UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2005

ý OR oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM_______TO_______	~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2004~~

	OR

o	~~TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________~~

Commission File Number: 1-15829

FEDEX CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		62-1721435
(State or other jurisdiction of ~~incorporation)~~		(I.R.S. Employer ~~Identification No.)~~
	incorporation or organization)		Identification No.)
942 South Shady Grove Road
Memphis, Tennessee		38120
(Address of principal executive offices)		(~~Zip~~ZIP Code)

(901) 818-7500

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ýxNo o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Common Stock				Outstanding Shares at December ~~10, 2004~~16, 2005
Common Stock, par value $0.10 per share				~~301,317,517~~			303,881,824

FEDEX CORPORATION
INDEX

~~INDEX~~

PART I. FINANCIAL INFORMATION

		PAGE
ITEM 1. ~~Financial Statements~~
Financial Statements
	Condensed Consolidated Balance Sheets November 30, ~~2004~~2005 and May 31, ~~2004~~2005	3-4

	Condensed Consolidated Statements of Income Three and Six Months Ended November 30, ~~2004~~2005 and ~~2003~~2004	5

	Condensed Consolidated Statements of Cash Flows Six Months Ended November 30, ~~2004~~2005 and ~~2003~~2004	6

	Notes to Condensed Consolidated Financial Statements	~~7-16~~
	7-18
	Report of Independent Registered Public Accounting Firm	17
	19
ITEM 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	~~18-34~~
	20-38
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	35
	39
ITEM 4.	Controls and Procedures	35
	39
PART II. OTHER INFORMATION

ITEM 4.	Submission of Matters to a Vote of Security Holders	36

~~ITEM 5. Other Information~~		~~36-37~~
	40
ITEM 6. ~~Exhibits~~	38Exhibits
	40
Signature		39
	41
Exhibit Index		E-1

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS)

~~ASSETS~~

	November 30, 2004		May 31, 2004		November 30,
	(Unaudited)				2005			May 31,
					(Unaudited)			2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	939	$	1,046		$	786	$	1,039
Receivables, less allowances of $148 and $151	3,251		3,027
Spare parts, supplies and fuel, less allowances of $134 and $124	256		249
Receivables, less allowances of $142 and $125						3,546		3,297
Spare parts, supplies and fuel, less allowances of $147 and $142						278		250
Deferred income taxes	527		489			520		510
Prepaid expenses and other	160		159			162		173

Total current assets	5,133		4,970			5,292		5,269

PROPERTY AND EQUIPMENT, AT COST	21,201		20,311			23,244		22,017
Less accumulated depreciation and amortization	11,855		11,274			12,969		12,374

Net property and equipment	9,346		9,037			10,275		9,643

OTHER LONG-TERM ASSETS
Goodwill	2,834		2,802			2,826		2,835
Prepaid pension cost	1,267		1,127			1,537		1,272
Intangible and other assets	1,457		1,198			1,281		1,385

Total other long-term assets	5,558		5,127			5,644		5,492
						$	21,211	$	20,404
	$	20,037	$	19,134

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

FEDEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT SHARE DATA)

~~LIABILITIES AND STOCKHOLDERS’ INVESTMENT~~

	November 30, 2004			May 31, 2004			November 30,
	(Unaudited)						2005				May 31,
							(Unaudited)				2005
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt	$	775		$	750			$	493		$	369
Accrued salaries and employee benefits	1,036			1,062				1,052			1,275
Accounts payable	1,703			1,615				1,859			1,739
Accrued expenses	1,400			1,305				1,387			1,351

Total current liabilities	4,914			4,732				4,791			4,734

LONG-TERM DEBT, LESS CURRENT PORTION	2,740			2,837				2,203			2,427

OTHER LONG-TERM LIABILITIES
Deferred income taxes	1,176			1,181				1,251			1,206
Pension, postretirement healthcare and other benefit obligations	807			768				846			828
Self-insurance accruals	620			591				645			621
Deferred lease obligations	502			503				610			532
Deferred gains, principally related to aircraft transactions	414			426				387			400
Other liabilities	68			60				70			68

Total other long-term liabilities	3,587			3,529				3,809			3,655

COMMITMENTS AND CONTINGENCIES

COMMON STOCKHOLDERS’ INVESTMENT
Common stock, $0.10 par value; 800 million shares authorized, 301 million shares issued as of November 30, 2004 and 300 million shares issued as of May 31, 2004	30			30
Common stock, $0.10 par value; 800 million shares authorized, 304 million shares issued as of November 30, 2005 and 302 million shares issued as of May 31, 2005								30			30
Additional paid-in capital	1,164			1,079				1,309			1,241
Retained earnings	7,643			7,001				9,125			8,363
Accumulated other comprehensive loss	(3		)	(46		)		(16		)	(17		)
Deferred compensation and treasury stock, at cost	(38		)	(28		)		(40		)	(29		)

Total common stockholders’ investment	8,796			8,036				10,408			9,588
								$	21,211		$	20,404
	$	20,037		$	19,134

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

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)

	Three Months Ended November 30,						Six Months Ended November 30,
	2004			2003			2004			2003			Three Months Ended								Six Months Ended
													November 30, 2005				November 30, 2004				November 30, 2005				November 30, 2004
REVENUES	$	7,334		$	5,920		$	14,309		$	11,607			$	8,090			$	7,334			$	15,797			$	14,309

OPERATING EXPENSES:
Salaries and employee benefits	2,930			2,559			5,850			5,129				3,081				2,930				6,143				5,850
Purchased transportation	747			598			1,428			1,153				812				747				1,583				1,428
Rentals and landing fees	584			447			1,143			876				584				577				1,249				1,128
Depreciation and amortization	363			336			723			670				386				363				756				723
Fuel	592			352			1,075			686				891				592				1,619				1,075
Maintenance and repairs	415			370			835			734				445				422				913				850
Business realignment costs	—			283			—			415
Airline Stabilization Act charge	48			—			48			—
Other	1,055			792			2,028			1,561				1,101				1,103				2,160				2,076
	6,734			5,737			13,130			11,224				7,300				6,734				14,423				13,130

OPERATING INCOME	600			183			1,179			383				790				600				1,374				1,179

OTHER INCOME (EXPENSE):
Interest, net	(38		)	(35		)	(77		)	(40		)		(30		)		(38		)		(54		)		(77		)
Other, net	(8		)	(2		)	(14		)	(1		)		—				(8		)		(11		)		(14		)
	(46		)	(37		)	(91		)	(41		)		(30		)		(46		)		(65		)		(91		)

INCOME BEFORE INCOME TAXES	554			146			1,088			342				760				554				1,309				1,088

PROVISION FOR INCOME TAXES	200			55			404			123				289				200				499				404

NET INCOME	$	354		$	91		$	684		$	219			$	471			$	354			$	810			$	684

EARNINGS PER COMMON SHARE:
Basic	$	1.18		$	0.31		$	2.27		$	0.73			$	1.55			$	1.18			$	2.67			$	2.27

Diluted	$	1.15		$	0.30		$	2.23		$	0.72			$	1.53			$	1.15			$	2.63			$	2.23

DIVIDENDS DECLARED PER COMMON SHARE	$	0.07		$	—		$	0.14		$	0.10			$	0.08			$	0.07			$	0.16			$	0.14

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

FEDEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(IN MILLIONS)

	Six Months Ended November 30,						Six Months Ended
	2004			2003			November 30,				November 30,
							2005				2004
Operating Activities:
Net income	$	684		$	219			$	810			$	684
Adjustments to reconcile net income to cash provided by operating activities:
Lease accounting charge								79				—
Depreciation and amortization	723			670				754				723
Provision for uncollectible accounts	49			54				57				49
Deferred income taxes and other noncash items	(56		)	10				64				(56		)
Changes in operating assets and liabilities, net of the effect of business acquired:
Changes in operating assets and liabilities, net of the effect of businesses acquired:
Receivables	(196		)	(175		)		(314		)		(196		)
Spare parts and supplies	(15		)	8				(15		)		(15		)
Accounts payable and other operating liabilities	198			505				(9		)		198
Other, net	(148		)	(31		)		(291		)		(148		)

Net cash provided by operating activities	1,239			1,260				1,135				1,239

Investing Activities:
Capital expenditures	(1,175		)	(608		)		(1,326		)		(1,175		)
Business acquisition	(122		)	—				—				(122		)
Proceeds from asset dispositions	5			12				37				5

Net cash used in investing activities	(1,292		)	(596		)		(1,289		)		(1,292		)

Financing Activities:
Principal payments on debt	(73		)	(43		)		(102		)		(73		)
Proceeds from stock issuances	61			79				53				61
Dividends paid	(42		)	(30		)		(48		)		(42		)
Purchase of treasury stock	—			(179		)
Other, net	—			1				(2		)		—

Net cash used in financing activities	(54		)	(172		)		(99		)		(54		)

Net (decrease) increase in cash and cash equivalents	(107		)	492
Net decrease in cash and cash equivalents								(253		)		(107		)
Cash and cash equivalents at beginning of period	1,046			538				1,039				1,046

Cash and cash equivalents at end of period	$	939		$	1,030			$	786			$	939

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

FEDEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

~~(UNAUDITED)~~

(1)General

~~(1)~~ ~~General~~

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.These interim financial statements of FedEx Corporation (“FedEx”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information, the instructions to Quarterly Report on Form 10-Q and Rule 10-01 of Regulation S-X, and should be read in conjunction with our Annual Report on Form 10-K ~~as amended,~~ for the year ended May 31, ~~2004.~~2005. Accordingly, significant accounting policies and other disclosures normally provided have been omitted since such items are disclosed therein.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly our financial position as of November 30, ~~2004,~~2005 and the results of our operations for the three- and six-month periods ended November 30, ~~2004~~2005 and ~~2003~~2004 and our cash flows for the six-month periods ended November 30, ~~2004~~2005 and ~~2003.~~2004. Operating results for the three- and six-month periods ended November 30, ~~2004~~2005 are not necessarily indicative of the results that may be expected for the year ending May 31, ~~2005.~~

2006.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, ~~2005~~2006 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year.

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

~~BUSINESS REALIGNMENT COSTS.~~ During 2004, we incurred $435 million of business realignment costs related to voluntary early retirement and severance programs ($283 million in the second quarter and $415 million in the first half of the year). At May 31, 2004, we had remaining business realignment related accruals of $28 million. At November 30, 2004, these accruals had decreased to $13 million due predominantly to cash payments made in the first half of 2005. The remaining accruals relate to management severance agreements, which are payable over future periods.

GUARANTEES.FedEx’s publicly held debt is guaranteed by our subsidiaries. The guarantees are full and unconditional, joint and several, and any subsidiaries that are not guarantors are minor as defined by Securities and Exchange Commission (“SEC”) regulations. FedEx, as the parent company issuer of this debt, has no independent assets or operations. There are no significant restrictions on our ability or the ability of any guarantor to obtain funds from its subsidiaries by such means as a dividend or loan.

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

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

DIVIDENDS DECLARED PER COMMON SHARE.On November ~~22, 2004,~~18, 2005, our Board of Directors declared a dividend of ~~$0.07~~$0.08 per share of common stock. The dividend is payable on January 3, ~~2005~~2006 to stockholders of record as of the close of business on December 13, 2004. In the first quarter of 2005, a dividend of $0.07 per common share was declared. During 2004, the declaration of two of our quarterly dividends fell in the first quarter. In both instances, the dividend was $0.05 per common share.2005. 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.

LEASE ADJUSTMENT. During the first quarter of 2006, a one-time, non-cash charge of $79 million ($49 million after tax or $0.16 per diluted share before variable compensation effects) was recorded, which represented the impact on prior years, to adjust the accounting for certain facility leases, predominantly at

FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

FedEx Express. The charge related primarily to rent escalations in on-airport facility leases. Because the amounts involved were not material to our financial statements in any individual prior period and the cumulative amount is not expected to be material to 2006 results, we recorded the cumulative adjustment in the first quarter, which increased operating expenses by $79 million.

FEDEX SMARTPOST ~~ACQUISITION~~ACQUISITION.~~. On September 12, 2004,~~During the second quarter of 2005, 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~~expanded 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 ~~were~~are not material to ~~second quarter results. FedEx SmartPost’s~~reported or pro forma results of operations ~~would not materially affect pro forma results in~~of any ~~of the periods presented.~~period.

The allocation of the purchase price to the fair value of the assets acquired, liabilities assumed and goodwill was based primarily on internal estimates and independent appraisals. While the purchase price allocation is substantially complete and we do not expect any material adjustments, we may make adjustments to the purchase price allocation if new data becomes available.

~~The accompanying unaudited balance sheet reflects the following allocation of the total purchase price (in millions):~~

Current assets, primarily accounts receivable

$
11

Property and equipment

91

Goodwill

19

Intangible assets

10

Current liabilities

(9
)

Total purchase price

$
122

AIRLINE STABILIZATION ACT ~~CHARGE~~CHARGE.. During the second quarter of 2005, ~~the United States Department~~we recorded a charge of ~~Transportation (“DOT”) issued a final order in its administrative review~~$48 million ($31 million, net of ~~the FedEx Express~~tax, or $0.10 per diluted share) related to our claim for compensation under the Air Transportation Safety and System Stabilization Act (“Act”). Under their interpretation of the Act, the DOT determined that FedEx Express is entitled to $72 million of compensation, an increase of $3 million from its initial determination. Because we had previously received $101 million under the Act, the DOT has demanded repayment of $29 million. While we will vigorously contest this determination judicially and will continue to aggressively pursue our compensation claim, we can no longer conclude that collection of the entire $119 million recorded in fiscal 2002 is probable. Accordingly, we recorded a charge of $48 million in the second quarter of 2005, representing the DOT’s repayment demand of $29 million and the write-off of a $19 million receivable. Should any additional amounts ultimately be recovered by FedEx Express on this matter, they will be recognized in the period that they are realized.Act.

STOCK ~~COMPENSATION~~COMPENSATION.. We currently apply Accounting Principles Board Opinion No. (“APB”) 25, “Accounting for Stock Issued to Employees,” and its related interpretations to measure compensation expense for stock-based compensation plans. ~~See Note 4~~As a result, no compensation expense is recorded for ~~a discussion~~stock options when the exercise price is equal to or greater than the market price of our common stock at the ~~assumptions underlying~~date of grant. For awards of restricted stock and to determine the pro forma ~~calculations below.~~ effects of stock options set forth below, we recognize the fair value of the awards ratably over their explicit service period.

