(Dollars in millions)

% Change

Supplies and Services

Supplies and services expenses of $2,416 million remained relatively flat in 2005. In 2004, supplies and services expense charges of $2,414 million increased $86 million. The increase was primarily attributable to a $50 million increase in purchases of mail transportation equipment compared to 2003.

(Dollars in millions)

% Change

Depreciation and Amortization

Depreciation and amortization expenses of $2,089 million in 2005 were $56 million less than last year. Depreciation expenses of $2,145 million in 2004 decreased $150 million from 2003. The depreciation decreases in both years were the result of lower capital spending in 2002 and 2003.

(Dollars in millions)

% Change

Other Expenses

Other expenses of $4,409 million increased by $220 million in 2005, a reduction from the $327 million increase in 2004. The major components included in this category are rent and utilities of $1,589 million, vehicle maintenance services of $1,036 million, information technology of $398 million, facility maintenance services of $223 million and communications of $253 million.

Rent and utilities, up $29 million or 1.9%, experienced slower growth than 2004, when the increase was 6% or $85 million over 2003. Vehicle maintenance services increased by $114 million, or 12%, as the fleet ages and fuel costs rise, the same was true in 2004 when the increase was $63 million or 7% over 2003. Communications increased $35 million mainly from upgrading the communication lines in many offices. In 2004 communication was $13 million more than 2003. Information technology costs decreased $78 million, or 16% in 2005, this was on top of the $66 million decrease achieved in 2004. This reflects the continuing downward price trend in this industry and favorable negotiations on software maintenance and licensing agreements. Facility maintenance services declined $21 million as repair projects returned to a more normal level, in contrast to the $64 million increase in 2004. The 2004 increase was a result of long delayed repair projects that were undertaken. We also spent $55 million in 2004 to decontaminate the Trenton, NJ and Washington, DC facilities closed due to the Anthrax attack.

In 2005, we increased our provision for contingent liabilities due to an adverse settlement of three labor-related arbitration cases. These cases which are recorded as miscellaneous expenses contributed approximately $115 million to the increase in Other expenses in 2005. This was the opposite of 2004 when our contingent liability expense decreased $32 million from 2003. These swings are not unusual due to the unpredictable timing of these types of cases.

In 2005, we re-evaluated our allowance for bad debt methodology, based on our last five years of collection history. This change in estimate reduced our bad debt expense by $77 million over 2004. In 2004 bad debt expense increased $25 million over 2003.

Productivity

We use two indicators to measure our efficiency. We use output per workhour, which measures the change in the relationship between workload (mail volume and deliveries) and the labor resources used to do the work. We use total factor productivity (TFP) to measure the change in the relationship between outputs, or workload, and all the resources used in producing these outputs. Our main output is delivered mail and special services and carrier service to an expanding delivery network. TFP calculations include inputs for all resources including labor, materials, transportation and capital investments.

During 2005, our output per workhour grew 1.4% and our TFP improved 1.1%. This TFP growth is equivalent to $749 million in expense reductions. This marks our sixth consecutive year of TFP growth, equivalent to an expense reduction of over $6.8 billion over this time. Our productivity growth this year was driven primarily by absorbing workload growth. Mail volume grew by 2.7% and delivery points grew by 1.6% contributing to a 1.8% increase in workload. We were able to achieve TFP growth by managing an increased workload with a smaller increase in resource usage. We continue our policy to develop an annual budget so that the net income target also yields positive and sustainable TFP growth.