UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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		(I.R.S. Employer
incorporation or organization)		Identification No.)
942 South Shady Grove Road
Memphis, Tennessee		38120
(Address of principal executive offices)		(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 x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No 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 x

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 16, 2005
Common Stock, par value $0.10 per share				303,881,824

FEDEX CORPORATION
INDEX

PART I. FINANCIAL INFORMATION

		PAGE
ITEM 1.	Financial Statements
	Condensed Consolidated Balance Sheets November 30, 2005 and May 31, 2005	3-4
	Condensed Consolidated Statements of Income Three and Six Months Ended November 30, 2005 and 2004	5
	Condensed Consolidated Statements of Cash Flows Six Months Ended November 30, 2005 and 2004	6
	Notes to Condensed Consolidated Financial Statements	7-18
	Report of Independent Registered Public Accounting Firm	19
ITEM 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition	20-38
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	39
ITEM 4.	Controls and Procedures	39
PART II. OTHER INFORMATION
ITEM 4.	Submission of Matters to a Vote of Security Holders	40
ITEM 6.	Exhibits	40
Signature		41
Exhibit Index		E-1

FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)

	November 30,
	2005			May 31,
	(Unaudited)			2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	786	$	1,039
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		520		510
Prepaid expenses and other		162		173
Total current assets		5,292		5,269
PROPERTY AND EQUIPMENT, AT COST		23,244		22,017
Less accumulated depreciation and amortization		12,969		12,374
Net property and equipment		10,275		9,643
OTHER LONG-TERM ASSETS
Goodwill		2,826		2,835
Prepaid pension cost		1,537		1,272
Intangible and other assets		1,281		1,385
Total other long-term assets		5,644		5,492
		$	21,211	$	20,404

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

FEDEX CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT SHARE DATA)

	November 30,
	2005				May 31,
	(Unaudited)				2005
LIABILITIES AND STOCKHOLDERS’ INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt		$	493		$	369
Accrued salaries and employee benefits		1,052			1,275
Accounts payable		1,859			1,739
Accrued expenses		1,387			1,351
Total current liabilities		4,791			4,734
LONG-TERM DEBT, LESS CURRENT PORTION		2,203			2,427
OTHER LONG-TERM LIABILITIES
Deferred income taxes		1,251			1,206
Pension, postretirement healthcare and other benefit obligations		846			828
Self-insurance accruals		645			621
Deferred lease obligations		610			532
Deferred gains, principally related to aircraft transactions		387			400
Other liabilities		70			68
Total other long-term liabilities		3,809			3,655
COMMITMENTS AND CONTINGENCIES
COMMON STOCKHOLDERS’ INVESTMENT
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		1,309			1,241
Retained earnings		9,125			8,363
Accumulated other comprehensive loss		(16		)	(17		)
Deferred compensation and treasury stock, at cost		(40		)	(29		)
Total common stockholders’ investment		10,408			9,588
		$	21,211		$	20,404