If compensation cost for stock-based compensation plans had been determined under Statement of Financial Accounting Standards No. (“SFAS”) 123, “Accounting for ~~Stock-Based~~Stock Based Compensation,” stock option compensation expense, pro forma net income ~~stock option compensation expense~~ and basic and diluted earnings per common share, ~~for the three- and six-month periods ended November 30, 2004 and 2003,~~ assuming all options granted in 1996 and

thereafter were valued at fair value using the Black-Scholes method, would have been as follows (in millions, except per share amounts):

Three Months Ended
November 30,

Six Months Ended
November 30,

2004

2003

2004

2003

Net income, as reported

$
354

$
91

$
684

$
219

Add: Stock compensation included in reported net income, net of tax

2

—

3

9

Deduct: Total pro forma stock compensation expense, net of tax

(10
)
(10
)
(19
)
(21
)

Pro forma net income

$
346

$
81

$
668

$
207

Earnings per common share:

Basic – as reported

$
1.18

$
0.31

$
2.27

$
0.73

Basic – pro forma

$
1.15

$
0.27

$
2.22

$
0.69

Diluted - as reported

$
1.15

$
0.30

$
2.23

$
0.72

Diluted - pro forma

$
1.13

$
0.27

$
2.18

$
0.68

	Three Months Ended						Six Months Ended
	November 30,			November 30,			November 30,			November 30,
	2005			2004			2005			2004
Net income, as reported		$	471		$	354		$	810		$	684
Add: Stock compensation included in reported net income, net of tax		3			2			2			3
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax benefit		13			10			23			19
Pro forma net income		$	461		$	346		$	789		$	668
Earnings per common share:
Basic—as reported		$	1.55		$	1.18		$	2.67		$	2.27
Basic—pro forma		$	1.52		$	1.15		$	2.60		$	2.22
Diluted—as reported		$	1.53		$	1.15		$	2.63		$	2.23
Diluted—pro forma		$	1.50		$	1.13		$	2.56		$	2.18

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) finalized SFAS 123R “Share-Based Payment,” which will be effective for interim or annual reporting periods beginning after June 15, 2005. The new standard will require us to expense stock options and the FASB believes the use of a binomial lattice model for option valuation is capable of more fully reflecting certain characteristics of employee share options. We have begun a process to analyze how the utilization of a binomial lattice model could impact the valuation of our options. The effect of expensing stock options on our results of operations using the Black-Scholes model is presented in the table above.8

~~(2)~~ ~~Comprehensive Income~~

~~The following table provides a reconciliation of net income reported in our financial statements to comprehensive income (in millions):~~

Three Months Ended
November 30,

2004

2003

Net income

$
354

$
91

Other comprehensive income:

Foreign currency translation adjustments, net of deferred taxes of $7 and $5

35

20

Comprehensive income

$
389

$
111

Six Months Ended
November 30,

2004

2003

Net income

$
684

$
219

Other comprehensive income:

Foreign currency translation adjustments, net of deferred taxes of $8 and $1

43

10

Comprehensive income

$
727

$
229

FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

~~(3)~~ ~~Financing Arrangements~~

From time to time, we finance certain operating and investing activities, including acquisitions, through the issuance of commercial paper. Our commercial paper program is backed by unused commitments under two revolving credit agreements totaling $1 billion and borrowings under the program reduce the amount available under these agreements. One revolver provides for $750 million through September 28, 2006. The second is a 364-day facility providing for $250 million through September 22, 2005. At November 30, 2004, no commercial paper borrowings were outstanding and the entire amount under the credit facilities was available. The agreements contain covenants requiring us to maintain certain fixed charge coverage and leverage ratios. We are in compliance with all covenants of our credit agreements and do not expect the covenants to significantly affect our operations or ability to pay dividends.

~~(4)~~ ~~Stock Option Assumptions~~

We account for stock options using the intrinsic value method wherein compensation expense is recognized on stock options granted to employees only for the excess of the market price of our common stock at the date of grant over the option exercise price. No compensation expense is recorded at the date of grant, as all of our options have an exercise price equal to the fair value of our stock on that date.

Some companies recognize compensation expense for the fair value of the option right itself. We have elected not to adopt this accounting method because it requires the use of subjective valuation models, which we believe are not representative of the real value of the option to either FedEx or our employees. However, we are required to disclose the pro forma effect of accounting for stock options using such a valuation method for all options granted in 1996 and thereafter (see Note 1). We use the Black-Scholes option-pricing model to calculate the fair value of options for our pro forma disclosures. The key assumptions for this valuation method include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, forfeiture rate and exercise price. Many of these assumptions are judgmental and highly sensitive in the determination of pro forma compensation expense. Following is a table of the key weighted-average assumptions used in the ~~option~~ valuation calculations for the options ~~granted in the three- and six-month periods ended November 30, 2004 and 2003,~~ and a discussion of our methodology for developing each of the assumptions used in the valuation model:

	Three Months Ended November 30,				Six Months Ended November 30,				Three Months Ended						Six Months Ended
	2004		2003		2004		2003		November 30,			November 30,			November 30,			November 30,
									2005			2004			2005			2004
Expected lives	4 years		4 years		4 years		4 years			5 years			4 years			5 years			4 years
Expected volatility	26.00	%	30.50	%	27.02	%	32.56	%		24	%		26	%		25	%		27	%
Risk-free interest rate	3.13	%	2.64	%	3.53	%	2.07	%		4.15	%		3.13	%		3.70	%		3.53	%
Dividend yield	0.306	%	0.311	%	0.327	%	0.310	%		0.358	%		0.306	%		0.325	%		0.327	%

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

Expected Volatility.~~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. An increase in the expected volatility will increase compensation expense.

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

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

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

The following table summarizes information about our stock option plans for the three- and six-month periods ended November 30, 2005:

	Three Months Ended					Six Months Ended
	Shares		Weighted-Average Exercise Price			Shares		Weighted-Average Exercise Price
Oustanding at beginning of period	19,660,743			$	57.67	17,359,382			$	51.96
Granted	123,405			83.73		2,929,640			89.41
Exercised	(825,572	)		42.82		(1,301,345	)		41.16
Canceled	(36,316	)		72.47		(65,417	)		74.61
Oustanding at end of period	18,922,260			58.46		18,922,260			58.46

~~During the second quarter of 2005, we made option grants of 105,525 shares at a weighted-average exercise price of $84.98 per share.~~ The weighted-average Black-Scholes value of ~~these~~the grants under the assumptions indicated above ~~was $21.12 per option. For~~for the ~~six-months~~three- and six-month periods ended November 30, 2004, 2,417,125 shares have been granted at a weighted average exercise price of $73.57 per share, primarily in connection with our principal annual stock option grant. The weighted-average Black-Scholes value of these grants under the assumptions indicated above2005 was ~~$19.25 per option.~~$24.13 and $25.33, respectively.

FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Total equity compensation shares outstanding or available for grant at November 30, ~~2004~~2005 represented ~~7.2%~~8.7% of total outstanding common and equity compensation shares and equity compensation shares available for grant. During the second quarter of ~~2005,~~2006, our stockholders approved a ~~two~~7.5 million share increase in the number of shares of our common stock reserved for issuance pursuant to stock ~~options.~~options and a 750,000 share increase in the number of restricted shares of our common stock reserved for issuance.

NEW ACCOUNTING PRONOUNCEMENTS. In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123R, “Share-Based Payment.” SFAS 123R is a revision of SFAS 123 and supersedes APB 25. The new standard requires companies to record compensation expense for stock-based awards using a fair value method and is effective for annual periods beginning after June 15, 2005 (effective in the first quarter of 2007 for FedEx). Compensation expense will be recorded over the requisite service period, which is typically the vesting period of the award. We plan to adopt this standard using the modified prospective method.

In March 2005, the FASB issued Financial Accounting Standards Board Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143”. FIN 47 clarifies that liabilities associated with asset retirement obligations the timing or settlement method of which are conditional upon future events should be recorded at fair value as soon as fair value is reasonably estimable. FIN 47 also provides guidance on the information required to reasonably estimate the fair value of the liability. FIN 47 will be effective for FedEx no later than May 31, 2006. Management is in the process of evaluating the impact, if any, FIN 47 will have on FedEx.

FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

(2)Comprehensive Income

The following table provides a reconciliation of net income reported in our financial statements to comprehensive income (in millions):

	Three Months Ended
	November 30,				November 30,
	2005				2004
Net income		$	471			$	354
Other comprehensive income:
Foreign currency translation adjustments, net of deferred tax benefit of $3 and deferred taxes of $7		(4		)		35
Comprehensive income		$	467			$	389

	Six Months Ended
	November 30,			November 30,
	2005			2004
Net income		$	810		$	684
Other comprehensive income:
Foreign currency translation adjustments, net of deferred tax benefit of $4 and deferred taxes of $8		1			43
Comprehensive income		$	811		$	727

~~(5)~~(3)Financing Arrangements

From time to time, we finance certain operating and investing activities, including acquisitions, through borrowings under our $1.0 billion revolving credit facility or the issuance of commercial paper. In July 2005, we executed a new $1.0 billion five-year revolving credit facility, which replaced and consolidated our prior revolving credit facilities. Borrowings under the credit facility will bear interest at short-term interest rates (based on the London Interbank Offered Rate (LIBOR), the Prime Rate or the Federal Funds Rate) plus a margin dependent upon our senior unsecured long-term debt ratings.

Our commercial paper program is backed by unused commitments under the revolving credit facility and borrowings under the program reduce the amount available under the credit facility. At November 30, 2005, no commercial paper borrowings were outstanding and the entire amount under the credit facility was available. The revolving credit agreement contains certain covenants and restrictions, none of which are expected to significantly affect our operations.

FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

(4) Computation of Earnings Per Share

The calculation of basic and diluted earnings per common share for the three- and six-month periods ended November 30 ~~2004 and 2003~~ was as follows (in millions, except per share amounts):

	Three Months Ended November 30,						Six Months Ended November 30,						Three Months Ended								Six Months Ended
	2004			2003			2004			2003			November 30,				November 30,				November 30,				November 30,
													2005				2004				2005				2004
Net income applicable to common stockholders	$	354		$	91		$	684		$	219			$	471			$	354			$	810			$	684

Weighted-average shares of common stock outstanding	301			298			300			298				303				301				303				300

Common equivalent shares:
Assumed exercise of outstanding dilutive options	18			19			19			20				16				18				17				19
Less shares repurchased from proceeds of assumed exercise of options	(12		)	(13		)	(13		)	(14		)		(11		)		(12		)		(12		)		(13		)
Weighted-average common and common equivalent shares outstanding	307			304			306			304				308				307				308				306
Basic earnings per share	$	1.18		$	0.31		$	2.27		$	0.73			$	1.55			$	1.18			$	2.67			$	2.27
Diluted earnings per share	$	1.15		$	0.30		$	2.23		$	0.72			$	1.53			$	1.15			$	2.63			$	2.23

11We have excluded from the calculation of diluted earnings per share approximately 3.1 million antidilutive options for the three- and six- month periods ended November 30, 2005, as the exercise price of the options was greater than the average market price of common stock for the period.

FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

~~(6)~~(5) Employee Benefit Plans

We sponsor defined benefit pension plans covering a majority of our employees. The largest plan covers certain U.S. employees age 21 and over, with at least one year of service. Certain of our subsidiaries offer medical, dental, and vision coverage to eligible U.S. retirees and their eligible dependents. Net periodic benefit cost of the pension and postretirement healthcare plans ~~for the three- and six-month periods ended November 30~~ was as follows (in millions):

Three Months Ended
November 30,

Six Months Ended
November 30,

2004

2003

2004

2003

Pension Plans

Service cost

$
104

$
94

$
208

$
188

Interest cost

145

122

290

245

Expected return on plan assets

(178
)
(150
)
(353
)
(299
)
Net amortization and deferral

18

18

36

37

$
89

$
84

$
181

$
171

	Three Months Ended November 30,					Six Months Ended November 30,				Three Months Ended								Six Months Ended
										November 30,				November 30,				November 30,				November 30,
										2005				2004				2005				2004
Pension Plans
Service cost											$	118			$	104			$	237			$	208
Interest cost											161				145				322				290
Expected return on plan assets											(203		)		(178		)		(406		)		(353		)
Recognized actuarial losses											29				16				55				31
Amortization of transition obligation											(1		)		(1		)		(1		)		(1		)
Amortization of prior service cost											3				3				6				6
	2004			2003		2004		2003			$	107			$	89			$	213			$	181
Postretirement Healthcare Plans
Service cost	$		9	$	9	$	18	$	18		$	11			$	9			$	21			$	18
Interest cost	8			7		16		13			8				8				16				16
Expected return on plan assets	—			—		—		—
Net amortization and deferral	—			—		—		—
	$	17		$	16	$	34	$	31		$	19			$	17			$	37			$	34

Voluntary, tax deductible contributions of $456 million and $300 million were made to our principal U.S. domestic pension ~~plan~~plans during the ~~second quarter~~first six months of ~~2005. During 2004, we made primarily voluntary contributions of $335 million to our qualified pension plans.~~2006 and 2005, respectively. Although ~~no material~~additional contributions are ~~expected to be~~not required, we may elect to ~~continue to~~ make further voluntary contributions to our qualified ~~pension plans.~~

plans in 2006.

~~(7)~~(6) Business Segment Information

We provide ~~customers and businesses worldwide with~~ a broad portfolio of transportation, e-commerce and business ~~services. We offer integrated business applications~~services through operating companies that ~~operate independently~~compete collectively and ~~compete collectively~~are managed collaboratively under the respected FedEx ~~brand.~~brands. Our operations are primarily represented by Federal Express Corporation (“FedEx ~~Express,~~Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading provider of small-package ground delivery ~~service;~~services; FedEx Freight Corporation (“FedEx Freight”), ~~the largest~~a leading U.S. provider of regional less-than-truckload (“LTL”) freight services; and FedEx Kinko’s Office and Print Services, Inc. (“FedEx Kinko’s”), a leading provider of document solutions and business services. These businesses form the core of our reportable segments. Management evaluates segment financial performance based on operating income.

FedEx Corporate Services, Inc. (“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 also allocate costs for administrative services provided between operating companies and certain other costs such as costs associated with services received for general corporate oversight, including executive officers

1213

FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

and certain legal and finance functions. We believe these allocations approximate the cost of providing these functions.

In addition, 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, which we believe approximate fair value, and are reflected as revenues of the billing segment. The FedEx Kinko’s segment revenues include package acceptance revenue, which represents the fee received by FedEx Kinko’s from FedEx Express and FedEx Ground for accepting and handling packages at FedEx Kinko’s locations on behalf of these operating companies. Package acceptance revenue does not include the external revenue associated with the actual shipments. All shipment revenues are reflected in the segment performing the transportation services. Intersegment revenues and expenses are eliminated in the consolidated results but are not separately identified in the following segment information as the amounts are not material.

