# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

# FOR	ANNUAL	AND	TRANSITION	REPORTS

# PURSUANT	TO	SECTIONS	13	OR	15(d)	OF	THE

SECURITIES	EXCHANGE	ACT	OF	1934

(Mark	One)

þ ANNUAL	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF	THE	SECURITIES	EXCHANGE	ACT	OF	1934

For	the	fiscal	year	ended	December	31,	2007

¨ TRANSITION	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF	THE	SECURITIES	EXCHANGE	ACT	OF	1934

# United	Parcel	Service,	Inc.

# (Exact	Name	of	Registrant	as	Specified	in	Its	Charter)

Delaware

(State	or	Other	Jurisdiction	of Incorporation	or	Organization)

55	Glenlake	Parkway,	N.E.	Atlanta,	Georgia (Address	of	Principal	Executive	Offices)

(I.R.S.	Employer Identification	No.)

(Zip	Code)

(Registrant's	telephone	number,	including	area	code)

Securities	registered	pursuant	to	Section	12(b)	of	the	Act:

Title	of	Each	Class

Class	B	common	stock,	par	value	$.01	per	share

Name	of	Each	Exchange	on	Which	Registered

New	York	Stock	Exchange

# Securities	registered	pursuant	to	Section	12(g)	of	the	Act:

Class	A	common	stock,	par	value	$.01	per	share

# (Title	of	Class)

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.				Yes		 þ				No		¨

Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15(d)	of	the	Exchange	Act.				Yes		 ¨				No		þ

Indicate	by	check	mark	whether	the	registrant:	(1)	has	filed	all	reports	required	to	be	filed	by	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934	during	the	preceding	12	months	(or	for	such	shorter	period that	the	registrant	was	required	to	file	such	reports),	and	(2)	has	been	subject	to	such	filing	requirements	for	the	past	90	days.				Yes		þ				No		¨

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of	registrant's	knowledge,	in	definitive	proxy	or information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment	to	this	Form	10-K.		¨

Indicate	by	check	mark	whether	the	registrant	is	a	large	accelerated	filer,	an	accelerated	filer,	a	non-accelerated	filer	or	a	smaller	reporting	company.	See	definition	of	"accelerated	filer",	"large	accelerated	filer" and	"smaller	reporting	company"	in	Rule	12b-2	of	the	Exchange	Act.	Check	one:

Indicate	by	check	mark	whether	the	registrant	is	a	shell	company	(as	defined	in	Rule	12b-2	of	the	Exchange	Act).				Yes ¨				No		þ

The	aggregate	market	value	of	the	class	B	common	stock	held	by	non-affiliates	of	the	registrant	was	approximately	$49,523,505,067	as	of	June	30,	2007.	The	registrant's	class	A	common	stock	is	not	listed	on	a national	securities	exchange	or	traded	in	an	organized	over-the-counter	market,	but	each	share	of	the	registrant's	class	A	common	stock	is	convertible	into	one	share	of	the	registrant's	class	B	common	stock.

# DOCUMENTS	INCORPORATED	BY	REFERENCE

Portions	of	the	registrant's	definitive	proxy	statement	for	its	annual	meeting	of	shareowners	scheduled	for	May	8,	2008	are	incorporated	by	reference	into	Part	III	of	this	report.

# PART	I

# Item	1. Business

# Overview

United	Parcel	Service,	Inc.	("UPS")	is	the	world's	largest	package	delivery	company,	a	leader	in	the	U.S.	less-than-truckload	industry,	and	a	global	leader	in supply	chain	management.	We	were	founded	in	1907	as	a	private	messenger	and	delivery	service	in	Seattle,	Washington.	Today,	we	deliver	packages	each	business	day for	1.8	million	shipping	customers	to	6.1	million	consignees	in	over	200	countries	and	territories.	In	2007,	we	delivered	an	average	of	15.75	million	pieces	per	day worldwide,	or	a	total	of	3.97	billion	packages.	Total	revenue	in	2007	was	$49.7	billion.

Our	primary	business	is	the	time-definite	delivery	of	packages	and	documents	worldwide.	In	recent	years,	we	have	extended	our	service	portfolio	to	include	less- than-truckload	transportation,	primarily	in	the	U.S.,	and	supply	chain	services.	We	report	our	operations	in	three	segments:	U.S.	Domestic	Package	operations, International	Package	operations,	and	Supply	Chain	&	Freight	operations.

•	 U.S.	Domestic	Package.	U.S.	Domestic	Package	operations	include	the	time-definite	delivery	of	letters,	documents,	and	packages	throughout	the	United States.

•International	Package.	International	Package	operations	include	delivery	to	more	than	200	countries	and	territories	worldwide,	including	shipments	wholly outside	the	United	States,	as	well	as	shipments	with	either	origin	or	distribution	outside	the	United	States.

•Supply	Chain	&	Freight.	Supply	Chain	&	Freight	includes	our	forwarding	and	logistics	operations,	UPS	Freight,	and	other	related	business	units.	Our forwarding	and	logistics	business	provides	services	in	more	than	175	countries	and	territories	worldwide,	and	includes	supply	chain	design	and management,	freight	distribution,	customs	brokerage,	mail	and	consulting	services.	UPS	Freight	offers	a	variety	of	less-than-truckload	("LTL")	and truckload	("TL")	services	to	customers	in	North	America.	Other	business	units	within	this	segment	include	Mail	Boxes,	Etc.	(the	franchisor	of	Mail	Boxes, Etc.	and	The	UPS	Store)	and	UPS	Capital.

Transportation	and	Infrastructure.				We	operate	a	ground	fleet	approximately	100,000	vehicles,	which	reaches	all	business	and	residential	zip	codes	in	the contiguous	U.S.	We	also	operate	an	air	fleet	of	about	600	aircraft,	the	ninth	largest	airline	in	the	world.	Our	primary	air	hub	is	in	Louisville,	KY.	Regional	air	hubs	are located	in	Columbia,	SC;	Dallas,	TX;	Hartford,	CT;	Ontario,	CA;	Philadelphia,	PA;	and	Rockford,	IL.	Our	largest	international	air	hub	is	in	Cologne,	Germany,	with other	regional	international	hubs	in	Hong	Kong,	Singapore,	Taiwan,	Miami,	FL	and	Pampanga,	Philippines.

We	have	established	a	global	transportation	infrastructure	and	a	comprehensive	portfolio	of	services.	We	support	these	services	with	advanced	operational	and customer-facing	technology.	Our	supply	chain	solutions	enable	customers'	inventory	to	move	more	effectively.	As	a	consequence,	they	can	concentrate	on	their	own core	competencies.

Outlook.				We	believe	that	the	following	trends	will	allow	us	to	continue	to	grow	our	business:

•	 Globalization	of	trade	is	a	worldwide	economic	reality,	which	will	continue	to	expand	as	trade	barriers	are	eliminated	and	large	consumer	markets,	in particular	China,	India	and	Europe,	experience	economic	growth.

•Package	shipments	will	increase	as	a	result	of	just-in-time	inventory	management,	greater	use	of	the	Internet	for	ordering	goods,	and	direct-to-consumer business	models.

•	 Outsourcing	supply	chain	management	is	becoming	more	prevalent,	as	customers	increasingly	view	effective	management	of	their	supply	chains	as	a strategic	advantage	rather	than	a	cost	center.

Our	vision	for	the	future	is	to	synchronize	the	world	of	commerce,	addressing	the	complexities	of	our	customers'	supply	chain	needs.	Our	goal	is	to	develop business	solutions	that	create	value	and	competitive	advantages	for	our	customers,	enabling	them	to	achieve	supply	chain	efficiencies,	better	customer	service	for	their customers	and	improved	cash	flow.

# Operations

We	believe	that	our	integrated	global	network	is	the	most	extensive	in	the	industry.	It	is	the	only	network	that	handles	all	levels	of	service	(air,	ground,	domestic, international,	commercial,	residential)	through	one	integrated	pickup	and	delivery	service	system.

# U.S.	Domestic	Package

The	U.S.	business	consists	of	air	and	ground	delivery	of	small	packages—up	to	150	pounds	in	weight—and	letters	to	and	from	all	50	states.	It	also	provides guaranteed,	time-definite	delivery	of	certain	heavy-weight	packages.	Substantially	all	of	our	U.S.	small	package	delivery	services	are	guaranteed.

This	business	is	built	on	an	integrated	air	and	ground	pick-up	and	delivery	network.	We	believe	that	this	model	improves	productivity	and	asset	utilization,	and provides	the	flexibility	to	transport	packages	using	the	most	reliable	and	cost-effective	transportation	mode	or	combination	of	modes.

In	2006,	we	made	the	most	significant	upgrade	ever	to	our	U.S.	ground	package	delivery	network,	accelerating	the	transit	times	for	more	than	a	half-million packages	nationwide	by	one	day	or	more.	Additional	lane	enhancements	were	introduced	in	February	2008.

We	believe	that	our	broad	product	portfolio,	reliable	package	delivery	service,	experienced	and	dedicated	employees	and	unmatched,	integrated	air	and	ground network	provide	us	with	the	advantages	of	reputation,	service	quality	and	economies	of	scale	that	differentiate	us	from	our	competitors.	Our	strategy	is	to	increase domestic	revenue	through	cross-selling	services	to	our	large	and	diverse	customer	base,	to	limit	the	rate	of	expense	growth,	and	to	employ	technology-driven	efficiencies to	increase	operating	profit.

# International	Package

The	International	Package	segment	provides	air	and	ground	delivery	of	small	packages	and	letters	to	200	countries	and	territories	around	the	world.	Export services	cross	country	boundaries;	domestic	services	move	shipments	within	a	country's	borders.	UPS's	global	presence	grew	out	of	its	highly	refined	U.S.	domestic business.

•Europe	is	our	largest	region	outside	the	United	States—accounting	for	approximately	half	of	our	international	revenue.	In	Europe	we	provide	both	express and	domestic	service,	much	like	the	service	portfolio	we	offer	in	the	U.S.,	and	based	on	the	same	integrated	network.

•Through	more	than	two	dozen	alliances	with	Asian	delivery	companies	that	supplement	company-owned	operations,	we	currently	serve	more	than	40	Asia Pacific	countries	and	territories.	Two	of	the	fastest	growing	economies	in	the	world,	China	and	India,	are	among	our	most	promising	opportunities.

•	 Our	Canadian	operations	include	both	domestic	and	import/export	capabilities.	We	deliver	to	all	addresses	throughout	Canada.	We	are	also	the	largest	air cargo	carrier	and	a	leading	logistics	provider	in	Latin	America	and	the	Caribbean.

We	have	built	a	strong	international	presence	through	significant	investments	over	several	decades.	Some	of	our	recent	acquisitions	and	investments	include	the following:

•In	2005,	we	acquired	Stolica	in	Poland	and	Lynx	Express	in	the	United	Kingdom.	These	acquisitions	strengthened	our	European	network,	increasing package	delivery	density,	and	hence,	productivity,	in	these	geographic	areas.

•In	2006,	to	capitalize	on	growth	opportunities	across	the	whole	of	Europe,	we	completed	the	expansion	of	our	automated	package	sorting	hub	at	the Cologne/Bonn	airport	in	Germany.	The	expansion	doubled	the	hub's	sorting	capacity	to	110,000	packages	per	hour,	largely	through	the	use	of	new automation	technology.

•In	2007,	we	implemented	the	largest	service	expansion	of	our	international	shipping	portfolio	in	more	than	a	decade.	UPS	began	offering	customers	three, rather	than	two,	daily	time-definite	delivery	options	to	and	from	the	world's	most	active	trading	markets,	giving	customers	greater	flexibility	in	managing their	businesses.

Growth	in	Asia	is	being	driven	by	global	demand,	which	is	stimulating	improved	demographic	and	economic	trends	throughout	the	region,	particularly	in	China and	India.	Over	the	last	few	years	UPS	has	steadily	increased	air	service	between	the	U.S.	and	Asia.

•In	2005,	UPS	became	the	first	U.S.	airline	to	launch	non-stop	service	between	the	U.S.	and	Guangzhou,	which	is	located	in	one	of	China's	fastest	growing manufacturing	regions.	We	also	launched	express	delivery	service	for	customers	within	China.

•In	2006,	we	added	another	three	daily	flights	between	Shanghai,	China	and	the	U.S.,	and	another	new	flight	between	Qingdao,	China	and	Incheon,	Korea. We	also	began	direct	air	service	between	Shanghai	and	Cologne.	Those	flights	support	international	express	volume	into	and	out	of	China,	which	has	seen dramatic	growth	in	recent	years.

•In	2007,	we	added	six	daily	flights	between	the	U.S.	and	Nagoya,	Japan.	This	new	service	complements	our	78	weekly	flights	into	and	out	of	Tokyo	and Osaka,	Japan.	These	flights	will	connect	to	Shanghai	in	2008,	enhancing	intra-Asia	service.

•In	2007,	we	also	announced	plans	for	a	new	air	hub	in	Shanghai,	the	first	constructed	in	China	by	a	U.S.	carrier.	Scheduled	to	open	in	2008,	it	will	link	all of	China	via	Shanghai	to	UPS's	international	network	with	direct	service	to	the	Americas,	Europe	and	Asia.	It	also	will	connect	points	served	in	China	by UPS.	Once	this	hub	is	operational,	we	will	have	the	ability	to	add	an	unlimited	number	of	flights	between	the	U.S.	and	Shanghai.

The	international	package	delivery	market	has	been	growing	at	a	faster	rate	than	that	of	the	U.S.,	and	our	international	package	operations	have	historically	been growing	faster	than	the	market.	We	plan	to	use	our	worldwide	infrastructure	and	broad	product	portfolio	to	grow	high-margin	premium	services.	We	will	also	implement cost,	process	and	technology	improvements	in	our	international	operations.	We	believe	that	both	Europe	and	Asia	offer	significant	opportunities	for	growth.

# Supply	Chain	&	Freight	Segment

The	Supply	Chain	&	Freight	segment	consists	of	our	forwarding	and	logistics	capabilities	as	well	as	our	freight	business	unit.

In	recent	years	we	extended	our	service	portfolio	into	heavy	air	and	ground	forwarding	through	two	acquisitions.	In	2005	we	acquired	Menlo	Worldwide Forwarding,	which	forms	the	basis	for	our	time-definite,	guaranteed	air	forwarding	service.	In	the	same	year,	we	acquired	Overnite	Corp.,	a	LTL	service,	which	offers	a full	range	of	regional,	inter-regional	and	long-haul	LTL	capabilities	in	all	50	states,	Canada,	Puerto	Rico,	Guam,	the	Virgin	Islands	and	Mexico.	Overnite	Corp.	was rebranded	as	UPS	Freight	in	2006.

In	today's	global	economy,	companies'	supply	chains	are	growing	increasingly	complex,	as	shown	in	Diagram	1	below.	Many	of	our	customers,	large	and	small, have	outsourced	all	or	part	of	their	supply	chains	to	streamline	and	gain	efficiencies,	to	improve	service,	to	support	new	business	models	and	to	strengthen	their	balance sheets.

This	increasing	complexity	creates	demand	for	a	global	service	offering	that	incorporates	transportation,	distribution	and	international	trade	services	with	financial and	information	services.	We	believe	that	we	can	capitalize	on	this	opportunity	because:

•	 We	manage	supply	chains	in	over	175	countries	and	territories,	with	about	35	million	square	feet	of	distribution	space	worldwide.

•	 We	focus	on	supply	chain	optimization,	freight	forwarding,	international	trade	services	and	management-based	solutions	for	our	customers	rather	than solely	on	more	traditional	asset-based	logistics	such	as	warehouses	and	vehicle	fleets.

•	 We	provide	a	broad	range	of	transportation	solutions	to	customers	worldwide,	including	air,	ocean	and	ground	freight,	as	well	as	customs	brokerage,	and trade	and	materials	management.

•	 We	provide	service,	information	technology	systems	and	distribution	facilities	adapted	to	the	unique	supply	chains	of	specific	industries	such	as	healthcare, technology,	and	consumer/retail.	We	call	this	"configurable	solutions."	In	a	configurable	solution,	multiple	customers	share	standardized	IT	systems	and processes	as	well	as	a	common	network	of	assets.	A	configurable	solution	is	repeatable	for	multiple	customers	and	has	a	transportation	component.

•	 We	offer	a	portfolio	of	financial	services	that	provides	customers	with	short-term	and	long-term	financing,	secured	lending,	working	capital,	government guaranteed	lending,	letters	of	credit,	global	trade	financing,	credit	cards	and	equipment	leasing.

Our	growth	strategy	is	to	increase	the	number	of	customers	benefiting	from	configurable	supply	chain	solutions	and	to	increase	the	amount	of	small	package transportation	from	these	customers.	We	intend	to	leverage	our	small	package	and	freight	customers	through	cross-selling	the	full	complement	of	UPS	services.

# Products	and	Services

Our	goal	is	to	provide	our	customers	with	easy-to-use	products	and	services.	We	seek	to	streamline	their	shipment	processing	and	integrate	critical	transportation information	into	their	own	business	processes,	helping	them	create	supply	chain	efficiencies,	better	serve	their	customers	and	improve	their	cash	flows.	These	products and	services	support	LTL	and	air	freight	shipments,	as	well	as	small	package	transportation.	UPS	offers	a	variety	of	technology	solutions	for	automated	shipping, visibility	and	billing.	We	believe	we	have	the	most	comprehensive	suite	of	such	services	in	the	industry.

Global	Small	Package.				Our	global	small	package	portfolio	consists	of	air	and	ground	services	for	package	delivery	to	over	200	countries,	providing	delivery within	one-to-two	business	days	to	the	world's	major	business	centers.	We	offer	a	spectrum	of	export	and	domestic	services.	Export	services	are	those	provided	for packages	crossing	a	country's	borders,	while	domestic	services	are	for	packages	that	stay	within	the	borders	of	a	single	country.	We	provide	domestic	services	in	23 major	countries	outside	the	United	States.	This	portfolio	includes	guaranteed	delivery	options	to	major	cities	around	the	world.	We	handle	packages	that	weigh	up	to 150	pounds	and	are	up	to	165	inches	in	combined	length	and	girth.	We	offer	same-day	pickup	of	air	and	ground	packages.	We	also	offer	worldwide	customs	clearance service	for	any	mode	of	transportation.

Additional	products	that	provide	enhanced	shipping,	visibility,	billing	and	returns	services	are	available	to	customers	who	require	customized	package	solutions.

Our	enhanced,	data-driven	package	pick-up	and	delivery	technology	is	the	basis	for	new	services	introduced	in	2007.	For	example,	UPS	Delivery	Intercept enables	a	shipper	to	reroute	a	package	while	it	is	in	transit.	And	UPS	Proactive	Response	provides	support	to	customers	who	require	even	greater	control	of	their shipments.	Shipments	sent	using	this	service	are	constantly	monitored	from	pickup	to	delivery,	watching	for	problems	or	delays,	at	which	point	prearranged	intervention steps	commence.

We	provide	our	customers	with	easy	access	to	UPS.	There	are	approximately	150,000	domestic	and	international	access	points	to	UPS.	These	include:	nearly 40,000	branded	drop-boxes,	more	than	1,000	UPS	Customer	Centers,	over	5,800	independently	owned	and	operated	The	UPS	Store®	and	Mail	Boxes	Etc.®	locations worldwide	(over	4,400	in	the	U.S.),	more	than	2,400	alliance	partner	locations,	in	excess	of	15,000	Authorized	Shipping	Outlets	and	commercial	counters,	and	more than	85,000	UPS	drivers	who	can	accept	packages	given	to	them.

Supply	Chain	Services.				Our	freight	forwarding	and	logistics	businesses	meet	customers'	supply	chain	needs	through	a	comprehensive	portfolio	of	services, including:

•Freight	Forwarding:	international	air,	full	container	load	("FCL")	and	less	than	container	load	("LCL")	ocean,	rail	and	ground	freight	for	all	size shipments	utilizing	UPS	and	other	carriers,	and	multimodal	transportation	network	management.

•Logistics	and	Distribution:	supply	chain	management,	distribution	center	design,	planning	and	management,	order	fulfillment,	inventory	management, receiving	and	shipping,	critical	parts	logistics,	reverse	logistics	and	cross	docking.

•International	Trade	Management:	customs	brokerage	and	international	trade	consulting.

•Industry-specific	Solutions:	for	healthcare,	retail,	high	tech,	automotive,	industrial	manufacturing	and	government	customers.

•UPS	CapitalSM	provides	asset-based	lending,	global	trade	finance	and	export-import	lending	services.

Freight	Services.				UPS	Freight	provides	LTL	services	through	a	network	of	owned	and	leased	service	centers	and	carrier	partnerships.	UPS	Freight	also	provides our	customers	with	truckload	and	dedicated	truckload	transportation	solutions.	Since	expanding	into	the	freight	transport	market,	we	have	enhanced	our	value	proposition through	improvements	in	technology,	operations	and	the	customer	experience.	These	efforts	have	resulted	in	expanded	market	presence,	despite	a	challenging	economic environment.	Significant	service	and	reliability	improvements	for	freight	transportation	enabled	us	to	implement	a	no-fee,	guaranteed	delivery	service	in	early	2008.

# Technology

Technology	is	the	backbone	of	everything	we	do	at	UPS.	It	is	at	the	heart	of	customer	access	to	the	company.