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								Six Months Ended
	November 30, 2005				November 30, 2004				November 30, 2005				November 30, 2004
REVENUES		$	8,090			$	7,334			$	15,797			$	14,309
OPERATING EXPENSES:
Salaries and employee benefits		3,081				2,930				6,143				5,850
Purchased transportation		812				747				1,583				1,428
Rentals and landing fees		584				577				1,249				1,128
Depreciation and amortization		386				363				756				723
Fuel		891				592				1,619				1,075
Maintenance and repairs		445				422				913				850
Other		1,101				1,103				2,160				2,076
		7,300				6,734				14,423				13,130
OPERATING INCOME		790				600				1,374				1,179
OTHER INCOME (EXPENSE):
Interest, net		(30		)		(38		)		(54		)		(77		)
Other, net		—				(8		)		(11		)		(14		)
		(30		)		(46		)		(65		)		(91		)
INCOME BEFORE INCOME TAXES		760				554				1,309				1,088
PROVISION FOR INCOME TAXES		289				200				499				404
NET INCOME		$	471			$	354			$	810			$	684
EARNINGS PER COMMON SHARE:
Basic		$	1.55			$	1.18			$	2.67			$	2.27
Diluted		$	1.53			$	1.15			$	2.63			$	2.23
DIVIDENDS DECLARED PER COMMON SHARE		$	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,				November 30,
	2005				2004
Operating Activities:
Net income		$	810			$	684
Adjustments to reconcile net income to cash provided by operating activities:
Lease accounting charge		79				—
Depreciation and amortization		754				723
Provision for uncollectible accounts		57				49
Deferred income taxes and other noncash items		64				(56		)
Changes in operating assets and liabilities, net of the effect of businesses acquired:
Receivables		(314		)		(196		)
Spare parts and supplies		(15		)		(15		)
Accounts payable and other operating liabilities		(9		)		198
Other, net		(291		)		(148		)
Net cash provided by operating activities		1,135				1,239
Investing Activities:
Capital expenditures		(1,326		)		(1,175		)
Business acquisition		—				(122		)
Proceeds from asset dispositions		37				5
Net cash used in investing activities		(1,289		)		(1,292		)
Financing Activities:
Principal payments on debt		(102		)		(73		)
Proceeds from stock issuances		53				61
Dividends paid		(48		)		(42		)
Other, net		(2		)		—
Net cash used in financing activities		(99		)		(54		)
Net decrease in cash and cash equivalents		(253		)		(107		)
Cash and cash equivalents at beginning of period		1,039				1,046
Cash and cash equivalents at end of period		$	786			$	939

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

FEDEX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(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 for the year ended May 31, 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, 2005 and the results of our operations for the three- and six-month periods ended November 30, 2005 and 2004 and our cash flows for the six-month periods ended November 30, 2005 and 2004. Operating results for the three- and six-month periods ended November 30, 2005 are not necessarily indicative of the results that may be expected for the year ending May 31, 2006.

Except as otherwise specified, references to years indicate our fiscal year ending May 31, 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.

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 FedEx Express, which represent a small number of FedEx Express total employees, are employed under a collective bargaining agreement that became amendable on May 31, 2004. In accordance with applicable labor law, we will continue to operate under our current agreement while we negotiate with our pilots. Contract negotiations with the pilots’ union began in March 2004. These negotiations are ongoing and are being 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 18, 2005, our Board of Directors declared a dividend of $0.08 per share of common stock. The dividend is payable on January 3, 2006 to stockholders of record as of the close of business on December 13, 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. 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, a leading small-parcel consolidator, 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 are not material to reported or pro forma results of operations of any period.

AIRLINE STABILIZATION ACT CHARGE. During the second quarter of 2005, we recorded a charge of $48 million ($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.

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

If compensation cost for stock-based compensation plans had been determined under Statement of Financial Accounting Standards No. (“SFAS”) 123, “Accounting for Stock Based Compensation,” stock option compensation expense, pro forma net income and basic and diluted earnings per common share, 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						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

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

Following is a table of the key weighted-average assumptions used in the valuation calculations for the options and a discussion of our methodology for developing each of the assumptions used in the valuation model:

	Three Months Ended						Six Months Ended
	November 30,			November 30,			November 30,			November 30,
	2005			2004			2005			2004
Expected lives		5 years			4 years			5 years			4 years
Expected volatility		24	%		26	%		25	%		27	%
Risk-free interest rate		4.15	%		3.13	%		3.70	%		3.53	%
Dividend yield		0.358	%		0.306	%		0.325	%		0.327	%

Expected Lives. This is the period of time over which the options granted are expected to remain outstanding. Generally, options granted have a maximum term of 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. 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. This is the U.S. Treasury Strip rate posted at the date of grant having a term equal to the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.