Our reportable segments include the following businesses:

FedEx Express Segment		FedEx Express (express transportation)
		FedEx Trade Networks (global trade services)

FedEx Ground Segment		FedEx Ground (small-package ground delivery)
		FedEx SmartPost (small-parcel consolidator)
		FedEx Supply Chain Services (contract logistics)

FedEx Freight Segment		FedEx Freight (LTL freight transportation)
		FedEx Custom Critical (time-critical transportation)
		Caribbean Transportation Services (airfreight forwarding)

FedEx Kinko’s Segment		FedEx Kinko’s (document solutions and business services)

FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

The following table provides a reconciliation of reportable segment revenues and operating income to our consolidated financial statement totals (in millions):

	Three Months Ended								Six Months Ended
	November 30,				November 30,				November 30,				November 30,
	2005				2004				2005				2004
Revenue
FedEx Express segment		$	5,370			$	4,834			$	10,492			$	9,450
FedEx Ground segment		1,307				1,174				2,526				2,247
FedEx Freight segment		932				820				1,824				1,627
FedEx Kinko’s segment		528				524				1,045				1,014
Other and eliminations		(47		)		(18		)		(90		)		(29		)
		$	8,090			$	7,334			$	15,797			$	14,309
Operating Income
FedEx Express segment		$	476			$	333	⁽²⁾		$	761	⁽¹⁾		$	643	⁽²⁾
FedEx Ground segment		163				135				311				282
FedEx Freight segment		135				102				270				205
FedEx Kinko’s segment		16				29				32				48
Other and eliminations		—				1				—				1
		$	790			$	600			$	1,374			$	1,179

Three Months Ended
November 30,

Six Months Ended
November 30,

2004

2003

2004

2003

Revenue

FedEx Express segment

$
4,834

$
4,279

$
9,450

$
8,416

FedEx Ground segment

1,174

978

2,247

1,892

FedEx Freight segment

820

664

1,627

1,301

FedEx Kinko’s segment ⁽¹⁾

524

—

1,014

—

Other and eliminations

(18
)
(1
)
(29
)
(2
)

$
7,334

$
5,920

$
14,309

$
11,607

Operating Income

FedEx Express segment ⁽²⁾

$
333

$
(19
)
$
643

$
4

FedEx Ground segment

135

135

282

251

FedEx Freight segment

102

66

205

127

FedEx Kinko’s segment ⁽¹⁾

29

—

48

—

Other and eliminations

1

1

1

1

$
600

$
183

$
1,179

$
383

⁽¹⁾~~The FedEx Kinko’s segment was formed following~~Operating expenses for the ~~acquisition~~first six months of ~~Kinko’s, Inc. on February 12, 2004.~~2006 include a $75 million (before variable compensation effects) one-time, non-cash charge to adjust the accounting for certain facility leases.

⁽²⁾~~Includes business realignment costs of $279 million in the~~The second quarter ~~and $411~~of 2005 includes $48 million ~~in the first half of 2004.~~

related to an Airline Stabilization Act charge.

~~(8)~~(7) Commitments

As of November 30, ~~2004,~~2005, our purchase commitments for the remainder of ~~2005~~2006 and annually thereafter under various contracts were as follows (in millions):

	Aircraft		Aircraft- Related ⁽¹⁾		Other ⁽²⁾		Total					Aircraft-
									Aircraft			Related(1)			Other(2)			Total
2005 (remainder)	$	111	$	88	$	282	$	481
2006	48		201		184		433
2006 (remainder)										$	50		$	122		$	466	$	638
2007	116		98		97		311			327			212			195		734
2008	131		53		36		220			290			91			104		485
2009	567		55		35		657			567			60			79		706
2010										517			61			60		638
Thereafter	1,142		94		188		1,424			625			74			269		968

⁽¹⁾Primarily aircraft modifications.

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

FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

The amounts reflected in the table above for purchase commitments represent ~~noncancelable~~non-cancelable 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.~~transport unless we have entered into non-cancelable commitments to modify such aircraft. Open purchase orders that are cancelable are not considered unconditional purchase obligations ~~for financial reporting purposes.~~

and therefore are not included in the table above.

FedEx Express is committed to purchase three MD11s, five Airbus A300s, nine Airbus A310s and one ATR (all in passenger configuration) and ten Airbus A380s (a new high-capacity, long-range aircraft). The three MD11s, one A300, seven A310s and the ATR are expected to be delivered in 2005. FedEx Express expects to take delivery of four A300s and one A310 in 2006, one A310 in 2007 and three of the ten A380s in each of 2009, 2010 and 2011 and the remaining one in 2012.certain aircraft. Deposits and progress payments of ~~$33~~$28 million have been made toward these purchases and other planned aircraft-related transactions. In addition, we have committed to modify our DC10 aircraft for passenger-to-freighter and two-man cockpit configurations. ~~Payments~~Future payments related to ~~all of~~ 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 our aircraft purchase commitments as of November 30, 2005 with the year of expected delivery by type:

	A300		A310		A380		ATR72		Total
2006 (remainder)		2		1		—		2		5
2007		5		2		—		—		7
2008		4		—		—		—		4
2009		—		—		3		—		3
2010		—		—		3		—		3
Thereafter		—		—		4		—		4
Total		11		3		10		2		26

Subsequent to November 30, 2005, FedEx Express entered into an amendment that rescheduled the delivery of certain A380 aircraft. The amendment will result in one less delivery in 2009 and one additional delivery in 2010.

A summary of future minimum lease payments under capital leases ~~and noncancelable~~at November 30, 2005 is as follows (in millions):

2006 (remainder)

$
14

2007

22

2008

99

2009

11

2010

95

Thereafter

130

371

Less amount representing interest

68

Present value of net minimum lease payments

$
303

FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

A summary of future minimum lease payments under non-cancelable operating leases ~~(principally aircraft, retail locations and facilities)~~ with an initial or remaining term in excess of one year at November 30, ~~2004~~2005 is as follows (in millions):

	Capital Leases		Operating Leases		Aircraft and Related			Facilities and
					Equipment			Other			Total
2005 (remainder)	$	75	$	905
2006	122		1,550
2006 (remainder)						$	390		$	518	$	908
2007	22		1,419			609			945		1,554
2008	99		1,304			585			806		1,391
2009	11		1,138			555			665		1,220
2010						544			528		1,072
Thereafter	225		8,117			4,460			3,121		7,581
	554		$	14,433		$	7,143		$	6,583	$	13,726
Less amount representing interest	89
Present value of future minimum lease payments	$	465

While certain of our lease agreements contain covenants governing the use of the leased assets or ~~requiring~~require us to maintain certain levels of insurance, none of our lease agreements include no 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.

~~(9)~~(8) Contingencies

~~Wage-and-Hour.~~ 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 ~~California’s~~federal or California wage-and-hour laws. The plaintiffs in these lawsuits are employees of FedEx operating companies who allege, among other things, that they were forced to work “off the clock” and were not provided work breaks or other benefits. The plaintiffs generally seek unspecified monetary damages, injunctive relief, or both.

To date, one of these wage-and-hour cases, Foster ~~et al.~~ v. FedEx Express, has been certified as a class action. ~~In this matter, which is pending in California state court, the~~The plaintiffs ~~purport to~~ represent a class of ~~all~~ hourly FedEx Express employees in California from October ~~15,~~14, 1998 to present. The plaintiffs allege that hourly employees are routinely required to work “off the clock” and are not paid for this additional work. The court issued a ruling on December 13, 2004 granting class certification on all issues. The ruling, however, does not address whether we will ultimately be held liable. Trial has been scheduled for April 2006.

We have denied any liability with respect to these claims and intend to vigorously defend ~~ourselves~~ourself in these cases. However, it is reasonably possible that material losses could be incurred on one or more of these matters as these cases develop.

Race Discrimination.On September 28, 2005, a California federal district court granted class certification in Satchell v. FedEx Express, a lawsuitalleging discrimination by FedEx Express in the Western region of the United States against certain current and former minority employees in pay and promotion. The district court’s ruling on class certification is not a decision on the merits of the plaintiffs’ claim and does not address whether we will be held liable. Trial is currently scheduled for February 2007. We have denied any liability and intend to vigorously defend ourself in this case. Given the nature and preliminary status of ~~these wage-and-hour claims,~~

FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

the claim, we ~~are currently evaluating, but~~ cannot yet determine the amount or a reasonable range of potential loss in ~~these matters; however, it~~this matter, if any. It is reasonably possible, however, that ~~such amounts~~we could ~~be material.~~

incur a material loss as this case develops.

Independent ~~Contractor.~~ Contractor. FedEx Ground is involved in ~~a number of~~numerous purported class-action lawsuits and other proceedings in which the threshold issue is whether some or all of FedEx Ground’s owner-operators are in fact employees, rather than independent contractors. These matters include Estrada v. FedEx Ground, a class action involving single work area contractors that is pending in California state court. Although the trial court has granted some of the plaintiffs’ claims for relief in Estrada ($18 million, inclusive of attorney’s fees, plus equitable relief), we expect to prevail on appeal. Adverse 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 ~~the~~these claims, ~~however,~~ we cannot yet determine the amount or a reasonable range of potential loss in these matters, if any.

~~Jet Engine Maintenance.~~ During the first quarter of 2004, we received a favorable ruling from the U.S. District Court in Memphis over the tax treatment of jet engine maintenance costs. The Court held that these costs were ordinary and necessary business expenses and properly deductible. As a result of this decision, we recognized a one-time benefit of $26 million, net of tax, in the first quarter of 2004, primarily related to the reduction of accruals related to this matter and the recognition of interest earned on amounts previously paid to the IRS. These adjustments affected both net interest expense ($30 million pre-tax) and income tax expense ($7 million). Future periods are not expected to be materially affected by the resolution of this matter. Although the IRS has appealed this ruling, we believe the District Court’s ruling will be upheld on appeal. Oral arguments were conducted before the Sixth Circuit Court of Appeals in December 2004.

Other.FedEx and its subsidiaries are subject to other legal proceedings 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.

~~(10)~~(9) Supplemental Cash Flow Information

Six Months Ended
November 30,

2004

2003

(In millions)

Cash payments for:

Interest (net of capitalized interest)

$
85

$
78

Income taxes

493

261

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

	Six Months Ended
	November 30,			November 30,
	2005			2004
	(In millions)
Cash payments for:
Interest (net of capitalized interest)		$	64		$	85
Income taxes		475			493

~~(11)~~(10) Income Taxes

~~As a result~~Income tax expense for the second quarter and first half of 2005 was favorably impacted by the passage of the American Jobs Creation Act of 2004, ~~we recognized~~which resulted in an $11 million tax benefit in the second quarter of 2005. This was principally due to the reduction of a valuation allowance previously established against ~~certain~~ foreign tax credits arising from certain of our ~~non-Express~~ international operations. Primarily as a result of this reduction, our effective tax rate was reduced to 36% for the second quarter of 2005 and to 37% for the first half of 2005. Our effective tax rates for the second quarter and first half of 2004 were 38% and 36%, respectively. The lower effective tax rate for the first half of 2004 was primarily related to the above-described jet engine maintenance tax ruling received in the first quarter of 2004 (see Note 9).

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

FedEx Corporation

We have reviewed the condensed consolidated balance sheet of FedEx Corporation as of November 30, ~~2004,~~2005, and the related condensed consolidated statements of income for the three-month and six-month periods ended November 30, ~~2004~~2005 and ~~2003~~2004 and the condensed consolidated statements of cash flows for the six-month periods ended November 30, ~~2004~~2005 and ~~2003.~~2004. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of FedEx Corporation as of May 31, ~~2004,~~2005, and the related consolidated statements of income, changes in stockholders’ investment and comprehensive income, and cash flows for the year then ended not presented herein, and in our report dated ~~June 22, 2004,~~July 12, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of May 31, ~~2004,~~2005, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

	/s/ Ernst & Young LLP
Memphis, Tennessee
December 20, 2005

~~Memphis, Tennessee~~
~~December 15, 2004~~

1719

Item 2. Management’s Discussion and Analysis of Results of Operations and Financial Condition

GENERAL

The following Management’s Discussion and Analysis of Results of Operations and Financial Condition describes the principal factors affecting the results of operations, liquidity, capital resources and contractual cash obligations, as well as the critical accounting policies and estimates, of FedEx. This discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and our Annual Report on Form 10-K ~~as amended,~~ for the year ended May 31, ~~2004~~2005 (“Annual Report”), which include additional information about our significant accounting policies, practices and the transactions that underlie our financial results.

FedEx provides a broad portfolio of transportation, e-commerce and business services ~~with~~through operating companies that ~~operate independently~~compete collectively and ~~compete collectively~~are managed collaboratively under the respected FedEx ~~brand.~~brands. These operating companies are primarily represented by FedEx Express, the world’s largest express transportation company; FedEx Ground, a leading provider of small-package ground delivery ~~service;~~services; FedEx Freight, ~~the largest~~a leading U.S. provider of regional LTL freight services; and FedEx Kinko’s, a leading provider of document solutions and business ~~services, which was formed following the acquisition of Kinko’s, Inc. on February 12, 2004.~~services. These companies form the core of our reportable segments. See “Reportable Segments” for further discussion.

The key ~~factors that affect~~indicators necessary to understand our operating results ~~are as follows:~~

include:

•· the overall customer demand for our various services;

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

•· the mix of services purchased by our customers;

•· the prices we obtain for our services, primarily measured by average price per shipment (yield);

•· our ability to manage our cost structure for capital expenditures and operating expenses such as salaries and employee benefits ~~fuel~~ and ~~maintenance;~~maintenance and repairs, and to match such expenses to shifting volume levels; and

•· the timing and amount of fluctuations in fuel prices and our ability to ~~match operating~~recover incremental fuel costs ~~to shifting volume levels.~~

through our supplemental fuel surcharges.

Except as otherwise specified, references to years indicate our fiscal year ~~ending~~ended May 31, ~~2005~~2006 or ended May 31 of the year referenced and comparisons are to the corresponding period of the prior year. References to our transportation segments mean, collectively, our FedEx Express, FedEx Ground and FedEx Freight segments.

RESULTS OF OPERATIONS

~~RESULTS OF OPERATIONS~~

CONSOLIDATED RESULTS

~~Dollars~~The following table compares revenues, operating income, operating margin, net income and diluted earnings per share (dollars in millions, except per share ~~amounts~~

~~Three-~~amounts) for the three- and six-month periods ended November 30:

	Three Months Ended							Percent			Six Months Ended						Percent
	2005			2004(2)				Change			2005(1)			2004(2)			Change
Revenues	$	8,090			$	7,334			10		$	15,797		$	14,309			10
Operating income	790				600				32		1,374			1,179				17
Operating margin	9.8		%		8.2		%		160	bp	8.7		%	8.2		%		50	bp
Net income	$	471			$	354			33		$	810		$	684			18
Diluted earnings per share	$	1.53			$	1.15			33		$	2.63		$	2.23			18

Three Months Ended

Percent
Change

Six Months Ended

Percent
Change

2004 ⁽¹⁾

2003 ⁽²⁾

2004 ⁽¹⁾

2003 ⁽³⁾

Revenues

$
7,334

$
5,920

24

$
14,309

$
11,607

23

Operating income

600

183

228

1,179

383

208

Operating margin

8.2
%
3.1
%
510
bp
8.2
%
3.3
%
490
bp

Net income

$
354

$
91

289

$
684

$
219

212

Diluted earnings per share

$
1.15

$
0.30

283

$
2.23

$
0.72

210

⁽¹⁾Operating expenses for the first six months of 2006 include a $79 million ($49 million after tax or $0.16 per diluted share before variable compensation effects) one-time, non-cash charge to adjust the accounting for certain facility leases, predominantly at FedEx Express, as described below.

⁽²⁾Second quarter of 2005 includes $48 million ($31 million, net of tax, or $0.10 per diluted share) related to an Airline Stabilization Act charge and aan $11 million or $0.04 per diluted share benefit from an income tax adjustment described below.