•	 UPS.com	processes	over	15	million	package	tracking	transactions	daily.	A	growing	number	of	those	tracking	requests	now	come	from	customers	in countries	that	have	wireless	access	to	UPS	tracking	information.

•Package	tracking,	pickup	requests,	rate	quotes,	account	opening,	wireless	registration,	drop-off	locator,	transit	times	and	supply	ordering	services	are	all available	at	customers'	desktops	or	laptops.	The	site	also	displays	full	domestic	and	international	service	information	and	allows	customers	to	process outbound	shipments	as	well	as	return	labels	for	their	customers.

•	 Businesses	in	a	number	of	countries	also	can	download	UPS	OnLine	Tools	SM	to	their	own	websites	for	direct	use	by	their	customers.	This	allows	users	to access	the	information	they	need	without	leaving	our	customers'	websites.

•In	2007,	we	integrated	all	freight	products,	including	international	air	freight	forwarding	shipments,	into	our	small	package	visibility	systems.	Now	a shipper	can	view	the	status	of	package	and	freight	shipments	from	a	single	web	page.

Technology	is	also	the	foundation	for	process	improvements	within	UPS	that	enhance	productivity,	improve	efficiency	and	reduce	costs.	The	most	comprehensive improvement	to	our	U.S.	small	package	handling	facilities	was	completed	in	2007.	This	multi-year	effort	re-engineered	our	domestic	business,	based	on	a	data-driven platform,	and	included	software,	hardware	and	process	changes.	It	enables	a	package	center	to	produce	an	optimized	dispatch	plan	for	every	driver	and	detailed	loading instructions	for	every	vehicle	before	center	employees	handle	any	packages.	This	plan	reduces	mileage	driven,	resulting	in	substantial	savings	in	fuel	usage.	The	re- engineered	system	provides	the	basis	for	unique	customer-focused	services	based	on	the	customer-specific	data	which	powers	the	system.

# Sales	and	Marketing

The	UPS	worldwide	sales	organization	is	responsible	for	the	complete	spectrum	of	UPS	products	and	services.	This	field	sales	organization	consists	primarily	of locally	based	account	executives	assigned	to	our	individual	operating	units.	For	our	largest	multi-shipping-site	customers,	we	manage	sales	through	an	organization	of regionally	based	account	managers,	reporting	directly	to	executive	management.

Our	sales	force	also	includes	specialized	groups	that	work	with	our	general	sales	organization	to	support	the	sale	of	customer	technology	solutions,	international package	delivery,	LTL	and	freight	transportation,	and	warehousing	and	distribution	services.

In	2007,	we	completed	a	major	sales	force	reorganization	to	better	align	our	sales	resources	and	integrate	with	customer	business	processes.	Our	goal	is	to	enhance the	customer	experience	when	dealing	with	the	extensive	scope	of	UPS	capabilities,	at	any	point	in	the	shipping	or	supply	chain	management	process.

Our	worldwide	marketing	organization	also	supports	global	small	package	and	our	supply	chain	and	freight	businesses.	Our	corporate	marketing	function	is engaged	in	market	and	customer	research,	brand	management,	rate-making	and	revenue	management	policy,	new	product	development,	product	portfolio	management, marketing	alliances	and	e-commerce,	including	the	non-technical	aspects	of	our	web	presence.	Advertising,	public	relations,	and	most	formal	marketing communications	are	centrally	developed	and	controlled.

In	addition	to	our	corporate	marketing	group,	field-based	marketing	personnel	are	assigned	to	our	individual	operating	units	and	are	primarily	engaged	in	business planning,	bid	preparation	and	revenue	management	activities.	These	local	marketing	teams	support	the	execution	of	corporate	initiatives	while	also	managing	limited promotional	and	public	relations	activities	pertinent	to	their	local	markets.

# Employees

Approximately	246,000	of	our	employees	are	employed	under	a	national	master	agreement	and	various	supplemental	agreements	with	local	unions	affiliated	with the	International	Brotherhood	of	Teamsters

("Teamsters").	These	agreements	run	through	July	31,	2008.	At	the	end	of	2007,	UPS	Teamster-represented	employees	ratified	a	new	five-year	labor	contract	which	will take	effect	on	August	1,	2008	and	run	through	July	31,	2013.

We	have	approximately	2,900	pilots	who	are	employed	under	a	collective	bargaining	agreement	with	the	Independent	Pilots	Association	("IPA").	The	current contract	becomes	amendable	at	the	end	of	2011.	Our	airline	mechanics	are	covered	by	a	collective	bargaining	agreement	with	Teamsters	Local	2727,	which	became amendable	on	November	1,	2006.	We	began	formal	negotiations	with	Teamsters	Local	2727	in	October	2006.	In	addition,	the	majority	of	our	ground	mechanics	who	are not	employed	under	agreements	with	the	Teamsters	are	employed	under	collective	bargaining	agreements	with	the	International	Association	of	Machinists	and Aerospace	Workers	(approximately	2,900).	These	agreements	run	through	July	31,	2009.

We	believe	that	our	relations	with	our	employees	are	good.	Every	year	we	survey	all	our	employees	to	determine	their	level	of	job	satisfaction.	Areas	of	concern receive	management	attention	as	we	strive	to	keep	UPS	the	employer	of	choice	among	our	employees.

We	consistently	receive	numerous	awards	and	wide	recognition	as	an	employer-of-choice,	resulting	in	part	from	our	emphasis	on	diversity	and	corporate citizenship.

# Competition

We	are	the	largest	package	delivery	company	in	the	world,	in	terms	of	both	revenue	and	volume.	We	offer	a	broad	array	of	services	in	the	package	and	freight delivery	industry	and,	therefore,	compete	with	many	different	local,	regional,	national	and	international	companies.	Our	competitors	include	worldwide	postal	services, various	motor	carriers,	express	companies,	freight	forwarders,	air	couriers	and	others.	Through	our	supply	chain	service	offerings,	we	compete	with	a	number	of participants	in	the	supply	chain,	financial	services	and	information	technology	industries.

# Competitive	Strengths

Our	competitive	strengths	include:

Integrated	Global	Network.				We	believe	that	our	integrated	global	ground	and	air	network	is	the	most	extensive	in	the	industry.	It	is	the	only	network	that handles	all	levels	of	service	(air,	ground,	domestic,	international,	commercial,	residential)	through	a	single	pickup	and	delivery	service	system.

Our	sophisticated	engineering	systems	allow	us	to	optimize	our	network	efficiency	and	asset	utilization	on	a	daily	basis.	This	unique,	integrated	global	business model	creates	consistent	and	superior	returns.

We	believe	we	have	the	most	comprehensive	integrated	delivery	and	information	services	portfolio	of	any	carrier	in	Europe.	In	other	regions	of	the	world,	we	rely on	both	our	own	and	local	service	providers'	capabilities	to	meet	our	service	commitments.

Leading-edge	Technology.				We	are	a	global	leader	in	developing	technology	that	helps	our	customers	optimize	their	shipping	and	logistics	business	processes	to lower	costs,	improve	service	and	increase	efficiency.

Technology	powers	virtually	every	service	we	offer	and	every	operation	we	perform.	Our	technology	initiatives	are	driven	by	our	customers'	needs.	We	offer	a variety	of	on-line	service	options	that	enable	our	customers	to	integrate	UPS	functionality	into	their	own	businesses	not	only	to	conveniently	send,	manage	and	track their	shipments,	but	to	provide	their	customers	with	better	information	services.	We	provide	the	infrastructure	for	an	Internet	presence	that	extends	to	tens	of	thousands of	customers	who	have	integrated	UPS	tools	directly	into	their	own	web	sites.

Broad,	Portfolio	of	Services.				Our	portfolio	of	services	enables	customers	to	choose	the	delivery	option	that	is	most	appropriate	for	their	requirements. Increasingly,	our	customers	benefit	from	business	solutions	that	integrate	many	UPS	services	in	addition	to	package	delivery.	For	example,	our	supply	chain	services— such	as	freight	forwarding,	customs	brokerage,	order	fulfillment,	and	returns	management—help	improve	the	efficiency	of	the	supply	chain	management	process.

Customer	Relationships.				We	focus	on	building	and	maintaining	long-term	customer	relationships.	We	serve	1.8	million	pick-up	customers	and	6.1	million delivery	customers	daily.	Cross-selling	small	package,	supply	chain	and	freight	services	across	our	customer	base	is	an	important	growth	mechanism	for	the	company.

Brand	Equity.				We	have	built	a	leading	and	trusted	brand	in	our	industry—a	brand	that	stands	for	quality	service,	reliability	and	product	innovation.	The distinctive	appearance	of	our	vehicles	and	the	friendliness	and	helpfulness	of	our	drivers	are	major	contributors	to	our	brand	equity.

Distinctive	Culture.				We	believe	that	the	dedication	of	our	employees	results	in	large	part	from	our	distinctive	"employee-owner"	concept.	Our	employee	stock ownership	tradition	dates	from	1927,	when	our	founders,	who	believed	that	employee	stock	ownership	was	a	vital	foundation	for	successful	business,	first	offered	stock to	employees.	To	facilitate	employee	stock	ownership,	we	maintain	several	stock-based	compensation	programs.

Our	long-standing	policy	of	"promotion	from	within"	complements	our	tradition	of	employee	ownership,	and	this	policy	reduces	the	need	for	us	to	hire	managers and	executive	officers	from	outside	UPS.	The	majority	of	our	management	team	began	their	careers	as	full-time	or	part-time	hourly	UPS	employees,	and	have	spent their	entire	careers	with	us.	Many	of	our	executive	officers	have	more	than	30	years	of	service	with	UPS	and	have	accumulated	a	meaningful	ownership	stake	in	our company.	Therefore,	our	executive	officers	have	a	strong	incentive	to	effectively	manage	UPS,	which	benefits	all	our	shareowners.

Financial	Strength.				Our	balance	sheet	reflects	financial	strength	that	few	companies	can	match.	As	of	December	31,	2007,	we	had	a	balance	of	cash	and marketable	securities	of	approximately	$2.604	billion	and	shareowners'	equity	of	$12.183	billion.	We	carry	long-term	debt	ratings	of	AA-	/	Aa2	from	Standard	& Poor's	and	Moody's,	respectively,	reflecting	our	strong	capacity	to	service	our	obligations.	Our	financial	strength	gives	us	the	resources	to	achieve	global	scale;	to	make investments	in	technology,	transportation	equipment	and	buildings;	to	pursue	strategic	opportunities	which	will	facilitate	our	growth;	and	to	return	value	to	our shareowners	in	the	form	of	increasing	dividends	and	share	repurchases.

# Government	Regulation

The	U.S.	Department	of	Homeland	Security,	through	the	Transportation	Security	Administration	("TSA"),	the	U.S.	Department	of	Transportation	("DOT")	and the	Federal	Aviation	Administration	("FAA"),	regulates	air	transportation	services.

The	TSA	regulates	various	security	aspects	of	air	cargo	transportation	in	a	manner	consistent	with	the	TSA	mission	statement	to	"protect[s]	the	Nation's transportation	systems	to	ensure	freedom	of	movement	for	people	and	commerce."

The	DOT's	authority	primarily	relates	to	economic	aspects	of	air	transportation,	such	as	discriminatory	pricing,	non-competitive	practices,	interlocking	relations and	cooperative	agreements.	The	DOT	also	regulates,	subject	to	the	authority	of	the	President	of	the	United	States,	international	routes,	fares,	rates	and	practices,	and	is authorized	to	investigate	and	take	action	against	discriminatory	treatment	of	U.S.	air	carriers	abroad.	We	are	subject	to	U.S.	customs	laws	and	related	DOT	regulations regarding	the	import	and	export	of	shipments	to	and	from	the	U.S.	In	addition,	our	customs	brokerage	entities	are	subject	to	those	same	laws	and	regulations	as	they relate	to	the	filing	of	documents	on	behalf	of	client	importers	and	exporters.

The	FAA's	authority	primarily	relates	to	safety	aspects	of	air	transportation,	including	aircraft	standards	and	maintenance,	personnel	and	ground	facilities.	In 1988,	the	FAA	granted	us	an	operating	certificate,	which	remains	in	effect	so	long	as	we	meet	the	operational	requirements	of	federal	aviation	regulations.

FAA	regulations	mandate	an	aircraft	corrosion	control	program,	and	aircraft	inspection	and	repair	at	periodic	intervals	specified	by	approved	programs	and procedures,	for	all	aircraft.	Our	total	expenditures	under	these	programs	for	2007	were	$15	million.	The	future	cost	of	repairs	pursuant	to	these	programs	may	fluctuate. All	mandated	repairs	have	been	completed,	or	are	scheduled	to	be	completed,	within	the	timeframes	specified	by	the	FAA.

Our	ground	transportation	of	packages	in	the	U.S.	is	subject	to	the	DOT's	jurisdiction	with	respect	to	the	regulation	of	routes	and	to	both	the	DOT's	and	the	states' jurisdiction	with	respect	to	the	regulation	of	safety,	insurance	and	hazardous	materials.

We	are	subject	to	similar	regulation	in	many	non-U.S.	jurisdictions.	In	addition,	we	are	subject	to	non-U.S.	government	regulation	of	aviation	rights	involving non-U.S.	jurisdictions,	and	non-U.S.	customs	regulation.

The	Postal	Reorganization	Act	of	1970	created	the	U.S.	Postal	Service	as	an	independent	establishment	of	the	executive	branch	of	the	federal	government,	and vested	the	power	to	recommend	domestic	postal	rates	in	a	regulatory	body,	the	Postal	Rate	Commission.	We	participate	in	the	proceedings	before	the	Postal	Rate Commission	in	an	attempt	to	secure	fair	postal	rates	for	competitive	services.

We	are	subject	to	numerous	other	laws	and	regulations	in	connection	with	our	non-package	businesses,	including	customs	regulations,	Food	and	Drug Administration	regulation	of	our	transportation	of	pharmaceuticals,	and	state	and	federal	lending	regulations.

# Where	You	Can	Find	More	Information

We	make	our	annual	reports	on	Form	10-K,	quarterly	reports	on	Form	10-Q,	current	reports	on	Form	8-K,	and	all	amendments	to	these	reports	available	free	of charge	through	the	investor	relations	page	of	our	website,	located	at	www.shareholder.com/ups,	as	soon	as	reasonably	practicable	after	they	are	filed	with	or	furnished	to the	SEC.	Additional	information	about	UPS	is	available	at	www.ups.com.	Our	sustainability	report,	which	presents	the	highlights	of	our	activities	that	support	our commitment	to	acting	responsibly	and	contributing	to	society,	is	available	at	www.sustainability.ups.com	.

We	have	adopted	a	written	Code	of	Business	Conduct	that	applies	to	all	of	our	directors,	officers	and	employees,	including	our	principal	executive	officer	and senior	financial	officers.	It	is	available	in	the	governance	section	of	the	investor	relations	page	of	our	website,	located	at	www.shareholder.com/ups.	In	the	event	that	we make	changes	in,	or	provide	waivers	from,	the	provisions	of	the	Code	of	Business	Conduct	that	the	SEC	requires	us	to	disclose,	we	intend	to	disclose	these	events	in	the governance	section	of	our	investor	relations	website.

Our	Corporate	Governance	Guidelines	and	the	charters	for	our	Audit	Committee,	Compensation	Committee	and	Nominating	and	Corporate	Governance Committee	are	also	available	in	the	governance	section	of	the	investor	relations	page	of	our	website.

See	Footnote	12	to	our	consolidated	financial	statements	for	financial	information	regarding	our	reporting	segments	and	geographic	areas	in	which	we	operate.

# Executive	Officers	of	the	Registrant

# Item	1A. Risk	Factors

Information	about	risk	factors	can	be	found	in	Item	7	of	this	report	under	the	caption	"Risk	Factors".

# Item	1B. Unresolved	Staff	Comments

Not	applicable.

# Item	2. Properties

# Operating	Facilities

We	own	our	headquarters,	which	are	located	in	Atlanta,	Georgia	and	consist	of	about	735,000	square	feet	of	office	space	on	an	office	campus,	and	our	UPS Supply	Chain	Solutions	group's	headquarters,	which	are	located	in	Alpharetta,	Georgia	and	consist	of	about	310,000	square	feet	of	office	space.

We	also	own	our	27	principal	U.S.	package	operating	facilities,	which	have	floor	spaces	that	range	from	about	310,000	to	693,000	square	feet.	In	addition,	we have	a	1.9	million	square	foot	operating	facility	near	Chicago,	Illinois,	which	is	designed	to	streamline	shipments	between	East	Coast	and	West	Coast	destinations,	and we	own	or	lease	over	1,100	additional	smaller	package	operating	facilities	in	the	U.S.	The	smaller	of	these	facilities	have	vehicles	and	drivers	stationed	for	the	pickup	of packages	and	facilities	for	the	sorting,	transfer	and	delivery	of	packages.	The	larger	of	these	facilities	also	service	our	vehicles	and	equipment	and	employ	specialized mechanical	installations	for	the	sorting	and	handling	of	packages.

We	own	or	lease	almost	600	facilities	that	support	our	international	package	operations	and	over	900	facilities	that	support	our	freight	forwarding	and	logistics operations.	Our	freight	forwarding	and	logistics	operations	maintain	facilities	with	about	35	million	square	feet	of	floor	space.	We	own	and	operate	a	logistics	campus consisting	of	approximately	3.5	million	square	feet	in	Louisville,	Kentucky.

UPS	Freight	operates	approximately	270	service	centers	with	a	total	of	6.3	million	square	feet	of	floor	space.	UPS	Freight	owns	200	of	these	service	centers, while	the	remainder	are	occupied	under	operating	lease	agreements.	The	main	offices	of	UPS	Freight	are	located	in	Richmond,	Virginia	and	consist	of	about	240,000 square	feet	of	office	space.

Our	aircraft	are	operated	in	a	hub	and	spokes	pattern	in	the	U.S.	Our	principal	air	hub	in	the	U.S.,	known	as	Worldport,	is	located	in	Louisville,	KY.	The Worldport	facility	consists	of	over	4.1	million	square	feet	and	the	site	includes	approximately	596	acres.	We	are	able	to	sort	over	300,000	packages	per	hour	in	the Worldport	facility.	We	also	have	regional	air	hubs	in	Columbia,	SC;	Dallas,	TX;	Hartford,	CT;	Ontario,	CA;	Philadelphia,	PA;	and	Rockford,	IL.	These	hubs	house facilities	for	the	sorting,	transfer	and	delivery	of	packages.	Our	European	air	hub	is	located	in	Cologne,	Germany,	and	our	Asia-Pacific	air	hub	is	located	in	Taipei, Taiwan.	Our	intra-Asia	air	hub	is	located	at	Clark	Air	Force	Base	in	Pampanga,	Philippines,	our	regional	air	hub	in	Canada	is	located	in	Hamilton,	Ontario,	and	our regional	air	hub	for	Latin	America	and	the	Caribbean	is	in	Miami,	FL.

In	2007,	work	continued	on	our	Worldport	facility	that	will	increase	sorting	capacity	over	the	next	five	years	by	37	percent	to	416,000	packages	per	hour.	The expansion	involves	the	addition	of	two	aircraft	load	/	unload	wings	to	the	hub	building,	followed	by	the	installation	of	high-speed	conveyor	and	computer	control systems.	The	overall	size	of	the	Worldport	facility	will	increase	by	1.1	million	square	feet	to	5.2	million	square	feet,	and	the	facility	will	be	able	to	accommodate	the Boeing	747-400	aircraft	currently	on	order.	The	expansion	will	cost	over	$1	billion	and	is	expected	to	be	completed	by	2010.

Over	the	past	five	years,	UPS	has	invested	about	$600	million	in	China,	including	a	successful	transition	to	become	the	first	wholly-owned	foreign	express	carrier in	the	country.	In	2007,	UPS	broke	ground	for	the	UPS	International	Air	Hub	at	Pudong	International	Airport,	which	will	be	built	on	a	parcel	totaling	1	million	square feet	and	will	open	during	2008.	Rapid	expansion	is	planned	to	a	sorting	capacity	of	17,000	pieces	per	hour.	The	new	hub	will	link	all	of	China	via	Shanghai	to	UPS's international	network	with	direct	service	to	the	Americas,	Europe	and	Asia.	It	also	will	connect	points	served	in	China	by	UPS	through	a	dedicated	service	provided	by Yangtze	River	Express,	a	Chinese	all-cargo	airline.

Our	primary	information	technology	operations	are	consolidated	in	a	435,000	square	foot	owned	facility,	the	Ramapo	Ridge	facility,	which	is	located	on	a	39-acre site	in	Mahwah,	New	Jersey.	We	also	own	a	175,000	square	foot	facility	located	on	a	25-acre	site	in	Alpharetta,	Georgia,	which	serves	as	a	backup	to	the	main information	technology	operations	facility	in	New	Jersey.	This	facility	provides	production	functions	and	backup	capacity	in	the	event	that	a	power	outage	or	other disaster	incapacitates	the	main	data	center.	It	also	helps	us	to	meet	our	internal	communication	needs.

We	believe	that	our	facilities	are	adequate	to	support	our	current	operations.

