,
including the value of the Kinko’s trade name, customer-related
intangibles, technology assets and contract-based intangibles.

Approximately $1.8 billion was recorded as goodwill, as the acqui-
sition expands our portfolio of business services, while providing a
substantially enhanced capability to provide package-shipping
services to small- and medium-sized business customers through
FedEx Kinko’s network of retail locations. Because this was an
acquisition of stock, goodwill is not deductible for tax purposes.
Approximately $130 million of the goodwill was attributed to the

FedEx Express segment and $70 million was attributed to the
FedEx Ground segment based on the expected increase in each
segment’s fair value as a result of the acquisition.

The purchase price was allocated as follows (in millions):

Current assets, primarily accounts

receivable and inventory

Property and equipment
Goodwill
Intangible asset with an indefinite life
Amortizable intangible assets
Other long-term assets

Total assets acquired

Current liabilities
Deferred income taxes
Long-term capital lease obligations
and other long-term liabilities
Total liabilities assumed
Total purchase price

$ 241
328
1,751
567
82
52
3,021
(298)
(267)

(36)
(601)
$2,420

Indefinite lived intangible asset.This intangible asset represents
the estimated fair value allocated to the Kinko’s trade name. This
intangible asset will not be amortized because it has an indefinite
remaining useful life based on the length of time that the Kinko’s
name had been in use, the Kinko’s brand awareness and market
position and our plans for continued use of the Kinko’s brand.

Amortizable intangible assets.These intangible assets represent
the fair value associated with the business expected to be gen-
erated from existing customer relationships and contracts as of
the acquisition date. Substantially all of these assets are being
amortized on an accelerated basis over an estimated useful life
of approximately seven years. While the useful life of these
customer-relationship assets is not limited by contract or any
other economic, regulatory or other known factors, a useful life
of seven years was determined at the acquisition date based on
customer attrition patterns.

The following unaudited pro forma consolidated financial infor-
mation presents the combined results of operations of FedEx and
FedEx Kinko’s as if the acquisition had occurred at the beginning
of 2004. The unaudited pro forma results have been prepared for
comparative purposes only. Adjustments were made to the
combined results of operations, primarily related to higher depre-
ciation and amortization expense resulting from higher property
and equipment values and acquired intangible assets and
additional interest expense resulting from acquisition debt.
Accounting literature establishes firm guidelines around how this
pro forma information is presented, which precludes the assump-
tion of business synergies. Therefore, this unaudited pro forma
information is not intended to represent, nor do we believe it is
indicative of the consolidated results of operations of FedEx that
would have been reported had the acquisition been completed
as of the beginning of 2004. Furthermore, this pro forma informa-
tion is not representative of the future consolidated results of
operations of FedEx.

FEDEX CORPORATION

Pro forma unaudited results for the year ended May 31, 2004
were as follows (in millions, except per share data):

Revenues

Net income (1)

Basic earnings per common share (1)
Diluted earnings per common share (1)

$26,056
836
2.80
2.75

(1) Includes $27 million, net of tax, of nonrecurring expenses at FedEx Kinko's, primarily in
anticipation of the acquisition. Also includes $270 million, net of tax, of business realign-
ment costs and a $37 million, net of tax, nonrecurring tax benefit at FedEx.

We paid a portion of the purchase price from available cash bal-
ances. To finance the remainder of the purchase price, we issued
commercial paper backed by a six-month $2 billion credit facility.
In March 2004, we issued $1.6 billion of senior unsecured notes in
three maturity tranches: one, three and five years at $600 million,
$500 million and $500 million, respectively. Net proceeds from the
borrowings were used to repay the commercial paper backed by
the six-month credit facility. We canceled the six-month credit
facility in March 2004. See Note 7 for further discussion.

The FedEx SmartPost and FedEx Kinko’s acquisitions were
accounted for under the purchase method of accounting. The
operating results of the acquired businesses are included in our
consolidated results of operations from the date of acquisition.

NOTE 4: GOODWILL AND INTANGIBLES

OTHER BUSINESS COMBINATIONS
On May 26, 2006, we announced an agreement to acquire the LTL
operations of Watkins Motor Lines (“Watkins”), a privately held
company, and certain affiliates for approximately $780 million,
payable in cash. Watkins is a leading provider of long-haul LTL
services. Watkins will be rebranded as FedEx National LTL and
will be included in the FedEx Freight segment from the date of
acquisition, which is expected to occur during the first half of
2007, subject to customary closing conditions.

The carrying amount of goodwill attributable to each reportable operating segment and changes therein follows (in millions):

FedEx Express segment
FedEx Ground segment
FedEx Freight segment
FedEx Kinko’s segment

(1) FedEx SmartPost acquisition.

May 31, 2004

$ 527
70
666
1,539
$2,802

Goodwill
Acquired

Purchase
Adjustments
and Other

$ –
20(1)
–
–
$20

$ 1
–
–
12
$13

May 31, 2005

$ 528
90
666
1,551
$2,835

Purchase
Adjustments
and Other

$ 2
–
(10)
(2)
$(10)

May 31, 2006

$ 530
90
656
1,549
$2,825

The components of our intangible assets were as follows (in millions):

Amortizable intangible assets
Customer relationships
Contract related
Technology related and other

Total

Non-amortizing intangible asset
Kinko’s trade name

Gross Carrying
Amount

May 31, 2006
Accumulated
Amortization

Net Book
Value

Gross Carrying
Amount

May 31, 2005
Accumulated
Amortization

$ 77
79
54
$210

$567

$ (29)
(57)
(30)
$(116)

–

$ 48
22
24
$ 94

$567

$ 77
79
51
$207

$567

$(16)
(50)
(23)
$(89)

$ –

Net Book
Value

$ 61
29
28
$118

$567

The recoverability of the amounts recorded for FedEx Kinko’s goodwill and trade name is dependent on execution of key initiatives
related to revenue growth, network expansion and improved profitability.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amortization expense for intangible assets was $25 million in
2006, $26 million in 2005 and $14 million in 2004. Estimated amorti-
zation expense for the next five years is as follows (in millions):

NOTE 7: LONG-TERM DEBT AND OTHER FINANCING
ARRANGEMENTS

The components of our long-term debt were as follows (in millions):

2007
2008
2009
2010
2011

$23
21
18
16
8

NOTE 5: BUSINESS REALIGNMENT COSTS

During the first half of 2004, voluntary early retirement incentives
with enhanced pension and postretirement healthcare benefits
were offered to certain groups of employees at FedEx Express
who were age 50 or older. Voluntary cash severance incentives
were also offered to eligible employees at FedEx Express.
Approximately 3,600 employees accepted offers under these pro-
grams. Costs were also incurred for the elimination of certain
management positions, primarily at FedEx Express and FedEx
Services. We recognized $435 million of business realignment
costs during 2004 ($428 million related to the FedEx Express
Segment). No material costs for these programs were incurred
in 2006 or 2005. At both May 31, 2006 and May 31, 2005, business
realignment related accruals were immaterial.

NOTE 6: SELECTED CURRENT LIABILITIES

The components of selected current liability captions were as
follows (in millions):

Accrued Salaries and Employee Benefits

Salaries
Employee benefits
Compensated absences

Accrued Expenses

Self-insurance accruals
Taxes other than income taxes
Other

May 31,

2006

2005

$ 236
655
434
$1,325

$ 523
305
562
$1,390

$ 202
658
415
$1,275

$ 483
288
580
$1,351

Unsecured debt
Capital lease obligations
Other debt, interest rates of 4.03% to 9.98%

due through 2008

Less current portion

May 31,

2006

$2,006
310

126
2,442
850
$1,592

2005

$2,255
401

140
2,796
369
$2,427

From time to time, we finance certain operating and investing
activities, including acquisitions, through borrowings under our
$1.0 billion revolving credit facility or the issuance of commercial
paper. In July 2005, we executed a new $1.0 billion five-year
revolving credit facility, which replaced and consolidated our prior
revolving credit facilities. Borrowings under the credit facility will
bear interest at short-term interest rates (based on the London
Interbank Offered Rate (“LIBOR”), the Prime Rate or the Federal
Funds Rate) plus a margin dependent upon our senior unsecured
long-term debt ratings. The revolving credit agreement contains
certain covenants and restrictions, none of which are expected
to significantly affect our operations or ability to pay dividends.