⁽²⁾ ~~Second quarter of 2004 includes $283 million ($175 million, net of tax, or $0.57 per diluted share) of business realignment costs described below.~~

⁽³⁾First six months of 2004 includes $415 million ($257 million, net of tax, or $0.85 per diluted share) of business realignment costs described below and includes a $26 million, net of tax, or $0.08 per diluted share benefit related to a favorable ruling on an IRS tax case described below.

The following table shows changes in revenues and operating income by reportable segment for the three- and six-month periods ended November 30, 2005 compared to 2004 ~~and 2003~~ (in millions):

	Change in							Percent Change				Change in								Percent Change in
	Revenues							in Revenues				Operating Income								Operating Income
	Three				Six			Three		Six		Three				Six				Three			Six
	Months				Months			Months		Months		Months				Months				Months			Months
	Ended				Ended			Ended		Ended		Ended				Ended				Ended			Ended
FedEx Express segment		$	536		$	1,042			11		11		$	143	(2)		$	118	(1)(2)		43			18
FedEx Ground segment		133			279				11		12		28				29				21			10
FedEx Freight segment		112			197				14		12		33				65				32			32
FedEx Kinko’s segment		4			31				1		3		(13		)		(16		)		(45	)		(33	)
Other and Eliminations		(29		)	(61		)		NM		NM		(1		)		(1		)		NM			NM
		$	756		$	1,488			10		10		$	190			$	195			32			17

Change in
Revenues

Percent Change
in Revenues

Change in
Operating Income

Percent Change in
Operating Income

Three
Months
Ended

Six
Months
Ended

Three
Months
Ended

Six
Months
Ended

Three
Months
Ended

Six
Months
Ended

Three
Months
Ended

Six
Months
Ended

FedEx Express segment

$
555

$
1,034

13

12

$
352
^{(1) (2)}
$
639
^{(1) (3)}
NM

NM

FedEx Ground segment

196

355

20

19

—

31

—

12

FedEx Freight segment

156

326

23

25

36

78

55

61

FedEx Kinko’s segment ⁽⁴⁾

524

1,014

NM

NM

29

48

NM

NM

Other and Eliminations

(17
)
(27
)
NM

NM

—

—

NM

NM

$
1,414

$
2,702

24

23

$
417

$
796

228

208

⁽¹⁾ ~~Second quarter~~FedEx Express operating expenses for the first six months of ~~2005 includes $48~~2006 include a $75 million ~~related~~(before variable compensation effects) one-time, non-cash charge to ~~an Airline Stabilization Act charge~~adjust the accounting for certain facility leases, as described below.

⁽²⁾ ~~Business realignment costs of $283 million were incurred during~~FedEx Express operating expenses for the second quarter of ~~2004 as described below.~~2005 include a $48 million charge related to the Airline Stabilization Act.

⁽³⁾ ~~Business realignment costs of $415 million were incurred during the first half of 2004 as described below.~~21

⁽⁴⁾ ~~The FedEx Kinko’s segment was formed following the acquisition of Kinko’s, Inc. on February 12, 2004.~~

The following table shows selected operating statistics (in thousands, except yield amounts) for the three- and six-month periods ended November ~~30, 2004 and 2003:~~30:

	Three Months Ended				Percent	Six Months Ended				Percent	Three Months Ended						Percent		Six Months Ended				Percent
	2004		2003		Change	2004		2003		Change	2005			2004			Change		2005		2004		Change
Average daily package volume (ADV):
FedEx Express	3,226		3,145		3	3,158		3,118		1		3,279			3,226			2	3,255		3,158			3
FedEx Ground	2,725		2,342		16	2,584		2,228		16		2,843			2,725			4	2,712		2,584			5
Total ADV	5,951		5,487		8	5,742		5,346		7		6,122			5,951			3	5,967		5,742			4

Average daily LTL shipments:
FedEx Freight	65		58		12	65		57		14		68			65			5	67		65			3

Revenue per package (yield):
FedEx Express	$	20.28	$	18.37	10	$	20.03	$	18.13	10		$	21.99		$	20.28		8	$	21.39	$	20.03		7
FedEx Ground	6.48		6.37		2	6.51		6.40		2		6.90			6.48			6	6.91		6.51			6

LTL yield (revenue per hundredweight):
FedEx Freight	$	15.55	$	14.32	9	$	15.26	$	14.14	8		$	16.80		$	15.55		8	$	16.68	$	15.26		9

Revenue growth for the second quarter and first half of ~~2005~~2006 was attributable to ~~improvements~~yield improvement and volume growth across all ~~operating segments and the inclusion~~ of ~~FedEx Kinko’s. Transportation business revenue growth resulted from increased volumes~~our transportation segments. Yield improvements were principally due to significantly higher fuel surcharges across all of our transportation segments and ~~strong~~rate increases at FedEx Ground and FedEx Freight. Volume increases were driven by solid growth ~~in yields~~ at FedEx Express ~~(both U.S.~~in both international and domestic ~~and IP) and~~overnight services, continued growth at FedEx ~~Freight. One additional operating day at each~~Ground, led by the performance of our ~~transportation companies also contributed to revenue~~home delivery service, and growth ~~for~~at FedEx Freight, which accelerated throughout the ~~first half of 2005.~~

quarter.

Operating income increased ~~substantially~~ during the second quarter and first half of ~~2005~~2006 primarily due to revenue growth and improved margins ~~at FedEx Express and FedEx Freight. Also, FedEx Express benefited from~~across all transportation segments. During the ~~realization of savings from our 2004 business realignment programs. The~~ second quarter of ~~2004 included $283 million of business realignment costs. For the first half of 2004 these costs were $415 million. Although our~~2006, fuel ~~costs~~prices increased significantly ~~during~~in the ~~second quarter and first half~~aftermath of ~~2005,~~several hurricanes; however, our operating margins improved as higher revenues from our jet and diesel fuel surcharges ~~at FedEx Express and FedEx Freight~~ offset these higher fuel costs.

~~During~~ In response to the significant fluctuations in jet and diesel fuel prices during the second quarter of ~~2005~~2006, we temporarily capped certain of our fuel surcharges to ensure our services remain competitively priced in the ~~United States Department~~marketplace. Productivity gains across all transportation segments also contributed to our margin expansion in the second quarter and first half of ~~Transportation (“DOT”) issued a final order in its administrative review of the~~2006. Operating margin improvement was partially offset by higher costs at FedEx Express to support international volume growth.

Our results for the first half of 2006 included a one time, non-cash charge of $79 million ($49 million after tax or $0.16 per diluted share before variable compensation effects), which was recorded during the first quarter and represented the impact on prior years, to adjust the accounting for certain facility leases, predominantly at FedEx Express. Second quarter 2005 results at FedEx Express included a $48 million charge ($31 million net of tax, or $0.10 per diluted share) related to our claim for compensation under the Air Transportation Safety and System Stabilization ~~Act (“Act”). Under its interpretation~~Act.

In August 2005, Hurricane Katrina devastated certain portions of the ~~Act, the DOT determined that FedEx Express is entitled to $72 million~~Gulf Coast region where each of ~~compensation, an increase of $3 million from its initial determination. Because we had previously received $101 million under the Act, the DOT~~our business segments has demanded repayment of $29 million. While we will vigorously contest this determination judicially and will continue to aggressively pursue our compensation claim, we can no longer conclude that collection of the entire $119 million recorded in fiscal 2002 is probable. Accordingly, we recorded a charge of $48 million inoperations. During the second quarter of ~~2005 ($31 million net~~2006, Hurricanes Wilma and Rita impacted our operations in Louisiana, Texas and Florida. While we took precautions by relocating aircraft and equipment, we suffered damage to a limited number of ~~tax,~~facilities and some of our equipment as a result of these storms. Furthermore, these storms negatively impacted our operations, resulting in reduced shipment volumes and incremental operating costs. We maintain business interruption and other insurance coverage that may provide for recovery of certain of these losses. The amount or ~~$0.10 per diluted share), representing the DOT’s repayment demand~~timing of ~~$29 million and the write-off of a $19 million receivable. Should~~ any ~~additional amounts ultimately~~business interruption insurance proceeds cannot be ~~recovered by FedEx Express on~~estimated at this ~~matter, they~~time. Any such recoveries will be recognized ~~in the period that they are~~only when realized.

Net interest expense ~~increased $37 million~~decreased during the second quarter and first half of 2006. The decrease in net interest expense was primarily due to a reduction in the level of outstanding debt and capital leases as a result of scheduled payments and additional capitalized interest due to modification of aircraft at FedEx Express.

Our effective tax rate was 38% for the second quarter and first half of 2006. We expect the effective tax rate to approximate 38% for the remainder of the fiscal year; however, the actual rate will depend on a number of factors, including the amount and source of operating income. Our effective tax rates for the second quarter and first half of 2005 aswere 36% and 37%, respectively. The lower effective tax rates for the ~~favorable resolution of the tax case described below lowered net interest expense in the~~second quarter and first half of ~~2004. Additional borrowings~~2005 were primarily related to the ~~FedEx Kinko’s acquisition also contributed to the increase.~~

~~As a result of the~~ passage of the American Jobs Creation Act of 2004, ~~we recognized~~which resulted in an $11 million tax benefit in the second quarter of 2005. This was principally due to the reduction of a valuation allowance previously established against ~~certain~~ foreign tax credits arising from certain of our ~~non-Express~~ international operations.

Outlook

~~operations. Primarily as a result of this reduction, our effective tax rate was 36% for the second quarter of 2005 and 37% for the first half of 2005. For 2005, we~~We expect the effective tax rate to approximate 38%; however, the actual rate will depend on a number of factors, including the amount and source of operating income and the timing and nature of discrete income tax events. Our effective tax rates for the second quarter and first half of 2004 were 38% and 36%, respectively. The lower effective tax rate for the first half of 2004 was primarily related to the jet engine maintenance tax ruling described below, which was received in the first quarter of 2004.

During the first quarter of 2004, we received a favorable ruling from the U.S. District Court in Memphis over the tax treatment of jet engine maintenance costs. The Court held that these costs were ordinary and necessary business expenses and properly deductible. As a result of this decision, we recognized a one-time benefit of $26 million, net of tax, or $0.08 per diluted share, in the first quarter of 2004, primarily related to the reduction of accruals related to this matter and the recognition of interest earned on amounts previously paid to the IRS. These adjustments affected both net interest expense ($30 million pre-tax) and income tax expense ($7 million). Future periods are not expected to be materially affected by the resolution of this matter. Although the IRS has appealed this ruling, we believe the District Court’s ruling will be upheld on appeal. Oral arguments were conducted before the Sixth Circuit Court of Appeals in December 2004.

~~Both net income and diluted earnings per share increased substantially during the second quarter and first half of 2005, primarily due to~~ revenue growth at all operating segments and improved margins at FedEx Express and FedEx Freight. Also, FedEx Express benefited from the realization of savings from our 2004 business realignment programs. Second quarter 2004 results included business realignment costs of $283 million ($175 million, net of tax, or $0.57 per diluted share). For the first half of 2004, these costs were $415 million ($257 million, net of tax, or $0.85 per diluted share).

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 were not material to second quarter results.

~~Business Realignment Costs~~

During 2004, voluntary early retirement incentives with enhanced pension and postretirement healthcare benefits were offered to certain groups of employees at FedEx Express who were age 50 or older. Voluntary cash severance incentives were also offered to eligible employees at FedEx Express. These programs, which commenced August 1, 2003 and expired during the second quarter of 2004, were limited to eligible U.S. salaried staff employees and managers and approximately 3,600 employees accepted offers under these programs. Costs were also incurred for the elimination of certain management positions based on the staff reductions from the voluntary programs and other cost reduction initiatives. Costs for the benefits provided under the voluntary programs were recognized in the period that eligible employees accepted the offer. Other costs associated with business realignment activities were recognized in the period incurred.

~~During 2004, we incurred $435 million of business realignment costs related to these programs ($283 million~~strong earnings growth across all transportation segments in the second ~~quarter and $415 million in the first~~ half of the year). At May 31, 2004, we had remaining business realignment related accruals of $28 million. At November 30, 2004, these accruals had decreased to $13 million due predominantly to cash payments made in the first half of 2005. The remaining accruals relate to management severance agreements, which are payable over future periods.

~~Over the past few years, we have taken many steps to bring our expense~~2006. We also expect continued growth in ~~line with revenue growth, particularly at FedEx Express, while maintaining our industry-leading service levels. The business~~

realignment programs were another step in this ongoing process of reducing our cost structure to increase our competitiveness, meet the future needs of our employees and provide the expected financial returns for our shareholders. We continue to examine cost reduction opportunities and may identify additional actions that result in the recognition of charges in 2005 and beyond.

~~Outlook~~

Our outlook anticipates continued revenue and earnings growth in all segments for the remainder of 2005, led by volume growth and productivity gains across all our transportation companies and continued yield improvements at FedEx Express and FedEx Freight. Our view stems from expectations of strong customer demand for services across our operating companies ~~a lower cost structure~~and strong yields, even in light of recent declines in our fuel surcharge levels. While our fuel surcharges have been sufficient to offset increased fuel prices, we cannot predict the impact on the overall economy, if any, if fuel costs increase sharply from current levels.

We expect continued strong growth of international volumes and yields and growth in U.S. domestic overnight revenue at FedEx ~~Express~~Express. We anticipate improved volumes and continued growth in the worldwide economy. In addition, FedEx Kinko’s revenue during 2005 is projected to be approximately $2.1 billion, which is significantly higher than the partial year revenue of $621 million included in our 2004 results.

We also anticipate significant growth in both operating income and margins in 2005. These measures will be positively impacted by expected revenue growth, improved productivity and the full-year savings from our business realignment initiatives discussed above. Our management teams continue to examine additional cost reduction and operational productivity opportunities as we focus on optimizing our networks, improving our service offerings and enhancing the customer experience. This will position FedEx to increase cash flows and financial returns through improved operating margin.

~~In November 2004, we announced average list price increases starting in January 2005 of 2.9%~~yields at FedEx Ground and ~~4.6%~~FedEx Freight, as FedEx Ground continues its multi-year capacity expansion plan and FedEx Freight continues to grow its regional and interregional business and enhance its portfolio of services. FedEx Kinko’s is expected to generate revenue growth from the transition of FedEx World Service Centers to FedEx Kinko’s Ship Centers and increased package acceptance revenue.

Volatility in fuel costs may pressure quarterly earnings growth as the trailing impact of adjustments to the FedEx Express fuel surcharge can significantly affect earnings in the short term. Incremental costs associated with the new westbound and eastbound around-the-world flights at FedEx Express ~~the re-introduction~~will continue to be significant in 2006. All of ~~an indexed fuel surcharge for FedEx Ground and an approximate 2% fuel surcharge decrease at FedEx Express. While~~ our jet and diesel fuel surcharge revenues at FedEx Express and FedEx Freight offset significantly higher fuel costs during the second quarter and first half of 2005, our future results could be negatively affectedtransportation businesses operate in a competitive pricing environment, heightened by ~~prolonged~~continuing high fuel ~~costs to the extent these costs negatively impact the worldwide economy. In addition, competitive pressures may limit our ability to~~prices. However, we continue to ~~maintain or increase~~manage our ~~fuel surcharges in response~~yields to ~~rising fuel prices.~~

ensure that volume growth can be achieved at compensatory rates.