# Fleet

# Aircraft

The	following	table	shows	information	about	our	aircraft	fleet	as	of	December	31,	2007:

|  | Owned	and | Chartered |  |  |
| :--- | :--- | :--- | :--- | :--- |
| Description | Capital\nLeases | From\nOthers | On\nOrder | Under\nOption |
| McDonnell-Douglas\tDC-8-71 | 20 | — | — | — |
| McDonnell-Douglas\tDC-8-73 | 26 | — | — | — |
| Boeing\t727-100 | 8 | — | — | — |
| Boeing\t727-200 | 2 | — | — | — |
| Boeing\t747-100 | 7 | — | — | — |
| Boeing\t747-200 | 4 | — | — | — |
| Boeing\t747-400F | 3 | — | 9 | — |
| Boeing\t747-400BCF | — | — | 2 | — |
| Boeing\t757-200 | 75 | — | — | — |
| Boeing\t767-300 | 32 | — | 27 | — |
| Boeing\tMD-11 | 38 | — | — | — |
| Airbus\tA300-600 | 53 | — | — | — |
| Other | — | 311 | — | — |
| Total | 268 | 311 | 38 | — |

We	maintain	an	inventory	of	spare	engines	and	parts	for	each	aircraft.

All	of	the	aircraft	we	own	meet	Stage	III	federal	noise	regulations	and	can	operate	at	airports	that	have	aircraft	noise	restrictions.	We	became	the	first	major airline	to	successfully	operate	a	100%	Stage	III	fleet	more	than	three	years	in	advance	of	the	date	required	by	federal	regulations.

During	2007,	we	placed	into	service	10	Boeing	MD-11	aircraft	and	3	Boeing	747-400F	aircraft.	In	February	2007,	we	announced	an	order	for	27	Boeing	767- 300ER	freighters	to	be	delivered	between	2009	and	2012.	We	also	have	firm	commitments	to	purchase	nine	Boeing	747-400F	aircraft	scheduled	for	delivery	between 2008	and	2010	and	two	Boeing	747-400BCF	aircraft	scheduled	for	delivery	during	2008.	Also,	during	2007	we	sold	21	727-100	aircraft,	with	eight	remaining	to	be	sold in	2008.	In	addition,	we	terminated	the	agreement	to	purchase	10	Airbus	A380-800	freighter	aircraft	including	the	options	to	purchase	10	additional	A380-800	aircraft.

# Vehicles

We	operate	a	ground	fleet	of	approximately	100,000	package	cars,	vans,	tractors	and	motorcycles.	Our	ground	support	fleet	consists	of	over	26,000	pieces	of equipment	designed	specifically	to	support	our	aircraft	fleet,	ranging	from	non-powered	container	dollies	and	racks	to	powered	aircraft	main	deck	loaders	and	cargo tractors.	We	also	have	about	41,000	containers	used	to	transport	cargo	in	our	aircraft.

# Safety

We	promote	safety	throughout	our	operations.	Our	Automotive	Fleet	Safety	Program	is	built	with	the	following	components:

•Selection.	Five	out	of	every	six	drivers	come	from	our	part-time	ranks.	Therefore,	many	of	our	new	drivers	are	familiar	with	our	philosophies,	policies, practices	and	training	programs.

•Training.	Training	is	the	cornerstone	of	our	Fleet	Safety	Program.	Our	approach	starts	with	training	the	trainer.	All	trainers	are	certified	to	ensure	that	they have	the	skills	and	motivation	to	effectively	train	novice	drivers.	A	new	driver's	employment	includes	extensive	classroom	and	on-line	training	as	well	as on-road	training,	followed	by	three	safety	training	rides	integrated	into	his	or	her	training	cycle.

•Responsibility.	Our	operations	managers	are	responsible	for	their	drivers'	safety	records.	We	investigate	every	accident.	If	we	determine	that	an	accident could	have	been	prevented,	we	retrain	the	driver.

•Preventive	Maintenance.	An	integral	part	of	our	Fleet	Safety	Program	is	a	comprehensive	Preventive	Maintenance	Program.	Our	fleet	is	tracked	by computer	to	ensure	that	each	vehicle	is	serviced	before	a	breakdown	or	accident	is	likely	to	occur.

•	 Honor	Plan.	A	well-defined	safe	driver	honor	plan	recognizes	and	rewards	our	drivers	when	they	achieve	success.	We	have	over	4,450	drivers	who	have driven	for	25	years	or	more	without	an	avoidable	accident.

Our	workplace	safety	program	is	built	upon	a	comprehensive	health	and	safety	process.	The	foundation	of	this	process	is	our	employee-management	health	and safety	committees.	The	workplace	safety	process	focuses	on	employee	conditioning	and	safety-related	habits.	Our	employee	co-chaired	health	and	safety	committees complete	comprehensive	facility	audits	and	injury	analyses,	and	recommend	facility	and	work	process	changes.

# Item	3. Legal	Proceedings

We	are	a	defendant	in	a	number	of	lawsuits	filed	in	state	and	federal	courts	containing	various	class-action	allegations	under	state	wage-and-hour	laws.	In	one	of these	cases,	Marlo	v.	UPS,	which	has	been	certified	as	a	class	action	in	a	California	federal	court,	plaintiffs	allege	that	they	improperly	were	denied	overtime,	and	seek penalties	for	missed	meal	and	rest	periods,	and	interest	and	attorneys'	fees.	Plaintiffs	purport	to	represent	a	class	of	1,200	full-time	supervisors.	In	August	2005,	the court	granted	summary	judgment	in	favor	of	UPS	on	all	claims,	and	plaintiff	appealed	the	ruling.	In	October	2007,	the	appeals	court	reversed	the	lower	court's	ruling. We	have	denied	any	liability	with	respect	to	these	claims	and	intend	to	vigorously	defend	ourselves	in	this	case.	At	this	time,	we	have	not	determined	the	amount	of	any liability	that	may	result	from	this	matter	or	whether	such	liability,	if	any,	would	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations,	or liquidity.

In	another	case,	Cornn	v.	UPS,	which	was	certified	as	a	class	action	in	a	California	federal	court,	plaintiffs	allege	that	they	were	improperly	denied	wages	and/or overtime	and	meal	and	rest	periods.	Plaintiffs	purport	to	represent	a	class	of	approximately	23,600	drivers	and	seek	back	wages,	penalties,	interest	and	attorneys'	fees. UPS	settled	this	matter	in	full	for	a	total	payment	of	$87	million	in	the	second	quarter	of	2007.	The	settlement	had	no	impact	on	our	2007	operating	results	as	it	was accrued	for	previously	during	the	third	quarter	of	2006.

In	another	case,	Hohider	v.	UPS,	which	in	July	2007	was	certified	as	a	class	action	in	a	Pennsylvania	federal	court,	plaintiffs	have	challenged	certain	aspects	of the	Company's	interactive	process	for	assessing	requests	for	reasonable	accommodation	under	the	Americans	with	Disabilities	Act.	Plaintiffs	purport	to	represent	a	class of	over	35,000	current	and	former	employees,	and	seek	backpay,	compensatory	and	punitive	damages,	as	well	as	attorneys'	fees.	In	August	2007,	the	Third	Circuit	Court of	Appeals	granted	the	Company's	Petition	to	hear	the	appeal	of	the	trial	court's	recent	certification	order.	The	appeal	will	likely	take	one	year.	At	this	time,	we	have	not determined	the	amount	of	any	liability	that	may	result	from	this	matter	or	whether	such	liability,	if	any,	would	have	a	material	adverse	effect	on	our	financial	condition, results	of	operations,	or	liquidity.

UPS	and	Mail	Boxes	Etc.,	Inc.	are	defendants	in	various	lawsuits	brought	by	franchisees	who	operate	Mail	Boxes	Etc.	centers	and	The	UPS	Store	locations. These	lawsuits	relate	to	the	re-branding	of	Mail	Boxes	Etc.	centers	to	The	UPS	Store,	the	The	UPS	Store	business	model,	the	representations	made	in	connection	with	the rebranding	and	the	sale	of	The	UPS	Store	franchises,	and	UPS's	sale	of	services	in	the	franchisees'	territories.

We	have	denied	any	liability	with	respect	to	these	claims	and	intend	to	defend	ourselves	vigorously.	At	this	time,	we	have	not	determined	the	amount	of	any	liability	that may	result	from	these	matters	or	whether	such	liability,	if	any,	would	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations,	or	liquidity.

UPS	and	UPS	Freight,	along	with	several	other	companies	involved	in	the	LTL	freight	business,	have	been	named	as	defendants	in	numerous	putative	class- action	lawsuits	filed	since	July	30,	2007	in	courts	across	the	nation.	The	cases	have	been	consolidated	for	pretrial	purposes	in	a	Multi-District	Litigation	proceeding	in the	United	States	District	Court	for	the	Northern	District	of	Georgia.	The	lawsuits	allege	that	the	defendants	conspired	to	fix	fuel	surcharge	rates,	and	they	seek injunctive	relief,	treble	damages	and	attorneys'	fees.	We	intend	to	defend	against	these	suits	vigorously.	These	cases	are	at	a	preliminary	stage	and	at	this	time,	we	have not	determined	the	amount	of	any	liability	that	may	result	from	this	matter	or	whether	such	liability,	if	any,	would	have	a	material	adverse	effect	on	our	financial condition,	results	of	operations,	or	liquidity.

We	are	a	defendant	in	various	other	lawsuits	that	arose	in	the	normal	course	of	business.	We	believe	that	the	eventual	resolution	of	these	cases	will	not	have	a material	adverse	effect	on	our	financial	condition,	results	of	operations,	or	liquidity.

# Other	Matters

We	received	grand	jury	subpoenas	from	the	Antitrust	Division	of	the	U.S.	Department	of	Justice	("DOJ")	regarding	the	DOJ's	investigations	into	air	cargo	pricing practices	in	July	2006	and	into	freight	forwarding	pricing	practices	in	December	2007.	In	October	2007,	we	received	information	requests	from	the	European Commission	and	the	New	Zealand	Commerce	Commission	relating	to	investigations	of	freight	forwarding	pricing	practices.	We	are	cooperating	with	these investigations.

# Item	4. Submission	of	Matters	to	a	Vote	of	Security	Holders

# PART	II

# Item	5. Market	for	Registrant's	Common	Equity,	Related	Stockholder	Matters	and	Issuer	Purchases	of	Equity	Securities

Our	Class	A	common	stock	is	not	listed	on	a	national	securities	exchange	or	traded	in	an	organized	over-the-counter	market,	but	each	share	of	our	Class	A common	stock	is	convertible	into	one	share	of	our	Class	B	common	stock.

The	following	is	a	summary	of	our	Class	B	common	stock	price	activity	and	dividend	information	for	2007	and	2006.	Our	Class	B	common	stock	is	listed	on	the New	York	Stock	Exchange	under	the	symbol	"UPS."

|  | High | Low | Close | Dividends<br>Declared |
| :--- | :--- | :--- | :--- | :--- |
| 2007: |  |  |  |  |
| First\tQuarter | $75.98 | $68.66 | $70.10 | $0.42 |
| Second\tQuarter | $74.48 | $69.54 | $73.00 | $0.42 |
| Third\tQuarter | $78.99 | $72.70 | $75.10 | $0.42 |
| Fourth\tQuarter | $77.00 | $70.00 | $70.72 | $0.42 |
| 2006: |  |  |  |  |
| First\tQuarter | $80.16 | $72.74 | $79.38 | $0.38 |
| Second\tQuarter | $83.99 | $77.55 | $82.33 | $0.38 |
| Third\tQuarter | $83.00 | $65.50 | $71.94 | $0.38 |
| Fourth\tQuarter | $79.72 | $71.95 | $74.98 | $0.38 |

The	policy	of	our	Board	of	Directors	is	to	declare	dividends	each	year	out	of	current	earnings.	The	declaration	of	future	dividends	is	subject	to	the	discretion	of the	Board	of	Directors	in	light	of	all	relevant	facts,	including	earnings,	general	business	conditions	and	working	capital	requirements.

On	October	30,	2007,	the	Board	of	Directors	approved	an	increase	in	our	share	repurchase	authorization	to	$2.0	billion,	which	replaced	the	remaining	amount available	under	our	February	2007	share	repurchase	authorization.	In	January	2008,	the	Board	of	Directors	approved	an	increase	in	our	share	repurchase	authorization to	$10.0	billion,	as	part	of	a	new	financial	policy.	Unless	terminated	earlier,	the	program	will	expire	when	we	have	purchased	all	shares	authorized	for	repurchase	under the	program.

A	summary	of	repurchases	of	our	Class	A	and	Class	B	common	stock	during	the	fourth	quarter	of	2007	is	as	follows	(in	millions,	except	per	share	amounts):

|  |  |  | Total	Number | Value	of	Shares	that |
| :--- | :--- | :--- | :--- | :--- |
|  | Total\tNumber | Average | of\tShares\tPurchased | May\tYet\tbe\tPurchased |
|  | of\tShares | Price\tPaid | as\tPart\tof\tPublicly | Under\tthe\tProgram |
|  | Purchased(1) | Per\tShare(1) | Announced\tProgram | (as\tof\tmonth-end) |
| October\t1—October\t31,\t2007 | 2.1 | $75.58 | 2.1 | $60 |
| November\t1—November\t30,\t2007 | 3.8 | 72.19 | 3.8 | 1,725 |
| December\t1—December\t31,\t2007 | 2.2 | 73.04 | 2.2 | 1,566 |
| Total\tOctober\t1—December\t31,\t2007 | 8.1 | $73.31 | 8.1 | $1,566 |

(1) Includes	shares	repurchased	through	our	publicly	announced	share	repurchase	program	and	shares	tendered	to	pay	the	exercise	price	and	tax	withholding	on employee	stock	options.

# Shareowner	Return	Performance	Graph

The	following	Performance	Graph	and	related	information	shall	not	be	deemed	"soliciting	material"	or	to	be	"filed"	with	the	Securities	and	Exchange Commission,	nor	shall	such	information	be	incorporated	by	reference	into	any	future	filing	under	the	Securities	Act	of	1933	or	Securities	Exchange	Act	of	1934,	each	as amended,	except	to	the	extent	that	the	Company	specifically	incorporates	such	information	by	reference	into	such	filing.

The	following	graph	shows	a	five-year	comparison	of	cumulative	total	shareowners'	returns	for	our	class	B	common	stock,	the	S&P	500	Index,	and	the	Dow Jones	Transportation	Average.	The	comparison	of	the	total	cumulative	return	on	investment,	which	is	the	change	in	the	quarterly	stock	price	plus	reinvested	dividends for	each	of	the	quarterly	periods,	assumes	that	$100	was	invested	on	December	31,	2002	in	the	S&P	500	Index,	the	Dow	Jones	Transportation	Average,	and	the	class	B common	stock	of	United	Parcel	Service,	Inc.

|  | 12/31/02 | 12/31/03 | 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| United\tParcel\tService,\tInc. | $100.00 | $119.89 | $139.55 | $124.88 | $127.08 | $122.64 |
| S&amp;P\t500\tIndex | $100.00 | $128.68 | $142.68 | $149.69 | $173.33 | $182.85 |
| Dow\tJones\tTransportation\tAverage | $100.00 | $131.84 | $168.39 | $188.00 | $206.46 | $209.40 |

# Securities	Authorized	for	Issuance	under	Equity	Compensation	Plans

The	following	table	provides	information	as	of	December	31,	2007	regarding	compensation	plans	under	which	our	Class	A	common	stock	is	authorized	for issuance.	These	plans	do	not	authorize	the	issuance	of	our	Class	B	common	stock.

# EQUITY	COMPENSATION	PLANS

|  | Number	of	securities	to	be<br>issued	upon	exercise<br>of	outstanding	options,<br>warrants	and	rights<br>(a) | Weighted-average	exercise<br>price	of	outstanding	options,<br>warrants	and	rights<br>(b) | available	for	future	issuance<br>under	equity	compensation<br>plans	(excluding	securities<br>reflected	in	column	(a))<br>(c) |
| :--- | :--- | :--- | :--- |
| Plan\tcategory |  |  |  |
| Equity\tcompensation\tplans\tapproved\tby |  |  |  |
| security\tholders | 33,493,586 | $36.12 | 44,589,843 |
| Equity\tcompensation\tplans\tnot\tapproved\tby |  |  |  |
| security\tholders | — | N/A | — |
| Total | 33,493,586 | $36.12 | 44,589,843 |

Our	shareowners	have	approved	the	United	Parcel	Service,	Inc.	Incentive	Compensation	Plan	and	the	United	Parcel	Service,	Inc.	Discounted	Employee	Stock Purchase	Plan.	The	material	features	of	each	of	these	plans	are	described	in	Note	11	to	our	consolidated	financial	statements	included	in	this	Form	10-K.

# Item	6. Selected	Financial	Data

The	following	table	sets	forth	selected	financial	data	for	each	of	the	five	years	in	the	period	ended	December	31,	2007	(amounts	in	millions,	except	per	share amounts).	This	financial	data	should	be	read	together	with	our	consolidated	financial	statements	and	related	notes,	Management's	Discussion	and	Analysis	of	Financial Condition	and	Results	of	Operations,	and	other	financial	data	appearing	elsewhere	in	this	report.

|  | 2007 | 2006 | 2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Selected\tIncome\tStatement\tData |  |  |  |  |  |
| Revenue: |  |  |  |  |  |
| U.S.\tDomestic\tPackage | $30,985 | $30,456 | $28,610 | $26,960 | $25,362 |
| International\tPackage | \t 10,281 | 9,089 | 7,977 | 6,809 | 5,609 |
| Supply\tChain\t&amp;\tFreight | 8,426 | 8,002 | 5,994 | 2,813 | 2,514 |
| Total\trevenue | \t 49,692 | \t 47,547 | \t 42,581 | \t 36,582 | \t 33,485 |
| Operating\texpenses: |  |  |  |  |  |
| Compensation\tand\tbenefits | \t 31,745 | \t 24,421 | \t 22,517 | \t 20,823 | \t 19,251 |
| Other | \t 17,369 | \t 16,491 | \t 13,921 | \t 10,770 | 9,789 |
| Total\toperating\texpenses | \t 49,114 | \t 40,912 | \t 36,438 | \t 31,593 | \t 29,040 |
| Operating\tprofit\t(loss): |  |  |  |  |  |
| U.S.\tDomestic\tPackage | (1,531) | 4,923 | 4,493 | 3,702 | 3,657 |
| International\tPackage | 1,831 | 1,710 | 1,494 | 1,149 | 732 |
| Supply\tChain\tand\tFreight | 278 | 2 | 156 | 138 | 56 |
| Total\toperating\tprofit | 578 | 6,635 | 6,143 | 4,989 | 4,445 |
| Other\tincome\t(expense): |  |  |  |  |  |
| Investment\tincome | 99 | 86 | 104 | 82 | 18 |
| Interest\texpense | (246) | (211) | (172) | (149) | (121) |
| Gain\ton\tredemption\tof\tlong-term\tdebt | — | — | — | — | 28 |
| Income\tbefore\tincome\ttaxes | 431 | 6,510 | 6,075 | 4,922 | 4,370 |
| Income\ttax\texpense | (49) | (2,308) | (2,205) | (1,589) | (1,472) |
| Net\tincome | $382 | $4,202 | $3,870 | $3,333 | $2,898 |
| Per\tshare\tamounts: |  |  |  |  |  |
| Basic\tearnings\tper\tshare | $0.36 | $3.87 | $3.48 | $2.95 | $2.57 |
| Diluted\tearnings\tper\tshare | $0.36 | $3.86 | $3.47 | $2.93 | $2.55 |
| Dividends\tdeclared\tper\tshare | $1.68 | $1.52 | $1.32 | $1.12 | $0.92 |
| Weighted\taverage\tshares\toutstanding: |  |  |  |  |  |
| Basic | 1,057 | 1,085 | 1,113 | 1,129 | 1,128 |
| Diluted | 1,063 | 1,089 | 1,116 | 1,137 | 1,138 |

|  | 2007 | 2006 | As	of	December	31,<br>2005 | 2004 | 2003 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Selected\tBalance\tSheet\tData |  |  |  |  |  |
| Cash\tand\tmarketable\tsecurities | $2,604 | $1,983 | $3,041 | $5,197 | $3,952 |
| Total\tassets | \t 39,042 | \t 33,210 | \t 34,947 | \t 32,847 | \t 29,734 |
| Long-term\tdebt | 7,506 | 3,133 | 3,159 | 3,261 | 3,149 |
| Shareowners'\tequity | \t 12,183 | \t 15,482 | \t 16,884 | \t 16,378 | \t 14,852 |

