FedEx Annual Report 2007

FY2007 Annual Report · FedEx

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Possibility speaks.

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

Talking to FedEx gives voice to new possibilities. And those
conversations yield powerful returns: ideas that move your
business and the world forward.

Quiksilver meets the demand for its outdoor sports apparel
and accessories in 90 countries — from Chile to China — using
the FedEx portfolio for global sourcing and distribution.

With the most express flights from India
and secure, temperature-controlled
delivery, FedEx helps Zydus Cadila
provide its healthcare solutions to people
around the globe.

Using a variety of FedEx shipping
solutions, Build-A-Bear Workshop® brings
customized, furry friendships to life in
more than 15 countries.

With freight delivery options that match speed to need,
FedEx keeps Borders employees selling books rather
than waiting for trucks.

Rosenstiel’s, a family-owned business
since 1880, uses FedEx as its modern-day
clipper ship to export fine art prints from
London to more than 100 countries.

Using critical replacement parts stocked
at FedEx Kinko’s Office and Print Centers,
Wincor Nixdorf’s technicians get
customers’ ATMs up and running faster.

By replacing Boeing 727s with 757s, FedEx is adding planes
that lessen the environmental impact — reducing fuel
consumption up to 36% while providing 20% more capacity.

By consolidating Lug’s shipments from
Canada, FedEx enables the company to
cut costs, streamline customs clearance
and move 10 times more of its travel
accessories across the border each day.

With the click of a mouse you can access
FedEx Kinko’s Print Online, an innovation
that connects your computer to the
professional printing capabilities of
FedEx Kinko’s Office and Print Centers.

Possibilities speak loudest to those who want to achieve
more: the possibility of innovation to give you an advantage
your competitors can’t match, new choices to ensure a better
future, and greater access for communities at the farthest
frontiers of the world.

FedEx has always been fluent in possibility. We continue
to give people, businesses and nations the ability to move
forward, achieving higher standards of living and new
levels of success.

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

2007(1)

2006(2)

Percent
Change

$35,214
3,276

9.3 %

2,016
6.48
311
2,882

$24,000
2,646
12,656

$32,294
3,014

9.3 %

1,806
5.83
310
2,518

$22,690
2,442
11,511

9
9

12
11

6
8
10

2003 2004 2005 2006 2007

2003 2004 2005 2006() 2007()
00
00() 2007()

00 00

2003 2004 2005 2006() 2007()
00
00() 2007()

00 00

$22.5 $24.7 $29.4 $32.3 $35.2

6.5% 5.8%
.%
.%

8.4% 9.3% 9.3%
.%
.%
9.3%

$2.74 $2.76 $4.72 $5.83 $6.48

Revenue (in billions)

Operating margin
Operating margin

Diluted earnings per common share

2003 2004 2005 2006() 2007()

2003 2004 2005 2006 2007

2003

2004

2005

2006

2007

12.0% 10.9% 16.4% 17.1% 16.7%

21.7% 30.9% 22.6% 17.5% 17.3%

$63.98 $73.58 $89.42 $109.27 $111.62

Return on average equity

Debt to total capitalization

Stock price (May 31 close)

(1) Results for 2007 include a $143 million charge associated with upfront compensation and benefits under the new pilot labor contract.
(2) Results for 2006 include a $79 million ($49 million, net of tax, or $0.16 per diluted share) charge to adjust the accounting for certain facility leases.

MESSAGE FROM THE CHAIRMAN

To Our Shareowners:

This past year, 280,000 FedEx team members applied their
dedication, creativity, and passion to the task of changing
what’s possible for our customers, offering them more
innovative solutions, faster delivery, and greater access
to the world. In short, our team members are providing
a consistently outstanding customer experience that we
believe sets an industry standard. Thanks to their efforts,
I am pleased to report that FedEx Corporation achieved
another benchmark in financial performance.

We have just entered our 35th year of continuous operation,
and often, someone mentions to me they’ve seen the first
FedEx aircraft — the very special “Wendy” N8FE — at
the Smithsonian Air and Space Museum. I tell them how
honored I am to be a part of that history. But I also say I’m
proud to be part of a team that focuses on the future and
new ways we can help our customers achieve their goals
in the vast global marketplace. In fact, I often tell people
that FedEx is just getting started. Though customers may
begin talking to us about one or more of our services,
they sometimes end up telling us what they really want
to accomplish is better service, greater sales, and higher
profits. Then, given our broad portfolio of solutions, we
can really help them achieve their goals.

And as we talk to businesses large and small, we realize
that what FedEx provides is greater than transportation,
logistics, and business services. We ultimately provide
access. As we’ve learned from our landmark research with
SRI International, greater access leads to better societies.
Individuals, businesses, and nations alike benefit from the
ability to draw from a global marketplace of goods, services,
and information. The possibilities speak to our customers,
and they speak to us at FedEx as well. Looking forward, we
will strive to meet the evolving needs of our customers and
create new markets for our services.

With that forward focus in mind, I’d like to mention in
particular three areas of accomplishment among many
in fiscal 2007.

The first is the growth of our networks. We believe we
have the best collection of networks in the industry and
are always looking to expand them strategically for
more profitable growth and greater possibilities for our
customers. In FY07, we completed acquisitions in areas
where we see a bright future.

In China, FedEx Express completed its acquisition of our
partner DTW’s share of our joint venture international
priority express business. We also acquired DTW’s domestic
China express network. Within three months, we instituted
next-business-day domestic express service in China,
improving access to markets for businesses throughout the
world’s largest nation.

In India, we acquired our service provider, PAFEX, giving us
a wholly owned subsidiary serving nearly 4,400 destinations
in a country that has joined China as one of the world’s
fastest growing markets.

We strengthened our network in both the eastern and
western portions of the European Union. In the UK, we
acquired ANC, allowing FedEx Express to directly serve the
entire UK domestic market, providing customers a broader
range of shipping options and services. In Hungary, we
acquired our global service provider there, Flying-Cargo,
increasing our capacity in fast-growing eastern Europe.

In North America, we enhanced our less-than-truckload
freight portfolio by completing the acquisition of Watkins
Motor Lines. Watkins now operates as FedEx National
LTL, broadening our FedEx Freight service offerings.
Watkins’ Canadian operations are now FedEx Freight
Canada, a great addition to our portfolio there. A number
of new terminals were opened throughout the Freight
system this past year.

The second area of accomplishment to note this past fiscal
year was continued crisp execution.

When we acquired FedEx Kinko’s, we envisioned it as a
complementary and powerful retail and digital network,
having great synergies with other FedEx services. We made
significant progress toward that vision in FY07. We are
weaving FedEx philosophy, culture, and metrics deep into
the fabric of FedEx Kinko’s, resulting in reduced employee
turnover and continued performance improvement. We
rolled out a new, more compact model for FedEx Kinko’s
centers and opened more than 200 of them in FY07. This
new model will help us open more locations faster and
increase convenience and service for our customers.
Through FedEx Print Online, we are applying our digital
network expertise to helping customers print complex
documents, regardless of time and distance. In the same
vein, customers can now initiate end-to-end direct mail
campaigns right from their computers, with the order
fulfilled at a FedEx Kinko’s. The FedEx Kinko’s network
is now producing significant revenues — at an
$800,000,000 run rate as we ended FY07 — for our
Express and Ground companies. This highly profitable
traffic is growing substantially.

FedEx Ground made a seamless transition from its long-
time leader Dan Sullivan to its new president and CEO, Dave
Rebholz, who brings great skills and many years of FedEx
experience to his new role. This past year FedEx Ground
added new hubs, additional direct routings, and numerous
IT system improvements to further reduce transit times
in our Ground network. A number of new state-of-the-art
FedEx Ground facilities were opened during FY07.

The FedEx Ground small business owners have remained
committed to providing outstanding service to Ground
customers, despite litigation challenges. As we have in the
past, we will continue to aggressively defend our model,
wherever challenged.

At FedEx Express, we further strengthened our industry-
leading global network. Our strongest emphasis in FY07
came where growth is fastest: Asia. Our new Asia Pacific

MESSAGE FROM THE CHAIRMAN

Hub is slated to open in FY09 in Guangzhou, the epicenter
of Chinese manufacturing, optimally positioning us to meet
the future needs of this thriving market. Our domestic hub
in Hangzhou opened at the end of FY07 and will play a
major role in our new China system. We also created a new
administrative center for China in Nanjing and one for the
Asia Pacific region in Manila. We added more capacity to
meet projected shipping growth in South Korea as well.

A third area of significant accomplishment is our continuing
commitment to improving our customers’ experience at
every FedEx touchpoint.

We know that expanding the physical networks of our
companies is not enough. We must also fulfill our Purple
Promise: “I will make every FedEx experience outstanding.”
In FY07, we revamped our Service Quality Index across
operating companies to better reflect customer needs.
This is making our networks easier to use and helping us
offer new solutions that enable customers to build their
businesses by tapping into the power of access.

FedEx team members in our operating companies literally
see the world from the air, the ground, and from store
windows facing main streets and malls in cities and towns
of every size. From every angle, we see opportunities to
improve the quality of life for people in the communities we
serve. We continue to act on many of those opportunities,
both in our daily business activities and through our
corporate citizenship activities.

In FY07, we expanded our long-standing commitment to
bring help quickly when disaster strikes. We announced a
donation to the Salvation Army to deploy mobile canteens,
each providing up to 2,500 meals a day, along with a grant
to train Salvation Army emergency response personnel
in countries around the world. On a day-to-day basis, our
company continues to increase support to communities
by giving people access to needed food, education,
medical care, safety programs, and more. This past year,
in conjunction with Heart to Heart, we agreed to pre-stage
disaster-relief supplies in a response center in Kansas City

and in FedEx facilities in Subic Bay, Dubai, and Miami.
We also maintain a significant support relationship with
the Red Cross to help in times of crisis.

We recognize the importance of environmental stewardship
and the necessity of improving fuel efficiency. That is why
we are adding more hybrid vans to our FedEx Express
fleet and are participating in the development of improved
commercial hybrid powertrains, to accelerate the spread
and lower the acquisition costs of this promising technology
industry-wide. We will further reduce our energy intensity
and noise footprint by acquiring Boeing 757 aircraft, which
offer major reductions in fuel consumption per ton earned
over the planes they replace. Also with conservation in
mind, we have chosen the fuel-efficient Boeing 777-200LR
twin jet wide-body freighter to meet future international
expansion needs.

Our focus in FY07 resolutely remained on providing more
possibilities each day to our customers, while positioning
FedEx to extend access to more markets and offer more
services in coming years. This is how the people of FedEx
keep businesses small and large on the leading edge of
commerce — equipping them for continued success in a
changing business world.

Though the years ahead will certainly contain challenges,
there will also be unprecedented opportunities. Whether in
China, Chile, California or the Czech Republic, people today
move to a global beat of new possibilities, thanks in large
part to the explosive growth of access to goods and ideas.

It’s a future we at FedEx anticipate with great excitement.

Sincerely,

Frederick W. Smith
Chairman, President and Chief Executive Officer

Talking with FedEx results
in tailored solutions that
take advantage of our
global transportation and
information networks:
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 1,700 locations.

Possibilities speak when we talk with customers about enhancing
their return on investment, increasing sales, improving the experience
for their customers or extending access to more of the world.

By understanding customers’ needs and tailoring solutions to serve them,
we help turn conversations into the fulfillment of valuable possibilities.

ChinaSony

“FedEx framed the conversation around
Sony’s end objectives — with results
that help us grow our business.”

“Sony’s business units span many segments of the
electronics and entertainment industries. But whether
it’s a movie, a music CD or a computer game, our
products all excite and touch the lives of our customers.
That’s really how the whole conversation with FedEx
started: How can we compete as a united front? We
didn’t need vendors — we needed a carrier that could
help us work smarter and grow our business. FedEx
talked with us to understand our business objectives.
They saw that some of our processes weren’t serving our
business needs and proposed changes to better address
what we really wanted to accomplish. We didn’t expect
FedEx to focus on our business objectives, but that’s what
made the discussions and the solutions so valuable.

“The conversations extended to all of our business
units. If we said, ‘We want X,’ FedEx asked what
X meant to us — what was the root need? They
worked across the operating companies to build
solutions that help us better serve our customers and
vendors, reduce costs and give us the competitive
edge. Today, the conversation has become about
how we’re going to move forward in our industry.”

— Todd Yamagiwa, Director of Logistics,
Sony Logistics of America

Hitting critical “street dates” has
gotten easier for Sony and its
customers with the help of FedEx.

In Sony’s business, the number one priority is meeting
the “street dates” when new products are expected to
arrive across retail outlets for public release. Missing
that window not only disappoints consumers and hurts
sales, it also results in retailer penalties and other costs.

FedEx saw that 100% in-transit visibility was essential.
We provided a creative technology solution that gives
Sony the information it needs to make solid decisions
if weather or other factors threaten the timing of a
shipment. And with the flexibility to access FedEx
express, ground and freight services to optimize
shipping, Sony has increased its on-time performance
serving retail outlets across North America.

The company is also taking advantage of a similar
flexibility to cut costs and better fulfill direct-to-
consumer orders for computer equipment, electronics
and more through its Web site, sonystyle.com.

With thousands of product releases each year, Sony
counts on FedEx to keep the hits coming.

Crocs

“ Crocs gained global advantages when

FedEx changed the conversation
about what was possible.”

“When Crocs started talking to FedEx three years
ago, we were a small company that wanted to break
the mold in our industry. Footwear has always been
a seasonal business where retailers typically place
orders six months ahead. We wanted a greater ability
to match styles and colors to changing demand. In a
series of discussions, FedEx coached us on adopting
a direct distribution model that would give us the
just-in-time replenishment capabilities of a high-
tech manufacturer — and save $5 million annually
on traditional warehousing and distribution. These
discussions brought our vision of rapid replenishment
to life with a solution unlike anything in our industry.

“We’ve relied on our relationship with individuals across
FedEx as we’ve grown from $13.5 million to more than
$350 million in sales over the past three years. Apart
from providing solutions for a wide range of issues,
they’ve been a great sounding board for us. It’s not an
overstatement to say that our conversations with FedEx
have been instrumental in our success.”

— Scott Crutchfield, VP of Operations,
Crocs, Inc.

With FedEx shipping options from
China, Crocs has turn-on-a-dime
control of its distribution.

Crocs invites everyone to “walk a mile in our shoes,”
but those shoes typically cross several thousand miles
to reach devoted customers’ feet. FedEx provides the
company with a suite of services to move products
manufactured in China to the U.S. market, matching
speed to demand.

Using an innovative technology solution developed
by FedEx, Crocs can select the best mode of delivery
for a shipment and generate the appropriate U.S.
domestic shipping labels in China. During peak
seasons — and whenever the hottest-selling shoes
and new releases need to get into stores quickly —
FedEx Express moves bulk shipments by air and
breaks them down on arrival for delivery to retailers.
More classic stock moves in bulk via ocean shipments,
arranged by FedEx Trade Networks, for final delivery
through FedEx Ground and FedEx Freight.

Whether the company needs to meet a surge in
demand for a special product release, or a retailer’s
request for as few as 24 pairs, FedEx has given Crocs
the flexibility to choose the distribution method
to match.

China

“ What FedEx is doing in China

today is so different — it opens
up possibilities that customers are
increasingly talking to us about.”

“Sometimes in order to change the conversation about
what’s possible, you have to build the infrastructure to
support new ideas. We did this when FedEx began
service in the United States 35 years ago, and the
growth in China today is even greater. Middle-class
incomes are rising dramatically — China is expected to
become the world’s third-largest consumer market in
the coming decades. By building two new hubs here,
we’re expanding access within the country and for our
customers around the world.

“In May, our new China domestic hub in Hangzhou began
operations, providing time- or day-definite service to
more than 200 cities and counties poised for growth.
And in December 2008, we’ll relocate our current Asia
Pacific hub in Subic Bay, Philippines, farther north to
Guangzhou. It’s a move that uniquely positions us to
serve the global demand for service in and out of the
booming Pearl River Delta region. These investments
are initiating some of the most powerful conversations
we have today: helping companies large and small
navigate this market and grow their business here.”

— David L. Cunningham Jr., President,

Asia Pacific, FedEx Express

“ Even before a conversation starts,

we’re looking ahead for new
answers. FedEx Innovation Lab was
created for this purpose.”

“Our job is to keep changing what’s possible. That means
using imagination to address needs that others haven’t
anticipated — or maybe never thought could be met.
FedEx was founded on this ability, and we set up the
lab to support innovation by exploring emerging
technologies and ideas that might be applied anywhere
from two years to much farther into the future.

“Within our portfolios, we’re working with mobile

technologies, biometrics and video object recognition,
as a few examples. Some of the applications are
operationally driven; others are more customer-focused.
Ultimately, they’re all designed to contribute to the
customer experience. One innovation we’re piloting now
is packaging with sensors that continually monitor
temperature, humidity, speed and light — factors that
are critical for certain types of shipments. Advanced as
it sounds, it goes back to our idea that ‘the information
about the package is as important as the package itself.’
This important principle has driven FedEx from
the beginning.”

— Miley Ainsworth, Director,
Innovation and Scanning Technology,
FedEx Innovation Lab

MESSAGE FROM THE CHIEF FINANCIAL OFFICER

To Our Shareowners:

FedEx delivered solid financial performance for our
shareowners despite increasingly challenging economic
conditions in fiscal 2007. Our results benefited from the
continued strong growth of our ground and international
express businesses and from our investments to
expand our portfolio of service offerings, drive
revenue growth and increase productivity.

We completed strategic acquisitions in three
dynamic international markets — China, India and
the United Kingdom — and began offering domestic
time-definite service to customers throughout China.
In the United States, we absorbed the acquisition
and network integration costs associated with our
new FedEx National LTL business. We also made
investments in technology and network infrastructure
at FedEx Ground, which have resulted in faster
delivery lanes and increased productivity. Finally,
we continued to expand the FedEx Kinko’s retail
network with 226 new store openings in FY07.

During the year, we also announced our intentions to
modernize our employee retirement plans in response
to a changing regulatory landscape and shifting
demographic trends. The recently adopted and proposed
accounting rules presented an unacceptable level of risk
and volatility to the future of the company. Under our new
programs, we expect our retirement plan costs to become
more predictable. In addition, we were able to reduce the
impact on shareholder equity of the adoption of SFAS 158

by $1 billion. We feel these changes balance our
responsibilities to remain competitive in the future, to
provide our employees with a comfortable retirement and
to maintain our fiscal responsibility to our shareowners.

In FY08, we will continue to be challenged by a soft
economic environment; however, we will continue to
make significant investments in our global networks.
These investments will position our company to
continue to achieve our long-term financial goals
of improving earnings, margins, cash flows and
returns for our shareowners. We have an excellent
track record in this regard. Over the last 10 years,
our revenues have grown more than 11 percent on
a compounded annual basis while net income has
increased more than 18 percent. Equally as important,
our shareholders have earned more than 15 percent
annually on their investment during that time.

Thank you for your continued support as a FedEx
shareowner. I hope you share my confidence that we
will deliver on our long-term financial goals for our investors.

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

Comparison of Five-Year
Cumulative Total Return*

$ 220 -------------------------------------------------------------------------------------------------------

$ 200 -------------------------------------------------------------------------------------------------------

$ 180 -------------------------------------------------------------------------------------------------------

$ 160 -------------------------------------------------------------------------------------------------------

$ 140 -------------------------------------------------------------------------------------------------------

$ 120 -------------------------------------------------------------------------------------------------------

$ 100 -------------------------------------------------------------------------------------------------------

$ 80 -------------------------------------------------------------------------------------------------------

2002

2003

2004

2005

2006

2007

FedEx Corporation

Dow Jones Transportation Average

S&P 500

* 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, 2002, and assumes reinvestment of dividends. Fiscal year ended May 31.

34 Management’s Discussion and Analysis
57 Management’s Report on Internal Control over Financial Reporting
58 Report of Independent Registered Public Accounting Firm
59 Consolidated Financial Statements
63 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

Financial Results

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

Overview of Financial Section

The financial section of the FedEx Corporation (“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 signifi-
cant 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
2007 results compared to 2006, and 2006 results compared to
2005. This section also includes a discussion of key actions and
events that impacted our results, as well as a discussion of our
outlook for 2008.

