**UNITED STATES**SECURITIES AND EXCHANGE COMMISSION

**Washington,D.C. 20549**

**FORM 10-K**
| **(Mark One)**                                                                                                                                                                                                                                                     |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| x                                                                                                                                                                                                                                                                  | **ANNUAL REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| **For the  fiscal year ended May 31, 2006.**                                                                                                                                                                                                                  |
| **OR**                                                                                                                                                                                                                                                             |
| o                                                                                                                                                                                                                                                                  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| **For the  transition period from                     to                   .** |

 

**Commissionfile number 1-7806**

**FEDERAL EXPRESS CORPORATION**

(Exact Name of Registrantas Specified in its Charter)

| **Delaware**                                   | ** ** | **71-0427007**      |
|------------------------------------------------|------------|---------------------|
| (State or Other Jurisdiction of                |       | (I.R.S. Employer    |
| Incorporation or Organization)                 |       | Identification No.) |
| **3610 Hacks Cross Road, Memphis,  Tennessee** | ** ** | **38125**           |
| (Address of Principal Executive Offices)       |       | (ZIP Code)          |

 

**Registrant’stelephone number, including area code: **(901) 369-3600

**Securitiesregistered pursuant to Section 12(b) of the Act:**

|      | **Title of each class** | ** ** | ** ** | ** ** | **Name of each exchange on which registered** | ** ** |
|------|-------------------------|------------|------------|------------|-----------------------------------------------|------------|
| None |                    | None       |

 

**Securitiesregistered pursuant to Section 12(g) of the Act: **None

Indicate by check mark if the Registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o    No x

Indicate by check mark if the Registrant is notrequired to file reports pursuant to Rule 13 or Section 15(d) ofthe Exchange Act. Yes o    No x

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or forsuch 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 if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K (§ 229.405 of thischapter) is not contained herein, and will not be contained, to the best ofRegistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. x

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and large acceleratedfiler” in Rule 12b-2 of the Exchange Act. (Check one):

Large acceleratedfiler o   Acceleratedfiler o   Non- accelerated filer x

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

The Registrant is a wholly owned subsidiary of FedExCorporation, a Delaware corporation, and there is no market for the Registrant’scommon stock, par value $0.10 per share. As of July 10, 2006, 1,000 sharesof the Registrant’s common stock were outstanding.

**The Registrant meets theconditions set forth in General Instruction I(1)(a) and (b) of Form 10-Kand is therefore filing this Form with the reduced disclosure formatpermitted by General Instruction I(2).**

 

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**TABLEOF CONTENTS**
|                                            | ** ** | ** **                                                                                                                      | ** ** | Page |
|--------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|------|
| **PART I**                            |
| ITEM 1.                                    |       | Business                                                                                                                        |       | 3    |
| ITEM 1A.                                   |       | Risk Factors                                                                                                                    |       | 10   |
| ITEM  1B.                                  |       | Unresolved  Staff Comments                                                                                                      |       | 10   |
| ITEM 2.                                    |       | Properties                                                                                                                      |       | 10   |
| ITEM 3.                                    |       | Legal  Proceedings                                                                                                              |       | 13   |
| ITEM  4.                                   |       | Submission  of Matters to a Vote of Security Holders                                                                            |       | 13   |
| **PART II**                           |
| ITEM 5.                                    |       | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities             |       | 14   |
| ITEM  6.                                   |       | Selected  Financial Data                                                                                                        |       | 14   |
| ITEM  7.                                   |       | Management’s  Discussion and Analysis of Results of Operations and Financial Condition       |       | 14   |
| ITEM  7A.                                  |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                     |       | 14   |
| ITEM  8.                                   |       | Financial  Statements and Supplementary Data                                                                                    |       | 14   |
| ITEM  9.                                   |       | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure                  |       | 14   |
| ITEM  9A.                                  |       | Controls  and Procedures                                                                                                        |       | 14   |
| ITEM 9B.                                   |       | Other  Information                                                                                                              |       | 15   |
| **PART III**                          |
| ITEM 10.                                   |       | Directors  and Executive Officers of the Registrant                                                                             |       | 15   |
| ITEM  11.                                  |       | Executive  Compensation                                                                                                         |       | 15   |
| ITEM  12.                                  |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                 |       | 15   |
| ITEM  13.                                  |       | Certain  Relationships and Related Transactions                                                                                 |       | 15   |
| ITEM  14.                                  |       | Principal  Accounting Fees and Services                                                                                         |       | 15   |
| **PART IV**                           |
| ITEM 15.                                   |       | Exhibits,  Financial Statement Schedules                                                                                        |       | 17   |
| **FINANCIAL SECTION**                      |
| Table  of Contents                         |       | 19                                                                                                                              |
| Management’s  Discussion and Analysis |       | 20                                                                                                                              |
| Consolidated Financial Statements          |       | 30                                                                                                                              |
| Other Financial Information                |       | 57                                                                                                                              |
| **EXHIBITS**                               |
| Exhibit Index                         |       | E-1                                                                                                                             |

 

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**PART I**

***Item 1.   Business***

**Overview**

Federal Express Corporation (“FedEx Express”) inventedexpress distribution in 1973 and remains the industry leader, providing rapid,reliable, time-definite delivery of packages and freight to more than 220 countriesand territories. FedEx Express is a wholly owned subsidiary of FedExCorporation (“FedEx”), which was incorporated in Delaware on October 2,1997 to serve as the parent holding company of FedEx Express. We offertime-certain delivery within one to three business days, serving markets that generate more than 90% of the world’s grossdomestic product through door-to-door, customs-cleared service, with amoney-back guarantee. Our unmatched air route authorities and extensivetransportation infrastructure, combined with our leading-edge informationtechnologies, make us the world’s largest express transportation company. Weemploy more than 138,000 employees and operate approximately 53,500 drop-offlocations, 671 aircraft and 41,000 vehicles and trailers in our integratedglobal network.

FedEx Corporate Services, Inc. (“FedEx Services”),a wholly owned subsidiary of FedEx, provides a convenient single point ofaccess for many customer support functions. FedEx Services provides much of thesales, marketing, information technology and customer service support for FedExExpress and FedEx Ground Package System, Inc. (“FedEx Ground”), a whollyowned subsidiary of FedEx. Effective June 1, 2006, we moved severaladditional groups that are responsible for FedEx Express and FedEx Groundcustomer information (credit, collections and customer service) into a newlyformed subsidiary of FedEx Services named FedEx Customer Information Services, Inc.Bringing these groups under a common management structure will help to ensure aconsistent and outstanding experience for our customers.

FedEx acquired FedEx Kinko’s Office and Print Services, Inc. (“FedEx Kinko’s”) in February 2004 andhas rebranded Kinko’s locations as FedEx Kinko’s Office and PrintCenters and converted FedEx World Service Centers into full-service FedEx Kinko’sShip Centers. This strategic business acquisition has substantially increasedour retail presence worldwide, expanding customer access to our shippingservices. FedEx Kinko’s has approximately 1,500 locations and offers the fullrange of our services at virtually all U.S. locations and is adding ourshipping services at its international locations. In addition, FedEx Kinko’soffers packing services at virtually all U.S. FedEx Kinko’s Office and PrintCenters, and packing supplies and boxes are included in FedEx Kinko’s retailproduct assortment. By allowing customers to have unpackaged itemsprofessionally packed by specially trained FedEx Kinko’s team members and thenshipped using any of the full range of our services, FedEx Kinko’s provides acomplete “pack-and-ship” solution.

Except as otherwisespecified, any reference to a year indicates our fiscal year ended May 31of the year referenced.

**Services**

We offer a wide range of shipping services fordelivery of packages and freight. Overnight package services are backed bymoney-back guarantees and extend to virtually the entire United Statespopulation. We offer three U.S. overnight delivery services: FedEx First Overnight,FedEx Priority Overnight and FedEx Standard Overnight. FedEx SameDay service isavailable for urgent shipments up to 70 pounds to virtually any U.S.destination. We also offer express freight services to handle the needs of thetime-definite global freight market.

International express delivery with a money-backguarantee is available to more than 220 countries and territories, with avariety of time-definite services to meet distinct customer needs. We alsooffer a comprehensive international freight service, backed by a money-backguarantee, real-time tracking and advanced customs clearance.

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We provide our customers with a high level of servicequality, as evidenced by our ISO 9001 certification for our global operations. ISO9001 registration is required by thousands of customers around the world. Ourglobal certification solidifies our reputation as the quality leader in thetransportation industry. ISO 9001 is currently the most rigorousinternational standard for Quality Management and Assurance. ISO standards weredeveloped by the International Organization for Standardization in Geneva,Switzerland to promote and facilitate international trade. More than 150 countries, including EuropeanUnion members, the United States and Japan, recognize ISO standards.

Information regarding oure-shipping tools and solutions can be found below (“Technology”). In addition,detailed information about all of our delivery services and e-commerce toolsand solutions can be found on the FedEx Web site, *fedex.com*.The information on the FedEx Web site, however, is not incorporated byreference in, and does not form part of, this Report.

**InternationalExpansion**

We are focused on further expanding our internationalpresence, especially in key markets such as China and India. China and Indiaare the two fastest growing major economies in the world, consistentlyrecording gross domestic product growth rates of over 7% a year. China isalready the third largest trading country in the world, behind the UnitedStates and Germany, with total foreign trade exceeding $1.4 trillion incalendar 2005.

We began servingChina in 1984 and, since that time, have expanded our service to cover morethan 200 cities across the country with plans to add 100 additional cities overthe next few years. We have recently taken several important actions thatincrease our presence in China and India and bolster our leadership in theglobal, air cargo industry:

·       In March 2005, we launched theexpress air cargo industry’s first direct flight from mainland China to Europe(a daily direct flight from Shanghai to Frankfurt, Germany) as part of a newwestbound around-the-world route that originates and terminates in Memphis andprovides connections via the FedEx AsiaOne network to and from more than 130cities in northern and eastern China. Additionally, the flight links keymanufacturing regions in Germany into the FedEx network, while other parts ofEurope connect with the FedEx EuroOne network via our Paris hub.

·       In September 2005, we launched thefirst overnight express link between India and China as part of our neweastbound around-the-world route, which connects Europe, India, China and Japanwith our U.S. hub in Memphis.

·       In November 2005, we expanded ourservice in India. We increased our flight frequencies in and out of India andimproved connectivity between key export centers and regional hubs, resultingin improved service, especially for customers in Delhi and north India.

·       In January 2006, we broke ground ona new Asia-Pacific hub at the Guangzhou Baiyun International Airport inSouthern China, which is expected to employ approximately 1,200 workers. Thenew Asia-Pacific hub is expected to assume and expand the current activities ofour existing hub in Subic Bay, Philippines, beginning in 2009. We believe thenew hub will better serve our global customers doing business in and with thefast-growing China and Asia-Pacific markets.

·       On January 24, 2006, we signed anagreement with Tianjin Datian W. Group Co., Ltd. (“DTW Group”) to acquire DTWGroup’s fifty percent share of the FedEx-DTW International Priority expressjoint venture and DTW Group’s domestic express network in China forapproximately $400 million in cash. The acquisition will convert our jointventure with DTW Group, formed in 1999, into a wholly owned subsidiary andincrease our presence in China in the international and domestic expressbusinesses. The acquisition is expected to close in the first half of 2007 andis subject to customary conditions, including government approvals andlicensing.

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·       In March 2006, we began using threenew flight frequencies into China. We now have a total of 26 weeklyflights to China, the most of any U.S.-based cargo carrier.

In support of ourinternational expansion, we have agreed to purchase ten Airbus A380 aircraft,with deliveries beginning in 2009. We also hold options for ten additional A380aircraft. We are scheduled to be the first company to take delivery of theAirbus A380 freighter and the first to deploy the plane into service. Theimmense capacity, extensive range and excellent efficiency of this aircraftmake it ideally suited for the anticipated needs of our global network laterthis decade. To facilitate the use of our growing international network, weoffer strong international trade consulting services and a variety of onlinetools that enable customers to more easily determine and comply withinternational shipping requirements.

**Technology**

In 1979, FedEx Express founder Frederick W. Smithsaid, “The information about a package is as important as the delivery of thepackage itself.” Mr. Smith’s vision for our technology in 1979 was aradical idea. Yet, today we are a world leader in technology, and his visionremains at the core of our comprehensive technology strategy.

Our technology strategy is driven by our desire forcustomer satisfaction. Through FedEx Services, we strive to build technologysolutions that will solve our customers’ business problems with simplicity,convenience, speed and reliability. The focal point of our strategy is theaward-winning FedEx Web site, together with our integration solutions.

The *fedex.com* Website was launched over ten years ago, and during that time, customers have usedthe Web site to track the status of over a billion packages online. The *fedex.com* Web site is widely recognizedfor its speed, ease of use and customer-focused features. At *fedex.com*, our customers ship packages, determineinternational documentation requirements, track package status and pay invoices.The FedEx Insight application provides our customers with visibility andpackage status of their inbound and outbound shipments. The FedEx Global TradeManager online resource enables our customers to more easily navigate the complexitiesof international commerce by helping them identify the documents they need toship to and from specific countries. FedEx Global Trade Manager also offers acurrency converter, profiles of regulatory information by country, a customsregulation guide and, through its “Estimate Duties and Taxes” features,customers can estimate applicable governmental charges, duties and fees. FedExBilling Online provides our customers with real-time access to their accounts,invoices and paid shipment details.

The *fedex.com* Website is accessible from most wireless devices, making it faster and easier forour U.S. and Canadian customers to access real-time package status trackinginformation, rates and drop-off location data for shipments. The wirelessservice is available through Web-enabled devices, such as mobile telephones,personal digital assistants and Research In Motion (RIM) devices (such as theBlackBerry). We also use wireless data collection devices to scan bar codes onshipments. Our data collection device, the FedEx PowerPad, uses Bluetoothwireless technology to give our couriers wireless access to our network,thereby enhancing and accelerating the package information available to ourcustomers.

Our e-commerce tools andsolutions are designed to be easily integrated into our customers’applications, as well as into third-party software being developed by leadinge-procurement, systems integration and enterprise resource planning companies. TheFedEx Ship Manager suite of solutions offers a wide range of options to helpour customers manage their shipping and associated processes.

**Marketing**

The FedEx brandname is a symbol for high-quality service, reliability and speed. FedEx is oneof the most widely recognized brands in the world. Special emphasis is placedon promoting and protecting the FedEx 

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brand, one of ourmost important assets. In addition to traditional print and broadcastadvertising, we promote the FedEx brand through corporate sponsorships andspecial events. For example, FedEx sponsors:

·       TheNational Football League, as its “Official Delivery Service Sponsor”

·       ThePGA TOUR and the Champions Tour golf organizations, as their “Official ShippingCompany”

·       AJoe Gibbs Racing car in the NASCAR NEXTEL Cup Series

·       FedExField,home of the NFL’s Washington Redskins

·       TheFedEx Orange Bowl, host of one of college football’s Bowl Championship Series games

·       FedExForum,the home of the NBA’s Memphis Grizzlies

·       TheBMW WilliamsF1 Formula One racing team

·       TheFrench Open tennis tournament

In 2006, FedEx and the PGATOUR announced the establishment of the FedEx Cup, a new season-long pointsbonus program for players and the centerpiece to the entire PGA TOUR season. Theinaugural FedEx Cup program will begin in January 2007.

**U.S. Postal ServiceAgreements**

Under two agreements withthe U.S. Postal Service that run through August 2008, we provide aircapacity for transportation of Priority, Express and First-Class Mail andhave approximately 5,000 drop boxes at U.S. Post Offices in approximately 340metropolitan areas. We also provide transportation and delivery for the U.S.Postal Service’s international delivery service called Global ExpressGuaranteed (GXG).

**Pricing**

We periodically publish list prices in our ServiceGuides for the majority of our services. In general, during 2006, U.S. shippingrates were based on the service selected, destination zone, weight, size, anyancillary service charge and whether the shipment was picked up by a FedExExpress courier or dropped off by the customer at a FedEx Express, FedEx Kinko’sor FedEx Authorized ShipCenter location. International rates are based on thetype of service provided and vary with size, weight and destination. We offerour customers discounts generally based on actual or potential average dailyrevenue produced.

We have an indexed fuelsurcharge for all U.S. domestic and U.S. outbound shipments and for shipmentsoriginating internationally, where legally and contractually possible. Thesurcharge percentage is subject to monthly adjustment based on the spot pricefor jet fuel. For example, the fuel surcharge for June 2006 was based onthe spot price for jet fuel published for April 2006. Changes to our fuelsurcharge, when calculated according to the spot price for jet fuel and FedExExpress trigger points, are applied effective from the first Monday of themonth. These trigger points may change from time to time, but information onthe fuel surcharge for each month is available at *fedex.com*approximately two weeks before the surcharge is applicable.

**Operations**

Our primary sorting facility, located in Memphis,serves as the center of our multiple hub-and-spoke system. A second nationalhub is located in Indianapolis. In May 2006, we extended the term of ourlease at the Indianapolis International Airport by twelve years and announcedplans to significantly expand the Indianapolis hub facility. In addition tothese national hubs, we operate regional hubs in Newark, Oakland 

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and Fort Worth and major metropolitan sortingfacilities in Los Angeles and Chicago. We are building a new regional hub inGreensboro, North Carolina, which is scheduled to begin operations in 2009.

Facilities in Anchorage, Paris and Subic Bay,Philippines, serve as sorting facilities for express package and freighttraffic moving to and from Asia, Europe and North America. Additional majorsorting and freight handling facilities are located at Narita Airport in Tokyo,Stansted Airport outside London and Pearson Airport in Toronto. The facilitiesin Subic Bay and Paris are also designed to serve as regional hubs for theirrespective market areas. A new facility in Miami—the Miami Gateway Hub—servesour South Florida, Latin American and Caribbean markets. In January 2006,we broke ground on a new Asia-Pacific hub at the Guangzhou Baiyun InternationalAirport in Southern China. The new Asia-Pacific hub is expected to assume andexpand the current activities of our existing hub in Subic Bay, Philippines,beginning in 2009.

Throughout our worldwide network, we operate citystations and employ a staff of customer service agents, cargo handlers andcouriers who pick up and deliver shipments in the station’s service area. Formore information about our sorting and handling facilities, see Part I,Item 2 of this Annual Report on Form 10-K under the caption “Sortingand Handling Facilities.” In some international areas, independent agents (GlobalService Participants) have been selected to complete deliveries and to pick uppackages.

FedEx Kinko’s offersretail access to our shipping services at all of its U.S. locations and isadding our shipping services at its international locations. We also havealliances with certain other retailers to provide in-store drop-off sites. Ourunmanned FedEx Drop Boxes provide customers the opportunity to drop off packagesin office buildings, shopping centers, corporate or industrial parks andoutside U.S. Post Offices.

**Fuel Supplies andCosts**

During 2006, we purchased jet fuel from varioussuppliers under contracts that vary in length and which provide for specific amountsof fuel to be delivered. The fuel represented by these contracts is purchasedat market prices that may fluctuate daily. Because of our indexed fuelsurcharge, we do not have any jet fuel hedging contracts. See “Pricing.”

Thefollowing table sets forth our costs for jet fuel and its percentage of ourtotal revenues for the last five fiscal years:
| Fiscal Year | ** ** | ** ** | ** ** | **Total Cost  (in millions)** | ** ** | **Percentage of  Total Revenues** | ** ** |
|------------------|------------|------------|------------|-----------------------------------------|------------|---------------------------------------------|------------|
| 2006             |       |       | $          | 2,497                                   |       |                                        |       | 11.7 | % |   |
| 2005             |       |       | 1,780      |                                    |       |                                        | 9.2        |   |   |
| 2004             |       |       | 1,160      |                                    |       |                                        | 6.7        |   |   |
| 2003             |       |       | 1,058      |                                    |       |                                        | 6.5        |   |   |
| 2002             |       |       | 852        |                                    |       |                                        | 5.6        |   |   |

 

Approximately 9% of our requirement for vehicle fuelis purchased in bulk. The remainder of our requirement is satisfied by retailpurchases with various discounts.

We believe that, barring asubstantial disruption in supplies, our fuel purchase contracts will ensure theavailability of an adequate supply of fuel for our needs for the immediatefuture. A substantial reduction of crude oil supplies or refining capacity, orother events causing a substantial reduction in the supply of jet or vehicle fuel,however, could have a significant adverse effect on us.

**Competition**

The express package andfreight markets are both highly competitive and sensitive to price and service.The ability to compete effectively depends upon price, frequency and capacityof scheduled service, ability 

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to track packages, extentof geographic coverage, reliability and innovative service offerings. Competitorsinclude other package delivery concerns, principally United Parcel Service, Inc.(“UPS”), DHL, passenger airlines offering express package services, regionalexpress delivery concerns, airfreight forwarders and the U.S. Postal Service. Ourprincipal competitors in the international market are DHL, UPS, foreign postalauthorities such as Deutsche Post and TNT N.V., freight forwarders, passengerairlines and all-cargo airlines. Many of our competitors in the internationalmarket are government-owned, -controlled or -subsidized carriers, which mayhave greater resources, lower costs, less profit sensitivity and more favorableoperating conditions than we do.

**Employees**

We are headquartered in Memphis, Tennessee. David J.Bronczek is our President and Chief Executive Officer. As of May 31, 2006,we employed approximately 87,400 permanent full-time and 51,000 permanentpart-time employees, of which approximately 18% are employed in the Memphisarea. Our international employees in the aggregate represent approximately 18%of all employees. We believe our relationship with our employees is excellent.

Our pilots, who are represented by the Air Line PilotsAssociation, International (“ALPA”), are employed under a collective bargainingagreement that became amendable on May 31, 2004. In accordance withapplicable labor law, we will continue to operate under our current agreementwhile we negotiate with our pilots. Contract negotiations with ALPA began in March 2004.These negotiations are ongoing and are being mediated through the National MediationBoard.

Attempts by other labororganizations to organize certain other groups of employees occur from time totime. Although these organizing attempts have not resulted in any certificationof a U.S. domestic collective bargaining representative (other than ALPA), wecannot predict the outcome of these labor activities or their effect, if any,on us or our employees.

**Trademarks**

The “FedEx” trademark,service mark and trade name is essential to our worldwide business. FedEx andFedEx Express, among others, are trademarks, service marks and trade names ofFederal Express Corporation for which registrations, or applications forregistration, are on file. We have authorized, through licensing arrangements,the use of certain of our trademarks, service marks and trade names by ourGlobal Service Participants to support our business. In addition, we licensethe use of certain of our trademarks, service marks and trade names onpromotional items for the primary purpose of enhancing brand awareness.

**Regulation**

*Air.***  **Under the Federal Aviation Act of1958, as amended, both the U.S. Department of Transportation (“DOT”) and theFederal Aviation Administration (“FAA”) exercise regulatory authority over us.

The FAA’s regulatory authority relates primarily tooperational aspects of air transportation, including aircraft standards,maintenance and corrosion control, as well as personnel and ground facilities,which may from time to time affect our ability to operate our aircraft in themost efficient manner. We hold an air carrier certificate granted by the FAApursuant to Part 119 of the federal aviation regulations. This certificateis of unlimited duration and remains in effect so long as we maintain ourstandards of safety and meet the operational requirements of the regulations.

