Financial Section Part II

Package Services volume increased 9 million pieces, or 0.8% over 2005. A volume increase in Bound Printed Matter of 6% or 35 million pieces was partially offset by declines of 6.5% or 25 million pieces in Parcel Post and Media Mail of 2 million pieces or 1.2%. The Parcel Select component of Parcel Post was adversely affected by three major parcel consolidators which ceased operations in 2006.

Periodical Mail volume declined 0.5% compared to 2005 continuing a long-term trend, as businesses and consumers utilize less hard-copy material and increasingly rely on the Internet as a substitute for hardcopy publication of news, information and entertainment.

Revenue	2006	2005	2004
(Dollars in millions)
First-Class Mail	$37,039	$36,062	$36,377
Standard Mail	19,877	18,953	18,123
Priority Mail	5,042	4,634	4,421
Package Services	2,259	2,201	2,207
Periodicals	2,215	2,161	2,192
Express Mail	918	872	853
International	1,794	1,765	1,696
Other *	3,673	3,345	3,160
Total Revenue	$72,817	$69,993	$69,029
*Included in the “Other” category are special services revenue, other income and investment income.

Operating Expenses

Operating expenses are comprised of Compensation and Benefits, Transportation, Supplies and Services, Depreciation and Amortization and Other Expenses.

In 2006 operating expenses of $71,684 million were $3,401 million or 5% more than 2005. The increase was driven primarily by a 4.4% increase in compensation and benefits, and an 11.2% increase in transportation expenses. Increasing fuel prices contributed significantly to the increase in transportation expenses and also contributed to increased compensation and benefits expenses through their impact on employee cost-of-living adjustments (COLAs). Compensation and benefits expense growth was also influenced by contractual pay increases and retirement and health benefits costs. These same factors drove the $2,432 million increase in operating expenses in 2005, compared to 2004.