• The overview is followed by a financial summary and analysis
(including a discussion of both historical operating results and
our outlook for 2008) 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 flow 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 competing collec-
tively, operating independently 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 pro-
vider of small-package ground delivery services; FedEx Freight
Corporation, a leading U.S. provider of less-than-truckload
(“LTL”) freight services; and FedEx Kinko’s, a leading provider of
document solutions and business services. These companies rep-
resent our major service lines and 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
yield (average price per shipment or pound) or average price
per hundredweight for FedEx Freight LTL Group shipments;

• our ability to manage our cost structure for capital expendi-
tures 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
ability to recover incremental fuel costs through our fuel
surcharges.

Except as otherwise specified, references to years indicate our
fiscal year ended May 31, 2007 or ended May 31 of the year ref-
erenced 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

2007(1)

2006(2)

2005(3)

2007/2006

2006/2005

Percent Change

$ 35,214
3,276

9.3%

$ 2,016
$ 6.48

$ 32,294
3,014

9.3%

$ 1,806
$ 5.83

$ 29,363
2,471

8.4%

$ 1,449
$ 4.72

9
9
–bp
12
11

10
22
90bp
25
24

(1) Operating expenses include a $143 million charge at FedEx Express associated with upfront compensation and benefits under the new labor contract with our pilots, which was ratified in October
2006. The impact of this new contract on second quarter net income was approximately $78 million net of tax, or $0.25 per diluted share.
(2) 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.
(3) Results include a $48 million ($31 million, net of tax, or $0.10 per diluted share) Airline Stabilization Act charge at FedEx Express and a $12 million, or $0.04 per diluted share, benefit from an income
tax adjustment.

The following table shows changes in revenues and operating income by reportable segment for 2007 compared to 2006, and 2006
compared to 2005 (in millions):

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

Revenues

Operating Income

Dollar Change

Percent Change

Dollar Change

Percent Change

2007/2006

2006/2005

2007/2006

2006/2005

2007/2006

2006/2005

2007/2006

2006/2005

$1,235
737
941
(48)
55
$2,920

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

6
14
26
(2)
NM
9

10
13
13
1
NM
10

$188
108
(22)
(12)
–
$262

$353
101
131
(43)
1
$543

11
15
(5)
(21)
NM
9

25
17
37
(43)
NM
22

(1) FedEx Express 2007 operating expenses include a $143 million charge associated with upfront compensation and benefits under the new pilot labor contract, 2006 operating expenses include a
$75 million charge to adjust the accounting for certain facility leases, and 2005 operating expenses include a $48 million charge related to the Airline Stabilization Act.

The following graphs for FedEx Express, FedEx Ground and the FedEx Freight LTL Group show selected operating statistics (in thousands,
except yield amounts) for the years ended May 31:

Average Daily Package Volume (ADV)
FedEx Express and FedEx Ground

Average Daily LTL Shipments (ADS)
FedEx Freight LTL Group

Total ADV
% Change

5,864
8%

6,098
4%

6,391
5%

Total ADS
% Change

63
9%

67
6%

7,000

6,000

5,000

4,000

3,000

2,000

1,000

2,609

3,255

2005

2,815

3,126

3,283

2006

3,265

2007

78
16%

2005

2006

2007

FedEx Express

FedEx Ground

FedEx Freight LTL Group

FEDEX CORPORATION

Revenue Per Package – Yield

LTL Revenue per Hundredweight – Yield

$30.00

$25.00

$20.00

$15.00

$10.00

$5.00

$0.00

$19.31

$20.77

$21.72

$6.68

$7.02

$7.21

2005

2006

2007

$30.00

$25.00

$20.00

$15.00

$10.00

$5.00

$0.00

$15.48

$16.84

$18.65

2005

2006

2007

FedEx Express

FedEx Ground

FedEx Freight LTL Group

Overall results for 2007 were solid in spite of several challenges,
as we continued to execute our business strategy during a time
of slower economic growth and expanded our service offerings
through key acquisitions. Operating results moderated during
2007, reflecting the impact of weaker volumes in the second
half of our fiscal year in our FedEx Express and FedEx Freight
segments due to the slowing economic environment. The
year-over-year negative impact from the timing lag in our fuel
surcharges and a $143 million charge associated with upfront
compensation and benefits under the new contract with our
pilots also negatively impacted 2007 operating results.

Revenue growth in 2007 was due to strong FedEx Ground pack-
age volume growth and continued growth in FedEx Express
International Priority (“IP”) services, as we continued to focus
on expanding these service offerings. Our 2007 revenues also
reflected the acquisition of FedEx National LTL (formerly known
as Watkins Motor Lines), which added approximately $760 million
to 2007 revenue. Revenue growth in 2007 was slightly offset by
declines in copy product revenues at FedEx Kinko’s.

Operating income increased in 2007, as revenue growth at FedEx
Express and FedEx Ground more than offset reduced profitability
at the FedEx Freight segment and FedEx Kinko’s. Operating mar-
gin was flat in 2007 due to slower economic growth, the negative
impact of higher salaries and benefits primarily as a result of the
new labor contract with our pilots and the timing of adjustments
to our fuel surcharges at FedEx Express (described below), as
well as operating losses at FedEx National LTL. Softening vol-
umes in the LTL sector and ongoing expenses to integrate the
FedEx National LTL network negatively impacted the performance
of the FedEx Freight segment in 2007.

Salaries and employee benefits increased in 2007 as a result of
the new labor contract for the pilots of FedEx Express and the
FedEx National LTL acquisition. The impacts of expensing stock
options commencing in 2007 and higher retirement plan costs
were largely offset by lower incentive compensation accruals.
Purchased transportation costs increased in 2007 due to FedEx
Ground volume growth, the FedEx National LTL acquisition and
IP package volume growth.

The pilots of FedEx Express, who represent a small number of
our total employees, are employed under a collective bargaining
agreement. In October 2006, the pilots ratified a new four-year

labor contract that included signing bonuses and other upfront
compensation of approximately $143 million, as well as pay
increases and other benefit enhancements. These costs were
partially mitigated by reductions in variable incentive compensa-
tion. The effect of this new agreement on second quarter 2007
net income was approximately $78 million net of tax, or $0.25 per
diluted share.

The timing and amount of fluctuations in fuel prices and our abil-
ity to recover incremental fuel costs through our various fuel
surcharges continue to impact our results. Fuel costs increased
during 2007 due to an increase in the average price per gallon of
fuel and an increase in gallons consumed. Because of the timing
lag that exists between when we purchase fuel and when our
fuel surcharges are automatically adjusted at FedEx Express, fuel
surcharges were not sufficient to offset the effect of changes in
fuel costs on our operating results for 2007. Though 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 price and other extra service fees we obtain for these ser-
vices and the level of pricing discounts 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 for 2007, 2006 and 2005 in the accompa-
nying discussions of each of our transportation segments.

Our 2006 results benefited from strong growth in the global econ-
omy. During 2006, revenue growth was primarily attributable to yield
improvement across our transportation segments, package volume
growth in our 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.

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, contrib-
uted to our margin growth. Operating income improvement was
partially offset by higher costs at FedEx Express to support inter-
national volume growth, expansion costs at FedEx Ground and
reduced operating profit at FedEx Kinko’s.

MANAGEMENT’S DISCUSSION AND ANALYSIS

While fuel costs increased substantially in 2006, fuel surcharges
more than offset the effect of these higher fuel costs. Salaries and
employee benefits increased 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 in 2006 due
primarily to the continued increase in the use of contract carriers
to support increasing volumes at FedEx Ground, increased IP vol-
umes at FedEx Express and higher fuel surcharges from third-party
transportation providers, including our independent contractors.

Other Income and Expense
Net interest expense decreased $51 million during 2007 primarily
due to increased interest income earned on higher cash bal-
ances. Net interest expense decreased $35 million during 2006
due primarily 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
aircraft at FedEx Express.

Income Taxes
Our effective tax rate was 37.3% in 2007, 37.7% in 2006 and 37.4%
in 2005. Our 2007 tax rate was favorably impacted by the conclu-
sion of various state and federal tax audits and appeals. This
favorable impact was partially offset by tax charges incurred as
a result of a reorganization in Asia associated with our acqui-
sition in China (described below). 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 inter-
national operations as a result of the passage of the American
Jobs Creation Act of 2004 and by a lower effective state tax rate.
For 2008, we expect our effective tax rate to be between 37.5%
and 38%. The actual rate, however, will depend on a number of
factors, including the amount and source of operating income.

Business Acquisitions
On September 3, 2006, we acquired the assets and assumed cer-
tain obligations of the LTL operations of Watkins Motor Lines,
a privately held company, and certain affiliates for $787 million
in cash. Watkins, a leading provider of long-haul LTL services,
was renamed FedEx National LTL and meaningfully extends our
leadership position in the heavyweight LTL freight sector. The
financial results of FedEx National LTL are included in the FedEx
Freight segment from the date of acquisition.

On December 16, 2006, we acquired all of the outstanding capital
stock of ANC Holdings Ltd. (“ANC”), a United Kingdom domestic
express transportation company, for $241 million, predominantly
in cash. This acquisition allows FedEx Express to better serve the
United Kingdom domestic market, which we previously served
primarily through independent agents.

million in cash. This acquisition converts our joint venture with
DTW Group into a wholly owned subsidiary and increases our
presence in China in the international and domestic express busi-
nesses. Prior to the fourth quarter of 2007, we accounted for our
investment in the joint venture under the equity method.

We paid the purchase price for these acquisitions from available
cash balances, which included the net proceeds from our $1 bil-
lion senior unsecured debt offering completed during 2007. See
Note 6 of the accompanying consolidated financial statements
for further discussion of this debt offering.

See Note 3 of the accompanying consolidated financial state-
ments for further information about these acquisitions.

Lease Accounting Charge
Our results for 2006 included a noncash charge of $79 million
($49 million net of tax, or $0.16 per diluted share) to adjust the
accounting for certain facility leases, predominantly at FedEx
Express. The charge, which included the impact on prior years,
related primarily to rent escalations in on-airport facility leases
that were not being recognized appropriately.

Airline Stabilization Act Charge
In 2005, the United States Department of Transportation (“DOT”)
issued a final order in its administrative 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 2005 ($31 million net of tax, or $0.10 per
diluted share), representing the DOT’s repayment demand of $29
million and the write-off of a $19 million receivable.

Outlook
Our outlook for 2008 reflects continued investment in several
major, long-term initiatives in a soft but stable U.S. economy.
Outside the United States, economic activity is expected to con-
tinue to expand, but at a more moderate pace than in 2007. As a
result, we expect our revenue trends to moderate in 2008, with
growth driven by increased shipments at FedEx Ground, the full-
year benefit of the FedEx National LTL business and expansion of
international business at FedEx Express (both IP and international
domestic services).

We expect our earnings in 2008 to be below our long-term goal
of 10% to 15% annual earnings growth due to the softening U.S.
economy and planned investments in our businesses, which are
critical to our long-term strategy. We remain optimistic about the
long-term prospects for all of our business segments.

FEDEX CORPORATION

We expect to make significant investments to expand our global
networks, in part through the continued integration and expansion
of the businesses we acquired in 2007. Our planned investments
for 2008 are focused on the following three key opportunities:

• support for long-term volume growth, such as additional or
expanded facilities across all segments, new aircraft (such as
the Boeing 757 and 777 Freighter) and expansion of our inter-
national domestic express businesses;

• improvements in service levels, including expanded delivery
areas for the FedEx Priority Overnight and FedEx First Overnight
services at FedEx Express and reduced transit times at FedEx
Ground; and

• improvements to productivity, including updates and enhance-

ments to our technology capabilities.

FedEx Kinko’s will continue to focus on key strategies related to
adding new locations, improving customer service and increasing
investments in employee development and training. We expect
these strategies to continue to adversely affect profitability in
2008. FedEx Kinko’s plans to open approximately 300 new centers
in the coming year, which will bring the total number of centers
to approximately 2,000 by the end of 2008.

All of our transportation businesses operate in a competitive pric-
ing environment, exacerbated by continuing volatile fuel prices.
Historically, our fuel surcharges have generally been sufficient to
offset incremental fuel costs; however, volatility in fuel costs may
impact earnings because adjustments to our fuel surcharges lag
changes in actual fuel prices paid. Therefore, the trailing impact
of adjustments to our fuel surcharges can affect our earnings.

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, particu-
larly in the Asia-to-U.S. market, peaks in October and November
in advance of the U.S. holiday sales season. Our first and third
fiscal quarters, because they are summer vacation and post win-
ter-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 the FedEx Freight LTL Group, 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 busi-
ness services industries are directly affected by the state of the
overall global economy.

new accOunting prOnOuncements
New accounting rules and disclosure requirements can signifi-
cantly impact the comparability of our financial statements. We
believe the following new accounting pronouncements, which
were issued or became effective for us during 2007, are relevant
to the readers of our financial statements.

On June 1, 2006, we adopted the provisions of Statement of
Financial Accounting Standards (“SFAS”) 123R, “Share-Based
Payment,” which requires recognition of compensation expense
for stock-based awards using a fair value method. The adop-
tion of SFAS 123R reduced earnings for 2007 by $0.17 per diluted
share. For additional information on the impact of the adoption
of SFAS 123R, refer to Note 1 to the accompanying consolidated
financial statements.

On May 31, 2007, we adopted SFAS 158, “Employers’ Accounting
for Defined Benefit Pension and Other Postretirement Plans,”
which requires recognition in the balance sheet of the funded
status of defined benefit pension and other postretirement benefit
plans, and the recognition in accumulated other comprehensive
income of unrecognized gains or losses, prior service costs or
credits and transition assets or obligations existing at the time
of adoption. Additionally, SFAS 158 requires the measurement
date for plan assets and liabilities to coincide with the sponsor’s
year-end. We currently use a February 28 measurement date for
our plans; therefore, this standard will require us to change our
measurement date to May 31 (beginning in 2009).

The funded status recognition and disclosure provisions of SFAS
158 were effective for FedEx as of May 31, 2007. The requirement
to measure plan assets and benefit obligations as of our fiscal
year-end is effective for FedEx no later than 2009.

The adoption of SFAS 158 resulted in a $982 million charge to
shareholders’ equity at May 31, 2007 through accumulated other
comprehensive income. Under SFAS 158, we were required to
write off our prepaid pension asset of $1.4 billion and increase
our pension and other postretirement benefit liabilities by $120
million. These adjustments, net of deferred taxes of $582 mil-
lion, were required to recognize the unfunded projected benefit
obligation in our balance sheet. SFAS 158 has no impact on the
determination of expense for our pension or other postretirement
benefit plans.

In February 2007, we announced changes to modernize certain of
our retirement programs over the next two fiscal years. Effective
January 1, 2008, we will increase the annual company matching
contribution under the largest of our 401(k) plans covering most
employees from $500 to a maximum of 3.5% of eligible compensa-
tion. Effective May 31, 2008, benefits previously accrued under our
primary pension plans using a traditional pension benefit formula
will be capped for most employees, and those benefits will be
payable beginning at retirement. Beginning June 1, 2008, future
pension benefits for most employees will be accrued under a cash
balance formula we call the Portable Pension Account. These
changes will not affect the benefits of current retirees. For addi-
tional information on the adoption of SFAS 158 and these changes,
see Note 12 to the accompanying audited financial statements
and the Critical Accounting Estimates section of this MD&A.

MANAGEMENT’S DISCUSSION AND ANALYSIS

In July 2006, the Financial Accounting Standards Board (“FASB”)
issued FASB Interpretation No. (“FIN”) 48, “Accounting for
Uncertainty in Income Taxes.” This interpretation establishes new
standards for the financial statement recognition, measurement
and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns. The new rules will be effective for
FedEx in the first quarter of 2008. The adoption of this interpreta-
tion will not have a material effect on our financial statements.

feDex services & Other intersegment
transactiOns
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
provided. We believe these allocations approximate the cost of
providing these functions.

In September 2006, the Securities and Exchange Commission
(“SEC”) issued Staff Accounting Bulletin (“SAB”) 108,
“Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements,”
which eliminates the diversity in practice surrounding the quan-
tification and evaluation of financial statement errors. The
guidance outlined in SAB 108 was effective for FedEx in the fourth
quarter of 2007 and is consistent with our historical practices for
assessing such matters when circumstances have required such
an evaluation.

repOrtaBle segments
FedEx Express, FedEx Ground, FedEx Freight and FedEx Kinko’s
represent our major service lines and form the core of our report-
able segments. As of May 31, 2007, 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 Freight Segment

FedEx Freight LTL Group:

FedEx Freight

(regional LTL freight
transportation)
FedEx National LTL

(long-haul 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)

The operating expenses line item “Intercompany charges” on
the accompanying unaudited financial summaries of our report-
able 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.

Effective June 1, 2006, we moved the credit, collections and
customer service functions with responsibility for FedEx Express
U.S. and FedEx Ground customer information from FedEx Express
into a new subsidiary of FedEx Services named FedEx Customer
Information Services, Inc. (“FCIS”). Also, effective June 1, 2006,
we moved FedEx Supply Chain Services, Inc., the results of which
were previously reported in the FedEx Ground segment, into a
new subsidiary of FedEx Services named FedEx Global Supply
Chain Services, Inc. The costs of providing these customer
service functions and the net operating costs of FedEx Global
Supply Chain Services are allocated back to the FedEx Express
and FedEx Ground segments. Prior year amounts have not been
reclassified to conform to the current year segment presentation,
as the financial results are materially comparable.

Certain FedEx operating companies provide transportation
and related services for other FedEx companies outside their
reportable segment. Billings for such services are based on
negotiated rates that we believe approximate fair value and are
reflected as revenues of the billing segment. These rates are
adjusted from time to time based on market conditions. 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 compa-
nies. Package acceptance revenue does not include the external
revenue associated with the actual shipments. Such interseg-
ment revenues and expenses are eliminated in the consolidated
results and are not separately identified in the following segment
information, as the amounts are not material.

FEDEX CORPORATION

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

2007

2006

2005

Percent Change
2006/
2005

2007/
2006

Package Statistics (1)
Average daily package volume (ADV):
U.S. overnight box
U.S. overnight envelope
U.S. deferred
Total U.S.

1,174
706
898

1,203
713
901

1,184
680
958

domestic ADV

IP (2)

Total ADV

2,778
487
3,265

2,817
466
3,283

2,822
433
3,255

Revenue per package (yield):
U.S. overnight box
U.S. overnight envelope
U.S. deferred

$ 21.66
11.06
12.59

$ 20.94
10.86
12.42

$ 19.77
10.37
11.46

U.S. domestic
composite

IP (2)
Composite

16.04
54.13

15.66
51.64

14.69
49.47

package yield

21.72

20.77

19.31

Freight Statistics (1)
Average daily freight pounds:

U.S.

9,569

9,374

8,885

(2)
(1)
–

(1)
5
(1)

3
2
1

2
5

International
priority freight (2)
1,878
International airfreight 1,831

Total average

1,634
2,126

1,395
1,914

15
(14)

daily freight pounds 13,278

13,134

12,194

Revenue per pound (yield):
U.S.

International
priority freight (2)
International airfreight
Composite

$ 0.99

$ 0.93

$ 0.82

2.18
0.84

2.02
0.80

1.88
0.78

8
5

2
5
(6)

–
8
1

6
5
8

7
4

17
11

7
3

freight yield

1.14

1.04

0.93

(1) Package and freight statistics include only the operations of FedEx Express.
(2) We reclassified certain prior period international priority freight service statistics previously
included within the IP package statistics to international priority freight statistics to conform to
the current period presentation and more precisely present the nature of the services provided.

feDex express segment
The following table compares revenues, operating expenses,
operating income and operating margin (dollars in millions) for
the years ended May 31:

2007

2006

2005

Percent Change
2006/
2005

2007/
2006

Revenues:
Package:

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

$ 6,485 $ 6,422 $ 5,969

1,990
2,883

1,974
2,853

1,798
2,799

Total U.S. domestic

package revenue 11,358

11,249

10,566

International
Priority (IP) (1)
Total package
revenue

Freight:
U.S.

