Item 7. Management's discussion and analysis of financial condition and results of operations

Volume and Revenue

In 2004, our revenue was slightly more than last year, while the results by product line were mixed. The economy also grew slightly more than projected.

Standard Mail volume continued to grow in 2004, causing total volume to increase. Most of the growth in Standard Mail volume was in the regular automation presort category. Economic growth and increases in advertising spending and corporate profits spurred the growth in Standard Mail volume and revenue. Standard Mail has also benefited from the "Do Not Call" telephone restrictions. International Mail volume increased as well. Revenue and volume growth in Standard Mail and International Mail offset declines in other classes of mail.

First-Class Mail, which is our largest mail class in terms of both volume and revenue, declined in volume for the third consecutive year in 2004. The declines in volume and revenue in First-Class Mail reflect the impact of electronic diversion as businesses, nonprofit organizations, governments, and households increasingly automate their financial transactions and divert correspondence to the Internet. The volumes of Priority Mail and Express Mail also declined as we continue to lose market share in the package market. Package Services volume increased slightly because growth in Bound Printed Matter and Media Mail volume offset losses in Parcel Post volume. Periodical Mail volume and revenue are declining as businesses and consumers increasingly rely on the Internet as a substitute for hardcopy publication of news, information, and entertainment.

The mix of mail has changed significantly in recent years. As recently as 2000, First-Class Mail was by far the largest component of the mailstream. However, over the past four years, First-Class Mail volume has declined 5.4% while Standard Mail volume has grown 6.1%. This change in the mix of mail has flattened revenue because revenue growth has been coming from Standard Mail, which has an average revenue per piece of only 19 cents, compared with the average 37 cents per piece of the First-Class Mail it is replacing. In this new era, volume growth has been accompanied by the hollowing out of revenues.

E-commerce and e-mail are replacing personal correspondence and hard copy commercial transactions that formerly traveled as First-Class single-piece Mail. In 2003, we also experienced our first ever annual decline in the volume of workshare First-Class Mail, which is mail that a large-scale mailer has presorted and prepared for entry into our system before delivering it to us for processing. Some of the decline in workshare mail was related to the weakness of the economy, but the decline is at least as much due to the absence of new hard-copy billing and statement applications and electronic diversion of bills and statements. Workshare volume increased slightly in 2004. We expect this growth to be transitory as First-Class Mail continues to decline due to long term trends in communication and payment technologies.