Financial Section Part II

Revenue and Volume

Total revenue for 2007 was $74,973 million, an increase of $2,156 million or 3.0% from last year. The first quarter was affected favorably from the carryover effect of the January 2006 rate increase and a portion of the third quarter and all of the fourth quarter benefited from the May 2007 rate increase. Mail volume for 2007 was 212.2 billion pieces, a decrease of 904 million pieces or 0.4%. Although the volume decrease was modest, the mix of services provided was less favorable than in previous years. Without the rate increase this level of volume would have resulted in lower revenue due to the change in service mix.

* Special services revenue, other income and investment income included in “Other” category.

* Free mail for the blind and Mailgrams included in the “Other” category.

While Standard Mail volume exceeds First-Class Mail volume, First-Class Mail remains, by far, the largest revenue generator, as illustrated by the two previous charts.

First-Class Mail revenue increased $525 million or 1.4%, while volume decreased by 1.7 billion pieces, or 1.8% in 2007. The revenue increase was mainly a result of the May rate change. An increase of 530 million pieces in workshare First-Class letters and cards partially offset the continuing decline in single-piece volume, which was down more than 2 billion pieces, or 4.7%. The long-term continued decline in single-piece volume reflects the impact of electronic diversion as businesses, nonprofit organizations, governments, and households continue to move their correspondence and transactions to electronic alternatives, such as Internet bill payment, automatic deduction, and direct deposit. While most Americans still view mail as more secure and more private than Internet-related activities, consumers of all demographic groups are becoming increasingly comfortable with electronic alternatives.

First-Class Mail revenue increased $977 million in 2006 as volume decreased slightly. An increase of approximately 1 billion pieces, or 2.1%, in workshare First-Class letters partially offset the continuing decline in single-piece volume, which was down 1.5 billion pieces, or 3.3%.

In 2007, Standard Mail revenue increased by $902 million, or 4.5%, while volume increased 1.1 billion pieces or 1.0%. Standard Mail volume has grown each of the last five years. For the third consecutive year, Standard Mail volume has exceeded First-Class Mail volume. While Standard Mail has increased in volume each year since 2002, growth was tempered this year by a decline in Enhanced Carrier Route volume of more than 800 million pieces. Standard Mail revenue and volume is expected to show year-over-year increases into the foreseeable future.

In 2006, Standard Mail revenue increased $924 million compared with 2005 on 1.5% volume growth.

Spurred by the May 2007 rate increase, Priority Mail revenue increased $191 million, or 3.8%. Volume, however, decreased by 27 million pieces, or 2.9%. Priority Mail volume decreased during the last three quarters of 2007 after an extended period of growth. Priority Mail is a price-sensitive service and we anticipate several quarters of slight revenue growth on stagnant volumes, before this service rebounds.

Priority Mail revenue increased $408 million, or 8.8%, in 2006. Volume also increased, growing 4.1% in 2006, in spite of the January 2006 rate increase.

Package Services revenue increased $47 million, or 2.1%, in 2007, while its volume decreased 12 million pieces, or 1.0%, compared to 2006. This volume decrease in Package Services ended four straight years of growth.

Package Services revenue increased $58 million on a volume increase of 9 million pieces, or 0.8%, in 2006. The Parcel Select component of Parcel Post was adversely affected by three major parcel consolidators, which ceased operations in 2006.

Periodicals volume decreased 227 million pieces, or 2.5%, in 2007. This resulted in a revenue decrease of $27 million, or 1.2%, in spite of the rate increase.

Although Periodicals volume declined 0.5% in 2006 revenue increased $54 million due to the 2006 rate increase. The volume decline continued a long-term trend.

In 2007, Express Mail revenue increased $33 million, or 3.6%, while volume decreased one million pieces, or 1.8%, compared to 2006. Express Mail is our most price-sensitive service and price increases in January 2006 and May 2007 will likely result in lower volume for this service in the foreseeable future.

Express Mail revenue increased $46 million while volume increased 475,000 pieces in 2006. This was the second consecutive year of volume increases for Express Mail after four years of declines.

Our international products portfolio was simplified in conjunction with the May 2007 price implementation. Eight products were reduced to four, eliminating redundancy and reducing customer confusion. International product names are now linked to their domestic counterparts. New packaging further reduced complexity, while cutting waste and better positioning our brand. The international products portfolio now comprises Global Express Guaranteed, Express Mail International, Priority Mail International, and First-Class Mail International services. The product simplification has had a significant effect on international volume and revenue. International revenue grew by $242 million, or 13.5%, while volume grew 40 million pieces, or 5.0%, in 2007. In addition, Foreign Postal Transactions and International Mail fees grew by $38 million, or 16.3%.

In 2006, International Mail revenue increased $29 million, or 1.6%. The 2006 rate increase offset a volume decline of 59 million pieces, or 6.9%, compared to 2005.

The previous chart shows the change in the mail mix since 2001. If the mail mix in 2007 were as it was in 2001, we would have had an estimated additional $3 billion in revenue in 2007.