3. NET LOSS

(dollars in millions)

		FY 2002	FY 2001	Difference	Change %
	Income:
	Mail Revenue	$63,761	$63,426	$335	0.5%
	Special Services	2,654	2,341	313	13.4
	Revenue forgone appropriation	48	67	(19)	-28.4
	Operating revenue	66,463	65,834	629	1.0
	Expense
	Compensation and benefits	51,557	51,351	206	0.4
	Other costs	13,677	14,289	(612)	-4.3
	Operating Expense	62,234	65,640	(406)	-0.6
	Income from operations	1,229	194	1,035	533.5
	Interest Income	46	35	11	31.4
	Interest espense on deferred       retirement liabilities	(1,601)	(1,603)	2	-0.1
	Interest expense on borrowings	(403)	(306)	(34)	11.1
	Emergency Preparedness       Appropriations	179	—	179	NM
	Emergency       Expenses	(189)	—	(184)	NM
	Net loss	$(676)	&(1,680)	$1,004	-58.8%

We posted a net loss of $676 million in 2002, which was well below our budgeted loss of $1.35 billion, despite the largest mail volume decline in our history. This volume decline was brought on chiefly by the economic recession that began in 2001 and continued into 2002. In addition to the recession, disruptions resulting from the September 11 and anthrax attacks and continued diversion of letter mail to electronic communications contributed to lower-than-expected revenues. The revenue decrease was partially offset by the early implementation of higher postage rates in June 2002, which, although increasing 2002 revenues by almost $1 billion, was not nearly enough to increase revenues to previously expected levels.

In response to this mail volume and revenue shortfall, we aggressively managed expenses and increased productivity. Driven by the goals set forth in the Postal Service Transformation Plan, we reduced costs, net of the impact of reduced volume, by $1,452 million in 2002. These cost reductions allowed us to hold total expenses to $67.4 billion, almost $200 million less than 2001 expenses. This is the first time since the establishment of the Postal Service in 1970 that expenses have decreased from the prior year.