6,722

6,139

5,464

18,080

17,388

16,030

2,412

2,218

1,854

International
priority freight (1)
International airfreight
Total freight
revenue

Other (2)

Total revenues

Operating expenses:
Salaries and

1,045
394

3,851
750
22,681

840
434

670
381

3,492
566
21,446

2,905
550
19,485

1
1

24
(9)

10
33
6

10
2

25
14

20
3
10

employee benefits

8,234(3) 8,033

7,704

Purchased

transportation

1,098

971

843

Rentals and

landing fees

1,610

1,696(4)

1,608

(5)

Depreciation and
amortization

Fuel
Maintenance and

856
2,946

805
2,786

798
2,012

repairs

1,444

1,344

1,276

6
6

1
38

Airline Stabilization

Act charge
Intercompany charges

Other

Total operating
expenses

Operating income
Operating margin

–
2,082
2,456

–
1,542
2,502

48
1,509
2,273

NM NM
2
10

35
(2)

19,679
18,071
20,726
$ 1,955 $ 1,767 $ 1,414

8.6%

8.2%

7.3%

9
25

5
11
40bp 90bp

(1) We reclassified certain prior period international priority freight service revenues previously
included within IP package revenues to international priority freight revenues to conform to the
current period presentation and more precisely present the nature of the services provided.
(2) Other revenues includes FedEx Trade Networks and our international domestic express
businesses, such as ANC, DTW Group and our Canadian domestic express operations.
(3) Includes a $143 million charge for signing bonuses and other upfront compensation associated
with a new four-year labor contract with our pilots.
(4) Includes a $75 million one-time, noncash charge to adjust the accounting for certain facility
leases.

MANAGEMENT’S DISCUSSION AND ANALYSIS

FedEx Express Segment Revenues
Solid yield growth primarily due to pricing discipline contributed
to revenue growth in 2007, despite flat package volume growth.
Package revenue growth in 2007 was driven by IP revenues, which
grew 9% on yield growth of 5% as a result of yield improvements
across all regions and a 5% increase in volumes due to IP vol-
ume growth in U.S. outbound, Asia and Europe, as we continued
to focus on expanding this service. Also contributing to revenue
growth in 2007 were increases in other revenues primarily due
to our acquisition of ANC and increases in freight revenues due
to higher U.S. and international priority freight volumes. U.S.
domestic package revenues increased 1% as a result of yield
improvements, partially offset by a decrease in volumes.

IP yield increased during 2007 as a result of favorable exchange
rates, higher package weights and an increase in the average
rate per pound. U.S. domestic composite yield increases in 2007
were due to an increase in the average rate per pound, partially
offset by changes in product mix and lower package weights.
U.S. freight yield increased in 2007 due to an increase in the aver-
age rate per pound and higher fuel surcharges.

IP volume growth in 2007 was primarily due to increased demand
in the U.S. outbound, Asia and Europe markets. U.S. domestic
package volumes decreased during 2007 primarily due to the
moderating growth rate of the U.S. economy.

FedEx Express segment revenues increased in 2006 due to yield
improvements and volume growth in IP services (particularly in
Asia, U.S. outbound and Europe). U.S. domestic package and U.S.
freight revenue growth also contributed to the revenue increase for
2006. U.S. volumes were flat compared to the prior year, as growth
in our U.S. domestic overnight services was offset by declines in
deferred volumes that resulted from yield management actions.

IP yield increased during 2006 due to higher fuel surcharges and
increases in international average weight per package and aver-
age rate per pound. U.S. domestic composite yield increases were
due to higher fuel surcharges and improved yields on U.S. domes-
tic deferred packages. Improvements in U.S. domestic deferred
yield resulted from our continued efforts to improve the profit-
ability of this service. U.S. freight yield increases were due to an
increase in average rate per pound and higher fuel surcharges.

Our fuel surcharges are 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:

2007

2006

2005

U.S. Domestic and Outbound Fuel Surcharge:
Low
High
Weighted-average
International Fuel Surcharges:
Low
High
Weighted-average

8.50%
17.00
12.91

8.50
17.00
12.98

10.50%
20.00
13.69

6.00%
13.00
9.05

10.00
20.00
12.73

3.00
13.00
8.45

FedEx Express Segment Operating Income
Despite slower overall revenue growth, operating income and
operating margin increased in 2007. Increases in operating
income and margin in 2007 resulted from growth in IP services
and were partially offset by costs associated with the ratification
of a new labor contract with our pilots in October 2006. These
costs included signing bonuses and other upfront compensa-
tion of $143 million, as well as pay increases and other benefit
enhancements, which were mitigated by reductions in variable
incentive compensation. Year-over-year results in 2007 were
positively affected by a $75 million charge in 2006 to adjust the
accounting for certain facility leases.

Fuel costs increased during 2007 due to an increase in the aver-
age price per gallon of fuel. Fuel surcharges did not offset the
effect of higher fuel costs on our year-over-year operating results
for 2007, due to the timing lag that exists between when we pur-
chase fuel and when our fuel surcharges are adjusted, based
on a static analysis of the year-over-year changes in fuel prices
compared to changes in fuel surcharges.

Salaries and employee benefits increased in 2007 primarily as
a result of the new labor contract with our pilots. Purchased
transportation costs increased 13% in 2007 due to IP volume
growth, which required a higher utilization of contract pickup
and delivery services and an increase in the cost of purchased
transportation. We use purchased transportation in markets
where we do not have a direct presence or to meet short-term
capacity needs. Maintenance and repairs increased 7% in 2007
primarily due to higher aircraft maintenance expenses for vari-
ous airframes and Airbus A300 engines. The 5% decrease in
rentals and landing fees in 2007 was attributable to the one-time
adjustment for leases in 2006 described above. Intercompany
charges increased 35% in 2007 due to allocations as a result
of moving the FCIS organization from FedEx Express to FedEx
Services in 2007. The costs associated with the FCIS organiza-
tion in 2006 were of a comparable amount but were reported in
individual operating expense captions.

During 2007, we terminated our agreement with Airbus for the
purchase of A380 aircraft and in March 2007 entered into a sepa-
rate settlement agreement with Airbus that, among other things,
provides us with credit memoranda applicable to the purchase
of goods and services in the future. The net impact of this settle-
ment was immaterial to our 2007 results and was recorded as an
operating gain during the fourth quarter of 2007.

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 the one-time adjustment for leases and
costs associated with two new around-the-world flights.

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:

2007

2006

2005

Percent Change
2006/
2005

2007/
2006

Revenues:
Operating expenses:
Salaries and

$ 6,043

$ 5,306

$ 4,680

employee benefits

1,006

929

845

Purchased

transportation

Rentals
Depreciation and
amortization

Fuel
Maintenance
and repairs
Intercompany charges

Other

Total operating
expenses
Operating income
Operating margin
FedEx Ground:
Average daily

2,326
166

2,019
133

1,791
122

268
117

224
93

176
48

134
578
635

118
526
559

110
482
502

15
25

20
26

14
10
14

13
9

27
94

7
9
11

5,230
$ 813

4,601
$ 705

4,076
$ 604

13.5%

13.3%

12.9%

13
17

14
15
20bp 40bp

package volume

3,126

2,815

2,609

Revenue per

package (yield)

$ 7.21

$ 7.02

$ 6.68

FedEx Ground Segment Revenues
Strong volume growth fueled a 14% increase in revenue during
2007. Average daily volumes at FedEx Ground rose 11% because
of increased commercial business and the continued growth of
our FedEx Home Delivery service. Yield improvement during 2007
was primarily due to the impact of general rate increases and
higher extra service revenues, primarily on our residential ser-
vices. This yield increase was partially offset by higher customer
discounts and a lower average weight and zone per package.
Additionally, revenue at FedEx SmartPost increased significantly
in 2007 due to increased market share, as a major competitor
exited this market in 2006, enabling significant growth in the cus-
tomer base and related volumes.

Revenues increased during 2006 due to volume increases and
yield improvement. 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
and the impact of general rate increases. These increases were
partially offset by higher customer discounts and a lower average
weight per package.

In 2006, salaries and benefits increased primarily due to higher
pension costs and wage rates. Fuel costs were higher in 2006
primarily due to an increase in the average price per gallon of
jet fuel, while gallons consumed increased slightly, primarily
related to the two new 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 in 2006, primarily due
to the one-time adjustment for leases of $75 million.

FedEx Express Segment Outlook
We expect moderate revenue growth at FedEx Express in 2008,
as growth in both IP and domestic package services will continue
to slow as a result of the softening U.S. economy and declining
growth outside the U.S. The majority of the revenue increase in
2008 will be provided by IP services, as we continue to focus on
growing our service offerings in international markets, particu-
larly China and Europe. Our international domestic revenue is
projected to increase in 2008 due to the full-year benefit of 2007
acquisitions such as ANC and DTW Group and the expansion of
our China domestic service.

Operating income and operating margin are expected to improve
in 2008 despite the soft U.S. economy due to continued cost con-
tainment and productivity improvements. Capital expenditures at
FedEx Express are expected to be higher in 2008 due to invest-
ments in equipment and facilities necessary to support projected
long-term volume 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. Aircraft-related capi-
tal and expense outlays, including support of our Boeing 757
program and the new Boeing 777 Freighter fleet, are expected
to approximate 2007 spending levels. We will continue to make
strategic investments despite short-term economic softness.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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

2007

2006

2005

3.50%
5.25
4.18

2.50%
5.25
3.54

1.80%
2.50
2.04

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

FedEx Ground Segment Operating Income
FedEx Ground segment operating income increased 15% during
2007 principally due to revenue growth and improved results at
FedEx SmartPost. Operating margin increased only slightly in 2007,
as revenue growth was partially offset by increased purchased
transportation costs, increased legal costs and higher deprecia-
tion and rent expense associated with network expansion.

Purchased transportation increased 15% in 2007 primarily due
to volume growth and higher rates paid to our independent con-
tractors, including fuel supplements. Our fuel surcharge was
sufficient to 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 the fuel surcharge. Other
operating expenses increased 14% in 2007 primarily due to
increased legal costs. Depreciation expense increased 20% and
rent expense increased 25% principally due to higher spending
on material handling and scanning equipment and facilities asso-
ciated with our multi-year network expansion.

Effective June 1, 2006, we moved FedEx Supply Chain Services,
Inc., the results of which were previously reported in the FedEx
Ground segment, into a new subsidiary of FedEx Services named
FedEx Global Supply Chain Services, Inc. The net operating costs
of this entity are allocated to FedEx Express and FedEx Ground.
Prior year amounts have not been reclassified to conform to the
current year segment presentation, as financial results are mate-
rially comparable.

FedEx Ground segment operating income increased 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 in 2006 principally due
to wage rate increases and increases in staffing and facilities to
support volume growth. Depreciation expense in 2006 increased
at a higher rate than revenue due to increased spending associ-
ated with material handling and scanning equipment. In 2006,
purchased transportation increased 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.

FedEx Ground Segment Outlook
We expect the FedEx Ground segment to have revenue growth
in 2008 consistent with 2007, led by continued strong volume
growth at FedEx Ground and FedEx SmartPost. FedEx Ground’s
average daily volume is expected to increase in 2008 due to
increased base business and FedEx Home Delivery volumes.
FedEx SmartPost volumes are also expected to grow, because of
increased market share and improved service levels. Yields for all
services at FedEx Ground are expected to increase in 2008 from
increases in list prices and residential and commercial delivery
area surcharges.

FedEx Ground’s operating margin in 2008 is expected to improve
from continued cost controls, productivity gains and yield
improvements, partially offset by the impact of our network
expansion and increased purchased transportation costs. Capital
spending is expected to grow, as we continue with comprehen-
sive network expansion and productivity-enhancing technologies
within the FedEx Ground segment. During 2008, the multi-phase
expansion plan includes one new hub, 14 expanded hubs and
two relocated facilities. We are committed to investing in the
FedEx Ground network because of the long-term benefits we will
experience from these investments.

feDex freight segment
The following table shows revenues, operating expenses, operat-
ing income and operating margin (dollars in millions) and selected
statistics for the years ended May 31:

2007

2006

2005

Percent Change
2006/
2007/
2005
2006

Revenues
Operating expenses:
Salaries and

$ 4,586

$ 3,645

$ 3,217

56
19

63
24

38
65
30

(5)
(5)

18
47

(6)
42
9

employee benefits

2,250

1,801

1,650

Purchased

transportation

465
Rentals and landing fees 112
Depreciation and
amortization

195
468

298
94

315
99

120
377

102
257

Fuel
Maintenance
and repairs
Intercompany charges

Other

Total operating
expenses
Operating income
Operating margin
Average daily LTL
shipments (in thousands)
Weight per LTL
shipment (lbs)
LTL yield (revenue per
hundredweight)

165
61
407

120
37
313

128
26
286

4,123
$ 463

3,160
$ 485

10.1%

13.3%

2,863
$ 354

30
(5)
11.0% (320)bp 230bp

10
37

1,130

$ 18.65

1,143

1,132

(1)

$ 16.84

$ 15.48

The results of operations of FedEx National LTL are included in
FedEx Freight segment results from the date of acquisition on
September 3, 2006.

FEDEX CORPORATION

FedEx Freight Segment Revenues
FedEx Freight segment revenues increased 26% in 2007 primarily
as a result of the acquisition of FedEx National LTL, which contrib-
uted significantly to an increase in average daily LTL shipments
of 16% and LTL yield of 11%. Average daily LTL shipments exclud-
ing FedEx National LTL grew slightly in 2007 due to increased
demand for our regional and interregional services. This growth
rate moderated throughout the year, however, with year-over-
year declines in the second half of 2007. LTL yield growth was due
to higher yields from longer-haul FedEx National LTL shipments,
higher rates and favorable contract renewals.

FedEx Freight segment revenues increased 13% in 2006 due to
growth in LTL yield and average daily LTL shipments. LTL yield
grew during 2006, reflecting incremental fuel surcharges result-
ing from higher fuel prices and higher rates. Average daily LTL
shipment growth in 2006 was driven in part by features such as
our no-fee money-back guarantee and our Advance Notice ser-
vice, which continue to differentiate us in the LTL market.

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

2007

2006

2005

14.0%
21.2
17.8

12.5%
20.1
16.3

7.6%
14.0
11.0

FedEx Freight Segment Operating Income
FedEx Freight segment operating income decreased 5% dur-
ing 2007 due to operating losses at FedEx National LTL, which
resulted from softening volumes and ongoing expenses to inte-
grate its network. The inclusion of FedEx National LTL in our
results has impacted the year-over-year comparability of all
of our operating expenses. Along with incremental costs from
FedEx National LTL (including amortization of acquired intan-
gible assets), depreciation expense increased due to prior-year
purchases of vehicles and other operating equipment to sup-
port volume growth. Purchased transportation increased due
to higher rates paid to our third-party transportation providers
and the utilization of third-party providers at FedEx National LTL.
While fuel costs increased in 2007, our fuel surcharge was more
than sufficient to offset the effect of higher fuel costs, based on a
static analysis of the year-over-year changes in fuel prices com-
pared to changes in the fuel surcharge.

FedEx Freight segment operating income increased in 2006
primarily due to LTL revenue growth, as well as our ability to
control costs in line with volume growth. Increased staffing
to support volume growth and higher incentive compensation
expense increased salaries and employee benefits in 2006. While
fuel costs increased substantially in 2006, fuel surcharges more
than offset the effect of higher fuel costs. Depreciation costs
increased in 2006 primarily due to investments in operating
equipment, which in some cases replaced leased equipment.
Maintenance and repairs decreased in 2006 due to the pres-
ence of rebranding costs in 2005, as well as an increase in the
purchase of new fleet vehicles. Purchased transportation costs

decreased, due to increased utilization of company equipment
in our interregional freight services.

FedEx Freight Segment Outlook
We expect FedEx Freight segment revenue to increase in 2008
due to continued growth in our LTL business and the inclusion
of FedEx National LTL for the full year. LTL yield is expected to
increase due to our continued focus on pricing discipline, as well
as the impact of higher yields on longer-haul FedEx National LTL
shipments. Ongoing costs to integrate information technology
systems and to increase sales resources to support long-term
growth opportunities, as well as incremental costs associated
with facility expansions, are expected to restrain operating
income and operating margin growth in 2008. Continued invest-
ments in facilities and equipment to support revenue growth and
in technology to improve productivity and to meet our customers’
needs account for the majority of the total incremental capital
spending anticipated for 2008. We expect our rebranding efforts
at FedEx National LTL to continue in 2008.

feDex KinKO’s segment
The following table shows revenues, operating expenses, oper-
ating income and operating margin (dollars in millions) for the
years ended May 31:

2007

2006

2005

Percent Change
2006/
2005

2007/
2006

$ 2,040 $ 2,088 $ 2,066

(2)

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

781
375

752
394

742
412

139

148

138

4
(5)

(6)

1
(4)

66
57

73
26

70
6

(10)
NM

4
NM

263
314

274
364

278
320

(4)
(14)

(1)
14

1,995
$

45 $
2.2%

2,031

1,966
57 $ 100
2.7%

4.8%

3
(43)

(2)
(21)
(50)bp (210)bp

FedEx Kinko’s Segment Revenues
Revenues decreased slightly during 2007 due to decreased
demand for copy products and the discontinuation of unprofit-
able service offerings, which more than offset higher package
acceptance fees from FedEx Express and FedEx Ground. During
2007, FedEx Kinko’s announced a multi-year network expan-
sion plan, including the model for new centers, which will be
approximately one-third the size of a traditional center and will
include enhanced pack-and-ship stations and a doubling of the
number of retail office products offered. While revenues from
new centers were not significant in 2007, this multi-year expan-
sion of the FedEx Kinko’s network is a key strategy relating to
FedEx Kinko’s future revenue growth. In addition, this expansion

MANAGEMENT’S DISCUSSION AND ANALYSIS

will provide FedEx Express and FedEx Ground customers with
more retail access points. FedEx Kinko’s opened 226 new centers
during 2007.

In 2006, a year-over-year increase in package acceptance reve-
nue 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 revenues in
2006 due to decreased demand for these services and a competi-
tive pricing environment.

FedEx Kinko’s Segment Operating Income
Operating income decreased $12 million during 2007 primarily due
to the decrease in copy product revenues, as well as the impact
of increased salaries and employee benefit costs incurred in con-
nection with expansion activities and significant investments in
employee training and development programs. Rentals decreased
during 2007 due to declines in copier rental expenses, which are
variable based on usage. The increase in intercompany charges
was primarily due to increased allocations of sales and marketing
and IT support functions in 2007.

Operating income decreased in 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 addition of FedEx Kinko’s Ship Centers,
higher group health insurance costs and increased costs asso-
ciated 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 operating expenses was primar-
ily due to increased costs related to technology, strategic and
product offering initiatives.

FedEx Kinko’s Segment Outlook
We expect increased revenue at FedEx Kinko’s in 2008 primarily
due to the new store openings associated with the multi-year
network expansion, together with a sales force realignment and
marketing and service initiatives. The network expansion pro-
gram, combined with employee training and retention programs,
is expected to negatively impact operating income and operat-
ing margin in 2008. These investments, however, are focused on
long-term profit and margin growth. Initiatives in e-commerce
technology such as Print Online and new service offerings,
including our direct mail service, are expected to support addi-
tional growth opportunities for 2008 and beyond. Capital spending
is expected to increase at FedEx Kinko’s in 2008 primarily due to
the multi-year network expansion and technology investments.
FedEx Kinko’s plans to open approximately 300 new centers in
2008, which will bring the total number of centers to approxi-
mately 2,000 by the end of the year.

Financial Condition

liQuiDitY
Cash and cash equivalents totaled $1.569 billion at May 31, 2007,
compared to $1.937 billion at May 31, 2006 and $1.039 billion at
May 31, 2005. 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

Cash provided by
operating activities
Investing activities:
Business acquisitions,

net of cash acquired

Capital expenditures

2007

2006

2005

$ 2,016
1,988

$ 1,806
2,006

$ 1,449
1,671

(441)

(136)

(3)

3,563

3,676

3,117

(1,310)

–

(122)

and other investing activities

(2,814)

(2,454)

(2,226)

Cash used in

investing activities

Financing activities:
Proceeds from debt issuances
Principal payments on debt
Dividends paid
Other financing activities
Cash provided by

(used in) financing activities
Net (decrease) increase
in cash and cash

(4,124)

(2,454)

(2,348)

1,054
(906)
(110)
155

–
(369)
(97)
142

–
(791)
(84)
99

193

(324)

(776)

equivalents

$ (368)

898

(7)

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
are adequate to meet our current and foreseeable future working
capital and capital expenditure needs. In addition, other forms
of secured financing may be used to obtain capital assets if we
determine that they best suit our needs for the foreseeable future.
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 eco-
nomic factors. We believe the capital resources available to us
provide flexibility to access the most efficient markets for financ-
ing capital acquisitions, including aircraft, and are adequate for
our future capital needs.