The DOT’s authority relates primarily to economic andsecurity aspects of air transportation. The DOT’s jurisdiction extends toaviation route authority and to other regulatory matters, including thetransfer of route authority between carriers. We hold various certificatesissued by the DOT, authorizing us to engage 

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in U.S. and international air transportation ofproperty and mail on a worldwide basis. Our international authority permits usto carry cargo and mail from several points in our U.S. route system tonumerous points throughout the world. The DOT regulates international routesand practices and is authorized to investigate and take action againstdiscriminatory treatment of United States air carriers abroad. The right of aUnited States carrier to serve foreign points is subject to the DOT’s approvaland generally requires a bilateral agreement between the United States and theforeign government. The carrier must then be granted the permission of suchforeign government to provide specific flights and services. The regulatoryenvironment for global aviation rights may from time to time impair our abilityto operate our air network in the most efficient manner.

In 2001, the Aviation and Transportation Security Acttransferred responsibility for aviation security from the FAA to theTransportation Security Administration (“TSA”) within the DOT, and ultimately,the Department of Homeland Security. In May 2006, the TSA adopted new rules enhancingmany of the security requirements for air cargo on both passenger and all-cargoaircraft. The TSA is currently seeking comments on a draft version of a newall-cargo aircraft security program, which would implement the new rules. Untilthe required security program is finalized, we cannot determine the effect thatthese new rules will have on our cost structure or our operating results. Itis reasonably possible, however, that these rules or other future securityrequirements for air cargo carriers could impose material costs on us.

We participate in the Civil Reserve Air Fleet (“CRAF”)program. Under this program, the U.S. Department of Defense may requisition formilitary use certain of our wide-bodied aircraft in the event of a declaredneed, including a national emergency. We are compensated for the operation ofany aircraft requisitioned under the CRAF program at standard contract ratesestablished each year in the normal course of awarding contracts. Through ourparticipation in the CRAF program, we are entitled to bid on peacetime militarycargo charter business. We, together with a consortium of other carriers,currently contract with the U.S. Government for charter flights.

*Ground.***  **The ground transportation performed byus is integral to our air transportation services. The enactment of the FederalAviation Administration Authorization Act of 1994 abrogated the authority ofstates to regulate the rates, routes or services of intermodal all-cargo aircarriers and most motor carriers. States may now only exercise jurisdictionover safety and insurance. We are registered in those states that requireregistration.

Like other interstate motor carriers, we are subjectto certain DOT safety requirements governing interstate operations. Inaddition, vehicle weight and dimensions remain subject to both federal andstate regulations.

*Communication.***  **Because of the extensive use ofradio and other communication facilities in our aircraft and groundtransportation operations, we are subject to the Federal CommunicationsCommission Act of 1934, as amended. Additionally, the Federal CommunicationsCommission regulates and licenses our activities pertaining to satellitecommunications.

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***Environmental***.**  **Pursuant to the Federal AviationAct, the FAA, with the assistance of the U.S. Environmental Protection Agency,is authorized to establish standards governing aircraft noise. Our aircraftfleet is in compliance with current noise standards of the federal aviationregulations. Our aircraft are also subject to, and are in compliance with, theregulations governing engine emissions. In addition to federal regulation ofaircraft noise, certain airport operators have local noise regulations, whichlimit aircraft operations by type of aircraft and time of day. Theseregulations have had a restrictive effect on our aircraft operations in some ofthe localities where they apply but do not have a material effect on any of oursignificant markets. Congress’s passage of the Airport Noise and Capacity Actof 1990 established a National Noise Policy, which enabled us to plan for noisereduction and better respond to local noise constraints. Our internationaloperations are also subject to noise regulations in certain of the countries inwhich we operate.

We are subject to federal, state and localenvironmental laws and regulations relating to, among other things, contingencyplanning for spills of petroleum products and the disposal of waste oil.Additionally, we are subject to numerous regulations dealing with undergroundfuel storage tanks, hazardous waste handling, vehicle and equipment emissionsand the discharge of effluents from our properties and equipment. We haveenvironmental management programs to ensure compliance with these regulations.

***Item 1A.***                  RiskFactors

We present information about our risk factors onpages 26 through 29 of this Annual Report on Form 10-K.

***Item 1B.***                  Unresolved Staff Comments

None.

***Item 2.         Properties***

Our principal owned and leased properties include ouraircraft, vehicles, national, regional and metropolitan sorting facilities,administration buildings, FedEx Drop Boxes and data processing andtelecommunications equipment.

**Aircraft and Vehicles**

As of May 31,2006, our operating aircraft fleet consisted of the following:
| Description         | ** ** | ** ** | ** ** | **Owned** | ** ** | **Leased** | ** ** | **  Total  ** | ** ** | **Maximum Operational  Revenue Payload  (Pounds per Aircraft)**(1) | ** ** |
|---------------------|------------|------------|------------|-----------|------------|------------|------------|-----------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| Boeing MD11         |       |       | 28         |      |       |       | 30         |                              |       | 58                                                                                     | (3)        |   |   | 155,800 |   |   |
| Boeing MD10-30(2)   |       |       | 4          |      |       |       | 2          |                              |       | 6                                                                                      |       |   |   | 128,900 |   |   |
| Boeing DC10-30      |       |       | 4          |      |       |       | 10         |                              |       | 14                                                                                     |       |   |   | 128,900 |   |   |
| Boeing MD10-10(2)   |       |       | 41         |      |       |       | —     |                              |       | 41                                                                                     |       |   |   | 117,800 |   |   |
| Boeing DC10-10      |       |       | 23         |      |       |       | 2          |                              |       | 25                                                                                     | (4)        |   |   | 117,800 |   |   |
| Airbus A300-600     |       |       | 17         |      |       |       | 36         |                              |       | 53                                                                                     | (5)        |   |   | 91,000 |   |   |
| Airbus A310-200/300 |       |       | 49         |      |       |       | 16         |                              |       | 65                                                                                     | (6)        |   |   | 69,800 |   |   |
| Boeing B727-200     |       |       | 84         |      |       |       | 10         |                              |       | 94                                                                                     |       |   |   | 43,100 |   |   |
| Boeing B727-100     |       |       | 13         |      |       |       | —     |                              |       | 13                                                                                     |       |   |   | 31,100 |   |   |
| ATR 72-202          |       |       | 11         |      |       |       | —     |                              |       | 11                                                                                     | (7)        |   |   | 18,000 |   |   |
| ATR 42-300/320      |       |       | 29         |      |       |       | —     |                              |       | 29                                                                                     |       |   |   | 12,000 |   |   |
| Fokker F27-500      |       |       | 3          |      |       |       | —     |                              |       | 3                                                                                      |       |   |   | 13,500 |   |   |
| Fokker F27-600      |       |       | 6          |      |       |       | —     |                              |       | 6                                                                                      |       |   |   | 13,800 |   |   |
| Cessna 208B         |       |       | 243        |      |       |       | —     |                              |       | 243                                                                                    |       |   |   | 3,400 |   |   |
| Cessna 208A         |       |       | 10         |      |       |       | —     |                              |       | 10                                                                                     |       |   |   | 3,000 |   |   |
| Total               |       |       | 565        |      |       |       | 106        |                              |       | 671                                                                                    |       |   |   |   |   |   |

 

(1)                 Maximum operational revenue payload is thelesser of the net volume-limited payload and the net maximum structuralpayload.

(2)                 The MD10-30s and MD10-10s areDC10-30s and DC10-10s, respectively, that have been converted to anMD10 configuration.

(3)                 Includes 9 aircraft not currently inoperation and awaiting completion of passenger-to-freighter modification.

(4)                 Includes 8 aircraft not currently inoperation and awaiting completion of passenger-to-freighter modification.

(5)                 Includes 4 aircraft not currently inoperation and awaiting completion of passenger-to-freighter modification.

(6)                 Includes 6 aircraft not currently inoperation and awaiting completion of passenger-to-freighter modification.

(7)                 Includes 5 aircraft not currently in operation andawaiting completion of passenger-to-freighter modification.

10

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·       TheMD11s are three-engine, wide-bodied aircraft that have a longer range andlarger capacity than DC10s.

·       TheDC10s are three-engine, wide-bodied aircraft that have been specially modifiedto meet FedEx Express’s cargo requirements. The DC10s come in two versions, theDC10-10 and the DC10-30. The DC10-30 has a longer range andhigher weight capacity than the DC10-10.

·       TheMD10s are three-engine, wide-bodied DC10 aircraft that have received anAdvanced Common Flightdeck (ACF) modification, which includes a conversion to atwo-pilot cockpit, as well as upgrades of electrical and other systems.

·       TheA300s and A310s are two-engine, wide-bodied aircraft that have a longer rangeand more capacity than B727s.

·       TheB727s are three-engine aircraft configured for cargo service.

·       TheFokker F27, Cessna 208 and ATR turbo-prop aircraft are leased to independentoperators to support FedEx Express operations in areas where demand does notjustify use of a larger aircraft.

An inventory of spare engines and parts is maintainedfor each aircraft type.

In addition, we “wet lease” approximately 45 smallerpiston-engine and turbo-prop aircraft which feed packages to and from airportsserved by our larger jet aircraft. The wet lease agreements call for theowner-lessor to provide flight crews, insurance and maintenance, as well as fueland other supplies required to operate the aircraft. Our wet lease agreementsare for terms not exceeding one year and are generally cancelable upon 30 days’notice.

At May 31, 2006, weoperated approximately 41,000 ground transport vehicles, including pickup anddelivery vans, larger trucks called container transport vehicles andover-the-road tractors and trailers.

**Aircraft PurchaseCommitments**

Thefollowing table is a summary of our aircraft purchase commitments as of May 31,2006 with the year of expected delivery by type:
|            | ** ** | **A300** | ** ** | **A310** | ** ** | **A380** | ** ** | **Total** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|-----------|------------|
| 2007       |       |     | 5          |     |       |     | 1          |      |       |   | — |   |   |   | 6 |   |   |
| 2008       |       |     | 10         |     |       |     | —     |      |       |   | — |   |   |   | 10 |   |   |
| 2009       |       |     | 2          |     |       |     | —     |      |       |   | 2 |   |   |   | 4 |   |   |
| 2010       |       |     | —     |     |       |     | —     |      |       |   | 4 |   |   |   | 4 |   |   |
| 2011       |       |     | —     |     |       |     | —     |      |       |   | 3 |   |   |   | 3 |   |   |
| Thereafter |       |     | —     |     |       |     | —     |      |       |   | 1 |   |   |   | 1 |   |   |
| Total      |       |     | 17         |     |       |     | 1          |      |       |   | 10 |   |   |   | 28 |   |   |

 

Deposits and progresspayments of $64 million have been made toward these purchases and other plannedaircraft-related transactions. Also see Note 15 of the accompanyingconsolidated financial statements for more information about our purchasecommitments.

11

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**Sorting andHandling Facilities**

At May 31,2006, we operated the following sorting and handling facilities:
| Location             | ** ** | ** ** | ** ** | **Acres** | ** ** | **Square  Feet** | ** ** | **Sorting  Capacity  (per hour)**(1) | ** **     | ** ** | **Lessor** | ** **                                                   | ** ** | **Lease  Expiration  Year** |
|---------------------------|------------|------------|------------|-----------|------------|------------------|------------|-------------------------------------------|----------------|------------|------------|--------------------------------------------------------------|------------|-----------------------------|
| ***National***            |       |       |       |      |       |             |       |                                      |           |       |
| Memphis, Tennessee        |       |       | 525        |      |       | 3,074,000        |       |                                      | 465,000        |       |       | Memphis-Shelby  County Airport Authority                     |       | 2012                        |
| Indianapolis, Indiana     |       |       | 215        |      |       | 1,895,000        |       |                                      | 191,000        |       |       | Indianapolis  Airport Authority                              |       | 2028                        |
| ***Regional***            |       |       |       |      |       |             |       |                                      |           |       |       |                                                         |       |                        |
| Fort Worth, Texas         |       |       | 168        |      |       | 977,000          |       |                                      | 76,000         |       |       | Fort Worth  Alliance Airport Authority                       |       | 2021                        |
|                      |       |       |       |      |       |             |       |                                      |           |       |       |                                                         |       |                        |
| Newark, New Jersey        |       |       | 64         |      |       | 595,000          |       |                                      | 154,000        |       |       | Port Authority of New  York and New Jersey                   |       | 2010                        |
| Oakland, California       |       |       | 64         |      |       | 320,000          |       |                                      | 53,000         |       |       | City of Oakland                                              |       | 2011                        |
| ***Metropolitan***        |       |       |       |      |       |             |       |                                      |           |       |       |                                                         |       |                        |
| Chicago, Illinois         |       |       | 51         |      |       | 419,000          |       |                                      | 52,000         |       |       | City of Chicago                                              |       | 2018                        |
| Los Angeles, California   |       |       | 23         |      |       | 305,000          |       |                                      | 57,000         |       |       | City of Los Angeles                                          |       | 2009                        |
| ***International***       |       |       |       |      |       |             |       |                                      |           |       |       |                                                         |       |                        |
| Anchorage, Alaska(2)      |       |       | 62         |      |       | 258,000          |       |                                      | 17,000         |       |       | Alaska Department  of  Transportation and  Public Facilities |       | 2023                        |
| Paris, France(3)          |       |       | 87         |      |       | 861,000          |       |                                      | 48,000         |       |       | Aeroports de  Paris                                          |       | 2029                        |
| Subic Bay, Philippines(4) |       |       | 18

  |      |       | 316,000

   |       |                                      | 22,000

  |       |       | Subic Bay Metropolitan Authority                             |       | 2010

                 |

 

(1)                 Documents and packages.

(2)                 Handles international express package and freightshipments to and from Asia, Europe and North America.

(3)                 Handles intra-Europe express package and freightshipments, as well as international express package and freight shipments toand from Europe.

(4)                 Handles intra-Asia express package and freightshipments, as well as international express package and freight shipments toand from Asia.

Our facilities at the Memphis International Airportalso include aircraft maintenance hangars, flight training and fuel facilities,administrative offices and warehouse space. We lease these facilities from theMemphis-Shelby County Airport Authority (the “Authority”) under several leases.The leases cover land, administrative and sorting buildings, other facilities, rampsand certain related equipment. We have the option to purchase certain equipment(but not buildings or improvements to real estate) leased under such leases atthe end of the lease term for a nominal sum. The leases obligate us to maintainand insure the leased property and to pay all related taxes, assessments andother charges. The leases are subordinate to, and our rights thereunder couldbe affected by, any future lease or agreement between the Authority and theU.S. Government.

We have major internationalsorting and freight handling facilities located at Narita Airport in Tokyo,Japan, Stansted Airport outside London, England and Pearson Airport in Toronto,Canada. We also have a substantial presence at airports in Hong Kong; Taiwan;Dubai, United Arab Emirates; Frankfurt, Germany; and Miami.

12

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**Administrative andOther Properties and Facilities**

Our world headquarters is located in southeasternShelby County, Tennessee. The headquarters campus, which comprises eightseparate buildings with more than 1.1 million square feet of space, housesapproximately 1,900 employees. We also have facilities housing administrativeand technical operations on approximately 200 acres adjacent to the MemphisInternational Airport. Of the eight buildings located on this site, four aresubject to long-term leases and the other four are owned by us. We also leaseapproximately 25 facilities in the Memphis area for administrative offices andwarehouses.

We lease state-of-the-art technology centers inCollierville, Tennessee, Irving, Texas, Colorado Springs, Colorado, andOrlando, Florida. These facilities house our personnel and FedEx Services’personnel responsible for strategic software development and other functionsthat support FedEx’s technology and e-commerce solutions.

We own or lease approximately 665 facilities for citystation operations in the United States. In addition, approximately 225 citystations are owned or leased throughout our international network. The majorityof these leases are for terms of five to ten years. City stations serve as thesorting and distribution center for a particular city or region. We believethat suitable alternative facilities are available in each locale onsatisfactory terms, if necessary.

As of May 31, 2006,we had approximately 42,500 Drop Boxes, including 5,000 Drop Boxes outside U.S.Post Offices. As of May 31, 2006, we also had approximately 11,000 FedExAuthorized ShipCenters and FedEx ShipSites, which are drop-off locationssituated within certain retailers, such as FedEx Kinko’s, OfficeMax and Staples.Internationally, we have over 2,000 drop-off locations.

***Item 3.         LegalProceedings***

FedEx Express and its subsidiaries are subject tolegal proceedings and claims that arise in the ordinary course of theirbusiness. For a description of material pending legal proceedings, see Note 16of the accompanying consolidated financial statements.

On June 23, 2006,FedEx Express and its subsidiaries were served with a grand jury subpoenademanding the production of documents in connection with an ongoinginvestigation by the Antitrust Division of the U.S. Department of Justice (“DOJ”)into possible violations of federal criminal antitrust laws in the air cargotransportation industry. We have no reason to believe that we are a target ofthe investigation, and we will cooperate with the DOJ.

***Item 4.         Submissionof Matters to a Vote of Security Holders***

Omitted under the reduced disclosure format permittedby General Instruction I(2)(c) of Form 10-K.

13

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**PART II**

***Item 5.***                          Market for Registrant’s CommonEquity, Related Stockholder Matters andIssuer Purchases of Equity Securities

FedEx Express is a whollyowned subsidiary of FedEx, and there is no market for FedEx Express’s commonstock.

***Item 6.***                          SelectedFinancial Data

Omitted under the reduceddisclosure format permitted by General Instruction I(2)(a) of Form 10-K.

***Item 7.***                          Management’s Discussion andAnalysis of Results of Operations and Financial Condition

Management’s discussionand analysis of results of operations and financial condition is presented on pages 20through 29 of this Annual Report on Form 10-K.

***Item 7a.***                   Quantitativeand Qualitative Disclosures About Market Risk

Quantitative andqualitative information about market risk is presented on page 57 of thisAnnual Report on Form 10-K.

***Item 8.***                          FinancialStatements and Supplementary Data

FedEx Express’sconsolidated financial statements, together with the notes thereto and thereport of Ernst & Young LLP dated July 11, 2006 thereon, are presentedon pages 32 through 56 of this Annual Report on Form 10-K.

***Item 9.***                          Changes in and Disagreementswith Accountants on Accounting and Financial Disclosure

**None.**

***Item 9A.***                  Controlsand Procedures

**Management’sEvaluation of Disclosure Controls and Procedures**

Our management, with theparticipation of our principal executive and financial officers, has evaluatedthe effectiveness of our disclosure controls and procedures in ensuring thatthe information required to be disclosed in our filings under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms, including ensuring that such information is accumulated and communicatedto management as appropriate to allow timely decisions regarding requireddisclosure. Based on such evaluation, our principal executive and financialofficers have concluded that such disclosure controls and procedures wereeffective as of May 31, 2006 (the end of the period covered by this AnnualReport on Form 10-K).

**Assessment ofInternal Control Over Financial Reporting**

Management’s report on ourinternal control over financial reporting is presented on page 30 of thisAnnual Report on Form 10-K. The report of Ernst & Young LLPwith respect to management’s assessment of internal control over financialreporting is presented on page 31 of this Annual Report on Form 10-K.

14

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**Changes in InternalControl Over Financial Reporting**

During our fiscal quarterended May 31, 2006, no change occurred in our internal control overfinancial reporting that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

***Item 9B.***                  OtherInformation

None.

**PART III**

***Item 10.***                   Directorsand Executive Officers of the Registrant

Omitted under the reduceddisclosure format permitted by General Instruction I(2)(c) of Form 10-K.

***Item 11.***                   ExecutiveCompensation

Omitted under the reduceddisclosure format permitted by General Instruction I(2)(c) of Form 10-K.

***Item 12.***                   SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters

Omitted under the reduceddisclosure format permitted by General Instruction I(2)(c) of Form 10-K.

***Item 13.***                   CertainRelationships and Related Transactions

Omitted under the reduceddisclosure format permitted by General Instruction I(2)(c) of Form 10-K.

***Item 14.***                   PrincipalAccounting Fees and Services

Of thefees Ernst & Young LLP billed FedEx for services provided during 2006and 2005, we estimate that the following amounts were for services related toFedEx Express. These amounts (in thousands) represent the fees that Ernst &Young LLP directly billed to FedEx Express, as well as that portion of Ernst &Young LLP’s fees that FedEx allocated to FedEx Express through management fees.
|                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------|------------|----------|------------|----------|------------|
| Audit fees          |       | $        | 8,211      |     | $          | 9,426 |   |
| Audit-related  fees |       | 332      |       | 289      |       |
| Tax fees            |       | 342      |       | 1,010    |       |
| All other fees      |       | 13       |       | 20       |       |
| Total               |       | $        | 8,898      |     | $          | 10,745 |   |

 

·       *Audit Fees.  *Represents fees forprofessional services provided for the audit of FedEx Express’s annualfinancial statements and review of FedEx Express’s quarterly financialstatements, for the audit of FedEx Express’s internal control over financialreporting and for audit services provided in connection with other statutory orregulatory filings.

·       *Audit-Related Fees.  *Represents feesfor assurance and other services related to the audit of FedEx Express’sfinancial statements. The fees for 2006 and 2005 include fees primarily forbenefit plan audits.

·       *Tax Fees.  *Represents fees forprofessional services provided primarily for domestic and internationalcompliance and tax advice. Tax compliance and preparation fees totaled $34,000and $238,000 in 2006 and 2005, respectively.

15

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·       *All Other Fees.  *Represents fees forproducts and services not otherwise included in the categories above. Theamounts shown for 2006 and 2005 include fees for online technical resources. Theamount shown for 2005 also includes fees for international operational auditservices.

To help ensure the independence of our independentregistered public accounting firm, the Audit Committee of the Board ofDirectors of FedEx has adopted a Policy on Engagement of Independent Auditor,which is available on FedEx’s Web site at *http://http://ir.fedex.com/governance/Auditor_Policy.cfm*.

Pursuant to the Policy on Engagement of IndependentAuditor, the Audit Committee preapproves all audit services and non-auditservices to be provided to FedEx by its independent registered publicaccounting firm. The Audit Committee may delegate to one or more of its membersthe authority to grant the required approvals, provided that any exercise ofsuch authority is presented at the next Audit Committee meeting.

The Audit Committee may preapprove for up to one yearin advance the provision of particular types of permissible routine andrecurring audit-related, tax and other non-audit services, in each casedescribed in reasonable detail and subject to a specific annual monetary limitalso approved by the Audit Committee. The Audit Committee must be informedabout each such service that is actually provided. In cases where a service isnot covered by one of those approvals, the service must be specificallypreapproved by the Audit Committee no earlier than one year prior to thecommencement of the service.

Each audit or non-audit service that is approved bythe Audit Committee (excluding tax services performed in the ordinary course ofFedEx’s business) will be reflected in a written engagement letter or writingspecifying the services to be performed and the cost of such services, whichwill be signed by either a member of the Audit Committee or by an officer ofFedEx authorized by the Audit Committee to sign on behalf of FedEx.