# Item	7. Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations

The	following	tables	set	forth	information	showing	the	change	in	revenue,	average	daily	package	volume,	and	average	revenue	per	piece,	both	in	dollars	or amounts	and	in	percentage	terms:

|  | Year	Ended<br>December	31,<br>2007 | 2006 | Change<br>$% | Change<br>$% |
| :--- | :--- | :--- | :--- | :--- |
| Revenue\t(in\tmillions): |  |  |  |  |
| U.S.\tDomestic\tPackage: |  |  |  |  |
| Next\tDay\tAir | $6,738 | $6,778 | $(40) | (0.6)% |
| Deferred | 3,359 | 3,424 | (65) | (1.9) |
| Ground | \t 20,888 | \t 20,254 | 634 | 3.1 |
| Total\tU.S.\tDomestic\tPackage | \t 30,985 | \t 30,456 | 529 | 1.7 |
| International\tPackage: |  |  |  |  |
| Domestic | 2,177 | 1,950 | 227 | 11.6 |
| Export | 7,488 | 6,554 | 934 | 14.3 |
| Cargo | 616 | 585 | 31 | 5.3 |
| Total\tInternational\tPackage | \t 10,281 | 9,089 | \t 1,192 | 13.1 |
| Supply\tChain\t&amp;\tFreight: |  |  |  |  |
| Forwarding\tand\tLogistics | 5,911 | 5,681 | 230 | 4.0 |
| Freight | 2,108 | 1,952 | 156 | 8.0 |
| Other | 407 | 369 | 38 | 10.3 |
| Total\tSupply\tChain\t&amp;\tFreight | 8,426 | 8,002 | 424 | 5.3 |
| Consolidated | $49,692 | $47,547 | $2,145 | 4.5% |
| Average\tDaily\tPackage\tVolume\t(in\tthousands): |  |  | # |  |
| U.S.\tDomestic\tPackage: |  |  |  |  |
| Next\tDay\tAir | 1,277 | 1,267 | 10 | 0.8% |
| Deferred | 974 | 993 | (19) | (1.9) |
| Ground | \t 11,606 | \t 11,537 | 69 | 0.6 |
| Total\tU.S.\tDomestic\tPackage | \t 13,857 | \t 13,797 | 60 | 0.4 |
| International\tPackage: |  |  |  |  |
| Domestic | 1,132 | 1,108 | 24 | 2.2 |
| Export | 761 | 689 | 72 | 10.4 |
| Total\tInternational\tPackage | 1,893 | 1,797 | 96 | 5.3 |
| Consolidated | \t 15,750 | \t 15,594 | 156 | 1.0% |
| Operating\tdays\tin\tperiod | 252 | 253 |  |  |
| Average\tRevenue\tPer\tPiece: |  |  | $ |  |
| U.S.\tDomestic\tPackage: |  |  |  |  |
| Next\tDay\tAir | $20.94 | $21.14 | $(0.20) | (0.9)% |
| Deferred | 13.69 | 13.63 | 0.06 | 0.4 |
| Ground | 7.14 | 6.94 | 0.20 | 2.9 |
| Total\tU.S.\tDomestic\tPackage | 8.87 | 8.73 | 0.14 | 1.6 |
| International\tPackage: |  |  |  |  |
| Domestic | 7.63 | 6.96 | 0.67 | 9.6 |
| Export | 39.05 | 37.60 | 1.45 | 3.9 |
| Total\tInternational\tPackage | 20.26 | 18.70 | 1.56 | 8.3 |
| Consolidated | $10.24 | $9.88 | $0.36 | 3.6% |

|  | Year	Ended<br>December	31,<br>2006 | 2005 | Change<br>$% | Change<br>$% |
| :--- | :--- | :--- | :--- | :--- |
| Revenue\t(in\tmillions): |  |  |  |  |
| U.S.\tDomestic\tPackage: |  |  |  |  |
| Next\tDay\tAir | $6,778 | $6,381 | $397 | 6.2% |
| Deferred | 3,424 | 3,258 | 166 | 5.1 |
| Ground | \t 20,254 | \t 18,971 | \t 1,283 | 6.8 |
| Total\tU.S.\tDomestic\tPackage | \t 30,456 | \t 28,610 | \t 1,846 | 6.5 |
| International\tPackage: |  |  |  |  |
| Domestic | 1,950 | 1,588 | 362 | 22.8 |
| Export | 6,554 | 5,856 | 698 | 11.9 |
| Cargo | 585 | 533 | 52 | 9.8 |
| Total\tInternational\tPackage | 9,089 | 7,977 | \t 1,112 | 13.9 |
| Supply\tChain\t&amp;\tFreight: |  |  |  |  |
| Forwarding\tand\tLogistics | 5,681 | 4,859 | 822 | 16.9 |
| UPS\tFreight | 1,952 | 797 | \t 1,155 | 144.9 |
| Other | 369 | 338 | 31 | 9.2 |
| Total\tSupply\tChain\t&amp;\tFreight | 8,002 | 5,994 | \t 2,008 | 33.5 |
| Consolidated | $47,547 | $42,581 | $4,966 | 11.7% |
| Average\tDaily\tPackage\tVolume\t(in\tthousands): |  |  | # |  |
| U.S.\tDomestic\tPackage: |  |  |  |  |
| Next\tDay\tAir | 1,267 | 1,228 | 39 | 3.2% |
| Deferred | 993 | 946 | 47 | 5.0 |
| Ground | \t 11,537 | \t 11,044 | 493 | 4.5 |
| Total\tU.S.\tDomestic\tPackage | \t 13,797 | \t 13,218 | 579 | 4.4 |
| International\tPackage: |  |  |  |  |
| Domestic | 1,108 | 916 | 192 | 21.0 |
| Export | 689 | 616 | 73 | 11.9 |
| Total\tInternational\tPackage | 1,797 | 1,532 | 265 | 17.3 |
| Consolidated | \t 15,594 | \t 14,750 | 844 | 5.7% |
| Operating\tdays\tin\tperiod | 253 | 254 |  |  |
| Average\tRevenue\tPer\tPiece: |  |  | $ |  |
| U.S.\tDomestic\tPackage: |  |  |  |  |
| Next\tDay\tAir | $21.14 | $20.46 | $0.68 | 3.3% |
| Deferred | 13.63 | 13.56 | 0.07 | 0.5 |
| Ground | 6.94 | 6.76 | 0.18 | 2.7 |
| Total\tU.S.\tDomestic\tPackage | 8.73 | 8.52 | 0.21 | 2.5 |
| International\tPackage: |  |  |  |  |
| Domestic | 6.96 | 6.83 | 0.13 | 1.9 |
| Export | 37.60 | 37.43 | 0.17 | 0.5 |
| Total\tInternational\tPackage | 18.70 | 19.13 | (0.43) | (2.2) |
| Consolidated | $9.88 | $9.62 | $0.26 | 2.7% |

The	following	tables	set	forth	information	showing	the	change	in	UPS	Freight's	less-than-truckload	("LTL")	revenue,	shipments,	and	gross	weight	hauled,	both	in dollars	or	amounts	and	in	percentage	terms:

|  | Year	Ended<br>December	31, |  | Change | Change |
| :--- | :--- | :--- | :--- | :--- |
|  | 2007 | 2006 | $% |  |
| LTL\trevenue\t(in\tmillions) | $2,013 | $1,831 | $182 | 9.9% |
| LTL\trevenue\tper\tLTL\thundredweight | $17.41 | $15.93 | $1.48 | 9.3% |
| LTL\tshipments\t(in\tthousands) | \t 10,481 | 9,638 | 843 | 8.7% |
| LTL\tshipments\tper\tday\t(in\tthousands) | 41.4 | 38.2 | 3.2 | 8.3% |
| LTL\tgross\tweight\thauled\t(in\tmillions\tof\tpounds) | \t 11,560 | \t 11,498 | 62 | 0.5% |
| LTL\tweight\tper\tshipment | 1,103 | 1,193 | (90) | (7.5)% |
| Operating\tdays\tin\tperiod | 253 | 252 |  |  |

|  | Year	Ended<br>December	31, |  | Change | Change |
| :--- | :--- | :--- | :--- | :--- |
|  | 2006 | 2005 | $% | $% |
| LTL\trevenue\t(in\tmillions) | $1,831 | $754 | $1,077 | 142.8% |
| LTL\trevenue\tper\tLTL\thundredweight | $15.93 | $15.53 | $0.40 | 2.6% |
| LTL\tshipments\t(in\tthousands) | 9,638 | 4,113 | \t 5,525 | 134.3% |
| LTL\tshipments\tper\tday\t(in\tthousands) | 38.2 | 40.7 | (2.5) | (6.1)% |
| LTL\tgross\tweight\thauled\t(in\tmillions\tof\tpounds) | \t 11,498 | 4,855 | \t 6,643 | 136.8% |
| LTL\tweight\tper\tshipment | 1,193 | 1,180 | 13 | 1.1% |
| Operating\tdays\tin\tperiod | 252 | 101 |  |  |

Overnite	Corp.,	now	known	as	UPS	Freight,	was	acquired	on	August	5,	2005.	The	information	presented	above	reflects	the	performance	of	UPS	Freight	for	the period	subsequent	to	the	date	of	acquisition.

# Operating	Profit	and	Margin

The	following	tables	set	forth	information	showing	the	change	in	operating	profit	(loss),	both	in	dollars	(in	millions)	and	in	percentage	terms,	for	each	reporting segment:

|  | Year	Ended<br>December	31,<br>2007 | 2006 | Change<br>$% | Change<br>$% |
| :--- | :--- | :--- | :--- | :--- |
| Reporting\tSegment |  |  |  |  |
| U.S.\tDomestic\tPackage | $(1,531) | $4,923 | $(6,454) | N/A |
| International\tPackage | 1,831 | \t 1,710 | 121 | 7.1% |
| Supply\tChain\t&amp;\tFreight | 278 | 2 | 276 | N/A |
| Consolidated\tOperating\tProfit | $578 | $6,635 | $(6,057) | (91.3)% |

|  | Year	Ended<br>December	31,<br>2006 | 2005 | Change<br>$% | Change<br>$% |
| :--- | :--- | :--- | :--- | :--- |
| Reporting\tSegment |  |  |  |  |
| U.S.\tDomestic\tPackage | $4,923 | $4,493 | $430 | 9.6% |
| International\tPackage | 1,710 | \t 1,494 | 216 | 14.5 |
| Supply\tChain\t&amp;\tFreight | 2 | 156 | (154) | (98.7) |
| Consolidated\tOperating\tProfit | $6,635 | $6,143 | $492 | 8.0% |

The	following	table	sets	forth	information	showing	the	operating	margin	for	each	reporting	segment:

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Reporting\tSegment |  |  |  |
| U.S.\tDomestic\tPackage | (4.9)% | 16.2% | 15.7% |
| International\tPackage | 17.8% | 18.8% | 18.7% |
| Supply\tChain\t&amp;\tFreight | 3.3% | 0.0% | 2.6% |
| Consolidated\tOperating\tMargin | 1.2% | 14.0% | 14.4% |

# U.S.	Domestic	Package	Operations

U.S.	Domestic	Package	revenue	increased	$529	million,	or	1.7%,	in	2007,	due	to	a	1.6%	improvement	in	revenue	per	piece	and	a	0.4%	increase	in	average	daily package	volume.	Next	Day	Air	volume	increased	0.8%	and	Ground	volume	increased	0.6%	for	the	year,	largely	as	a	result	of	a	solid	peak	season	in	the	fourth	quarter, when	our	Next	Day	Air	volume	rose	2.2%	and	Ground	volume	increased	1.5%.	Deferred	air	volume	declined	1.9%	in	2007.	Our	domestic	air	and	ground	products	have been	impacted	by	the	slowing	U.S.	economy	and	weak	small	package	market	in	2007.	Trends	in	U.S.	industrial	production	and	business-to-consumer	shipments	in	2007 have	not	been	favorable	to	the	overall	small	package	market,	which	places	pressure	on	our	domestic	package	volume.

The	increase	in	overall	revenue	per	piece	of	1.6%	in	2007	resulted	primarily	from	a	rate	increase	that	took	effect	earlier	in	the	year,	but	was	negatively	impacted by	lower	fuel	surcharge	revenue	and	an	unfavorable	shift	in	product	mix.	Next	Day	Air	revenue	per	piece	declined	0.9%,	and	was	negatively	impacted	by	strong	growth in	our	lower-yielding	Next	Day	Air	Saver	products.	Deferred	revenue	per	piece	increased	only	0.4%.	The	change	in	revenue	per	piece	for	all	our	air	products	was negatively	impacted	by	a	lower	fuel	surcharge	rate	(discussed	further	below).	Ground	revenue	per	piece	increased	2.9%,	primarily	due	to	the	rate	increase,	but	was	also impacted	slightly	by	a	higher	fuel	surcharge	due	to	higher	diesel	fuel	prices	in	2007	compared	with	2006.	Overall	product	mix	reduced	revenue	per	piece,	as	our	premium air	products	suffered	volume	declines	while	our	ground	volume	grew	0.6%.

Consistent	with	the	practice	in	previous	years,	a	rate	increase	took	effect	on	January	1,	2007.	We	increased	the	base	rates	6.9%	on	UPS	Next	Day	Air,	UPS	2nd Day	Air,	and	UPS	3	Day	Select,	and	4.9%	on	UPS	Ground.	Other	pricing	changes	included	a	$0.10	increase	in	the	residential	surcharge,	and	a	$0.75	increase	in	the charge	for	undeliverable	packages	after	three	delivery	attempts.

In	January	2007,	we	modified	the	fuel	surcharge	on	domestic	air	services	by	reducing	the	index	used	to	determine	the	fuel	surcharge	by	2%.	This	fuel	surcharge continues	to	be	based	on	the	U.S.	Energy	Department's	Gulf	Coast	spot	price	for	a	gallon	of	kerosene-type	jet	fuel.	Based	on	published	rates,	the	average	fuel	surcharge on	domestic	air	products	was	12.17%	in	2007,	a	decline	from	the	14.02%	in	2006,	primarily	due	to	the	2%	reduction	in	the	index.	The	ground	fuel	surcharge	rate continues	to	fluctuate	based	on	the	U.S.	Energy	Department's	On-Highway	Diesel	Fuel	Price.	Based	on	published	rates,	the	average	fuel	surcharge	on	domestic	ground products	was	4.30%	in	2007,	an	increase	from	4.13%	in	2006,	due	to	higher	diesel	fuel	prices.	As	a	result	of	the	air	products	index	rate	reduction	and	fuel	market	price movements,	total	domestic	fuel	surcharge	revenue	decreased	by	$110	million	in	2007.

U.S.	Domestic	Package	incurred	an	operating	loss	of	$1.531	billion	in	2007,	compared	with	a	$4.923	billion	operating	profit	in	2006,	largely	due	to	a	$6.100 billion	charge	related	to	our	withdrawal	from	the	Central	States,	Southeast	and	Southwest	Areas	Pension	Fund	("Central	States	Pension	Fund").	Additionally,	Domestic Package	operating	results	were	negatively	impacted	by	low	revenue	growth,	an	aircraft	impairment	charge,	and	a	special	voluntary	separation	opportunity	("SVSO") charge.	The	aircraft	impairment	and	SVSO	charges	reduced	domestic	operating	profit	by	$159	million	and	$53	million,	respectively.	These	factors	were	partially	offset by	cost	controls,	including,	among	other	categories,	lower	self-insurance	expense.	The	expense	associated	with	our	self-insurance

accruals	for	workers'	compensation	claims,	automotive	liability	and	general	business	liabilities	declined	as	a	result	of	several	factors.	The	Central	States	Pension	Fund withdrawal,	aircraft	impairment,	and	SVSO	charges,	as	well	as	the	impact	of	lower	self-insurance	expense,	are	discussed	further	in	the	"Operating	Expenses"	section.

U.S.	Domestic	Package	revenue	increased	$1.846	billion,	or	6.5%,	for	the	year,	with	average	daily	package	volume	up	4.4%.	Volume	gains	were	realized	across all	products	primarily	due	to	a	solid	U.S.	economy,	strong	small	package	market	and	continuing	efforts	to	generate	new	volume.	Overall	domestic	volume	growth moderated	in	the	latter	half	of	2006	compared	with	2005,	due	to	slower	overall	economic	growth	in	the	U.S.	and	a	downturn	in	industrial	production	during	the	fourth quarter.

Pricing	remained	firm	as	overall	revenue	per	piece	was	up	2.5%	for	the	year.	Ground	revenue	per	piece	increased	2.7%	and	Next	Day	Air	revenue	per	piece increased	3.3%	for	the	year,	primarily	due	to	the	impact	of	a	rate	increase	that	took	effect	in	2006	and	the	impact	of	an	increased	fuel	surcharge	rate	in	2006	compared	to 2005.	Deferred	revenue	per	piece	increased	0.5%	for	the	year	for	the	same	reasons,	but	was	adversely	affected	by	the	growth	in	lighter	weight,	lower	revenue	packages.

On	January	2,	2006,	a	rate	increase	took	effect	which	was	in	line	with	previous	years'	rate	increases.	We	increased	rates	5.5%	on	UPS	Next	Day	Air,	UPS	2nd Day	Air,	and	UPS	3	Day	Select,	and	3.9%	on	UPS	Ground.	Other	pricing	changes	included	a	new	charge	for	undeliverable	packages	after	three	delivery	attempts	and	an increase	in	rates	for	proof	of	delivery	features	for	our	Delivery	Required	and	Signature	Confirmation	services.	The	residential	surcharge	increased	$0.25	for	UPS	Ground services	and	$0.35	for	UPS	Next	Day	Air,	UPS	2nd	Day	Air	and	UPS	3	Day	Select.

In	January	2006,	we	modified	the	fuel	surcharge	on	domestic	air	services	by	reducing	the	index	used	to	determine	the	fuel	surcharge	by	2%.	The	air	fuel	surcharge was	subject	to	a	maximum	cap	of	12.50%	through	June	4,	2006.	Effective	June	5,	2006,	we	reduced	the	index	by	another	2%	and	no	longer	applied	a	cap	to	the	air	fuel surcharge.	This	fuel	surcharge	continued	to	be	based	on	the	U.S.	Energy	Department's	Gulf	Coast	spot	price	for	a	gallon	of	kerosene-type	jet	fuel.	Based	on	published rates,	the	average	fuel	surcharge	on	domestic	air	products	was	14.02%	in	2006,	as	compared	with	10.23%	in	2005.	Additionally,	the	UPS	Ground	fuel	surcharge continued	to	fluctuate	based	on	the	U.S.	Energy	Department's	On-Highway	Diesel	Fuel	Price.	Based	on	published	rates,	the	average	fuel	surcharge	on	domestic	ground products	was	4.13%	in	2006,	as	compared	to	2.86%	in	2005.	Total	domestic	fuel	surcharge	revenue	increased	by	$542	million	in	2006,	due	to	higher	jet	and	diesel	fuel prices,	volume	growth,	and	the	modifications	to	our	fuel	surcharges	noted	above.	These	fuel	surcharges	are	used	to	provide	some	protection	against	the	increased	fuel expense	that	we	incur	due	to	higher	fuel	prices,	as	well	as	the	increased	purchased	transportation	expense	which	is	also	affected	by	higher	fuel	prices.

U.S.	Domestic	Package	operating	profit	increased	$430	million,	or	9.6%,	for	the	year,	and	the	operating	margin	increased	by	approximately	50	basis	points	to 16.2%.	This	increase	was	primarily	a	result	of	the	revenue	growth	described	previously,	combined	with	efficiencies	from	leveraging	our	integrated	ground	and	air networks.	The	2006	operating	profit	for	our	U.S.	Domestic	Package	segment	was	negatively	impacted	by	the	settlement	of	a	class	action	litigation	(see	"Contingencies" section	below),	which	resulted	in	an	$87	million	charge	to	expense.	Operating	profit	for	this	segment	was	positively	affected	as	a	result	of	lower	expense	associated	with our	self-insurance	accruals	for	workers'	compensation	claims,	automotive	liability	and	general	business	liabilities	in	2006	compared	with	2005.

# International	Package	Operations

International	Package	revenue	improved	$1.192	billion,	or	13.1%	in	2007,	driven	by	a	10.4%	volume	increase	for	our	export	products	and	an	8.3%	increase	in total	revenue	per	piece.	The	growth	in	revenue	per	piece

was	positively	impacted	by	base	rate	increases	and	the	weakening	of	the	U.S.	Dollar	against	several	major	foreign	currencies	in	2007,	but	was	adversely	affected	by	a lower	fuel	surcharge	rate	applied	to	our	U.S.	origin	international	air	products.

Export	volume	increased	throughout	the	world.	Asian	export	volume	grew	strongly	in	key	markets	during	the	year,	especially	China.	Asian	export	volume continues	to	benefit	from	our	geographic	service	expansion,	as	well	as	strong	economic	growth,	which	benefits	our	intra-Asian	package	business.	To	continue	this expansion,	we	received	authority	in	2007	to	operate	six	daily	flights	between	the	U.S.	and	Nagoya,	Japan.	We	are	also	constructing	a	package	and	freight	air	hub	in Shanghai,	China	that	is	expected	to	open	in	2008.	This	hub	will	link	Shanghai	to	our	international	air	network,	with	direct	service	to	Europe,	Asia,	and	the	Americas.

European	export	volume	also	grew	solidly,	largely	due	to	continued	growth	in	the	transborder	business	and	improved	economic	and	industrial	output	in	the European	Union.	U.S.	export	volume	increased	at	a	slower	pace.	Non-U.S.	domestic	volume	increased	2.2%	for	the	year,	and	was	impacted	by	growth	in	several	major European	countries	and	Canada.

Export	revenue	per	piece	increased	3.9%	for	the	year,	largely	due	to	rate	increases	and	favorable	exchange	rates,	but	was	adversely	impacted	by	relatively	higher growth	in	lower	revenue	per	piece	transborder	products,	and	a	reduction	in	certain	fuel	surcharge	rates.	Non-U.S.	domestic	revenue	per	piece	increased	9.6%	for	the	year, and	was	affected	by	rate	increases	and	favorable	exchange	rates.	Total	average	revenue	per	piece	increased	2.7%	on	a	currency-adjusted	basis,	and	the	overall	change	in segment	revenue	was	positively	affected	by	$464	million	in	2007	due	to	currency	fluctuations,	net	of	hedging	activity.

