At FedEx, the bigger picture starts with a clear vision executed through a unique operating strategy and brought to life through a sense of purpose shared by our unmatched team.

A Vision for Global Access
FedEx sees a global marketplace with expanded access to goods, services and information. It's good for individuals, good for businesses and good for nations. Countries with higher levels of access consistently have higher growth rates for GDP and per capita income, and as world GDP continues to expand, global trade is expected to increase twelvefold over the next three decades.

More than two decades ago, we envisioned China as a nexus of global supply and demand. FedEx Express became the first all-cargo carrier to enter that market in 1984 and now operates more all-cargo flights to and from China than any other U.S. airline. In FY05, FedEx Express launched the express industry's first direct flight from mainland China to Europe. The westbound around-the-world flight is the initial phase of a plan that extends the company's global connectivity leadership. This flight will further enhance our service offerings between the fastest growing economies in both markets. In FY09, we also plan to open a new hub at the Guangzhou Bauyun International Airport in southern China to better serve our global customers doing business in and with the fast-growing China and Asia-Pacific markets.

In addition to improving access to our physical transportation networks, our vision also calls for improved access to information. Last November, fedex.com celebrated its 10th year and exceeded the one-billion mark for packages tracked online. When it comes to technology solutions, one of our greatest successes this year was the launch of File, Print FedEx Kinko's, a software enhancement to the Microsoft Office Suite that turns the "print" function into a direct link to any U.S. FedEx Kinko's Office and Print Center.

Our entire Information Technology organization has stepped back to look at the bigger picture, taking on a major transformation to enable us to deliver faster business solutions and improve return on investment. In FY06, we expect to see real benefits from that multi-year transformation.

Effective Operating Strategy
Our strong performance in FY05 may be largely credited to the successful execution of our unique "operate independently, compete collectively" strategy. We operate independently to allow our companies to focus on very distinct market needs while we compete collectively under the FedEx brand name worldwide.

Independently, we continued to improve the efficiency of each network. Both FedEx Ground and FedEx Freight have significantly reduced transit times, which provides an even greater value proposition for customers who are speeding up their supply chains.

Our major networks also continued to expand capacity to meet customer needs and promote business growth. For example, FedEx Ground opened major facilities in Dallas and Cincinnati, continuing our plan to increase network capacity to five million packages a day by 2010. Also in FY05, we expanded the FedEx Ground service portfolio with the acquisition of Parcel Direct, now called FedEx SmartPost. Targeted to customers in the fast-growing e-tail and catalog industries, FedEx SmartPost provides a cost-effective means of shipping low-weight, less-time-sensitive goods.

When it comes to "operating independently," the FedEx Ground contractor model is a perfect example. Although we believe the contractor model is best for our contractors, our customers, our company and our shareowners, it has recently been challenged by a small number of current and former owner-operators. These proceedings question whether owner-operators — who enjoy great opportunities through self-employment — should be classified as employees. We will continue to defend our model vigorously to keep the entrepreneurial spirit alive and to ensure superior service for our customers.

While our strategy provides the freedom and flexibility to operate independently, our companies all compete collectively. Five years ago, when we extended the FedEx brand name to our major operating companies, we made a commitment to provide easy, one-touch access for our customers to the full range of FedEx services. In FY05, we did a better job of that than ever before, particularly in cross-selling the entire portfolio of FedEx services.

Another part of our collective strategy involves our retail presence — giving our customers a convenient drop-off point for both Express and Ground package shipping. With the conversion of 176 former FedEx World Service Centers to FedEx Kinko's Ship Centers, along with the continued opening of new locations, FedEx Kinko's now has about 1,440 centers worldwide, up from about 1,200 a year ago.

An Outstanding Experience
Along with our vision and our strategy, there is one more important ingredient. That's a clear sense of purpose. For every one of our more than 250,000 employees, contractors and team members around the world, our purpose is to deliver outstanding customer service. Internally, we call it The Purple Promise, which is, simply stated, "I will make every FedEx experience outstanding."

Our Promise extends to the way we work with each other, the way we serve our customers, and the way we care for communities and the environment. For example, we are building California's largest corporate solar-electric system atop our hub at Oakland International Airport to provide approximately 80 percent of the peak-load energy demand. At FedEx Kinko's, we increased the recycled content of the paper used behind the counter from 10 percent to 30 percent — conserving an estimated 19,000 tons of wood annually. Add that to our rollout of energy-saving hybrid vehicles and more fuel-efficient aircraft joining our fleet and it's clear that FedEx is taking a much broader view of environmental needs for today and for the future.

Seeing the Bigger Picture
By remaining focused on our vision, executing our strategy and coming together with a sense of purpose centered on our customers, FedEx is uniquely positioned to weather times of change and transition.

We remain committed to continuing to deliver for our shareowners by increasing earnings, return on our investments and cash flow.

Our outstanding results for FY05, and our plans for FY06 and beyond, are just part of the bigger picture. Our vision compels us to work for expanded access around the world. Our strategy requires us to invest in our networks wisely as we work together to strengthen the FedEx brand and reputation worldwide. Our purpose calls us to action, focused on serving our customers and our communities.

This bigger picture continues to open the world to our customers so they may turn the power of possibility into prosperity.

Sincerely,

Frederick W. Smith
Chairman, President and Chief Executive Officer