The Audit Committee will not approve any prohibitednon-audit service or any non-audit service that individually or in theaggregate may impair, in the Audit Committee’s opinion, the independence of theindependent registered public accounting firm.

In addition, FedEx’s registeredpublic accounting firm may not provide any services, including financialcounseling and tax services, to any FedEx officer, Audit Committee member orFedEx managing director (or its equivalent) in the Finance department or to anyimmediate family member of any such person.

16

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**PART IV**

***Item 15.***                   Exhibits,Financial Statement Schedules

**(a)(1) and (2) Financial Statements; Financial Statement Schedules**

FedEx Express’sconsolidated financial statements, together with the notes thereto and thereport of Ernst & Young LLP dated July 11, 2006 thereon, arelisted on page 19 and presented on pages 32 through 56 of this AnnualReport on Form 10-K. FedEx Express’s “Schedule II — Valuationand Qualifying Accounts,” together with the report of Ernst & YoungLLP dated July 11, 2006 thereon, is presented on pages 58 through 59of this Annual Report on Form 10-K. All other financial statementschedules have been omitted because they are not applicable or the requiredinformation is included in FedEx Express’s consolidated financial statements orthe notes thereto.

**(a)(3) Exhibits**

See the Exhibit Index on pages E-1through E-7 for a list of the exhibits being filed or furnished with orincorporated by reference into this Annual Report on Form 10-K.

17

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, as amended, the Registrant has duly caused this Report to be signed onits behalf by the undersigned, thereunto duly authorized.
|                           |   | FEDERAL  EXPRESS CORPORATION |
|---------------------------|--------|------------------------------|
| Dated: July 14, 2006 |   |                         | By: |   | /s/ DAVID J. BRONCZEK |
|                      |   |                         |   | DAVID  J. BRONCZEK |
|                      |   |                         |   | PRESIDENT AND CHIEF  EXECUTIVE OFFICER |
|                           |        |                              |  |  |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, this Reporthas been signed below by the following persons on behalf of the Registrant inthe capacities and on the dates indicated.
| Signature                  | ** ** | ** **                                       | ** ** | Capacity           | ** ** | ** **          | ** ** | Date | ** ** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|--------------------|------------|---------------------|------------|------|------------|------------|
| /s/ DAVID J. BRONCZEK      |       | President, Chief  Executive Officer and Director |       | July 14, 2006 |
| David J. Bronczek          |       | *(Principal  Executive Officer)*                 |       |               |
| /s/ CATHY D. ROSS          |       | Senior Vice President  and Chief Financial       |       | July 14, 2006 |
| Cathy D. Ross              |       | Officer *(Principal Financial Officer)*          |       |               |
| /s/ JAY L. COFIELD         |       | Vice President and  Worldwide Controller         |       | July 14, 2006 |
| Jay L. Cofield             | * *   | *(Principal  Accounting Officer)*                |       |               |
| /s/ FREDERICK W. SMITH*    |       | Chairman of the Board of  Directors              |       | July 14, 2006 |
| Frederick W. Smith         |       |                                             |       |               |
| /s/ ROBERT B. CARTER*      |       | Director                                         |       | July 14, 2006 |
| Robert B. Carter           |       |                                             |       |               |
| /s/ MICHAEL L. DUCKER*     |       | Executive Vice President  — International   |       | July 14, 2006 |
| Michael L. Ducker          |       | and Director                                     |       |               |
| /s/ T. MICHAEL GLENN*      |       | Director                                         |       | July 14, 2006 |
| T. Michael Glenn           |       |                                             |       |               |
| /s/ ALAN B. GRAF, JR.*     |       | Director                                         |       | July 14, 2006 |
| Alan B. Graf, Jr.     |       |                                             |       |               |
| /s/ DAVID F. REBHOLZ*      |       | Executive Vice President  — Operations      |       | July 14, 2006 |
| David F. Rebholz           |       | and Systems  Support and Director                |       |               |
| /s/ CHRISTINE P. RICHARDS* |       | Director                                         |       | July 14, 2006 |
| Christine P. Richards      |       |                                             |       |               |
| *By:                       |       | /s/ JAY L. COFIELD                               |       |               |       |                |
|                       |       | Jay  L. Cofield  Attorney-in-Fact                |       |               |       | July 14,  2006 |
|                            |            |                                                  |            |                    |            |                     |            |      |            |            |  |  |

 

18

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**FINANCIALSECTION TABLE OF CONTENTS**
|                                                                                     | ** ** | **Page** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------|------------|
| **Management’s Discussion and  Analysis**                                      | ** ** |     | ** ** | ** ** |   |
| Overview  of Financial Section                                                      |       |     | 20         | ** ** |   |
| New  Accounting Pronouncements                                                      |       |     | 21         | ** ** |   |
| Results of  Operations                                                              |       |     | 22         | ** ** |   |
| Risk Factors                                                                        |       |     | 26         | ** ** |   |
| Forward-Looking  Statements                                                         |       |     | 29         | ** ** |   |
| **Consolidated  Financial Statements**                                              | ** ** |     | ** ** | ** ** |   |
| Management’s Report on Internal Control over Financial  Reporting              |       |     | 30         | ** ** |   |
| Reports  of Independent Registered Public Accounting Firm                           |       |     | 31         | ** ** |   |
| Consolidated Balance Sheets                                                         |       |     |       | ** ** |   |
| May 31,  2006 and 2005                                                         |       |     | 33         | ** ** |   |
| Consolidated Statements of  Income                                                  |       |     |       | ** ** |   |
| Years  Ended May 31, 2006, 2005 and 2004                                       |       |     | 35         | ** ** |   |
| Consolidated Statements of  Cash Flows                                              |       |     |       | ** ** |   |
| Years  Ended May 31, 2006, 2005 and 2004                                       |       |     | 36         | ** ** |   |
| Consolidated Statements of  Changes in Owner’s Equity and Comprehensive Income |       |     |       | ** ** |   |
| Years  Ended May 31, 2006, 2005 and 2004                                       |       |     | 37         | ** ** |   |
| Notes  to Consolidated Financial Statements                                         |       |     | 38         | ** ** |   |
| **Other  Financial Information**                                                    | ** ** |     | ** ** | ** ** |   |
| Quantitative  and Qualitative Disclosures about Market Risk                         |       |     | 57         | ** ** |   |
| Report  of Independent Registered Public Accounting Firm                            |       |     | 58         | ** ** |   |
| Schedule  II — Valuation and Qualifying Accounts                               |       |     | 59         | ** ** |   |
| Computation of Ratio of  Earnings to Fixed Charges                                  |       |     | 60         | ** ** |   |

 

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**MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OFOPERATIONS AND FINANCIAL CONDITION**

**OVERVIEW OFFINANCIAL SECTION**

The financial section ofthe Federal Express Corporation (“FedEx Express”) Annual Report on Form 10-K(“Annual Report”), consists of the following Management’s Discussion andAnalysis of Results of Operations and Financial Condition (“MD&A”), theConsolidated Financial Statements and the notes to the Consolidated FinancialStatements, and Other Financial Information, all of which include informationabout our significant accounting policies, practices and the transactions thatunderlie our financial results. The following MD&A, which describes theprincipal factors affecting the results of operations and financial conditionof FedEx Express, is abbreviated pursuant to General Instruction I(2)(a) ofForm 10-K. The Results of Operations section includes an overview ofour consolidated 2006 results compared to 2005. This section also includes adiscussion of key actions and events that impacted our results, as well as adiscussion of our outlook for 2007. For additional information, including adiscussion of liquidity, capital resources and contractual cash obligations, aswell as our critical accounting estimates, see the Annual Report on Form 10-Kfor the fiscal year ended May 31, 2006 of our parent company, FedExCorporation (“FedEx”.) The discussion in the financial section should be readin conjunction with the other sections of this Annual Report, particularly “Item 1:Business” and our detailed discussion of risk factors included in thisMD&A.

***DESCRIPTION OF BUSINESS***

FedEx Express is the world’s largest expresstransportation company. FedEx Services provides the customer-facing sales,marketing and information technology functions of FedEx Express and our sistercompany FedEx Ground. The costs for these activities are allocated based onmetrics such as relative revenues or estimated services provided. We believethese allocations approximate the cost of providing these functions. Theoperating expenses line item “Intercompany charges” on the financial summarybelow represents an allocation primarily of salaries and benefits, depreciationand other costs for the sales, marketing and information technology functionsprovided to us by FedEx Services. In addition, “Intercompany charges” includesallocated charges from our parent for management fees related to servicesreceived for general corporate oversight, including executive officers andcertain legal and finance functions. We believe the total amounts allocatedreasonably reflect the cost of providing these functions.

The key indicatorsnecessary to understand our operating results include:

·       theoverall customer demand for our various services;

·       thevolume of shipments transported through our network, as measured by our averagedaily volume and shipment weight;

·       themix of services purchased by our customers;

·       theprices we obtain for our services, as measured by average revenue per shipment(yield);

·       ourability to manage our cost structure for capital expenditures and operatingexpenses and to match such our cost structure to shifting volume levels; and

·       thetiming and amount of fluctuations in fuel prices and our ability to recoverincremental fuel costs through our supplemental fuel surcharges.

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

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**NEW ACCOUNTINGPRONOUNCEMENTS**

Our parent company, FedEx, applied AccountingPrinciples Board Opinion No. (“APB”) 25, “Accounting for Stock Issued toEmployers,” and its related interpretations to measure compensation expense forstock-based compensation plans. In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No. (“SFAS”) 123R,“Share-Based Payment.” SFAS 123R is a revision of SFAS 123 andsupersedes APB 25. The new standard requires companies to recordcompensation expense for stock-based awards using a fair value method. Compensationexpense will be recorded over the requisite service period, which is typicallythe vesting period of the award.

FedEx will adopt this standard using the modifiedprospective method as of June 1, 2006. As a result, compensation expensefor stock based awards granted to our employees will be charged to us by FedExbeginning June 1, 2006. We expect the amount of additional compensationexpense allocated to us to be approximately $20 million in 2007. This estimate is impacted by thelevels of share-based payments granted by FedEx to our employees in the future,assumptions used in the fair value calculation and the market price of FedEx’scommon stock. Accordingly, the actual amount could differ from this estimate.

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

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**RESULTS OFOPERATIONS**

Thefollowing table compares revenues, operating expenses, operating income, netincome and operating margin (dollars in millions) for the years ended May 31:
|                                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent** | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|-------------|------------|
| ** **                          | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Change**  | ** ** |
| Revenues:                           |       |       |       |       |       |        |       |   |   |
| Package:                            |       |       |       |       |       |        |       |   |   |
| U.S. overnight box                  |       | $          | 6,422      |       | $          | 5,969       |       |   | 8 |   |   |
| U.S. overnight envelope             |       | 1,974      |       | 1,798      |       |        | 10         |   |   |
| U.S. deferred                       |       | 2,853      |       | 2,799      |       |        | 2          |   |   |
| Total U.S. domestic package revenue |       | 11,249     |       | 10,566     |       |        | 6          |   |   |
| International Priority (IP)         |       | 6,979      |       | 6,134      |       |        | 14         |   |   |
| Total package revenue               |       | 18,228     |       | 16,700     |       |        | 9          |   |   |
| Freight:                            |       |       |       |       |       |        |       |   |   |
| U.S.                                |       | 2,218      |       | 1,854      |       |        | 20         |   |   |
| International                       |       | 434        |       | 381        |       |        | 14         |   |   |
| Total freight revenue               |       | 2,652      |       | 2,235      |       |        | 19         |   |   |
| Other                               |       | 416        |       | 429        |       |        | (3         | ) |   |
| Total revenues                      |       | 21,296     |       | 19,364     |       |        | 10         |   |   |
| Operating  expenses:                |       |       |       |       |       |        |       |   |   |
| Salaries and employee benefits      |       | 7,861      |       | 7,540      |       |        | 4          |   |   |
| Purchased transportation            |       | 969        |       | 865        |       |        | 12         |   |   |
| Rentals and landing fees            |       | 1,684      |       | 1,597      |       |        | 5          |   |   |
| Depreciation and amortization       |       | 792        |       | 785        |       |        | 1          |   |   |
| Fuel                                |       | 2,786      |       | 2,012      |       |        | 38         |   |   |
| Maintenance and repairs             |       | 1,340      |       | 1,272      |       |        | 5          |   |   |
| Airline Stabilization Act charge    |       | —     |       | 48         |       |        | NM         |   |   |
| Intercompany charges                |       | 1,538      |       | 1,505      |       |        | 2          |   |   |
| Other                               |       | 2,596      |       | 2,349      |       |        | 11         |   |   |
| Total operating expenses            |       | 19,566     | (1)        | 17,973     |       |        | 9          |   |   |
| Operating income                    |       | 1,730      |       | 1,391      |       |        | 24         |   |   |
| Interest expense                    |       | (54        | )          | (73        | )          |        | (26        | ) |   |
| Interest income                     |       | 104        |       | 45         |       |        | 131        |   |   |
| Other, net                          |       | (46        | )          | (58        | )          |        | (21        | ) |   |
| Income before  income taxes         |       | 1,734      |       | 1,305      |       |        | 33         |   |   |
| Provision for  income taxes         |       | 648        |       | 482        |       |        | 34         |   |   |
| Net income                          |       | $          | 1,086      |       | $          | 823         |       |   | 32 |   |   |
| Operating margin                    |       | 8.1        | %          | 7.2        | %          |        | 90         | bp |   |

 

(1)                 Operating expenses for 2006 include a $75 millionone-time, noncash charge to adjust the accounting for certain facility leases.

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Thefollowing table compares selected statistics (in thousands, except yieldamounts) for the years ended May 31:
|                                     | ** ** | ** ** | ** ** | ** ** | ** ** | **Percent** | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|-------------|------------|
| ** **                          | ** ** | **2006**   | ** ** | **2005**   | ** ** | **Change**  | ** ** |
| Package  Statistics                 |       |       |       |       |       |        |       |   |   |
| Average daily package volume (ADV): |       |       |       |       |       |        |       |   |   |
| U.S. overnight box                  |       | 1,203      |       | 1,184      |       |        | 2          |   |   |
| U.S. overnight envelope             |       | 713        |       | 680        |       |        | 5          |   |   |
| U.S. deferred                       |       | 901        |       | 958        |       |        | (6         | ) |   |
| Total U.S. domestic ADV             |       | 2,817      |       | 2,822      |       |        | —     |   |   |
| IP                             |       | 470        |       | 437        |       |        | 8          |   |   |
| Total ADV                           |       | 3,287      |       | 3,259      |       |        | 1          |   |   |
| Revenue per package (yield):        |       |       |       |       |       |        |       |   |   |
| U.S. overnight box                  |       | $          | 20.94      |       | $          | 19.77       |       |   | 6 |   |   |
| U.S. overnight envelope             |       | 10.86      |       | 10.37      |       |        | 5          |   |   |
| U.S. deferred                       |       | 12.42      |       | 11.46      |       |        | 8          |   |   |
| U.S. domestic composite             |       | 15.66      |       | 14.69      |       |        | 7          |   |   |
| IP                             |       | 58.17      |       | 55.07      |       |        | 6          |   |   |
| Composite package yield             |       | 21.75      |       | 20.10      |       |        | 8          |   |   |
| Freight Statistics                  |       |       |       |       |       |        |       |   |   |
| Average daily freight pounds:       |       |       |       |       |       |        |       |   |   |
| U.S.                                |       | 9,374      |       | 8,885      |       |        | 6          |   |   |
| International                       |       | 2,126      |       | 1,914      |       |        | 11         |   |   |
| Total average daily freight pounds  |       | 11,500     |       | 10,799     |       |        | 6          |   |   |
| Revenue per pound (yield):          |       |       |       |       |       |        |       |   |   |
| U.S.                                |       | $          | 0.93       |       | $          | 0.82        |       |   | 13 |   |   |
| International                       |       | 0.80       |       | 0.78       |       |        | 3          |   |   |
| Composite freight  yield            |       | 0.90       |       | 0.81       |       |        | 11         |   |   |

 

***Revenues***

Total revenues increased in 2006, principally due toincreases in international priority (“IP”), U.S. domestic overnight package andfreight revenues. During 2006, IP revenues grew 14% on an 8% increase in volumeand yield growth of 6%. U.S. domestic package revenues grew 6% in 2006 as aresult of increased yields. In 2006, freight revenues increased 19%, primarilydriven by higher yields and growth in U.S. domestic freight volumes.

Asia experienced strong average daily volume growth in2006, while outbound shipments from the United States, Europe and Latin Americaalso increased compared to the prior year. IP and international freightcapacity has increased significantly as a result of our two around-the-worldflights, which we added in late 2005 and early 2006. This additional capacityresulted in higher international freight volume. U.S. volumes were flatcompared to the prior year, as growth in our U.S. domestic overnight serviceswas offset by declines in deferred volumes that resulted in part from yieldmanagement actions.

IP yield increased during 2006 primarily due to higherfuel surcharges and increases in international average weight per package andaverage rate per pound. U.S. domestic composite yield increases were due tohigher fuel surcharges and improved yields on U.S. domestic deferred packages. Improvementsin U.S. domestic deferred yield resulted from our continued efforts to improvethe profitability of this service. U.S. freight yield increases were due to anincrease in average rate per pound and higher fuel surcharges. In 

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January 2006, we implemented an average listprice increase of 5.5% on U.S. domestic shipments and U.S. outboundinternational shipments, while we lowered our fuel surcharge index by 2%.

Fuelsurcharges increased in 2006 primarily due to higher jet fuel prices. Our fuelsurcharge is indexed to the spot price for jet fuel. Using this index, the U.S.domestic and outbound fuel surcharge and the international fuel surchargesranged as follows for the years ended May 31:
|                                             | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| U.S. Domestic and  Outbound Fuel Surcharge: |       |     |       |     |       |
| Low                                         |       | 10.50    | %          | 6.00     | %          |
| High                                        |       | 20.00    |       | 13.00    |       |
| Weighted-average                            |       | 13.69    |       | 9.05     |       |
| International Fuel Surcharges:              |       |     |       |     |       |
| Low                                         |       | 10.00    |       | 3.00     |       |
| High                                        |       | 20.00    |       | 13.00    |       |
| Weighted-average                            |       | 12.58    |       | 8.36     |       |

 

**Inresponse to the significant fluctuations in jet and diesel fuel prices duringthe second and third quarters of 2006, we temporarily capped certain of ourfuel surcharges in November and December 2005 to ensure our servicesremained competitively priced in the marketplace. While fluctuations in fuelsurcharge rates can be significant from period to period, fuel surchargesrepresent one of the many individual components of our pricing structure thatimpact our overall revenue and yield. Additional components include the mix ofservices purchased, the base price we obtain for these services and the levelof pricing discounts offered.**

***Operating Income***

Operating income grew significantly in 2006 as aresult of strong revenue growth and improved operating margin. Volume growth inhigher margin U.S. domestic overnight and IP services contributed to yieldimprovements. Improved yields, combined with productivity gains and costcontainment, allowed us to improve operating margin in 2006. Revenue and margingrowth for 2006 more than offset a one-time adjustment for leases of$75 million (described below) and costs associated with our twoaround-the-world flights.

In 2006, salaries andbenefits increased primarily due to higher pension costs and wage rates. Fuelcosts were higher in 2006 primarily due to a 34% increase in the average priceper gallon of jet fuel, while gallons consumed increased slightly, primarilyrelated to the westbound and eastbound around-the-world flights. However, ourfuel surcharges substantially mitigated the impact of higher jet fuel prices. Purchasedtransportation costs increased in 2006, driven by IP volume growth, whichrequired a higher utilization of contract pickup and delivery services. Rentalsand landing fees increased 5% in 2006, primarily due to the one-time adjustmentfor leases of $75 million described below.

***Lease Accounting Charge***

Our results for 2006included a one-time, noncash charge of $75 million, which represented theimpact on prior years, to adjust the accounting for certain facility leases. Thecharge related primarily to rent escalations in on-airport facility leases. Theapplicable accounting literature provides that rent expense under operatingleases with rent escalation clauses should be recognized evenly, on astraight-line basis over the lease term. During the first quarter of 2006, wedetermined that a portion of our facility leases had rent escalation clausesthat were not being recognized appropriately. Because the amounts involved werenot material to our financial statements in any individual prior period and thecumulative amount was not material to 2006 results, we recorded the cumulativeadjustment, which increased operating expenses by $75 million, in the firstquarter of 2006.

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***Airline Stabilization Act Charge***

During the second quarterof 2005, the United States Department of Transportation (“DOT”) issued a finalorder in its administrative review of the FedEx Express claim for compensationunder the Air Transportation Safety and System Stabilization Act. As a result,we recorded a charge of $48 million in the second quarter of 2005, representingthe DOT’s repayment demand of $29 million and the write-off of a $19million receivable.

***Other Income and Expense and Income Taxes***

Interest income increased in 2006 primarily due toincreased intercompany interest income related to higher interest onintercompany receivables. Interest expense decreased due to additionalcapitalized interest resulting from significant increases in the number ofaircraft undergoing modifications and a reduction in the level of outstandingdebt and capital leases as a result of scheduled payments.

Our effective tax rate was37.4% in 2006 and 36.9% in 2005. The effective tax rate in 2005 was favorablyimpacted by a lower effective state tax rate. For 2007, we expect the effectivetax rate to be 38.0% to 38.5%. The actual rate, however, will depend on anumber of factors, including the amount and source of operating income.

***Business Acquisition***

On January 24, 2006,we entered into an agreement with Tianjin Datian W. Group Co., Ltd. (“DTW Group”)to acquire DTW Group’s 50% share of the FedEx-DTW International Priorityexpress joint venture (“FedEx-DTW”) and DTW Group’s domestic express network inChina for approximately $400 million in cash. This acquisition willconvert our joint venture with DTW Group, formed in 1999 and currentlyaccounted for under the equity method, into a wholly owned subsidiary andincrease our presence in China in the international and domestic expressbusinesses. The acquisition is expected to be completed in the first half of2007, subject to customary closing conditions. The financial results of thistransaction will be included in our consolidated financial statements from thedate of acquisition.

***Outlook***

Our outlook for 2007 is based on an expectation ofglobal economic growth of 3%, which is slower than prior years and a return tohistorical levels. Strong international growth is expected to help offsetmoderating growth in the U.S. We expect comparatively slower overall revenuegrowth during 2007, due in part to more comparable fuel surcharge levels duringthe year. Revenue increases will be led by IP, where we expect volume and yieldgrowth, particularly in Asia and U.S. outbound as a result of continued strongdemand for our services. We expect improved U.S. domestic revenue growth, drivenby expected increases in U.S. domestic yields and improved overnight anddeferred volumes.

As described above, in January 2006, we enteredinto an agreement with DTW Group to acquire its 50% share of the FedEx-DTWInternational Priority express joint venture and its domestic express networkin China. The acquisition is expected to be completed in the first half of2007.