Our commercial paper program is backed by unused commit-
ments under the revolving credit facility and borrowings under the
program reduce the amount available under the credit facility. At
May 31, 2006, no commercial paper borrowings were outstanding
and the entire amount under the credit facility was available.

The components of unsecured debt (net of discounts) were as
follows (in millions):

Senior unsecured debt

Interest rate of 7.80%, due in 2007
Interest rate of 2.65%, due in 2007
Interest rate of 3.50%, due in 2009
Interest rate of 7.25%, due in 2011
Interest rate of 9.65%, due in 2013
Interest rate of 7.60%, due in 2098

Other notes, due in 2007

May 31,

2006

2005

$ 200
500
500
249
300
239
18
$2,006

$ 200
500
499
499
299
239
19
$2,255

FEDEX CORPORATION

Our capital lease obligations include leases for aircraft, as well as
certain special facility revenue bonds that have been issued by
municipalities primarily to finance the acquisition and construction
of various airport facilities and equipment. These bonds require
interest payments at least annually, with principal payments due
at the end of the related lease agreement.

Our other debt includes $118 million related to leases for air-
craft that are consolidated under the provisions of FIN 46,
“Consolidation of Variable Interest Entities, an Interpretation of
ARB No. 51.” The debt accrues interest at LIBOR plus a margin
and is due in installments through March 30, 2007. See Note 17
for further discussion.

We issue other financial instruments in the normal course of
business to support our operations. Letters of credit at May 31,
2006 were $586 million. The amount unused under our letter of
credit facility totaled approximately $63 million at May 31, 2006.
This facility expires in July of 2010. These instruments are gener-
ally required under certain U.S. self-insurance programs and are
used in the normal course of international operations. The under-
lying liabilities insured by these instruments are reflected in the
balance sheets, where applicable. Therefore, no additional liabil-
ity is reflected for the letters of credit.

Scheduled annual principal maturities of debt, exclusive of capital
leases, for the five years subsequent to May 31, 2006, are as
follows (in millions):

2007
2008
2009
2010
2011

$844
–
500
–
250

Long-term debt, exclusive of capital leases, had carrying values of
$2.1 billion compared with an estimated fair value of approximately
$2.2 billion at May 31, 2006, and $2.4 billion compared with an esti-
mated fair value of $2.6 billion at May 31, 2005. The estimated fair
values were determined based on quoted market prices or on the
current rates offered for debt with similar terms and maturities.

We have a $1 billion shelf registration statement with the SEC to
provide flexibility and efficiency when obtaining financing. Under
this shelf registration statement we may issue, in one or more
offerings, either unsecured debt securities, common stock or a
combination of such instruments. The entire $1 billion is available
for future financings.

NOTE 8: LEASES

We utilize certain aircraft, land, facilities, retail locations and
equipment under capital and operating leases that expire at var-
ious dates through 2039. We leased approximately 16% of our total
aircraft fleet under capital or operating leases as of May 31, 2006.
In addition, supplemental aircraft are leased by us under agree-
ments that generally provide for cancellation upon 30 days notice.
Our leased facilities include national, regional and metropolitan
sorting facilities and administrative buildings.

The components of property and equipment recorded under cap-
ital leases were as follows (in millions):

May 31,

Aircraft
Package handling and

ground support equipment

Vehicles
Other, principally facilities

Less accumulated amortization

2006

$114

167
34
166
481
331
$150

2005

$232

167
36
167
602
329
$273

Rent expense under operating leases was as follows (in millions):

Minimum rentals
Contingent rentals

For years ended May 31,

2006

2005

2004

$1,919
245
$2,164

$1,793
235
$2,028

$1,560
143
$1,703

Contingent rentals are based on equipment usage.

A summary of future minimum lease payments under capital
leases at May 31, 2006 is as follows (in millions):

2007
2008
2009
2010
2011
Thereafter

Less amount representing interest
Present value of net minimum lease payments

$ 24
100
12
96
8
144
384
74
$310

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

A summary of future minimum lease payments under noncan-
celable operating leases (principally aircraft, retail locations and
facilities) with an initial or remaining term in excess of one year at
May 31, 2006 is as follows (in millions):

Option-vesting periods range from one to four years, with approx-
imately 90% of stock option grants vesting ratably over four years.
At May 31, 2006, there were 7,998,267 shares available for future
grants under these plans.

2007
2008
2009
2010
2011
Thereafter

Aircraft and Related
Equipment

Facilities and
Other

$ 632
586
555
544
526
3,934
$6,777

$1,040
892
735
576
458
2,846
$6,547

Total

$ 1,672
1,478
1,290
1,120
984
6,780
$13,324

The weighted-average remaining lease term of all operating
leases outstanding at May 31, 2006 was approximately six years.
While certain of our lease agreements contain covenants gov-
erning the use of the leased assets or require us to maintain
certain levels of insurance, none of our lease agreements include
material financial covenants or limitations.

FedEx Express makes payments under certain leveraged oper-
ating leases that are sufficient to pay principal and interest on
certain pass-through certificates. The pass-through certifi-
cates are not direct obligations of, or guaranteed by, FedEx or
FedEx Express.

During the first quarter of 2006, a one-time, noncash charge of
$79 million ($49 million after tax or $0.16 per diluted share) was
recorded, which represented the impact on prior years to adjust
the accounting for certain facility leases, predominantly at FedEx
Express. The charge related primarily to rent escalations in on-
airport facility leases. Because the amounts involved were not
material to our financial statements in any individual prior period
or to 2006 results, we recorded the cumulative adjustment in the
first quarter, which increased operating expenses by $79 million.

NOTE 9: PREFERRED STOCK

Our Certificate of Incorporation authorizes the Board of Directors,
at its discretion, to issue up to 4,000,000 shares of preferred stock.
The stock is issuable in series, which may vary as to certain
rights and preferences, and has no par value. As of May 31, 2006,
none of these shares had been issued.

NOTE 10: STOCK COMPENSATION PLANS

STOCK OPTION PLANS
Under the provisions of our stock incentive plans, key employees
and non-employee directors may be granted options to purchase
shares of common stock at a price not less than its fair market
value at the date of grant. Options granted have a maximum term
of 10 years. Vesting requirements are determined at the discre-
tion of the Compensation Committee of our Board of Directors.

The weighted-average fair value of these grants, calculated
using the Black-Scholes valuation method under the assumptions
indicated below, was $25.78 per option in 2006, $20.37 per option
in 2005 and $18.02 per option in 2004.

The key assumptions for the Black-Scholes valuation method
include the expected life of the option, stock price volatility, risk-
free interest rate, dividend yield, forfeiture rate and exercise price.
Many of these assumptions are judgmental and highly sensitive.
Following is a table of the key weighted-average assumptions
used in the option valuation calculations for the options granted
in the three years ended May 31, and a discussion of our method-
ology for developing each of the assumptions used in the
valuation model:

Expected lives
Expected volatility
Risk-free interest rate
Dividend yield

2006

5 years

25%
3.794%
0.3229%

2005
4 years

2004
4 years
32%
27%
3.559%
2.118%
0.3215% 0.3102%

Expected Lives. This is the period of time over which the options
granted are expected to remain outstanding. Generally, options
granted have a maximum term of 10 years. We examine actual
stock option exercises to determine the expected life of the
options. An increase in the expected term will increase compen-
sation expense.

Expected Volatility. Actual changes in the market value of our
stock are used to calculate the volatility assumption. We calcu-
late daily market value changes from the date of grant over a past
period equal to the expected life of the options to determine
volatility. An increase in the expected volatility will increase com-
pensation expense.

Risk-Free Interest Rate.This is the U.S. Treasury Strip rate posted
at the date of grant having a term equal to the expected life of the
option. An increase in the risk-free interest rate will increase
compensation expense.

Dividend Yield. This is the annual rate of dividends per share over
the exercise price of the option. An increase in the dividend yield
will decrease compensation expense.

Forfeiture Rate. This is the estimated percentage of options
granted that are expected to be forfeited or canceled before
becoming fully vested. This percentage is derived from historical
experience. An increase in the forfeiture rate will decrease com-
pensation expense. Our forfeiture rate is approximately 8%.

