UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

OR

Commission File Number: 1-4364

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES þ NO ¨

Ryder System, Inc. Common Stock ($0.50 par value per share) outstanding at March 31, 2005 was 64,333,767.

RYDER SYSTEM, INC.
FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(unaudited)

See accompanying notes to consolidated condensed financial statements.

1

RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS

See accompanying notes to consolidated condensed financial statements.

2

RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)

See accompanying notes to consolidated condensed financial statements.

3

RYDER SYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)

See accompanying notes to consolidated condensed financial statements.

4

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)

(A) INTERIM FINANCIAL STATEMENTS

       The accompanying unaudited Consolidated Condensed Financial Statements include the accounts of Ryder System, Inc. and subsidiaries, which have been prepared in accordance with the accounting policies described in the 2004 Annual Report on Form 10-K, and should be read in conjunction with the Consolidated Financial Statements and notes thereto. These statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (primarily consisting of normal recurring accruals) considered necessary for a fair presentation have been included and the disclosures herein are adequate. The operating results for interim periods are unaudited and are not necessarily indicative of the results that can be expected for a full year. Certain prior year amounts have been reclassified to conform to current period presentation.

(B) RECENT ACCOUNTING PRONOUNCEMENTS

       In March 2005, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations” which clarifies that the term conditional asset retirement obligation as used in Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations,” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. Uncertainty about the timing and (or) method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005, with early adoption encouraged. Retrospective application of interim financial information is permitted but is not required. We are currently assessing the impact FIN 47 may have on our conditional obligation to remove underground storage tanks located at our maintenance facilities.

       In December 2004, the FASB issued SFAS No. 123 (revised 2004) (SFAS No. 123R), “Share-Based Payment,” which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” supersedes APB Opinion No. 25 (APB No. 25), “Accounting for Stock Issued to Employees” and amends SFAS No. 95, “Statement of Cash Flows.” SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. SFAS No. 123R also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. SFAS No. 123R was to be adopted no later than the first interim or annual period after June 15, 2005, with early adoption encouraged. In April 2005, the Securities and Exchange Commission (SEC) announced that they would allow companies to implement SFAS No. 123R at the beginning of our next fiscal year. We plan to adopt the provisions of SFAS No. 123R effective January 1, 2006. Under SFAS No. 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include modified prospective and modified retrospective adoption options. The modified prospective method requires compensation cost to be recognized beginning with the effective date based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. The modified retrospective method includes the requirements of the modified prospective method described above, but also permits companies to restate, based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures, either all prior periods presented or prior interim periods of the year of adoption. We plan to adopt SFAS No. 123R using the modified prospective method.

5

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

       As permitted by SFAS No. 123, we currently account for share-based payments to employees using the intrinsic value method of APB No. 25 and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of the fair value method from SFAS No. 123R will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123R depends on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123R in prior periods, the impact of SFAS No. 123R would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and earnings per share. The adoption of SFAS No. 123R will reduce net operating cash flows and increase net financing cash flows in periods of adoption as a result of the classification requirements of the benefits of tax deductions in excess of recognized compensation cost. We are currently evaluating the requirements of SFAS No. 123R, including which fair value model to use to value share-based payments and the impact to our statement of cash flows.

       In May 2004, the FASB issued FASB Staff Position (FSP) No. FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004” (FSP 109-2) which provides guidance under SFAS No. 109, “Accounting for Income Taxes,” with respect to recording the potential impact of the repatriation provisions of the American Jobs Creation Act of 2004 (the Jobs Act) on enterprises’ income tax expense and deferred tax liability. The Jobs Act was enacted on October 22, 2004. FSP 109-2 states that an enterprise is allowed time beyond the financial reporting period of enactment to evaluate the effect of the Jobs Act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. We expect to complete our evaluation of the impact of the repatriation provisions by June 2005. Accordingly, as provided for in FSP 109-2, we have not adjusted our tax expense or deferred tax liability to reflect the repatriation provisions of the Jobs Act.