For 2007, we expectoperating margin will continue to improve. We expect improved utilization ofthe capacity added by the eastbound and westbound around-the-world flights,partially offset by costs associated with capacity additions in China and withthe integration of the DTW Group business into our network. The mix of serviceson our worldwide network will change as we sell higher yielding traffic intothe network. We will continue to focus on cost savings and productivityenhancement opportunities. Capital expenditures are expected to be higher in2007 due to continued investment in aircraft and sorting capacity associatedwith package growth, as well as continued investments in China. In March 2006,we broke ground on a new $150 million Asia-Pacific hub in the southern Chinacity of Guangzhou. This hub is 

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planned to be operationalin 2009. We believe these investments will enhance our growth prospects forthese profitable services in emerging markets.

We operate in acompetitive pricing environment, exacerbated by continuing high fuel prices. Whileour fuel surcharges have been sufficient to offset increased fuel prices, wecannot predict the impact on the overall economy if fuel costs significantlyfluctuate from current levels. Volatility in fuel costs may also impactquarterly earnings because adjustments to our fuel surcharges lag changes inactual fuel prices paid. Therefore, the trailing impact of adjustments to ourfuel surcharges can significantly affect earnings in the short term.

Our management teamcontinues to examine additional cost reductions and operational productivityopportunities as we focus on optimizing our networks, improving our serviceofferings, enhancing the customer experience and rewarding our employeesthrough effective compensation and incentive programs.

Our pilots, who representa small number of our total employees, are employed under a collectivebargaining agreement that became amendable on May 31, 2004. In accordancewith applicable labor law, we will continue to operate under our currentagreement while we negotiate with our pilots. Contract negotiations with thepilots’ union began in March 2004. These negotiations are ongoing and arebeing mediated through the National Mediation Board. We cannot estimate thefinancial impact, if any, the results of these negotiations may have on ourfuture results of operations.

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

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

***Seasonality ofBusiness***

Our business is seasonalin nature. Seasonal fluctuations affect volumes, revenues and earnings. Historically,the U.S. express package business experiences an increase in volumes in late November andDecember. International business, particularly in the Asia-to-U.S. market,peaks in October and November due to U.S. holiday sales. Our firstand third fiscal quarters, because they are summer vacation and postwinter-holiday seasons, have historically experienced lower volumes relative toother periods. Shipment levels, operating costs and earnings for our companycan also be adversely affected by inclement weather, particularly in our thirdfiscal quarter. In addition, the transportation industry is directly affectedby the state of the overall global economy. 

**RISK FACTORS**

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

***Our businesses depend on our strong reputation andthe value of the FedEx brand.******  ***The FedExbrand name symbolizes high-quality service, reliability and speed. FedEx is oneof the most widely recognized, trusted and respected brands in the world, andthe FedEx brand is one of our most important and valuable assets. In addition,we have a strong reputation among customers and the general public for highstandards of social and environmental responsibility and ethics. The FedExbrand name and our reputation are powerful sales and marketing tools, and wedevote significant resources to promoting and protecting them. Adversepublicity (whether or not justified) relating to activities by our employees oragents could tarnish our reputation and reduce the value of our brand. Damageto our reputation and loss of brand equity 

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could reduce demand for our services and thus have anadverse effect on our financial condition, liquidity and results of operations,as well as require additional resources to rebuild our reputation and restorethe value of the FedEx brand.

***We rely heavily on technology to operate ourtransportation network, and any disruption to FedEx’s technology infrastructureor the Internet could harm our operations and our reputation among customers.***   Ourability to attract and retain customers and to compete effectively depends inpart upon the sophistication and reliability of FedEx’s technology network,including the ability to provide features of service that are important to ourcustomers. Any disruption to the Internet or FedEx’s technology infrastructure,including those impacting FedEx’s computer systems and Web site, couldadversely impact our customer service and our volumes and result in increasedcosts. While FedEx has invested and continues to invest in technology securityinitiatives and disaster recovery plans, these measures cannot fully insulateFedEx from technology disruptions and the resulting adverse effect on ouroperations and financial results.

***Our business is capital intensive, and we mustmake capital expenditures based upon projected volume levels.******  ***We makesignificant investments in aircraft, vehicles, technology, package handlingfacilities, sort equipment and other capital to support our transportationnetwork. The amount and timing of capital investments depend on variousfactors, including our anticipated volume growth. For example, we must makecommitments to purchase or modify aircraft years before the aircraft areactually needed. We must predict volume levels and fleet requirements and makecommitments for aircraft based on those projections. If we miss ourprojections, we could end up with too much or too little capacity relative toour shipping volumes.

***We face intense competition.******  ***The expresstransportation market is both highly competitive and sensitive to price andservice. Some of our competitors have more financial resources than we do, orthey are controlled or subsidized by foreign governments, which enables them toraise capital more easily. We believe we compete very effectively with thesecompanies—for example, by providing more reliable service at compensatoryprices. We cannot, however, control what our competitors charge for theirservices. If the pricing environment becomes irrational, it could limit ourability to maintain or increase our prices (including our fuel surcharge inresponse to rising fuel costs) or to maintain or grow our market share.

***If FedEx and we do not effectively operate,integrate, leverage and grow acquired businesses, our financial results andreputation may suffer.***   Our strategy for long-termgrowth, productivity and profitability depends in part on FedEx’s and ourability to make prudent strategic acquisitions and to realize the benefits weexpect when we make those acquisitions. In furtherance of this strategy, werecently signed an agreement to buy out our joint venture partner in China, aswell as to acquire its China domestic express network. While we expect thisacquisition to enhance our value proposition to customers and improve ourlong-term profitability, there can be no assurance that we will realize ourexpectations within the time frame we have established, if at all. There can beno assurance that our acquisitions will be successful or that we can continueto support the value we allocate to acquired businesses, including theirgoodwill.

***Our business may be impacted by the price andavailability of jet fuel.******  ***We mustpurchase large quantities of fuel to operate our aircraft, and the price andavailability of fuel can be unpredictable and beyond our control. To date, wehave been successful in mitigating the impact of higher fuel costs through ourindexed fuel surcharges, as the amount of the surcharges is closely linked tothe market prices for fuel. If we are unable to maintain or increase our fuelsurcharges because of competitive pricing pressures or some other reason, fuelcosts could adversely impact our operating results. In addition, disruptions inthe supply of fuel could have a negative impact on our ability to operate ourtransportation network.

***Increased security requirements could imposesubstantial costs on us.******  ***As a result ofincreased concerns about global terrorism and homeland security, governmentsaround the world are adopting or are considering adopting stricter securityrequirements that will increase operating costs for businesses, including thosein the transportation industry. For example, in May 2006, the U.S.Transportation Security Administration 

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(“TSA”) adopted new rules enhancing many of thesecurity requirements for air cargo on both passenger and all-cargo aircraft. TheTSA is currently seeking comments on a draft version of a new all-cargoaircraft security program, which would implement the new rules. Until therequired security program is finalized, we cannot determine the effect thatthese new rules will have on our cost structure or our operating results. Itis reasonably possible, however, that these rules or other future securityrequirements for air cargo carriers could impose material costs on us.

***The regulatory environment for global aviationrights may impact our air operations.******  ***Our extensiveair network is critical to our success. Our right to serve foreign points issubject to the approval of the Department of Transportation and generallyrequires a bilateral agreement between the United States and foreign governments.In addition, we must obtain the permission of foreign governments to providespecific flights and services. Regulatory actions affecting global aviationrights or a failure to obtain or maintain aviation rights in importantinternational markets could impair our ability to operate our air network.

***We arenegotiating a new collective bargaining agreement with the union thatrepresents our pilots.******  ***Our pilots are employed under a collectivebargaining agreement that became amendable on May 31, 2004. In accordancewith applicable labor law, we will continue to operate under our currentagreement while we negotiate with our pilots. Contract negotiations with thepilots’ union began in March 2004. These negotiations are ongoing and arebeing mediated through the National Mediation Board. We cannot predict theoutcome of these negotiations. The terms of any new collective bargainingagreement could increase our operating costs and adversely affect our ability to compete with otherproviders of express delivery services. Onthe other hand, if we are unable to reach agreement on a new collectivebargaining agreement, we may be subject to a strike, work stoppages orslowdowns by our pilots, subject to the requirements of the Railway Labor Act. Theseactions could have a negative impact on our ability to operate ourtransportation network and ultimately cause us to lose customers.

***We are also subject to risks and uncertainties thataffect many other businesses, including:***

·       economic conditions in theglobal markets in which we operate;

·       theimpact of any international conflicts or terrorist activities on the UnitedStates and global economies in general, the transportation industry or us inparticular, and what effects these events will have on our costs or the demandfor our services;

·       anyimpacts on our businesses resulting from new domestic or internationalgovernment regulation, including tax, accounting, labor or environmental rules;

·       ourability to manage our cost structure for capital expenditures and operatingexpenses and match them to shifting customer volume levels;

·       changesin foreign currency exchange rates, especially in the Japanese yen, Taiwandollar, Canadian dollar and euro, which can affect our sales levels and foreigncurrency sales prices;

·       ourability to maintain good relationships with our employees;

·       ashortage of qualified labor and our ability to mitigate this shortage throughrecruiting and retention efforts and productivity gains;

·       increasingcosts for employee benefits, especially pension and healthcare benefits;

·       significantchanges in the volumes of shipments transported through our network, customerdemand for our various services or the prices we obtain for our services;

·       market acceptance of our new service and growthinitiatives;

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·       anyliability resulting from and the costs of defending against class-actionlitigation, such as wage-and-hour and race discrimination claims, and any otherlegal proceedings;

·       theimpact of technology developments on our operations and on demand for ourservices;

·       adverse weather conditionsor natural disasters, such as earthquakes and hurricanes, which can damage ourproperty, disrupt our operations, increase fuel costs and adversely affectshipment levels;

·       widespreadoutbreak of an illness, such as avian influenza (bird flu), severe acuterespiratory syndrome (SARS) or any other communicable disease, or any otherpublic health crisis; and

·       availability of financingon terms acceptable to FedEx and FedEx’s ability to maintain its current creditratings, especially given the capital intensity of our operations.

***We aredirectly affected by the state of the economy.******  ***While theglobal, or macro-economic, risks listed above apply to most companies, we areparticularly vulnerable. The transportation industry is highly cyclical andespecially susceptible to trends in economic activity. Our primary business isto transport goods, so our business levels are directly tied to the purchaseand production of goods — key macro-economic measurements. When individuals andcompanies purchase and produce fewer goods, we transport fewer goods. Inaddition, we have a relatively high fixed-cost structure, which is difficult toadjust to match shifting volume levels. Moreover, as we grow our internationalbusiness, we are increasingly affected by the health of the global economy.

**FORWARD-LOOKING STATEMENTS**

Certain statements in thisreport, including (but not limited to) those contained in “Outlook” and the “EmployeeBenefit Plans” note to the consolidated financial statements, are “forward-looking”statements within the meaning of the Private Securities Litigation Reform Actof 1995 with respect to our financial condition, results of operations, cashflows, plans, objectives, future performance and business. Forward-lookingstatements 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-lookingstatements involve risks and uncertainties. Actual results may differmaterially from those contemplated (expressed or implied) by suchforward-looking statements, because of, among other things, the risk factorsidentified above and the other risks anduncertainties you can find in FedEx’s and our press releases and other SECfilings.

As a result of these andother factors, no assurance can be given as to our future results andachievements. Accordingly, a forward-looking statement is neither a predictionnor a guarantee of future events or circumstances and those future events orcircumstances may not occur. You should not place undue reliance on theforward-looking statements, which speak only as of the date of this report. Weare under no obligation, and we expressly disclaim any obligation, to update oralter any forward-looking statements, whether as a result of new information,future events or otherwise.

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**MANAGEMENT’SREPORT ON INTERNALCONTROL OVER FINANCIAL REPORTING**

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended). Ourinternal control over financial reporting includes, among other things, definedpolicies and procedures for conducting and governing our business,sophisticated information systems for processing transactions and a properlystaffed, professional internal audit department at FedEx. Mechanisms are inplace to monitor the effectiveness of our internal control over financialreporting and actions are taken to correct deficiencies identified. Ourprocedures for financial reporting include the active involvement of seniormanagement, FedEx’s Audit Committee and a staff of highly qualified financialand legal professionals.

Management, with the participation of our principalexecutive and financial officers, assessed our internal control over financialreporting as of May 31, 2006, the end of our fiscal year. Management basedits assessment on criteria established in Internal Control — IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission (the COSO criteria).

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

Our independent registered public accounting firm,Ernst & Young LLP, audited management’s assessment and theeffectiveness of our internal control over financial reporting. Ernst &Young LLP has issued their report concurring with management’s assessment,which is included in this Annual Report on Form 10-K.

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**REPORT OFINDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

The Board of Directors andStockholderFederal Express Corporation

We have audited management’sassessment, included in the accompanying Management’s Report on InternalControl over Financial Reporting, that Federal Express Corporation maintainedeffective internal control over financial reporting as of May 31, 2006,based on criteria established inInternal Control—Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). FederalExpress Corporation’s management is responsible for maintaining effectiveinternal control over financial reporting and for its assessment of theeffectiveness of internal control over financial reporting. Our responsibilityis to express an opinion on management’s assessment and an opinion on theeffectiveness of the company’s internal control over financial reporting basedon our audit.

We conducted our audit inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether effective internal control overfinancial reporting was maintained in all material respects. Our audit includedobtaining an understanding of internal control over financial reporting,evaluating management’s assessment, testing and evaluating the design andoperating effectiveness of internal control, and performing such otherprocedures as we considered necessary in the circumstances. We believe that ouraudit provides a reasonable basis for our opinion.

A company’s internalcontrol over financial reporting is a process designed to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles. A company’s internal control over financialreporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally acceptedaccounting principles, and that receipts and expenditures of the company arebeing made only in accordance with authorizations of management and directorsof the company; and (3) provide reasonable assurance regarding preventionor timely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

Because of its inherentlimitations, internal control over financial reporting may not prevent ordetect misstatements. Also, projections of any evaluation of effectiveness tofuture periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with thepolicies or procedures may deteriorate.

In our opinion, management’sassessment that Federal Express Corporation maintained effective internalcontrol over financial reporting as of May 31, 2006, is fairly stated, inall material respects, based on the COSO criteria. Also, in our opinion,Federal Express Corporation maintained, in all material respects, effectiveinternal control over financial reporting as of May 31, 2006, based on theCOSO criteria.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofFederal Express Corporation as of May 31, 2006 and 2005, and relatedconsolidated statements of income, changes in owner’s equity and comprehensiveincome, and cash flows for each of the three years in the period ended May 31,2006 of Federal Express Corporation and our report dated July 11, 2006expressed an unqualified opinion thereon.
|                     | /s/  Ernst & Young LLP |
|---------------------|---------------------------------|
| Memphis,  Tennessee |
| July 11,  2006 |

 

31

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**REPORT OFINDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

The Board of Directors and StockholderFederal Express Corporation

We have audited the accompanying consolidated balancesheets of Federal Express Corporation as of May 31, 2006 and 2005, and therelated consolidated statements of income, changes in owner’s equity andcomprehensive income, and cash flows for each of the three years in the periodended May 31, 2006. These financial statements are the responsibility ofthe Company’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred toabove present fairly, in all material respects, the consolidated financialposition of Federal Express Corporation at May 31, 2006 and 2005, and theconsolidated results of its operations and its cash flows for each of the threeyears in the period ended May 31, 2006, in conformity with U.S. generallyaccepted accounting principles.

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Federal Express Corporation’s internalcontrol over financial reporting as of May 31, 2006, based on criteriaestablished in Internal Control-Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated July 11,2006 expressed an unqualified opinion thereon.
|                     | /s/  Ernst & Young LLP |
|---------------------|---------------------------------|
| Memphis,  Tennessee |
| July 11,  2006 |

 

32

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**FEDERAL EXPRESS CORPORATIONCONSOLIDATED BALANCE SHEETS(IN MILLIONS)**
|                                                                    | ** ** | **May 31,** | ** ** |
|--------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                         | ** ** | **2006**         | ** ** | **2005** | ** ** |
| **ASSETS**                                                         |       |             |       |   |   |
| CURRENT ASSETS                                                     |       |             |       |   |   |
| Cash and cash  equivalents                                         |       | $                | 217        |   | $ | 257 |   |
| Receivables, less  allowances of $105 and $92                      |       | 2,860            |       | 2,703 |   |
| Spare parts,  supplies and fuel, less  allowances of $150 and $142 |       | 251              |       | 204 |   |
| Deferred income  taxes                                             |       | 422              |       | 403 |   |
| Prepaid expenses  and other                                        |       | 76               |       | 70 |   |
| Total current  assets                                              |       | 3,826            |       | 3,637 |   |
| PROPERTY AND  EQUIPMENT, AT COST                                   |       |             |       |   |   |
| Aircraft and  related equipment                                    |       | 8,611            |       | 7,610 |   |
| Package handling  and ground support  equipment                    |       | 1,947            |       | 2,062 |   |
| Vehicles                                                           |       | 1,647            |       | 1,558 |   |
| Computer and  electronic equipment                                 |       | 709              |       | 703 |   |
| Other                                                              |       | 2,637            |       | 2,585 |   |
|                                                               |       | 15,551           |       | 14,518 |   |
| Less accumulated  depreciation and amortization                    |       | 8,599            |       | 8,310 |   |
| Net property and  equipment                                        |       | 6,952            |       | 6,208 |   |
| OTHER LONG-TERM  ASSETS                                            |       |             |       |   |   |
| Due from parent  company                                           |       | 3,049            |       | 2,277 |   |
| Goodwill                                                           |       | 343              |       | 342 |   |
| Other assets                                                       |       | 556              |       | 629 |   |
| Total other  long-term assets                                      |       | 3,948            |       | 3,248 |   |
|                                                               |       | $                | 14,726     |   | $ | 13,093 |   |

 

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

33

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**FEDERAL EXPRESSCORPORATIONCONSOLIDATED BALANCE SHEETS(IN MILLIONS, EXCEPT SHARE DATA)**
|                                                                                  | ** ** | **May 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                       | ** ** | **2006**         | ** ** | **2005** | ** ** |
| **LIABILITIES AND OWNER’S EQUITY**                                          |       |             |       |   |   |
| CURRENT LIABILITIES                                                              |       |             |       |   |   |
| Current portion of long-term debt                                                |       | $                | 146        |   | $ | 109 |   |
| Accrued salaries and employee benefits                                           |       | 855              |       | 809 |   |
| Accounts payable                                                                 |       | 1,292            |       | 1,171 |   |
| Accrued expenses                                                                 |       | 942              |       | 907 |   |
| Due to parent company and other FedEx subsidiaries                               |       | 310              |       | 184 |   |
| Total current liabilities                                                        |       | 3,545            |       | 3,180 |   |
| LONG-TERM DEBT, LESS  CURRENT PORTION                                            |       | 828              |       | 974 |   |
| OTHER LONG-TERM  LIABILITIES                                                     |       |             |       |   |   |
| Deferred income taxes                                                            |       | 656              |       | 512 |   |
| Pension, postretirement healthcare and other benefit  obligations                |       | 684              |       | 646 |   |
| Self-insurance  accruals                                                         |       | 541              |       | 511 |   |
| Deferred lease  obligations                                                      |       | 623              |       | 520 |   |
| Deferred gains,  principally related to aircraft transactions                    |       | 371              |       | 398 |   |
| Other liabilities                                                                |       | 46               |       | 33 |   |
| Total other  long-term liabilities                                               |       | 2,921            |       | 2,620 |   |
| COMMITMENTS AND CONTINGENCIES                                                    |       |             |       |   |   |
| OWNER’S EQUITY                                                              |       |             |       |   |   |
| Common stock,  $0.10 par value; 1,000 shares  authorized, issued and outstanding |       | —           |       | — |   |
| Additional  paid-in capital                                                      |       | 298              |       | 298 |   |
| Retained earnings                                                                |       | 7,122            |       | 6,036 |   |
| Accumulated other  comprehensive income (loss)                                   |       | 12               |       | (15 | ) |
| Total owner’s  equity                                                       |       | 7,432            |       | 6,319 |   |
|                                                                             |       | $                | 14,726     |   | $ | 13,093 |   |

 

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

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**FEDERAL EXPRESS CORPORATIONCONSOLIDATED STATEMENTS OF INCOME(IN MILLIONS)**
|                                 | ** ** | **Years ended May 31,** | ** ** |
|---------------------------------|------------|----------------------------------------|------------|
| ** **                      | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| REVENUES                        |       | $                                      | 21,296     |   | $ | 19,364 |   | $ | 17,383 |   |
| OPERATING EXPENSES:             |       |                                   |       |   |   |   |   |
| Salaries and  employee benefits |       | 7,861                                  |       | 7,540 |   | 7,245 |   |
| Purchased  transportation       |       | 969                                    |       | 865 |   | 704 |   |
| Rentals and  landing fees       |       | 1,684                                  |       | 1,597 |   | 1,521 |   |
| Depreciation and  amortization  |       | 792                                    |       | 785 |   | 794 |   |
| Fuel                            |       | 2,786                                  |       | 2,012 |   | 1,343 |   |
| Maintenance and  repairs        |       | 1,340                                  |       | 1,272 |   | 1,189 |   |
| Business  realignment costs     |       | —                                 |       | — |   | 422 |   |
| Intercompany  charges, net      |       | 1,538                                  |       | 1,505 |   | 1,452 |   |
| Other                           |       | 2,596                                  |       | 2,397 |   | 2,085 |   |
|                            |       | 19,566                                 |       | 17,973 |   | 16,755 |   |
| OPERATING INCOME                |       | 1,730                                  |       | 1,391 |   | 628 |   |
| OTHER INCOME (EXPENSE):         |       |                                   |       |   |   |   |   |
| Interest expense                |       | (54                                    | )          | (73 | ) | (64 | ) |
| Interest income                 |       | 104                                    |       | 45 |   | 29 |   |
| Other, net                      |       | (46                                    | )          | (58 | ) | (52 | ) |
|                            |       | 4                                      |       | (86 | ) | (87 | ) |
| INCOME BEFORE  INCOME TAXES     |       | 1,734                                  |       | 1,305 |   | 541 |   |
| PROVISION FOR  INCOME TAXES     |       | 648                                    |       | 482 |   | 181 |   |
| NET INCOME                      |       | $                                      | 1,086      |   | $ | 823 |   | $ | 360 |   |

 