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

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

The weighted-average Black-Scholes value of the grants under the assumptions indicated above for the three- and six-month periods ended November 30, 2005 was $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, 2005 represented 8.7% of total outstanding common and equity compensation shares and equity compensation shares available for grant. During the second quarter of 2006, our stockholders approved a 7.5 million share increase in the number of shares of our common stock reserved for issuance pursuant to stock 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

(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 was as follows (in millions, except per share amounts):

	Three Months Ended								Six Months Ended
	November 30,				November 30,				November 30,				November 30,
	2005				2004				2005				2004
Net income applicable to common stockholders		$	471			$	354			$	810			$	684
Weighted-average shares of common stock outstanding		303				301				303				300
Common equivalent shares:
Assumed exercise of outstanding dilutive options		16				18				17				19
Less shares repurchased from proceeds of assumed exercise of options		(11		)		(12		)		(12		)		(13		)
Weighted-average common and common equivalent shares outstanding		308				307				308				306
Basic earnings per share		$	1.55			$	1.18			$	2.67			$	2.27
Diluted earnings per share		$	1.53			$	1.15			$	2.63			$	2.23

We 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)

(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 was as follows (in millions):

	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
		$	107			$	89			$	213			$	181
Postretirement Healthcare Plans
Service cost		$	11			$	9			$	21			$	18
Interest cost		8				8				16				16
		$	19			$	17			$	37			$	34

Voluntary, tax deductible contributions of $456 million and $300 million were made to our principal U.S. domestic pension plans during the first six months of 2006 and 2005, respectively. Although additional contributions are not required, we may elect to make further voluntary contributions to our qualified plans in 2006.

(6) Business Segment Information

We provide a broad portfolio of transportation, e-commerce and business services through operating companies that compete collectively and are managed collaboratively under the respected FedEx brands. Our operations are primarily represented by Federal Express Corporation (“FedEx Express”), the world’s largest express transportation company; FedEx Ground Package System, Inc. (“FedEx Ground”), a leading provider of small-package ground delivery services; FedEx Freight Corporation (“FedEx Freight”), a leading U.S. provider of regional less-than-truckload (“LTL”) freight services; and FedEx Kinko’s Office and Print Services, Inc. (“FedEx Kinko’s”), a leading provider of document solutions and business services. These 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

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

⁽¹⁾ 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.

⁽²⁾ The second quarter of 2005 includes $48 million related to an Airline Stabilization Act charge.

(7) Commitments

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

				Aircraft-
	Aircraft			Related(1)			Other(2)			Total
2006 (remainder)		$	50		$	122		$	466	$	638
2007		327			212			195		734
2008		290			91			104		485
2009		567			60			79		706
2010		517			61			60		638
Thereafter		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 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 unless we have entered into non-cancelable commitments to modify such aircraft. Open purchase orders that are cancelable are not considered unconditional purchase obligations and therefore are not included in the table above.

FedEx Express is committed to purchase certain aircraft. Deposits and progress payments of $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. Future payments related to these activities are included in the table above. Aircraft and aircraft-related contracts are subject to price escalations. The following table is a summary of 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 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 with an initial or remaining term in excess of one year at November 30, 2005 is as follows (in millions):

	Aircraft and Related			Facilities and
	Equipment			Other			Total
2006 (remainder)		$	390		$	518	$	908
2007		609			945		1,554
2008		585			806		1,391
2009		555			665		1,220
2010		544			528		1,072
Thereafter		4,460			3,121		7,581
		$	7,143		$	6,583	$	13,726

While certain of our lease agreements contain covenants governing the use of the leased assets or require us to maintain certain levels of insurance, none of our lease agreements include material financial covenants or limitations.

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

(8) Contingencies

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

To date, one of these wage-and-hour cases, Foster v. FedEx Express, has been certified as a class action. The plaintiffs represent a class of hourly FedEx Express employees in California from October 14, 1998 to present. The plaintiffs allege that hourly employees are routinely required to work “off the clock” and are not paid for this additional work. The court issued a ruling 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 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 lawsuit alleging discrimination by FedEx Express in the Western region of the United States against certain current and former minority employees in pay and promotion. The district court’s ruling on class certification is not a decision on the merits of the plaintiffs’ claim and does not address whether we will be held liable. Trial is currently scheduled for February 2007. We have denied any liability and intend to vigorously defend ourself in this case. Given the nature and preliminary status of

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

the claim, we cannot yet determine the amount or a reasonable range of potential loss in this matter, if any. It is reasonably possible, however, that we could incur a material loss as this case develops.