(C) STOCK-BASED COMPENSATION

       Ryder’s stock-based employee compensation plans are accounted for under the intrinsic value method. Under this method, compensation cost is recognized based on the excess, if any, of the quoted market price of the common stock at the date of grant (or other measurement date) and the amount an employee must pay to acquire the common stock. We recognize compensation expense for restricted stock issued to employees and directors.

6

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

       The following table illustrates the effect on net earnings and earnings per common share if we had applied the fair value method of accounting to stock-based employee compensation. The fair values of options granted were estimated as of the dates of grant using the Black-Scholes option-pricing model.

(D) EARNINGS PER SHARE

       Basic earnings per common share is computed by dividing net earnings by the weighted-average number of common shares outstanding. Restricted stock granted to employees and directors are not included in the computation of basic earnings per common share until the securities vest. Diluted earnings per common share reflect the dilutive effect of potential common shares from securities such as stock options and unvested restricted stock. The dilutive effect of stock options and unvested restricted stock is computed using the treasury stock method, which assumes any proceeds that could be obtained upon the exercise of stock options and vesting of restricted stock would be used to purchase common shares at the average market price for the period. A reconciliation of the number of shares used in computing basic and diluted earnings per common share follows:

7

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

(E) RESTRUCTURING AND OTHER RECOVERIES

       The components of restructuring and other recoveries, net were as follows:

       Allocation of restructuring and other recoveries, net across business segments was as follows:

       Restructuring recoveries, net in 2005 and 2004 relate primarily to employee severance and benefits recorded in prior restructuring charges that were reversed due to refinements in estimates. Other recoveries in 2004 primarily represent the gain on sale of a property that was part of our headquarters complex, which was sold in connection with the relocation of our headquarters.

       Activity related to restructuring reserves was as follows:

       At March 31, 2005, employee terminations from prior year restructuring plans were finalized. Deductions primarily represent cash payments made during the period of $0.2 million. At March 31, 2005, outstanding restructuring obligations are generally required to be paid over the next nine months.

8

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

(F) REVENUE EARNING EQUIPMENT

       At March 31, 2005 and December 31, 2004, the net carrying value of revenue earning equipment held for sale was $91.0 million and $76.1 million, respectively.

(G) ACCRUED EXPENSES AND OTHER NON-CURRENT LIABILITIES

9

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

(H) INCOME TAXES

       We are subject to tax audits in numerous jurisdictions in the U.S. and around the world. Tax audits by their very nature are often complex and can require several years to complete. As previously disclosed, the Internal Revenue Service (IRS) has closed audits of our U.S. federal income tax returns through fiscal year 2000. In connection with the resolution of our federal income tax audit for the 1998 to 2000 tax period, on February 22, 2005 we paid $176 million, including interest through the date of payment. The payment was funded through the issuance of commercial paper. In making this payment we utilized all available federal net operating losses and alternative minimum tax credit carry-forwards and as a result expect to remain a net cash taxpayer in the near term.

       In 2005, the IRS began auditing our federal income tax returns for 2001 through 2003. We believe that Ryder has not entered into any other transactions since 2000 that raise the same type of issues identified by the IRS in its most recently concluded audit. Management believes that taxes accrued on the Consolidated Condensed Balance Sheet fairly represent the amount of future tax liability due by Ryder.

(I) DEBT

       Ryder can borrow up to $870 million through a global revolving credit facility with a syndicate of lenders. The credit facility is used primarily to finance working capital and provide support for the issuance of commercial paper. The credit facility can also be used to issue up to $75 million in letters of credit (there were no letters of credit outstanding against the facility at March 31, 2005). At Ryder’s option, the interest rate on borrowings under the credit facility is based on LIBOR, prime, federal funds or local equivalent rates. The credit facility’s current annual facility fee is 15.0 basis points, which applies to the total facility of $870 million, and is based on Ryder’s current credit ratings. In order to maintain availability of funding, Ryder must maintain a ratio of debt to consolidated tangible net worth, as defined in the agreement, of less than or equal to 300%. The ratio at March 31, 2005 was 122%. At March 31, 2005, foreign borrowings of $42.8 million were outstanding under the facility. At March 31, 2005, $423.7 million was available under the credit facility.