FEDEX CORPORATION

The $500 million of floating-rate notes issued in 2007 will become
due in August 2007. The timing of cash requirements in the first
half of 2008 may dictate that we refinance a portion of this debt
through our commercial paper program.

As discussed in Note 1 of the accompanying consolidated finan-
cial statements, we adopted SFAS 158 on May 31, 2007. Our
adoption of this standard did not impact our compliance with
any current loan covenants or affect our debt ratings, pension
funding requirements or our overall liquidity.

Dividends. Dividends paid were $110 million in 2007, $97 million
in 2006 and $84 million in 2005. On May 25, 2007, our Board of
Directors declared a dividend of $0.10 per share of common
stock, an increase of $0.01 per share. The dividend was paid on
July 2, 2007 to stockholders of record as of the close of business
on June 11, 2007. 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 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 out-
look as “positive.” If our credit ratings drop, our interest expense
may increase. If our commercial paper ratings drop below cur-
rent levels, we may have difficulty utilizing the commercial paper
market. If our senior unsecured debt ratings drop below invest-
ment grade, our access to financing may become more limited.

Cash Provided by Operating Activities. Cash flows from operat-
ing activities decreased $113 million in 2007 primarily due to an
increase in income tax payments of $184 million, partially offset
by increased earnings. The $559 million increase in cash flows
from operating activities in 2006 was principally due to increased
earnings. During 2007, we made tax-deductible voluntary con-
tributions to our principal U.S. domestic pension plans of $482
million, compared to $456 million during 2006 and $460 million
during 2005.

Cash Used in Investing Activities. During 2007, $1.3 billion of cash
was used for the FedEx National LTL, ANC, DTW Group and other
immaterial acquisitions. See Note 3 of the accompanying audited
financial statements for further discussion of these acquisitions.
See “Capital Resources” for a discussion of capital expenditures
during 2007 and 2006.

Financing Activities. On August 2, 2006, we filed an updated shelf
registration statement with the SEC. The new registration state-
ment does not limit the amount of any future offering. By using
this shelf registration statement, we may sell, in one or more
future offerings, any combination of our unsecured debt securi-
ties and common stock.

On August 8, 2006, under the new shelf registration statement, we
issued $1 billion of senior unsecured debt, comprised of floating-
rate notes totaling $500 million due in August 2007 and fixed-rate
notes totaling $500 million due in August 2009. The floating-rate
notes bear interest at the three-month London Interbank Offered
Rate (“LIBOR”) plus 0.08%, reset on a quarterly basis. As of May
31, 2007, the floating interest rate was 5.44%. The fixed-rate notes
bear interest at an annual rate of 5.5%, payable semi-annually.
The net proceeds were used for working capital and general
corporate purposes, including the funding of the acquisitions
referenced above.

During 2007, $700 million of senior unsecured notes and $18 mil-
lion of medium-term notes matured and were repaid. During 2006,
$250 million of senior unsecured notes matured and were repaid.
In addition, other debt was reduced by $118 million as a result of
the purchase by FedEx Express of two MD11 aircraft in March
2007. In 2001, FedEx Express entered into a lease for the two
MD11 aircraft from a separate entity, which we were required to
consolidate under FIN 46. The purchase of these aircraft extin-
guished this liability.

A $1.0 billion revolving credit facility is available to finance our
operations and other cash flow needs and to provide support
for the issuance of commercial paper. Our revolving credit
agreement contains a financial covenant, which 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. Our leverage
ratio of adjusted debt to capital was 0.6 at May 31, 2007. We are
in compliance with this and all other restrictive covenants of our
revolving credit agreement and do not expect the covenants to
affect our operations. As of May 31, 2007, no commercial paper
was outstanding and the entire $1.0 billion under the revolving
credit facility was available for future borrowings.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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, 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):

2007

2006

2005

Aircraft and

related equipment

$ 1,107

$ 1,033

$ 990

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

674
445

507
413

496
261

431
225

394
171

331
158

$ 2,882
$ 1,672
489
287
157

$ 2,518
$ 1,408
487
274
94

$ 2,236
$ 1,195
456
217
152

277

255

216

Percent Change
2006/
2005

2007/
2006

33
8

9
32

14
19
–
5
67

2
58

19
8

13
18
7
26
(38)

expenditures

$ 2,882

$ 2,518

$ 2,236

Capital expenditures increased during 2007 primarily due to
increased spending at FedEx Express for facility expansion and
aircraft and related equipment and expenditures at FedEx Kinko’s

associated with its multi-year expansion program. Capital expen-
ditures 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 in 2006 to support growth in customer demand.

While we pursue market opportunities to purchase aircraft when
they become available, we must make commitments regarding
our airlift requirements years before aircraft are actually needed
because of substantial lead times associated with the manufacture
and modification of aircraft. We are closely managing our capital
spending based on current and anticipated volume levels and will
defer or limit capital additions where economically feasible, while
continuing to invest strategically in growing service lines.

During 2007, FedEx Express announced two aircraft acquisition
programs designed to meet future capacity needs. The first is a
$2.6 billion multi-year program to acquire and modify approxi-
mately 90 Boeing 757-200 aircraft to replace our narrow-body
fleet of Boeing 727-200 aircraft. The second is an agreement to
acquire 15 new Boeing 777F (“B777F”) aircraft and an option to
purchase an additional 15 B777F aircraft. The B777F aircraft will
provide us with non-stop, point-to-point transoceanic routes with
shorter flight times. See Note 16 of the accompanying consoli-
dated financial statements for further discussion of our aircraft
purchase commitments.

Our capital expenditures are expected to be approximately $3.5
billion in 2008, with much of the year-over-year increase due
to spending for facilities and sort equipment at FedEx Express
and FedEx Ground and network expansion at FedEx Kinko’s. We
also continue to invest in productivity-enhancing technologies.
Aircraft-related capital and expense outlays, including support
of the narrow-body aircraft replacement program and the B777F
fleet, are expected to approximate 2007 aircraft spending levels.
We currently expect to fund our 2008 capital requirements with
cash from operations.

cOntractual cash OBligatiOns
The following table sets forth a summary of our contractual cash obligations as of May 31, 2007. 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, 2007. Accordingly, this table is not meant to represent a forecast
of our total cash expenditures for any of the periods presented.

(in millions)

2008

2009

Payments Due by Fiscal Year
2011

2010

2012

Thereafter

Total

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 16 to the accompanying consolidated financial statements.

$ 521
103

1,282
118
1,680
$ 3,704

$ 530
13

$ 500
97

1,111
111
1,481
$ 3,246

1,150
79
1,297
$ 3,123

$ 250
8

704
65
1,143
$ 2,170

–
8

86
47
1,010
$ 1,151

$ 539
137

164
1,553
6,752
$ 9,145

$ 2,340
366

4,497
1,973
13,363
$ 22,539

FEDEX CORPORATION

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. The underlying liabilities insured by these instruments
are reflected in our balance sheets, where applicable. Therefore,
no additional liability is reflected for the surety bonds and letters
of credit themselves.

We have other long-term liabilities reflected in our balance sheet,
including deferred income taxes, qualified and nonqualified
pension and postretirement 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 non-cancelable 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
contracts. In addition, we have committed to modify our DC10
aircraft for two-man cockpit configurations, which is reflected
in the table above. Commitments to purchase aircraft in passen-
ger configuration do not include the attendant costs to modify
these aircraft for cargo transport unless we have entered into a
non-cancelable commitment. Open purchase orders that are can-
celable are not considered unconditional purchase obligations
for financial reporting purposes and are not included in the table
above. Such purchase orders often represent authorizations 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 non-cancelable
operating leases (principally aircraft and facilities) with an initial
or remaining term in excess of one year at May 31, 2007. 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 $17 million
as of May 31, 2007, 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 prob-
able 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.

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 complex,
global corporation. However, even under optimal circumstances,
estimates routinely require adjustment based on changing cir-
cumstances 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.

As discussed in the notes to our financial statements and previ-
ously in this MD&A, we are required to adopt new accounting
rules for income taxes under FIN 48, commencing in 2008. While
the adoption of FIN 48 will not have a material effect on our
financial statements, its application substantially increases the
sensitivities of the estimation process used in the accounting
and reporting for tax contingencies. Therefore, we will add a
“Contingencies, including Income Taxes” category to our criti-
cal accounting estimates in the first quarter of 2008.

Over the past several years, we have substantially improved
and automated the rating and billing processes for our package
businesses. As a result, our experience with invoice corrections
and bad debts has improved markedly, as has the accuracy of
our revenue estimates for shipments not yet billed at period end.
Therefore, substantially less judgment is required in the report-
ing of revenue and we have concluded that revenue recognition
will no longer be considered a critical accounting estimate com-
mencing in 2008.

MANAGEMENT’S DISCUSSION AND ANALYSIS

retirement plans
Overview. We sponsor programs that provide retirement ben-
efits to most of our employees. These programs include defined
benefit pension plans, defined contribution plans and retiree
healthcare plans. The accounting for pension and healthcare
plans includes numerous assumptions, such as: discount rates;
expected long-term investment returns on plan assets; future sal-
ary increases; employee turnover; mortality; and retirement ages.
These assumptions most significantly impact our U.S. domestic
pension plan.

A summary of our retirement plans costs over the past three
years is as follows (in millions):

U.S. domestic pension plans
International pension and
defined contribution plans

U.S. domestic defined
contribution plans
Retiree healthcare plans

2007

$ 442

2006

$ 400

2005

$ 337

152
55
$ 698

147
73
$ 665

136
68
$ 582

The determination of our annual retirement plans cost is highly
sensitive to changes in the assumptions discussed above
because we have a large active workforce, a significant amount
of assets in the pension plans, and the payout of benefits will
occur over an extended period in the future. Total retirement
plans cost increased approximately $33 million in 2007, $83 mil-
lion in 2006 and $37 million in 2005, primarily due to changes to
these assumptions.

In February 2007, we announced changes to modernize certain of
our retirement programs over the next two fiscal years. Effective
January 1, 2008, we will increase the annual company matching
contribution under the largest of our 401(k) plans covering most
employees from $500 to a maximum of 3.5% of eligible compensa-
tion. Employees not participating in the 401(k) plan as of January
1, 2008 will be automatically enrolled at 3% of eligible pay with
a company match of 2% of eligible pay. Effective May 31, 2008,
benefits previously accrued under our primary pension plans
using a traditional pension benefit formula will be capped for
most employees, and those benefits will be payable beginning
at retirement. Beginning June 1, 2008, future pension benefits for
most employees will be accrued under a cash balance formula
we call the Portable Pension Account. These changes will not
affect the benefits of current retirees.

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 minimum rate of 4% or the one-year
Treasury Constant Maturities rate and a maximum rate based on
the average 30-year Treasury rate.

Under the new programs, we expect the long-term costs and
funding for our retirement plans will approximate those under
the current design. However, we expect that the costs of our
retirement plans will become more predictable, as we reduce
highly volatile pension costs in favor of more predictable 401(k)
costs associated with our matching contributions. These retire-
ment plan changes were contemplated in our February 28, 2007
actuarial measurement and reduced the impact on shareholders’
equity of adopting SFAS 158 by $1 billion. Because it will take
several years to fully implement the increases to our 401(k) plan
contributions, we will realize a net retirement plans cost reduc-
tion in the near term from these changes.

Retirement plans cost in 2008 is expected to be approximately
$615 million, a decrease of $83 million from 2007. This expected
decrease in cost is due to the retirement plan design changes
described above, which will be partially offset by changes in
assumptions related to plan asset rate of return, mortality, ben-
efit age for deferred vested participants and pilot-specific benefit
formula and salary increases. Retirement plans cost is included
in the “Salaries and Employee Benefits” caption in our consoli-
dated income statements.

As part of our strategy to manage future pension costs and net
funded status volatility, we are also in the process of re-evaluat-
ing our pension investment strategy. We have decided to move
certain equity investments out of actively managed funds and into
index funds. Also, we are currently evaluating the mix of invest-
ments between equities and fixed income securities, whose cash
flows will more closely align with the cash flows of our pension
obligations. Based on these considerations, we have reduced
our estimated long-term rate of return on plan assets from 9.1%
to 8.5% for 2008.

Pension Cost. Of all of our retirement plans, our largest qualified
U.S. domestic pension plan is the most significant and subjective.
The components of pension cost for all pension plans recognized
in our income statements are as follows (in millions):

Service cost
Interest cost
Expected return on plan assets
Recognized actuarial
losses and other

2007

$ 540
707
(930)

150
$ 467

2006

$ 473
642
(811)

121
$ 425

2005

$ 417
579
(707)

72
$ 361

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
estimated future benefit payments that have been accrued to
date (the projected benefit obligation, or PBO) to their net pres-
ent 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.

FEDEX CORPORATION

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

2008
2007
2006
2005

Discount

Rate (1)

n/a
6.012%
5.912%
6.285%

Sensitivity (in millions) (2)
PBO

Expense

$2.1
2.5
2.1
1.8

n/a
$19
21
16

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

We determine the discount rate (which is required to be the
rate at which the projected benefit obligation could be effec-
tively 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 in
future years. This bond modeling technique allows for the use of
non-callable and make-whole bonds that meet certain screen-
ing criteria to ensure that the selected bonds with a call feature
have a low probability of being called. To the extent scheduled
bond proceeds exceed the estimated benefit payments in a given
period, the yield calculation assumes those excess proceeds are
reinvested at the one-year forward rates implied by the Citigroup
Pension Discount Curve. The trend of declines in the discount rate
negatively affected our primary domestic pension plan expense
by $89 million in 2007, $101 million in 2006 and $32 million in 2005.
Pension costs will be favorably affected in 2008 by approximately
$27 million due to the slight increase 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, 2007, with approximately $11.3 billion of plan assets,
a one-basis-point change in this assumption for our domestic
pension plans affects pension cost by approximately $1.1 million.
We have assumed an 8.5% compound geometric long-term rate
of return on our principal U.S. domestic pension plan assets for
2008, down from 9.1% in 2007, as discussed above.

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.

As noted above, we have refined our investment strategy and
lowered the long-term rate of return for 2008. To support our
conclusions, we periodically commission 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. The following table
summarizes our current asset allocation strategy:

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

2007

2006

Actual

Target

Actual

Target

52%
21
3
76

53%
17
5
75

54%
20
3
77

53%
17
5
75

15
9
100%

15
10
100%

14
9
100%

15
10
100%

The actual historical return on our U.S. pension plan assets,
calculated on a compound geometric basis, was 9.8%, net of
investment manager fees, for the 15-year period ended February
28, 2007. In addition, our actual return on plan assets exceeded
the estimated return in each of the past four 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 per-
formance (both increases and decreases). Another method used
in practice applies the market value of plan assets at the mea-
surement date. The application of the calculated-value method
equaled the result from applying the market-value method for
2005 through 2007.

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 indi-
cator of general inflation and cost of living adjustments) and
general estimated levels of profitability (since most incentive
compensation is a component of pensionable wages). Our aver-
age future salary increases based on age and years of service
were 3.46% for 2007 and 3.15% for 2006 and 2005. Future salary
increases are estimated to be 4.47% for our 2008 pension costs,
reflecting the impact of the modernization of our retirement plans
(discussed above). In the future, a one-basis-point across-the-
board change in the rate of estimated future salary increases will
have an immaterial impact on our pension costs.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Following is information concerning the funded status of our
pension plans as of May 31 (in millions):

2007 (1)

2006

Funded Status of Plans:
Projected benefit obligation (PBO)
Fair value of plan assets
PBO in excess of plan assets
Unrecognized actuarial losses and other
Net amount recognized

$ 12,209
11,506
(703)
22(2)
(681)

–(4)
1

Components of Amounts Included in Balance Sheets:
Prepaid pension cost
Noncurrent pension assets
Current pension, postretirement
healthcare and other
benefit obligations
Accrued pension liability
Minimum pension liability
Noncurrent pension, postretirement
healthcare and other benefit obligations
Accumulated other comprehensive income
Intangible asset and other
Net amount recognized

(658)
–(4)
–(4)
(681)

(24)
–(4)
–(4)

$ 12,153
10,130
(2,023)
3,119(3)
$ 1,096

$ 1,349
–

–
(253)
(122)

–
112
10
$ 1,096

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

$
$

524
261

$
$

492
228

(1) Incorporates the provisions of SFAS 158 adopted on May 31, 2007.
(2) Amounts for 2007 represent only employer contributions after measurement date, as
unrecognized net actuarial loss, unamortized prior service cost and unrecognized net transition
amount were not applicable in 2007 due to adoption of SFAS 158.
(3) Amounts for 2006 consist of unrecognized net actuarial loss, unamortized prior service cost,
unrecognized net transition amount and employer contributions after measurement date.
(4) Not applicable for 2007 due to adoption of SFAS 158.

The funded status of the plans reflects a snapshot of the state of
our long-term pension liabilities at the plan measurement date.
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
2007 were approximately 2% of plan assets). As described previ-
ously in this MD&A, the adoption of SFAS 158 resulted in a $982
million charge to shareholders’ equity in accumulated other com-
prehensive income from the elimination of our prepaid pension
asset of $1.4 billion and an increase in other postretirement ben-
efit liabilities of $120 million, net of tax. Under SFAS 158 we are
required to recognize the funded status of the PBO and cannot
defer actuarial gains and losses even though such items continue
to be deferred for the determination of pension expense.

We made tax-deductible voluntary contributions of $482 million in
2007 and $456 million in 2006 to our qualified U.S. domestic pen-
sion plans. We expect approximately $10 million of contributions
to such plans to be legally required in 2008, and we currently
expect to make tax-deductible voluntary contributions to our
qualified plans in 2008 at levels approximating those in 2007.

Cumulative unrecognized actuarial losses for pension plans
expense determination were approximately $3.3 billion through
February 28, 2007, compared to $3.0 billion at February 28,
2006. These unrecognized losses primarily reflect the declin-
ing discount rate from 2002 through 2006 and other changes in
assumptions. 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 corridor amount, these unrecognized
actuarial losses are required to be amortized and recognized in
future periods. For example, projected U.S. domestic plan pen-
sion expense for 2008 includes $162 million of amortization of
these actuarial losses versus $136 million in 2007, $107 million in
2006 and $60 million in 2005.

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, 2007 there were
approximately $1.3 billion of self-insurance accruals reflected in
our balance sheet ($1.2 billion at May 31, 2006). In 2007 approxi-
mately 41% of these accruals were classified as current liabilities
and in 2006 approximately 43% of self-insurance 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, on
a quarterly basis for material accruals. 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 premium expense. Historically,
it has been infrequent that incurred claims exceeded our self-
insured limits. Other acceptable methods of accounting for these
accruals include measurement of claims outstanding and pro-
jected payments based on historical development factors.

We believe the use of actuarial methods to account for these lia-
bilities provides a consistent and effective way to measure these
highly judgmental accruals. However, the use of any estimation
technique in this area is inherently sensitive given the magni-
tude 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 intensive,
with more than 53% of our total assets invested in our transpor-
tation 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 not part of the
cost of acquiring the asset are expensed as incurred. However,
consistent with industry practice, we capitalize certain aircraft-
related major maintenance costs on one of our aircraft fleet types
and amortize these costs over their estimated service lives.

FEDEX CORPORATION

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 adjustments
to our estimated service lives or salvage values are necessary
to ensure these estimates properly match the economic 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 oper-
ating equipment have not been material (typically less than $15
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, aircraft purchases (primarily
aircraft in passenger configuration) that have not been placed in
service totaled $71 million at May 31, 2007 and $208 million at May
31, 2006. 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-
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 2007, 2006 or 2005.

Leases. We utilize operating leases to finance certain of our
aircraft, facilities and equipment. 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 7 to the accompanying consolidated
financial statements, at May 31, 2007 we had approximately $13
billion (on an undiscounted basis) of future commitments for pay-
ments under operating leases. The weighted-average remaining
lease term of all operating leases outstanding at May 31, 2007
was approximately seven 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 operating
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 mate-
rial transactions to assist us in making these evaluations.

Goodwill. We have approximately $3.5 billion of goodwill in our
balance sheet resulting from business acquisitions. Our busi-
ness acquisitions in 2007 contributed approximately $670 million
in goodwill, as follows:

Segment

FedEx Express
FedEx Express
FedEx Freight
FedEx Express

Acquisition

DTW Group
ANC
FedEx National LTL
Other

Goodwill
(in millions)

$ 348
168
121
33
$ 670

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, such
as: revenue growth rates; operating margins; discount rates and
expected capital expenditures. Estimates used by management
can significantly affect the outcome of the impairment test. 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 project 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 2007. Because the fair value of each of our reporting units
exceeded its carrying value, including goodwill, no additional
testing or 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
2007. Because the fair value of the trade name exceeded its car-
rying value, no impairment charge was necessary.