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

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**FEDERAL EXPRESS CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(IN MILLIONS)**
|                                                                                | ** ** | **Years ended May 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| OPERATING ACTIVITIES                                                           |       |                                   |       |   |   |   |   |
| Net income                                                                     |       | $                                      | 1,086      |   | $ | 823 |   | $ | 360 |   |
| Adjustments to reconcile net income to cash provided  by operating activities: |       |                                   |       |   |   |   |   |
| Lease accounting charge                                                        |       | 75                                     |       | — |   | — |   |
| Depreciation and amortization                                                  |       | 790                                    |       | 785 |   | 794 |   |
| Provision for uncollectible accounts                                           |       | 82                                     |       | 68 |   | 76 |   |
| Deferred income taxes and other noncash items                                  |       | 108                                    |       | (1 | ) | (98 | ) |
| Changes in  operating assets and liabilities:                                  |       |                                   |       |   |   |   |   |
| Receivables                                                                    |       | (191                                   | )          | (204 | ) | (218 | ) |
| Other current assets                                                           |       | (48                                    | )          | (15 | ) | 8 |   |
| Accounts payable and other operating liabilities                               |       | 340                                    |       | 228 |   | 628 |   |
| Other, net                                                                     |       | (31                                    | )          | (23 | ) | (41 | ) |
| Cash provided by  operating activities                                         |       | 2,211                                  |       | 1,661 |   | 1,509 |   |
| INVESTING  ACTIVITIES                                                          |       |                                   |       |   |   |   |   |
| Capital expenditures                                                           |       | (1,402                                 | )          | (1,189 | ) | (585 | ) |
| Proceeds from asset dispositions                                               |       | 31                                     |       | — |   | 3 |   |
| Cash used in  investing activities                                             |       | (1,371                                 | )          | (1,189 | ) | (582 | ) |
| FINANCING  ACTIVITIES                                                          |       |                                   |       |   |   |   |   |
| Principal payments on debt                                                     |       | (108                                   | )          | (173 | ) | (62 | ) |
| Net payments to parent company                                                 |       | (772                                   | )          | (316 | ) | (728 | ) |
| Cash used in  financing activities                                             |       | (880                                   | )          | (489 | ) | (790 | ) |
| CASH AND CASH  EQUIVALENTS                                                     |       |                                   |       |   |   |   |   |
| Net (decrease)  increase in cash and cash equivalents                          |       | (40                                    | )          | (17 | ) | 137 |   |
| Cash and cash  equivalents at beginning of period                              |       | 257                                    |       | 274 |   | 137 |   |
| Cash and cash  equivalents at end of period                                    |       | $                                      | 217        |   | $ | 257 |   | $ | 274 |   |

 

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

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**FEDERAL EXPRESS CORPORATIONCONSOLIDATED STATEMENTS OF CHANGES IN OWNER’SEQUITY AND COMPREHENSIVE INCOME(IN MILLIONS)**
|                                                                         | ** ** | ** ** | ** ** | ** **     | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | ** **                   | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|----------------|------------|--------------|------------|------------------------|------------|------------------------------|------------|
| ** **                                                              | ** ** | ** ** | ** ** | **Additional** | ** ** | ** **   | ** ** | **Other**              | ** ** | ** **                   | ** ** |
| ** **                                                              | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Retained** | ** ** | **Comprehensive**      | ** ** | **Total**                    | ** ** |
| ** **                                                              | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Earnings** | ** ** | **Income (Loss)** | ** ** | **Owner’s Equity** | ** ** |
| BALANCE AT  MAY 31, 2003                                           |       |       | $          | —         |       |         |       | $                      | 298        |                         |       |   | $ | 4,853 |   |   |   | $ | (33 | ) |   |   | $ | 5,118 |   |   |
| Net income                                                              |       |       | —     |           |       |         | —     |                   |       |                         | 360        |   |   |   | — |   |   |   | 360 |   |   |
| Foreign currency  translation adjustment                                |       |       | —     |           |       |         | —     |                   |       |                         | —     |   |   |   | 1 |   |   |   | 1 |   |   |
| Minimum pension  liability adjustment                                   |       |       | —     |           |       |         | —     |                   |       |                         | —     |   |   |   | (1 | ) |   |   | (1 | ) |   |
| Total  comprehensive income                                             | ** ** |       |       |           |       |         |       |                   |       |                         |       |   |   |   |   |   | ** ** | ** ** | **360** |   |   |
| BALANCE AT  MAY 31, 2004                                           |       |       | —     |           |       |         | 298        |                   |       |                         | 5,213      |   |   |   | (33 | ) |   |   | 5,478 |   |   |
| Net income                                                              |       |       | —     |           |       |         | —     |                   |       |                         | 823        |   |   |   | — |   |   |   | 823 |   |   |
| Foreign currency  translation adjustment net of deferred taxes of $4    |       |       | —     |           |       |         | —     |                   |       |                         | —     |   |   |   | 22 |   |   |   | 22 |   |   |
| Minimum pension  liability adjustment net of deferred tax benefit of $2 |       |       | —     |           |       |         | —     |                   |       |                         | —     |   |   |   | (4 | ) |   |   | (4 | ) |   |
| Total  comprehensive income                                             | ** ** |       |       |           |       |         |       |                   |       |                         |       |   |   |   |   |   | ** ** | ** ** | **841** |   |   |
| BALANCE AT  MAY 31, 2005                                           |       |       | —     |           |       |         | 298        |                   |       |                         | 6,036      |   |   |   | (15 | ) |   |   | 6,319 |   |   |
| Net income                                                              |       |       | —     |           |       |         | —     |                   |       |                         | 1,086      |   |   |   | — |   |   |   | 1,086 |   |   |
| Foreign currency  translation adjustment net of deferred taxes of $1    |       |       | —     |           |       |         | —     |                   |       |                         | —     |   |   |   | 22 |   |   |   | 22 |   |   |
| Minimum pension  liability adjustment net of deferred taxes of $3       |       |       | —     |           |       |         | —     |                   |       |                         | —     |   |   |   | 5 |   |   |   | 5 |   |   |
| Total  comprehensive income                                             | ** ** |       |       |           |       |         |       |                   |       |                         |       |   |   |   |   |   | ** ** | ** ** | **1,113** |   |   |
| BALANCE AT MAY 31,  2006                                           |       |       | $          | —         |       |         |       | $                      | 298        |                         |       |   | $ | 7,122 |   |   |   | $ | 12 |   |   |   | $ | 7,432 |   |   |

 

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

37

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1: DESCRIPTIONOF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*DESCRIPTIONOF BUSINESS.*   Federal Express Corporation (“FedExExpress”) is the world’s largest express transportation company and a whollyowned subsidiary of FedEx Corporation (“FedEx”).

*FISCALYEARS.*   Except as otherwise specified, referencesto years indicate our fiscal year ended May 31, 2006 or ended May 31of the year referenced.

*PRINCIPLESOF CONSOLIDATION.*   The consolidated financialstatements include the accounts of FedEx Express and its subsidiaries,substantially all of which are wholly owned. All significant intercompanyaccounts and transactions have been eliminated.

*CREDITRISK.*   We routinely grant credit to many of ourcustomers for transportation services without collateral. The risk of creditloss in our trade receivables is substantially mitigated by our creditevaluation process, short collection terms and sales to a large number ofcustomers, as well as the low revenue per transaction for most of our services.Allowances for potential credit losses are determined based on historicalexperience and current evaluation of the composition of accounts receivable. Historically,credit losses have been within management’s expectations.

*REVENUERECOGNITION.*   Revenue is recognized upon deliveryof shipments. For shipments in transit, revenue is recorded based on thepercentage of service completed at the balance sheet date. Estimates for futurebilling adjustments to revenue and accounts receivable are recognized at thetime of shipment for certain discounts, money-back service guarantees andbilling corrections. Delivery costs are accrued as incurred.

*ADVERTISING.*   Advertisingcosts are expensed as incurred and are classified in other operating expenses. Advertisingexpenses were $82 million in 2006, $76 million in 2005 and $74 million in 2004.In addition, FedEx Corporate Services, Inc. (“FedEx Services”) performsmarketing functions for us and the related charges are allocated to us and arereflected on the line item “Intercompany charges, net” on the consolidatedstatements of income. We believe the total amounts allocated approximate thecosts of providing such services.

*CASHEQUIVALENTS.*   Cash in excess of current operatingrequirements are invested in short-term, interest-bearing instruments withmaturities of three months or less at the date of purchase and are stated atcost, which approximates market value.

*SPAREPARTS, SUPPLIES AND FUEL.*   Spare parts arereported at weighted-average cost. Supplies and fuel are reported principallyat standard cost, which approximates actual cost on a first-in, first-out basis.Allowances for obsolescence are provided, over the estimated useful life of therelated aircraft and engines, for spare parts expected to be on hand at thedate the aircraft are retired from service, and for spare parts currentlyidentified as excess or obsolete. These allowances are based on managementestimates, which are subject to change.

*PROPERTYAND EQUIPMENT.*   Expenditures for major additions,improvements, flight equipment modifications and certain equipment overhaulcosts are capitalized when such costs are determined to extend the useful lifeof the asset or are part of the cost of acquiring the asset. Maintenance andrepairs are charged to expense as incurred, except for certain aircraft-relatedmajor maintenance costs on one of our aircraft fleet types, which arecapitalized as incurred and amortized over the estimated remaining useful 

38

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

lives of the aircraft. Gains and losses on sales ofproperty used in operations are classified with depreciation and amortization.

Forfinancial reporting purposes, depreciation and amortization of property andequipment are provided on a straight-line basis over the asset’s service lifeor related lease term. For income tax purposes, depreciation is generallycomputed using accelerated methods. The depreciable lives and net book value ofour property and equipment are as follows (dollars in millions):
|                                                        | ** ** | ** **     | ** ** | **Net Book Value at May 31,** | ** ** |
|--------------------------------------------------------|------------|----------------|------------|--------------------------------------------------------|------------|
| ** **                                             | ** ** | **Range**      | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| Wide-body  aircraft and related equipment              |       | 15 to 25 years |       | $                                                      | 4,669      |   | $ | 3,948 |   |
| Narrow-body and  feeder aircraft and related equipment |       | 5 to 15 years  |       | 368                                                    |       | 330 |   |
| Package handling  and ground support equipment         |       | 5 to 30 years  |       | 405                                                    |       | 432 |   |
| Vehicles                                               |       | 5 to 10 years  |       | 411                                                    |       | 382 |   |
| Computer and  electronic equipment                     |       | 3 to 10 years  |       | 115                                                    |       | 114 |   |
| Facilities and other                                   |       | 3 to 30 years  |       | 984                                                    |       | 1,002 |   |
|                                                        |            |                |            |                                                        |            |  |  |  |  |

 

Substantially all property and equipment have nomaterial residual values. The majority of aircraft costs are depreciated on astraight-line basis over 15 to 18 years. We periodically evaluate the estimatedservice lives and residual values used to depreciate our aircraft and otherequipment. This evaluation may result in changes in the estimated lives andresidual values. Such changes did not materially affect depreciation expense inany period presented. Depreciation expense, excluding gains and losses on salesof property and equipment used in operations, was $786 million in 2006, $783million in 2005 and $791 million in 2004. Depreciation and amortization expenseincludes amortization of assets under capital lease.

*CAPITALIZEDINTEREST.*   Interest on funds used to finance theacquisition and modification of aircraft and construction of certain facilitiesup to the date the asset is ready for its intended use is capitalized andincluded in the cost of the asset. Capitalized interest was $27 million in2006, $13 million in 2005 and $7 million in 2004.

*IMPAIRMENTOF LONG-LIVED ASSETS.**  *Long-lived assets are reviewed forimpairment when circumstances indicate the carrying value of an asset may notbe recoverable. For assets that are to be held and used, an impairment isrecognized when the estimated undiscounted cash flows associated with the assetor group of assets are less than their carrying value. If impairment exists, anadjustment is made to write the asset down to its fair value, and a loss isrecorded as the difference between the carrying value and fair value. Fairvalues are determined based on quoted market values, discounted cash flows orinternal and external appraisals, as applicable. Assets to be disposed of arecarried at the lower of carrying value or estimated net realizable value. Becausethe cash flows of our transportation networks cannot be identified toindividual assets, and based on the ongoing profitability of our operations, wehave not experienced any significant impairment of assets to be held and used.

*PENSIONAND POSTRETIREMENT HEALTHCARE PLANS.**  *These defined benefit plans are measured as of thelast day of our fiscal third quarter of each year using actuarial techniquesthat reflect management’s assumptions for discount rate, rate of return, salaryincreases, expected retirement, mortality, employee turnover and futureincreases in healthcare costs. We determine the discount rate (which isrequired to be the rate at which the projected benefit obligation could beeffectively settled as of the measurement date) with the assistance ofactuaries, who calculate the yield on a theoretical portfolio of 

39

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

high-grade corporate bonds (rated Aa or better) withcash flows that generally match our expected benefit payments. Acalculated-value method is employed for purposes of determining the expectedreturn on the plan asset component of net periodic pension cost for ourqualified U.S. pension plans. Generally, we do not fund defined benefit planswhen such funding provides no current tax deduction or when such funding wouldbe deemed current compensation to plan participants.

*GOODWILL.*   Goodwillis recognized for the excess of the purchase price over the fair value oftangible and identifiable intangible net assets of businesses acquired. Goodwillis reviewed at least annually for impairment. Fair value is determined using adiscounted cash flow methodology and includes management’s assumptions onrevenue growth rates, operating margins, discount rates and expected capitalexpenditures. Unless circumstances otherwise dictate, we perform our annualimpairment testing in the fourth quarter.

*INCOMETAXES.*   Deferred income taxes are provided forthe tax effect of temporary differences between the tax basis of assets andliabilities and their reported amounts in the financial statements. Theliability method is used to account for income taxes, which requires deferredtaxes to be recorded at the statutory rate in effect when the taxes are paid.

We have not recognized deferred taxes for U.S. federalincome taxes on foreign subsidiaries’ earnings that are deemed to bepermanently reinvested and any related taxes associated with such earnings arenot material. Pretax earnings of foreign operations were approximately $596million in 2006, $591 million in 2005 and $425 million in 2004, which representonly a portion of total results associated with international shipments.

*SELF-INSURANCEACCRUALS.*   We are primarily self-insured forworkers’ compensation claims, vehicle accidents and general liabilities,benefits paid under employee healthcare programs and long-term disability. Accrualsare primarily based on the actuarially estimated, undiscounted cost of claims,which includes incurred-but-not-reported claims. Current workers’ compensationclaims, vehicle and general liability, employee healthcare claims and long-termdisability are included in accrued expenses. We self-insure up to certainlimits that vary by type of risk. Periodically, we evaluate the level ofinsurance coverage and adjust insurance levels based on risk tolerance andpremium expense.

*LEASES.*   Certainof our aircraft and facility leases contain fluctuating or escalating paymentsand rent holiday periods. The related rent expense is recorded on astraight-line basis over the lease term. The cumulative excess of rent paymentsover rent expense is accounted for as a deferred lease asset and recorded in “Otherlong-term assets” in the balance sheets. The cumulative excess of rent expenseover rent payments is accounted for as a deferred lease obligation. Rentexpense associated with contingent rentals is recorded as incurred. Thecommencement date of all leases is the earlier of the date we become legallyobligated to make rent payments or the date we may exercise control over theuse of the property.  Leasehold improvements associated with assetsutilized under capital or operating leases are amortized over the shorter ofthe asset’s useful life or the lease term.

*DEFERREDGAINS.*   Gains on the sale and leaseback ofaircraft and other property and equipment are deferred and amortized ratablyover the life of the lease as a reduction of rent expense. Substantially all ofthese deferred gains were related to aircraft transactions.

*FOREIGNCURRENCY TRANSLATION.*   Translation gains andlosses of foreign operations that use local currencies as the functional currencyare accumulated and reported, net of applicable deferred income taxes, as acomponent of accumulated other comprehensive loss within owner’s equity. Transaction

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

gains and losses that arise from exchange ratefluctuations on transactions denominated in a currency other than the localcurrency are included in the results of operations. Cumulative net foreigncurrency translation gains and (losses) in accumulated other comprehensive losswere $28 million at May 31, 2006, $6 million at May 31, 2005 and($16) million May 31, 2004.

*AIRLINESTABILIZATION ACT CHARGE.*   During the secondquarter of 2005, the United States Department of Transportation (“DOT”) issueda final order in its administrative review of our claim for compensation underthe Air Transportation Safety and System Stabilization Act (“Act”). Under itsinterpretation of the Act, the DOT determined that we were entitled to $72million of compensation, an increase of $3 million from its initialdetermination. Because we had previously received $101 million under the Act,the DOT demanded repayment of $29 million, which was made in December 2004.Because we could no longer conclude that collection of the entire $119 millionrecorded in 2002 was probable, we recorded a charge of $48 million in the secondquarter of 2005, representing the DOT’s repayment demand of $29 million and thewrite-off of a $19 million receivable.

*EMPLOYEESUNDER COLLECTIVE BARGAINING ARRANGEMENTS.**  *Our pilots, who represent a smallnumber of our total employees, are employed under a collective bargainingagreement that became amendable on May 31, 2004. In accordance withapplicable labor law, we will continue to operate under our current agreementwhile we negotiate with our pilots. Contract negotiations with the pilots’union began in March 2004. We cannot estimate the financial impact, ifany, the results of these negotiations may have on our future results ofoperations.

*STOCKCOMPENSATION.**  *Weparticipate in the stock-based compensation plans of our parent, FedEx. AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” and its related interpretations are applied by FedEx to measureexpense for stock-based compensation plans. As a result, no compensationexpense is recorded for stock options granted to our employees when theexercise price is equal to or greater than the market price of our common stockat the date of grant. For awards by FedEx of restricted stock to our employees,we recognize the fair value of the awards ratably over their explicit serviceperiod.

*USE OF ESTIMATES.*   Thepreparation of our consolidated financial statements requires the use ofestimates and assumptions that affect the reported amounts of assets andliabilities, the reported amounts of revenues and expenses and the disclosureof contingent liabilities. Management makes its best estimate of the ultimateoutcome for these items based on historical trends and other informationavailable when the financial statements are prepared. Changes in estimates arerecognized in accordance with the accounting rules for the estimate, whichis typically in the period when new information becomes available to management.Areas where the nature of the estimate makes it reasonably possible that actualresults could materially differ from amounts estimated include: self-insuranceaccruals; employee retirement plan obligations; long-term incentive accruals,tax liabilities; accounts receivable allowances; obsolescence of spare parts;contingent liabilities; and impairment assessments on long-lived assets(including goodwill).

**NOTE 2: RECENTACCOUNTING PRONOUNCEMENTS**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No. (“SFAS”)123R, “Share-Based Payment.”  The newstandard requires companies to record compensation expense for stock-basedawards using a fair value method. Compensation expense will be recorded overthe requisite service period, which is typically the vesting period of theaward.

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

FedEx will adopt this standard using the modifiedprospective basis as of June 1, 2006. As a result, compensation expensefor stock based awards granted to our employees will be charged to us by FedExbeginning June 1, 2006. We expect the amount of additional compensationexpense allocated to us to be approximately $20 million in 2007. This estimateis impacted by the levels of share-based payments granted by FedEx to ouremployees in the future, assumptions used in the fair value calculation and themarket price of FedEx’s common stock. Accordingly, the actual amount coulddiffer from this estimate.

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

**NOTE 3: BUSINESSCOMBINATION**

On January 24, 2006,we entered into an agreement with Tianjin Datian W. Group Co., Ltd. (“DTW Group”)to acquire DTW Group’s 50% share of the FedEx-DTW International Priorityexpress joint venture (“FedEx-DTW”) and DTW Group’s domestic express network inChina for approximately $400 million in cash. This acquisition will convert ourjoint venture with DTW Group, formed in 1999 and currently accounted for underthe equity method, into a wholly owned subsidiary and increase our presence inChina in the international and domestic express businesses. The acquisition isexpected to be completed in the first half of 2007, subject to customaryclosing conditions.

**NOTE 4: INTANGIBLEASSETS**

Ourintangible assets, included in other long-term assets on the accompanyingbalance sheets, were as follows (in millions):
|                  | ** ** | **May 31, 2006** | ** ** | **May 31, 2005** | ** ** |
|------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **       | ** ** | **Gross Carrying**    | ** ** | **Accumulated**            | ** ** | **Net Book** | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** | **Net Book** | ** ** |
| ** **       | ** ** | **Amount**                 | ** ** | **Amortization**           | ** ** | **Value** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| Contract related |       |                       | 73         |                       |       |   | (52 | ) |   |   | 21 |   |   |   | 73 |   |   |   | (47 | ) |   |   | 26 |   |   |
|                  |            |                            |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Amortization expense forintangible assets was $5 million in 2006, 2005 and 2004. Estimated amortizationexpense is $5 million for years 2007 through 2010 and $1 million in 2011.

**NOTE 5: BUSINESSREALIGNMENT COSTS**

During the first half of2004, voluntary early retirement incentives with enhanced pension andpostretirement healthcare benefits were offered to certain groups of ouremployees who were age 50 or older. Voluntary cash severance incentives werealso offered to eligible employees. Approximately 3,600 employees acceptedoffers under these programs. Costs were also incurred for the elimination ofcertain management positions. We recognized $422 million of businessrealignment costs during 2004. No material costs for these programs wereincurred in 2006 or 2005. At both May 31, 2006 and May 31, 2005,business realignment related accruals were immaterial.

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**NOTE 6: SELECTEDCURRENT LIABILITIES**

The componentsof selected current liability captions were as follows (in millions):
|                                         | ** ** | **May 31,** | ** ** |
|-----------------------------------------|------------|------------------|------------|
| ** **                              | ** ** | **2006**         | ** ** | **2005** | ** ** |
| Accrued Salaries  and Employee Benefits |       |             |       |   |   |
| Salaries                                |       | $                | 164        |   | $ | 147 |   |
| Employee benefits                       |       | 334              |       | 325 |   |
| Compensated absences                    |       | 357              |       | 337 |   |
|                                    |       | $                | 855        |   | $ | 809 |   |
| Accrued Expenses                        |       |             |       |   |   |
| Self-insurance accruals                 |       | $                | 361        |   | $ | 332 |   |
| Taxes other than income taxes           |       | 251              |       | 239 |   |
| Other                                   |       | 330              |       | 336 |   |
|                                    |       | $                | 942        |   | $ | 907 |   |

 

**NOTE 7: LONG-TERMDEBT AND OTHER FINANCING ARRANGEMENTS**

Thecomponents of our long-term debt were as follows (in millions):
|                                                                 | ** ** | **May 31,** | ** ** |
|-----------------------------------------------------------------|------------|------------------|------------|
| ** **                                                      | ** ** | **2006**         | ** ** | **2005** | ** ** |
| Senior unsecured  debt                                          |       |             |       |   |   |
| Interest rate of 9.65%, due in 2013                             |       | $                | 300        |   | $ | 299 |   |
| Interest rate of 7.60%, due in 2098                             |       | 239              |       | 239 |   |
| Medium term notes                                               |       |             |       |   |   |
| Interest rate of 9.95%, due in 2007                             |       | 18               |       | 19 |   |
|                                                            |       | 557              |       | 557 |   |
| Capital lease  obligations                                      |       | 292              |       | 386 |   |
| Other debt,  interest rates of 4.03% to 9.98%, due through 2008 |       | 125              |       | 140 |   |
|                                                            |       | 974              |       | 1,083 |   |
| Less current  portion                                           |       | 146              |       | 109 |   |
|                                                            |       | $                | 828        |   | $ | 974 |   |

 

Our capital lease obligationsinclude leases for aircraft, as well as certain special facility revenue bondsthat have been issued by municipalities primarily to finance the acquisitionand construction of various airport facilities and equipment. These bondsrequire interest payments at least annually, with principal payments due at theend of the related lease agreement.