In	January	2007,	we	increased	rates	6.9%	for	international	shipments	originating	in	the	United	States	(Worldwide	Express,	Worldwide	Express	Plus,	UPS Worldwide	Expedited	and	UPS	International	Standard	service).	Rate	changes	for	international	shipments	originating	outside	the	United	States	vary	by	geographical market	and	occur	throughout	the	year.

Also	in	January	2007,	we	modified	the	fuel	surcharge	on	certain	U.S.-related	international	air	services	by	reducing	the	index	used	to	determine	the	fuel	surcharge by	2%.	The	fuel	surcharge	for	products	originating	outside	the	United	States	continues	to	be	indexed	to	fuel	prices	in	our	different	international	regions.	Total international	fuel	surcharge	revenue	increased	by	$12	million	during	the	year	due	to	increased	volume,	but	was	partially	offset	by	the	reduction	in	the	fuel	surcharge index.

International	Package	operating	profit	increased	$121	million,	or	7.1%,	for	the	year,	primarily	due	to	the	volume	and	revenue	per	piece	improvements	described above.	The	change	in	operating	profit	was	also	positively	affected	by	$153	million	during	the	year	due	to	favorable	currency	exchange	rates,	net	of	hedging	activity. International	Package	operating	profit	was	adversely	affected	in	2007	by	charges	related	to	the	aircraft	impairment	($62	million)	and	the	SVSO	($7	million),	both	of which	are	discussed	further	in	the	"Operating	Expenses"	section.	Operating	profit	was	negatively	impacted	by	fuel,	as	the	increase	in	fuel	surcharge	revenue	was	more than	offset	by	the	increase	in	fuel	expense.	The	adverse	impact	of	the	aircraft	impairment,	SVSO	charge,	and	fuel	were	the	primary	causes	of	the	100	basis	point	decline in	operating	margin	to	17.8%.

International	Package	revenue	improved	$1.112	billion,	or	13.9%,	for	the	year,	primarily	due	to	the	11.9%	volume	growth	for	our	export	products	and	the	impact of	acquisitions	completed	in	2005.	Total	international	revenue	per	piece	declined	slightly	for	the	year	due	to	changes	in	product	mix,	as	lower-yielding	domestic products	comprised	a	larger	proportion	of	overall	international	volume.	The	change	in	revenue	was	positively	affected	by	$83	million	during	the	year	due	to	currency fluctuations,	net	of	hedging	activity.	Revenue	increased	by	$247	million	during	the	year	due	to	business	acquisitions	completed	previously.

In	January	2006,	we	increased	rates	5.5%	for	international	shipments	originating	in	the	United	States	(Worldwide	Express,	Worldwide	Express	Plus,	UPS Worldwide	Expedited	and	UPS	International	Standard	service).	Rate	changes	for	international	shipments	originating	outside	the	United	States	varied	by	geographical market	and	occurred	throughout	the	year.

Also	in	January	2006,	we	modified	the	fuel	surcharge	on	certain	U.S.-related	international	air	services	by	reducing	the	index	used	to	determine	the	fuel	surcharge by	2%.	The	air	fuel	surcharge	continued	to	remain	subject	to	a	maximum	cap	of	12.5%	through	June	4,	2006.	Effective	June	5,	2006,	we	reduced	the	index	by	another 2%	and	no	longer	applied	a	cap	to	the	air	fuel	surcharge.	The	fuel	surcharge	for	products	originating	outside	the	United	States	continued	to	be	indexed	to	fuel	prices	in our	different	international	regions,	depending	upon	where	the	shipment	took	place.	Total	international	fuel	surcharge	revenue	increased	by	$189	million	during	the	year due	to	higher	jet	fuel	prices	and	increased	international	air	volume.

Export	volume	increased	throughout	the	world,	with	solid	volume	increases	in	Europe,	Asia,	and	U.S.	export	products.	Asian	export	volume	continued	to	benefit from	geographic	service	expansion	and	strong	economic	growth	in	Asia,	while	European	export	volume	gains	were	impacted	by	our	growing	transborder	business	and the	expansion	of	the	European	Union.	International	domestic	volume	increased	21.0%	for	the	year,	due	to	volume	growth	in	Canada	and	Europe,	which	also	benefited from	the	acquisition	of	Stolica	in	Poland	during	the	second	quarter	of	2005	and	the	acquisition	of	Lynx	in	the	U.K.	during	the	third	quarter	of	2005.	Excluding	the	impact of	acquisitions,	international	domestic	volume	and	revenue	increased	6.9%	and	8.3%,	respectively,	for	the	year.

Export	revenue	per	piece	increased	0.5%	for	the	year,	largely	due	to	the	rate	increases	discussed	previously,	the	impact	of	the	fuel	surcharge,	and	currency fluctuations,	partially	offset	by	relatively	higher	growth	in	lower	revenue	per	piece	transborder	products.	For	the	year,	total	international	average	daily	package	volume increased	17.3%,	while	average	revenue	per	piece	decreased	2.2%	(decreased	3.3%	currency-adjusted).

The	improvement	in	operating	profit	for	our	International	Package	segment	was	$216	million	for	the	year,	or	14.5%,	and	the	operating	margin	increased	10	basis points	to	18.8%.	The	increases	in	operating	profit	and	margin	were	driven	by	the	volume	and	revenue	growth	described	previously.	The	change	in	operating	profit	was also	positively	affected	by	$26	million	during	the	year	due	to	currency	fluctuations.

# Supply	Chain	&	Freight	Operations

Supply	Chain	&	Freight	revenue	increased	$424	million,	or	5.3%,	in	2007.	Forwarding	and	logistics	revenue	increased	$230	million,	or	4.0%,	for	the	year,	and was	affected	by	favorable	exchange	rate	movements	and	revenue	management	initiatives	begun	in	2006.	Favorable	exchange	rate	movements	positively	affected	the growth	in	revenue	by	$178	million	during	the	year.	Revenue	growth	in	this	business	was	driven	by	improvements	in	international	air	freight	and	mail	services,	which were	impacted	by	overall	market	growth	and	lower	customer	turnover	rates.

UPS	Freight	increased	revenue	$156	million,	or	8.0%,	for	the	year	as	a	result	of	improved	yields	and	a	strong	increase	in	average	daily	shipment	volume.	Average LTL	shipments	per	day	increased	8.3%	during	the	year,	driven	by	new	customer	wins	and	leveraging	our	existing	small	package	customer	base	for	new	sales opportunities.	LTL	revenue	per	hundredweight	increased	9.3%	during	the	year,	due	to	an	increase	in	base	rates	in	2007	and	a	focus	on	higher-yielding	customer segments.	The	increase	in	revenue	per	hundredweight	and	average	daily	shipments	were	somewhat	offset	by	a	7.5%	decrease	for	the	year	in	the	LTL	weight	per shipment.

The	other	businesses	within	Supply	Chain	&	Freight,	which	include	our	retail	franchising	business,	our	financial	business,	and	our	U.S.	domestic	cargo operations,	increased	revenue	by	10.3%	during	the	year.	This	revenue	growth	was	primarily	due	to	increased	revenue	from	our	contract	to	provide	domestic	air transportation	services	for	the	U.S.	Postal	Service.

Operating	profit	for	the	Supply	Chain	&	Freight	segment	was	$278	million	in	2007,	compared	with	a	profit	of	$2	million	in	2006,	resulting	in	a	330	basis	point improvement	in	the	operating	margin.	This	improvement	was	largely	due	to	improved	results	in	the	forwarding	and	logistics	business	as	a	result	of	cost	controls,	a	focus on	asset	utilization,	and	revenue	management	initiatives.	Cost	improvements	were	realized	as	a	result	of	the	restructuring	program	that	began	in	2006,	which	included	a reduction	of	non-operating	staff	of	approximately	1,400	people.	Additionally,	margin	improvements	are	being	realized	by	focusing	on	capacity	utilization	in	the	air freight	business,	through	better	utilizing	space	available	on	our	own	aircraft.	Finally,	revenue	management	initiatives	put	into	place	last	year	are	producing	better	returns through	reducing	less	profitable	accounts,	and	ensuring	that	new	accounts	meet	specific	criteria	that	allow	us	to	better	utilize	our	existing	transportation	assets.

Operating	profit	in	2007	for	this	segment	was	reduced	by	$46	million	as	a	result	of	a	charge	for	restructuring	and	disposing	of	certain	non-core	business	units	in France,	as	well	as	by	$8	million	due	to	the	SVSO	charge.	These	charges	are	discussed	further	in	the	"Operating	Expenses"	section.	Currency	fluctuations	positively affected	the	growth	in	operating	profit	by	$18	million	in	2007.

Supply	Chain	&	Freight	revenue	increased	$2.008	billion,	or	33.5%,	for	the	year.	UPS	Freight,	formerly	known	as	Overnite	Corp.,	provided	$1.155	billion	of	the increase	in	revenue	for	the	year.	Excluding	the	impact	of	the	Overnite	acquisition	in	August	2005,	segment	revenues	grew	16.4%	for	the	year.	Total	average	daily	LTL shipments	for	UPS	Freight	in	2006	declined	against	the	full	year	2005	(both	the	pre	and	post-acquisition	period)	due	to	service	issues	caused	by	the	integration	of	the UPS	Freight	business,	as	well	as	a	weakening	in	the	overall	LTL	market	in	the	United	States	in	the	latter	half	of	2006.	LTL	revenue	per	LTL	hundredweight	increased	as we	proactively	reduced	less	profitable	accounts	and	focused	on	higher	yielding	customer	segments.

Forwarding	and	logistics	revenue	increased	$822	million,	or	16.9%	for	the	year,	largely	due	to	continued	changes	in	the	business	model	for	this	unit.	The forwarding	and	logistics	business	is	moving	towards	a	model	that	places	more	transactional	ownership	risk	on	UPS,	including	increased	utilization	of	UPS-owned	assets. This	has	the	effect	of	increasing	revenue	as	well	as	purchased	transportation	expense.	The	increased	revenue	associated	with	these	forwarding	transactions	was somewhat	offset	by	certain	revenue	management	initiatives,	which	involved	reducing	less	profitable	accounts.	In	addition,	revenue	increased	by	$29	million	during	the year	due	to	currency	fluctuations.

The	other	businesses	within	Supply	Chain	&	Freight,	which	include	our	retail	franchising	business	and	our	financial	business,	increased	revenue	by	9.2%	during the	year.	This	revenue	growth	was	primarily	due	to	increased	financial	services	revenue,	as	well	as	revenue	earned	from	our	previously-announced	contract	to	provide domestic	air	transportation	for	the	U.S.	Postal	Service.

For	the	year,	the	Supply	Chain	&	Freight	segment	reported	$2	million	in	operating	profit,	as	compared	with	a	$156	million	in	operating	profit	for	2005.	These results	were	impacted	by	the	integration	of	the	acquired	Menlo	Worldwide	Forwarding	business	into	our	air	network,	and	the	integration	of	the	Motor	Cargo	business unit	within	the	acquired	Overnite	Corp.	operations	into	the	UPS	Freight	network.	The	UPS	Freight	integration	led	to	service	issues,	which	resulted	in	a	loss	of	revenue, as	well	as	productivity	setbacks	resulting	in	increased	costs.	The	integration	of	the	Menlo	Worldwide	Forwarding	business	resulted	in	increased	costs	and	some	lost	sales resulting	from	customer	turnover.	The	increase	in	operating	profit	was	positively	affected	by	$2	million	during	2006	due	to	the	impact	of	currency	fluctuations	on revenue	and	expense.

In	an	effort	to	rationalize	our	cost	structure	and	focus	on	profitable	revenue	growth,	we	initiated	a	restructuring	plan	for	our	forwarding	and	logistics	operations	in the	fourth	quarter	of	2006.	This	restructuring	plan	was	designed	to	generate	efficiencies,	resulting	in	improved	operating	profits,	by	further	integrating	all	of	our transportation	services	to	better	serve	our	customers.	This	restructuring	involved	the	reduction	of	non-operating	expenses	by	approximately	20%,	including	a	reduction	in non-operating	staff	of	approximately	1,400	people.	We	incurred	$12	million	in	expenses	in	2006	related	to	employee	severance.

# Operating	Expenses

Consolidated	operating	expenses	increased	by	$8.202	billion,	or	20.0%,	in	2007	compared	with	2006.	Currency	fluctuations	in	our	International	Package	and Supply	Chain	&	Freight	segments	resulted	in	consolidated	operating	expenses	increasing	by	$471	million	for	the	year.

Compensation	and	benefits	expense	increased	by	$7.324	billion	for	the	year,	and	was	impacted	by	several	items	including	the	charge	for	the	withdrawal	from	the Central	States	Pension	Fund,	higher	wage	rates	in	the	union	workforce,	increased	stock-based	compensation,	higher	expense	for	union	pension	and	welfare	programs,	the SVSO	charge,	and	the	restructuring	charge	in	our	Supply	Chain	&	Freight	business	in	France.	These	increases	were	slightly	offset	by	lower	workers	compensation expense.

Our	national	master	agreement	with	the	International	Brotherhood	of	Teamsters	("Teamsters")	allowed	us,	upon	ratification,	to	withdraw	employees	from	the Central	States	Pension	Fund	and	to	establish	a	jointly	trusteed	single-employer	plan	for	this	group.	Upon	ratification	of	the	contract	in	December	2007	and	our withdrawal	from	the	Central	States	Pension	Fund,	we	recorded	a	pre-tax	$6.100	billion	charge	to	establish	our	withdrawal	liability,	and	made	a	December	2007	payment in	the	same	amount	to	the	Central	States	Pension	Fund	to	satisfy	this	liability.

In	December	2006,	we	offered	a	special	voluntary	separation	opportunity	("SVSO")	to	approximately	640	employees	who	work	in	non-operating	functions.	This program	was	established	to	improve	the	efficiency	of	non-operating	processes	by	eliminating	duplication	and	sharing	expertise	across	the	company.	The	SVSO	ended	in February	2007,	and	195,	or	30%	of	eligible	employees,	accepted	the	offer.	As	a	result,	we	recorded	a	charge	to	expense	of	approximately	$68	million	in	the	first	quarter of	2007,	to	reflect	the	cash	payout	and	the	acceleration	of	stock	compensation	and	certain	retiree	healthcare	benefits	under	the	SVSO	program.

In	the	third	quarter	of	2007,	we	initiated	a	restructuring	plan	for	our	forwarding	and	logistics	operations	in	France.	The	objective	of	this	restructuring	plan	was	to reduce	our	forwarding	and	logistics	cost	structure	and	focus	on	profitable	revenue	growth	in	the	Europe	region.	The	restructuring	principally	consisted	of	an employment	reduction	program,	which	was	ratified	by	our	company's	trade	union	representatives	in	France	in	July	2007.	Employees	participating	in	this	program	are entitled	to	severance	benefits,	including	certain	bonuses	for	employees	participating	in	the	voluntary	termination	phase.	These	severance	benefits	are	formula-driven	and are	in	accordance	with	French	statutory	laws	as	well	as	the	applicable	collective	bargaining	agreements.	We	recorded	a	restructuring	charge	of	$46	million	($42	million related	to	severance	costs,	and	thus	recorded	in	compensation	and	benefits	expense)	in	2007	related	to	this	program.

Stock-based	and	other	management	incentive	compensation	expense	increased	$113	million,	or	17.7%,	during	2007,	primarily	due	to	2007	awards	of	stock options,	restricted	performance	units,	and	restricted	stock	units.	Pension	and	healthcare	expense	increased	during	the	year,	largely	due	to	higher	expense	associated	with plans	covering	union	employees,	but	was	somewhat	offset	by	lower	expense	for	the	UPS-sponsored	pension	benefits	(See	Note	5	to	the	consolidated	financial statements).

During	the	first	quarter	of	2005,	we	modified	our	Management	Incentive	Awards	program	under	our	Incentive	Compensation	Plan	to	provide	that	half	of	the annual	award	be	made	in	restricted	stock	units,	with	certain	exceptions	for	first	time	participants	in	the	program.	The	restricted	stock	units	granted	each	year	under	this program	generally	have	a	five-year	graded	vesting	period,	with	approximately	20%	of	the	total	restricted	stock	unit	award	vesting	at	each	anniversary	date	of	the	grant. The	other	half	of	the	Management	Incentive	Award	granted	each	year	is	in	the	form	of	cash	and	unrestricted	shares	of	Class	A	common	stock	and	is	fully	vested	at	the time	of	grant.	Previous	awards	under	the	Management	Incentive	Awards	program	were	made	in	common	stock	that	was	fully	vested	in	the	year	of	grant.	As	discussed	in Note	1	to	the	consolidated	financial	statements,	we	recognize	the	expense	associated	with	restricted	stock	unit	awards	over	the	appropriate	vesting

period.	We	anticipate	that	this	change	in	the	award	structure	will	have	the	effect	of	increasing	the	expense	recognized	for	our	restricted	stock	unit	grants	in	future	years, until	approximately	2010,	when	we	the	effect	of	expensing	new	restricted	stock	unit	grants	will	be	somewhat	offset	with	the	elimination	of	expense	from	awards	that have	become	completely	vested.

The	expense	associated	with	our	self-insurance	accruals	for	workers'	compensation	claims,	automotive	liability	and	general	business	liabilities	was	$46	million lower	in	2007	compared	with	2006.	Insurance	reserves	are	established	for	estimates	of	the	loss	that	we	will	ultimately	incur	on	reported	claims,	as	well	as	estimates	of claims	that	have	been	incurred	but	not	yet	reported.	Recorded	balances	are	based	on	reserve	levels,	which	incorporate	historical	loss	experience	and	judgments	about	the present	and	expected	levels	of	cost	per	claim.	The	lower	expense	reflects	favorable	claims	experience	resulting	from	several	company	initiatives	put	into	place	over	the last	several	years	and	other	factors,	including	initiatives	to	decrease	accident	frequencies,	improved	oversight	and	management	of	claims,	improved	trends	in	health	care costs,	and	favorable	state	legislative	reforms.

The	0.2%	increase	in	repairs	and	maintenance	reflects	higher	maintenance	expense	on	aircraft,	largely	offset	by	lower	maintenance	expense	on	vehicles	and buildings.	The	0.2%	decrease	in	depreciation	and	amortization	was	influenced	by	several	factors,	including	lower	depreciation	expense	on	aircraft	and	amortization expense	on	capitalized	software,	partially	offset	by	increased	depreciation	expense	on	vehicles.	The	7.4%	increase	in	purchased	transportation	was	impacted	by	volume growth	in	our	International	Package	business	and	currency	fluctuations,	as	well	as	growth	in	our	international	forwarding	business.	The	12.0%	increase	in	fuel	expense for	the	year	was	primarily	due	to	higher	prices	for	jet	and	diesel	fuel,	as	well	as	higher	usage,	but	was	partially	mitigated	by	hedging	gains.	Other	occupancy	expense increased	2.1%	for	the	year,	and	was	affected	by	increased	rent	expense	and	property	taxes,	but	partially	offset	by	lower	utilities	expense.	The	3.0%	increase	in	other expenses	for	the	year	was	affected	by	a	$221	million	aircraft	impairment	charge,	discussed	further	below,	but	partially	offset	with	cost	controls	in	several	areas.	The comparison	in	other	expenses	was	also	affected	by	the	$87	million	charge	in	the	Cornn	class	action	litigation	in	2006	(see	"Contingencies"	section).

As	a	result	of	business	changes	that	occurred	in	the	first	quarter	of	2007,	including	capacity-optimization	programs	in	our	domestic	and	international	air	freight forwarding	business	as	well	as	changes	to	our	aircraft	orders	and	planned	delivery	dates,	we	began	a	review	process	of	our	aircraft	fleet	types	to	ensure	that	we	maintain the	optimum	mix	of	aircraft	types	to	service	our	international	and	domestic	package	businesses.	The	review	was	completed	in	March	2007,	and	based	on	the	results	of our	evaluation	we	accelerated	the	planned	retirement	of	certain	Boeing	727	and	747	aircraft,	and	recognized	an	impairment	and	obsolescence	charge	of	$221	million	for the	aircraft	and	related	engines	and	parts	in	2007.	This	charge	is	included	in	the	caption	"Other	expenses"	in	the	Statement	of	Consolidated	Income,	of	which	$159 million	impacted	our	U.S.	Domestic	Package	segment	and	$62	million	impacted	our	International	Package	segment.

Consolidated	operating	expenses	increased	by	$4.474	billion,	or	12.3%,	for	the	year,	and	were	significantly	impacted	by	the	acquisitions	of	Overnite,	Stolica,	and Lynx.	Currency	fluctuations	in	our	International	Package	and	Supply	Chain	&	Freight	segments	resulted	in	operating	expenses	increasing	by	$84	million	for	the	year.

Compensation	and	benefits	increased	by	$1.904	billion,	or	8.5%,	for	the	year,	largely	due	to	the	acquisitions	mentioned	above,	as	well	as	increased	health	and welfare	benefit	costs	and	higher	pension	expense.	These	increases	were	partially	offset	by	the	decline	in	workers	compensation	expense,	as	previously	discussed. Excluding	the	effect	of	acquisitions,	compensation	and	benefits	expense	increased	5.1%	for	the	year.	Stock-based	and	other	management	incentive	compensation expense	increased	$49	million,	or	8.0%	in	2006,	due	to	the	expensing	of	restricted	stock	units	granted	in	the	fourth	quarter	of	2005,	the	impact	of	a	new	grant	of	stock options	and	restricted	performance	units	in	the	second	quarter	of	2006,	and	the	impact	of	adopting	the	non-substantive	vesting	period	approach	of	FAS	123R	(discussed further	in	Note	1	to	the	consolidated	financial	statements).	These	grants	were	partially	offset	by	lower	accruals	for	our	Management	Incentive	Awards	program	in	2006.