While FedEx Kinko’s experienced a slight revenue decline in 2007
and decreased profitability in 2007 and 2006, we believe that our
long-term growth and expansion strategies support our fair value
conclusions. For both goodwill and recorded intangible assets at
FedEx Kinko’s, the recoverability of these amounts is dependent
on execution of key initiatives related to revenue growth, location
expansion and improved profitability.

MANAGEMENT’S DISCUSSION AND ANALYSIS

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 pro-
cesses and the estimates have historically not varied significantly
from actual amounts subsequently invoiced.

Shipments in Process. Because the majority of our shipments
have short cycle times, 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 subse-
quently 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 adjust-
ments through a reserve against accounts receivable that takes
into consideration historical experience and current trends. For
2007, 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 maintained a consistently low revenue adjustment per-
centage. A one-basis-point change in the revenue adjustment
percentage would increase or decrease revenue adjustments
by approximately $2 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 0.3% in 2007, 0.4% in 2006 and 0.3% in 2005 of total revenue
and reflects our strong credit management processes.

revenue recOgnitiOn
Historically, the policies adopted to recognize revenue have
been deemed critical because an understanding of the account-
ing 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.
Revenue recognition will no longer be considered a critical
accounting estimate category for 2008 due to the improvements
we have made in our rating and billing processes, which have
significantly reduced the level of management judgment applied
in these areas.

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 account-
ing 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 associ-
ated 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 for our trans-
portation businesses and upon completion of services for our
business services, logistics and trade services businesses.
Transportation industry practice includes four acceptable meth-
ods for revenue recognition for shipments in process at the end
of an accounting period, two of which are predominant: (1) rec-
ognize 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 revenue 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 revenue with expenses and
recognizes liabilities as incurred.

Our contract logistics, global trade services and certain transpor-
tation 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, com-
missions, taxes and duties. These amounts are not material.

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

FEDEX CORPORATION

Market Risk Sensitive Instruments
and Positions

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.

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. At
May 31, 2007, we had approximately $500 million of outstanding
floating-rate senior unsecured debt issued in August 2006. This
floating-rate debt matures in August 2007. We have not employed
interest rate hedging to mitigate the risks with respect to this bor-
rowing. A hypothetical 10% increase in the interest rate on our
outstanding floating-rate debt would not have a material effect
on our results of operations. In 2006, we had approximately $118
million of outstanding floating-rate borrowings related to leases
for two MD-11 aircraft that were consolidated under the provi-
sions of FIN 46, “Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51.” FedEx Express purchased these air-
craft in March 2007, extinguishing this debt. As disclosed in Note
6 to the accompanying consolidated financial statements, we had
outstanding fixed-rate, long-term debt (exclusive of capital leases)
with an estimated fair value of $2.4 billion at May 31, 2007 and
$2.2 billion at May 31, 2006. 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 $36 million as of May 31, 2007 and $42 million as
of May 31, 2006. The underlying fair values of our long-term debt
were estimated based on quoted market prices or on the current
rates offered for debt with similar terms and maturities.

Foreign Currency. While we are a global provider of transporta-
tion, e-commerce and business services, the substantial majority
of our transactions are denominated in U.S. dollars. The distribu-
tion 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 for-
eign currency exchange rate risks to which we are exposed are
in the euro, Chinese yuan, Canadian dollar, Great Britain pound
and Japanese yen. During 2007 and 2006, we believe operating
income was positively impacted due to foreign currency fluctua-
tions. 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, 2007, the result of a uniform
10% strengthening in the value of the dollar relative to the cur-
rencies in which our transactions are denominated would result
in a decrease in operating income of approximately $151 million
for 2008 (the comparable amount in the prior year was approxi-
mately $135 million). 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

Commodity. We have market risk for changes in the price of jet and
diesel fuel; however, this risk is largely mitigated by our fuel sur-
charges. 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 fluctuate 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 pro-
moting 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, includ-
ing 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 revenues 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.

MANAGEMENT’S DISCUSSION AND ANALYSIS

Our businesses are capital intensive, and we must make capi-
tal 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 pur-
chase 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 compensatory
prices. However, our competitors determine the charges for their
services. If the pricing environment becomes irrational, it could
limit our ability to maintain or increase our prices (including our
fuel surcharges in response to rising fuel costs) or to maintain or
grow our market share. In addition, maintaining a broad portfo-
lio 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 ser-
vices 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 profit-
ability 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, during 2007
we acquired the LTL freight operations of Watkins Motor Lines
(renamed FedEx National LTL) and made strategic acquisitions
in China, the United Kingdom and India. While we expect these
acquisitions to enhance our value proposition 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 services 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 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 successful or that we can continue
to support the value we allocate to these acquired businesses,
including their goodwill or other intangible assets.

Our transportation businesses may be impacted by the price and
availability of fuel. We must purchase large quantities 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 surcharges because
of competitive pricing pressures or some other reason, fuel costs
could adversely impact our operating results. In addition, disrup-
tions in the supply of fuel could have a negative impact on our
ability to operate our transportation networks.

FedEx Ground relies on owner-operators to conduct its operations,
and the status of these owner-operators as independent contrac-
tors, 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 contractors. 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.
However, adverse determinations in these matters could, among
other things, entitle some 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
independent 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 concerns about
global terrorism and homeland security, governments 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, and in May
2007, the TSA issued a revised model all-cargo aircraft security
program for implementing the new rules. Together with other
all-cargo aircraft operators, we have filed comments with the
TSA requesting clarification regarding several provisions in the
revised model program. Until the requirements for our security
program under the new rules are 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 material costs on us.

The regulatory environment for global aviation rights may impact
our air operations. Our extensive air network is critical to our suc-
cess. 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 gov-
ernments. 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.

FEDEX CORPORATION

We are directly affected by the state of the economy. While the
global, or macro-economic, risks listed above apply to most com-
panies, 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 busi-
ness levels are directly tied to the purchase and production of
goods — key macro-economic measurements. When individuals
and companies purchase and produce fewer goods, we trans-
port 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.

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 “Retirement Plans” note to the
consolidated financial statements, are “forward-looking” state-
ments within the meaning of the Private Securities Litigation
Reform Act of 1995 with respect to our financial 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,” “anticipates,” “plans,” “esti-
mates,” “targets,” “projects,” “intends” or similar expressions.
These forward-looking statements involve risks and uncertain-
ties. 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 guarantee 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 obliga-
tion, to update or alter any forward-looking statements, whether as
a result of new information, future events or otherwise.

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

• 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 laws and 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
euro, Chinese yuan, Canadian dollar, Great Britain pound and
Japanese yen, which can affect our sales levels and foreign
currency sales prices;

• 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 produc-
tivity gains;

• increasing costs for employee benefits, especially pension and

healthcare benefits;

• 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 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 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.

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 our 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, 2007, 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, 2007.

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
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, 2007, based on crite-
ria 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
financial 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 reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliabil-
ity of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (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 state-
ments 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 prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.

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

In our opinion, management’s assessment that FedEx Corporation maintained effective internal control over financial reporting as of
May 31, 2007, 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, 2007, 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, 2007 and 2006, 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, 2007
of FedEx Corporation and our report dated July 9, 2007 expressed an unqualified opinion thereon.

Memphis, Tennessee
July 9, 2007

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
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.

2007

$ 35,214

13,740
3,873
2,343
1,742
3,533
1,952
4,755
31,938

3,276

(136)
83
(8)
(61)
3,215
1,199
$ 2,016
$ 6.57
$ 6.48

Years ended May 31,

2006

$ 32,294

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

2005

$ 29,363

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

FEDEX CORPORATION

Consolidated Balance Sheets

(In millions, except per share data)

ASSETS
Current Assets
Cash and cash equivalents
Receivables, less allowances of $136 and $144
Spare parts, supplies and fuel, less allowances of $156 and $150
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; 308 million shares

issued for 2007 and 306 million shares issued for 2006

Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Treasury stock

Total common stockholders’ investment

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

May 31,

2007

2006

$ 1,569
3,942
338
536
244
6,629

9,593
3,889
4,685
2,561
6,362
27,090
14,454
12,636

3,497
–
1,238
4,735
$ 24,000

639
$
1,354
2,016
1,419
5,428
2,007

897
1,164
759
655
343
91
3,909

31
1,689
11,970
(1,030)
(4)
12,656
$ 24,000

$ 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
1,438
10,068
(24)
(2)
11,511
$ 22,690

FEDEX CORPORATION

Consolidated Statements of Cash Flows

(In millions)

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

Depreciation and amortization
Provision for uncollectible accounts
Deferred income taxes and other noncash items
Lease accounting charge
Excess tax benefits on the exercise of stock options
Stock-based compensation
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
Excess tax benefits on the exercise of stock options
Dividends paid
Other, net
Cash provided by (used in) financing activities

CASH AND CASH EQUIVALENTS
Net (decrease) increase 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.

2007

$ 2,016

1,742
106
37
–
–
103

(323)
(85)
(69)
66
(30)
3,563

(2,882)
(1,310)
68
–
(4,124)

(906)
1,054
115
45
(110)
(5)
193

(368)
1,937
$ 1,569

Years ended May 31,

2006

$ 1,806

1,548
121
159
79
62
37

(319)
(38)
(71)
346
(54)
3,676

(2,518)
–
64
–
(2,454)

(369)
–
144
–
(97)
(2)
(324)

898
1,039
$ 1,937

2005

$ 1,449

1,462
101
40
–
36
32

(235)
(26)
(118)
365
11
3,117

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

(791)
–
99
–
(84)
–
(776)

(7)
1,046
$ 1,039

FEDEX CORPORATION

Consolidated Statements of Changes in Stockholders’
Investment and Comprehensive Income

(In millions, except share data)

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)

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)

BALANCE AT MAY 31, 2006
Net income
Foreign currency translation adjustment,
net of deferred taxes of $8
Minimum pension liability adjustment,
net of deferred taxes of $24

Total comprehensive income

Retirement plans adjustment in connection
with the adoption of SFAS 158, net of
deferred taxes of $582
Cash dividends declared ($0.37 per share)
Employee incentive plans and other

(2,508,850 shares issued)
BALANCE AT MAY 31, 2007

Common
Stock

$ 30
–

Additional
Paid-in
Capital

$ 1,051
–

Accumulated
Other
Comprehensive
Loss

(46)
–

Retained
Earnings

$ 7,001
1,449

Treasury
Stock

$ –
–

–

30
–

–

31
–

–

–
–

–
$ 31

–

162

1,213
–

–

225

1,438
–

–

–
–

251
$ 1,689

–

(87)

–

8,363
1,806

–

(101)

–

10,068
2,016

–

(17)
–

(36)

–

(24)
–

(50)

–
(114)

–
$ 11,970

(982)
–

–
$ (1,030)

–

(1)

(1)
–

–

(1)

(2)
–

–

–
–

(2)
$ (4)

Total

$ 8,036
1,449

2
1,478
(87)

161

9,588
1,806

(36)
1,799
(101)

225

11,511
2,016

(50)
1,992

(982)
(114)

249
$ 12,656

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 trans-
portation, e-commerce and business services through companies
competing collectively, operating independently and managed
collaboratively, under the respected FedEx brand. These oper-
ating 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, a leading U.S. pro-
vider of 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 represent our major service lines and 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 Global Supply Chain Services,
Inc. (“FedEx Supply Chain Services”), a contract logistics pro-
vider; 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, 2007 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.

revenue recOgnitiOn
We recognize revenue upon delivery of shipments for our trans-
portation businesses and upon completion of services for our
business 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 trans-
actions is recognized on a gross basis. Costs associated with
independent contractor settlements are recognized as incurred
and included in the caption “Purchased transportation” in the
accompanying consolidated statements of income. 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.

Our contract logistics, global trade services and certain transpor-
tation 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, commis-
sions, and taxes and duties. These amounts are not material.

Certain of our revenue-producing transactions are subject to
taxes assessed by governmental authorities, such as sales tax.
We present these taxes on a net basis.

creDit risK
We routinely grant credit to many of our customers for transpor-
tation 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 trans-
action 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.

aDvertising
Advertising and promotion costs are expensed as incurred and
are classified in other operating expenses. Advertising and pro-
motion expenses were $406 million in 2007, $376 million in 2006
and $326 million in 2005.

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

spare parts, supplies anD fuel
Spare parts (principally aircraft related) 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 for spare parts
expected to be on hand at the date the aircraft are retired from
service over the estimated useful life of the related aircraft and
engines. Additionally, allowances for obsolescence are provided
for spare parts currently identified as excess or obsolete. These
allowances are based on management estimates, which are
subject to change.

prOpertY anD eQuipment
Expenditures for major additions, improvements, flight equip-
ment modifications and certain equipment overhaul costs are
capitalized when such costs are determined to extend the use-
ful 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

FEDEX CORPORATION

and losses on sales of property used in operations are classified
with depreciation and amortization.

For financial reporting purposes, we record depreciation and
amortization of property and equipment 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):

Net Book Value at May 31,
2006

2007

Range

15 to 25 years

Wide-body aircraft and
related equipment
Narrow-body and feeder
aircraft and related equipment 5 to 15 years
Package handling and
ground support equipment
Computer and electronic
equipment
Vehicles
Facilities and other

2 to 10 years
3 to 15 years
2 to 40 years

2 to 30 years

$ 5,391

$ 4,669

352

369

1,420

1,255

1,021
957
3,495

928
743
2,806

Substantially all property and equipment have no material resid-
ual 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 depre-
ciate 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 presented. Depreciation expense, excluding gains and
losses on sales of property and equipment used in operations,
was $1.7 billion in 2007, $1.5 billion in 2006 and $1.4 billion in 2005.
Depreciation and amortization expense includes amortization of
assets under capital lease.

capitalizeD interest
Interest on funds used to finance the acquisition and modification
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 $34 million
in 2007, $33 million in 2006 and $22 million in 2005.

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 car-
rying 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 values
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 esti-
mated net realizable value. We operate integrated transportation
networks, and accordingly, cash flows cannot be associated with
an individual asset for our analysis of impairment.

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.

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 pattern in which the economic benefits are realized. Our
only non-amortizing intangible asset is the Kinko’s trade name.
Non-amortizing intangibles are reviewed at least annually for
impairment. Unless circumstances otherwise dictate, we perform
our annual impairment testing in the fourth quarter.

pensiOn anD pOstretirement healthcare
plans
On May 31, 2007, we adopted Statement of Financial Accounting
Standards (“SFAS”) 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans,” which amended
several other Financial Accounting Standards Board (“FASB”)
Statements. SFAS 158 requires recognition in the balance sheet
of the funded status of defined benefit pension and other post-
retirement benefit plans, and the recognition in accumulated
other comprehensive income (“AOCI”) of unrecognized gains
or losses and prior service costs or credits existing at the time
of adoption. Additionally, SFAS 158 requires the measurement
date for plan assets and liabilities to coincide with the sponsor’s
year-end. We currently use a February 28 measurement date for
our plans; therefore, this standard will require us to change our
measurement date to May 31 (beginning in 2009). The impact
of adopting the measurement date provision on our financial
statements will depend on the funded status of the plans at the
date of adoption.

The adoption of SFAS 158 resulted in a $982 million charge to
shareholders’ equity at May 31, 2007 through AOCI. Under SFAS
158, we were required to write off our prepaid pension asset
of $1.4 billion and increase our pension and other postretire-
ment benefit liabilities by $120 million. These adjustments, net
of deferred taxes of $582 million, were required to recognize the
unfunded projected benefit obligation in our balance sheet. SFAS
158 has no impact on the determination of expense for our pen-
sion and other postretirement benefit plans.

In February 2007, we announced changes to modernize certain of
our retirement programs over the next two fiscal years. Effective
May 31, 2008, all benefits previously accrued under our primary
pension plans using a traditional pension benefit formula will be
capped for most employees, and those benefits will be payable
beginning at retirement. Beginning June 1, 2008, future pension

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

benefits for most employees will be accrued under a cash bal-
ance formula we call the Portable Pension Account (as described
in Note 12). These retirement plan changes were contemplated
in our February 28, 2007 actuarial measurement. These changes
will not affect the benefits of current retirees.

Currently, our defined benefit plans are measured using actuarial
techniques that reflect management’s assumptions for discount
rate, rate of return, salary increases, expected retirement, mor-
tality, 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 effec-
tively 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. A cal-
culated-value method is employed for purposes of determining
the expected return on the plan asset component of net periodic
pension cost for our qualified 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.

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 liabil-
ity method is used to account for income taxes, which requires
deferred taxes to be recorded at the statutory rate expected to
be 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 such taxes associated with these
earnings are not material. Pretax earnings of foreign operations
were approximately $648 million in 2007, $606 million in 2006 and
$636 million in 2005, 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
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 premium expense.

leases
We lease certain aircraft, facilities, equipment and vehicles
under capital and operating leases. 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. 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. Certain of our leases
contain fluctuating or escalating payments and rent holiday peri-
ods. 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 accompa-
nying consolidated balance sheets. The cumulative excess of
rent expense over rent payments is accounted for as a deferred
lease obligation. 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 denomi-
nated in a currency other than the local currency are included
in the caption “Other, net” in the accompanying consolidated
statements of income. Cumulative net foreign currency transla-
tion gains in accumulated other comprehensive loss were $69
million at May 31, 2007, $43 million at May 31, 2006 and $14 million
at May 31, 2005.

airline staBilizatiOn act charge
In 2005, the United States Department of Transportation (“DOT”)
issued a final order in its administrative review of the FedEx
Express claim for compensation under the Air Transportation
Safety and System Stabilization Act. We recorded a charge of $48
million in 2005, representing the repayment of $29 million that we
had previously received and the write-off of a $19 million receiv-
able that we concluded was no longer collectible.

emplOYees unDer cOllective Bargaining
arrangements
The pilots of FedEx Express, which represent a small number of
our total employees, are employed under a collective bargaining
agreement. In October 2006, the pilots ratified a new four-year
labor contract that included signing bonuses and other upfront
compensation of approximately $143 million, as well as pay
increases and other benefit enhancements. These costs were
partially mitigated by reductions in variable incentive compensa-
tion. The effect of this new agreement on second quarter 2007
net income was approximately $78 million after tax, or $0.25 per
diluted share.

stOcK-BaseD cOmpensatiOn
On June 1, 2006, we adopted the provisions of SFAS 123R, “Share-
Based Payment,” which requires recognition of compensation
expense for stock-based awards using a fair value method.

FEDEX CORPORATION

SFAS 123R is a revision of SFAS 123, “Accounting for Stock-
Based Compensation,” and supersedes Accounting Principles
Board Opinion No. (“APB”) 25, “Accounting for Stock Issued
to Employees.” Prior to the adoption of SFAS 123R, we applied
APB 25 and its related interpretations to measure compensa-
tion expense for stock-based compensation plans. As a result,
no compensation expense was recorded for stock options, as
the exercise price was equal to the market price of our common
stock at the date of grant.

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; retirement plan obligations; long-term
incentive accruals; tax liabilities; 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

New accounting rules and disclosure requirements can signifi-
cantly impact the comparability of our financial statements. We
believe the following new accounting pronouncements, which
were issued or became effective for us during 2007, are relevant
to the readers of our financial statements.

In July 2006, the FASB issued FASB Interpretation No. (“FIN”) 48,
“Accounting for Uncertainty in Income Taxes.” This interpretation
establishes new standards for the financial statement recogni-
tion, measurement and disclosure of uncertain tax positions
taken or expected to be taken in income tax returns. The new
rules will be effective for FedEx in the first quarter of 2008. The
adoption of this interpretation will not have a material effect on
our financial statements.

In September 2006, the Securities and Exchange Commission
(“SEC”) issued Staff Accounting Bulletin (“SAB”) 108,
“Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements,”
which eliminates the diversity in practice surrounding the quan-
tification and evaluation of financial statement errors. The
guidance outlined in SAB 108 was effective for FedEx in the fourth
quarter of 2007 and is consistent with our historical practices
for assessing such matters when circumstances have required
such an evaluation.

We adopted SFAS 123R using the modified prospective method,
which resulted in prospective recognition of compensation
expense for all outstanding unvested share-based payments
based on the fair value on the original grant date. Under this
method of adoption, our financial statement amounts for the prior
period presented have not been restated.