10

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

       During March 2005, we issued $225.0 million of unsecured medium-term notes maturing in April 2010. The proceeds from the notes were used for general corporate purposes.

       At March 31, 2005, Ryder had $440 million of securities available for issuance under the $800 million universal shelf registration statement filed with the SEC during 2003. During April 2005, we issued an additional $175 million of unsecured medium-term notes maturing in April 2011. The proceeds from the notes will be used for general corporate purposes, which may include capital expenditures and reductions in commercial paper borrowings.

(J) GUARANTEES

       Ryder has executed various agreements with third parties that contain standard indemnifications that may require Ryder to indemnify a third party against losses arising from a variety of matters such as lease obligations, financing agreements, environmental matters and agreements to sell business assets. In each of these instances, payment by Ryder is contingent on the other party bringing about a claim under the procedures outlined in the specific agreement. Normally, these procedures allow Ryder to dispute the other party’s claim. Additionally, Ryder’s obligations under these agreements may be limited in terms of the amount and (or) timing of any claim. We cannot predict the maximum potential amount of future payments under certain of these agreements due to the contingent nature of the potential obligations and the distinctive provisions that are involved in each individual agreement. Historically, no such payments made by Ryder have had a material adverse effect on our business. We believe that if a loss were incurred in any of these matters, the loss would not result in a material adverse impact on our consolidated results of operations or financial position.

       At March 31, 2005, the maximum determinable exposure of guarantees and the corresponding liability, if any, currently recorded on the Consolidated Condensed Balance Sheet, were as follows:

11

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

       At March 31, 2005, Ryder had letters of credit outstanding totaling $167.8 million, which primarily guarantee various insurance activities. Certain of these letters of credit guarantee insurance activities associated with insurance claim liabilities transferred in conjunction with the sale of a business reported as discontinued operations in previous years. To date, the insurance claims, representing per claim deductibles payable under third-party insurance policies, have been paid by the company that assumed such liabilities. However, if all or a portion of the estimated outstanding assumed claims of approximately $10.9 million are unable to be paid, the third-party insurers may have recourse against certain of the outstanding letters of credit provided by Ryder in order to satisfy the unpaid claim deductibles. In order to reduce our potential exposure to these claims, we have received a letter of credit from the purchaser of the business referred to above totaling $9.5 million. Periodically, an actuarial valuation will be made and the letter of credit issued in our favor will be adjusted to the amount of the insurance claims liabilities estimated by the independent actuary.

(K) SHARE REPURCHASE PROGRAM

       In July 2004, our Board of Directors authorized a two-year share repurchase program intended to mitigate the dilutive impact of shares issued under our various employee stock option and stock purchase plans. Under this program, shares of common stock are purchased in an amount not to exceed the number of shares issued to employees since May 1, 2004, which totaled approximately 2.0 million shares at March 31, 2005. The program limits aggregate share repurchases to no more than 3.5 million shares of Ryder common stock. During the three months ended March 31, 2005, we repurchased and retired approximately 0.5 million shares under the program at an aggregate cost of $21.4 million. At March 31, 2005, we had repurchased and retired a total of approximately 1.8 million shares under the program at an aggregate cost of $83.9 million. Management has established a trading plan under Rule 10b5-1 of the Securities Exchange Act of 1934 as part of this repurchase program, which allows for share repurchases during Ryder’s quarterly blackout periods as set forth in a prearranged written trading plan.

(L) COMPREHENSIVE INCOME

       Comprehensive income presents a measure of all changes in shareholders’ equity except for changes resulting from transactions with shareholders in their capacity as shareholders. The following table provides a reconciliation of net earnings as reported in the Consolidated Condensed Statements of Earnings to comprehensive income.

12

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

(M) EMPLOYEE BENEFIT PLANS

       Components of net periodic benefit cost were as follows:

       As previously disclosed in our 2004 Annual Report, we expect to contribute approximately $39 million to our pension plans during 2005. At March 31, 2005, $0.2 million of global contributions have been made to our pension plans.