Other	operating	expenses	increased	by	$2.570	billion,	or	18.5%,	for	the	year,	largely	due	to	the	acquisitions	mentioned	above,	as	well	as	increases	in	fuel	expense and	purchased	transportation.	The	table	below	indicates	the	impact	of	business	acquisitions	completed	in	2005	on	the	increase	in	operating	expenses	by	category	in	2006.

|  | Total	%<br>Increase | Acquisition<br>Impact | without<br>Acquisitions |
| :--- | :--- | :--- | :--- |
| Other\tOperating\tExpenses: |  |  |  |
| Repairs\tand\tmaintenance | 5.3% | 3.0% | 2.3% |
| Depreciation\tand\tamortization | 6.3% | 3.1% | 3.2% |
| Purchased\ttransportation | 34.9% | 4.8% | 30.1% |
| Fuel | 27.3% | 7.1% | 20.2% |
| Other\toccupancy | 7.6% | 4.2% | 3.4% |
| Other\texpenses | 8.5% | 3.9% | 4.6% |
|  | 18.5% | 4.5% | 14.0% |

Excluding	the	effect	of	acquisitions,	the	20.2%	increase	in	fuel	expense	for	the	year	was	impacted	by	higher	prices	for	jet-A,	diesel	and	unleaded	gasoline	as	well as	higher	usage,	but	was	partially	mitigated	by	hedging	gains.	The	30.1%	increase	in	purchased	transportation	was	influenced	by	volume	growth	in	our	International Package	business,	currency	fluctuations,	higher	fuel	prices,	increased	rail	costs,	and	changes	to	the	freight	forwarding	business	model	described	previously.	The	2.3% increase	in	repairs	and	maintenance	was	largely	due	to	increased	expense	on	airframe	and	engine	repairs.	The	3.2%	increase	in	depreciation	and	amortization	for	the	year was	caused	primarily	by	higher	depreciation	expense	on	plant	equipment,	aircraft	and	engines,	and	higher	amortization	expense	on	intangible	assets.	The	3.4%	increase in	other	occupancy	expense	was	largely	due	to	higher	electricity	and	other	utilities	expenses.	The	increase	in	other	expenses	was	impacted	by	several	items,	including	the $87	million	tentative	settlement	of	a	class	action	litigation	(see	"Contingencies"	section	below).

# Investment	Income	and	Interest	Expense

The	increase	in	investment	income	of	$13	million	was	primarily	due	to	higher	realized	gains	on	sales	of	investments,	but	partially	offset	by	a	lower	average balance	of	interest-earning	investments	and	increased	equity-method	losses	on	investment	partnerships.

Interest	expense	increased	$35	million	in	2007,	primarily	due	to	higher	average	debt	balances	outstanding,	largely	related	to	commercial	paper.	Our	commercial paper	balances	increased	in	the	fourth	quarter	of	2007,	causing	a	corresponding	increase	in	interest	expense,	as	a	result	of	the	payment	made	to	withdraw	from	the Central	States	Pension	Fund.	Increased	interest	charges	were	somewhat	offset,	however,	by	higher	capitalized	interest	related	to	various	construction	projects,	including aircraft	purchases	and	our	Worldport	expansion.

The	decrease	in	investment	income	of	$18	million	during	the	year	was	primarily	due	to	a	lower	average	balance	of	interest-earning	investments,	due	to	the	timing of	cash	payments	for	pension	fundings,	business	acquisitions,	and	capital	expenditures.	This	was	partially	offset	by	a	higher	average	interest	rate	earned	on	investments, as	well	as	the	absence	of	any	investment	impairments	during	2006	($16	million	of	investment	impairments	were	recognized	in	2005,	as	described	below).

The	$39	million	increase	in	interest	expense	during	the	year	was	primarily	due	to	higher	average	interest	rates	on	variable	rate	debt	and	interest	rate	swaps,	as	well as	interest	expense	incurred	on	debt	related	to	real	estate	investment	partnerships.	This	was	partially	offset	by	slightly	lower	average	debt	balances	during	2006,	as	well as	higher	capitalized	interest	due	to	large	aircraft	contract	deposit	payments	made	during	the	year.

# Net	Income	and	Earnings	Per	Share

Net	income	for	2007	was	$382	million,	an	90.9%	decrease	from	the	$4.202	billion	achieved	in	2006,	resulting	in	an	90.7%	decrease	in	diluted	earnings	per	share to	$0.36	in	2007	from	$3.86	in	2006.	This	decrease	in	net	income	was	largely	due	to	the	after-tax	$3.772	billion	charge	recorded	to	reflect	our	withdrawal	from	the Central	States	Pension	Fund.	Additionally,	2007	net	income	was	adversely	impacted	by	$31	million	as	a	result	of	the	restructuring	charge	in	our	France	Supply	Chain	& Freight	business,	$141	million	as	a	result	of	the	aircraft	impairment	charge,	and	$43	million	as	a	result	of	the	SVSO	charge.	These	items	were	partially	offset	by	the improved	results	in	our	International	Package	and	Supply	Chain	&	Freight	segments.

The	reduction	in	basic	and	diluted	earnings	per	share	were	largely	due	to	the	pension	withdrawal,	aircraft	impairment,	France	restructuring,	and	SVSO	charges noted	above.	These	items	reduced	basic	and	diluted	earnings	per	share	by	$3.77	and	$3.75	in	2007.	Basic	and	diluted	earnings	per	share	benefited	from	a	reduction	in outstanding	shares	in	2007	compared	with	2006,	due	to	our	ongoing	share	repurchase	program.

Net	income	for	2006	was	$4.202	billion,	an	8.6%	increase	from	the	$3.870	billion	achieved	in	2005,	resulting	in	a	11.2%	increase	in	diluted	earnings	per	share	to $3.86	in	2006	from	$3.47	in	2005.	Net	income	in	2006	benefited	from	a	$52	million	reduction	in	income	tax	expense	($0.05	impact	to	diluted	earnings	per	share)	due	to favorable	developments	with	certain	U.S.	Federal	tax	contingency	matters	involving	non-U.S.	operations.	Diluted	earnings	per	share	has	increased	at	a	faster	rate	than the	growth	in	net	income	due	to	the	reduction	in	shares	outstanding	as	a	result	of	our	ongoing	share	repurchase	program.	The	increase	in	net	income	for	2006	was	largely due	to	higher	operating	profits	for	both	our	U.S.	Domestic	and	International	Package	segments.

# Liquidity	and	Capital	Resources

# Operating	Activities

Net	cash	provided	by	operating	activities	was	$1.123,	$5.589,	and	$5.793	billion	in	2007,	2006,	and	2005,	respectively.	The	decrease	in	2007	operating	cash	flows compared	with	2006	and	2005	was	primarily	due	to	the	$6.100	billion	payment	made	to	withdraw	from	the	Central	States	Pension	Fund	in	2007.	This	was	partially	offset by	reduced	2007	fundings	to	our	management	pension	and	postretirement	benefit	plans.	In	2007,	we	funded	$687	million	to	our	pension	and	postretirement	benefit	plans as	compared	to	$1.625	billion	in	2006	and	$995	million	in	2005.	As	discussed	in	Note	5	to	the	consolidated	financial	statements,	pension	and	postretirement	health contributions	to	plan	trusts	in	2008	are	projected	to	be	approximately	$133	million.

The	amount	of	U.S.	federal	estimated	income	tax	payments	was	lower	in	2007	compared	with	2006	and	2005,	due	to	the	deductibility	of	the	pension	withdrawal payment	for	income	tax	purposes.	Additionally,	in	the	first	quarter	of	2008,	we	received	an	$850	million	U.S.	federal	tax	refund	due	to	2007	overpayments	of	our estimated	tax	liability.	In	2005,	we	received	a	$374	million	tax	refund	associated	with	the	1985-1990	settlement	with	the	Internal	Revenue	Service	("IRS")	reached previously,	primarily	on	tax	matters	related	to	excess	value	package	insurance.

Additionally,	we	paid	approximately	$35	million	in	2007	to	employees	who	accepted	the	SVSO	offer,	and	we	expect	to	pay	approximately	$28	million	in	the	first quarter	of	2008	related	to	this	program.

On	November	9,	2007,	we	announced	a	rate	increase	and	a	change	in	the	fuel	surcharge	that	took	effect	on	December	31,	2007.	We	increased	the	base	rates	6.9% on	UPS	Next	Day	Air,	UPS	2nd	Day	Air,	and	UPS	3	Day	Select,	and	4.9%	on	UPS	Ground.	We	also	increased	the	base	rates	6.9%	for	international	shipments originating	in	the	United	States	(Worldwide	Express,	Worldwide	Express	Plus,	UPS	Worldwide	Expedited	and	UPS	International	Standard	service).	Other	pricing changes	included	a	$0.10	increase	in	the	residential	surcharge,	and

an	increase	of	$0.10	in	the	delivery	area	surcharge	on	both	residential	and	commercial	services	to	certain	ZIP	codes.	These	rate	changes	are	customary,	and	are consistent	with	previous	years'	rate	increases.	Additionally,	we	modified	the	fuel	surcharge	on	domestic	and	U.S.-origin	international	air	services	by	reducing	by	2%	the index	used	to	determine	the	fuel	surcharge.	The	UPS	Ground	fuel	surcharge	continues	to	fluctuate	based	on	the	U.S.	Energy	Department's	On-Highway	Diesel	Fuel Price.	Rate	changes	for	shipments	originating	outside	the	U.S.	were	made	throughout	the	past	year	and	varied	by	geographic	market.

In	January	2008,	UPS	Freight	announced	a	general	rate	increase	averaging	5.4	percent	covering	non-contractual	shipments	in	the	United	States	and	Canada.	The increase	goes	into	effect	on	February	4,	2008,	and	applies	to	minimum	charge,	LTL	and	TL	rates.

# Investing	Activities

Net	cash	used	in	investing	activities	was	$2.199	billion,	$2.340	billion,	and	$975	million	in	2007,	2006,	and	2005,	respectively.	The	decrease	in	cash	used	in	2007 compared	with	2006	was	primarily	due	to	lower	capital	expenditures	and	increased	net	sales	of	marketable	securities	and	short-term	investments.	Net	sales	of	marketable securities	and	short-term	investments	were	$621	million,	$482	million,	and	$2.752	billion	in	2007,	2006,	and	2005,	respectively,	and	were	primarily	used	to	fund	our pension	and	postretirement	medical	benefit	plans,	as	well	as	complete	business	acquisitions.	In	2005,	we	spent	$1.488	billion	on	business	acquisitions,	primarily Overnite	Corp.,	Lynx	Express	Ltd.	in	the	United	Kingdom,	Messenger	Service	Stolica	S.A.	in	Poland,	and	the	express	operations	of	Sinotrans	Air	Transportation Development	Co.	Ltd.	in	China	(See	Note	7	to	the	consolidated	financial	statements).	We	had	a	net	cash	use	of	$39	million	in	2007,	compared	with	cash	generation	of $68	and	$95	million	in	2006	and	2005,	respectively,	due	to	originations,	sales,	and	customer	paydowns	of	finance	receivables,	primarily	in	our	commercial	lending, asset-based	lending,	and	leasing	portfolios.

In	the	second	quarter	of	2006,	we	terminated	several	energy	derivatives	and	received	$229	million	in	cash,	which	is	reported	in	other	investing	activities	in	the statement	of	cash	flows.	These	derivatives	were	designated	as	hedges	of	forecasted	cash	outflows	for	purchases	of	fuel	products.	As	these	derivatives	maintained	their effectiveness	and	qualified	for	hedge	accounting,	we	recognized	the	gains	associated	with	these	hedges	as	a	reduction	of	fuel	expense	over	the	original	term	of	the	hedges through	2007.

Capital	expenditures	represent	a	primary	use	of	cash	in	investing	activities,	as	follows	(in	millions):

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Buildings\tand\tfacilities | $853 | $720 | $495 |
| Aircraft\tand\tparts | 1,137 | 1,150 | 874 |
| Vehicles | 492 | 831 | 456 |
| Information\ttechnology | 338 | 384 | 362 |
|  | $2,820 | $3,085 | $2,187 |

As	described	in	the	"Commitments"	section	below,	we	have	commitments	for	the	purchase	of	aircraft,	vehicles,	equipment	and	other	fixed	assets	to	provide	for	the replacement	of	existing	capacity	and	anticipated	future	growth.	We	fund	our	capital	expenditures	with	our	cash	from	operations.

# Financing	Activities

Net	cash	provided	by	(used	in)	financing	activities	was	$2.297,	($3.851),	and	($4.175)	billion	in	2007,	2006,	and	2005,	respectively.	As	of	December	31,	2007, we	increased	our	commercial	paper	borrowings	to	$7.366	billion,	an	increase	of	$6.575	billion	over	December	31,	2006.	This	issuance	of	commercial	paper	was	used	to fund	the	withdrawal	payment	to	the	Central	States	Pension	Fund	upon	ratification	of	our	labor	contract	with	the	Teamsters,	as	previously	discussed.	The	commercial paper	balance	was	reduced	subsequent	to	December	31,	2007	as	a	result	of	an	issuance	of	long-term	debt	(discussed	further	in	the	"Sources	of	Credit"	section)	and	the receipt	of	an	income	tax	refund.

Issuances	of	debt	during	2007	consisted	primarily	of	issuances	of	commercial	paper	and	UPS	Notes.	Repayments	of	debt	consisted	primarily	of	scheduled principal	payments	on	our	capital	lease	obligations	and	principal	payments	on	debt	related	to	our	investment	in	certain	equity-method	partnerships.	We	consider	the overall	fixed	and	floating	interest	rate	mix	of	our	portfolio	and	the	related	overall	cost	of	borrowing	when	planning	for	future	issuances	and	non-scheduled	repayments	of debt.

Our	primary	uses	of	cash	in	financing	activities	have	been	to	repurchase	stock,	pay	dividends,	and	repay	long-term	debt.	In	October	2007,	the	Board	of	Directors approved	an	increase	in	our	share	repurchase	authorization	to	$2.0	billion,	which	replaced	the	remaining	amount	available	under	our	February	2007	share	repurchase authorization.	For	the	years	ended	December	31,	2007,	2006	and	2005,	we	repurchased	a	total	of	35.9,	32.6,	and	33.9	million	shares	of	Class	A	and	Class	B	common stock	for	$2.618	,	$2.455,	and	$2.479	billion,	respectively	($2.639,	$2.460,	and	$2.479	billion	reported	on	the	statement	of	cash	flows	due	to	timing	of	settlements).

In	January	2008,	we	announced	a	new	financial	policy	regarding	our	capital	structure	to	enhance	shareowner	value.	Prospectively,	we	intend	to	manage	our balance	sheet	to	a	target	debt	ratio	of	approximately	50%-60%	funds	from	operations	to	total	debt.	To	implement	this	policy,	the	Board	of	Directors	authorized	an increase	in	our	share	repurchase	authorization	to	$10.0	billion.	We	intend	to	complete	this	level	of	share	repurchases	within	two	years.	Share	repurchases	may	take	the form	of	an	accelerated	share	repurchase	program,	open	market	purchases,	or	other	such	methods	as	we	deem	appropriate.

We	increased	our	quarterly	cash	dividend	payment	to	$0.42	per	share	in	2007	from	$0.38	per	share	in	2006,	resulting	in	an	increase	in	total	cash	dividends	paid	to $1.703	billion	from	$1.577	billion.	The	declaration	of	dividends	is	subject	to	the	discretion	of	the	Board	of	Directors	and	will	depend	on	various	factors,	including	our net	income,	financial	condition,	cash	requirements,	future	prospects,	and	other	relevant	factors.	We	expect	to	continue	the	practice	of	paying	regular	cash	dividends.	On January	31,	2008,	our	Board	declared	a	dividend	of	$0.45	per	share,	which	is	payable	on	March	4,	2008	to	shareowners	of	record	on	February	11,	2008.	The	Board	also approved	an	earlier	payment	schedule	for	the	dividend	typically	declared	in	November.	Beginning	in	2008	and	going	forward,	that	dividend	is	expected	to	be	paid	in December	instead	of	the	following	January.	The	movement	of	the	fourth	quarter	dividend	payment	into	December	will	result	in	a	total	of	five	dividend	payments	being made	in	2008.

# Sources	of	Credit

We	are	authorized	to	borrow	up	to	$10.0	billion	under	our	U.S.	commercial	paper	program.	We	had	$7.366	billion	outstanding	under	this	program	as	of December	31,	2007,	with	an	average	interest	rate	of	4.36%.	At	December	31,	2007,	we	classified	$4.0	billion	of	our	commercial	paper	as	long-term	debt	on	our	balance sheet,	due	to	the	subsequent	refunding	of	the	commercial	paper	through	the	issuance	of	long-term	debt,	as	discussed	further	below.	We	also	maintain	a	European commercial	paper	program	under	which	we	are	authorized	to	borrow	up	to	€1.0	billion	in	a	variety	of	currencies,	however	no	amounts	were	outstanding	under	this program	as	of	December	31,	2007.

In	November	2007,	we	filed	a	shelf	registration	statement	under	which	we	may	issue	debt	securities	in	the	United	States.	On	January	15,	2008,	we	completed	an offering	of	$1.750	billion	of	4.50%	senior	notes	due	January	2013,	$750	million	of	5.50%	senior	notes	due	January	2018,	and	$1.500	billion	of	6.20%	senior	notes	due January	2038.	All	of	these	notes	pay	interest	semiannually,	and	allow	for	redemption	of	the	notes	by	UPS	at	any	time	by	paying	the	greater	of	the	principal	amount	or	a "make-whole"	amount,	plus	accrued	interest.	After	pricing	and	underwriting	discounts,	we	received	a	total	of	$3.961	billion	in	cash	proceeds	from	the	offering.	The proceeds	from	the	offering	were	used	to	reduce	our	outstanding	commercial	paper	balance.

We	maintain	three	credit	agreements	with	a	consortium	of	banks,	two	of	which	provide	revolving	credit	facilities	of	$1.0	billion	each,	with	one	expiring	April	17, 2008	and	the	other	April	19,	2012,	and	the	third

providing	a	revolving	credit	facility	of	$7.0	billion	and	expiring	on	October	17,	2008.	Interest	on	any	amounts	we	borrow	under	these	facilities	would	be	charged	at	90- day	LIBOR	plus	15	basis	points.	At	December	31,	2007,	there	were	no	outstanding	borrowings	under	these	facilities.

Our	existing	debt	instruments	and	credit	facilities	do	not	have	cross-default	or	ratings	triggers,	however	these	debt	instruments	and	credit	facilities	do	subject	us	to certain	financial	covenants.	Covenants	in	our	credit	facilities	generally	require	us	to	maintain	a	$3.0	billion	minimum	net	worth	and	limit	the	amount	of	secured indebtedness	that	may	be	incurred	by	the	company.	The	notes	issued	in	January	2008	include	limitations	on	secured	indebtedness	and	on	sale-leaseback	transactions. These	covenants	are	not	considered	material	to	the	overall	financial	condition	of	the	company,	and	all	applicable	covenant	tests	were	satisfied	as	of	December	31,	2007.

# Commitments

We	have	contractual	obligations	and	commitments	in	the	form	of	capital	leases,	operating	leases,	debt	obligations,	purchase	commitments,	and	certain	other liabilities.	We	intend	to	satisfy	these	obligations	through	the	use	of	cash	flow	from	operations.	The	following	table	summarizes	the	expected	cash	outflow	to	satisfy	our contractual	obligations	and	commitments	as	of	December	31,	2007	(in	millions):

|  | Capital | Operating | Debt | Debt | Purchase | Pension | Other |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Year | Leases | Leases | Principal | Interest | Commitments | Fundings | Liabilities |
| 2008 | $108 | $378 | $3,426 | $329 | $1,306 | $101 | $78 |
| 2009 | 73 | 325 | 83 | 384 | 791 | 824 | 74 |
| 2010 | 91 | 237 | 40 | 380 | 729 | 630 | 71 |
| 2011 | 31 | 166 | 33 | 379 | 698 | 717 | 69 |
| 2012 | 31 | 116 | 26 | 377 | 304 | 859 | 67 |
| After\t2012 | 285 | 560 | 6,919 | \t 6,177 | — | 334 | 203 |
| Total | $619 | $1,782 | $10,527 | $8,026 | $3,828 | $3,465 | $562 |

Our	capital	lease	obligations	relate	primarily	to	leases	on	aircraft.	Capital	leases,	operating	leases,	and	purchase	commitments,	as	well	as	our	debt	principal obligations,	are	discussed	further	in	Note	8	to	our	consolidated	financial	statements.	The	amount	of	interest	on	our	debt	was	calculated	as	the	contractual	interest payments	due	on	our	fixed-rate	debt,	in	addition	to	interest	on	variable	rate	debt	that	was	calculated	based	on	interest	rates	as	of	December	31,	2007.	The	calculations	of debt	interest	do	not	take	into	account	the	effect	of	interest	rate	swap	agreements.	The	maturities	of	debt	principal	and	interest	include	the	effect	of	the	January	2008 issuance	of	$4.0	billion	in	senior	notes	that	were	used	to	reduce	the	commercial	paper	balance.