Independent Contractor. FedEx Ground is involved in 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 these claims, we cannot yet determine the amount or a reasonable range of potential loss in these matters, if any.

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

(9) Supplemental Cash Flow Information

	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

(10) Income Taxes

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, 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 foreign tax credits arising from certain of our international operations.

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, 2005, and the related condensed consolidated statements of income for the three-month and six-month periods ended November 30, 2005 and 2004 and the condensed consolidated statements of cash flows for the six-month periods ended November 30, 2005 and 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, 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 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, 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

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 for the year ended May 31, 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 through operating companies that compete collectively and are managed collaboratively under the respected FedEx 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 services; FedEx Freight, a leading U.S. provider of regional LTL freight services; and FedEx Kinko’s, a leading provider of document solutions and business services. These companies form the core of our reportable segments. See “Reportable Segments” for further discussion.

The key indicators necessary to understand our operating results include:

· the overall customer demand for our various services;

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

· the mix of services purchased by our customers;

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

· our ability to manage our cost structure for capital expenditures and operating expenses such as salaries and employee benefits and 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 recover incremental fuel costs through our supplemental fuel surcharges.

Except as otherwise specified, references to years indicate our fiscal year ended May 31, 2006 or ended May 31 of the year referenced and comparisons are to the 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

CONSOLIDATED RESULTS

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

⁽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 an $11 million or $0.04 per diluted share benefit from an income tax adjustment 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 (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

⁽¹⁾ FedEx Express 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, as described below.

⁽²⁾ FedEx Express operating expenses for the second quarter of 2005 include a $48 million charge related to the Airline Stabilization Act.

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

	Three Months Ended						Percent		Six Months Ended				Percent
	2005			2004			Change		2005		2004		Change
Average daily package volume (ADV):
FedEx Express		3,279			3,226			2	3,255		3,158			3
FedEx Ground		2,843			2,725			4	2,712		2,584			5
Total ADV		6,122			5,951			3	5,967		5,742			4
Average daily LTL shipments:
FedEx Freight		68			65			5	67		65			3
Revenue per package (yield):
FedEx Express		$	21.99		$	20.28		8	$	21.39	$	20.03		7
FedEx Ground		6.90			6.48			6	6.91		6.51			6
LTL yield (revenue per hundredweight):
FedEx Freight		$	16.80		$	15.55		8	$	16.68	$	15.26		9

Revenue growth for the second quarter and first half of 2006 was attributable to yield improvement and volume growth across all of our transportation segments. Yield improvements were principally due to significantly higher fuel surcharges across all of our transportation segments and rate increases at FedEx Ground and FedEx Freight. Volume increases were driven by solid growth at FedEx Express in both international and domestic overnight services, continued growth at FedEx Ground, led by the performance of our home delivery service, and growth at FedEx Freight, which accelerated throughout the quarter.

Operating income increased during the second quarter and first half of 2006 primarily due to revenue growth and improved margins across all transportation segments. During the second quarter of 2006, fuel prices increased significantly in the aftermath of several hurricanes; however, our operating margins improved as higher revenues from our jet and diesel fuel surcharges offset these higher fuel costs. In response to the significant fluctuations in jet and diesel fuel prices during the second quarter of 2006, we temporarily capped certain of our fuel surcharges to ensure our services remain competitively priced in the marketplace. Productivity gains across all transportation segments also contributed to our margin expansion in the second quarter and first half of 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.

In August 2005, Hurricane Katrina devastated certain portions of the Gulf Coast region where each of our business segments has operations. During the second quarter of 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 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 timing of any business interruption insurance proceeds cannot be estimated at this time. Any such recoveries will be recognized only when realized.

Net interest expense 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 were 36% and 37%, respectively. The lower effective tax rates for the second quarter and first half of 2005 were primarily related to the passage of the American Jobs Creation Act of 2004, 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 foreign tax credits arising from certain of our international operations.