(N) SEGMENT REPORTING

       Ryder’s operating segments are aggregated into reportable business segments based primarily upon similar economic characteristics, products, services and delivery methods. Ryder operates in three reportable business segments: (1) Fleet Management Solutions (FMS), which provides full service leasing, contract maintenance, contract-related maintenance and commercial rental of trucks, tractors and trailers to customers, principally in the U.S., Canada and the U.K.; (2) Supply Chain Solutions (SCS), which provides comprehensive supply chain consulting and lead logistics management solutions that support customers’ entire supply chains from inbound raw materials through distribution of finished goods throughout North America and in Latin America, Europe and Asia; and (3) Dedicated Contract Carriage (DCC), which provides vehicles and drivers as part of a dedicated transportation solution in North America.

       Ryder’s primary measurement of segment financial performance, defined as “Net Before Taxes” (NBT), includes an allocation of Central Support Services (CSS) and excludes restructuring and other recoveries, net. CSS represents those costs incurred to support all business segments, including sales and marketing, human resources, finance, corporate services, health and safety, information technology, legal and communications. The objective of the NBT measurement is to provide clarity on the profitability of each business segment and, ultimately, to hold leadership of each business segment and each operating segment within each business segment accountable for their allocated share of CSS costs. Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included among the unallocated overhead remaining within CSS are the costs for investor relations, corporate communications, public affairs and certain executive compensation. CSS costs attributable to the business segments are generally allocated to FMS, SCS and DCC as follows:

13

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

•	Sales and marketing, finance, corporate services, and health and safety — allocated based upon estimated and planned resource utilization;

•	Human resources — individual costs within this category are allocated in several ways, including allocation based on estimated utilization and number of personnel supported;

•	Information technology — allocated principally based upon utilization-related metrics such as number of users or minutes of CPU time. Customer-related project costs and expenses are allocated to the business segment responsible for the project; and

•	Other — represents purchasing, legal and other centralized costs and expenses including certain incentive compensation costs. Expenses, where allocated, are based primarily on the number of personnel supported.

       The following tables set forth financial information for each of Ryder’s business segments and a reconciliation between segment NBT and earnings before income taxes for the three months ended March 31, 2005 and 2004. In the fourth quarter of 2004, we changed our methodology of allocating insurance related costs between the FMS, SCS and DCC business segments. Accordingly, the 2004 segment NBT measures have been adjusted to provide the retroactive effect of this change. Segment results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented.

14

RYDER SYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS — (Continued)
(unaudited)

       Our customer base includes governments and enterprises operating in a variety of industries including automotive, electronics, high-tech, telecommunications, manufacturing, aerospace, consumer goods, paper and paper products, office equipment, food and beverage, and general retail industries. Our largest customer, General Motors Corporation, accounted for approximately 27% and 30% of SCS total revenue for the three months ended March 31, 2005 and 2004, respectively, and is comprised of multiple contracts in various geographic regions.

       Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to the SCS and DCC segments. Inter-segment revenue and NBT are accounted for at approximate fair value as if the transactions were made with independent third parties. NBT related to inter-segment equipment and services billed to customers (equipment contribution) is included in both FMS and the business segment which served the customer, then eliminated (presented as “Eliminations”). The following table sets forth equipment contribution included in NBT for our SCS and DCC segments:

15

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

THE BOARD OF DIRECTORS AND SHAREHOLDERS
RYDER SYSTEM, INC.:

       We have reviewed the accompanying consolidated condensed balance sheet of Ryder System, Inc. and subsidiaries as of March 31, 2005, the related consolidated condensed statements of earnings, shareholders’ equity and cash flows for the three months ended March 31, 2005 and the related consolidated condensed statements of earnings and cash flows for the three months ended March 31, 2004. These consolidated condensed financial statements are the responsibility of the Company’s management.

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

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

       We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Ryder System, Inc. and subsidiaries as of December 31, 2004, and the related consolidated statements of earnings, shareholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated February 22, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 2004, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ KPMG LLP

Miami, Florida
April 26, 2005

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS —
THREE MONTHS ENDED MARCH 31, 2005 AND 2004

OVERVIEW

       The following discussion should be read in conjunction with the unaudited Consolidated Condensed Financial Statements and notes thereto included under Item 1. In addition, reference should be made to our audited Consolidated Financial Statements and notes thereto and related Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2004 Annual Report on Form 10-K.