Purchase	commitments	represent	contractual	agreements	to	purchase	goods	or	services	that	are	legally	binding,	the	largest	of	which	are	orders	for	aircraft, engines,	and	parts.	In	February	2007,	we	announced	an	order	for	27	Boeing	767-300ER	freighters	to	be	delivered	between	2009	and	2012.	We	also	have	firm commitments	to	purchase	nine	Boeing	747-400F	aircraft	scheduled	for	delivery	between	2008	and	2010,	and	two	Boeing	747-400BCF	aircraft	scheduled	for	delivery during	2008.	These	aircraft	purchase	orders	will	provide	for	the	replacement	of	existing	capacity	and	anticipated	future	growth.

In	July	2007,	we	formally	cancelled	our	previous	order	for	ten	Airbus	A380-800	freighter	aircraft,	pursuant	to	the	provisions	of	an	agreement	signed	with	Airbus in	February	2007.	As	a	result	of	our	cancellation	of	the	Airbus	A380-800	order,	we	received	cash	in	July	2007	representing	the	return	of	amounts	previously	paid	to Airbus	as	purchase	contract	deposits	and	accrued	interest	on	those	balances.	Additionally,	we	received	a	credit	memorandum	to	be	used	by	UPS	for	the	purchase	of	parts and	services	from	Airbus.	The	cancellation	of	the	Airbus	order	did	not	have	a	material	impact	on	our	financial	condition,	results	of	operations,	or	liquidity.

Pension	fundings	represent	the	anticipated	required	cash	contributions	that	will	be	made	to	the	UPS	IBT	Pension	Plan,	which	was	established	upon	ratification	of the	national	master	agreement	with	the	Teamsters.	The	UPS	IBT	Pension	Plan	is	the	only	UPS-sponsored	pension	or	postretirement	benefit	plan	with	a	material minimum	funding	requirement	as	of	December	31,	2007.	The	pension	funding	requirements	were	estimated	under	the	provisions	of	the	Pension	Protection	Act	of	2006 and	the	Employee	Retirement	Income	Security	Act	of	1974,	using	discount	rates,	asset	returns,	and	other	assumptions	appropriate	for	this	plan.	To	the	extent	that	the funded	status	of	the	UPS	IBT	pension	plan	in	future	years	differs	from	our	current	projections,	the	actual	contributions	made	in	future	years	could	materially	differ	from the	amounts	shown	in	the	table	above.

The	contractual	payments	due	under	the	"other	liabilities"	column	primarily	includes	commitment	payments	related	to	our	investment	in	certain	partnerships.	The table	above	does	not	include	approximately	$355	million	of	unrecognized	tax	benefits	that	have	been	recognized	as	liabilities	in	accordance	with	FASB	Interpretation No.	48,	"Accounting	for	Uncertainty	in	Income	Taxes—an	Interpretation	of	FASB	Statement	No.	109"	("FIN	48"),	because	we	are	uncertain	if	or	when	such	amounts will	ultimately	be	settled	in	cash.	In	addition,	although	we	have	recognized	and	disclosed	unrecognized	tax	benefits	in	accordance	with	FIN	48,	we	also	have	outstanding recognized	tax	benefits	in	excess	of	the	recorded	liabilities	such	that	we	do	not	believe	a	net	contractual	obligation	exists	to	the	taxing	authorities.	FIN	48	is	discussed further	in	Note	13	to	the	consolidated	financial	statements.

As	of	December	31,	2007,	we	had	outstanding	letters	of	credit	totaling	approximately	$2.177	billion	issued	in	connection	with	routine	business	requirements.	As of	December	31,	2007,	we	had	unfunded	loan	commitments	totaling	$860	million	associated	with	our	financial	business.

We	believe	that	funds	from	operations	and	borrowing	programs	will	provide	adequate	sources	of	liquidity	and	capital	resources	to	meet	our	expected	long-term needs	for	the	operation	of	our	business,	including	anticipated	capital	expenditures,	such	as	commitments	for	aircraft	purchases,	for	the	foreseeable	future.

# Contingencies

UPS	and	Mail	Boxes	Etc.,	Inc.	are	defendants	in	various	lawsuits	brought	by	franchisees	who	operate	Mail	Boxes	Etc.	centers	and	The	UPS	Store	locations. These	lawsuits	relate	to	the	re-branding	of	Mail	Boxes	Etc.	centers	to	The	UPS	Store,	the	The	UPS	Store	business	model,	the	representations	made	in	connection	with	the rebranding	and	the	sale	of	The	UPS	Store	franchises,	and	UPS's	sale	of	services	in	the	franchisees'	territories.	We	have	denied	any	liability	with	respect	to	these	claims and	intend	to	defend	ourselves	vigorously.	At	this	time,	we	have	not	determined	the	amount	of	any	liability	that	may	result	from	these	matters	or	whether	such	liability, if	any,	would	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations,	or	liquidity.

Along	with	an	income	tax	audit	for	years	2003	and	2004,	the	Internal	Revenue	Service	("IRS")	is	currently	examining	non-income	based	taxes	including	excise taxes	on	transportation	of	property	by	air	and	fuel	purchases,	which	could	lead	to	proposed	assessments.	The	IRS	has	not	presented	an	official	position	with	regard	to excise	taxes	at	this	time,	and	therefore	we	are	not	able	to	determine	the	technical	merit	of	any	potential	assessment;	however,	we	do	not	believe	that	the	resolution	of	this matter	would	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations,	or	liquidity.

As	of	December	31,	2007,	we	had	approximately	246,000	employees	employed	under	a	national	master	agreement	and	various	supplemental	agreements	with local	unions	affiliated	with	the	Teamsters.	In	September	2007,	we	reached	a	new	national	master	agreement	with	the	Teamsters,	which	was	ratified	in	December	2007. The	new	agreement	provides	for	wage	increases	as	well	as	contributions	to	healthcare	and	pension	plans,	and	most	economic	provisions	of	the	new	five	year	agreement will	take	effect	on	August	1,	2008,	with	the	exception	of	our	withdrawal	from	the	Central	States	Pension	Fund,	as	discussed	in	Note	5	to	the	consolidated	financial statements.	We	have	approximately	2,900	pilots	who	are	employed	under	a	collective	bargaining	agreement	with	the	Independent	Pilots	Association,	which	becomes amendable	at	the	end	of	2011.	Our	airline	mechanics	are	covered	by	a	collective	bargaining	agreement	with	Teamsters	Local	2727,	which	became	amendable	on November	1,	2006.	We	began	formal	negotiations	with	Teamsters	Local	2727	on	October	2,	2006.	In	addition,	the	majority	of	our	ground	mechanics	who	are	not employed	under	agreements	with	the	Teamsters	are	employed	under	collective	bargaining	agreements	with	the	International	Association	of	Machinists	and	Aerospace Workers	(approximately	2,900).	These	agreements	run	through	July	31,	2009.

Apart	from	the	Central	States	Pension	Fund,	we	participate	in	a	number	of	trustee-managed	multi-employer	pension	and	health	and	welfare	plans	for	employees covered	under	collective	bargaining	agreements.	Several	factors	could	cause	us	to	make	significantly	higher	future	contributions	to	these	plans,	including	unfavorable investment	performance,	changes	in	demographics,	and	increased	benefits	to	participants.	At	this	time,	we	are	unable	to	determine	the	amount	of	additional	future contributions,	if	any,	or	whether	any	material	adverse	effect	on	our	financial	condition,	results	of	operations,	or	liquidity	would	result	from	our	participation	in	these plans.

We	received	grand	jury	subpoenas	from	the	Antitrust	Division	of	the	U.S.	Department	of	Justice	("DOJ")	regarding	the	DOJ's	investigations	into	air	cargo	pricing practices	in	July	2006	and	into	freight	forwarding

pricing	practices	in	December	2007.	In	October	2007,	we	received	information	requests	from	the	European	Commission	and	the	New	Zealand	Commerce	Commission relating	to	investigations	of	freight	forwarding	pricing	practices.	We	are	cooperating	with	these	investigations.

# Market	Risk

We	are	exposed	to	market	risk	from	changes	in	certain	commodity	prices,	foreign	currency	exchange	rates,	interest	rates,	and	equity	prices.	All	of	these	market risks	arise	in	the	normal	course	of	business,	as	we	do	not	engage	in	speculative	trading	activities.	In	order	to	manage	the	risk	arising	from	these	exposures,	we	utilize	a variety	of	foreign	exchange,	interest	rate,	equity	and	commodity	forward	contracts,	options,	and	swaps.

The	following	analysis	provides	quantitative	information	regarding	our	exposure	to	commodity	price	risk,	foreign	currency	exchange	risk,	interest	rate	risk,	and equity	price	risk.	We	utilize	valuation	models	to	evaluate	the	sensitivity	of	the	fair	value	of	financial	instruments	with	exposure	to	market	risk	that	assume	instantaneous, parallel	shifts	in	exchange	rates,	interest	rate	yield	curves,	and	commodity	and	equity	prices.	For	options	and	instruments	with	non-linear	returns,	models	appropriate	to the	instrument	are	utilized	to	determine	the	impact	of	market	shifts.	There	are	certain	limitations	inherent	in	the	sensitivity	analyses	presented,	primarily	due	to	the assumption	that	exchange	rates	change	in	a	parallel	fashion	and	that	interest	rates	change	instantaneously.	In	addition,	the	analyses	are	unable	to	reflect	the	complex market	reactions	that	normally	would	arise	from	the	market	shifts	modeled.

A	discussion	of	our	accounting	policies	for	derivative	instruments	and	further	disclosures	are	provided	in	Note	15	to	the	consolidated	financial	statements.

# Commodity	Price	Risk

We	are	exposed	to	changes	in	the	prices	of	refined	fuels,	principally	jet-A,	diesel,	and	unleaded	gasoline.	Currently,	the	fuel	surcharges	that	we	apply	to	our domestic	and	international	package	and	LTL	services	are	the	primary	means	of	reducing	the	risk	of	adverse	fuel	price	changes.	Additionally,	we	use	a	combination	of options	contracts	to	provide	partial	protection	from	changing	fuel	and	energy	prices.	The	net	fair	value	of	such	contracts	subject	to	price	risk,	excluding	the	underlying exposures,	as	of	December	31,	2007	and	2006	was	an	asset	(liability)	of	$(179)	and	$10	million,	respectively.	The	potential	loss	in	the	fair	value	of	these	derivative contracts,	assuming	a	hypothetical	10%	adverse	change	in	the	underlying	commodity	price,	would	be	approximately	$42	and	$8	million	at	December	31,	2007	and	2006, respectively.	This	amount	excludes	the	offsetting	impact	of	the	price	risk	inherent	in	the	physical	purchase	of	the	underlying	commodities.

In	the	second	quarter	of	2006,	we	terminated	several	energy	derivatives	and	received	$229	million	in	cash.	These	derivatives	were	designated	as	hedges	of forecasted	cash	outflows	for	purchases	of	fuel	products.	As	these	derivatives	maintained	their	effectiveness	and	qualified	for	hedge	accounting,	the	gains	associated	with these	hedges	were	recognized	in	income	over	the	original	term	of	the	hedges	through	the	end	of	2007.

# Foreign	Currency	Exchange	Risk

We	have	foreign	currency	risks	related	to	our	revenue,	operating	expenses,	and	financing	transactions	in	currencies	other	than	the	local	currencies	in	which	we operate.	We	are	exposed	to	currency	risk	from	the	potential	changes	in	functional	currency	values	of	our	foreign	currency-denominated	assets,	liabilities,	and	cash	flows. Our	most	significant	foreign	currency	exposures	relate	to	the	Euro,	the	British	Pound	Sterling	and	the	Canadian	Dollar.	We	use	a	combination	of	purchased	and	written options	and	forward	contracts	to	hedge	cash	flow	currency	exposures.	These	derivative	instruments	generally	cover	forecasted	foreign	currency	exposures	for	periods	up to	one	year.	As	of	December	31,	2007	and	2006,	the	net	fair	value	of	the	hedging	instruments	described	above	was	an	asset	(liability)	of	$(42)	and	$30	million, respectively.	The	potential	loss	in	fair	value	for

such	instruments	from	a	hypothetical	10%	adverse	change	in	quoted	foreign	currency	exchange	rates	would	be	approximately	$387	and	$183	million	at	December	31, 2007	and	2006,	respectively.	This	sensitivity	analysis	assumes	a	parallel	shift	in	the	foreign	currency	exchange	rates.	Exchange	rates	rarely	move	in	the	same	direction. The	assumption	that	exchange	rates	change	in	a	parallel	fashion	may	overstate	the	impact	of	changing	exchange	rates	on	assets	and	liabilities	denominated	in	a	foreign currency.

# Interest	Rate	Risk

As	described	in	Note	8	to	the	consolidated	financial	statements,	we	have	issued	debt	instruments,	including	debt	associated	with	capital	leases,	that	accrue expense	at	fixed	and	floating	rates	of	interest.	We	use	a	combination	of	derivative	instruments,	including	interest	rate	swaps	and	cross-currency	interest	rate	swaps,	as part	of	our	program	to	manage	the	fixed	and	floating	interest	rate	mix	of	our	total	debt	portfolio	and	related	overall	cost	of	borrowing.	These	swaps	are	generally	entered into	concurrently	with	the	issuance	of	the	debt	that	they	are	intended	to	modify,	and	the	notional	amount,	interest	payment,	and	maturity	dates	of	the	swaps	match	the terms	of	the	associated	debt.

Our	floating	rate	debt	and	interest	rate	swaps	subject	us	to	risk	resulting	from	changes	in	short-term	(primarily	LIBOR)	interest	rates.	The	potential	change	in annual	interest	expense	resulting	from	a	hypothetical	100	basis	point	change	in	short-term	interest	rates	applied	to	our	floating	rate	debt	and	swap	instruments	at December	31,	2007	and	2007	would	be	approximately	$100	and	$29	million,	respectively.

We	have	investments	in	debt	and	preferred	equity	securities	(including	auction	rate	securities),	as	well	as	cash-equivalent	instruments,	some	of	which	accrue income	at	variable	rates	of	interest.	The	potential	change	in	annual	investment	income	resulting	from	a	hypothetical	100	basis	point	change	in	interest	rates	applied	to our	investments	exposed	to	variable	interest	rates	at	December	31,	2007	and	2006	would	be	approximately	$15	and	$12	million,	respectively.

Additionally,	as	described	in	Note	3	to	the	consolidated	financial	statements,	we	hold	a	portfolio	of	finance	receivables	that	accrue	income	at	fixed	and	floating rates	of	interest.	The	potential	change	in	the	annual	income	resulting	from	a	hypothetical	100	basis	point	change	in	interest	rates	applied	to	our	variable	rate	finance receivables	at	December	31,	2007	and	2006	would	be	immaterial.

This	interest	rate	sensitivity	analysis	assumes	interest	rate	changes	are	instantaneous,	parallel	shifts	in	the	yield	curve.	In	reality,	interest	rate	changes	are	rarely instantaneous	or	parallel.	While	this	is	our	best	estimate	of	the	impact	of	the	specified	interest	rate	scenarios,	these	estimates	should	not	be	viewed	as	forecasts.	We adjust	the	fixed	and	floating	interest	rate	mix	of	our	interest	rate	sensitive	assets	and	liabilities	in	response	to	changes	in	market	conditions.

# Equity	Price	Risk

We	hold	investments	in	various	common	equity	securities	that	are	subject	to	price	risk,	and	for	certain	of	these	securities,	we	utilize	options	to	hedge	this	price risk.	At	December	31,	2007	and	2006,	the	fair	value	of	such	investments	was	$35	and	$80	million,	respectively.	The	potential	change	in	the	fair	value	of	such investments,	assuming	a	10%	change	in	equity	prices	net	of	the	offsetting	impact	of	any	hedges,	would	be	approximately	$4	and	$8	million	at	December	31,	2007	and 2006.

# Credit	Risk

The	forward	contracts,	swaps,	and	options	previously	discussed	contain	an	element	of	risk	that	the	counterparties	may	be	unable	to	meet	the	terms	of	the agreements.	However,	we	minimize	such	risk	exposures	for	these	instruments	by	limiting	the	counterparties	to	large	banks	and	financial	institutions	that	meet	established credit	guidelines.	We	do	not	expect	to	incur	any	losses	as	a	result	of	counterparty	default.

# New	Accounting	Pronouncements

In	September	2006,	the	FASB	issued	Statement	No.	157	"Fair	Value	Measurements"	("FAS	157"),	which	was	issued	to	define	fair	value,	establish	a	framework for	measuring	fair	value,	and	expand	disclosures	about	fair	value	measurements,	and	is	effective	for	fiscal	years	beginning	after	November	15,	2007.	In	February	2008, the	FASB	deferred	the	effective	date	of	FAS	157	for	one	year	for	certain	nonfinancial	assets	and	liabilities,	and	removed	certain	leasing	transactions	from	its	scope.	We adopted	FAS	157	on	January	1,	2008,	and	the	impact	of	adoption	was	not	material	to	our	results	of	operations	or	financial	condition.

In	September	2006,	the	FASB	issued	Statement	No.	158	"Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans	(an	amendment	of FASB	Statements	No.	87,	88,	106,	and	132(R))"	("FAS	158").	This	statement	requires	us	to	recognize	the	funded	status	of	defined	benefit	pension	and	other postretirement	plans	as	an	asset	or	liability	in	the	balance	sheet,	and	required	delayed	recognition	items,	consisting	of	actuarial	gains	and	losses	and	prior	service	costs and	credits,	to	be	recognized	in	other	comprehensive	income	and	subsequently	amortized	to	the	income	statement.	On	December	31,	2006,	we	adopted	the	recognition and	disclosure	provisions	of	FAS	158,	which	resulted	in	a	reduction	to	AOCI	of	$2.097	billion	and	a	reduction	of	long-term	deferred	tax	liabilities	of	$1.258	billion.

Additionally,	we	currently	utilize	the	early	measurement	date	option	available	under	Statement	No.	87	"Employers'	Accounting	for	Pensions",	and	we	measure the	funded	status	of	our	plans	as	of	September	30	each	year.	Under	the	provisions	of	FAS	158,	we	will	be	required	to	use	a	December	31	measurement	date	for	all	of	our pension	and	postretirement	benefit	plans	beginning	in	2008.	As	a	result	of	this	change	in	measurement	date,	we	recorded	a	cumulative	effect	after-tax	$44	million reduction	to	retained	earnings	as	of	January	1,	2008.

In	February	2007,	the	FASB	issued	Statement	No.	159	"The	Fair	Value	Option	for	Financial	Assets	and	Financial	Liabilities"	("FAS	159"),	which	gives	entities the	option	to	measure	eligible	financial	assets,	financial	liabilities	and	firm	commitments	at	fair	value	(i.e.,	the	fair	value	option),	on	an	instrument-by-instrument	basis, that	are	otherwise	not	accounted	for	at	fair	value	under	other	accounting	standards.	The	election	to	use	the	fair	value	option	is	available	at	specified	election	dates,	such as	when	an	entity	first	recognizes	a	financial	asset	or	financial	liability	or	upon	entering	into	a	firm	commitment.	Subsequent	changes	in	fair	value	must	be	recorded	in earnings.	Additionally,	SFAS	No.	159	allows	for	a	one-time	election	for	existing	positions	upon	adoption,	with	the	transition	adjustment	recorded	to	beginning	retained earnings.	We	adopted	FAS	159	on	January	1,	2008,	and	elected	to	apply	the	fair	value	option	to	our	investment	in	certain	investment	partnerships	that	were	previously accounted	for	under	the	equity	method.	Accordingly,	we	recorded	an	after-tax	$12	million	reduction	to	retained	earnings	as	of	January	1,	2008,	representing	the cumulative	effect	adjustment	of	adopting	FAS	159.

In	June	2006,	the	FASB	issued	FASB	Interpretation	No.	48,	"Accounting	for	Uncertainty	in	Income	Taxes—an	Interpretation	of	FASB	Statement	No.	109"	("FIN 48").	FIN	48	requires	that	we	determine	whether	a	tax	position	is	more	likely	than	not	to	be	sustained	upon	examination,	including	resolution	of	any	related	appeals	or litigation	processes,	based	on	the	technical	merits	of	the	position.	Once	it	is	determined	that	a	position	meets	this	recognition	threshold,	the	position	is	measured	to determine	the	amount	of	benefit	to	be	recognized	in	the	financial	statements.	On	January	1,	2007,	we	adopted	the	provisions	of	FIN	48,	and	the	impact	of	this Interpretation	is	discussed	in	Note	13.

In	June	2007,	the	EITF	reached	consensus	on	Issue	No.	06-11,	"Accounting	for	Income	Tax	Benefits	of	Dividends	on	Share-Based	Payment	Awards."	EITF	06- 11	requires	that	the	tax	benefit	related	to	dividend	equivalents	paid	on	restricted	stock	units,	which	are	expected	to	vest,	be	recorded	as	an	increase	to	additional	paid-in capital.	EITF	06-11	is	to	be	applied	prospectively	for	tax	benefits	on	dividends	declared	in	fiscal	years	beginning	after	December	15,	2007,	and	we	will	adopt	the provisions	of	EITF	06-11	beginning	in	the	first	quarter	of	2008.	EITF	06-11	is	not	expected	to	have	a	material	impact	on	our	results	of	operations	or	financial	condition.