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

Increased security requirements for air cargo carriers ~~have been put in place and~~ have not had a material impact on our operating results for the periods presented. In November 2004, the Transportation Security Administration (“TSA”) proposed new rules ~~extending~~enhancing many of the security requirements ~~already in place~~ for air cargo on both passenger ~~airlines that carry belly cargo to~~and all-cargo ~~carriers and freight forwarders.~~aircraft. Because the TSA’s proposed rules are subject to comment, any final rules may differ significantly from the proposed rules. Accordingly, it is not yet possible to estimate the impact, if any, that the ~~TSA’s proposed~~adoption of new rules by the TSA or any other additional security requirements may have on our results of operations. However, it is possible that increased security requirements could impose substantial incremental costs on us and our competitors.

Future results will depend upon a number of factors, including ~~U.S.~~global economic conditions, the effect of severe weather events on our operations and ~~international economic conditions,~~the economy, the impact from any terrorist activities or international conflicts, our ability to match our cost structure and capacity with shifting volume levels, our ability to effectively leverage our new service and growth initiatives and our ability to ~~effectively operate, integrate~~successfully conclude contract negotiations with our pilots and ~~leverage~~defend against challenges to our independent contractor model described in Note 8 to the ~~FedEx Kinko’s business.~~accompanying unaudited condensed consolidated financial statements. In addition, adjustments to our fuel surcharges lag changes in actual fuel prices paid. Therefore, our operating income could be materially affected should the price of fuel ~~suddenly change~~continue to fluctuate by a significant ~~amount.~~amounts. See “Forward-Looking Statements” for a more complete discussion of potential risks and uncertainties that could materially affect our future performance.

NEW ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS 123R, “Share-Based Payment.” The new standard requires companies to record compensation expense for stock-based awards using a fair value method and is effective for annual periods beginning after June 15, 2005 (effective in the first quarter of 2007 for FedEx). Compensation expense will be recorded over the requisite service period, which is typically the vesting period of the award. We plan to adopt this standard using the modified prospective method.

The impact of the adoption of SFAS 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future, the assumptions and the fair value model used to value those future grants and the market value of our common stock. However, we anticipate that the impact of SFAS 123R will approximate the pro forma results under SFAS 123 presented in Note 1 to the accompanying unaudited condensed consolidated financial statements. The effect of recording compensation expense under SFAS 123 would have resulted in a reduction to earnings per diluted share of $0.03 and $0.02 for the three-month periods ended November 30, 2005 and 2004, respectively, and $0.07 and $0.05 for the six-month periods ended November 30, 2005 and 2004, respectively.

In March 2005, the FASB issued Financial Accounting Standards Board Interpretation No. (“FIN”) 47, “Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143”. FIN 47 clarifies that liabilities associated with asset retirement obligations whose timing or settlement method are conditional upon future events should be recorded at fair value as soon as fair value is reasonably estimable. FIN 47 also provides guidance on the information required to reasonably estimate the fair value of the liability. FIN 47 will be effective for FedEx no later than May 31, 2006. Management is in the process of evaluating the impact, if any, FIN 47 will have on FedEx.

REPORTABLE SEGMENTS

FedEx Express, FedEx Ground, FedEx Freight and FedEx Kinko’s form the core of our reportable segments. Our reportable segments include the following businesses:

FedEx Express Segment	FedEx Express (express transportation)
	FedEx Trade Networks (global trade services)

FedEx Ground Segment	FedEx Ground (small-package ground delivery)
	FedEx SmartPost (small-parcel consolidator)
	FedEx Supply Chain Services (contract logistics)

FedEx Freight Segment	FedEx Freight (LTL freight transportation)
	FedEx Custom Critical (time-critical transportation)
	Caribbean Transportation Services (airfreight forwarding)

FedEx Kinko’s Segment	FedEx Kinko’s (document solutions and business services)

FedEx 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 ~~and~~or estimated services provided. ~~These~~We believe these allocations ~~materially~~ approximate the cost of providing these functions. The operating expenses line item “Intercompany charges” on the accompanying unaudited financial summaries of our reportable segments includes the allocations from FedEx Services to FedEx Express, FedEx Ground, FedEx Freight and FedEx ~~Freight,~~Kinko’s. 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 general corporate oversight, including executive officers and certain ~~administrative~~legal and finance functions. Management evaluates segment financial performance based on operating income.

In addition, 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, which we believe approximate fair value, and are reflected as revenues of the billing segment. The FedEx Kinko’s segment revenues include package acceptance revenue, which represents the fee received by FedEx Kinko’s from FedEx Express and FedEx Ground for accepting and handling packages at FedEx Kinko’s locations on behalf of these operating companies. Package acceptance revenue does not include the external revenue associated with the actual shipments. All shipment revenues are reflected in the segment performing the transportation services. Such intersegment revenues and expenses are eliminated in the consolidated results but are not separately identified in the following segment information as the amounts are not material.

2325

FEDEX EXPRESS SEGMENT

The following table compares revenues, operating expenses, ~~and~~ operating income ~~(loss)~~and margin (dollars in millions) for the three- and six-month periods ended November 30:

	Three Months Ended								Percent			Six Months Ended						Percent
	2005				2004				Change			2005			2004			Change
Revenues:
Package:
U.S. overnight box		$	1,604			$	1,471			9		$	3,165		$	2,920			8
U.S. overnight envelope		480				432				11		969			871				11
U.S. deferred		702				682				3		1,388			1,330				4
Total U.S. domestic package revenue		2,786				2,585				8		5,522			5,121				8
International Priority (IP)		1,757				1,537				14		3,391			2,977				14
Total package revenue		4,543				4,122				10		8,913			8,098				10
Freight:
U.S.		564				470				20		1,070			892				20
International		117				91				29		222			181				23
Total freight revenue		681				561				21		1,292			1,073				20
Other⁽¹⁾		146				151				(3	)	287			279				3
Total revenues		5,370				4,834				11		10,492			9,450				11
Operating expenses:
Salaries and employee benefits		1,959				1,873				5		3,930			3,762				4
Purchased transportation		236				206				15		477			397				20
Rentals and landing fees		409				399				3		892			782				14
Depreciation and amortization		203				199				2		396			399				(1	)
Fuel		760				513				48		1,388			935				48
Maintenance and repairs		339				322				5		700			647				8
Airline Stabilization Act charge		—				48				NM		—			48				NM
Intercompany charges		383				374				2		741			736				1
Other		605				567				7		1,207			1,101				10
Total operating expenses		4,894				4,501				9		9,731		⁽²⁾	8,807				10
Operating income		$	476			$	333			43		$	761		$	643			18
Operating margin		8.9		%		6.9		%		200	bp	7.3		%	6.8		%		50	bp

⁽¹⁾Other revenues includes FedEx Trade Networks.

⁽²⁾Operating expenses for the first six months of 2006 include a $75 million (before variable compensation effects) one-time, non-cash charge to adjust the accounting for certain facility leases.

The following table compares selected statistics (in thousands, except yield amounts) for the three- and six-month periods ended November 30:

	Three Months Ended						Percent	Six Months Ended						Percent	Three Months Ended		Percent			Six Months Ended		Percent
	2004			2003			Change	2004			2003			Change	2005	2004	Change			2005	2004	Change
Revenues:
Package:
U.S. overnight box	$	1,471		$	1,347		9	$	2,920		$	2,695		8
U.S. overnight envelope	432			408			6	871			840			4
U.S. deferred	682			626			9	1,330			1,232			8
Total U.S. domestic package revenue	2,585			2,381			9	5,121			4,767			7
International Priority (IP)	1,537			1,258			22	2,977			2,413			23
Total package revenue	4,122			3,639			13	8,098			7,180			13
Freight:
U.S.	470			401			17	892			766			16
International	91			98			(7)	181			203			(11)
Total freight revenue	561			499			12	1,073			969			11
Other ⁽¹⁾	151			141			7	279			267			4
Total revenues	4,834			4,279			13	9,450			8,416			12
Operating expenses:
Salaries and employee benefits	1,873			1,806			4	3,762			3,640			3
Purchased transportation	206			169			22	397			327			21
Rentals and landing fees	399			384			4	782			754			4
Depreciation and amortization	199			203			(2)	399			407			(2)
Fuel	513			310			65	935			603			55
Maintenance and repairs	322			293			10	647			578			12
Business realignment costs	—			279			NM	—			411			NM
Airline Stabilization Act charge	48			—			NM	48			—			NM
Intercompany charges	374			347			8	736			689			7
Other	567			507			12	1,101			1,003			10
Total operating expenses	4,501			4,298			5	8,807			8,412			5
Operating income (loss)	$	333		$	(19	)⁽²⁾	NM	$	643		$	4	⁽³⁾	NM
Operating margin	6.9		%	(0.4		)%⁽²⁾		6.8		%	0.0		%⁽³⁾


Package Statistics ⁽⁴⁾
Package Statistics⁽¹⁾
Average daily package volume (ADV):
U.S. overnight box	1,179			1,169			1	1,164			1,169			—	1,211	1,179		3		1,195	1,164		3
U.S. overnight envelope	663			655			1	663			668			(1)	702	663		6		707	663		7
U.S. deferred	941			924			2	901			898			—	886	941		(6	)	891	901		(1	)
Total U.S. domestic ADV	2,783			2,748			1	2,728			2,735			—	2,799	2,783		1		2,793	2,728		2
IP	443			397			12	430			383			12	480	443		8		462	430		7
Total ADV	3,226			3,145			3	3,158			3,118			1	3,279	3,226		2		3,255	3,158		3

Revenue per package (yield):
U.S. overnight box	$	19.81		$	18.29		8	$	19.59		$	18.15		8	$ 21.03	$ 19.81		6		$ 20.69	$ 19.59		6
U.S. overnight envelope	10.33			9.90			4	10.27			9.90			4	10.86	10.33		5		10.71	10.27		4
U.S. deferred	11.51			10.74			7	11.54			10.81			7	12.56	11.51		9		12.16	11.54		5
U.S. domestic composite	14.74			13.75			7	14.67			13.72			7	15.80	14.74		7		15.44	14.67		5
IP	55.13			50.30			10	54.04			49.57			9	58.14	55.13		5		57.36	54.04		6
Composite package yield	20.28			18.37			10	20.03			18.13			10	21.99	20.28		8		21.39	20.03		7

Freight Statistics ⁽⁴⁾
Freight Statistics⁽¹⁾
Average daily freight pounds:
U.S.	9,008			8,649			4	8,605			8,270			4	9,544	9,008		6		9,209	8,605		7
International	1,874			2,092			(10)	1,867			2,185			(15)	2,283	1,874		22		2,159	1,867		16
Total average daily freight pounds	10,882			10,741			1	10,472			10,455			—	11,827	10,882		9		11,368	10,472		9

Revenue per pound (yield):
U.S.	$	0.83		$	0.74		12	$	0.81		$	0.73		11	$ 0.94	$ 0.83		13		$ 0.91	$ 0.81		12
International	0.77			0.74			4	0.76			0.73			4	0.81	0.77		5		0.80	0.76		5
Composite freight yield	0.82			0.74			11	0.80			0.73			10	0.91	0.82		11		0.89	0.80		11

⁽¹⁾ ~~Other includes FedEx Trade Networks.~~

⁽²⁾ ~~Includes $279 million of business realignment costs, described herein, which reduced operating margin by 652 basis points.~~

⁽³⁾ ~~Includes $411 million of business realignment costs, described herein, which reduced operating margin by 488 basis points.~~

⁽⁴⁾Package and freight statistics include only the operations of FedEx Express.

FedEx Express Segment Revenues

FedEx Express segment total revenues increased in the second quarter and first half of ~~2005,~~2006, principally due to higher IP revenues (particularly in Asia and U.S. ~~outbound and Europe)~~outbound) and higher U.S. domestic ~~yields.~~ overnight package revenues.

During the second quarter of 2006, IP revenues ~~experienced strong~~grew 14% on an 8% increase in volume and yield growth of ~~22% on a 10% increase in yield and volume growth of 12%~~5%. During the first half of 2006, IP revenues ~~experienced strong~~grew 14% on a 7% increase in volume and yield growth of ~~23% on a 9% increase in yield and volume growth of 12%~~6%. Asia experienced strong average daily volume growth during both the second quarter and first half of ~~2005. Outbound~~2006, while outbound shipments from the United States, Europe and Latin America also continued to improve. Our IP and international freight capacity has increased significantly as a result of our two new around-the-world flights. We may continue to realize increased international freight volume until higher yielding IP traffic can be sold into the added capacity. IP yield increased across virtually all regions during the second quarter and first half of ~~2005~~2006 due primarily to higher fuel surcharge revenue and an increase in average weight per package.

During the second quarter and first half of 2006, U.S. domestic package revenues grew 8% on yield increases of 7% and 5%, respectively, and volume increases of 1% and 2%, respectively. U.S. domestic composite yield increases were due to higher fuel surcharge revenue ~~increases in international average weight per package~~ and ~~favorable exchange rate differences, partially offset by a decline in international average rate per pound.~~

improved yields particularly on our U.S. domestic ~~composite yield increased 7%~~deferred packages as we continue to optimize our network. U.S. domestic package volume growth in both the second quarter and first half of 2006 resulted from the growth of our U.S. domestic overnight business, mostly offset by declines in U.S. domestic deferred volumes. We continue to manage our U.S. domestic deferred yield to improve the profitability of this service. In January 2005, ~~due to higher fuel surcharge revenue and increases in average weight per package and average rate per pound. An~~we implemented an average list price increase of ~~2.5%, along with certain surcharge increases, became effective in January 2004 for~~4.6% on FedEx Express U.S. domestic shipments and U.S. outbound international shipments. U.S. domestic volumes at FedEx Express increased 1% during the second quarter, but were slightly down for the first half of 2005. The domestic volume decrease for the first half reflects the transition of a major domestic shipper’s volume to FedEx Ground in the first quarter of 2005. Freight revenue increased during the first half due to higher yields and domestic volumes, which more than offset the effect of lower international volumes. We expect continuing decreases in international freight volumes asshipments, while we ~~prioritize sales efforts to fill space on international flights with higher yielding IP shipments.~~lowered our fuel surcharge index by 2%. In November ~~2004,~~2005, we announced a ~~4.6%~~5.5% average list price increase effective January ~~3, 2005~~2, 2006 on FedEx Express U.S. domestic shipments and U.S. outbound international shipments while lowering our fuel surcharge index by 2%.

and making changes to various other surcharges.