FEDEX CORPORATION

The following table summarizes information about our stock option plans for the years ended May 31:

Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year

Exercisable at end of year

2006

2005

2004

Weighted-
Average
Exercise
Price

$51.96
90.82
43.33
79.25
60.82

47.79

17,359,382
3,324,135
(3,345,827)
(238,164)
17,099,526

9,657,410

Weighted-
Average
Exercise
Price

$46.39
76.21
39.14
63.27
51.96

42.34

17,349,307
2,718,651
(2,540,324)
(168,252)
17,359,382

9,660,334

Weighted-
Average
Exercise
Price

$38.88
64.96
31.05
46.71
46.39

38.28

17,315,116
3,937,628
(3,724,605)
(178,832)
17,349,307

8,747,523

The following table summarizes information about stock options outstanding at May 31, 2006:

Range of
Exercise Prices

$15.34 – 22.16
23.81 – 35.69
35.89 – 53.77
55.94 – 83.73
84.57 – 117.52
15.34 – 117.52

Options Outstanding

Options Exercisable

Number
Outstanding

96,674
1,671,125
5,450,650
6,428,018
3,453,059
17,099,526

Weighted-
Average
Remaining
Contractual Life

1.4 years
1.8 years
5.2 years
6.9 years
9.0 years
6.2 years

Weighted-
Average
Exercise
Price

$17.70
30.14
44.81
66.67
91.28
60.82

Number
Exercisable

96,674
1,671,125
4,820,318
2,911,443
157,850
9,657,410

Weighted-
Average
Exercise
Price

$17.70
30.14
43.65
63.42
91.59
47.79

Total equity compensation shares outstanding or available for grant represented approximately 8.1% at May 31, 2006 and 6.8% at
May 31, 2005, of the total common and equity compensation shares outstanding and equity compensation shares available for grant.

RESTRICTED STOCK PLANS
Under the terms of our restricted stock plans, shares of common stock are awarded to key employees. All restrictions on the shares
expire ratably over a four-year period. Shares are valued at the market price at the date of award. Compensation related to these plans
is recorded as a reduction of common stockholders’ investment and is amortized to expense over the explicit service period. Annual
compensation cost for the restricted stock plans was approximately $29 million for 2006, $26 million for 2005 and $25 million for 2004.

The following table summarizes information about restricted stock awards for the years ended May 31:

Awarded
Forfeited

2006

2005

2004

Weighted-
Average
Fair Value

$90.12
78.42

233,939
13,791

Weighted-
Average
Fair Value

$80.24
55.41

218,273
21,354

Weighted-
Average
Fair Value

$67.11
43.41

282,423
10,000

At May 31, 2006, there were 1,076,617 shares available for future awards under these plans.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 11: COMPUTATION OF EARNINGS PER SHARE

The calculation of basic earnings per common share and diluted
earnings per common share for the years ended May 31 was as
follows (in millions, except per share amounts):

Net income
Weighted-average shares of
common stock outstanding

Common equivalent shares:
Assumed exercise of

2006

$1,806

2005

2004

$1,449

$ 838

304

301

299

outstanding dilutive options

Less shares repurchased

from proceeds of assumed
exercise of options
Weighted-average common
and common equivalent
shares outstanding

Basic earnings per
common share
Diluted earnings per
common share

NOTE 12: INCOME TAXES

(13)

(12)

(14)

310

307

304

$ 5.94

$ 4.81

$ 2.80

$ 5.83

$ 4.72

$ 2.76

The components of the provision for income taxes for the years
ended May 31 were as follows (in millions):

2006

2005

2004

Current provision
Domestic:
Federal
State and local

Foreign

Deferred provision (benefit)

Domestic:
Federal
State and local

Foreign

$ 719
79
132
930

151
13
(1)
163
$1,093

$ 634
65
103
802

67
(4)
(1)
62
$ 864

$ 371
54
85
510

(22)
(7)
–
(29)
$ 481

A reconciliation of the statutory federal income tax rate to the effec-
tive income tax rate for the years ended May 31 was as follows:

Statutory U.S. income tax rate
Increase resulting from:

State and local income taxes,

net of federal benefit

Other, net
Effective tax rate

2006

35.0%

2005

35.0%

2004

35.0%

2.1
0.6
37.7%

1.7
0.7
37.4%

2.3
(0.8)
36.5%

The 37.4% effective tax rate in 2005 was favorably impacted by
the reduction of a valuation allowance on foreign tax credits
arising from certain of our international operations as a result
of the passage of the American Jobs Creation Act of 2004
($12 million tax benefit or $0.04 per diluted share) and by a lower
effective state tax rate. The 36.5% effective tax rate in 2004
was favorably impacted by a reduction of accruals relating to
the tax treatment of jet engine maintenance costs, stronger than
anticipated international results and the results of tax audits
during 2004.

In 2004, we received a favorable ruling regarding the tax treatment
of jet engine maintenance costs, which was affirmed by the
appellate court in February of 2005, and became final in May of
2005, when the period for appeal lapsed. As a result we recog-
nized a one-time benefit of $26 million, net of tax, or $0.08 per
diluted share in 2004. These adjustments affected both net interest
expense ($30 million pretax) and income tax expense ($7 million).

The significant components of deferred tax assets and liabilities
as of May 31 were as follows (in millions):

Property, equipment,

leases and intangibles

Employee benefits
Self-insurance accruals
Other
Net operating loss/credit

carryforwards
Valuation allowance

2006

2005

Deferred

Deferred
Tax Assets Tax Liabilities

Deferred

Deferred
Tax Assets Tax Liabilities

$ 329
413
339
360

64
(48)
$1,457

$1,559
648
–
78

–
–
$2,285

$ 301
397
311
319

54
(42)
$1,340

$1,506
453
–
77

–
–
$2,036

The net deferred tax liabilities as of May 31 have been classified
in the balance sheets as follows (in millions):

Current deferred tax asset
Noncurrent deferred tax liability

2006

2005

$ 539
(1,367)
$ (828)

$ 510
(1,206)
$ (696)

The valuation allowance primarily represents amounts reserved
for operating loss and tax credit carryforwards, which expire over
varying periods starting in 2007. As a result of this and other fac-
tors, we believe that a substantial portion of these deferred tax
assets may not be realized.

FEDEX CORPORATION

NOTE 13: EMPLOYEE BENEFIT PLANS

PENSION PLANS
We sponsor defined benefit pension plans covering a majority of
our employees. The largest plan covers certain U.S. employees
age 21 and over, with at least one year of service. Eligible
employees as of May 31, 2003 were given the opportunity to
make a one-time election to accrue future pension benefits
under either a cash balance formula which we call the Portable
Pension Account or a traditional pension benefit formula.
Benefits provided under the traditional formula are based on
average earnings and years of service. Under the Portable
Pension Account, the retirement benefit is expressed as a dol-
lar amount in a notional account that grows with annual credits
based on pay, age and years of credited service, and interest on
the notional account balance. In either case, employees retained
all benefits previously accrued under the traditional pension ben-
efit formula and continue to receive the benefit of future salary
increases on benefits accrued as of May 31, 2003. Eligible
employees hired after May 31, 2003 accrue benefits exclusively
under the Portable Pension Account.

Plan funding is actuarially determined and is subject to certain tax
law limitations. International defined benefit pension plans pro-
vide benefits primarily based on final earnings and years of
service and are funded in accordance with local laws and income
tax regulations. Substantially all plan assets are actively managed.

The weighted-average asset allocations for our primary pension
plan at February 28 were as follows:

2006

2005

Actual

Target

Actual

Target

Domestic equities
International equities
Private equities
Total equities
Long duration fixed
income securities

Other fixed income securities

54%
20
3
77

14
9

53%
17
5
75

15
10

100% 100%

53%
20
2
75

53%
17
5
75

15
10

15
10
100% 100%

The investment strategy for pension plan assets is to utilize a diver-
sified mix of global public and private equity portfolios, together
with public and private fixed income portfolios, to earn a long-term
investment return that meets our pension plan obligations. Active
management strategies are utilized within the plan in an effort to
realize investment returns in excess of market indices.

Our pension cost is materially affected by the discount rate used
to measure pension obligations, the level of plan assets available
to fund those obligations and the expected long-term rate of
return on plan assets.

We use a measurement date of February 28 for our pension
and postretirement healthcare plans. Management reviews the
assumptions used to measure pension costs on an annual basis.