Our total share-based compensation expense was $103 million
in 2007, $37 million in 2006 and $32 million in 2005. The impact of
adopting SFAS 123R for the year ended May 31, 2007 was approxi-
mately $71 million ($52 million, net of tax), or $0.17 per basic and
diluted share.

Stock option compensation expense, pro forma net income and
basic and diluted earnings per common share, if determined
under SFAS 123 at fair value using the Black-Scholes method,
would have been as follows (in millions, except for per share
amounts) for the years ended May 31:

Net income, as reported
Add: Stock option compensation

2006

$ 1,806

2005

$ 1,449

included in reported net income, net of tax

Deduct: Total stock option 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

46
$ 1,765

$ 5.94
$ 5.81
$ 5.83
$ 5.70

40
$ 1,413

$ 4.81
$ 4.69
$ 4.72
$ 4.60

DiviDenDs DeclareD per cOmmOn share
On May 25, 2007, our Board of Directors declared a dividend of
$0.10 per share of common stock. The dividend was paid on July
2, 2007 to stockholders of record as of the close of business on
June 11, 2007. 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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3: Business Combinations

On September 3, 2006, we acquired the assets and assumed
certain obligations of the LTL operations of Watkins Motor Lines
(“Watkins”), a privately held company, and certain affiliates for
$787 million in cash. Watkins, a leading provider of long-haul LTL
services, was renamed FedEx National LTL and meaningfully
extends our leadership position in the heavyweight LTL freight
sector. The financial results of FedEx National LTL are included
in the FedEx Freight segment from the date of acquisition.

On March 1, 2007, FedEx Express acquired Tianjin Datian W.
Group Co., Ltd.’s (“DTW Group”) 50% share of the FedEx-DTW
International Priority express joint venture and assets relating
to DTW Group’s domestic express network in China for $427
million in cash. This acquisition converts our joint venture with
DTW Group into a wholly owned subsidiary and increases our
presence in China in the international and domestic express busi-
nesses. Prior to the fourth quarter of 2007, we accounted for our
investment in the joint venture under the equity method.

The financial results of the ANC and DTW Group acquisitions,
as well as other immaterial business acquisitions during 2007,
are included in the FedEx Express segment from the date of
acquisition. These acquisitions were not material to our results
of operations or financial condition. The portion of the purchase
price allocated to goodwill and other identified intangible assets
for the FedEx National LTL, ANC and DTW Group acquisitions will
generally be deductible for U.S. tax purposes over 15 years.

Pro forma results of these acquisitions, individually or in the
aggregate, would not differ materially from reported results in
any of the periods presented. Our accompanying consolidated
balance sheet reflects the following preliminary allocations of the
purchase price for the FedEx National LTL, ANC and DTW Group
acquisitions (in millions):

FedEx
National LTL

ANC

DTW Group

Current assets
Property and equipment
Intangible assets
Goodwill
Other assets
Current liabilities
Long-term liabilities
Total purchase price

$ 121
525
77
121
3
(60)
–
$ 787

$ 68
20
49
168
2
(56)
(10)
$ 241

$ 54
16
17
348
10
(18)
–
$ 427

While the purchase price allocations are substantially complete
and we do not expect any material adjustments, we may make
adjustments to the purchase price allocations as refinements
to estimates are deemed necessary. Our ANC and DTW Group
acquisitions included the impact of foreign currency fluctua-
tions from the execution of the purchase agreement to the actual
closing date. The impact of these foreign currency fluctuations
was immaterial to these transactions.

The intangible assets acquired in the FedEx National LTL and
ANC acquisitions consist primarily of customer-related intangible
assets, which will be amortized on an accelerated basis over
their average estimated useful lives of seven years for FedEx
National LTL and up to 12 years for ANC, with the majority of the
amortization recognized during the first four years. The intan-
gible assets acquired in the DTW Group acquisition relate to the
reacquired rights for the use of certain FedEx technology and
service marks. These intangible assets will be amortized over
their estimated useful lives of approximately two years.

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 material to reported or pro forma results of operations
of any period.

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

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.

FEDEX CORPORATION

Note 4: Goodwill and Intangibles

The FedEx National LTL, ANC and DTW Group acquisitions, as well as other immaterial business acquisitions during 2007, contributed
approximately $670 million in goodwill for the year ended May 31, 2007. 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

May 31, 2005

$ 528
90
666
1,551
$ 2,835

Purchase
Adjustments
and Other

May 31, 2006

Goodwill
Acquired

Purchase
Adjustments
and Other

$ 2
–
(10)
(2)
$ (10)

$ 530
90
656
1,549
$ 2,825

$ 549
–
121
–
$ 670

$ 9
–
–
(7)
$ 2

May 31, 2007

$ 1,088
90
777
1,542
$ 3,497

The FedEx National LTL, ANC and DTW Group acquisitions, as well as other immaterial business acquisitions during 2007, contributed
approximately $147 million in intangible assets for the year ended May 31, 2007. The components of our intangible assets were as
follows (in millions):

Gross Carrying
Amount

May 31, 2007
Accumulated
Amortization

Net Book
Value

Gross Carrying
Amount

May 31, 2006
Accumulated
Amortization

Net Book
Value

Amortizable intangible assets
Customer relationships
Contract related
Technology related and other
Total

Non-amortizing intangible asset
Kinko’s trade name

$ 206
79
74
$ 359

$ 567

$ (58)
(62)
(39)
$ (159)

$ 148
17
35
$ 200

$ –

$ 567

$ 77
79
54
$ 210

$ 567

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

$ –

$ 48
22
24
$ 94

$ 567

Note 5: 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,

2007

2006

$ 283
599
472
$ 1,354

$ 548
310
561
$ 1,419

$ 236
655
434
$ 1,325

$ 523
305
562
$ 1,390

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

Amortization expense for intangible assets was $42 million in
2007, $25 million in 2006 and $26 million in 2005. Estimated amorti-
zation expense for the next five years is as follows (in millions):

$55
47
35
22
12

2008
2009
2010
2011
2012

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 6: Long-Term Debt and Other
Financing Arrangements

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

May 31,

2007

2006

Senior unsecured debt

Interest rate of 7.80%, due in 2007
Interest rate of 2.65%, due in 2007
Interest rate of three-month LIBOR plus 0.08%

(5.44% at May 31, 2007) due in 2008

Interest rate of 3.50%, due in 2009
Interest rate of 5.50%, due in 2010
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

Capital lease obligations
Other debt, interest rates of 3.89% to 9.98%
due through 2009

Less current portion

–
–

500
500
499
249
300
239
–
2,287
308

51
2,646
639
$ 2,007

$ 200
500

–
500
–
249
300
239
18
2,006
310

126
2,442
850
$ 1,592

Scheduled annual principal maturities of debt, exclusive of capi-
tal leases, for the five years subsequent to May 31, 2007, are as
follows (in millions):

2008
2009
2010
2011
2012

$521
530
500
250
–

On August 2, 2006, we filed an updated shelf registration state-
ment with the SEC. The new registration statement does not limit
the amount of any future offering. By using this shelf registration
statement, we may sell, in one or more future offerings, any com-
bination of our unsecured debt securities and common stock.

On August 8, 2006, under the new shelf registration statement, we
issued $1 billion of senior unsecured debt, comprised of floating-
rate notes totaling $500 million due in August 2007 and fixed-rate
notes totaling $500 million due in August 2009. The net proceeds
were used for working capital and general corporate purposes,
including the funding of acquisitions (see Note 3).

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 com-
mercial paper. The revolving credit agreement contains certain
covenants and restrictions, none of which are expected to sig-
nificantly affect our operations or ability to pay dividends. Our
commercial paper program is backed by unused commitments
under the revolving credit facility and borrowings under the pro-
gram reduce the amount available under the credit facility. At
May 31, 2007, no commercial paper borrowings were outstanding
and the entire amount under the credit facility was available.

Long-term debt, exclusive of capital leases, had carrying values
of $2.3 billion compared with an estimated fair value of approxi-
mately $2.4 billion at May 31, 2007, and $2.1 billion compared
with an estimated fair value of $2.2 billion at May 31, 2006. The
estimated fair values were determined based on quoted market
prices or on the current rates offered for debt with similar terms
and maturities.

Our other debt at May 31, 2006 included $118 million related to
leases for two MD-11 aircraft that were consolidated under the
provisions of FIN 46, “Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51.” These assets were held by a sepa-
rate entity, which was established to lease these aircraft to FedEx
Express, and was owned by independent third parties who provide
financing through debt and equity participation. FedEx Express
purchased these aircraft in March 2007, extinguishing this debt.

We issue other financial instruments in the normal course of
business to support our operations. Letters of credit at May 31,
2007 were $694 million. The amount unused under our letter of
credit facility totaled approximately $30 million at May 31, 2007.
This facility expires in July of 2010. These instruments are gen-
erally required under certain U.S. self-insurance programs and
are used in the normal course of international operations. The
underlying liabilities insured by these instruments are reflected
in the balance sheets, where applicable. Therefore, no additional
liability is reflected for the letters of credit.

Our capital lease obligations include leases for aircraft and
facilities. Our facility leases include leases that guarantee the
repayment of certain special facility revenue bonds that have
been issued by municipalities primarily to finance the acquisi-
tion 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.

Note 7: Leases

We utilize certain aircraft, land, facilities and equipment under
capital and operating leases that expire at various dates
through 2039. We leased approximately 15% of our total air-
craft fleet under capital or operating leases as of May 31,
2007. In addition, supplemental aircraft are leased by us under
agreements that generally provide for cancellation upon
30 days’ notice. Our leased facilities include national, regional
and metropolitan sorting facilities, retail facilities and administra-
tive buildings.

FEDEX CORPORATION

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

May 31,

Aircraft
Package handling and ground
support equipment
Vehicles
Other, principally facilities

Less accumulated amortization

2007

$ 115

165
20
151
451
306
$ 145

2006

$ 114

167
34
166
481
331
$ 150

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

Minimum rentals
Contingent rentals (1)

For years ended May 31,

2007

2006

$ 1,916
241
$ 2,157

$ 1,919
245
$ 2,164

2005

$ 1,793
235
$ 2,028

(1) Contingent rentals are based on equipment usage.

A summary of future minimum lease payments under capital
leases at May 31, 2007 is as follows (in millions):

2008
2009
2010
2011
2012
Thereafter

Less amount representing interest
Present value of net minimum lease payments

$103
13
97
8
8
137
366
58
$308

A summary of future minimum lease payments under non-cancel-
able operating leases with an initial or remaining term in excess
of one year at May 31, 2007 is as follows (in millions):

2008
2009
2010
2011
2012
Thereafter

Aircraft and Related Facilities and
Other

Equipment

$ 602
555
544
526
504
3,430
$ 6,161

$ 1,078
926
753
617
506
3,322
$ 7,202

Total

$ 1,680
1,481
1,297
1,143
1,010
6,752
$ 13,363

The weighted-average remaining lease term of all operating
leases outstanding at May 31, 2007 was approximately seven
years. While certain of our lease agreements contain covenants
governing 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 operating
leases that are sufficient to pay principal and interest on certain
pass-through certificates. The pass-through certificates are not
direct obligations of, or guaranteed by, FedEx or FedEx Express.

Our results for 2006 included a noncash charge of $79 million ($49
million after tax or $0.16 per diluted share) to adjust the account-
ing for certain facility leases, predominantly at FedEx Express.
This charge, which included the impact on prior years, related
primarily to rent escalations in on-airport facility leases that were
not being recognized appropriately.

Note 8: 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, 2007, none
of these shares had been issued.

Note 9: Stock-Based Compensation

We have two types of equity-based compensation: stock options
and restricted stock.

stOcK OptiOns
Under the provisions of our incentive stock 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 discretion
of the Compensation Committee of our Board of Directors. Option-
vesting periods range from one to four years, with approximately
90% of options granted vesting ratably over four years.

restricteD stOcK
Under the terms of our incentive stock plans, restricted 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 awards is recognized as expense over the
explicit service period.

For unvested stock options granted prior to June 1, 2006 and
all restricted stock awards, the terms of these awards provide
for continued vesting subsequent to the employee’s retirement.
Compensation expense associated with these awards is recog-
nized on a straight-line basis over the shorter of the remaining
service or vesting period. This postretirement vesting provision
was removed from all stock option awards granted subsequent
to May 31, 2006.

valuatiOn anD assumptiOns
We use the Black-Scholes option pricing model to calculate the
fair value of stock options. The value of restricted stock awards
is based on the stock price of the award on the grant date. We
recognize stock-based compensation expense on a straight-
line basis over the requisite service period of the award in the
“Salaries and employee benefits” caption in the accompanying
consolidated statements of income.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 and exercise price. Many of these assumptions are judgmental and highly sensitive. The following table
describes each assumption, as well as the results of increases in the various assumptions:

Assumption

Expected life of the option – 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.

Expected volatility – Actual changes in the market value of our stock are
used to calculate the volatility assumption. We calculate daily market value
changes from the date of grant over a past period equal to the expected life
of the options to determine volatility.

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.

Expected dividend yield – This is the annual rate of dividends per share over
the exercise price of the option.

Change in
Assumption
Increase

Impact on Fair
Value of Option
Increase

Increase

Decrease

Following is a table of the key weighted-average assumptions used in the valuation calculations for the options granted during the
years ended May 31:

Expected lives
Expected volatility
Risk-free interest rate
Dividend yield

2007

5 years

22%
4.879%
0.3023%

2006

5 years

25%
3.794%
0.3229%

2005

4 years

27%
3.559%
0.3215%

The weighted-average Black-Scholes value of our stock option grants using the assumptions indicated above was $31.60 per option
in 2007, $25.78 per option in 2006 and $20.37 per option in 2005. The intrinsic value of options exercised was $145 million in 2007, $191
million in 2006 and $126 million in 2005.

The following table summarizes information about stock option activity for the year ended May 31, 2007:

Outstanding at June 1, 2006
Granted
Exercised
Forfeited
Outstanding at May 31, 2007
Exercisable
Expected to Vest

Stock Options

17,099,526
2,094,873
(2,333,845)
(270,153)
16,590,401
10,418,072
5,678,543

Weighted-
Average
Exercise Price

$ 60.82
110.25
49.55
89.12
$ 68.22
$ 54.75
$ 90.97

Weighted-
Average
Remaining
Contractual
Term

Aggregate
Intrinsic Value
(in millions)

5.9 years
4.6 years
8.0 years

$ 696
$ 577
$ 109

The following table summarizes information about vested and unvested restricted stock for the year ended May 31, 2007:

Unvested at June 1, 2006
Granted
Vested
Forfeited
Unvested at May 31, 2007

Restricted Stock

Weighted-
Average Grant
Date Fair
Value

$ 76.97
109.90
69.92
88.69
$ 92.37

583,106
175,005
(260,821)
(15,943)
481,347

FEDEX CORPORATION

During the year ended May 31, 2006, there were 233,939 shares
of restricted stock granted with a weighted-average fair value of
$90.12. During the year ended May 31, 2005, there were 218,273
shares of restricted stock granted with a weighted-average fair
value of $80.24.

The following table summarizes information about stock option
vesting during the years ended May 31:

2005
2006
2007

Stock Options

Vested during
the year

Fair value
(in millions)

3,498,853
3,366,273
3,147,642

$56
59
65

As of May 31, 2007, there was $129 million of total unrecog-
nized compensation cost, net of estimated forfeitures, related to
unvested share-based compensation arrangements. This com-
pensation expense is expected to be recognized on a straight-line
basis over the remaining weighted-average vesting period of
approximately two years.

At May 31, 2007, there were 7,088,052 shares authorized and
available for future grants under our incentive stock plans. The
options granted during the year ended May 31, 2007 are primarily
related to our principal annual stock option grant in June 2006.

Total shares outstanding or available for grant related to equity
compensation at May 31, 2007 represented 7.3% of the total out-
standing common and equity compensation shares and equity
compensation shares available for grant.

Note 10: Computation of Earnings
Per Share

The calculation of basic 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 outstanding

2007

2006

2005

$ 2,016

$ 1,806

$ 1,449

307

304

301

dilutive options

Note 11: Income Taxes

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

2007

2006

2005

Current provision
Domestic:
Federal
State and local

Foreign

Deferred provision (benefit)
Domestic:
Federal
State and local

Foreign

$ 829
72
174
1,075

90
27
7
124
$ 1,199

$ 719
79
132
930

151
13
(1)
163
$ 1,093

$ 634
65
103
802

67
(4)
(1)
62
$ 864

A reconciliation of the statutory federal income tax rate to the
effective 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

2007

2006

2005

35.0%

2.0
0.3
37.3%

2.1
0.6
37.7%

1.7
0.7
37.4%

Our 2007 tax rate of 37.3% was favorably impacted by the con-
clusion of various state and federal tax audits and appeals. The
2007 rate reduction was partially offset by tax charges incurred
as a result of a reorganization in Asia associated with our acquisi-
tion in China, as described in Note 3. 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 inter-
national operations as a result of the passage of the American
Jobs Creation Act of 2004 and by a lower effective state tax rate.

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

2007

2006

Less shares repurchased from

proceeds of assumed
exercise of options
Weighted-average common
and common equivalent
311
shares outstanding
Basic earnings per common share
$ 6.57
Diluted earnings per common share $ 6.48

(14)

(13)

(12)

310
$ 5.94
$ 5.83

307
$ 4.81
$ 4.72

Property, equipment,

leases and intangibles

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

We have excluded from the calculation of diluted earnings per
share approximately 368,185 antidilutive options for the year
ended May 31, 2007, as the exercise price of each of these
options was greater than the average market price of our com-
mon stock for the period.

Deferred

Deferred
Tax Assets Tax Liabilities Tax Assets Tax Liabilities

Deferred

$ 328
406
350
346

61
(49)
$ 1,442

$ 1,655
53
–
95

–
–
$ 1,803

$ 329
413
339
360

64
(48)
$ 1,457

$ 1,559
648
–
78

–
–
$ 2,285

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 (1)

2007
$ 536
(897)
$ (361)

2006
$ 539
(1,367)
$ (828)

(1) The significant reduction in the noncurrent deferred tax liability in 2007 was primarily related
to the impact of our adoption of SFAS 158 discussed in Note 12.

The valuation allowance primarily represents amounts reserved
for operating loss and tax credit carryforwards, which expire over
varying periods starting in 2008. As a result of this and other fac-
tors, we believe that a substantial portion of these deferred tax
assets may not be realized.

Note 12: Retirement Plans

We sponsor programs that provide retirement benefits to most of
our employees. These programs include defined benefit pension
plans, defined contribution plans and retiree healthcare plans. The
accounting for pension and healthcare plans includes numerous
assumptions, such as: discount rates; expected long-term invest-
ment returns on plan assets; future salary increases; employee
turnover; mortality; and retirement ages. These assumptions most
significantly impact our U.S. domestic pension plan.

In February 2007, we announced changes to modernize certain of
our retirement programs over the next two fiscal years. Effective
January 1, 2008, we will increase the annual company matching
contribution under the largest of our 401(k) plans covering most
employees from $500 to a maximum of 3.5% of eligible compensa-
tion. Employees not participating in the 401(k) plan as of January
1, 2008 will be automatically enrolled at 3% of eligible pay with a
company match of 2% of eligible pay. Effective May 31, 2008, ben-
efits previously accrued under our primary pension plans using a
traditional pension benefit formula will be capped for most employ-
ees, and those benefits will be payable beginning at retirement.
Beginning June 1, 2008, future pension benefits for most employ-
ees will be accrued under a cash balance formula we call the
Portable Pension Account. These retirement plan changes were
contemplated in our February 28, 2007 actuarial measurement.
These changes will not affect the benefits of current retirees. In
addition, these pension plans will be modified to accelerate vest-
ing from five years to three years effective June 1, 2008.

A summary of our retirement plans costs over the past three
years is as follows (in millions):

U.S. domestic pension plans
International pension and
defined contribution plans

U.S. domestic defined
contribution plans
Retiree healthcare plans

2007

$ 442

2006

$ 400

152
55
$ 698

147
73
$ 665

2005

$ 337

136
68
$ 582

pensiOn plans
The largest pension 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 the
Portable Pension Account, or a traditional pension benefit for-
mula. 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. Eligible employees hired after May
31, 2003 accrue benefits exclusively under the Portable Pension
Account. We also sponsor or participate in nonqualified benefit
plans covering certain of our U.S. employee groups and other
pension plans covering certain of our international employees.
The international defined benefit pension plans provide bene-
fits primarily based on final earnings and years of service and
are funded in accordance with local practice. Where plans are
funded, they are in compliance with local laws.