Fuel surcharge revenue was higher in the second quarter and first half of ~~2005~~2006 due to higher jet fuel prices. Our fuel surcharge is indexed to the spot price for jet fuel. Using this index, the U.S. domestic and outbound fuel surcharge ~~ranged between 6.0%~~ and ~~11.0% during~~ the ~~first half of 2005 and between 3.0% and 4.5% during the prior year period. International~~international fuel surcharges ranged ~~between 3.0%~~as follows for the three- and ~~11.0% during the first half of 2005 and between 2.0% and 4.5% during the prior year period.~~six-month periods ended November 30:

	Three Months Ended						Six Months Ended
	2005			2004			2005			2004
U.S. Domestic and Outbound Fuel Surcharge:
Low		13.00	%		8.50	%		10.50	%		6.00	%
High		20.00			11.00			20.00			11.00
Average		16.17			9.67			13.83			8.25
International Fuel Surcharges:
Low		11.00			7.00			10.00			5.00
High		20.00			11.00			20.00			11.00
Average		14.80			8.97			13.00			7.72

~~During~~In November 2005, we temporarily capped our fuel surcharges at 15.5% in certain cases to ensure that our services remain competitively priced in the second quarter of 2005, FedEx Express entered into a fifth addendum to the transportation agreement with the U.S. Postal Service, allowing FedEx Express to continue carrying incremental pounds of mail through May 31, 2006 at higher committed volumes than under the original agreement. Revenues under this agreement are included in U.S. freight revenue.marketplace.

FedEx Express Segment Operating Income

Operating income at the FedEx Express segment increased during the second quarter and first half of 2005. The second quarter and first half of 2004 included $279 million and $411 million, respectively, of costs related to our business realignment programs. The savings from these programs were reflected in lower growth of salaries and employee benefits costs in the second quarter and first half of 2005. Increases in revenues, savings from our business realignment programs and ongoing cost control efforts more than offset salary increases, higher incentive compensation, an Airline Stabilization Act charge, higher purchased transportation and higher maintenance costs. In addition, FedEx Express benefited from one additional operating day in the first half of 2005.

During the second quarter and first half of ~~2005,~~2006, our operating income grew as a result of strong revenue growth and improved operating margin. Continued volume growth in higher margin U.S. domestic overnight and IP services, in conjunction with solid yield improvements and productivity gains in our domestic ground operations, allowed FedEx Express to substantially improve operating margin in the second quarter of 2006. Revenue and margin growth for the second quarter and first half of 2006 more than offset a one-time adjustment for leases in the first quarter and costs associated with our two new around-the-world flights.

During the second quarter and first half of 2006, fuel costs were higher due to an increase in the average price per gallon of ~~aircraft~~jet fuel, while gallons consumed increased slightly. However, fuel surcharge revenue ~~offset~~mitigated higher jet fuel prices. ~~The second quarter of 2005 included an Airline Stabilization Act charge of $48 million, representing the DOT’s repayment demand of $29 million and the write-off of a $19 million receivable.~~ Purchased transportation costs increased in the second quarter and first half of ~~2005 as~~2006 driven by IP volume growth, ~~led to an increase in~~which required a higher utilization of contract ~~pick-up~~pickup and delivery services. ~~Depreciation and amortization expense decreased,~~

~~reflecting lower capital spending over the past several years. Higher maintenance costs during~~The increase in the first half of ~~2005 were driven by a higher utilization~~2006 in rentals and landing fees is primarily due to the one-time adjustment for leases of ~~aircraft and a higher average age of certain types of our aircraft.~~$75 million.

FEDEX GROUND SEGMENT

The following table compares revenues, operating expenses, ~~and~~ operating income and margin (dollars in millions) and selected package statistics (in thousands, except yield amounts) for the three- and six-month periods ended November 30:

	Three Months Ended							Percent	Six Months Ended						Percent	Three Months Ended								Percent			Six Months Ended						Percent
	2004				2003			Change	2004			2003			Change	2005				2004				Change			2005			2004			Change
Revenues	$	1,174			$	978		20	$	2,247		$	1,892		19		$	1,307			$	1,174			11		$	2,526		$	2,247			12
Operating expenses:
Salaries and employee benefits	213				187			14	410			364			13		230				213				8		451			410				10
Purchased transportation	456				367			24	866			709			22		506				456				11		972			866				12
Rentals	32				26			23	58			46			26		36				32				13		67			58				16
Depreciation and amortization	43				39			10	83			76			9		53				43				23		103			83				24
Fuel	13				3			333	20			5			300		27				13				108		45			20				125
Maintenance and repairs	26				24			8	52			47			11		28				26				8		57			52				10
Intercompany charges	119				103			16	234			205			14		129				119				8		249			234				6
Other	137				94			46	242			189			28		135				137				(1	)	271			242				12
Total operating expenses	1,039				843			23	1,965			1,641			20		1,144				1,039				10		2,215			1,965				13

Operating income	$		135		$	135		—	$	282		$	251		12		$	163			$	135			21		$	311		$	282			10

Operating margin	11.5			%	13.8		%		12.6		%	13.3		%			12.5		%		11.5		%		100	bp	12.3		%	12.6		%		(30	)bp

Average daily package volume ⁽¹⁾	2,725				2,342			16	2,584			2,228			16		2,843				2,725				4		2,712			2,584				5
Revenue per package (yield) ⁽¹⁾	$		6.48		$	6.37		2	$	6.51		$	6.40		2		$	6.90			$	6.48			6		$	6.91		$	6.51			6

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

FedEx Ground Segment Revenues

Revenues increased during the second quarter and first half of ~~2005~~2006 principally due to ~~higher volumes. While average~~volume and yield growth. Average daily ~~volume growth was~~volumes increased across virtually all of our services, led by the continued growth of our home delivery service, average daily volumes increased across most of our service lines. The results of operations of FedEx SmartPost have been included from the date of its acquisition, September 12, 2004, and contributed nominally to revenue growth in the second quarter of 2005. Slight yield improvement, as well as one additional operating day in the first half of 2005, also contributed to revenue growth.

service.

Yield ~~at FedEx Ground increased slightly~~improvement during the second quarter and first half of ~~2005~~2006 was primarily due to fuel surcharge revenue, higher extra service revenue and athe impact of our January 2005 general rate ~~increase,~~increase. These increases were partially offset by higher ~~incentives, the elimination of the fuel surcharge in January 2004~~customer discounts and a lower average weight per package. An average list price increase of 1.9% on FedEx Ground services became effective January 5, 2004. On that date, the fuel surcharge for all FedEx Ground shipments was discontinued. Before its eliminationGains in ~~January 2004, FedEx Ground utilized a dynamic fuel surcharge, based on the spot price for on-highway diesel fuel. During the first half of 2004, this surcharge ranged between 1.25% and 1.50%.~~

extra service revenue are attributable to increases in our other surcharges.

In ~~November,~~January 2005, we ~~announced~~implemented an average list price increase of 2.9% ~~on FedEx Ground services, which will become effective January 3, 2005. In addition, FedEx Ground will re-introduce~~and reintroduced an indexed fuel surcharge for all ~~shipments~~shipments. No fuel surcharge was in effect during the prior year period. On December 2, 2005, we announced standard list rate increases averaging 3.9% for our ground and home delivery services and changes to various surcharges. The new rates and surcharge changes will be effective January ~~3, 2005.~~2, 2006.

Our fuel surcharge ranged as follows for the three- and six-month periods ended November 30, 2005:

	Three Months			Six Months
	Ended			Ended
Low		3.00	%		2.50	%
High		4.50			4.50
Average		3.67			3.17

2629

FedEx Ground Segment Operating Income

FedEx Ground segment operating income ~~was flat~~increased 21% during the second quarter and 10% in the first half of ~~2005,~~2006, as ~~the impact of~~yield and volume growth more than offset higher ~~fuel costs and the absence of a fuel surcharge severely restricted earnings growth. Also, during~~operating expenses. Purchased transportation increased in the second quarter ~~FedEx Supply Chain Services incurred a $10 million charge in other operating expenses for the termination~~and first half of ~~a vendor agreement. Overall, these items negatively impacted operating margin by approximately three percentage points. Purchased transportation increased at a higher rate than revenue~~2006 primarily due to the impact of higher fuel costs on contractor settlements, the acquisition of FedEx SmartPost, and a change in the mix of business at FedEx Supply Chain Services. FedEx Ground segment operating income increased 12% during the first half of 2005 as volume growth and productivity more than offset higher operating expenses.settlements. Salaries and employee benefits, as well as other operating costs, increased in ~~the second quarter and first half~~2006 principally due to increases in staffing and facilities to support volume growth. In the second quarter of 2005, segment operating income included a $10 million charge in other operating expenses related to the termination of a vendor agreement with FedEx Supply Chain Services.

Segment operating margin improved for the second quarter of 2006 due to fuel surcharge revenues and the inclusion in 2005 of the $10 million charge at FedEx Supply Chain Services, partially offset by increased expenses related to investments in new technology and our capacity expansion program. Segment operating margin declined slightly for the first half of 2006 due to higher year-over-year expenses related to investments in new technology and the opening of three new hubs in line with our long-term growth strategy.

FEDEX FREIGHT SEGMENT

The following table shows revenues, operating expenses, ~~and~~ operating income and margin (dollars in millions) and selected statistics for the three- and six-month periods ended November 30:

	Three Months Ended								Percent			Six Months Ended						Percent
	2005				2004				Change			2005			2004			Change
Revenues		$	932			$	820			14		$	1,824		$	1,627			12
Operating expenses:
Salaries and employee benefits		442				406				9		881			816				8
Purchased transportation		81				88				(8	)	153			172				(11	)
Rentals and landing fees		25				26				(4	)	49			51				(4	)
Depreciation and amortization		29				26				12		59			50				18
Fuel		104				65				60		186			119				56
Maintenance and repairs		30				31				(3	)	58			62				(6	)
Intercompany charges		9				7				29		18			13				38
Other		77				69				12		150			139				8
Total operating expenses		797				718				11		1,554			1,422				9
Operating income		$	135			$	102			32		$	270		$	205			32
Operating margin		14.5		%		12.5		%		200	bp	14.8		%	12.6		%		220	bp
Average daily LTL shipments (in thousands)		68				65				5		67			65				3
Weight per LTL shipment (lbs)		1,161				1,130				3		1,147			1,129				2
LTL yield (revenue per hundredweight)		$	16.80			$	15.55			8		$	16.68		$	15.26			9

Three Months Ended

Percent

Six Months Ended

Percent

2004

2003

Change

2004

2003

Change

Revenues

$
820

$
664

23

$
1,627

$
1,301

25

Operating expenses:

Salaries and employee benefits

406

345

18

816

685

19

Purchased transportation

88

64

38

172

120

43

Rentals and landing fees

26

25

4

51

49

4

Depreciation and amortization

26

24

8

50

45

11

Fuel

65

39

67

119

78

53

Maintenance and repairs

31

29

7

62

56

11

Intercompany charges

7

4

75

13

10

30

Other

69

68

1

139

131

6

Total operating expenses

718

598

20

1,422

1,174

21

Operating income

$
102

$
66

55

$
205

$
127

61

Operating margin

12.5
%
10.0
%

12.6
%
9.8
%

Average daily LTL shipments (in thousands)

65

58

12

65

57

14

Weight per LTL shipment (lbs)

1,130

1,119

1

1,129

1,119

1

LTL yield (revenue per hundredweight)

$
15.55

$
14.32

9

$
15.26

$
14.14

8

FedEx Freight Segment Revenues

FedEx Freight segment revenues increased 14% during the second quarter and 12% in the first half of 2006, due to year-over-year growth in LTL yield and average daily LTL shipments. LTL yield grew during the second quarter and first half of 2006, due to incremental fuel surcharges and higher rates. Average daily LTL shipments increased due to market share gains and increased customer demand for our regional and interregional LTL services. The LTL fuel surcharge, which applies to the majority of our revenue, is based on the national U.S. on-highway average prices for a gallon of diesel fuel, as published by the Department of Energy. Using this index, the approximate LTL fuel surcharge ranged as follows for the three- and six-month periods ended November 30:

	Three Months Ended						Six Months Ended
	2005			2004			2005			2004
Low		15.6	%		9.5	%		12.5	%		7.6	%
High		19.6			13.0			19.6			13.0
Average		16.9			11.4			15.7			9.9

From September 6 to October 31, 2005, we capped our LTL fuel surcharge at 16.7% to benefit customers impacted by the volatility in diesel fuel prices in the aftermath of several recent hurricanes.

FedEx Freight Segment Operating Income

FedEx Freight segment operating income increased 32% during the second quarter and first half of 2006 primarily due to LTL revenue growth and controlling costs in line with volume growth. Increased LTL yield contributed to improved margins in the second quarter and first half of 2006 despite higher salaries and employee benefits, fuel and depreciation. Salaries and benefits increased in 2006 due to increased staffing to support volume growth and higher incentive compensation. Depreciation increased primarily due to our investment in operating equipment, which in some cases replaced leased equipment. Purchased transportation costs decreased, reflecting increased utilization of our equipment and drivers for interregional freight services.

FEDEX KINKO’S SEGMENT

The following table shows revenues, operating expenses, operating income and margin (dollars in millions) for the three- and six-month periods ended November 30:

	Three Months Ended								Percent			Six Months Ended						Percent
	2005				2004				Change			2005			2004			Change
Revenues		$	528			$	524			1		$	1,045		$	1,014			3
Operating expenses:
Salaries and employee benefits		190				186				2		376			368				2
Rentals		99				107				(7	)	201			209				(4	)
Depreciation and amortization		37				32				16		73			64				14
Maintenance and repairs		19				17				12		37			34				9
Intercompany charges		6				3				100		10			6				67
Other operating expenses:
Supplies, including paper and toner		70				71				(1	)	137			136				1
Other		91				79				15		179			149				20
Total operating expenses		512				495				3		1,013			966				5
Operating income		$	16			$	29			(45	)	$	32		$	48			(33	)
Operating margin		3.0		%		5.7		%		(270	)bp	3.1		%	4.8		%		(170	)bp

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

FedEx ~~Freight~~Kinko’s Segment Revenues

~~FedEx Freight segment revenues~~Revenues increased ~~23%~~by 1% in the second quarter and ~~25%~~3% in the first half of ~~2005~~2006 due to ~~year-over-year~~continued growth in ~~average daily LTL shipments~~package acceptance revenue and ~~LTL yield. Market share gains along with~~the benefit of the conversion of certain FedEx World Service Centers to FedEx Kinko’s Ship Centers in 2005. Growth in these areas was mostly offset by a stronger economy, contributed to the significant increase in average daily LTL shipments. LTL yield grew during the second quarter and first half of 2005 reflecting incremental fuel surcharges due to higher fuel prices, growthdecline in our ~~interregional freight service and higher rates. Also, the first half of 2005 had one additional LTL operating day than the prior year.~~copy product line revenues, due in part to a competitive pricing environment.

FedEx ~~Freight~~Kinko’s Segment Operating Income

~~FedEx Freight segment operating~~Operating income increased during the second quarter and first half of 2005 primarily due to LTL revenue growth, as well as our ability to manage costs during a period of substantial growth. Higher fuel surcharges and productivity gains contributed to improved operating margin in spite of higher salaries and employee benefits, purchased transportation and fuel costs. Salaries and employee benefits costs increaseddecreased $13 million in the second quarter and ~~first half of 2005 principally due to increases~~$16 million in staffing to support volume growth and higher incentive compensation and healthcare costs. Purchased transportation increased due to growth in our interregional freight service and efforts to supplement our linehaul operations during a period of significant shipment growth.