Economic and market conditions at the measurement date
impact these assumptions from year to year and it is reasonably
possible that material changes in pension cost may be experi-
enced in the future. Additional information about our pension plan
can be found in the Critical Accounting Estimates section of
Management’s Discussion and Analysis.

Actuarial gains or losses are generated to the extent that actual
results differ from those assumed. These actuarial gains and
losses are amortized over the remaining average service lives of
our active employees if they exceed a corridor amount in the
aggregate.

Establishing the expected future rate of investment return on our
pension assets is a judgmental matter. Management considers
the following factors in determining this assumption:

• the duration of our pension plan liabilities, which drives the
investment strategy we can employ with our pension plan assets;

• the types of investment classes in which we invest our pension
plan assets and the expected compound return we can reason-
ably expect those investment classes to earn over the next
10- to 15-year time period (or such other time period that may
be appropriate); and

• the investment returns we can reasonably expect our active
investment management program to achieve in excess of the
returns we could expect if investments were made strictly in
indexed funds.

We review the expected long-term rate of return on an annual
basis and revise it as appropriate. Also, we periodically commis-
sion detailed asset/liability studies performed by third-party
professional investment advisors and actuaries to assist us in this
evaluation. These studies project our estimated future pension
payments and evaluate the efficiency of the allocation of our pen-
sion plan assets into various investment categories. These
studies also generate probability-adjusted expected future
returns on those assets. The study performed for 2004 supported
the reasonableness of our 9.10% return assumption used for 2004
based on our liability duration and market conditions at the time
we set this assumption (in 2004). The results of this study were
reaffirmed for 2005 and 2006 by our third-party professional
investment advisors and actuaries.

POSTRETIREMENT HEALTHCARE PLANS
Certain of our subsidiaries offer medical, dental and vision cov-
erage to eligible U.S. retirees and their eligible dependents. U.S.
employees covered by the principal plan become eligible for
these benefits at age 55 and older, if they have permanent, con-
tinuous service of at least 10 years after attainment of age 45 if
hired prior to January 1, 1988, or at least 20 years after attainment
of age 35 if hired on or after January 1, 1988. Postretirement
healthcare benefits are capped at 150% of the 1993 per capita
projected employer cost which has been reached and, therefore,
these benefits are not subject to additional future inflation.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table provides a reconciliation of the changes in the pension and postretirement healthcare plans’ benefit obligations and fair
value of assets over the two-year period ended May 31, 2006 and a statement of the funded status as of May 31, 2006 and 2005 (in millions):

Accumulated Benefit Obligation (“ABO”)
Changes in Projected Benefit Obligation (“PBO”)
Projected benefit obligation at the beginning of year

Service cost
Interest cost
Actuarial loss (gain)
Benefits paid
Amendments, benefit enhancements and other

Projected benefit obligation at the end of year
Change in Plan Assets
Fair value of plan assets at beginning of year

Actual return on plan assets
Company contributions
Benefits paid
Other

Fair value of plan assets at end of year
Funded Status of the Plans

Unrecognized actuarial loss (gain)
Unamortized prior service cost and other
Unrecognized transition amount

Prepaid (accrued) benefit cost
Amount Recognized in the Balance Sheet at May 31:

Prepaid benefit cost
Accrued benefit liability
Minimum pension liability
Accumulated other comprehensive income (1)
Intangible asset

Prepaid (accrued) benefit cost

Pension Plans

2006

$10,090

$10,401
473
642
858
(228)
7
$12,153

$ 8,826
1,034
492
(228)
6
$10,130
$ (2,023)
3,026
96
(3)
$ 1,096

$ 1,349
(253)
(122)
112
10
$ 1,096

2005

$ 8,933

$ 8,683
417
579
907
(194)
9
$10,401

$ 7,783
746
489
(194)
2
$ 8,826
$ (1,575)
2,500
104
(4)
$ 1,025

$ 1,272
(247)
(63)
52
11
$ 1,025

Postretirement
Healthcare Plans

2006

2005

$ 537
42
32
(109)
(39)
12
$ 475

–
–
27
(39)
12
–
$
$(475)
(110)
2
–
$(583)

–
(583)
–
–
–
$(583)

$ 496
37
32
–
(36)
8
$ 537

–
–
28
(36)
8
–
$
$(537)
(1)
4
–
$(534)

$
–
(534)
–
–
–
$(534)

(1) The minimum pension liability component of Accumulated Other Comprehensive Income is shown in the Statement of Changes in Stockholders’ Investment and Comprehensive
Income, net of deferred taxes.

Our pension plans included the following components at May 31, 2006 and 2005 (in millions):

U.S. Plans

Qualified

2006

2005

Nonqualified
2006

2005

ABO
PBO
Fair Value of Plan Assets
Funded Status

Unrecognized actuarial loss
Unamortized prior service cost
Unrecognized transition amount

Prepaid (accrued) benefit cost

$ 9,591
$11,569
9,969
$ (1,600)
2,859
77
(4)
$ 1,332

$ 8,534
$ 9,937
8,699
$(1,238)
2,414
86
(5)
$ 1,257

$ 239
$ 271
–
$(271)
109
14
–
$(148)

$ 166
$ 181
–
$(181)
27
14
–
$(140)

International Plans

2006

$ 260
$ 313
161
$(152)
58
5
1
$ (88)

2005

$ 233
$ 283
127
$(156)
59
4
1
$ (92)

Total

2006

2005

$10,090
$12,153
10,130
$ (2,023)
3,026
96
(3)
$ 1,096

$ 8,933
$10,401
8,826
$(1,575)
2,500
104
(4)
$ 1,025

The PBO is the actuarial present value of benefits attributable to employee service rendered to date, including the effects of estimated
future pay increases. The ABO also reflects the actuarial present value of benefits attributable to employee service rendered to date, but
does not include the effects of estimated future pay increases. Therefore, the ABO as compared to plan assets is an indication of the
assets currently available to fund vested and nonvested benefits accrued through May 31.

FEDEX CORPORATION

The measure of whether a pension plan is underfunded for financial accounting purposes is based on a comparison of the ABO to the
fair value of plan assets and amounts accrued for such benefits in the balance sheets. Although not legally required, we made $456
million in tax-deductible voluntary contributions to our qualified U.S. pension plans in 2006 compared to total tax-deductible voluntary
contributions of $460 million in 2005. Currently, we do not expect any contributions for 2007 will be legally required. However, we
currently expect to make tax-deductible voluntary contributions in 2007 at levels approximating those in 2006.

We have certain nonqualified defined benefit pension plans that are not funded because such funding provides no current tax deduction
and would be deemed current compensation to plan participants. Primarily related to those plans and certain international plans, we have
ABOs aggregating approximately $499 million at May 31, 2006 and $399 million at May 31, 2005, with assets of $161 million at May 31,
2006 and $127 million at May 31, 2005. Plans with this funded status resulted in the recognition of a minimum pension liability in our
balance sheets. This minimum liability was $122 million at May 31, 2006 and $63 million at May 31, 2005.

Net periodic benefit cost for the three years ended May 31 was as follows (in millions):

Service cost
Interest cost
Expected return on plan assets
Recognized actuarial losses
Amortization of transition obligation
Amortization of prior service cost

2006

$ 473
642
(811)
110
(1)
12
$ 425

Pension Plans
2005

$ 417
579
(707)
60
–
12
$ 361

2004

$ 376
490
(597)
62
–
12
$ 343

Postretirement Healthcare Plans

2006

$42
32
–
–
–
(1)
$73

2005

$37
32
–
–
–
(1)
$68

2004

$35
25
–
–
–
–
$60

Increases in pension costs from the prior year are primarily the result of changes in discount rate.

Weighted-average actuarial assumptions for our primary U.S. plans, which comprise substantially all of our projected benefit obliga-
tions, are as follows:

Discount rate
Rate of increase in future compensation levels
Expected long-term rate of return on assets

2006

5.912%
3.46
9.10

Pension Plans
2005

6.285%
3.15
9.10

2004

6.78%
3.15
9.10

Postretirement Healthcare Plans

2006

6.08%
–
–

2005

6.16%
–
–

2004

6.57%
–
–

Benefit payments, which reflect expected future service,
are expected to be paid as follows for the years ending May 31
(in millions):

Pension Plans

Postretirement Healthcare Plans

2007
2008
2009
2010
2011
2012-2016

$ 289
295
342
348
390
$2,759

$ 30
30
32
33
34
$196

These estimates are based on assumptions about future
events. Actual benefit payments may vary significantly from
these estimates.