       Our business is divided into three segments: our Fleet Management Solutions (FMS) business segment provides full service leasing, contract maintenance, contract-related maintenance and commercial rental of trucks, tractors and trailers to customers, principally in the U.S., Canada and the U.K.; our Supply Chain Solutions (SCS) business segment provides comprehensive supply chain consulting and lead logistics management solutions throughout North America and in Latin America, Europe and Asia; and our Dedicated Contract Carriage (DCC) business segment provides vehicles and drivers as part of a dedicated transportation solution in North America. We operate in extremely competitive markets. Our customers select us based on numerous factors including service quality, price, technology and service offerings. As an alternative to using our services, customers may also choose to provide these services for themselves, or may choose to obtain similar or alternative services from other third-party vendors. Our customer base includes governments and enterprises operating in a variety of industries including automotive, electronics, high-tech, telecommunications, manufacturing, aerospace, consumer goods, paper and paper products, office equipment, food and beverage, and general retail industries.

ITEMS AFFECTING COMPARABILITY BETWEEN PERIODS

       On March 1, 2004, we completed an asset purchase agreement with Ruan Leasing Company (Ruan) under which we acquired Ruan’s fleet of approximately 6,400 vehicles, 37 of its 111 service locations and more than 500 customers. Ryder also acquired contract maintenance agreements covering approximately 1,700 vehicles. The combined Ryder/Ruan network allowed us to leverage our existing U.S. infrastructure in key markets while adding new infrastructure to strengthen our presence in targeted areas of the Midwest, Southeast, Mid-Atlantic and Southwest. The results of this acquisition have been included in the consolidated results of Ryder since the date of acquisition.

CONSOLIDATED RESULTS

       Earnings before income taxes increased 19.9% to $67.2 million in the first three months of 2005 compared with the same period in 2004. Net earnings increased 18.4% to $41.5 million in the first three months of 2005 compared with the same period in 2004. The earnings growth in 2005 was principally driven by higher gains on FMS used vehicle sales, improved FMS commercial rental results and lease growth from FMS acquisitions. See “Operating Results by Business Segment” for a further discussion of operating results. Additionally, earnings in 2005 benefited from the one-time recovery of $2.6 million (pre-tax), or $0.02 per diluted common share, for project costs incurred in prior years. Net earnings in 2004 included a gain of approximately $1 million (pre-tax), or $0.01 per diluted common share, on the sale of a portion of our headquarters complex.

17

       Total revenue increased 8.5% to $1.3 billion in the first three months of 2005 compared with the same period in 2004. Revenue comparisons for all business segments were favorably impacted by increased fuel services revenue primarily as a result of higher average fuel prices. Our businesses realized minimal changes in profitability as a result of higher fuel services revenue as these generally reflect costs that are passed through to our customers. During 2005, FMS revenue was also positively impacted by acquisitions and higher rental revenue resulting from increased activity levels and better pricing. SCS revenue increased in 2005 compared to the same period in 2004 reflecting new business and increased volumes. Total revenue included a favorable foreign currency exchange impact of 0.9% due primarily to the strengthening of the Canadian dollar and the British pound.

       Operating expense increased 12.5% to $610.5 million in the first three months of 2005 compared with the same period in 2004. The increases in operating expense and operating expense as a percentage of revenue are largely a result of higher average fuel prices in 2005. In addition, higher maintenance costs resulting from a larger and older vehicle fleet and added operating costs attributed to the acquisition completed in March 2004 contributed to the increase in operating expense.

       Salaries and employee-related costs remained flat during the first three months of 2005 compared with the same period in 2004. Salaries and employee-related costs were impacted by higher incentive compensation, which was partially offset by lower pension expense. Pension expense decreased $2.0 million to $14.5 million in the first three months of 2005 compared with the same period in 2004. Pension expense declines primarily impacted our FMS business segment, which employs the majority of our employees that participate in the primary U.S. pension plan.