~~FEDEX KINKO’S SEGMENT~~

~~The following table shows revenues, operating expenses and operating income and margin (dollars in millions) for the three- and six-month periods ended November 30, 2004:~~

Three
Months
Ended

Six
Months
Ended

Revenues

$
524

$
1,014

Operating expenses:

Salaries and employee benefits

186

368

Rentals

114

224

Depreciation and amortization

32

64

Maintenance and repairs

10

19

Intercompany charges

3

6

Other operating expenses:

Supplies, including paper and toner

85

162

Other

65

123

Total operating expenses

495

966

Operating income

$
29

$
48

Operating margin

5.7
%
4.8
%

~~FedEx Kinko’s Segment Operating Results~~

~~The FedEx Kinko’s segment was formed in the fourth quarter of 2004, following the acquisition of Kinko’s, Inc. on February 12, 2004. During~~ the first half of ~~2005, FedEx Kinko’s focused its efforts on attracting a larger share of~~2006 as the commercial document solutions and business services market. During the second quarter and first half of 2005, revenues reflect continued international expansion and strong demand for signs and graphics, retail services and retail products.

~~FedEx Kinko’s revenues and operating margin during the second quarter of 2005 reflect an~~ increase in ~~business levels as compared to the first quarter of 2005, due to the seasonal impact of slower summer months.~~package acceptance revenues was more than offset by a decline in copy product line revenues, increases in other operating expenses and depreciation. The ~~operating margins~~increase for the second quarter and first half of ~~2005 were adversely impacted~~2006 in other operating expenses was primarily due to increased costs related to technology and product offering initiatives. Increased depreciation was driven by ~~integration activities, such as ramp-up costs associated with the offering of pack~~center rebranding and ship services at each U.S. location, the centralization of the FedEx Kinko’s corporate office and store rebranding. Costs associated with the integration of FedEx Kinko’s will continue throughout the remainder of 2005.investments in new technology to replace legacy systems.

FINANCIAL CONDITION

LIQUIDITY

Cash and cash equivalents totaled ~~$939~~$786 million at November 30, ~~2004,~~2005, compared to ~~$1.0~~$1.039 billion at May 31, ~~2004.~~2005. The following table provides a summary of our cash flows for the six-month periods ended November 30 (in millions):

	2004			2003
							2005			2004
Operating activities:
Net income	$	684		$	219		$	810		$	684
Noncash charges and credits	716			734			954			716
Changes in operating assets and liabilities	(161		)	307			(629		)	(161		)
Net cash provided by operating activities	1,239			1,260			1,135			1,239

Investing activities:
Capital expenditures and other investing activities							(1,289		)	(1,170		)
Business acquisition							—			(122		)
Net cash used in investing activities	(1,292		)	(596		)	(1,289		)	(1,292		)

Financing activities:
Principal payments on debt	(73		)	(43		)	(102		)	(73		)
Repurchase of treasury stock	—			(179		)
Proceeds from stock issuances							53			61
Dividends paid	(42		)	(30		)	(48		)	(42		)
Proceeds from stock issuances	61			79
Other	—			1
Other, net							(2		)	—
Net cash used in financing activities	(54		)	(172		)	(99		)	(54		)

Net (decrease) increase in cash and cash equivalents	$	(107	)	$	492
Net decrease in cash and cash equivalents							$	(253	)	$	(107	)

Cash Provided by Operating Activities.Cash flows from operating activities ~~for~~decreased by $106 million in the first half of ~~2005 approximated those in the comparable 2004 period.~~2006. Increased earnings in the first half of ~~2005~~2006 were more than offset ~~by voluntary contributions to our U.S. domestic pension plan, an increase in receivables driven by revenue growth and~~ by the payout of previously accrued amounts related to our ~~2004 annual~~2005 incentive compensation ~~plans.~~

~~Pension Contributions.~~ ~~Net cash provided by operating activities reflect voluntary~~plans, an increase in receivables due to revenue growth and increased contributions to our principal U.S. domestic pension ~~plan~~plans. During the first half of 2006 and 2005, we made voluntary, tax deductible contributions to our principal U.S. domestic pension plans of $456 million and $300 million, ~~in 2005 and $320 million in 2004.~~respectively.

Cash Used for Investing Activities. ~~See “Results of Operations” for a discussion of the cash used to acquire FedEx SmartPost.~~ Capital expenditures during the first half of ~~2005~~2006 were ~~93%~~10% higher than the prior year period ~~primarily~~largely due to planned aircraft expenditures at FedEx Express primarily to support IP volume growth. See “Capital Resources” below for further discussion. In the first half of 2005, our investing activities included our acquisition of FedEx SmartPost (formerly known as Parcel Direct), a division of a privately held company, for $122 million in cash.

Debt Financing Activities. ~~From time~~ The increase in principal payments on debt primarily relates to ~~time, we~~scheduled payments on our capital leases. A new $1.0 billion five-year revolving credit facility was executed in July 2005 and replaced our prior revolving credit facilities. The revolving credit facility is available to finance ~~certain operating~~our operations and ~~investing activities through~~other cash flow needs and to provide support for the issuance of commercial paper. ~~Our~~Any commercial paper ~~program is backed by unused commitments under two revolving credit agreements, totaling $1 billion, and reduces~~borrowings reduce the amount available under ~~these agreements.~~the revolving credit facility. At November 30, ~~2004,~~2005, no commercial paper was outstanding and the entire $1$1.0 billion under the revolving credit ~~agreements~~facility was available for future borrowings. ~~The agreements contain covenants requiring~~Borrowings under the revolving credit facility will bear interest at short-term interest rates (based on the London Interbank Offered Rate (LIBOR), the Prime Rate or the Federal Funds Rate) plus a margin dependent upon our senior unsecured long-term debt ratings.

Our revolving credit agreement contains a financial covenant, which requires us to maintain ~~certain fixed charge coverage~~a leverage ratio of adjusted debt (long-term debt, including the current portion of such debt, plus six times rentals and ~~leverage ratios.~~landing fees) to capital (adjusted debt plus total common stockholders’ investment) that does not exceed 0.7 to 1.0. We are in compliance with this and all other restrictive covenants of our revolving credit ~~agreements~~agreement and do not expect the covenants to significantly affect our ~~operations~~operations.

We also use capital and operating leases to finance a portion of our aircraft, facility, vehicles and equipment needs. In addition, we have a $1.0 billion shelf registration statement filed with the SEC to provide flexibility and efficiency when obtaining certain financing. Under this shelf registration statement we may issue, in one or ~~ability to pay dividends. See Note 3~~more offerings, unsecured debt securities, common stock or a combination of ~~the accompanying unaudited financial statements~~such instruments. The entire $1.0 billion is available for ~~further discussion of these credit facilities.~~future financings.

~~Cash Used for Share Repurchases.~~ We did not repurchase any shares during the first half of 2005. During the first half of 2004, we repurchased 2,625,000 shares at an average price of $68.14 per share, which decreased cash flows by approximately $179 million. Based on our current financing strategy, we are issuing

~~new shares in connection with our equity compensation programs rather than repurchasing shares. A total of 5.75 million shares remain under existing share repurchase authorizations.~~

Dividends.Dividends paid in the first half of 2006 and 2005 ~~and 2004~~ were ~~$42~~$48 million and ~~$30~~$42 million, respectively. On November ~~22, 2004,~~18, 2005, our Board of Directors declared a dividend of ~~$0.07~~$0.08 per share of common stock. The dividend is payable on January 3, ~~2005~~2006 to stockholders of record as of the close of business on December 13, ~~2004.~~2005.

Other Liquidity Information. We believe that our existing cash and cash equivalents, cash flow from operations, our commercial paper program, ~~and~~ revolving bank credit facilities and shelf registration statement will adequately meet our working capital and capital expenditure needs for the foreseeable future.

CAPITAL RESOURCES

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

The following table compares capital expenditures by asset category and reportable segment for the ~~three-and~~three- and six-month periods ended November 30 (in millions):

																							Percent Change
									Percent Change 2004/2003														2005/2004
	Three Months Ended				Six Months Ended				Three Months	Six Months	Three Months Ended						Six Months Ended						Three Months			Six Months
	2004		2003		2004		2003		Ended	Ended	2005			2004			2005			2004			Ended			Ended
Aircraft and related equipment	$	421	$	97	$	554	$	177	334	213		$	208		$	421		$	484		$	554		(51	)		(13	)
Facilities and sort equipment	124		75		221		145		65	52		137			124			229			221			10			4
Information and technology investments	87		52		167		110		67	52		94			87			185			167			8			11
Vehicles and other equipment	149		84		233		176		77	32
Vehicles												166			113			342			170			47			101
Other equipment												50			36			86			63			39			37
Total capital expenditures	$	781	$	308	$	1,175	$	608	154	93		$	655		$	781		$	1,326		$	1,175		(16	)		13

FedEx Express segment	$	477	$	161	$	642	$	263	196	144		$	336		$	477		$	724		$	642		(30	)		13
FedEx Ground segment	135		83		224		158		63	42		138			135			254			224			2			13
FedEx Freight segment	82		18		143		86		356	66		94			82			176			143			15			23
FedEx Kinko’s segment ⁽¹⁾	32		—		61		—		NM	NM
Other	55		46		105		101		20	4
FedEx Kinko’s segment												32			32			47			61			—			(23	)
Other, principally FedEx Services												55			55			125			105			—			19
Total capital expenditures	$	781	$	308	$	1,175	$	608	154	93		$	655		$	781		$	1,326		$	1,175		(16	)		13

⁽¹⁾ ~~The FedEx Kinko’s segment was formed following the acquisition of Kinko’s, Inc. on February 12, 2004.~~34

Capital expenditures during the ~~second quarter and~~ first half of ~~2005~~2006 were higher than the prior year period primarily due to the timing of planned aircraft expenditures at FedEx Express to support IP volume growth. The first half of 2005 also includes the capital expenditures of FedEx Kinko’s. For all of 2005, we expect capital expenditures of approximately $2.2 billion, compared to $1.3 billion in 2004. The expected year-over-year increase will fund additional aircraft capacity for FedEx Express, primarily to support IP volume growth. Also, additional investments ~~will be~~were made in the FedEx Ground and FedEx Freight ~~networks.~~

networks to support growth in customer demand. We expect capital expenditures of approximately $2.5 billion for 2006, compared to $2.2 billion in 2005. The expected year-over-year increase will fund planned aircraft purchases to support future IP volume growth and replacement vehicles at FedEx Express. We also continue to invest in infrastructure upgrades and productivity-enhancing technologies, the multi-year capacity expansion of the FedEx Ground network and growth and replacement vehicle needs at FedEx Freight.

Because of substantial lead times associated with the manufacture or modification of aircraft, we must generally plan our aircraft orders or modifications three to eight years in advance. ~~Therefore,~~While we also pursue market opportunities to purchase aircraft when they become available, we must make

commitments regarding our airlift requirements years before aircraft are actually needed. We are closely managing our capital spending based on current and anticipated volume levels and will defer or limit capital additions where economically feasible, while continuing to invest strategically in growing ~~business segments.~~service lines.

CONTRACTUAL CASH OBLIGATIONS

~~The~~As required under SEC rules and regulations, the following table sets forth a summary of our contractual cash obligations as of November 30, ~~2004.~~2005. 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. ~~Excluding~~Except for the current portion of long-term debt and capital lease obligations, this table does not include amounts already recorded on our balance sheet as current liabilities at November 30, ~~2004.~~2005. Accordingly, this table is not meant to represent a forecast of our total cash expenditures for any of the periods presented.

Payments Due by Fiscal Year
(in millions)

2005 ⁽¹⁾

2006

2007

2008

2009

There-
after

Total

Amounts reflected in Balance Sheet:

Long-term debt ⁽²⁾

$
609

$
265

$
844

$
—

$
499

$
833

$
3,050

Capital lease obligations ^{(3) (4)}

75

122

22

99

11

225

554

Other cash obligations not reflected in Balance Sheet:

Unconditional purchase obligations⁽⁴⁾

481

433

311

220

657

1,424

3,526

Operating leases ⁽⁴⁾

905

1,550

1,419

1,304

1,138

8,117

14,433

Total

$
2,070

$
2,370

$
2,596

$
1,623

$
2,305

$
10,599

$
21,563

	Payments Due by Fiscal Year (in millions)
	2006(1)		2007		2008		2009		2010		Thereafter			Total
Amounts reflected in Balance Sheet:
Long-term debt	$	261	$	844	$	—	$	500	$	—		$	788	$	2,393
Capital lease obligations⁽²⁾⁽³⁾	14		22		99		11		95			130		371
Other cash obligations not reflected in Balance Sheet:
Unconditional purchase obligations⁽³⁾	638		734		485		706		638			968		4,169
Interest on long-term debt	68		109		83		83		65			1,665		2,073
Operating leases⁽³⁾	908		1,554		1,391		1,220		1,072			7,581		13,726
Total	$	1,889	$	3,263	$	2,058	$	2,520	$	1,870		$	11,132	$	22,732

⁽¹⁾ Cash obligations for the remainder of ~~2005.~~2006.

⁽²⁾ ~~Amounts do not include related interest. See our Annual Report for the applicable interest rates.~~

⁽³⁾Capital lease obligations represent principal and interest payments.

⁽⁴⁾⁽³⁾ See Note 87 to the accompanying unaudited consolidated financial statements.

~~In accordance with accounting principles generally accepted in the United States, we~~We have certain contingent liabilities that are not accrued in our balance ~~sheet.~~sheet in accordance with accounting principles generally accepted in the United States. These contingent liabilities are not included in the table above.

Amounts Reflected in Balance Sheet

We have ~~other commercial~~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 instruments are generally required under certain U.S. self-insurance programs and are also used in the normal course of international operations. While the notional amounts of these instruments are material, there are no additional contingent liabilities associated with them because the underlying liabilities are already reflected in our balance sheet.

We have other long-term liabilities reflected in our balance sheet, including deferred income taxes, non-qualified pension and postretirement healthcare liabilities and 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 commitments represent ~~noncancelable~~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 passenger-to-freighter and two-man cockpit configurations, which is reflected in the table above. Commitments to purchase aircraft in passenger configuration do not include the attendant costs to modify these aircraft for cargo transport unless we have entered into a non-cancelable commitment. Open purchase orders that are cancelable are not considered unconditional purchase obligations for financial reporting purposes and are not included in the table above. Such purchase orders often represent 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 ~~noncancelable~~non-cancelable operating leases (principally aircraft and facilities) with an initial or remaining term in excess of one year at November 30, ~~2004.~~2005. 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 ~~and~~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 ~~this~~ information concerning minimum lease payments required for our operating leases to calculate our debt capacity. In addition, we have guarantees under certain operating leases, amounting to ~~$43~~$34 million as of November 30, ~~2004,~~2005, for the residual values of vehicles and facilities at the end of the respective operating lease periods. ~~Based upon our expectation that none~~Although some of these leased assets ~~will~~may 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.