Future medical benefit costs are estimated to increase at an annual
rate of 12% during 2007, decreasing to an annual growth rate of 5%
in 2019 and thereafter. Future dental benefit costs are estimated to
increase at an annual rate of 6.5% during 2007, decreasing to an
annual growth rate of 5% in 2013 and thereafter. A 1% change in
these annual trend rates would not have a significant impact on the
accumulated postretirement benefit obligation at May 31, 2006 or
2006 benefit expense because the level of these benefits is capped.

DEFINED CONTRIBUTION PLANS
Profit sharing and other defined contribution plans are in place
covering a majority of U.S. employees. The majority of U.S.
employees are covered under 401(k) plans to which we provide
discretionary matching contributions based on employee contri-
butions. In addition, some employees are covered under profit
sharing plans which provide for discretionary contributions, as
determined annually by those business units. Expense under
these plans was $104 million in 2006, $97 million in 2005 and
$89 million in 2004.

NOTE 14: BUSINESS SEGMENT INFORMATION

Our operations for the periods presented are primarily repre-
sented by FedEx Express, FedEx Ground, FedEx Freight and FedEx
Kinko’s. These businesses form the core of our reportable seg-
ments. Other business units in the FedEx portfolio are FedEx
Trade Networks, FedEx SmartPost, FedEx Supply Chain Services,
FedEx Custom Critical and Caribbean Transportation Services.
Management evaluates segment financial performance based
on operating income.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of May 31, 2006, our reportable segments included the follow-
ing businesses:

FedEx Express Segment

FedEx Ground Segment

FedEx Freight Segment

FedEx Express
FedEx Trade Networks

FedEx Ground
FedEx SmartPost
FedEx Supply Chain Services

FedEx Freight
FedEx Custom Critical
Caribbean Transportation Services

FedEx Kinko’s Segment

FedEx Kinko’s

FedEx Services provides customer-facing sales, marketing and
information technology support, primarily for FedEx Express and
FedEx Ground. The costs for these activities and certain other
costs such as corporate management fees related to services
received for general corporate oversight, including executive offi-
cers and certain legal and finance functions, are allocated based

on metrics such as relative revenues or estimated services pro-
vided. We believe these allocations approximate the cost of
providing these functions.

In addition, certain FedEx operating companies provide trans-
portation and related services for other FedEx companies outside
their reportable segment. Billings for such services are based on
negotiated rates, which we believe approximate fair value, and
are reflected as revenues of the billing segment. FedEx Kinko’s
segment revenues include package acceptance revenue, which
represents the fee received by FedEx Kinko’s from FedEx Express
and FedEx Ground for accepting and handling packages at FedEx
Kinko’s locations on behalf of these operating companies.
Package acceptance revenue does not include the external
revenue associated with the actual shipments. All shipment rev-
enues are reflected in the segment performing the transportation
services. Intersegment revenues and expenses are eliminated in
the consolidated results but are not separately identified in the
following segment information as the amounts are not material.

The following table provides a reconciliation of reportable segment revenues, depreciation and amortization, operating income (loss)
and segment assets to consolidated financial statement totals for the years ended or as of May 31 (in millions):

Revenues
2006
2005
2004
Depreciation and amortization
2006
2005
2004
Operating income
2006 (3)
2005 (4)
2004 (5)
Segment assets (6)
2006
2005
2004

FedEx
Express
Segment

$21,446
19,485
17,497

$ 805
798
810

$ 1,767
1,414
629

$14,673
13,130
12,443

FedEx
Ground
Segment

$5,306
4,680
3,910

$ 224
176
154

$ 705
604
522

$3,378
2,776
2,248

FedEx
Freight
Segment

$3,645
3,217
2,689

$ 120
102
92

$ 485
354
244

$2,245
2,047
1,924

FedEx
Kinko’s
Segment (1)

Other and
Eliminations (2)

Consolidated
Total

$2,088
2,066
521

$ 148
138
33

57
100
39

$2,941
2,987
2,903

$(191)
(85)
93

$ 253
248
286

$ –
(1)
6

$(547)
(536)
(384)

$32,294
29,363
24,710

$ 1,550
1,462
1,375

$ 3,014
2,471
1,440

$22,690
20,404
19,134

(1) Includes the operations of FedEx Kinko’s from the formation of the FedEx Kinko’s segment on March 1, 2004.
(2) Includes the results of operations of FedEx Kinko’s from February 12, 2004 (date of acquisition) through February 29, 2004 (approximately $100 million of revenue and $6 million of oper-
ating income).
(3) Includes a $79 million one-time, noncash charge to adjust the accounting for certain facility leases ($75 million at FedEx Express).
(4) Includes $48 million related to the Airline Stabilization Act charge.
(5) Includes business realignment costs of $428 million in the FedEx Express segment, $1 million in the FedEx Ground segment and $6 million in Other and Eliminations.
(6) Segment assets include intercompany receivables.

The following table provides a reconciliation of reportable segment capital expenditures to consolidated totals for the years ended
May 31 (in millions):

2006
2005
2004

FedEx
Express
Segment

$ 1,408
1,195
592

FedEx
Ground
Segment

$ 487
456
314

FedEx
Freight
Segment

$ 274
217
130

FedEx
Kinko’s
Segment

$ 94
152
36

Other

$ 255
216
199

Consolidated
Total

$ 2,518
2,236
1,271

FEDEX CORPORATION

The following table presents revenue by service type and geo-
graphic information for the years ended or as of May 31 (in millions):

Revenue by Service Type

FedEx Express segment:

Package:

U.S. overnight box
U.S. overnight envelope
U.S. deferred

Total domestic package

revenue

International Priority

Total package revenue

Freight:
U.S.
International

Total freight revenue

Other

Total FedEx Express segment

FedEx Ground segment
FedEx Freight segment
FedEx Kinko’s segment(1)
Other and Eliminations(2)

Geographical Information(3)
Revenues:
U.S.
International

Noncurrent assets:

U.S.
International

2006

2005

2004

$ 6,422
1,974
2,853

11,249
6,979
18,228

2,218
434
2,652
566
21,446
5,306
3,645
2,088
(191)
$32,294

$24,172
8,122
$32,294

$13,804
2,422
$16,226

$ 5,969
1,798
2,799

10,566
6,134
16,700

1,854
381
2,235
550
19,485
4,680
3,217
2,066
(85)
$29,363

$22,146
7,217
$29,363

$13,020
2,115
$15,135

$ 5,558
1,700
2,592

9,850
5,131
14,981

1,609
393
2,002
514
17,497
3,910
2,689
521
93
$24,710

$18,643
6,067
$24,710

$12,644
1,520
$14,164

(1) Includes the operations of FedEx Kinko’s from the formation of the FedEx Kinko’s seg-
ment on March 1, 2004.
(2) Includes the results of operations of FedEx Kinko’s from February 12, 2004 (date of
acquisition) through February 29, 2004 (approximately $100 million of revenue).
(3) International revenue includes shipments that either originate in or are destined to
locations outside the United States. Noncurrent assets include property and equipment,
goodwill and other long-term assets. Flight equipment is allocated between geographic
areas based on usage.

NOTE 15: SUPPLEMENTAL CASH FLOW INFORMATION

Cash paid for interest expense and income taxes for the years
ended May 31 was as follows (in millions):

Interest (net of capitalized interest)
Income taxes

2006

$145
880

2005

$162
824

2004

$151
364

FedEx Express amended two leases in 2004 for MD11 aircraft,
which required FedEx Express to record $110 million in 2004 in
both fixed assets and long-term liabilities.

NOTE 16: GUARANTEES AND INDEMNIFICATIONS

We account for guarantees and indemnifications in accor-
dance with FIN 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others,” which requires the recognition and
measurement of certain guarantees and indemnifications.

With the exception of residual value guarantees in certain oper-
ating leases, a maximum obligation is generally not specified in
our guarantees and indemnifications. As a result, the overall
maximum potential amount of the obligation under such guaran-
tees and indemnifications cannot be reasonably estimated.
Historically, we have not been required to make significant pay-
ments under our guarantee or indemnification obligations and
no amounts have been recognized in our financial statements for
the underlying fair value of these obligations.