Outlook

We expect revenue growth at all operating segments and strong earnings growth across all transportation segments in the second half of 2006. We also expect continued growth in demand for services across our operating companies 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. We anticipate improved volumes and yields at FedEx Ground and FedEx Freight, as FedEx Ground continues its multi-year capacity expansion plan and FedEx Freight continues to grow its regional and interregional 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 will continue to be significant in 2006. All of our transportation businesses operate in a competitive pricing environment, heightened by continuing high fuel prices. However, we continue to manage our yields to 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. 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 not had a material impact on our operating results for the periods presented. In November 2004, the Transportation Security Administration (“TSA”) proposed new rules enhancing many of the security requirements for air cargo on both passenger and all-cargo 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 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 global economic conditions, the effect of severe weather events on our operations and 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 successfully conclude contract negotiations with our pilots and defend against challenges to our independent contractor model described in Note 8 to the 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 continue to fluctuate by significant 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 or estimated services provided. We believe these allocations approximate the cost of providing these functions. The operating expenses line item “Intercompany charges” on the accompanying unaudited financial summaries of our reportable segments includes the allocations from FedEx Services to FedEx Express, FedEx Ground, FedEx Freight and FedEx 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 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.

FEDEX EXPRESS SEGMENT

The following table compares 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:
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
	2005	2004	Change			2005	2004	Change
Package Statistics⁽¹⁾
Average daily package volume (ADV):
U.S. overnight box	1,211	1,179		3		1,195	1,164		3
U.S. overnight envelope	702	663		6		707	663		7
U.S. deferred	886	941		(6	)	891	901		(1	)
Total U.S. domestic ADV	2,799	2,783		1		2,793	2,728		2
IP	480	443		8		462	430		7
Total ADV	3,279	3,226		2		3,255	3,158		3
Revenue per package (yield):
U.S. overnight box	$ 21.03	$ 19.81		6		$ 20.69	$ 19.59		6
U.S. overnight envelope	10.86	10.33		5		10.71	10.27		4
U.S. deferred	12.56	11.51		9		12.16	11.54		5
U.S. domestic composite	15.80	14.74		7		15.44	14.67		5
IP	58.14	55.13		5		57.36	54.04		6
Composite package yield	21.99	20.28		8		21.39	20.03		7
Freight Statistics⁽¹⁾
Average daily freight pounds:
U.S.	9,544	9,008		6		9,209	8,605		7
International	2,283	1,874		22		2,159	1,867		16
Total average daily freight pounds	11,827	10,882		9		11,368	10,472		9
Revenue per pound (yield):
U.S.	$ 0.94	$ 0.83		13		$ 0.91	$ 0.81		12
International	0.81	0.77		5		0.80	0.76		5
Composite freight yield	0.91	0.82		11		0.89	0.80		11

⁽¹⁾ 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 2006, principally due to higher IP revenues (particularly in Asia and U.S. outbound) and higher U.S. domestic overnight package revenues.

During the second quarter of 2006, IP revenues grew 14% on an 8% increase in volume and yield growth of 5%. During the first half of 2006, IP revenues grew 14% on a 7% increase in volume and yield growth of 6%. Asia experienced strong average daily volume growth during both the second quarter and first half of 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 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 and improved yields particularly on our U.S. domestic 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, we implemented an average list price increase of 4.6% on FedEx Express U.S. domestic shipments and U.S. outbound international shipments, while we lowered our fuel surcharge index by 2%. In November 2005, we announced a 5.5% average list price increase effective January 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 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 and the international fuel surcharges ranged as follows for the three- and 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

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 marketplace.

FedEx Express Segment Operating Income

During the second quarter and first half of 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 jet fuel, while gallons consumed increased slightly. However, fuel surcharge revenue mitigated higher jet fuel prices. Purchased transportation costs increased in the second quarter and first half of 2006 driven by IP volume growth, which required a higher utilization of contract pickup and delivery services. The increase in the first half of 2006 in rentals and landing fees is primarily due to the one-time adjustment for leases of $75 million.