Our other debt includes$118 million related to leases for aircraft that are consolidated under theprovisions of FIN 46, “Consolidation of Variable Interest Entities, anInterpretation of ARB No. 51.”  Thedebt accrues interest at the London Interbank Offered Rate (“LIBOR”) plus amargin and is due in installments through March 30, 2007. See Note 14 forfurther discussion.

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

We issue other financial instruments in the normalcourse of business to support our operations. Letters of credit at May 31,2006 were $317 million. These instruments are generally required under certainU.S. self-insurance programs and are used in the normal course of internationaloperations. The underlying liabilities insured by these instruments arereflected in the balance sheets, where applicable. Therefore, no additionalliability is reflected for the letters of credit.

Scheduledannual principal maturities of debt, exclusive of capital leases, for the fiveyears subsequent to May 31, 2006, are as follows (in millions):
| 2007 |   | $      | 143    |   |
|------|--------|--------|--------|--------|
| 2008 |   | — |   |
| 2009 |   | — |   |
| 2010 |   | — |   |
| 2011 |   | — |   |

 

Long-term debt, exclusiveof capital leases, had carrying values of $682 million at May 31, 2006 and$697 million at May 31, 2005, compared with estimated fair values of $777million at May 31, 2006, and $851 million at May 31, 2005. Theestimated fair values were determined based on quoted market prices or on thecurrent rates offered for debt with similar terms and maturities.

**NOTE 8: LEASES**

We utilize certain aircraft, land, facilities andequipment under capital and operating leases that expire at various datesthrough 2039. We leased approximately 16% of our total aircraft fleet undercapital or operating leases as of May 31, 2006. In addition, supplementalaircraft are leased by us under agreements that generally provide forcancellation upon 30 days notice. Our leased facilities include national, regionaland metropolitan sorting facilities and administrative buildings.

Thecomponents of property and equipment recorded under capital leases were asfollows (in millions):
|                                                | ** ** | **May 31,** | ** ** |
|------------------------------------------------|------------|------------------|------------|
| ** **                                     | ** ** | **2006**         | ** ** | **2005** | ** ** |
| Aircraft                                       |       | $                | 114        |   | $ | 232 |   |
| Package handling  and ground support equipment |       | 167              |       | 167 |   |
| Vehicles                                       |       | 34               |       | 36 |   |
| Other,  principally facilities                 |       | 131              |       | 134 |   |
|                                           |       | 446              |       | 569 |   |
| Less accumulated amortization                  |       | 306              |       | 314 |   |
|                                           |       | $                | 140        |   | $ | 255 |   |

 

Rentexpense under operating leases was as follows (in millions):
|                     | ** ** | **For years ended May 31,** | ** ** |
|---------------------|------------|-------------------------------------------------|------------|
| ** **          | ** ** | **2006**                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| Minimum rentals     |       | $                                               | 1,270      |   | $ | 1,206 |   | $ | 1,221 |   |
| Contingent  rentals |       | 190                                             |       | 165 |   | 120 |   |
|                |       | $                                               | 1,460      |   | $ | 1,371 |   | $ | 1,341 |   |

 

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Contingent rentals are based on equipment usage.

Asummary of future minimum lease payments under capital leases at May 31,2006 is as follows (in millions):
|                                              | ** ** | **Capital  Leases** | ** ** |
|----------------------------------------------|------------|---------------------|------------|
| 2007                                         |       |                | $          | 19 |   |   |
| 2008                                         |       |                | 98         |   |   |
| 2009                                         |       |                | 10         |   |   |
| 2010                                         |       |                | 95         |   |   |
| 2011                                         |       |                | 6          |   |   |
| Thereafter                                   |       |                | 123        |   |   |
|                                         |       |                | 351        |   |   |
| Less amount representing  interest           |       |                | 59         |   |   |
| Present value of net  minimum lease payments |       |                | $          | 292 |   |   |

 

A summary of futureminimum lease payments under noncancelable operating leases (principallyaircraft, retail locations and facilities) with an initial or remaining term inexcess of one year at May 31, 2006 is as follows (in millions):
|            | ** ** | **Aircraft and Related** | ** ** | **Facilities and** | ** ** | ** ** | ** ** |
|------------|------------|------------------------------------|------------|-------------------------|------------|------------|------------|
| ** ** | ** ** | **Equipment**                      | ** ** | **Other**               | ** ** | **Total**  | ** ** |
| 2007       |       |                               | $          | 606                     |       |       |       | $ | 563 |   |   |   | $ | 1,169 |   |   |
| 2008       |       |                               | 585        |                    |       |       | 511        |   |   |   | 1,096 |   |   |
| 2009       |       |                               | 555        |                    |       |       | 420        |   |   |   | 975 |   |   |
| 2010       |       |                               | 544        |                    |       |       | 327        |   |   |   | 871 |   |   |
| 2011       |       |                               | 526        |                    |       |       | 266        |   |   |   | 792 |   |   |
| Thereafter |       |                               | 3,934      |                    |       |       | 2,065      |   |   |   | 5,999 |   |   |
|       |       |                               | $          | 6,750                   |       |       |       | $ | 4,152 |   |   |   | $ | 10,902 |   |   |

 

The weighted-average remaining lease term of alloperating leases outstanding at May 31, 2006 was approximately seven years.While certain of our lease agreements contain covenants governing the use ofthe leased assets or require us to maintain certain levels of insurance, noneof our lease agreements include material financial covenants or limitations.

We make payments under certain leveraged operatingleases that are sufficient to pay principal and interest on certainpass-through certificates. The pass-through certificates are not our directobligations, nor do we guarantee them.

During the first quarter of 2006, a one-time, noncashcharge of $75 million was recorded, which represented the impact on prioryears, to adjust the accounting for certain facility leases. The charge relatedprimarily to rent escalations in on-airport facility leases. Because theamounts involved were not material to our financial statements in anyindividual prior period or to 2006 results, we recorded the cumulativeadjustment in the first quarter, which increased operating expenses by $75million.

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**NOTE 9: INCOMETAXES**

Our operations areincluded in the consolidated federal income tax return of FedEx. Our income taxprovision approximates the amount which would have been recorded on a separatereturn basis. The components of the provision for income taxes for the yearsended May 31 were as follows (in millions):
|                               | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current provision             |       |     |       |     |       |     |       |
| Domestic:                     |       |     |       |     |       |     |       |
| Federal                       |       | $        | 374        |     | $          | 336      |       | $ | 146 |   |
| State and local               |       | 29       |       | 24       |       | 24       |       |
| Foreign                       |       | 126      |       | 98       |       | 82       |       |
|                          |       | 529      |       | 458      |       | 252      |       |
| Deferred  provision (benefit) |       |     |       |     |       |     |       |
| Domestic:                     |       |     |       |     |       |     |       |
| Federal                       |       | 103      |       | 30       |       | (61      | )          |
| State and local               |       | 17       |       | (6       | )          | (10      | )          |
| Foreign                       |       | (1       | )          | —   |       | —   |       |
|                          |       | 119      |       | 24       |       | (71      | )          |
|                          |       | $        | 648        |     | $          | 482      |       | $ | 181 |   |

 

A reconciliation of thestatutory federal income tax rate to the effective income tax rate for theyears ended May 31 was as follows:
|                                                             | ** ** | **   2006   ** | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Statutory U.S. income  tax rate                             |       |                                         | 35.0       | %                                            |       |                                         | 35.0       | % |   |   | 35.0 | % |   |
| Increase resulting from:                                    |       |                                         |       |                                         |       |                                         |       |   |   |   |   |   |   |
| State and local income  taxes, net of federal benefit  |       |                                         | 1.7        |                                         |       |                                         | 0.9        |   |   |   | 1.7 |   |   |
| Foreign operations                                          |       |                                         | (0.3       | )                                            |       |                                         | —     |   |   |   | (2.0 | ) |   |
| Other, net                                                  |       |                                         | 1.0        |                                         |       |                                         | 1.0        |   |   |   | (1.2 | ) |   |
| Effective tax rate                                          |       |                                         | 37.4       | %                                            |       |                                         | 36.9       | % |   |   | 33.5 | % |   |

 

The 36.9% effective tax rate in 2005 was favorablyimpacted by a lower effective state tax rate. The lower 33.5% effective rate in2004 was primarily attributable to the favorable decision in the tax casediscussed below, stronger than anticipated international results and theresults of tax audits in 2004.

In 2004, we received a favorable ruling regarding thetax treatment of jet engine maintenance costs, which was affirmed by theappellate court in February of 2005, and became final in May of 2005,when the period for appeal lapsed. As a result we recognized a one-time benefitof $26 million, net of tax, in 2004. These adjustments affected both netinterest expense ($30 million pretax) and income tax expense ($7 million).

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The significant componentsof deferred tax assets and liabilities as of May 31 were as follows (inmillions):
|                                                    | ** ** | **2006**            | ** ** | **2005**                 | ** ** |
|----------------------------------------------------|------------|---------------------|------------|--------------------------|------------|
| ** **                                         | ** ** | **Deferred**        | ** ** | **Deferred**             | ** ** | **Deferred** | ** ** | **Deferred** | ** ** |
| ** **                                         | ** ** | **Tax Assets** | ** ** | **Tax Liabilities** | ** ** | **Tax Assets** | ** ** | **Tax Liabilities** | ** ** |
| Property,  equipment, leases and intangibles  |       |                | $          | 305                      |       |   |   | $ | 997 |   |   |   | $ | 287 |   |   |   | $ | 943 |   |   |
| Employee benefits                                  |       |                | 351        |                     |       |   | 39 |   |   |   | 338 |   |   |   | 39 |   |   |
| Self-insurance  accruals                           |       |                | 276        |                     |       |   | — |   |   |   | 260 |   |   |   | — |   |   |
| Other                                              |       |                | 254        |                     |       |   | 384 |   |   |   | 231 |   |   |   | 243 |   |   |
| Net operating  loss/credit  carryforwards          |       |                | 22         |                     |       |   | — |   |   |   | 20 |   |   |   | — |   |   |
| Valuation  allowance                               |       |                | (22        | )                        |       |   | — |   |   |   | (20 | ) |   |   | — |   |   |
|                                               |       |                | $          | 1,186                    |       |   |   | $ | 1,420 |   |   |   | $ | 1,116 |   |   |   | $ | 1,225 |   |   |

 

Thenet deferred tax liabilities as of May 31 have been classified in thebalance sheets as follows (in millions):
|                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Current deferred  tax asset         |       | $        | 422        |     | $          | 403 |   |
| Non-current  deferred tax liability |       | (656     | )          | (512     | )          |
|                                |       | $        | (234       | )        | $          | (109 | ) |

 

The valuation allowancerepresents amounts reserved for net operating loss and tax creditcarryforwards, which expire over varying periods starting in 2007. As a resultof this and other factors, we believe that substantially all of these deferredassets may not be realized.

**NOTE 10: EMPLOYEEBENEFIT PLANS**

*BENEFIT PLANS SPONSORED BY FEDEX*

*PENSIONPLANS.**  *Amajority of our employees are covered by the FedEx Corporation Employees’Pension Plan (“FedEx Plan’’), a defined benefit pension plan sponsored by ourparent, FedEx. The plan covers certain U.S. employees age 21 and over, with atleast one year of service. Eligible employees as of May 31, 2003 weregiven the opportunity to make a one-time election to accrue future pensionbenefits under either a cash balance formula which we call the Portable PensionAccount or a traditional pension benefit formula. Benefits provided under thetraditional formula are based on average earnings and years of service. Underthe Portable Pension Account, the retirement benefit is expressed as a dollaramount in a notional account that grows with annual credits based on pay, ageand years of credited service, and interest on the notional account balance. Ineither case, employees retained all benefits previously accrued under thetraditional pension benefit formula and continue to receive the benefit offuture salary increases on benefits accrued as of May 31, 2003. Eligibleemployees hired after May 31, 2003 accrue benefits exclusively under thePortable Pension Account.

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Ouremployees make up in excess of 83% of the participants in the FedEx Plan. Formore information about this plan and the related accounting assumptions, referto the financial statements of FedEx included in its Form 10-K forthe year ended May 31, 2006. Information regarding the funded status ofthe FedEx Plan was as follows (in millions):
|                                                   | ** ** | **May 31,** | ** ** |
|---------------------------------------------------|------------|------------------|------------|
| ** **                                        | ** ** | **2006**         | ** ** | **2005** | ** ** |
| Projected Benefit  Obligation (“PBO”)   |       | $                | 11,440     |   | $ | 9,835 |   |
| Accumulated Benefit  Obligation (“ABO”) |       | 9,485            |       | 8,446 |   |
| Fair value of plan  assets                        |       | 9,861            |       | 8,606 |   |
|                                                   |            |                  |            |  |  |  |  |

 

Theweighted-average actuarial assumptions for the FedEx plan were as follows:
|                                                  | ** ** | **Pension Plan**                        | ** ** |
|--------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                       | ** ** | **   2006   ** | ** ** | **   2005   ** | ** ** | **   2004   ** | ** ** |
| Discount rate                                    |       |                                         | 5.912      | % |   |   | 6.285 | % |   |   | 6.78 | % |   |
| Rate of increase  in future  compensation levels |       |                                         | 3.46       |   |   |   | 3.15 |   |   |   | 3.15 |   |   |
| Expected long-term rate  of  return on assets    |       |                                         | 9.10       |   |   |   | 9.10 |   |   |   | 9.10 |   |   |

 

The measurement date for the plans sponsored by FedExand our pension and postretirement healthcare plans is February 28. Theexpected long-term rate of return assumptions for each asset class are selectedbased on historical relationships between the asset classes and the economicand capital market environments updated for current conditions.

We incurred a net periodic benefit cost of $299million in 2006, $256 million in 2005 and $250 million in 2004, for ourparticipation in the FedEx Plan. The increase in our 2006 expense was primarilya result of changes in the discount rate. This expense is included in thesalaries and employee benefits caption in the accompanying statements ofincome.

Certain of our employees participate in a nonqualifieddefined benefit pension plan sponsored by FedEx. Our participants in thisnonqualified defined benefit plan make up approximately 43% of the participantsin the plan. FedEx has recorded an ABO aggregating approximately $199 millionat May 31, 2006 and $130 million at May 31, 2005 related to this plan. Thisplan’s funded status resulted in the recognition of a minimum pension liabilityin FedEx’s balance sheets. The minimum liability was $84 million at May31, 2006 and $22 million at May 31, 2005.

*DEFINEDCONTRIBUTION PLANS.*   Defined contributionplans are in place covering a majority of U.S. employees. Expense under theseplans was $31 million in 2006, $32 million in 2005 and $29 million in 2004.

*BENEFIT PLANS SPONSORED BY FEDERAL EXPRESS*

*PENSIONPLANS.**  *We also sponsor orparticipate in nonqualified benefit plans covering certain of our U.S. employeegroups and other pension plans covering certain of our international employees.The nonqualified benefit plans are not funded because such funding provides nocurrent tax deduction and would be deemed current compensation to planparticipants. The international defined benefit pension plans provide benefitsprimarily based on final earnings and years of service and are funded inaccordance 

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

with local laws and income tax regulations. For the planssponsored by us, our assets are primarily invested in equities (approximately70%) with the remainder in fixed income and other securities. The actual assetallocations approximate the target allocations.

*POSTRETIREMENTHEALTHCARE PLANS.*   We sponsor a planoffering medical, dental and vision coverage to eligible U.S. retirees andtheir eligible dependents. For Medicare eligible non-pilot retirees and theireligible dependents, we only provide a fixed subsidy toward the premium paymentfor an AARP Medigap policy. U.S. employees become eligible for these benefitsat age 55 and older, if they have permanent, continuous service of at least 10years after attainment of age 45 if hired prior to January 1, 1988, or atleast 20 years after attainment of age 35 if hired on or after January 1,1988. Our postretirement healthcare benefits are capped at 150% of the 1993 percapita projected employer cost which has been reached and, therefore, thesebenefits are not subject to additional future inflation.

Benefitpayments for FedEx Express employees in the plans sponsored by us, whichreflect expected future service, are expected to be paid as follows for theyears ending May 31 (in millions):
|            | ** ** | ** **             | ** ** | **Postretirement**        | ** ** |
|------------|------------|------------------------|------------|---------------------------|------------|
| ** ** | ** ** | **Pension Plans** | ** ** | **Healthcare Plans** | ** ** |
| 2007       |       |                   | $          | 15                        |       |   |   | $ | 28 |   |   |
| 2008       |       |                   | 15         |                      |       |   | 28 |   |   |
| 2009       |       |                   | 16         |                      |       |   | 29 |   |   |
| 2010       |       |                   | 13         |                      |       |   | 29 |   |   |
| 2011       |       |                   | 14         |                      |       |   | 30 |   |   |
| 2012-2016  |       |                   | 83         |                      |       |   | 168 |   |   |

 

These estimates are basedon assumptions about future events. Actual benefit payments may varysignificantly from these estimates.

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

For the plans currentlysponsored by us, the following table provides a reconciliation of the changesin the pension and postretirement healthcare plans’ benefit obligations andfair value of assets for FedEx Express employees over the two-year period endedMay 31, 2006 and a statement of the funded status as of May 31, 2006and 2005 (in millions):
|                                                             | ** ** | **Pension Plans** | ** ** | **Postretirement  Healthcare Plans** | ** ** |
|-------------------------------------------------------------|------------|------------------------|------------|-------------------------------------------|------------|
| ** **                                                  | ** ** | **2006**               | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Accumulated Benefit Obligation**                          |       | $                      | 275        |                                      | $          | 249 |   |   |   |   |   |
| **Changes in Projected Benefit  Obligation**                | ** ** | ** **             | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Projected benefit  obligation at the beginning of year      |       | $                      | 301        |                                      | $          | 247 |   | $ | 478 |   | $ | 447 |   |
| Service cost                                                |       | 17                     |       | 16                                        |       | 36 |   | 31 |   |
| Interest cost                                               |       | 14                     |       | 13                                        |       | 29 |   | 28 |   |
| Actuarial (gain)/loss                                       |       | 12                     |       | 24                                        |       | (92 | ) | (1 | ) |
| Benefits paid                                               |       | (20                    | )          | (8                                        | )          | (39 | ) | (35 | ) |
| Amendments, benefit  enhancements and other                 |       | 6                      |       | 9                                         |       | 12 |   | 8 |   |
| Projected benefit  obligation at the end of year            |       | $                      | 330        |                                      | $          | 301 |   | $ | 424 |   | $ | 478 |   |
| **Change in Plan Assets**                                   | ** ** | ** **             | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair value of plan  assets at beginning of year             |       | $                      | 127        |                                      | $          | 105 |   | $ | — |   | $ | — |   |
| Actual return on plan assets                                |       | 22                     |       | 9                                         |       | — |   | — |   |
| Company contributions                                       |       | 26                     |       | 19                                        |       | 27 |   | 28 |   |
| Benefits paid                                               |       | (20                    | )          | (8                                        | )          | (39 | ) | (35 | ) |
| Other                                                       |       | 6                      |       | 2                                         |       | 12 |   | 7 |   |
| Fair value of  plan assets at end of year                   |       | $                      | 161        |                                      | $          | 127 |   | $ | — |   | $ | — |   |
| **Funded  Status of the Plans**                             |       | $                      | (169       | )                                         | $          | (174 | ) | $ | (424 | ) | $ | (478 | ) |
| Unrecognized actuarial loss (gain)                          |       | 53                     |       | 57                                        |       | (97 | ) | (5 | ) |
| Unamortized prior service cost and other                    |       | 8                      |       | 8                                         |       | 3 |   | 5 |   |
| Unrecognized transition amount                              |       | 1                      |       | 1                                         |       | — |   | — |   |
| Accrued benefit  cost                                       |       | $                      | (107       | )                                         | $          | (108 | ) | $ | (518 | ) | $ | (478 | ) |
| **Amount  Recognized in the Balance Sheet at May 31:** | ** ** | ** **             | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Prepaid benefit cost                                        |       | $                      | 18         |                                      | $          | 16 |   | $ | — |   | $ | — |   |
| Accrued benefit liability                                   |       | (124                   | )          | (124                                      | )          | (518 | ) | (478 | ) |
| Minimum pension liability                                   |       | (30                    | )          | (37                                       | )          | — |   | — |   |
| Accumulated other comprehensive income(1)                   |       | 27                     |       | 35                                        |       | — |   | — |   |
| Intangible asset                                            |       | 2                      |       | 2                                         |       | — |   | — |   |
| Accrued benefit cost                                        |       | $                      | (107       | )                                         | $          | (108 | ) | $ | (518 | ) | $ | (478 | ) |

 

(1)                 The minimum pension liability component of AccumulatedOther Comprehensive Income is shown in the Statement of Changes in Owner’sEquity and Comprehensive Income, net of deferred taxes.

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The PBO is the actuarial present value of benefitsattributable to employee service rendered to date, including the effects ofestimated future pay increases. The ABO also reflects the actuarial presentvalue of benefits attributable to employee service rendered to date, but doesnot include the effects of estimated future pay increases. Therefore, the ABOas compared to plan assets is an indication of the assets currently availableto fund vested and nonvested benefits accrued through May 31. We currentlyexpect to make contributions in 2007 at levels approximating those in 2006.

Net periodic benefit costfor the three years ended May 31 was as follows (in millions) for theplans currently sponsored by us:
|                                     | ** ** | **Pension Plans** | ** ** | **Postretirement  Healthcare Plans** | ** ** |
|-------------------------------------|------------|------------------------|------------|-------------------------------------------|------------|
| ** **                          | ** ** | **2006**               | ** ** | **2005**                                  | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| Service cost                        |       |                   | $          | 17                                        |       |   |   | $ | 16 |   |   |   | $ | 14 |   |   |   | $ | 35 |   |   |   | $ | 31 |   |   |   | $ | 30 |   |   |
| Interest cost                       |       |                   | 14         |                                      |       |   | 13 |   |   |   | 10 |   |   |   | 29 |   |   |   | 28 |   |   |   | 23 |   |   |
| Expected return  on plan assets     |       |                   | (8         | )                                         |       |   | (7 | ) |   |   | (5 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Recognized  actuarial losses        |       |                   | 2          |                                      |       |   | 2 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Amortization of  prior service cost |       |                   | 1          |                                      |       |   | — |   |   |   | 2 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
|                                |       |                   | $          | 26                                        |       |   |   | $ | 24 |   |   |   | $ | 21 |   |   |   | $ | 64 |   |   |   | $ | 59 |   |   |   | $ | 53 |   |   |

 

Weighted-averageactuarial assumptions are as follows:
|                                                  | ** ** | **Pension Plans** | ** ** | **Postretirement  Healthcare Plans** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-------------------------------------------|------------|
| ** **                                       | ** ** | ** 2006 **   | ** ** | ** 2005 **                      | ** ** | ** 2004 ** | ** ** | ** 2006 ** | ** ** | ** 2005 ** | ** ** | ** 2004 ** | ** ** |
| Discount rate                                    |       |                   | 4.86       | %                                         |       |   | 4.98 | % |   |   | 5.26 | % |   |   | 6.08 | % |   |   | 6.16 | % |   |   | 6.57 | % |   |
| Rate of increase  in future  compensation levels |       |                   | 3.47       |                                      |       |   | 3.49 |   |   |   | 3.00 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Expected long-term rate  of  return on assets    |       |                   | 6.29       |                                      |       |   | 6.25 |   |   |   | 5.81 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |

 

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

**NOTE 11: BUSINESSSEGMENT INFORMATION**

We are in a single line of business and operate in onebusiness segment—the worldwide express transportation and distribution of goodsand documents.