We have guarantees under certain operating leases, amounting
to $34 million as of May 31, 2006, for the residual values of vehi-
cles and facilities at the end of the respective operating lease
periods. Under these leases, if the fair market value of the leased
asset at the end of the lease term is less than an agreed-upon
value as set forth in the related operating lease agreement, we
will be responsible to the lessor for the amount of such defi-
ciency. Based upon our expectation that none of these leased
assets will have a residual value at the end of the lease term that
is materially less than the value specified in the related operating
lease agreement, we do not believe it is probable that we will be
required to fund any amounts under the terms of these guarantee
arrangements. Accordingly, no accruals have been recognized for
these guarantees.

In conjunction with certain transactions, primarily the lease, sale
or purchase of operating assets or services in the ordinary
course of business, we sometimes provide routine indemnifica-
tions (e.g., environmental, fuel, tax and software infringement),
the terms of which range in duration and are often not limited.
The fair market value of these indemnifications is not believed to
be significant.

FedEx’s publicly held debt (approximately $1.4 billion) is guaranteed
by our subsidiaries. The guarantees are full and unconditional, joint
and several, and any subsidiaries that are not guarantors are minor
as defined by Securities and Exchange Commission (“SEC”) regu-
lations. FedEx, as the parent company issuer of this debt, has no
independent assets or operations. There are no significant restrictions
on our ability or the ability of any guarantor to obtain funds from
its subsidiaries by such means as a dividend or loan. Subsequent
to May 31, 2006, through a consent solicitation process, we have
obtained the ability to amend one of our public debt indentures
to allow us at any time to cause the release and discharge of
certain subsidiary guarantors from their respective guarantees.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Special facility revenue bonds have been issued by certain
municipalities primarily to finance the acquisition and construc-
tion of various airport facilities and equipment. These facilities
were leased to us and are accounted for as either capital leases
or operating leases. FedEx Express has unconditionally guaran-
teed $755 million in principal of these bonds (with total future
principal and interest payments of approximately $1.2 billion as
of May 31, 2006) through these leases. Of the $755 million bond
principal guaranteed, $204 million was included in capital lease
obligations in our balance sheet at May 31, 2006. The remaining
$551 million has been accounted for as operating leases.

NOTE 17: VARIABLE INTEREST ENTITIES

FedEx Express entered into a lease in July 2001 for two MD11 air-
craft. These assets were held by a separate entity, which was
established to lease these aircraft to FedEx Express and is owned
by independent third parties who provide financing through debt
and equity participation. The original cost of the assets under the
lease was approximately $150 million.

FIN 46 required us to consolidate the separate entity that owns
the two MD11 aircraft. Since the entity was created before
February 1, 2003, we measured the assets and liabilities at their
carrying amounts (the amounts at which they would have been
recorded in the consolidated financial statements if FIN 46 had
been effective at the inception of the lease). As a result of this
consolidation, the accompanying May 31, 2006 balance sheet
includes an additional $115 million of fixed assets and $118 mil-
lion of long-term debt. The May 31, 2005 balance sheet includes
an additional $120 million of fixed assets and $125 million of long-
term debt. In March 2006, FedEx Express provided notification to
the lessor of our intent to purchase these aircraft in March 2007.

NOTE 18: COMMITMENTS

Annual purchase commitments under various contracts as of
May 31, 2006 were as follows (in millions):

2007
2008
2009
2010
2011
Thereafter

Aircraft

$179
431
459
659
460
157

Aircraft-
Related(1)

$205
113
61
67
66
8

Other(2)

Total

$798
130
93
65
56
218

$1,182
674
613
791
582
383

(1) Primarily aircraft modifications.
(2) Primarily vehicles, facilities, computers, printing and other equipment and advertising
and promotions contracts.

The amounts reflected in the table above for purchase commit-
ments represent noncancelable agreements to purchase goods or
services. Commitments to purchase aircraft in passenger configu-
ration do not include the attendant costs to modify these aircraft
for cargo transport unless we have entered into noncancelable
commitments to modify such aircraft. Open purchase orders that
are cancelable are not considered unconditional purchase obliga-
tions for financial reporting purposes.

FedEx Express is committed to purchase certain aircraft.
Deposits and progress payments of $64 million have been made
toward these purchases and other planned aircraft-related trans-
actions. In addition, we have committed to modify our DC10
aircraft for passenger-to-freighter and two-man cockpit config-
urations. Future payments related to these activities are included
in the table above. Aircraft and aircraft-related contracts are sub-
ject to price escalations. The following table is a summary of our
aircraft purchase commitments as of May 31, 2006 with the year
of expected delivery by type:

A300

A310

A380

Total

2007
2008
2009
2010
2011
Thereafter
Total

5
10
2
–
–
–
17

1
–
–
–
–
–
1

–
–
2
4
3
1
10

6
10
4
4
3
1
28

NOTE 19: CONTINGENCIES

Wage-and-Hour.We are a defendant in a number of lawsuits filed
in federal or California state courts containing various class-
action allegations under federal or California wage-and-hour
laws. The plaintiffs in these lawsuits are employees of FedEx
operating companies who allege, among other things, that they
were forced to work “off the clock” and were not provided work
breaks or other benefits. The plaintiffs generally seek unspeci-
fied monetary damages, injunctive relief, or both.

To date, one of these wage-and-hour cases, Foster v. FedEx
Express, has been certified as a class action. The plaintiffs in
Foster represent a class of hourly FedEx Express employees in
California from October 14, 1998 to present. The plaintiffs allege
that hourly employees are routinely required to work “off the
clock” and are not paid for this additional work. The court issued
a ruling in December 2004 granting class certification on all
issues. In February 2006, the parties reached a settlement that
has been preliminarily approved by the court. FedEx Express con-
tinues to deny liability, but entered into the settlement to avoid
the cost and uncertainty of further litigation. The amount of the
proposed settlement was fully accrued at the end of the third
quarter of 2006 and is not material to FedEx.

FEDEX CORPORATION

With respect to the other wage-and-hour cases, we have denied
any liability and intend to vigorously defend ourselves. Given the
nature and preliminary status of these other wage-and-hour
claims, we cannot yet determine the amount or a reasonable
range of potential loss in these other matters, if any.

We strongly believe that FedEx Ground’s owner-operators are
properly classified as independent contractors and that we will
prevail in these proceedings. Given the nature and preliminary
status of these claims, we cannot yet determine the amount or a
reasonable range of potential loss in these matters, if any.

Other.FedEx and its subsidiaries are subject to other legal pro-
ceedings that arise in the ordinary course of their business. In the
opinion of management, the aggregate liability, if any, with
respect to these other actions will not materially adversely affect
our financial position, results of operations or cash flows.

NOTE 20: RELATED PARTY TRANSACTIONS

In November 1999, FedEx entered into a multi-year naming rights
agreement with the National Football League Washington
Redskins professional football team. Under this agreement, FedEx
has certain marketing rights, including the right to name the
Redskins’ stadium “FedExField.” In August 2003, Frederick W.
Smith, Chairman, President and Chief Executive Officer of FedEx,
personally acquired an approximate 10% ownership interest in
the Washington Redskins and joined its board of directors.

A member of our Board of Directors, J.R. Hyde, III, and his wife
together own approximately 13% of HOOPS, L.P. (“HOOPS”), the
owner of the NBA Memphis Grizzlies professional basketball
team. Mr. Hyde, through one of his companies, also is the gen-
eral partner of the minority limited partner of HOOPS. During 2002,
FedEx entered into a $90 million naming rights agreement with
HOOPS that will be amortized to expense over the term of the
agreement, which expires in 2024. Under this agreement, FedEx
has certain marketing rights, including the right to name the
Grizzlies’ arena “FedEx Forum.” Pursuant to a separate 25-year
agreement with HOOPS, the City of Memphis and Shelby County,
FedEx has agreed to pay $2.5 million a year for the balance of the
term if HOOPS terminates its lease for the arena after 17 years.
FedEx also purchased $2 million of municipal bonds issued by the
Memphis and Shelby County Sports Authority, the proceeds of
which were used to finance a portion of the construction costs
of the arena.