In the future, other forms of secured financing and direct purchases may be used to obtain capital assets if we determine that they best suit our needs. We have been successful in obtaining investment capital, both domestic and international, for long-term leases on acceptable terms, although the marketplace for such capital can become restricted depending on a variety of economic factors. We believe the capital resources

available to us provide flexibility to access the most efficient markets for financing capital acquisitions, including aircraft, and are adequate for our future capital needs.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Information regarding our “Critical Accounting Policies and Estimates” can be found in our Annual Report. The four critical accounting policies that we believe are either the most judgmental, or involve the selection or application of alternative accounting policies, and are material to our financial statements are those relating to pension cost, self-insurance accruals, long-lived assets and revenue recognition. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit Committee of our Board of Directors and with our independent registered public accounting firm. In addition, Note 1 to the financial statements in our Annual Report contains a summary of our significant accounting policies.

FORWARD-LOOKING STATEMENTS

Certain statements in this report, including (but not limited to) those contained in “Outlook,” ~~“Reportable Segments,”~~ “Liquidity,” “Capital ~~Resources,”~~Resources” and “Contractual Cash ~~Obligations” and “Critical Accounting Policies and Estimates,~~Obligations,” are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the financial condition, results of operations, cash flows, plans, objectives, future performance and business of FedEx. Forward-looking statements include those preceded by, followed by or that include the words “may,” “could,” “would,” “should,” “believes,” “expects,” “anticipates,” “plans,” “estimates,” “targets,” “projects,” “intends” or similar expressions. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated (expressed or implied) by such forward-looking statements, because of, among other things, potential risks and uncertainties, such as:

•· economic conditions in the ~~domestic and international~~global markets in which we operate;

•· any impacts on our business resulting from new domestic or international government regulation, including regulatory actions affecting aviation rights, security requirements and labor rules;

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

•· our ability to manage our cost structure for capital expenditures and operating expenses and match them, especially those relating to aircraft, vehicle and sort capacity, to shifting customer volume levels;

•· our ability to effectively operate, integrate and leverage the FedEx Kinko’s business;

•· sudden changes in fuel prices or currency exchange rates;

•· our ability to maintain or increase our fuel surcharges in response to rising fuel prices due to competitive pressures;

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

· our ability to successfully defend against challenges to our independent contractor model;

•· the outcome of negotiations to reach a new collective bargaining agreement with the union that represents the pilots of FedEx Express;

•· market acceptance of our new service and growth initiatives;

•· competition from other providers of transportation, e-commerce and business services, including our ability to compete with new or improved services offered by our competitors;

•· the impact of technology developments on our operations and on demand for our services;

•· ~~disruptions to our~~ technology infrastructure disruptions, including those impacting the Internet or our computer systems and Web site;

•· our ability to obtain and maintain aviation rights in important international markets;

•· adverse weather conditions or natural disasters;

•· availability of financing on terms acceptable to us and our ability to maintain our current credit ratings; and

•· other risks and uncertainties you can find in our press releases and 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 obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

As of November 30, ~~2004,~~2005, there had been no material changes in our market risk sensitive instruments and positions since the disclosure in our Annual Report. While we are a global provider of transportation, e-commerce and business services, the substantial majority of our transactions are denominated in U.S. dollars. The distribution of our foreign currency denominated transactions is such that foreign currency declines in some areas of the world are often offset by foreign currency gains of ~~equal~~comparable magnitude in other areas of the world. ~~The~~Our principal exposure to foreign currency exchange rate risks ~~to which we are exposed are~~is in the Japanese yen, Taiwan dollar, Canadian dollar and euro. Foreign currency fluctuations during the three- and six-month periods ended November 30, ~~2004~~2005 did not have a material effect on our results of operations.

We have market risk for changes in the price of jet and diesel fuel; however, this risk is largely mitigated by revenue from our fuel surcharges. 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 continue to fluctuate by significant amounts or change by amounts that do not result in a change in our fuel surcharges.

Item 4. Controls and Procedures

The management of FedEx, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure controls and procedures in ensuring that the information required to be disclosed in our filings under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, including ensuring that such information is accumulated and communicated to FedEx management as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that such disclosure controls and procedures were effective, as of November 30, ~~2004~~2005 (the end of the period covered by this Quarterly Report on Form 10-Q).

During our fiscal quarter ended November 30, ~~2004,~~2005, no change occurred in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

~~PART II. OTHER INFORMATION~~

Item 4. Submission of Matters to a Vote of Security Holders

At the 2004 annual meeting of stockholders held on September 27, 2004, FedEx’s stockholders elected one Class I director and five Class III directors. The tabulation of votes with respect to each nominee for office was as follows:

Nominee

For

Withheld

Class I

Charles T. Manatt

271,483,246

3,711,130

Class III

Judith L. Estrin

271,991,055

3,203,321

Philip Greer

271,901,083

3,293,293

J.R. Hyde III

271,919,203

3,275,173

Shirley A. Jackson

229,826,644

45,367,732

Frederick W. Smith

271,200,366

3,994,010

The stockholders approved the adoption of amendments to FedEx’s Bylaws to provide for the annual election of directors by a vote of 272,525,748 for and 1,193,190 against. There were 1,475,438 abstentions. Because the declassification proposal was approved, the term of all directors, including those elected at the 2004 annual meeting, will end at the 2005 annual meeting, and all directors will thereafter be elected for one-year terms.
The stockholders approved the adoption of an amendment to FedEx’s Incentive Stock Plan to increase the number of shares of common stock reserved for issuance pursuant to stock options by 2,000,000 shares. There were 224,164,660 votes for the amendment, 16,406,525 votes against the amendment, 1,676,446 abstentions and 32,946,745 broker non-votes.
The Audit Committee’s designation of Ernst & Young LLP as FedEx’s independent registered public accounting firm for the fiscal year ending May 31, 2005 was ratified by the stockholders by a vote of 270,808,355 for and 2,961,564 against. There were 1,424,457 abstentions.
~~Item 5. Other Information~~
On December 15, 2004, FedEx Corporation entered into new Management Retention Agreements (“MRAs”) with each of its executive officers: Frederick W. Smith, David J. Bronczek, Robert B. Carter, Douglas G. Duncan, T. Michael Glenn, Alan B. Graf, Jr., Gary M. Kusin, Kenneth R. Masterson and Daniel J. Sullivan. The new MRAs were approved by FedEx’s Board of Directors (Mr. Smith’s MRA was approved by FedEx’s independent directors). The purpose of the MRAs is to secure the executives’ continued services in the event of any threat or occurrence of a change of control (as defined in the MRAs).
Each MRA by its terms supersedes and nullifies any previous change of control employment agreement, including the previously existing MRA, between the executive officer and FedEx. There were several changes in the new MRAs from the previously existing MRAs, the most significant of which is elimination of the executive’s right to receive severance benefits upon a voluntary termination. That is, the new MRAs
36

~~provide for a “double trigger” — an executive is entitled to severance benefits only upon a change of control~~ ~~and~~ a termination of employment other than for cause, disability or death, or by the executive for good reason. The following summary of the terms and conditions of the new MRAs is qualified in its entirety by reference to the text of the form of MRA, a copy of which is attached to this report as Exhibit 10.2.
~~Term.~~ Each MRA renews annually for consecutive two-year terms, unless FedEx gives six months’ prior notice that the agreement will not be extended. The non-extension notice may not be given at any time when the Board of Directors has knowledge that any person has taken steps reasonably calculated to effect a change of control of FedEx.
~~Employment Period.~~ Upon a change of control, the MRA immediately establishes a three-year employment agreement with the executive officer. During the employment period, the officer’s position (including status, offices, titles and reporting relationships), authority, duties and responsibilities may not be materially diminished.
~~Compensation.~~ During the three-year employment period, the executive officer receives base salary (no less than his highest base salary over the twelve-month period prior to the change of control), annual bonus (no less than his average annual bonus over the three-year period prior to the change of control), incentive, savings and retirement plan benefits, expense reimbursement, fringe benefits, office and staff support, welfare plan benefits and vacation benefits. These benefits must be no less than the benefits the officer had during the 90-day period immediately prior to the change of control.
~~Termination.~~ The MRA terminates immediately upon the executive officer’s death. FedEx may terminate the MRA for disability, as determined in accordance with the procedures under FedEx’s long-term disability benefits plan. Once disability is established, the officer receives 180 days’ prior notice of termination. FedEx also may terminate the officer’s MRA for “cause.”
~~Benefits for Qualifying Terminations.~~ A “Qualifying Termination” is a termination by FedEx other than for cause, disability or death or by the officer “for good reason” (principally relating to assignment of duties inconsistent with the officer’s position and reductions in compensation).
In the event of a Qualifying Termination, the executive officer will receive: (1) a lump sum cash payment equal to three times his annual compensation, which includes his base salary, target annual bonus and target long-term incentive compensation; and (2) a lump sum cash payment equal to the excess of the benefit that would be accrued under FedEx’s pension and parity plans based on an additional 36 months of age and service over what was actually earned as of the date of termination.

For ~~a period ending~~the information called for by this item, see FedEx’s Current Report on the earliest of (i) 36 months following the termination date, (ii) the commencement of equivalent benefits from a new employer, or (iii) the date on which the executive officer reaches age 60, FedEx agrees to keep in force each planForm 8-K dated September 26, 2005 and policy providing medical, accidental death, disability and life coverage to the officer and his dependents with the same level of coverage and the same terms as each policy and plan in effect immediately prior to the termination date.

FedEx agrees to pay any taxes incurred by the officer for any payment, distribution or other benefit (including any acceleration of vesting of any benefit) received or deemed received by the officer from FedEx that triggers certain excise taxes.

In exchange for these benefits, the executive officer has agreed that, for the one-year period following his termination, he will not own, manage, operate, control or be employed by any enterprise that competes with FedEx or any of its affiliates.

filed September 28, 2005.

Item 6. Exhibits

Exhibit Number	Description of Exhibit

~~3.1~~		~~Restated Bylaws of FedEx.~~

10.1			~~Amendment~~Amendments dated ~~December 5, 2004~~October 26, 2005 to the ~~FedEx Corporation Retirement Parity Pension Plan.~~
		Transportation Agreement dated January 10, 2001, as amended, between The United States Postal Service and Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
10.2			~~Form of Management Retention~~Amendment No.1 dated December 20, 2005 to the Airbus A380-800F Purchase Agreement dated ~~December 2004, entered into~~as of July 12, 2002 between ~~FedEx Corporation~~AVSA, S.A.R.L. and ~~each~~Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of ~~Frederick W. Smith, David J. Bronczek, Robert B. Carter, Douglas G. Duncan, T. Michael Glenn, Alan B. Graf, Jr., Gary M. Kusin, Kenneth R. Masterson and Daniel J. Sullivan.~~
		1934, as amended.
12.1		Computation of Ratio of Earnings to Fixed Charges.

15.1		Letter re: Unaudited Interim Financial Statements.

31.1		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

3840

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		FEDEX CORPORATION


Date:	December ~~17, 2004~~	22, 2005	/s/ JOHN L. MERINO
		JOHN L. MERINO
			CORPORATE VICE PRESIDENT
		PRINCIPAL ACCOUNTING OFFICER

3941

EXHIBIT INDEX

Exhibit Number	Description of Exhibit		~~Description of Exhibit~~

~~3.1~~		~~Restated Bylaws of FedEx.~~

10.1				~~Amendment~~Amendments dated ~~December 5, 2004~~October 26, 2005 to the ~~FedEx Corporation Retirement Parity Pension Plan.~~
		Transportation Agreement dated January 10, 2001, as amended, between The United States Postal Service and Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.
10.2				~~Form of Management Retention~~Amendment No.1 dated December 20, 2005 to the Airbus A380-800F Purchase Agreement dated ~~December 2004, entered into~~as of July 12, 2002 between ~~FedEx Corporation~~AVSA, S.A.R.L. and ~~each~~Federal Express Corporation. Confidential treatment has been requested for confidential commercial and financial information, pursuant to Rule 24b-2 under the Securities Exchange Act of ~~Frederick W. Smith, David J. Bronczek, Robert B. Carter, Douglas G. Duncan, T. Michael Glenn, Alan B. Graf, Jr., Gary M. Kusin, Kenneth R. Masterson and Daniel J. Sullivan.~~
		1934, as amended.
12.1		Computation of Ratio of Earnings to Fixed Charges.

15.1		Letter re: Unaudited Interim Financial Statements.

31.1		Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~E-1~~E-1

Current assets, primarily accounts receivable	$	11
Property and equipment	91
Goodwill	19
Intangible assets	10
Current liabilities	(9		)

Total purchase price	$	122

	Three Months Ended						Percent Change		Six Months Ended						Percent Change
	2004 ⁽¹⁾			2003 ⁽²⁾			Percent Change		2004 ⁽¹⁾			2003 ⁽³⁾			Percent Change
Revenues	$	7,334		$	5,920		24		$	14,309		$	11,607		23

Operating income	600			183			228		1,179			383			208

Operating margin	8.2		%	3.1		%	510	bp	8.2		%	3.3		%	490	bp

Net income	$	354		$	91		289		$	684		$	219		212

Diluted earnings per share	$	1.15		$	0.30		283		$	2.23		$	0.72		210

	Change in Revenues						Percent Change in Revenues		Change in Operating Income						Percent Change in Operating Income
	Three Months Ended			Six Months Ended			Three Months Ended	Six Months Ended	Three Months Ended			Six Months Ended			Three Months Ended	Six Months Ended

FedEx Express segment	$	555		$	1,034		13	12	$	352	^{(1) (2)}	$	639	^{(1) (3)}	NM	NM
FedEx Ground segment	196			355			20	19	—			31			—	12
FedEx Freight segment	156			326			23	25	36			78			55	61
FedEx Kinko’s segment ⁽⁴⁾	524			1,014			NM	NM	29			48			NM	NM
Other and Eliminations	(17		)	(27		)	NM	NM	—			—			NM	NM

	$	1,414		$	2,702		24	23	$	417		$	796		228	208

	Payments Due by Fiscal Year (in millions)
	2005 ⁽¹⁾		2006		2007		2008		2009		There- after		Total

Amounts reflected in Balance Sheet:
Long-term debt ⁽²⁾	$	609	$	265	$	844	$	—	$	499	$	833	$	3,050
Capital lease obligations ^{(3) (4)}	75		122		22		99		11		225		554

Other cash obligations not reflected in Balance Sheet:
Unconditional purchase obligations⁽⁴⁾	481		433		311		220		657		1,424		3,526
Operating leases ⁽⁴⁾	905		1,550		1,419		1,304		1,138		8,117		14,433

Total	$	2,070	$	2,370	$	2,596	$	1,623	$	2,305	$	10,599	$	21,563

Nominee	For	Withheld
Class I
Charles T. Manatt	271,483,246	3,711,130

Class III
Judith L. Estrin	271,991,055	3,203,321
Philip Greer	271,901,083	3,293,293
J.R. Hyde III	271,919,203	3,275,173
Shirley A. Jackson	229,826,644	45,367,732
Frederick W. Smith	271,200,366	3,994,010