18

       Freight under management (FUM) expense represents subcontracted freight costs on logistics contracts for which we purchase transportation. FUM expense increased 23.6% to $112.6 million in the first three months of 2005 compared with the same period in 2004. Increased volumes of freight activity from new and expanded business and higher average pricing on subcontracted freight costs, resulting from increased fuel costs, contributed to the increase in FUM expense in our SCS business segment during 2005.

       Depreciation expense relates primarily to FMS revenue earning equipment. Depreciation expense increased 3.7% to $181.4 million in the first three months of 2005 compared with the same period in 2004. The growth in depreciation expense during the first three months of 2005 reflected the impact of vehicles added as part of the acquisition completed in March 2004.

       Gains on vehicle sales, net increased 90.8% to $12.8 million in the first three months of 2005 compared with the same period in 2004. An increase in the number of units sold combined with improved average pricing contributed to higher proceeds and stronger used vehicle gains performance in 2005.

       Equipment rental consists primarily of rental costs on revenue earning equipment in FMS. Equipment rental costs increased 6.3% to $27.3 million in the first three months of 2005 compared with the same period in 2004. Higher contingent rent expense associated with residual value guarantees on operating lease vehicles was slightly offset by the reduction in the number of leased vehicles when compared to the same period in 2004. Equipment rental was also negatively impacted by higher expenses from the rental of personal property as compared to the same period in 2004.

       Interest expense increased 10.3% to $27.0 million in the first three months of 2005 compared with the same period in 2004, which was due principally to higher average debt levels.

       Miscellaneous income, net increased to $5.1 million in the first three months of 2005 compared with $1.9 million in the same period in 2004. Miscellaneous income, net was positively impacted by the one-time recovery of $2.6 million for project costs incurred in prior years.

19

       Restructuring and other recoveries, net of $0.1 million in 2005 related primarily to employee severance and benefits recorded in prior restructuring charges that were reversed due to refinements in estimates. Restructuring and other recoveries, net of $1.1 million in 2004 related primarily to the gain on sale of a property that was part of our headquarters complex, which was sold in connection with the relocation of our headquarters. See Note (E), “Restructuring and Other Recoveries,” in the Notes to Consolidated Condensed Financial Statements, for a complete discussion of restructuring activity.

       In 2005, the higher effective income tax rate was impacted by a greater proportion of projected income being earned in higher tax-rate jurisdictions.

OPERATING RESULTS BY BUSINESS SEGMENT

       We define the primary measurement of our segment financial performance as “Net Before Taxes” (NBT), which includes an allocation of Central Support Services (CSS) and excludes restructuring and other recoveries, net. CSS represents those costs incurred to support all of our business segments, including sales and marketing, human resources, finance, corporate services, information technology, health and safety, legal and communications. The objective of the NBT measurement is to provide clarity on the profitability of each of our business segments and, ultimately, to hold leadership of each business segment and each operating segment within each business segment accountable for their allocated share of CSS costs. In the fourth quarter of 2004, we changed our methodology of allocating insurance related costs between the FMS, SCS and DCC business segments. Accordingly, 2004 segment NBT measures have been adjusted to provide the retroactive effect of this change. Segment results are not necessarily indicative of the results of operations that would have occurred had each segment been an independent, stand-alone entity during the periods presented.

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       Certain costs are considered to be overhead not attributable to any segment and remain unallocated in CSS. Included within the unallocated overhead remaining within CSS are the costs for investor relations, corporate communications, public affairs and certain executive compensation. See Note (N), “Segment Reporting,” in the Notes to Consolidated Condensed Financial Statements for a description of how the remainder of CSS costs is allocated to the business segments.

       Our FMS segment leases revenue earning equipment and provides fuel, maintenance and other ancillary services to our SCS and DCC segments. Inter-segment revenue and NBT are accounted for at approximate fair value as if the transactions were made with third parties. NBT related to inter-segment equipment and services billed to customers (equipment contribution) is included in both FMS and the business segment which served the customer and then eliminated (presented as “Eliminations”). The following table sets forth equipment contribution included in NBT for our SCS and DCC segments:

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