Race Discrimination.On September 28, 2005, a California federal
district court granted class certification in Satchell v. FedEx
Express, a lawsuit alleging discrimination by FedEx Express in the
Western region of the United States against certain current and
former minority employees in pay and promotion. The district
court’s ruling on class certification is not a decision on the merits
of the plaintiffs’ claim and does not address whether we will be
held liable. Trial is currently scheduled for February 2007. We have
denied any liability and intend to vigorously defend ourselves in
this case. Given the nature and preliminary status of the claim, we
cannot yet determine the amount or a reasonable range of poten-
tial loss in this matter, if any. It is reasonably possible, however,
that we could incur a material loss as this case develops.

On May 24, 2006, a jury ruled against FedEx Ground in Issa &
Rizkallah v. FedEx Ground, a California state court lawsuit brought
in July 2001 by two independent contractors who allege, among
other things, that a FedEx Ground manager harassed and dis-
criminated against them based upon their national origin. The jury
awarded the two plaintiffs a total of $60 million (which includes
$50 million of punitive damages), plus attorney’s fees and other
litigation expenses in an amount to be determined later. We
intend to vigorously contest the jury verdict, including the amount
of the damages award. We cannot yet determine the amount or a
range of probable loss, if any, in this matter. It is reasonably pos-
sible, however, that we could incur a material loss.

Independent Contractor.FedEx Ground is involved in numerous
purported class-action lawsuits and other proceedings that claim
that the company’s owner-operators should be treated as
employees, rather than independent contractors. These matters
include Estrada v. FedEx Ground, a class action involving single
work area contractors that is pending in California state court.
Although the trial court has granted some of the plaintiffs’ claims
for relief in Estrada ($18 million, inclusive of attorney’s fees, plus
equitable relief), we expect to prevail on appeal. Adverse deter-
minations in these matters could, among other things, entitle
certain of our contractors to the reimbursement of certain
expenses and to the benefit of wage-and-hour laws and result in
employment and withholding tax liability for FedEx Ground. On
August 10, 2005, the Judicial Panel on Multi-District Litigation
granted our motion to transfer and consolidate the majority of the
class-action lawsuits for administration of the pre-trial proceed-
ings by a single federal court — the U.S. District Court for the
Northern District of Indiana.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 21: SUMMARY OF QUARTERLY OPERATING RESULTS (UNAUDITED)

(In millions, except per share amounts)

2006
Revenues
Operating income
Net income
Basic earnings per common share(3)
Diluted earnings per common share(3)

2005
Revenues
Operating income
Net income
Basic earnings per common share(3)
Diluted earnings per common share(3)

First
Quarter(1)

Second
Quarter(2)

$7,707
584
339
1.12
1.10

$6,975
579
330
1.10
1.08

$8,090
790
471
1.55
1.53

$7,334
600
354
1.18
1.15

Third
Quarter

$8,003
713
428
1.41
1.38

$7,339
552
317
1.05
1.03

Fourth
Quarter

$8,494
927
568
1.86
1.82

$7,715
740
448
1.48
1.46

(1) Results for the first quarter of 2006 include a $79 million ($49 million, net of tax, or $0.16 per basic and diluted share) one-time, noncash charge to adjust the accounting for certain
facility leases as described in Note 8.
(2) Results for the second quarter of 2005 include $48 million ($31 million, net of tax, or $0.10 per basic and diluted share) related to the Airline Stabilization Act charge described in Note 1,
as well as an $11 million ($0.04 per basic and diluted share) benefit from an income tax adjustment described in Note 12.
(3) The sum of the quarterly earnings per share may not equal annual amounts due to differences in the weighted-average number of shares outstanding during the respective periods.

FEDEX CORPORATION

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
FedEx Corporation

We have audited the accompanying consolidated balance sheets of FedEx Corporation as of May 31, 2006 and 2005, and the related
consolidated statements of income, changes in stockholders’ investment and comprehensive income, and cash flows for each of the
three years in the period ended May 31, 2006. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the finan-
cial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of
FedEx Corporation at May 31, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended May 31, 2006, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effec-
tiveness of FedEx Corporation’s internal control over financial reporting as of May 31, 2006, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
July 11, 2006 expressed an unqualified opinion thereon.

Memphis, Tennessee
July 11, 2006

SELECTED FINANCIAL DATA

The following table sets forth certain selected consolidated financial and operating data for FedEx as of and for the five years ended
May 31, 2006. This information should be read in conjunction with the Consolidated Financial Statements, Management’s Discussion and
Analysis of Results of Operations and Financial Condition and other financial data appearing elsewhere in this Report.

(In millions, except per share amounts and other operating data)

2006(1)

2005(2)

2004(3)

2003

2002

Operating Results
Revenues
Operating income
Income before income taxes
Income before cumulative effect of change in

accounting principle

Cumulative effect of change in accounting for goodwill(4)
Net income

Per Share Data
Earnings per share:

Basic:

Income before cumulative effect of change in

accounting principle

Cumulative effect of change in accounting

for goodwill(4)

Assuming dilution:

Income before cumulative effect of change in

accounting principle

Cumulative effect of change in accounting

for goodwill(4)

Average shares of common stock outstanding
Average common and common equivalent

shares outstanding
Cash dividends declared

Financial Position
Property and equipment, net
Total assets
Long-term debt, less current portion
Common stockholders’ investment

Other Operating Data
FedEx Express aircraft fleet
Average full-time equivalent employees and contractors

$32,294
3,014
2,899

1,806
–
$ 1,806

$ 5.94

–
$ 5.94

$ 5.83

–
$ 5.83
304

310
$ 0.33

$10,770
22,690
1,592
11,511

671
221,677

$29,363
2,471
2,313

1,449
–
$ 1,449

$24,710
1,440
1,319

838
–
$ 838

$22,487
1,471
1,338

830
–
$ 830

$20,607
1,321
1,160

725
(15)
$ 710

$ 4.81

$ 2.80

$ 2.79

$ 2.43

–
$ 4.81

–
$ 2.80

–
$ 2.79

(0.05)
$ 2.38

$ 4.72

$ 2.76

$ 2.74

$ 2.39

–
$ 4.72
301

307
$ 0.29

$ 9,643
20,404
2,427
9,588

670
215,838

–
$ 2.76
299

304
$ 0.29

$ 9,037
19,134
2,837
8,036

645
195,838

–
$ 2.74
298

303
$ 0.15

$ 8,700
15,385
1,709
7,288

643
190,918

(0.05)
$ 2.34
298

303
$ 0.05

$ 8,302
13,812
1,800
6,545

647
184,953

(1) Results for 2006 include a $79 million ($49 million, net of tax, or $0.16 per share) one-time, noncash charge to adjust the accounting for certain facility leases. See Note 8 to the accom-
panying consolidated financial statements.
(2) Results for 2005 include $48 million ($31 million, net of tax, or $0.10 per diluted share) related to the Airline Stabilization Act charge. See Note 1 to the accompanying consolidated financial
statements. Results for 2005 also include a $12 million or $0.04 per diluted share benefit from an income tax adjustment. See Note 12 to the accompanying consolidated financial statements.
(3) Results for 2004 include $435 million ($270 million, net of tax, or $0.89 per diluted share) of business realignment costs. See Note 5 to the accompanying consolidated financial state-
ments. Additionally, FedEx Kinko’s financial results have been included from February 12, 2004 (the date of acquisition). See Note 3 to the accompanying consolidated financial
statements. A $37 million, net of tax, or $0.12 per diluted share benefit related to a favorable ruling on an aircraft engine maintenance tax case and the reduction of our effective tax rate
was also included in the 2004 results. See Note 12 to the accompanying consolidated financial statements.
(4) Results for 2002 reflect our adoption of SFAS 142, “Goodwill and Other Intangible Assets.” We recognized an adjustment of $25 million ($15 million, net of tax, or $0.05 per share) to
reduce the carrying value of certain goodwill to its implied fair value.