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thefollowing table presents revenue by service type and geographic information forthe years ended or as of May 31 (in millions):
|                                      | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **REVENUE  BY SERVICE TYPE**         |       |       |       |       |       |       |       |
| Package:                             |       |       |       |       |       |       |       |
| U.S. overnight box                   |       | $          | 6,422      |       | $          | 5,969      |       | $ | 5,558 |   |
| U.S. overnight envelope              |       | 1,974      |       | 1,798      |       | 1,700      |       |
| U.S. deferred                        |       | 2,853      |       | 2,799      |       | 2,592      |       |
| Total domestic package revenue       |       | 11,249     |       | 10,566     |       | 9,850      |       |
| International Priority               |       | 6,979      |       | 6,134      |       | 5,131      |       |
| Total package revenue                |       | 18,228     |       | 16,700     |       | 14,981     |       |
| Freight:                             |       |       |       |       |       |       |       |
| U.S.                                 |       | 2,218      |       | 1,854      |       | 1,609      |       |
| International                        |       | 434        |       | 381        |       | 393        |       |
| Total freight revenue                |       | 2,652      |       | 2,235      |       | 2,002      |       |
| Other                                |       | 416        |       | 429        |       | 400        |       |
|                                 |       | $          | 21,296     |       | $          | 19,364     |       | $ | 17,383 |   |
| **GEOGRAPHICAL  INFORMATION****(1)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                            |       |       |       |       |       |       |       |
| U.S.                                 |       | $          | 13,471     |       | $          | 12,436     |       | $ | 11,474 |   |
| International                        |       | 7,825      |       | 6,928      |       | 5,909      |       |
|                                 |       | $          | 21,296     |       | $          | 19,364     |       | $ | 17,383 |   |
| Noncurrent  assets:                  |       |       |       |       |       |       |       |
| U.S.                                 |       | $          | 8,543      |       | $          | 7,405      |       | $ | 7,321 |   |
| International                        |       | 2,357      |       | 2,051      |       | 1,466      |       |
|                                 |       | $          | 10,900     |       | $          | 9,456      |       | $ | 8,787 |   |

 

(1)                 International revenue includes shipmentsthat either originate in or are destined to locations outside the United States.Noncurrent assets include property and equipment, goodwill and other long-termassets. Flight equipment is allocated between geographic areas based on usage.

**NOTE 12:SUPPLEMENTAL CASH FLOW INFORMATION**

Cash paid for interest expense and income taxes forthe years ended May 31 was as follows (in millions):
|                                         | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest (net of  capitalized interest) |       | $        | 54         |     | $          | 74       |       | $ | 82 |   |
| Income taxes                            |       | 519      |       | 461      |       | 213      |       |
|                                         |            |          |            |          |            |          |            |  |  |  |

 

We amended two leases in 2004 for MD11 aircraft, whichrequired us to record $110 million in both fixed assets and long-termliabilities.

**NOTE 13: GUARANTEESAND INDEMNIFICATIONS**

We account for guarantees and indemnifications inaccordance with FIN 45, “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others,” whichrequires the recognition and measurement of certain guarantees andindemnifications.

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

With the exception of residual value guarantees incertain operating leases, a maximum obligation is generally not specified inour guarantees and indemnifications. As a result, the overall maximum potentialamount of the obligation under such guarantees and indemnifications cannot bereasonably estimated. Historically, we have not been required to makesignificant payments under our guarantee or indemnification obligations and noamounts have been recognized in our financial statements for the underlyingfair value of these obligations.

We have guarantees under certain operating leases,amounting to $15 million as of May 31, 2006, for the residual values ofvehicles and facilities at the end of the respective operating lease periods. Underthese leases, if the fair market value of the leased asset at the end of thelease term is less than an agreed-upon value as set forth in the relatedoperating lease agreement, we will be responsible to the lessor for the amountof such deficiency. Based upon our expectation that none of these leased assetswill have a residual value at the end of the lease term that is materially lessthan the value specified in the related operating lease agreement, we do notbelieve it is probable that we will be required to fund any amounts under theterms of these guarantee arrangements. Accordingly, no accruals have beenrecognized for these guarantees.

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

We provide guarantees on certain FedEx unsecured debtinstruments aggregating approximately $1.4 billion at May 31, 2006,jointly and severally with other affiliated companies in the FedEx consolidatedgroup. In addition, we guarantee, jointly and severally with other affiliatedcompanies in the FedEx consolidated group, FedEx’s $1 billion revolving creditagreement, which backs its commercial paper program. At May 31, 2006, nocommercial paper was outstanding and the entire $1 billion under the revolvingcredit agreement was available for future borrowings. The guarantees are fulland unconditional and are required by the lenders since FedEx has noindependent assets or operations.

Special facility revenuebonds have been issued by certain municipalities primarily to finance theacquisition and construction of various airport facilities and equipment. Thesefacilities were leased to us and are accounted for as either capital leases oroperating leases. We have unconditionally guaranteed $755 million in principalof these bonds (with total future principal and interest payments ofapproximately $1.2 billion as of May 31, 2006) through these leases. Ofthe $755 million bond principal guaranteed, $204 million was included incapital lease obligations in our balance sheet at May 31, 2006. Theremaining $551 million has been accounted for as operating leases.

**NOTE 14: VARIABLEINTEREST ENTITIES**

We entered into a lease in July 2001 for two MD11aircraft. These assets were held by a separate entity, which was established tolease these aircraft to us and is owned by independent third parties whoprovide financing through debt and equity participation. The original cost ofthe assets under the lease was approximately $150 million.

FIN 46 required us toconsolidate the separate entity that owns the two MD11 aircraft. Since theentity was created before February 1, 2003, we measured the assets and liabilitiesat their carrying amounts (the amounts at which they would have been recordedin the consolidated financial statements if FIN 46 had been effective at theinception of the lease). As a result of this consolidation, the accompanying May 31,2006 balance sheet includes an additional $115 million of fixed assets and $118million of long-term debt. 

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The May 31, 2005balance sheet includes an additional $120 million of fixed assets and $125million of long-term debt. In March 2006, we provided notification to thelessor of our intent to purchase these aircraft in March 2007.

**NOTE 15:COMMITMENTS**

Annual purchase commitments under various contracts asof May 31, 2006 were as follows (in millions):
|            | ** ** | **Aircraft** | ** ** | **Aircraft-  Related**(1) | ** ** | ** Other**(2)  | ** ** | **Total** | ** ** |
|------------|------------|--------------|------------|---------------------------|------------|--------------------------|------------|-----------|------------|
| 2007       |       |         | $          | 179                       |       |                     |       | $         | 205        |   |   |   | $ | 21 |   |   | $ | 405 |   |
| 2008       |       |         | 431        |                      |       |                     | 113        |      |       |   | 12 |   |   | 556 |   |
| 2009       |       |         | 459        |                      |       |                     | 61         |      |       |   | 10 |   |   | 530 |   |
| 2010       |       |         | 659        |                      |       |                     | 67         |      |       |   | 10 |   |   | 736 |   |
| 2011       |       |         | 460        |                      |       |                     | 66         |      |       |   | 10 |   |   | 536 |   |
| Thereafter |       |         | 157        |                      |       |                     | 8          |      |       |   | 116 |   |   | 281 |   |
|            |            |              |            |                           |            |                          |            |           |            |  |  |  |  |  |  |  |  |  |  |

 

(1)                 Primarily aircraft modifications.

(2)                 Primarily advertising and promotion contracts.

The amounts reflected in the table above for purchasecommitments represent noncancelable agreements to purchase goods or services. Commitmentsto purchase aircraft in passenger configuration do not include the attendantcosts to modify these aircraft for cargo transport unless we have entered intonon-cancelable commitments to modify such aircraft. Open purchase orders thatare cancelable are not considered unconditional purchase obligations for financialreporting purposes.

We arecommitted to purchase certain aircraft. Deposits and progress payments of $64million have been made toward these purchases and other plannedaircraft-related transactions. In addition, we have committed to modify our DC10aircraft for passenger-to-freighter and two-man cockpit configurations.  Future payments related to these activitiesare included in the table above. Aircraft and aircraft-related contracts aresubject to price escalations. The following table is a summary of our aircraftpurchase commitments as of May 31, 2006 with the year of expected deliveryby type:
|            | ** ** | **A300** | ** ** | **A310** | ** ** | **A380** | ** ** | **Total** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|-----------|------------|
| 2007       |       |     | 5          |     |       |     | 1          |      |       |   | — |   |   |   | 6 |   |   |
| 2008       |       |     | 10         |     |       |     | —     |      |       |   | — |   |   |   | 10 |   |   |
| 2009       |       |     | 2          |     |       |     | —     |      |       |   | 2 |   |   |   | 4 |   |   |
| 2010       |       |     | —     |     |       |     | —     |      |       |   | 4 |   |   |   | 4 |   |   |
| 2011       |       |     | —     |     |       |     | —     |      |       |   | 3 |   |   |   | 3 |   |   |
| Thereafter |       |     | —     |     |       |     | —     |      |       |   | 1 |   |   |   | 1 |   |   |
| Total      |       |     | 17         |     |       |     | 1          |      |       |   | 10 |   |   |   | 28 |   |   |

 

**NOTE 16:CONTINGENCIES**

*Wage-and-Hour.**  *We are a defendant in a number of lawsuits filed infederal or California state courts containing various class-action allegationsunder federal or California wage-and-hour laws. The plaintiffs in theselawsuits are our employees who allege, among other things, that they wereforced to work “off the clock” and were not provided work breaks or otherbenefits. The plaintiffs generally seek unspecified monetary damages,injunctive relief, or both.

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

To date, one of these wage-and-hour cases, *Foster v. FedEx Express*, has been certified as a classaction. The plaintiffs represent a class of hourly FedEx Express employees inCalifornia from October 14, 1998 to present. The plaintiffs allege thathourly employees are routinely required to work “off the clock” and are notpaid for this additional work. The court issued a ruling on December 13,2004 granting class certification on all issues. In February 2006, theparties reached a settlement that has been preliminarily approved by the court.We continue to deny liability, but entered into the settlement to avoid thecost and uncertainty of further litigation. The amount of the proposedsettlement was fully accrued at the end of the third quarter of 2006 and is notmaterial to FedEx Express.

*RaceDiscrimination.**  *OnSeptember 28, 2005, a California federal district court granted classcertification in *Satchell v. FedEx Express*,a lawsuit alleging discrimination in the Western region of the United Statesagainst certain current and former minority employees in pay and promotion. Thedistrict court’s ruling on class certification is not a decision on the meritsof the plaintiffs’ claim and does not address whether we will be held liable. Trialis currently scheduled for February 2007. We have denied any liability andintend to vigorously defend ourselves in this case. Given the nature andpreliminary status of the claim, we cannot yet determine the amount or areasonable range of potential loss in this matter, if any. It is reasonablypossible, however, that we could incur a material loss as this case develops.

*Other.**  *We are subject to other legal proceedings that arisein the ordinary course of our business. In the opinion of management, theaggregate liability, if any, with respect to these other actions will notmaterially adversely affect our financial position, results of operations orcash flows.

**NOTE 17:PARENT/AFFILIATE TRANSACTIONS**

Affiliate company balances that are currentlyreceivable or payable relate to charges for services provided to or by otherFedEx affiliates and are settled on a monthly basis. The noncurrentintercompany balance amounts at May 31, 2006 and 2005 primarily representthe net activity from participation in FedEx’s consolidated cash managementprogram. These net amounts are reflected as financing activities on thestatements of cash flows. In addition, we are allocated net interest on theseamounts at market rates.

We also receive allocated charges from FedEx CorporateServices, Inc. (“FedEx Services”), a wholly owned subsidiary of FedEx, forsales, marketing and information technology functions and from FedEx formanagement fees related to services received for general corporate oversight,including executive officers and certain administrative functions. We believethe total amounts allocated approximate the cost of providing such services.

Customers doing businesswith FedEx Express, FedEx Ground Package System, Inc. (“FedEx Ground”) andFedEx SmartPost, Inc. (“FedEx SmartPost”), wholly owned subsidiaries ofFedEx, are provided the ability to receive a single invoice for their shippingcharges. Revenue is recognized by the operating company performing thetransportation services and the corresponding total receivable is recorded andcollected by us. The net customer balances for transportation servicesperformed by FedEx Ground and FedEx SmartPost are reflected in tradereceivables in our balance sheets and totaled $446 million at May 31, 2006and $383 million at May 31, 2005.

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**FEDERAL EXPRESS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**NOTE 18: SUMMARY OF QUARTERLY OPERATING RESULTS(UNAUDITED)**
|                        | ** ** | **First**  | ** ** | **Second**     | ** ** | **Third**      | ** ** | **Fourth**  | ** ** |
|------------------------|------------|------------|------------|----------------|------------|----------------|------------|-------------|------------|
| **(in millions)** | ** ** | ** ** | ** ** | **Quarter**(1) | ** ** | **Quarter**(2) | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| 2006                   |       |       |       |           |       |           |       |        |       |   |   |   |   |   |   |   |   |
| Revenues               |       |       | $          | 5,084          |       |           |       | $           | 5,332      |   |   |   | $ | 5,304 |   |   |   | $ | 5,576 |   |   |
| Operating income       |       |       | 273        |           |       |           | 466        |        |       |   | 440 |   |   |   | 551 |   |   |
| Net income             |       |       | 163        |           |       |           | 286        |        |       |   | 280 |   |   |   | 357 |   |   |
| 2005                   |       |       |       |           |       |           |       |        |       |   |   |   |   |   |   |   |   |
| Revenues               |       |       | $          | 4,585          |       |           |       | $           | 4,803      |   |   |   | $ | 4,885 |   |   |   | $ | 5,091 |   |   |
| Operating income       |       |       | 303        |           |       |           | 327        |        |       |   | 338 |   |   |   | 423 |   |   |
| Net income             |       |       | 169        |           |       |           | 189        |        |       |   | 198 |   |   |   | 267 |   |   |
|                        |            |            |            |                |            |                |            |             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(1)                 Results for 2006 include a $75 million one-time, noncashcharge to adjust for certain facility leases described in Note 8.

(2)                 Results for 2005 include a $48 million ($30 million,net of tax) related to the Airline Stabilization Act charge described inNote 1.

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**QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

*INTERESTRATES.**  *While wecurrently have market risk sensitive instruments related to interest rates, wehave no significant exposure to changing interest rates on our long-term debtbecause the interest rates are fixed on the majority of our long-term debt. Wehad approximately $118 million of outstanding floating-rate borrowings at May 31,2006, and $125 million of outstanding floating-rate borrowings at May 31,2005. We have not employed interest rate hedging to mitigate the risks withrespect to these borrowings. A hypothetical 10% increase in the interest rateon our outstanding floating-rate borrowings would not have a material effect onour results of operations. As disclosed in Note 7 to the accompanyingconsolidated financial statements, we had outstanding fixed-rate, long-termdebt (exclusive of capital leases) of approximately $564 million at May 31,2006 and $572 million at May 31, 2005. Market risk for fixed-rate,long-term debt is estimated as the potential decrease in fair value resultingfrom a hypothetical 10% increase in interest rates and amounts to approximately$28 million as of May 31, 2006 and $29 million as of May 31, 2005. Theunderlying fair values of our long-term debt were estimated based on quotedmarket prices or on the current rates offered for debt with similar terms andmaturities.

*FOREIGNCURRENCY.**  *While weare a global provider of transportation services, the substantial majority ofour transactions are denominated in U.S. dollars. The distribution of ourforeign currency denominated transactions is such that currency declines insome areas of the world are often offset by currency gains in other areas ofthe world. The principal foreign currency exchange rate risks to which we areexposed are in the Japanese yen, Taiwan dollar, Canadian dollar and euro. During2006 and 2005, we believe operating income was positively impacted due toforeign currency fluctuations. However, favorable foreign currency fluctuationsalso may have had an offsetting impact on the price we obtained or the demandfor our services. At May 31, 2006, the result of a uniform 10%strengthening in the value of the dollar relative to the currencies in whichour transactions are denominated would result in a decrease in operating incomeof approximately $133 million for 2007 (the comparable amount in the prior yearwas approximately $118 million). This increase is primarily due to the stronggrowth of our international operations. This theoretical calculation assumesthat each exchange rate would change in the same direction relative to the U.S.dollar.

In practice, our experience is that exchange rates inthe principal foreign markets where we have foreign currency denominatedtransactions tend to have offsetting fluctuations. Therefore, the calculationabove is not indicative of our actual experience in foreign currencytransactions. In addition to the direct effects of changes in exchange rates,fluctuations in exchange rates also affect the volume of sales or the foreigncurrency sales price as competitors’ services become more or less attractive. Thesensitivity analysis of the effects of changes in foreign currency exchangerates does not factor in a potential change in sales levels or local currencyprices.

*COMMODITY.**  *We have market risk for changes in the price of jetfuel; however, this risk is largely mitigated by our fuel surcharges. Our fuelsurcharges are closely linked to market prices for jet fuel. Therefore, ahypothetical 10% change in the price of jet fuel would not be expected tomaterially affect our earnings. However, our fuel surcharges have a lag thatexists before they are adjusted for changes in jet fuel prices and jet fuelprices can fluctuate within certain ranges before resulting in a change in our fuelsurcharges. Therefore, our operating income may be affected should the spotprice of jet fuel suddenly change by a significant amount or change by amountsthat do not result in a change in our fuel surcharges.

*OTHER.**  *We do not purchase or hold any derivative financialinstruments for trading purposes.

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**REPORTOF INDEPENDENT REGISTERED**

**PUBLICACCOUNTING FIRM**

The Board of Directors and StockholderFederal Express Corporation

We have audited the consolidated financial statementsof Federal Express Corporation as of May 31, 2006 and 2005, and for eachof the three years in the period ended May 31, 2006, and have issued ourreport thereon dated July 11, 2006 (included elsewhere in this AnnualReport on Form 10-K). Our audits also included the financialstatement schedule listed in Item 15(a) in this Annual Report on Form 10-K.This schedule is the responsibility of the Company’s management. Ourresponsibility is to express an opinion based on our audits.

In our opinion, thefinancial statement schedule referred to above, when considered in relation tothe basic financial statements taken as a whole, presents fairly in allmaterial respects the information set forth therein.

/s/ Ernst & Young LLP

Memphis, TennesseeJuly 11, 2006

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**SCHEDULE II**

**FEDEX EXPRESS CORPORATIONVALUATION AND QUALIFYINGACCOUNTSFOR THE YEARS ENDED MAY 31, 2006, 2005 AND 2004(In millions)**

| ** **                           | ** ** | ** **    | ** ** | **ADDITIONS**     | ** ** | ** **   | ** ** | ** **   | ** ** |            |
|--------------------------------------|------------|---------------|------------|-------------------|------------|--------------|------------|--------------|------------|-----------------|
| ** **                           | ** ** | **BALANCE**   | ** ** | **CHARGED**       | ** ** | **CHARGED**  | ** ** | ** **   | ** ** | **BALANCE**     | ** ** |   |
| ** **                           | ** ** | **AT**        | ** ** | **TO COSTS** | ** ** | **TO**       | ** ** | ** **   | ** ** | **AT**          | ** ** |   |
| ** **                           | ** ** | **BEGINNING** | ** ** | **AND**           | ** ** | **OTHER**    | ** ** | ** **   | ** ** | **END OF** | ** ** |   |
| **DESCRIPTION**                      | ** ** | ** **    | ** ** | **OF YEAR**  | ** ** | **EXPENSES** | ** ** | **ACCOUNTS** | ** ** | **DEDUCTIONS**  | ** ** | **YEAR** | ** ** |   |
| **Accounts Receivable Reserves:**    |       |          |       |              |       |         |       |         |       |            |   |   |   |   |   |   |   |   |   |   |   |
| *Allowance  for Doubtful Accounts*   |       |          |       |              |       |         |       |         |       |            |   |   |   |   |   |   |   |   |   |   |   |
| 2006                                 |       |          | $          | 50                |       |         |       | $            | 82         |            |   |   | $ | 15 | (a) |   |   | $ | 95 | (b) |   |   | $ | 52 |   |   |
| 2005                                 |       |          | $          | 65                |       |         |       | $            | 68         |            |   |   | $ | 10 | (a) |   |   | $ | 93 | (b) |   |   | $ | 50 |   |   |
| 2004                                 |       |          | $          | 65                |       |         |       | $            | 76         |            |   |   | $ | 15 | (a) |   |   | $ | 91 | (b) |   |   | $ | 65 |   |   |
| *Allowance  for Revenue Adjustments* |       |          |       |              |       |         |       |         |       |            |   |   |   |   |   |   |   |   |   |   |   |
| 2006                                 |       |          | $          | 42                |       |         |       | $            | —     |            |   |   | $ | 397 | (c) |   |   | $ | 386 | (d) |   |   | $ | 53 |   |   |
| 2005                                 |       |          | $          | 54                |       |         |       | $            | —     |            |   |   | $ | 337 | (c) |   |   | $ | 349 | (d) |   |   | $ | 42 |   |   |
| 2004                                 |       |          | $          | 57                |       |         |       | $            | —     |            |   |   | $ | 329 | (c) |   |   | $ | 332 | (d) |   |   | $ | 54 |   |   |
| **Inventory  Valuation Allowance:**  |       |          |       |              |       |         |       |         |       |            |   |   |   |   |   |   |   |   |   |   |   |
| 2006                                 |       |          | $          | 142               |       |         |       | $            | 10         |            |   |   | $ | — |   |   |   | $ | 2 |   |   |   | $ | 150 |   |   |
| 2005                                 |       |          | $          | 124               |       |         |       | $            | 19         |            |   |   | $ | — |   |   |   | $ | 1 |   |   |   | $ | 142 |   |   |
| 2004                                 |       |          | $          | 101               |       |         |       | $            | 16         |            |   |   | $ | 10 | (e) |   |   | $ | 3 |   |   |   | $ | 124 |   |   |
|                                      |            |               |            |                   |            |              |            |              |            |                 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(a)  Transfers related to FedEx Ground factoring agreement.

(b)Uncollectible accounts written off, net of recoveries.

(c)  Principally charged against revenue.

(d)Service failures, rebills and other.

(e)  Reclassifications.