DefineD cOntriButiOn plans
Defined contribution plans are in place covering a majority of
U.S. employees and certain international employees. Expense
under these plans was $176 million in 2007, $167 million in 2006
and $153 million in 2005.

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,
continuous service of at least 10 years after attainment of age 45
if hired prior to January 1, 1988, or at least 20 years after attain-
ment 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.

new accOunting prOnOuncement
As discussed in Note 1, we adopted the recognition and disclo-
sure provisions of SFAS 158 on May 31, 2007. The adoption of
SFAS 158 requires recognition in the balance sheet of the funded
status of defined benefit pension and other postretirement ben-
efit plans, and the recognition in AOCI of unrecognized gains or
losses, prior service costs or credits and transition assets or
obligations existing at the time of adoption. The funded status is
measured as the difference between the fair value of the plan’s
assets and the projected benefit obligation (“PBO”) of the plan.
Additionally, SFAS 158 requires the measurement date for plan
assets and liabilities to coincide with the sponsor’s year-end.
We currently use a February 28 measurement date for our plans;
therefore, this standard will require us to change our measure-
ment date to May 31. The requirement to measure plan assets
and benefit obligations as of our fiscal year-end is effective for
FedEx no later than 2009.

FEDEX CORPORATION

As discussed in Note 1, upon adoption of SFAS 158, we recog-
nized assets of $1 million for our overfunded plans and liabilities
of $1.2 billion for our underfunded plans in our balance sheet at
May 31, 2007. In addition, we eliminated the minimum pension
liability balance of $191 million and intangible assets of $3 million
related to our plans that had been recorded prior to adoption. The
adoption of SFAS 158 did not affect our operating results in the
current period and will not have any effect on operating results
in future periods.

We have presented below the incremental effects of adopt-
ing SFAS 158 to our balance sheet for the individual line items
impacted from this adoption, as of May 31, 2007 (in millions).

Prepaid pension cost
Intangible and other assets
Accrued salaries and
employee benefits
Minimum pension liability
Pension, postretirement healthcare
and other benefit obligations
Deferred income taxes
Accumulated other
comprehensive loss

Prior to
Adopting
SFAS 158

$ 1,442
1,240

Effect of
Adopting
SFAS 158

As Reported
Under
SFAS 158

$ (1,442)
(2)

$
–
1,238

1,300
191

907
1,479

54
(191)

257
(582)

1,354
–

1,164
897

(48)

(982)

(1,030)

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

We currently 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 measure-
ment date impact these assumptions from year to year and it is
reasonably possible that material changes in pension cost may
be experienced 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 for changes in assump-
tions and 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.

Substantially all plan assets are actively managed. The invest-
ment strategy for pension plan assets is to utilize a diversified
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.

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

Domestic equities
International equities
Private equities
Total equities
Long duration fixed

income securities

Other fixed income securities

2007

2006

Actual

Target

Actual

Target

52%
21
3
76

53%
17
5
75

54%
20
3
77

53%
17
5
75

15
9
100%

15
10
100%

14
9
100%

15
10
100%

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 invest-
ment strategy we can employ with our pension plan assets;

• the types of investment classes in which we invest our pen-
sion plan assets and the expected compound 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. As part of our strategy to man-
age future pension cost and net funded status volatility, we are
also in the process of re-evaluating our pension investment strat-
egy. Initially, we have decided to move some equity investments
out of actively managed funds and into index funds. Also, we are
currently evaluating the mix of investments between equities and
fixed income securities, the cash flows of which will more closely
align with the cash flows of our pension obligations. Based on
these considerations, we will reduce our estimated long-term
rate of return on plan assets from 9.1% to 8.5% for 2008.

We periodically commission 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. The studies performed or updated supported the
reasonableness of our expected rate of return of 9.1% for 2007,
2006 and 2005. Our actual returns exceeded this assumption in
each of the last three years and for the 15-year period ended
February 28, 2007.

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, 2007 and a statement of the funded status as of May 31, 2007 and
2006 (in millions):

Postretirement Healthcare Plans
2006

2007 (1)

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
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 net actuarial loss (gain)
Unamortized prior service cost (credit)
Unrecognized net transition amount
Employer contributions after measurement date
Net amount recognized

Amount Recognized in the Balance Sheet at May 31:
Prepaid benefit cost
Noncurrent pension assets
Current pension, postretirement healthcare

and other benefit obligations

Accrued benefit liability
Minimum pension liability
Noncurrent pension, postretirement healthcare

and other benefit obligations

Accumulated other comprehensive income

Intangible asset
Net amount recognized

Amounts Recognized in AOCI and not yet reflected in
Net Periodic Benefit Cost:
Net actuarial loss (gain)
Prior service (credit) cost
Transition amount

Total

Amounts Recognized in AOCI and not yet reflected in
Net Periodic Benefit Cost expected to be amortized

in next year’s Net Periodic Benefit Cost:
Net actuarial loss (gain)
Prior service credit
Transition amount

Total

2006

$ 10,090

$ 10,401
473
642
858
(228)
1
6
$ 12,153

$ 8,826
1,034
492
(228)
6
$ 10,130

$ (2,023)
3,026
88
(3)
8
$ 1,096

$ 1,349
–

–
(253)
(122)

–
112 (3)
10
$ 1,096

Pension Plans

2007 (1)

$ 11,559

$ 12,153
540
707
590
(261)
(1,551)
31
$ 12,209

$ 10,130
1,086
524
(261)
27
$ 11,506

(703)
– (2)
– (2)
– (2)
22
(681)

– (2)
1

(24)
– (2)
– (2)

(658)
– (2)
– (2)
(681)

$ 3,324
(1,475)
(2)
$ 1,847

167
(113)
(1)
53

$ 475
31
28
9
(40)
5
17
$ 525

$ –
–
23
(40)
17
$ –

$ (525)
– (2)
– (2)
– (2)
4
$ (521)

$ – (2)
–

(30)
– (2)
– (2)

(491)
– (2)
– (2)
$ (521)

$ (97)
2
–
$ (95)

(3)
–
–
(3)

$ 537
42
32
(109)
(39)
–
12
$ 475

$ –
–
27
(39)
12
$ –

$ (475)
(110)
(3)
–
5
$ (583)

$ –
–

–
(583)
–

–
–
–
$ (583)

(1) Incorporates the provisions of SFAS 158 adopted on May 31, 2007.
(2) Not applicable for 2007 due to adoption of SFAS 158.
(3) The minimum pension liability component of Accumulated Other Comprehensive Income for 2006 is shown in the Statement of Changes in Stockholders’ Investment and Comprehensive
Income, net of deferred taxes.

FEDEX CORPORATION

Our pension plans included the following components at May 31, 2007 and 2006 (in millions):

2007 (1)
Qualified
Nonqualified

International Plans

Total

2006
Qualified
Nonqualified

International Plans

Total

ABO

PBO

Fair Value of
Plan Assets

$ 10,926
314
319
$ 11,559

$ 9,591
239
260
$ 10,090

$ 11,487
326
396
$ 12,209

$ 11,569
271
313
$ 12,153

$ 11,300
–
206
$ 11,506

$ 9,969
–
161
$ 10,130

Funded
Status

$ (187)
(326)
(190)
$ (703)

$ (1,600)
(271)
(152)
$ (2,023)

Other (2)

Net Amount
Recognized

–
16(3)
6(3)
22(3)

$ 2,932
123
64
$ 3,119

$ (187)
(310)
(184)
$ (681)

$ 1,332
(148)
(88)
$ 1,096

(1) Incorporates the provisions of SFAS 158 adopted on May 31, 2007.
(2) Amounts in “Other” consist of unrecognized net actuarial loss, unamortized prior service cost, unrecognized net transition amount and employer contributions after measurement date.
(3) Amounts in “Other” for 2007 represent only employer contributions after measurement date, as unrecognized net actuarial loss, unamortized prior service cost and unrecognized net transition
amount were not applicable in 2007 due to adoption of SFAS 158.

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 actu-
arial 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.

Prior to SFAS 158, the measure of whether a pension plan was
underfunded for recognition of a liability under financial account-
ing requirements was based on a comparison of the ABO to the
fair value of plan assets and amounts accrued for such benefits
in the balance sheets. With the adoption of SFAS 158, the funded
status is measured as the difference between the fair value of the
plan’s assets and the projected benefit obligation of the plan.

At May 31, 2007 and 2006, the projected benefit obligation, the
accumulated benefit obligation, and the fair value of plan assets
for pension plans with a projected benefit obligation in excess of
plan assets, and for pension plans with an accumulated benefit
obligation in excess of plan assets were as follows (in millions):

Pension Benefits
PBO
Fair Value of Plan Assets

Pension Benefits
PBO
ABO
Fair Value of Plan Assets

PBO Exceeds the Fair Value
of Plan Assets

2007

2006

$ 12,085
11,381

$ 12,153
10,130

ABO Exceeds the Fair Value
of Plan Assets

2007

2006

$ 727
637
206

$ 584
498
161

The accumulated postretirement benefit obligation exceeds plan
assets for all of our postretirement healthcare plans.

Plan funding is actuarially determined and is subject to certain
tax law limitations. International defined benefit pension plans
provide benefits primarily based on final earnings or final average
earnings and years of service and are funded in accordance with
local practice. Where plans are funded, they are in compliance
with local laws and income tax regulations. Amounts contributed
to these plans are generally not recoverable by us. Although not
legally required, we made $482 million in tax-deductible voluntary
contributions to our qualified U.S. pension plans in 2007 compared
to total tax-deductible voluntary contributions of $456 million in
2006. We expect approximately $10 million of contributions to
such plans to be legally required in 2008, and we currently expect
to make tax-deductible voluntary contributions in 2008 at levels
approximating those in 2007.

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 inter-
national plans, we have ABOs aggregating approximately $632
million at May 31, 2007 and $499 million at May 31, 2006 and PBOs
aggregating approximately $722 million at May 31, 2007 and $584
million at May 31, 2006, with assets of $206 million at May 31, 2007
and $161 million at May 31, 2006. Plans with this funded status
resulted in the recognition of a minimum pension liability in our
balance sheets prior to adopting SFAS 158. This minimum liability
was $122 million at May 31, 2006.

At the end of 2007 and prior to our adoption of SFAS 158, we
recorded a minimum pension liability on a plan-by-plan basis for
many of our pension plans for the amount by which the ABO
exceeded the fair value of the plan assets, after adjusting for
previously recorded accrued or prepaid pension cost for the plan.
We subsequently eliminated the minimum pension liability bal-
ance and intangible assets related to our plans that had been
recorded prior to adoption. The minimum liability eliminated at
May 31, 2007 was $191 million.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net periodic benefit cost for the three years ended May 31 and amounts recognized in other comprehensive income for 2007 were
as follows (in millions):

Service cost
Interest cost
Expected return on plan assets
Recognized actuarial losses (gains) and other

2007

$ 540
707
(930)
150
$ 467

Pension Plans
2006

$ 473
642
(811)
121
$ 425

2005

$ 417
579
(707)
72
$ 361

Postretirement Healthcare Plans
2006

2005

2007

$ 31
28
–
(4)
$ 55

$ 42
32
–
(1)
$ 73

$ 37
32
–
(1)
$ 68

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

2007

6.012%
4.47
9.10

Pension Plans
2006

5.912%
3.46
9.10

2005

6.285%
3.15
9.10

Postretirement Healthcare Plans
2006

2005

2007

6.084%
–
–

6.080%
–
–

6.160%
–
–

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

2008
2009
2010
2011
2012
2013-2017

$ 303
334
407
434
510
3,910

$ 30
30
32
34
35
213

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

Future medical benefit claims costs are estimated to increase
at an annual rate of 11% during 2008, 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 6.25% dur-
ing 2008, 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 ben-
efit obligation at May 31, 2007 or 2007 benefit expense because
the level of these benefits is capped.

Note 13: Business Segment
Information

Our operations for the periods presented are primarily represented
by FedEx Express, FedEx Ground, the FedEx Freight LTL Group and
FedEx Kinko’s. These businesses represent our major service lines
and form the core of our reportable segments. 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.

As of May 31, 2007, our reportable segments included the follow-
ing 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 Freight Segment

FedEx Freight LTL Group:

FedEx Freight

(regional LTL freight
transportation)
FedEx National LTL

(long-haul 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 Services provides customer-facing sales, marketing and
information technology support, primarily for FedEx Express
and FedEx Ground. The costs for these functions are allocated
based on metrics such as relative revenues or estimated services
provided. We also allocate costs for administrative functions
provided between operating companies and certain other costs,
such as those associated with services received for general cor-
porate oversight, including executive officers and certain legal
and finance functions. We believe these allocations approximate
the cost of providing these functions.

FEDEX CORPORATION

In addition, certain FedEx operating companies provide transpor-
tation and related services for other FedEx companies outside
their reportable segment. Billings for such services are based
on negotiated rates that we believe approximate fair value and
are reflected as revenues of the billing segment. These rates are
adjusted from time to time based on market conditions. 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 compa-
nies. 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 and are not separately identified in the
following segment information, as the amounts are not material.

Effective June 1, 2006, we moved the credit, collections and cus-
tomer service functions with responsibility for FedEx Express
and FedEx Ground customer information from FedEx Express
into a newly formed subsidiary of FedEx Services named FedEx
Customer Information Services, Inc. Also, effective June 1, 2006,
we moved FedEx Supply Chain Services, Inc., the results of which
were previously reported in the FedEx Ground segment, into a
new subsidiary of FedEx Services named FedEx Global Supply
Chain Services, Inc. The costs of providing these customer ser-
vice functions and the net operating costs of FedEx Global Supply
Chain Services are allocated back to the FedEx Express and FedEx
Ground segments. Prior year amounts have not been reclassified
to conform to the current year segment presentation, as the finan-
cial results of all segments are materially comparable.

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

Revenues
2007
2006
2005
Depreciation and amortization
2007
2006
2005
Operating income
2007(2)
2006(3)
2005(4)
Segment assets(5)
2007
2006
2005

FedEx
Express
Segment

$ 22,681
21,446
19,485

856
805
798

$ 1,955
1,767
1,414

$ 15,650
14,673
13,130

FedEx
Ground
Segment

FedEx
Freight
Segment(1)

$ 6,043
5,306
4,680

$ 268
224
176

$ 813
705
604

$ 3,937
3,378
2,776

$ 4,586
3,645
3,217

$ 195
120
102

$ 463
485
354

$ 3,150
2,245
2,047

FedEx
Kinko’s
Segment

$ 2,040
2,088
2,066

$ 139
148
138

45
57
100

$ 2,957
2,941
2,987

Other and
Eliminations

Consolidated
Total

$ (136)
(191)
(85)

$ 284
253
248

–
–
(1)

$ (1,694)
(547)
(536)

$ 35,214
32,294
29,363

$ 1,742
1,550
1,462

$ 3,276
3,014
2,471

$ 24,000
22,690
20,404

(1) Includes the operations of FedEx National LTL from the date of acquisition, September 3, 2006.
(2) FedEx Express operating expenses include a $143 million charge associated with upfront compensation and benefits under the new pilot labor contract.
(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) 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):

FedEx
Express
Segment

$ 1,672
1,408
1,195

FedEx
Ground
Segment

$ 489
487
456

FedEx
Freight
Segment

$ 287
274
217

FedEx
Kinko’s
Segment

$ 157
94
152

Other

$ 277
255
216

Consolidated
Total

$ 2,882
2,518
2,236

2007
2006
2005

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Note 15: Guarantees and
Indemnifications

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 (IP)(1)

Total package revenue

Freight:
U.S.

International priority freight(1)
International airfreight
Total freight revenue

Other(2)

Total FedEx Express segment

FedEx Ground segment
FedEx Freight segment(3)
FedEx Kinko’s segment
Other and Eliminations

Geographical Information(4)
Revenues:
U.S.

International

Noncurrent assets:
U.S.

International

2007

2006

2005

$ 6,485
1,990
2,883

$ 6,422
1,974
2,853

$ 5,969
1,798
2,799

11,358
6,722
18,080

11,249
6,139
17,388

10,566
5,464
16,030

2,412
1,045
394
3,851
750
22,681
6,043
4,586
2,040
(136)
$ 35,214

2,218
840
434
3,492
566
21,446
5,306
3,645
2,088
(191)
$ 32,294

1,854
670
381
2,905
550
19,485
4,680
3,217
2,066
(85)
$ 29,363

$ 26,132
9,082
$ 35,214

$ 24,172
8,122
$ 32,294

$ 14,191
3,180
$ 17,371

$ 13,804
2,422
$ 16,226

$ 22,146
7,217
$ 29,363

$ 13,020
2,115
$ 15,135

(1) We reclassified certain prior period international priority freight service revenues previously
included within IP package revenues to international priority freight revenues to conform to the
current period presentation and more precisely present the nature of the services provided.
(2) Other revenues includes FedEx Trade Networks and our international domestic express
businesses, such as ANC, DTW Group and our Canadian domestic express operations.
(3) Includes the operations of FedEx National LTL from the date of acquisition, September 3, 2006.
(4) 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 14: 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

2007

$ 136
1,064

2006

$ 145
880

2005

$ 162
824

In conjunction with certain transactions, primarily the lease,
sale or purchase of operating assets or services in the ordinary
course of business, we may provide routine indemnifications
(e.g., environmental, fuel, tax and software infringement), the
terms of which range in duration and are often not limited. With
the exception of residual value guarantees in certain operating
leases (described below), 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 guarantees and indemnifications cannot be reasonably esti-
mated. Historically, we have not been required to make significant
payments 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, amount-
ing to $17 million as of May 31, 2007, for the residual values of
vehicles 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 material amounts under the terms of these
guarantee arrangements. Accordingly, no material accruals have
been recognized for these guarantees.

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 $1.1 billion as
of May 31, 2007) 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, 2007. The remaining
$551 million has been accounted for as operating leases.

Note 16: Commitments

Annual purchase commitments under various contracts as of
May 31, 2007 were as follows (in millions):

Other (2)

Total

2008
2009
2010
2011
2012
Thereafter

Aircraft

$ 482
788
907
640
31
–

Aircraft-
Related (1)

$ 150
157
146
3
–
–

$ 650
166
97
61
55
164

(1) Primarily aircraft modifications.
(2) Primarily vehicles, facilities, computers and advertising and promotion contracts.

$ 1,282
1,111
1,150
704
86
164

FEDEX CORPORATION

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
configuration do not include the attendant costs to modify these
aircraft for cargo transport unless we have entered into non-
cancelable commitments to modify such aircraft. Open purchase
orders that are cancelable are not considered unconditional pur-
chase obligations for financial reporting purposes.

In September 2006, we announced a $2.6 billion multi-year pro-
gram to acquire and modify approximately 90 Boeing 757-200
(“B757”) aircraft to replace our narrow-body fleet of Boeing
727-200 aircraft. We expect to bring the new aircraft into service
during the eight-year period between calendar years 2008 and
2016 contingent upon identification and purchase of suitable B757
aircraft. As of May 31, 2007, we had entered into agreements to
purchase 30 B757 aircraft under this program.

In November 2006, we entered into an agreement to acquire 15
new Boeing 777 Freighter (“B777F”) aircraft and an option to
purchase an additional 15 B777F aircraft. In connection with the
decision to purchase these aircraft, we cancelled our order of
10 Airbus A380-800F aircraft. In March 2007, we entered into a
separate settlement agreement with Airbus that, among other
things, provides us with credit memoranda applicable to the pur-
chase of goods and services in the future. The net impact of this
settlement was immaterial to our 2007 results and was recorded
as an operating gain during the fourth quarter of 2007.

Deposits and progress payments of $109 million have been made
toward aircraft purchases, options to purchase additional aircraft
and other planned aircraft-related transactions. In addition, we
have committed to modify our DC10 aircraft for two-man cockpit
configurations. Future payments related to these activities are
included in the table above. Aircraft and aircraft-related contracts
are subject to price escalations. The following table is a summary
of the number and type of aircraft we are committed to purchase
as of May 31, 2007, with the year of expected delivery:

2008
2009
2010
2011
2012
Thereafter
Total

A300

A310

B757

B777F

Total

9
3
–
–
–
–
12

2
–
–
–
–
–
2

7
13
4
3
3
–
30

–
–
6
9
–
–
15

18
16
10
12
3
–
59

Note 17: 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 allege, among other things,
that they were forced to work “off the clock,” were not paid over-
time and were not provided work breaks or other benefits. The
plaintiffs generally seek unspecified monetary damages, injunc-
tive relief, or both. We have denied any liability and intend to
vigorously defend ourselves. Given the nature and preliminary
status of these wage-and-hour claims, we cannot yet determine
the amount or a reasonable range of potential loss in these mat-
ters, if any.