FEDEX CORPORATION

J.R. Hyde, III (3)
Chairman
GTx, Inc.
Biopharmaceutical company

Dr. Shirley A. Jackson (3)(4)
President
Rensselaer Polytechnic Institute
Technological university

Charles T. Manatt(2)
Partner and Co-founder
Manatt, Phelps & Phillips, LLP
Law firm

Frederick W. Smith
Chairman, President and
Chief Executive Officer
FedEx Corporation

Dr. Joshua I. Smith (1)
Chairman and Managing Partner
Coaching Group, LLC
Consulting firm

Paul S. Walsh (2)
Chief Executive Officer
Diageo plc
Beverage company

Peter S. Willmott (1)(4*)
Chairman and Chief Executive Officer
Willmott Services, Inc.
Retail and consulting firm

BOARD OF DIRECTORS

James L. Barksdale (2)(3)
Chairman and President
Barksdale Management Corporation
Investment management company

August A. Busch IV (2)
President
Anheuser-Busch, Inc.
Brewing organization

John A. Edwardson (1*)
Chairman and Chief Executive Officer
CDW Corporation
Technology products and services company

Judith L. Estrin (3*)
President and Chief Executive Officer
Packet Design, LLC
Internet technology company

J. Kenneth Glass (1)(4)
Chairman, President and
Chief Executive Officer
First Horizon National Corporation
Bank holding company

Philip Greer (2*)
Managing Director
Greer Family Consulting & Investments, LLC
Investment management firm

(1)Audit Committee
(2)Compensation Committee
(3)Information Technology Oversight Committee
(4)Nominating & Governance Committee
*Committee Chair

FEDEX CORPORATION

EXECUTIVE OFFICERS AND SENIOR MANAGEMENT

FedEx Corporation

Frederick W. Smith
Chairman, President and Chief Executive Officer

Christine P. Richards
Executive Vice President, General Counsel and Secretary

Alan B. Graf, Jr.
Executive Vice President and Chief Financial Officer

Robert B. Carter
Executive Vice President and Chief Information Officer

T. Michael Glenn
Executive Vice President,
Market Development and Corporate Communications

John L. Merino
Corporate Vice President and Principal Accounting Officer

FedEx Express

David J. Bronczek
President and Chief Executive Officer

David F. Rebholz
Executive Vice President,
Operations and Systems Support

Michael L. Ducker
Executive Vice President
and President, International

FedEx Freight

Douglas G. Duncan
President and Chief Executive Officer

FedEx Ground

Daniel J. Sullivan
President and Chief Executive Officer

Rodger G. Marticke
Executive Vice President and Chief Operating Officer

Bram B. Johnson
Executive Vice President,
Strategic Planning, Quality Management
and Communications

FedEx Kinko’s

Kenneth A. May
President and Chief Executive Officer

Patrick L. Reed
Executive Vice President and Chief Operating Officer

Brian D. Philips
Executive Vice President and Chief Operating Officer

John M. McDonald
Executive Vice President, Commercial Document Solutions

FedEx Trade Networks

G. Edmond Clark
President and Chief Executive Officer

FedEx SmartPost

Ward B. Strang
President and Chief Executive Officer

Caribbean Transportation Services

Rick A. Faieta
President and Chief Executive Officer

FedEx Custom Critical

John G. Pickard
President and Chief Executive Officer

FedEx Global Supply Chain Services

Thomas Schmitt
President and Chief Executive Officer

FEDEX CORPORATION

CORPORATE INFORMATION

CONTACT INFORMATION

Corporate Headquarters: 942 South Shady Grove Road,
Memphis, Tennessee 38120, (901) 818-7500.

Annual Meeting: The annual meeting of shareowners will be
held in the Tennessee Grand Ballroom at the Hilton Hotel,
939 Ridge Lake Boulevard, Memphis, Tennessee 38120,
on Monday, September 25, 2006, at 10:00 a.m. local time.

FINANCIAL INFORMATION

Stock Listing: FedEx Corporation’s common stock is listed on
the New York Stock Exchange under the ticker symbol FDX.

Shareowners: As of July 10, 2006, there were 20,152 share-
owners of record.

Market Information: Following are high and low sale prices and
cash dividends paid, by quarter, for FedEx Corporation’s common
stock in 2006 and 2005.

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

FY 2006
High
Low
Dividend

FY 2005
High
Low
Dividend

$91.43
79.55
0.08

$83.47
72.28
0.07

$98.81
76.81
0.08

$96.63
81.88
0.07

$108.83
95.79
0.08

$100.92
89.75
0.07

$120.01
106.00
0.08

$101.87
83.11
0.07

Dividends: FedEx paid a cash dividend on July 1, 2006 ($0.09 per
share). We expect to continue to pay regular quarterly cash divi-
dends, though each quarterly dividend is subject to review and
approval by our Board of Directors.

Financial Information: Copies of FedEx Corporation’s Annual
Report on Form 10-K, other documents filed with the Securities
and Exchange Commission (SEC) and other financial and statisti-
cal information are available through our Web site at fedex.com.
You will be mailed a copy of the Form 10-K upon request to
Investor Relations, FedEx Corporation, 942 South Shady Grove
Road, Memphis, Tennessee 38120, (901) 818-7200, e-mail
ir@fedex.com. Company documents filed electronically with the
SEC can also be found at the SEC’s Web site at www.sec.gov.
The most recent certifications by our principal executive and
financial officers pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 are filed as exhibits to our Form 10-K. We
have also filed with the New York Stock Exchange the most
recent Annual CEO Certification as required by section
303A.12(a) of the NYSE Listed Company Manual.

Independent Registered Public Accounting Firm:
Ernst & Young LLP, Memphis, Tennessee.

Customer Inquiries: Call 1-800-Go-FedEx or visit fedex.com

Media Inquiries: Contact Jesse W. Bunn, Staff Director,
Marketplace Communications, FedEx Corporation,
942 South Shady Grove Road, Memphis, Tennessee 38120,
(901) 818-7463 or visit the About FedEx section of fedex.com:
http://www.fedex.com/us/about/

Shareowner Account Inquiries: Contact Computershare
Investor Services, P.O. Box 43069, Providence, Rhode Island
02940-3069, (800) 446-2617.

Direct Stock Purchase and Dividend Reinvestment Inquiries:
For information on the direct stock purchase and dividend
reinvestment plan for FedEx Corporation common stock, call
Computershare at (800) 446-2617 or visit their direct stock
purchase plan Web site at www.computershare.com/equiserve
This plan provides an alternative to traditional retail brokerage
methods of purchasing, holding and selling FedEx common
stock. This plan also permits shareowners to automatically
reinvest their dividends to purchase additional shares of FedEx
common stock.

Investor Inquiries: Contact J.H. Clippard, Jr., Vice President,
Investor Relations, FedEx Corporation, 942 South Shady Grove
Road, Memphis, Tennessee 38120, (901) 818-7200, e-mail
ir@fedex.com or visit the Investor Relations section of
fedex.com: http://www.fedex.com/us/investorrelations/

GENERAL INFORMATION

Equal Employment Opportunity: Our greatest asset is our
people. We are committed to providing a workplace where
our employees and contractors feel respected, satisfied and
appreciated. Our policies are designed to promote fairness
and respect for everyone. We hire, evaluate and promote
employees, and engage contractors, based on their skills and
performance. With this in mind, we will not tolerate certain
behaviors. These include harassment, violence, intimidation
and discrimination of any kind involving race, color, religion,
national origin, gender, sexual orientation, age, disability or,
where applicable, veteran or marital status.

Service Marks: The following are registered service marks of
Federal Express Corporation, registered with the U.S. Patent &
Trademark Office and in other countries: FedEx®, FedEx Express®,
FedEx Ground®, FedEx Freight®, FedEx Freight Advance Notice®,
FedEx Custom Critical®, FedEx Supply Chain Services®, FedEx
SmartPost®, FedEx Home Delivery®, FedEx Trade Networks® and
FedEx Services®. FedEx National LTLSM, Caribbean Transportation
ServicesSM, FedEx Expedited Freight ServiceSM and FedEx Global
Supply Chain ServicesSM are service marks of Federal Express
Corporation. FedEx Kinko’s Office and Print CentersSM and FedEx
Kinko’s Ship CentersSM are service marks of Federal Express
Corporation and Kinko’s Ventures, Inc.

This entire annual report is printed on recycled paper.

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$1,000 invested in FedEx when we went public in 1978 was worth $111,500 on May 31, 2006. That’s an 11,050%
return over 28 years, or a compound average annual growth rate of more than 18%.

Dream new ideas.
Act on new opportunities.
Reach new horizons.
FedEx. Changing what’s possible.

FedEx Corporation
942 South Shady Grove Road
Memphis, Tennessee 38120
fedex.com