FEDEX GROUND SEGMENT

The following table compares revenues, operating expenses, 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
	2005				2004				Change			2005			2004			Change
Revenues		$	1,307			$	1,174			11		$	2,526		$	2,247			12
Operating expenses:
Salaries and employee benefits		230				213				8		451			410				10
Purchased transportation		506				456				11		972			866				12
Rentals		36				32				13		67			58				16
Depreciation and amortization		53				43				23		103			83				24
Fuel		27				13				108		45			20				125
Maintenance and repairs		28				26				8		57			52				10
Intercompany charges		129				119				8		249			234				6
Other		135				137				(1	)	271			242				12
Total operating expenses		1,144				1,039				10		2,215			1,965				13
Operating income		$	163			$	135			21		$	311		$	282			10
Operating margin		12.5		%		11.5		%		100	bp	12.3		%	12.6		%		(30	)bp
Average daily package volume⁽¹⁾		2,843				2,725				4		2,712			2,584				5
Revenue per package (yield)⁽¹⁾		$	6.90			$	6.48			6		$	6.91		$	6.51			6

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

FedEx Ground Segment Revenues

Revenues increased during the second quarter and first half of 2006 principally due to volume and yield growth. Average daily volumes increased across virtually all of our services, led by the continued growth of our home delivery service.

Yield improvement during the second quarter and first half of 2006 was primarily due to fuel surcharge revenue, higher extra service revenue and the impact of our January 2005 general rate increase. These increases were partially offset by higher customer discounts and a lower average weight per package. Gains in extra service revenue are attributable to increases in our other surcharges.

In January 2005, we implemented an average list price increase of 2.9% and reintroduced an indexed fuel surcharge for all 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 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

FedEx Ground Segment Operating Income

FedEx Ground segment operating income increased 21% during the second quarter and 10% in the first half of 2006, as yield and volume growth more than offset higher operating expenses. Purchased transportation increased in the second quarter and first half of 2006 primarily due to the impact of higher fuel costs on contractor settlements. Salaries and employee benefits, as well as other operating costs, increased in 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, 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

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 Kinko’s Segment Revenues

Revenues increased by 1% in the second quarter and 3% in the first half of 2006 due to continued growth in package acceptance revenue and 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 decline in our copy product line revenues, due in part to a competitive pricing environment.

FedEx Kinko’s Segment Operating Income

Operating income decreased $13 million in the second quarter and $16 million in the first half of 2006 as the increase in package acceptance revenues was more than offset by a decline in copy product line revenues, increases in other operating expenses and depreciation. The increase for the second quarter and first half of 2006 in other operating expenses was primarily due to increased costs related to technology and product offering initiatives. Increased depreciation was driven by center rebranding and investments in new technology to replace legacy systems.

FINANCIAL CONDITION

LIQUIDITY

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

	2005			2004
Operating activities:
Net income	$	810		$	684
Noncash charges and credits	954			716
Changes in operating assets and liabilities	(629		)	(161		)
Net cash provided by operating activities	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	(1,289		)	(1,292		)
Financing activities:
Principal payments on debt	(102		)	(73		)
Proceeds from stock issuances	53			61
Dividends paid	(48		)	(42		)
Other, net	(2		)	—
Net cash used in financing activities	(99		)	(54		)
Net decrease in cash and cash equivalents	$	(253	)	$	(107	)

Cash Provided by Operating Activities. Cash flows from operating activities decreased by $106 million in the first half of 2006. Increased earnings in the first half of 2006 were more than offset by the payout of previously accrued amounts related to our 2005 incentive compensation plans, an increase in receivables due to revenue growth and increased contributions to our principal U.S. domestic pension 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, respectively.

Cash Used for Investing Activities. Capital expenditures during the first half of 2006 were 10% higher than the prior year period 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. The increase in principal payments on debt primarily relates to 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 our operations and other cash flow needs and to provide support for the issuance of commercial paper. Any commercial paper borrowings reduce the amount available under the revolving credit facility. At November 30, 2005, no commercial paper was outstanding and the entire $1.0 billion under the revolving credit facility was available for future borrowings. Borrowings under the revolving credit facility will bear interest at short-term interest rates (based on the London Interbank Offered Rate (LIBOR), the Prime Rate or the Federal Funds Rate) plus a margin dependent upon our senior unsecured long-term debt ratings.