Independent Contractor. FedEx Ground is involved in numer-
ous 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 was filed in California state court.
Although the trial court granted some of the plaintiffs’ claims
for relief in Estrada ($18 million, inclusive of attorney’s fees, plus
equitable relief), the appellate court has reversed the trial court’s
issuance of equitable relief. The plaintiffs petitioned the California
Supreme Court for a review of the appellate court decision, and
that petition was denied. The rest of the appeal is pending.

Adverse determinations 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 proceedings by a single federal court – the U.S. District
Court for the Northern District of Indiana. 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.

Race Discrimination. During the fourth quarter of 2007, we settled
Satchell v. FedEx Express, a class-action lawsuit in California that
alleged discrimination by FedEx Express in the Western region
of the United States against certain current and former minority
employees in pay and promotion. The settlement will require a
payment of approximately $55 million by FedEx Express, which is
covered by insurance. The court has granted preliminary approval
of the settlement, and a hearing is scheduled for August 2007 for
the court to consider final approval of the settlement.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 18: Related Party Transactions

Two of our sponsorships of professional sports venues involve related parties. Our Chairman, President and Chief Executive Officer,
Frederick W. Smith, currently holds an approximate 10% ownership interest in the National Football League Washington Redskins
professional football team (“Redskins”) and is a member of its board of directors. FedEx has a multi-year naming rights agreement
with the Redskins granting us certain marketing rights, including the right to name the Redskins’ stadium “FedExField.”

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. FedEx has a naming rights agreement with HOOPS granting us 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.

Note 19: Summary of Quarterly Operating Results (Unaudited)

(in millions, except per share amounts)

2007
Revenues
Operating income
Net income
Basic earnings per common share
Diluted earnings per common share

2006
Revenues
Operating income
Net income
Basic earnings per common share
Diluted earnings per common share

First
Quarter (1)

$ 8,545
784
475
1.55
1.53

$ 7,707
584
339
1.12
1.10

Second
Quarter (2)

$ 8,926
839
511
1.67
1.64

$ 8,090
790
471
1.55
1.53

Third
Quarter

$ 8,592
641
420
1.37
1.35

$ 8,003
713
428
1.41
1.38

Fourth
Quarter

$ 9,151
1,012
610
1.98
1.96

$ 8,494
927
568
1.86
1.82

(1) Results for the first quarter of 2006 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, as described in Note 7.
(2) Results for the second quarter of 2007 include a $143 million charge at FedEx Express associated with upfront compensation and benefits under the new labor contract with our pilots. Additionally,
FedEx National LTL’s financial results have been included from September 3, 2006 (the date of acquisition).

FEDEX CORPORATION

Note 20: Condensed Consolidating Financial Statements

We are required to present condensed consolidating financial information in order for the subsidiary guarantors (other than FedEx
Express) of our public debt to be exempt from reporting under the Securities Exchange Act of 1934.

The guarantor subsidiaries, which are wholly owned by FedEx, guarantee approximately $1.7 billion of our debt. The guarantees are
full and unconditional and joint and several. Our guarantor subsidiaries were not determined using geographic, service line or other
similar criteria, and as a result, the “Guarantor” and “Non-Guarantor” columns each include portions of our domestic and international
operations. Accordingly, this basis of presentation is not intended to present our financial condition, results of operations or cash flows
for any purpose other than to comply with the specific requirements for subsidiary guarantor reporting.

Condensed consolidating financial statements for our guarantor subsidiaries and non-guarantor subsidiaries are presented in the
following tables (in millions):

cOnDenseD cOnsOliDating Balance sheets

Parent

Guarantor
Subsidiaries

May 31, 2007
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

ASSETS
Current Assets
Cash and cash equivalents
Receivables, less allowances
Spare parts, fuel, supplies, prepaid expenses

and other, less allowances

Deferred income taxes
Total current assets

Property and Equipment, at Cost
Less accumulated depreciation and amortization

Net property and equipment

Intercompany Receivable
Goodwill
Investment in Subsidiaries
Other 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
Intercompany Payable
Other Liabilities
Deferred income taxes
Other liabilities

Total other long-term liabilities

Stockholders’ Investment

$ 1,212
–

7
–
1,219

22
14
8

–
–
14,588
670
$ 16,485

551
60
37
36
684

1,248
1,463

–
451
451

12,639
$ 16,485

$
124
3,083

500
505
4,212

24,681
13,422
11,259

511
2,667
3,340
457
$ 22,446

$
85
1,079
1,563
1,197
3,924

398
–

1,262
2,445
3,707

14,417
$ 22,446

$ 233
894

75
31
1,233

2,387
1,018
1,369

952
830
–
755
$ 5,139

$
3
215
448
189
855

361
–

279
116
395

3,528
$ 5,139

–
(35)

–
–
(35)

–
–
–

(1,463)
–
(17,928)
(644)
$ (20,070)

–
–
(32)
(3)
(35)

–
(1,463)

(644)
–
(644)

(17,928)
$ (20,070)

$ 1,569
3,942

582
536
6,629

27,090
14,454
12,636

–
3,497
–
1,238
$ 24,000

$
639
1,354
2,016
1,419
5,428

2,007
–

897
3,012
3,909

12,656
$ 24,000

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

cOnDenseD cOnsOliDating Balance sheets

Parent

Guarantor
Subsidiaries

May 31, 2006
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

ASSETS
Current Assets
Cash and cash equivalents
Receivables, less allowances
Spare parts, fuel, supplies, prepaid expenses

and other, less allowances

Deferred income taxes
Total current assets

Property and Equipment, at Cost
Less accumulated depreciation and amortization

Net property and equipment

Intercompany Receivable
Goodwill
Prepaid Pension Cost
Investment in Subsidiaries
Other 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
Intercompany Payable
Other Liabilities
Deferred income taxes
Other liabilities

Total other long-term liabilities

Stockholders’ Investment

$ 1,679
–

7
–
1,686

22
12
10

–
–
1,310
12,301
69
$ 15,376

700
50
33
37
820

749
2,079

–
226
226

11,502
$ 15,376

$
114
2,864

423
522
3,923

22,430
12,410
10,020

680
2,675
18
2,070
571
$ 19,957

$
150
1,107
1,594
1,221
4,072

843
–

1,143
2,447
3,590

11,452
$ 19,957

$ 144
681

42
17
884

1,622
882
740

1,399
150
21
–
675
$ 3,869

$
–
168
310
132
610

–
–

257
74
331

2,928
$ 3,869

–
(29)

–
–
(29)

–
–
–

(2,079)
–
–
(14,371)
(33)
$ (16,512)

–
–
(29)
–
(29)

–
(2,079)

(33)
–
(33)

(14,371)
$ (16,512)

$ 1,937
3,516

472
539
6,464

24,074
13,304
10,770

–
2,825
1,349
–
1,282
$ 22,690

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

1,592
–

1,367
2,747
4,114

11,511
$ 22,690

FEDEX CORPORATION

cOnDenseD cOnsOliDating statements Of incOme

Parent

–

Guarantor
Subsidiaries

$ 29,894

Year Ended May 31, 2007
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

$ 5,671

$ (351)

$ 35,214

103
–
3
2
–
1
(193)
84
–

–

2,016
(22)
29
(7)

2,016
–
$ 2,016

11,632
2,964
2,082
1,513
3,317
1,830
(170)
4,133
27,301

2,593

390
(29)
(34)
–

2,920
971
$ 1,949

2,005
944
261
227
216
121
363
851
4,988

683

–
(2)
5
(1)

685
228
$ 457

–
(35)
(3)
–
–
–
–
(313)
(351)

–

(2,406)
–
–
–

(2,406)
–
$ (2,406)

13,740
3,873
2,343
1,742
3,533
1,952
–
4,755
31,938

3,276

–
(53)
–
(8)

3,215
1,199
$ 2,016

Parent

–

Guarantor
Subsidiaries

$ 28,310

Year Ended May 31, 2006
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

$ 4,325

$ (341)

$ 32,294

81
–
4
2
–
1
(164)
76
–

–

1,806
(47)
55
(8)

1,806
–
$ 1,806

11,046
2,642
2,163
1,401
3,128
1,709
(229)
4,008
25,868

2,442

327
(57)
(78)
(4)

2,630
876
$ 1,754

1,444
627
226
147
128
67
393
721
3,753

572

–
–
23
1

596
217
$ 379

–
(18)
(3)
–
–
–
–
(320)
(341)

–

(2,133)
–
–
–

(2,133)
–
$ (2,133)

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

3,014

–
(104)
–
(11)

2,899
1,093
$ 1,806

REVENUES

Operating Expenses:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs

Intercompany charges, net

Other

Operating Income

Other Income (Expense):
Equity in earnings of subsidiaries

Interest, net
Intercompany charges, net

Other, net

Income Before Income Taxes
Provision for income taxes
Net Income

REVENUES

Operating Expenses:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs

Intercompany charges, net

Other

Operating Income

Other Income (Expense):
Equity in earnings of subsidiaries

Interest, net
Intercompany charges, net

Other, net

Income Before Income Taxes
Provision for income taxes
Net Income

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

cOnDenseD cOnsOliDating statements Of incOme

REVENUES

Operating Expenses:
Salaries and employee benefits
Purchased transportation
Rentals and landing fees
Depreciation and amortization
Fuel
Maintenance and repairs

Intercompany charges, net

Other

Operating Income

Other Income (Expense):
Equity in earnings of subsidiaries

Interest, net
Intercompany charges, net

Other, net

Income Before Income Taxes
Provision for income taxes
Net Income

Parent

–

Guarantor
Subsidiaries

$ 25,859

Year Ended May 31, 2005
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

$ 3,927

$ (423)

$ 29,363

86
–
3
1
–
1
(172)
81
–

–

1,449
(79)
90
(11)

1,449
–
$ 1,449

10,523
2,388
2,088
1,324
2,231
1,625
(132)
3,804
23,851

2,008

244
(58)
(98)
(5)

2,091
695
$ 1,396

1,354
583
211
137
86
69
304
720
3,464

463

–
(2)
8
(3)

466
169
$ 297

–
(36)
(3)
–
–
–
–
(384)
(423)

–

(1,693)
–
–
–

(1,693)
–
$ (1,693)

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

2,471

–
(139)
–
(19)

2,313
864
$ 1,449

FEDEX CORPORATION

cOnDenseD cOnsOliDating statements Of cash flOws

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

INVESTING ACTIVITIES
Capital expenditures
Business acquisitions, net of cash acquired
Proceeds from asset dispositions
Cash Used in Investing Activities

FINANCING ACTIVITIES
Net transfers (to) from Parent
Principal payments on debt
Proceeds from debt issuance
Proceeds from stock issuances
Excess tax benefits on the exercise of stock options
Dividends paid
Other, net
Cash Provided by (Used in) Financing Activities

CASH AND CASH EQUIVALENTS
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

INVESTING ACTIVITIES
Capital expenditures
Proceeds from asset dispositions
Cash Used in Investing Activities

FINANCING ACTIVITIES
Net transfers (to) from Parent
Principal payments on debt
Proceeds from stock issuances
Dividends paid
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

Parent

(57)

Guarantor
Subsidiaries

$ 2,741

(1)
(175)
–
(176)

(578)
(700)
999
115
45
(110)
(5)
(234)

(2,631)
(36)
47
(2,620)

40
(206)
55
–
–
–
–
(111)

(467)
1,679
$ 1,212

10
114
$ 124

Parent

(69)

Guarantor
Subsidiaries

$ 3,418

(4)
–
(4)

1,215
(250)
144
(97)
(2)
1,010

937
742
$ 1,679

(2,321)
58
(2,263)

(1,073)
(119)
–
–
–
(1,192)

(37)
151
$ 114

Year Ended May 31, 2007
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

$ 879

(250)
(1,099)
21
(1,328)

538
–
–
–
–
–
–
538

89
144
$ 233

–

–
–
–
–

–
–
–
–
–
–
–
–

–
–
–

$ 3,563

(2,882)
(1,310)
68
(4,124)

–
(906)
1,054
115
45
(110)
(5)
193

(368)
1,937
$ 1,569

Year Ended May 31, 2006
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

$ 327

(193)
6
(187)

(142)
–
–
–
–
(142)

(2)
146
$ 144

–

–
–
–

–
–
–
–
–
–

–
–
–

$ 3,676

(2,518)
64
(2,454)

–
(369)
144
(97)
(2)
(324)

898
1,039
$ 1,937

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

cOnDenseD cOnsOliDating statements Of cash flOws

CASH PROVIDED BY (USED IN) 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
Net transfers (to) from Parent
Principal payments on debt
Proceeds from stock issuances
Dividends paid
Cash (Used in) Provided by Financing Activities

CASH AND CASH EQUIVALENTS
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period

Parent

(5)

Guarantor
Subsidiaries

$ 2,849

(3)
(122)
–
–
(125)

717
(600)
99
(84)
132

2
740
$ 742

(2,049)
–
10
(2)
(2,041)

(651)
(191)
–
–
(842)

(34)
185
$ 151

Year Ended May 31, 2005
Non-Guarantor
Subsidiaries

Eliminations

Consolidated

$ 273

(184)
–
2
–
(182)

(66)
–
–
–
(66)

25
121
$ 146

–

–
–
–
–
–

–
–
–

$ 3,117

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

–
(791)
99
(84)
(776)

(7)
1,046
$ 1,039

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, 2007 and 2006, 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, 2007. 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 financial
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, 2007 and 2006, and the consolidated results of its operations and its cash flows for each of the three
years in the period ended May 31, 2007, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, effective June 1, 2006, the Company adopted Statement of Financial
Accounting Standards (“SFAS”) No. 123 (revised 2004), “Share-Based Payment,” and effective May 31, 2007 the Company adopted
SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans – An Amendment of FASB
Statements No. 87, 88, 106 and 132(R).”

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, 2007, 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 9, 2007 expressed an unqualified opinion thereon.

Memphis, Tennessee
July 9, 2007

FEDEX CORPORATION

Selected Financial Data

The following table sets forth (in millions, except per share amounts and other operating data) certain selected consolidated financial
and operating data for FedEx as of and for the five years ended May 31, 2007. 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.

2007 (1)

2006 (2)

2005 (3)

2004 (4)

2003

Operating Results
Revenues
Operating income
Income before income taxes
Net income

Per Share Data
Earnings per share:
Basic
Diluted
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

$ 35,214
3,276
3,215
$ 2,016

$ 6.57
$ 6.48
307

311
$ 0.37

$ 12,636
24,000
2,007
12,656

669
238,935

$ 32,294
3,014
2,899
$ 1,806

$
$

5.94
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

$
$

4.81
4.72
301

307
0.29

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

670
215,838

$ 24,710
1,440
1,319
838
$

$
$

2.80
2.76
299

304
0.29

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

645
195,838

$ 22,487
1,471
1,338
830
$

$ 2.79
$ 2.74
298

303
$ 0.15

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

643
190,918

(1) Results for 2007 include a $143 million charge at FedEx Express associated with upfront compensation and benefits under the new labor contract with our pilots. See Note 1 to the accompanying
consolidated financial statements. Additionally, results for 2007 include several acquisitions from the date of acquisition as described in Note 3 to the accompanying financial statements.
(2) Results for 2006 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. See Note 7 to the
accompanying consolidated financial statements.
(3) Results for 2005 include a $48 million ($31 million, net of tax, or $0.10 per diluted share) Airline Stabilization Act charge at FedEx Express (see Note 1 to the accompanying consolidated financial
statements) and a $12 million or $0.04 per diluted share benefit from an income tax adjustment (see Note 11 to the accompanying consolidated financial statements).
(4) Results for 2004 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 an aircraft engine maintenance tax case and the reduction of our effective tax rate. Additionally, FedEx Kinko’s financial results have been included from February 12, 2004 (the date of acquisition).

FEDEX CORPORATION

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

Steven R. Loranger (1)
Chairman, President and
Chief Executive Officer
ITT Corporation
Engineering and manufacturing company

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

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 (3) (4)
Chairman and President
Barksdale Management Corporation
Investment management company

August A. Busch IV (2)
President and Chief Executive Officer
Anheuser-Busch Companies, 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 (2) (4)
Retired 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

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

(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,
FedEx Information Services 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

FedEx Ground

David J. Bronczek
President and Chief Executive Officer

Michael L. Ducker
Executive Vice President
and President, International

William J. Logue
Executive Vice President,
Operations and Systems Support

David F. Rebholz
President and Chief Executive Officer

Rodger G. Marticke
Executive Vice President and Chief Operating Officer

FedEx Freight

FedEx Kinko’s

Douglas G. Duncan
President and Chief Executive Officer

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

Thomas J. Leverton
Executive Vice President and Chief Development Officer

FedEx Trade Networks

FedEx SmartPost

G. Edmond Clark
President and Chief Executive Officer

Ward B. Strang
President and Chief Executive Officer

FedEx Custom Critical

FedEx Global Supply Chain Services

Virginia C. Albanese
President and Chief Executive Officer

Thomas Schmitt
President and Chief Executive Officer

Caribbean Transportation Services

Rick A. Faieta
President and Chief Executive Officer

FEDEX CORPORATION

Corporate Information

FedEx Corporation: 942 South Shady Grove Road, Memphis,
Tennessee 38120, (901) 818-7500, fedex.com

Annual Meeting of Shareowners: Monday, September 24, 2007,
10:00 a.m. local time, Hilton Hotel, Tennessee Grand Ballroom,
939 Ridge Lake Boulevard, Memphis, Tennessee 38120

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

Shareowners: As of July 9, 2007, there were 20,165
shareowners of record.

Market Information: Following are high and low sale prices and
cash dividends paid, by quarter, for FedEx Corporation’s common
stock in 2007 and 2006:

FY 2007
High
Low
Dividend

FY 2006
High
Low
Dividend

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

$118.74
97.79
0.09

$119.21
99.34
0.09

$121.42
106.63
0.09

$116.76
104.01
0.09

$ 91.43
79.55
0.08

$ 98.81
76.81
0.08

$ 108.83
95.79
0.08

$ 120.01
106.00
0.08

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 statis-
tical information are available through our Web site at fedex.com.
Company documents filed electronically with the SEC can
also be found at the SEC’s Web site at www.sec.gov. You will
be mailed a copy of the Form 10-K upon request to: FedEx
Corporation Investor Relations, 942 South Shady Grove Road,
Memphis, Tennessee 38120, (901) 818-7200, e-mail:
ir@fedex.com.

SEC and NYSE Certifications: 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 Service: Call 1-800-Go-FedEx or visit fedex.com.

Media Inquiries: Jesse W. Bunn, Staff Director, Marketplace
Communications, FedEx Corporation, 942 South Shady Grove
Road, Memphis, Tennessee 38120, (901) 818-7463,
e-mail: mediarelations@fedex.com

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

Direct Stock Purchase and Dividend Reinvestment:
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. 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 divi-
dends to purchase additional shares of FedEx common stock.

Investor Relations: Mickey Foster, Vice President, Investor
Relations, FedEx Corporation, 942 South Shady Grove Road,
Memphis, Tennessee 38120, (901) 818-7200, e-mail: ir@fedex.com

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,
veteran status or, where applicable, 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, and FedEx Global
Supply Chain ServicesSM are service marks of Federal Express
Corporation. FedEx Kinko’s Office and Print Centers® is a regis-
tered service mark of Federal Express Corporation and Kinko’s
Ventures, Inc. FedEx Kinko’s Ship CentersSM is a service mark of
Federal Express Corporation and Kinko’s Ventures, Inc.

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Talking to FedEx gives voice to new possibilities. And those
conversations yield powerful returns: ideas that move your
business and the world forward.

Quiksilver meets the demand for its outdoor sports apparel
and accessories in 90 countries — from Chile to China — using
the FedEx portfolio for global sourcing and distribution.

This entire annual report is printed on paper certified by the Forest Stewardship Council,
which promotes environmentally appropriate, socially beneficial and economically viable
management of the world’s forests. The paper contains a mix of pulp derived from
FSC-certified well-managed forests and FSC-certified recycled paper fibers.

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Possibility speaks.

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