59

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**FEDERAL EXPRESS CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES(UNAUDITED)(IN MILLIONS, EXCEPT RATIOS)**
|                                                                              | ** ** | **Years Ended May 31,** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                   | ** ** | **2006**                               | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| Earnings:                                                                    |       |                                   |       |   |   |   |   |   |   |   |   |
| Income before income taxes                                                   |       | $                                      | 1,734      |   | $ | 1,305 |   | $ | 541 |   | $ | 689 |   | $ | 703 |   |
| Add back:                                                                    |       |                                   |       |   |   |   |   |   |   |   |   |
| Interest expense, net of capitalized interest                                |       | 54                                     |       | 73 |   | 64 |   | 57 |   | 74 |   |
| Amortization of debt issuance costs                                          |       | —                                 |       | — |   | — |   | — |   | 1 |   |
| Portion of rent expense representative of interest  factor    |       | 630                                    |       | 600 |   | 583 |   | 599 |   | 594 |   |
| Earnings as  adjusted                                                        |       | $                                      | 2,418      |   | $ | 1,978 |   | $ | 1,188 |   | $ | 1,345 |   | $ | 1,372 |   |
| Fixed Charges:                                                               |       |                                   |       |   |   |   |   |   |   |   |   |
| Interest expense, net of capitalized interest                                |       | $                                      | 54         |   | $ | 73 |   | $ | 64 |   | $ | 57 |   | $ | 74 |   |
| Capitalized interest                                                         |       | 27                                     |       | 13 |   | 7 |   | 13 |   | 23 |   |
| Amortization of debt issuance costs                                          |       | —                                 |       | — |   | — |   | — |   | 1 |   |
| Portion of rent expense representative of interest  factor    |       | 630                                    |       | 600 |   | 583 |   | 599 |   | 594 |   |
|                                                                         |       | $                                      | 711        |   | $ | 686 |   | $ | 654 |   | $ | 669 |   | $ | 692 |   |
| Ratio of Earnings  to Fixed Charges                                          |       | 3.4                                    |       | 2.9 |   | 1.8 |   | 2.0 |   | 2.0 |   |

 

60

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**EXHIBITINDEX**
| Exhibit   Number | ** **   | Description of Exhibit                                                                                                                                                                                                                                                                                             | ** ** | ** ** |
|------------------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|             | *** *** | ***Certificate  of Incorporation and Bylaws***                                                                                                                                                                                                                                                                     |
|   3.1  |         | Restated  Certificate of Incorporation of FedEx Express, as amended. (Filed as  Exhibit 3.1 to FedEx Express’s FY98 Third Quarter Report on Form 10-Q,  and incorporated herein by reference.)                                                                                                      |
|   3.2  |         | By-laws of FedEx  Express. (Filed as Exhibit 3.2 to FedEx Express’s FY93 Annual Report on  Form 10-K, and incorporated herein by reference.)                                                                                                                                                        |
|             | *** *** | ***Facility  Lease Agreements***                                                                                                                                                                                                                                                                                   |
| 10.1             |         | Consolidated and  Restated Lease Agreement dated as of August 1, 1979 between the  Memphis-Shelby County Airport Authority (the “Authority”) and FedEx Express.  (Filed as Exhibit 10.12 to FedEx Express’s FY90 Annual Report on  Form 10-K, and incorporated herein by reference.) |
| 10.2             |         | First  Supplemental Lease Agreement dated as of April 1, 1981 between the  Authority and FedEx Express. (Filed as Exhibit 10.13 to FedEx Express’s  FY92 Annual Report on Form 10-K, and incorporated herein by  reference.)                                                                   |
| 10.3             |         | Second  Supplemental Lease Agreement dated as of May 1, 1982 between the  Authority and FedEx Express. (Filed as Exhibit 10.14 to FedEx Express’s  FY93 Annual Report on Form 10-K, and incorporated herein by  reference.)                                                                    |
| 10.4             |         | Third  Supplemental Lease Agreement dated November 1, 1982 between the  Authority and FedEx Express. (Filed as Exhibit 28.22 to FedEx Express’s  FY93 Second Quarter Report on Form 10-Q, and incorporated herein  by reference.)                                                              |
| 10.5             |         | Fourth  Supplemental Lease Agreement dated July 1, 1983 between the Authority  and FedEx Express. (Filed as Exhibit 28.23 to FedEx Express’s FY93  Second Quarter Report on Form 10-Q, and incorporated herein by  reference.)                                                                 |
| 10.6             |         | Fifth  Supplemental Lease Agreement dated February 1, 1984 between the  Authority and FedEx Express. (Filed as Exhibit 28.24 to FedEx Express’s  FY93 Second Quarter Report on Form 10-Q, and incorporated herein  by reference.)                                                              |
| 10.7             |         | Sixth  Supplemental Lease Agreement dated April 1, 1984 between the Authority  and FedEx Express. (Filed as Exhibit 28.25 to FedEx Express’s FY93  Second Quarter Report on Form 10-Q, and incorporated herein by  reference.)                                                                 |
| 10.8             |         | Seventh  Supplemental Lease Agreement dated June 1, 1984 between the Authority  and FedEx Express. (Filed as Exhibit 28.26 to FedEx Express’s FY93  Second Quarter Report on Form 10-Q, and incorporated herein by  reference.)                                                                |
| 10.9             |         | Eighth  Supplemental Lease Agreement dated July 1, 1988 between the Authority  and FedEx Express. (Filed as Exhibit 28.27 to FedEx Express’s FY93 Second  Quarter Report on Form 10-Q, and incorporated herein by  reference.)                                                                 |
| 10.10            |         | Ninth  Supplemental Lease Agreement dated July 12, 1989 between the Authority  and FedEx Express. (Filed as Exhibit 28.28 to FedEx Express’s FY93  Second Quarter Report on Form 10-Q, and incorporated herein by  reference.)                                                                 |

E-1

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| 10.11 |   | Tenth  Supplemental Lease Agreement dated October 1, 1991 between the Authority  and FedEx Express. (Filed as Exhibit 28.29 to FedEx Express’s FY93  Second Quarter Report on Form 10-Q, and incorporated herein by  reference.)             |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12 |   | Eleventh  Supplemental Lease Agreement dated as of July 1, 1994 between the  Authority and FedEx Express. (Filed as Exhibit 10.21 to FedEx Express’s  FY96 Annual Report on Form 10-K, and incorporated herein by  reference.)               |
| 10.13 |   | Twelfth  Supplemental Lease Agreement dated July 1, 1993 between the Authority  and FedEx Express. (Filed as Exhibit 10.23 to FedEx Express’s FY93  Annual Report on Form 10-K, and incorporated herein by reference.)                       |
| 10.14 |   | Thirteenth  Supplemental Lease Agreement dated as of June 1, 1995 between the  Authority and FedEx Express. (Filed as Exhibit 10.23 to FedEx Express’s  FY96 Annual Report on Form 10-K, and incorporated herein by  reference.)             |
| 10.15 |   | Fourteenth  Supplemental Lease Agreement dated as of January 1, 1996 between the  Authority and FedEx Express. (Filed as Exhibit 10.24 to FedEx Express’s  FY96 Annual Report on Form 10-K, and incorporated herein by  reference.)          |
| 10.16 |   | Fifteenth  Supplemental Lease Agreement dated as of January 1, 1997 between the  Authority and FedEx Express. (Filed as Exhibit 10.1 to FedEx Express’s  FY97 Third Quarter Report on Form 10-Q, and incorporated herein by  reference.)     |
| 10.17 |   | Sixteenth  Supplemental Lease Agreement dated as of April 1, 1997 between the  Authority and FedEx Express (Filed as Exhibit 10.28 to FedEx Express’s  FY97 Annual Report on Form 10-K, and incorporated herein by  reference.)              |
| 10.18 |   | Seventeenth  Supplemental Lease Agreement dated as of May 1, 1997 between the  Authority and FedEx Express. (Filed as Exhibit 10.29 to FedEx Express’s  FY97 Annual Report on Form 10-K, and incorporated herein by  reference.)             |
| 10.19 |   | Eighteenth  Supplemental Lease Agreement dated as of July 1, 1997 between the  Authority and FedEx Express. (Filed as Exhibit 10.2 to FedEx Express’s  FY98 First Quarter Report on Form 10-Q, and incorporated herein by  reference.)       |
| 10.20 |   | Nineteenth  Supplemental Lease Agreement dated as of September 1, 1998 between the  Authority and FedEx Express. (Filed as Exhibit 10.1 to FedEx Express’s  FY99 Second Quarter Report on Form 10-Q, and incorporated herein  by reference.) |
| 10.21 |   | Twentieth  Supplemental Lease Agreement dated as of April 1, 2000 between the  Authority and FedEx Express. (Filed as Exhibit 10.21 to FedEx’s FY2000  Annual Report on Form 10-K, and incorporated herein by reference.)                    |
| 10.22 |   | Twenty-First  Supplemental Lease Agreement dated as of May 15, 2000 between the  Authority and FedEx Express. (Filed as Exhibit 10.22 to FedEx’s FY2000  Annual Report on Form 10-K, and incorporated herein by reference.)                  |
| 10.23 |   | Twenty-Second  Supplemental Lease Agreement dated as of March 15, 2001 between the  Authority and FedEx Express. (Filed as Exhibit 10.23 to FedEx’s FY01  Annual Report on Form 10-K, and incorporated herein by reference.)                 |
| 10.24 |   | Twenty-Third  Supplemental Lease Agreement dated as of March 1, 2002 between the  Authority and FedEx Express. (Filed as Exhibit 10.1 to FedEx’s FY03  Second Quarter Report on Form 10-Q, and incorporated herein by  reference.)           |

E-2

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| 10.25 |   | Twenty-Fourth  Supplemental Lease Agreement dated as of May 1, 2003 between the  Authority and FedEx Express. (Filed as Exhibit 10.25 to FedEx’s FY03  Annual Report on Form 10-K, and incorporated herein by reference.)                         |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.26 |   | Twenty-Fifth  Supplemental Lease Agreement dated as of April 1, 2005 between the  Authority and FedEx Express. (Filed as Exhibit 10.26 to FedEx’s FY05  Annual Report on Form 10-K, and incorporated herein by reference.)                        |
| 10.27 |   | Twenty-Sixth  Supplemental Lease Agreement dated as of September 1, 2005 between the  Authority and FedEx Express. (Filed as Exhibit 10.1 to FedEx’s FY06  Third Quarter Report on Form 10-Q, and incorporated herein by  reference.)             |
| 10.28 |   | Twenty-Seventh  Supplemental Lease Agreement dated as of May 1, 2006 between the  Authority and FedEx Express. (Filed as Exhibit 10.28 to FedEx’s FY06 Annual  Report on Form 10-K, and incorporated herein by reference.)                        |
| 10.29 |   | Second Special  Facility Supplemental Lease Agreement dated as of November 1, 1982  between the Authority and FedEx Express. (Filed as Exhibit 10.26 to  FedEx Express’s FY93 Annual Report on Form 10-K, and incorporated  herein by reference.) |
| 10.30 |   | Third Special  Facility Supplemental Lease Agreement dated as of December 1, 1984  between the Authority and FedEx Express. (Filed as Exhibit 10.25 to  FedEx Express’s FY95 Annual Report on Form 10-K, and incorporated  herein by reference.)  |
| 10.31 |   | Fourth Special  Facility Supplemental Lease Agreement dated as of July 1, 1992 between  the Authority and FedEx Express. (Filed as Exhibit 10.20 to FedEx  Express’s FY92 Annual Report on Form 10-K, and incorporated herein  by reference.)     |
| 10.32 |   | Fifth Special  Facility Supplemental Lease Agreement dated as of July 1, 1997 between  the Authority and FedEx Express. (Filed as Exhibit 10.35 to FedEx  Express’s FY97 Annual Report on Form 10-K, and incorporated herein  by reference.)      |
| 10.33 |   | Sixth Special  Facility Supplemental Lease Agreement dated as of December 1, 2001  between the Authority and FedEx Express. (Filed as Exhibit 10.28 to  FedEx’s FY02 Annual Report on Form 10-K, and incorporated herein  by reference.)          |
| 10.34 |   | Seventh Special  Facility Supplemental Lease Agreement dated as of June 1, 2002 between  the Authority and FedEx Express. (Filed as Exhibit 10.3 to FedEx’s FY03  First Quarter Report on Form 10-Q, and incorporated herein by  reference.)      |
| 10.35 |   | Special Facility  Lease Agreement dated as of July 1, 1993 between the Authority and FedEx  Express. (Filed as Exhibit 10.29 to FedEx Express’s FY93 Annual Report  on Form 10-K, and incorporated herein by reference.)                          |
| 10.36 |   | Special Facility  Ground Lease Agreement dated as of July 1, 1993 between the Authority  and FedEx Express. (Filed as Exhibit 10.30 to FedEx Express’s FY93  Annual Report on Form 10-K, and incorporated herein by reference.)                   |

 

E-3

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| Exhibit   Number | ** **   | Description of Exhibit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | ** ** | ** ** |
|------------------|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|             | *** *** | ***Aircraft-Related Agreements***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| 10.37            |         | Airbus A380-800F Purchase Agreement dated as  of July 12, 2002 between AVSA, S.A.R.L. and FedEx Express and related  agreements, including letter agreements 1 through 21. Confidential treatment  has been granted for confidential commercial and financial information,  pursuant to Rule 24b-2 under the Securities Exchange Act of 1934,  as amended. (Filed as Exhibit 10.1 to FedEx’s FY03 First Quarter Report  on Form 10-Q, and incorporated herein by reference.)                                 |
| 10.38            |         | Amended Section 5.5.2 of Airbus A380-800F  Purchase Agreement dated as of July 12, 2002 between AVSA, S.A.R.L. and  FedEx Express. Confidential treatment has been granted for confidential  commercial and financial information, pursuant to Rule 24b-2 under  the Securities Exchange Act of 1934, as amended. (Filed as Exhibit 10.3  to FedEx’s FY03 Second Quarter Report on Form 10-Q, and  incorporated herein by reference.)                                                                   |
| 10.39            |         | 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 FedEx Express. 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.  (Filed as Exhibit 10.2 to FedEx’s FY06 Second Quarter Report on  Form 10-Q, and incorporated herein by reference.)                                      |
|             | *** *** | ***U.S. Postal Service Agreement***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.40            |         | Transportation Agreement dated January 10, 2001  between The United States Postal Service and FedEx Express. Confidential  treatment has been granted for confidential commercial and financial  information, pursuant to Rule 24b-2 under the Securities Exchange  Act of 1934, as amended. (Filed as Exhibit 10.1 to FedEx Express’s  Current Report on Form 8-K dated January 10, 2001, and  incorporated herein by reference.)                                                                      |
| 10.41            |         | Addendum dated December 13, 2001 to the  Transportation Agreement dated January 10, 2001, as amended, between The  United States Postal Service and FedEx Express. Confidential treatment has  been granted for confidential commercial and financial information, pursuant  to Rule 24b-2 under the Securities Exchange Act of 1934, as  amended. (Filed as Exhibit 10.1 to FedEx Express’s Current Report on  Form 8-K dated December 13, 2001, and incorporated herein by  reference.)          |
| 10.42            |         | Amendment dated  December 13, 2001 to the Transportation Agreement dated January 10,  2001, as amended, between The United States Postal Service and FedEx Express.  Confidential treatment has been granted for confidential commercial and  financial information, pursuant to Rule 24b-2 under the Securities  Exchange Act of 1934, as amended. (Filed as Exhibit 10.2 to FedEx  Express’s Current Report on Form 8-K dated December 13, 2001,  and incorporated herein by reference.)         |
| 10.43            |         | Letter Amendment  dated September 26, 2001 to the Transportation Agreement dated  January 10, 2001, as amended, between The United States Postal Service  and FedEx Express. Confidential treatment has been granted for confidential  commercial and financial information, pursuant to Rule 24b-2 under  the Securities Exchange Act of 1934, as amended. (Filed as Exhibit 10.3  to FedEx Express’s Current Report on Form 8-K dated  December 13, 2001, and incorporated herein by reference.) |

E-4

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| 10.44 |   | Amendment dated  August 31, 2001 to the Transportation Agreement dated January 10,  2001, as amended, between The United States Postal Service and FedEx Express.  Confidential treatment has been granted for confidential commercial and  financial information, pursuant to Rule 24b-2 under the Securities  Exchange Act of 1934, as amended. (Filed as Exhibit 10.4 to FedEx  Express’s Current Report on Form 8-K dated December 13, 2001,  and incorporated herein by reference.)                                                                                                              |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.45 |   | Amendment dated  August 28, 2001 to the Transportation Agreement dated January 10,  2001, as amended, between The United States Postal Service and FedEx Express.  Confidential treatment has been granted for confidential commercial and  financial information, pursuant to Rule 24b-2 under the Securities  Exchange Act of 1934, as amended. (Filed as Exhibit 10.5 to FedEx  Express’s Current Report on Form 8-K dated December 13, 2001,  and incorporated herein by reference.)                                                                                                              |
| 10.46 |   | First Amendment  to Addendum dated April 3, 2002, Second Amendment to Addendum dated  April 26, 2002 and Second Addendum dated August 29, 2002, each  amending the Transportation Agreement dated January 10, 2001, as  amended, between The United States Postal Service and FedEx Express.  Confidential treatment has been granted for confidential commercial and  financial information, pursuant to Rule 24b-2 under the Securities  Exchange Act of 1934, as amended. (Filed as Exhibit 10.2 to FedEx’s FY03  First Quarter Report on Form 10-Q, and incorporated herein by  reference.)  |
| 10.47 |   | First Amendment  to Second Addendum dated December 4, 2002, amending the Transportation  Agreement dated January 10, 2001, as amended, between The United States  Postal Service and FedEx Express. Confidential treatment has been granted for  confidential commercial and financial information, pursuant to Rule 24b-2  under the Securities Exchange Act of 1934, as amended. (Filed as  Exhibit 10.2 to FedEx’s FY03 Second Quarter Report on Form 10-Q,  and incorporated herein by reference.)                                                                                                     |
| 10.48 |   | Amendment dated  June 12, 2002, Investigative and Security Procedures Addendum dated  January 9, 2003 and Third Addendum dated January 30, 2003, each  amending the Transportation Agreement dated January 10, 2001, as  amended, between The United States Postal Service and FedEx Express.  Confidential treatment has been granted for confidential commercial and  financial information, pursuant to Rule 24b-2 under the Securities  Exchange Act of 1934, as amended. (Filed as Exhibit 10.1 to FedEx’s FY03  Third Quarter Report on Form 10-Q, and incorporated herein by  reference.) |
| 10.49 |   | Amendment dated  May 28, 2003 and First Amendment to Third Addendum dated June 4,  2003, each amending the Transportation Agreement dated January 10, 2001,  as amended, between The United States Postal Service and FedEx Express.  Confidential treatment has been granted for confidential commercial and  financial information, pursuant to Rule 24b-2 under the Securities  Exchange Act of 1934, as amended. (Filed as Exhibit 10.46 to FedEx’s  FY03 Annual Report on Form 10-K, and incorporated herein by  reference.)                                                                     |
| 10.50 |   | Amendment dated  November 21, 2003 and Second Amendment to Third Addendum dated  November 21, 2003, each amending the Transportation Agreement dated  January 10, 2001, as amended, between The United States Postal Service  and FedEx Express. Confidential treatment has been granted for confidential  commercial and financial information, pursuant to Rule 24b-2 under  the Securities Exchange Act of 1934, as amended. (Filed as Exhibit 10.1  to FedEx’s FY04 Second Quarter Report on Form 10-Q, and  incorporated herein by reference.)                                                   |

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| 10.51  |         | Third Amendment  to Third Addendum dated December 8, 2003 and Fourth Addendum dated  March 16, 2004, each amending the Transportation Agreement dated  January 10, 2001, as amended, between The United States Postal Service  and FedEx Express. Confidential treatment has been granted for confidential  commercial and financial information, pursuant to Rule 24b-2 under  the Securities Exchange Act of 1934, as amended. (Filed as Exhibit 10.1  to FedEx’s FY04 Third Quarter Report on Form 10-Q, and incorporated  herein by reference.)     |
|--------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.52  |         | Amendment dated  August 30, 2004 to the Transportation Agreement dated January 10,  2001, as amended, between The United States Postal Service and FedEx Express.  Confidential treatment has been granted for confidential commercial and  financial information, pursuant to Rule 24b-2 under the Securities  Exchange Act of 1934, as amended. (Filed as Exhibit 10.1 to FedEx’s FY05  First Quarter Report on Form 10-Q, and incorporated herein by  reference.)                                                                                         |
| 10.53  |         | Letter Agreement  dated September 22, 2004 and Fifth Addendum dated November 22,  2004, each amending the Transportation Agreement dated January 10, 2001,  as amended, between The United States Postal Service and FedEx Express.  Confidential treatment has been granted for confidential commercial and  financial information, pursuant to Rule 24b-2 under the Securities  Exchange Act of 1934, as amended. (Filed as Exhibit 99.1 to FedEx’s  Current Report on Form 8-K dated November 22, 2004, and  incorporated herein by reference.) |
| 10.54  |         | Amendments dated  October 26, 2005 to the Transportation Agreement dated January 10,  2001, as amended, between The United States Postal Service and FedEx Express.  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. (Filed as Exhibit 10.1 to FedEx’s FY06  Second Quarter Report on Form 10-Q, and incorporated herein by  reference.)                                                                                    |
| 10.55  |         | Sixth Addendum  dated June 9, 2006 to the Transportation Agreement dated  January 10, 2001, as amended, between The United States Postal Service  and FedEx Express. 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. (Filed as Exhibit 10.55  to FedEx’s FY06 Annual Report on Form 10-K, and incorporated  herein by reference.)                                                                                           |
|   | *** *** | ***Financing  Agreement***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 10.56  |         | Five-Year Credit  Agreement dated as of July 20, 2005 among FedEx, JPMorgan Chase Bank, N.A.,  individually and as administrative agent, and certain lenders. (Filed as  Exhibit 99.1 to FedEx’s Current Report on Form 8-K dated  July 20, 2005, and incorporated herein by reference.)                                                                                                                                                                                                                                                                          |
|   | * *     | *FedEx  Express is not filing any other instruments evidencing any indebtedness  because the total amount of securities authorized under any single such  instrument does not exceed 10% of the total assets of FedEx Express and its  subsidiaries on a consolidated basis. Copies of such instruments will be  furnished to the Securities and Exchange Commission upon request.*                                                                                                                                                                                                        |

 

E-6

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| Exhibit   Number      | ** **   | Description of Exhibit                                                                                                                                                                                                         | ** ** | ** ** |
|-----------------------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|                  | *** *** | ***Other  Exhibits***                                                                                                                                                                                                          |
| *12    |         | Statement re  Computation of Ratio of Earnings to Fixed Charges (presented on page 60  of this Annual Report on Form 10-K).                                                                                          |
| *23    |         | Consent of  Ernst & Young LLP, Independent Registered Public Accounting Firm.                                                                                                                                         |
| *24    |         | Powers of  Attorney.                                                                                                                                                                                                           |
| *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.                                                             |

 

*       Filedherewith.

E-7

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