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

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

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

Other Liquidity Information. We believe that our existing cash and cash equivalents, cash flow from operations, our commercial paper program, 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, technology, package-handling facilities and sort equipment. The amount and timing of capital additions depend on various factors, including 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 six-month periods ended November 30 (in millions):

													Percent Change
													2005/2004
	Three Months Ended						Six Months Ended						Three Months			Six Months
	2005			2004			2005			2004			Ended			Ended
Aircraft and related equipment		$	208		$	421		$	484		$	554		(51	)		(13	)
Facilities and sort equipment		137			124			229			221			10			4
Information and technology investments		94			87			185			167			8			11
Vehicles		166			113			342			170			47			101
Other equipment		50			36			86			63			39			37
Total capital expenditures		$	655		$	781		$	1,326		$	1,175		(16	)		13
FedEx Express segment		$	336		$	477		$	724		$	642		(30	)		13
FedEx Ground segment		138			135			254			224			2			13
FedEx Freight segment		94			82			176			143			15			23
FedEx Kinko’s segment		32			32			47			61			—			(23	)
Other, principally FedEx Services		55			55			125			105			—			19
Total capital expenditures		$	655		$	781		$	1,326		$	1,175		(16	)		13

Capital expenditures during the first half of 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. Also, additional investments were made in the FedEx Ground and FedEx Freight 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. 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 service lines.

CONTRACTUAL CASH OBLIGATIONS

As required under SEC rules and regulations, the following table sets forth a summary of our contractual cash obligations as of November 30, 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. 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, 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)
	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 2006.

⁽²⁾ Capital lease obligations represent principal and interest payments.

⁽³⁾ See Note 7 to the accompanying unaudited consolidated financial statements.

We have certain contingent liabilities that are not accrued in our balance 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 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 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 non-cancelable operating leases (principally aircraft and facilities) with an initial or remaining term in excess of one year at November 30, 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 or after-tax cash flows.

In accordance with accounting principles generally accepted in the United States, our operating leases are not recorded in our balance sheet. Credit rating agencies routinely use information concerning minimum lease payments required for our operating leases to calculate our debt capacity. In addition, we have guarantees under certain operating leases, amounting to $34 million as of November 30, 2005, for the residual values of vehicles and facilities at the end of the respective operating lease periods. Although some of these leased assets may have a residual value at the end of the lease term that is less than the value specified in the related operating lease agreement, we do not believe it is probable that we will be required to fund material amounts under the terms of these guarantee arrangements. Accordingly, no material accruals have been recognized for these guarantees.

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,” “Liquidity,” “Capital Resources” and “Contractual Cash 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 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, 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;

· 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, 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 comparable magnitude in other areas of the world. Our principal exposure to foreign currency exchange rate risks is in the Japanese yen, Taiwan dollar, Canadian dollar and euro. Foreign currency fluctuations during the three- and six-month periods ended November 30, 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, 2005 (the end of the period covered by this Quarterly Report on Form 10-Q).

During our fiscal quarter ended November 30, 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

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

For the information called for by this item, see FedEx’s Current Report on Form 8-K dated September 26, 2005 and filed September 28, 2005.

Item 6. Exhibits

Exhibit Number		Description of Exhibit
10.1		Amendments dated October 26, 2005 to the 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		Amendment No.1 dated December 20, 2005 to the Airbus A380-800F Purchase Agreement dated as of July 12, 2002 between AVSA, S.A.R.L. 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.
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.

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 22, 2005	/s/ JOHN L. MERINO
	JOHN L. MERINO
	CORPORATE VICE PRESIDENT
	PRINCIPAL ACCOUNTING OFFICER

EXHIBIT INDEX

Exhibit Number		Description of Exhibit
10.1		Amendments dated October 26, 2005 to the 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		Amendment No.1 dated December 20, 2005 to the Airbus A380-800F Purchase Agreement dated as of July 12, 2002 between AVSA, S.A.R.L. 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.
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.

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