In	December	2007	the	FASB	issued	Statement	No.	141(R)	"Business	Combinations"	("FAS	141(R)").	FAS	141(R)	requires	the	acquiring	entity	in	a	business combination	to	recognize	the	full	fair	value	of	assets	acquired

and	liabilities	assumed	in	the	transaction	(whether	a	full	or	partial	acquisition);	establishes	the	acquisition-date	fair	value	as	the	measurement	objective	for	all	assets acquired	and	liabilities	assumed;	requires	expensing	of	most	transaction	and	restructuring	costs;	and	requires	the	acquirer	to	disclose	to	investors	and	other	users	all	of the	information	needed	to	evaluate	and	understand	the	nature	and	financial	effect	of	the	business	combination.	FAS	141(R)	applies	prospectively	to	business combinations	for	which	the	acquisition	date	is	on	or	after	January	1,	2009.	The	impact	of	FAS	No.	141R	on	our	consolidated	financial	statements	will	depend	upon	the nature,	terms	and	size	of	the	acquisitions	we	consummate	after	the	effective	date.

In	December	2007,	the	FASB	issued	FAS	No.	160,	"Noncontrolling	Interests	in	Consolidated	Financial	Statements—an	amendment	of	Accounting	Research Bulletin	No.	51"	("FAS	160").	FAS	160	requires	reporting	entities	to	present	noncontrolling	(minority)	interests	as	equity	(as	opposed	to	as	a	liability	or	mezzanine equity)	and	provides	guidance	on	the	accounting	for	transactions	between	an	entity	and	noncontrolling	interests.	As	of	December	31,	2007,	we	had	approximately	$13 million	in	noncontrolling	interests	classified	in	other	non-current	liabilities.	FAS	160	applies	prospectively	as	of	January	1,	2009,	except	for	the	presentation	and disclosure	requirements	which	will	be	applied	retrospectively	for	all	periods	presented.

# Critical	Accounting	Policies	and	Estimates

Our	discussion	and	analysis	of	our	financial	condition	and	results	of	operations	are	based	on	our	consolidated	financial	statements,	which	are	prepared	in accordance	with	accounting	principles	generally	accepted	in	the	United	States	of	America.	As	indicated	in	Note	1	to	our	consolidated	financial	statements,	the	amounts of	assets,	liabilities,	revenue,	and	expenses	reported	in	our	financial	statements	are	affected	by	estimates	and	judgments	that	are	necessary	to	comply	with	generally accepted	accounting	principles.	We	base	our	estimates	on	prior	experience	and	other	assumptions	that	we	consider	reasonable	to	our	circumstances.	Actual	results	could differ	from	our	estimates,	which	would	affect	the	related	amounts	reported	in	our	financial	statements.	While	estimates	and	judgments	are	applied	in	arriving	at	many reported	amounts,	we	believe	that	the	following	matters	may	involve	a	higher	degree	of	judgment	and	complexity.

Contingencies—As	discussed	in	Note	9	to	our	consolidated	financial	statements,	we	are	involved	in	various	legal	proceedings	and	contingencies.	We	have recorded	liabilities	for	these	matters	in	accordance	with	Statement	of	Financial	Accounting	Standards	No.	5,	"Accounting	for	Contingencies"	("FAS	5").	FAS	5	requires a	liability	to	be	recorded	based	on	our	estimate	of	the	probable	cost	of	the	resolution	of	a	contingency.	The	actual	resolution	of	these	contingencies	may	differ	from	our estimates.	If	a	contingency	is	settled	for	an	amount	greater	than	our	estimate,	a	future	charge	to	income	would	result.	Likewise,	if	a	contingency	is	settled	for	an	amount that	is	less	than	our	estimate,	a	future	credit	to	income	would	result.

The	events	that	may	impact	our	contingent	liabilities	are	often	unique	and	generally	are	not	predictable.	At	the	time	a	contingency	is	identified,	we	consider	all relevant	facts	as	part	of	our	FAS	5	evaluation.	We	record	a	liability	for	a	loss	that	meets	the	recognition	criteria	of	FAS	5.	These	criteria	require	recognition	of	a	liability when	the	loss	is	probable	of	occurring	and	reasonably	estimable.	Events	may	arise	that	were	not	anticipated	and	the	outcome	of	a	contingency	may	result	in	a	loss	to	us that	differs	from	our	previously	estimated	liability.	These	factors	could	result	in	a	material	difference	between	estimated	and	actual	operating	results.	Contingent	losses that	meet	the	recognition	criteria	under	FAS	5,	excluding	those	related	to	income	taxes	and	self	insurance	which	are	discussed	further	below,	were	not	material	to	the Company's	financial	position	as	of	December	31,	2007.	In	addition,	we	have	certain	contingent	liabilities	that	have	not	been	recognized	as	of	December	31,	2007, because	a	loss	is	not	reasonably	estimable.

Goodwill	Impairment—We	account	for	goodwill	in	accordance	with	Statement	of	Financial	Accounting	Standards	No.	142,	"Goodwill	and	Other	Intangible Assets"	("FAS	142"),	which	requires	annual	impairment	testing	of	goodwill	for	each	of	our	reporting	units.	Goodwill	impairment	testing	requires	that	we	estimate	the fair	value	of	our	goodwill	and	compare	that	estimate	to	the	amount	of	goodwill	recorded	on	our	balance	sheet.

We	use	a	discounted	cash	flow	model	("DCF	model")	to	estimate	the	fair	value	of	our	goodwill.	The	completion	of	the	DCF	model	requires	that	we	make	a number	of	significant	assumptions	to	produce	an	estimate	of	future	cash	flows.	These	assumptions	include	projections	of	future	revenue,	costs	and	working	capital changes.	In	addition,	we	make	assumptions	about	the	estimated	cost	of	capital	and	other	relevant	variables,	as	required,	in	estimating	the	fair	value	of	our	reporting	units. The	projections	that	we	use	in	our	DCF	model	are	updated	annually	and	will	change	over	time	based	on	the	historical	performance	and	changing	business	conditions	for each	of	our	reporting	units.

As	of	December	31,	2007,	our	recorded	goodwill	was	$2.577	billion,	of	which	$2.282	billion	relates	to	our	Supply	Chain	and	Freight	segment.	This	segment	of our	business	has	experienced	rapid	growth	over	the	last	several	years,	largely	due	to	the	acquisitions	that	we	have	made.	Because	of	its	growth,	this	segment	continues	to experience	significant	change	as	we	integrate	the	acquired	companies,	resulting	in	higher	volatility	in	our	DCF	model	projections	than	for	our	other	segments.	Our annual	impairment	tests	performed	in	2007,	2006	and	2005	resulted	in	no	goodwill	impairment.

Self-Insurance	Accruals—We	self-insure	costs	associated	with	workers'	compensation	claims,	automotive	liability,	health	and	welfare,	and	general	business liabilities,	up	to	certain	limits.	Insurance	reserves	are	established	for	estimates	of	the	loss	that	we	will	ultimately	incur	on	reported	claims,	as	well	as	estimates	of	claims that	have	been	incurred	but	not	yet	reported.	Recorded	balances	are	based	on	reserve	levels,	which	incorporate	historical	loss	experience	and	judgments	about	the present	and	expected	levels	of	cost	per	claim.	Trends	in	actual	experience	are	a	significant	factor	in	the	determination	of	such	reserves.	We	believe	our	estimated reserves	for	such	claims	are	adequate,	but	actual	experience	in	claim	frequency	and/or	severity	could	materially	differ	from	our	estimates	and	affect	our	results	of operations.

Workers'	compensation,	automobile	liability	and	general	liability	insurance	claims	may	take	several	years	to	completely	settle.	Consequently,	actuarial	estimates are	required	to	project	the	ultimate	cost	that	will	be	incurred	to	fully	resolve	the	claims.	A	number	of	factors	can	affect	the	actual	cost	of	a	claim,	including	the	length	of time	the	claim	remains	open,	trends	in	health	care	costs	and	the	results	of	related	litigation.	Furthermore,	claims	may	emerge	in	future	years	for	events	that	occurred	in	a prior	year	at	a	rate	that	differs	from	previous	actuarial	projections.	Changes	in	state	legislation	with	respect	to	workers	compensation	can	affect	the	adequacy	of	our	self- insurance	accruals.	All	of	these	factors	can	result	in	revisions	to	prior	actuarial	projections	and	produce	a	material	difference	between	estimated	and	actual	operating results.

We	sponsor	a	number	of	health	and	welfare	insurance	plans	for	our	employees.	These	liabilities	and	related	expenses	are	based	on	estimates	of	the	number	of employees	and	eligible	dependents	covered	under	the	plans,	anticipated	medical	usage	by	participants	and	overall	trends	in	medical	costs	and	inflation.	Actual	results may	differ	from	these	estimates	and,	therefore,	produce	a	material	difference	between	estimated	and	actual	operating	results.

Pension	and	Postretirement	Medical	Benefits—As	discussed	in	Note	5	to	our	consolidated	financial	statements,	we	maintain	several	defined	benefit	and postretirement	benefit	plans.	Our	pension	and	other	postretirement	benefit	costs	are	calculated	using	various	actuarial	assumptions	and	methodologies	as	prescribed	by Statement	of	Financial	Accounting	Standards	No.	87,	"Employers'	Accounting	for	Pensions"	and	Statement	of	Financial	Accounting	Standards	No.	106,	"Employers' Accounting	for	Postretirement	Benefits	Other	than	Pensions."	These	assumptions	include	discount	rates,	health	care	cost	trend	rates,	inflation,	rate	of	compensation increases,	expected	return	on	plan	assets,	mortality	rates,	and	other	factors.	Actual	results	that	differ	from	our	assumptions	are	accumulated	and	amortized	over	future periods	and,	therefore,	generally	affect	our	recognized	expense	and	recorded	obligation	in	such	future	periods.	We	believe	that	the	assumptions	utilized	in	recording	the obligations	under	our	plans	are	reasonable	based	on	information	as	to	historical	experience	and	performance	as	well	as	other	factors	that	might	cause	future	expectations to	differ	from	past	trends.	Differences	in	actual

experience	or	changes	in	assumptions	may	affect	our	pension	and	other	postretirement	obligations	and	future	expense.	A	25	basis	point	change	in	the	assumed	discount rate,	expected	return	on	assets,	and	health	care	cost	trend	rate	for	the	U.S.	pension	and	postretirement	benefit	plans	would	result	in	the	following	increases	(decreases)	on the	Company's	costs	and	obligations	for	the	year	2007	(in	millions):

|  | 25	Basis	Point<br>Increase | 25	Basis	Point<br>Decrease |
| :--- | :--- | :--- |
| Pension\tPlans |  |  |
| Discount\tRate: |  |  |
| Effect\ton\tnet\tperiodic\tbenefit\tcost | $(65) | $67 |
| Effect\ton\tprojected\tbenefit\tobligation | (615) | 643 |
| Return\ton\tAssets: |  |  |
| Effect\ton\tnet\tperiodic\tbenefit\tcost | (36) | 36 |
| Postretirement\tMedical\tPlans |  |  |
| Discount\tRate: |  |  |
| Effect\ton\tnet\tperiodic\tbenefit\tcost | (6) | 6 |
| Effect\ton\tprojected\tbenefit\tobligation | (88) | 91 |
| Health\tCare\tCost\tTrend\tRate: |  |  |
| Effect\ton\tnet\tperiodic\tbenefit\tcost | 2 | (2) |
| Effect\ton\tprojected\tbenefit\tobligation | 19 | (19) |

Financial	Instruments—As	discussed	in	Notes	2,	3,	8,	and	15	to	our	consolidated	financial	statements,	and	in	the	"Market	Risk"	section	of	this	report,	we	hold and	issue	financial	instruments	that	contain	elements	of	market	risk.	Certain	of	these	financial	instruments	are	required	to	be	recorded	at	fair	value.	Fair	values	are	based on	listed	market	prices,	when	such	prices	are	available.	To	the	extent	that	listed	market	prices	are	not	available,	fair	value	is	determined	based	on	other	relevant	factors, including	dealer	price	quotations.	Certain	financial	instruments,	including	over-the-counter	derivative	instruments,	are	valued	using	pricing	models	that	consider,	among other	factors,	contractual	and	market	prices,	correlations,	time	value,	credit	spreads,	and	yield	curve	volatility	factors.	Changes	in	the	fixed	income,	equity,	foreign exchange,	and	commodity	markets	will	impact	our	estimates	of	fair	value	in	the	future,	potentially	affecting	our	results	of	operations.	A	quantitative	sensitivity	analysis of	our	exposure	to	changes	in	commodity	prices,	foreign	currency	exchange	rates,	interest	rates,	and	equity	prices	is	presented	in	the	"Market	Risk"	section	of	this report.

Depreciation,	Residual	Value,	and	Impairment	of	Fixed	Assets—As	of	December	31,	2007,	we	had	$17.663	billion	of	net	fixed	assets,	the	most	significant category	of	which	is	aircraft.	In	accounting	for	fixed	assets,	we	make	estimates	about	the	expected	useful	lives	and	the	expected	residual	values	of	the	assets,	and	the potential	for	impairment	based	on	the	fair	values	of	the	assets	and	the	cash	flows	generated	by	these	assets.

In	estimating	the	lives	and	expected	residual	values	of	aircraft,	we	have	relied	upon	actual	experience	with	the	same	or	similar	aircraft	types.	Subsequent	revisions to	these	estimates	could	be	caused	by	changes	to	our	maintenance	program,	changes	in	the	utilization	of	the	aircraft,	governmental	regulations	on	aging	aircraft,	and changing	market	prices	of	new	and	used	aircraft	of	the	same	or	similar	types.	We	periodically	evaluate	these	estimates	and	assumptions,	and	adjust	the	estimates	and assumptions	as	necessary.	Adjustments	to	the	expected	lives	and	residual	values	are	accounted	for	on	a	prospective	basis	through	depreciation	expense.

In	accordance	with	the	provisions	of	Statement	of	Financial	Accounting	Standards	No.	144	"Accounting	for	the	Impairment	or	Disposal	of	Long-Lived	Assets" ("FAS	144"),	we	review	long-lived	assets	for	impairment	when	circumstances	indicate	the	carrying	amount	of	an	asset	may	not	be	recoverable	based	on	the undiscounted	future	cash	flows	of	the	asset.	If	the	carrying	amount	of	the	asset	is	determined	not	to	be	recoverable,	a	write-down	to	fair	value	is	recorded.	Fair	values	are determined	based	on	quoted	market	values,	discounted	cash	flows,	or	external	appraisals,	as	applicable.	We	review	long-lived	assets	for	impairment	at	the	individual asset	or	the	asset	group	level	for	which	the	lowest	level	of	independent	cash	flows	can	be	identified.	The	circumstances	that

would	indicate	potential	impairment	may	include,	but	are	not	limited	to,	a	significant	change	in	the	extent	to	which	an	asset	is	utilized,	a	significant	decrease	in	the market	value	of	an	asset,	and	operating	or	cash	flow	losses	associated	with	the	use	of	the	asset.	In	estimating	cash	flows,	we	project	future	volume	levels	for	our	different air	express	products	in	all	geographic	regions	in	which	we	do	business.	Adverse	changes	in	these	volume	forecasts,	or	a	shortfall	of	our	actual	volume	compared	with our	projections,	could	result	in	our	current	aircraft	capacity	exceeding	current	or	projected	demand.	This	situation	would	lead	to	an	excess	of	a	particular	aircraft	type, resulting	in	an	aircraft	impairment	charge	or	a	reduction	of	the	expected	life	of	an	aircraft	type	(thus	resulting	in	increased	depreciation	expense).

During	2006,	we	reevaluated	the	anticipated	service	lives	of	our	Boeing	757,	Boeing	767,	and	Airbus	A300	fleets,	and	as	a	result	of	this	evaluation,	increased	the depreciable	lives	from	20	to	30	years	and	reduced	the	residual	values	from	30%	to	10%	of	original	cost.	This	change	did	not	have	a	material	effect	on	our	results	of operations.

Income	Taxes—We	make	certain	estimates	and	judgments	in	determining	income	tax	expense	for	financial	statement	purposes.	These	estimates	and	judgments occur	in	the	calculation	of	income	by	legal	entity	and	jurisdiction,	tax	credits,	benefits,	and	deductions,	and	in	the	calculation	of	certain	tax	assets	and	liabilities,	which arise	from	differences	in	the	timing	of	recognition	of	revenue	and	expense	for	tax	and	financial	statement	purposes,	as	well	as	the	interest	and	penalties	related	to	these uncertain	tax	positions.	Significant	changes	to	these	estimates	may	result	in	an	increase	or	decrease	to	our	tax	provision	in	a	subsequent	period.

We	assess	the	likelihood	that	we	will	be	able	to	recover	our	deferred	tax	assets.	If	recovery	is	not	likely,	we	must	increase	our	provision	for	taxes	by	recording	a valuation	allowance	against	the	deferred	tax	assets	that	we	estimate	will	not	ultimately	be	recoverable.	We	believe	that	we	will	ultimately	recover	a	substantial	majority of	the	deferred	tax	assets	recorded	on	our	consolidated	balance	sheets.	However,	should	there	be	a	change	in	our	ability	to	recover	our	deferred	tax	assets,	our	tax provision	would	increase	in	the	period	in	which	we	determined	that	the	recovery	was	not	likely.

The	calculation	of	our	tax	liabilities	involves	dealing	with	uncertainties	in	the	application	of	complex	tax	regulations.	In	the	first	quarter	of	2007,	we	adopted FASB	Interpretation	No.	48,	"Accounting	for	Uncertainty	in	Income	Taxes—an	interpretation	of	SFAS	No.	109"	("FIN	48"),	and	related	guidance	(see	Note	13	in	the consolidated	financial	statements).	As	a	result	of	the	implementation	of	FIN	48,	we	recognize	liabilities	for	uncertain	tax	positions	based	on	a	two-step	process prescribed	in	the	interpretation.	The	first	step	is	to	evaluate	the	tax	position	for	recognition	by	determining	if	the	weight	of	available	evidence	indicates	that	it	is	more likely	than	not	that	the	position	will	be	sustained	on	audit,	including	resolution	of	related	appeals	or	litigation	processes,	if	any.	The	second	step	requires	us	to	estimate and	measure	the	tax	benefit	as	the	largest	amount	that	is	more	than	50%	likely	to	be	realized	upon	ultimate	settlement.	It	is	inherently	difficult	and	subjective	to	estimate such	amounts,	as	we	have	to	determine	the	probability	of	various	possible	outcomes.	We	reevaluate	these	uncertain	tax	positions	on	a	quarterly	basis.	This	evaluation	is based	on	factors	including,	but	not	limited	to,	changes	in	facts	or	circumstances,	changes	in	tax	law,	effectively	settled	issues	under	audit,	and	new	audit	activity.	Such	a change	in	recognition	or	measurement	would	result	in	the	recognition	of	a	tax	benefit	or	an	additional	charge	to	the	tax	provision.

# Forward-Looking	Statements

"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations"	and	other	parts	of	this	report	contain	"forward-looking"	statements about	matters	that	inherently	are	difficult	to	predict.	The	words	"believes,"	"expects,"	"anticipates,"	"we	see,"	and	similar	expressions	are	intended	to	identify	forward- looking	statements.	These	statements	include	statements	regarding	our	intent,	belief	and	current	expectations	about	our	strategic	direction,	prospects	and	future	results. We	have	described	some	of	the	important	factors	that	affect	these	statements	as	we	discussed	each	subject.	Forward-looking	statements	involve	risks	and	uncertainties, and	certain	factors	may	cause	actual	results	to	differ	materially	from	those	contained	in	the	forward-looking	statements.

# Risk	Factors

The	following	are	some	of	the	factors	that	could	cause	our	actual	results	to	differ	materially	from	the	expected	results	described	in	our	forward-looking statements:

•The	effect	of	general	economic	and	other	conditions	in	the	markets	in	which	we	operate,	both	in	the	United	States	and	internationally.	Our	operations	in international	markets	are	also	affected	by	currency	exchange	and	inflation	risks.

•The	impact	of	competition	on	a	local,	regional,	national,	and	international	basis.	Our	competitors	include	the	postal	services	of	the	U.S.	and	other	nations, various	motor	carriers,	express	companies,	freight	forwarders,	air	couriers	and	others.	Our	industry	is	undergoing	rapid	consolidation,	and	the	combining entities	are	competing	aggressively	for	business.

•The	impact	of	complex	and	stringent	aviation,	transportation,	environmental,	labor,	employment	and	other	governmental	laws	and	regulations,	and	the impact	of	new	laws	and	regulations	that	may	result	from	increased	security	concerns	following	the	events	of	September	11,	2001.	Our	failure	to	comply with	applicable	laws,	ordinances	or	regulations	could	result	in	substantial	fines	or	possible	revocation	of	our	authority	to	conduct	our	operations.

•Strikes,	work	stoppages	and	slowdowns	by	our	employees.	Such	actions	may	affect	our	ability	to	meet	our	customers	needs,	and	customers	may	do	more business	with	competitors	if	they	believe	that	such	actions	may	adversely	affect	our	ability	to	provide	service.	We	may	face	permanent	loss	of	customers	if we	are	unable	to	provide	uninterrupted	service.	The	terms	of	future	collective	bargaining	agreements	also	may	affect	our	competitive	position	and	results	of operations.

•Possible	disruption	of	supplies,	or	an	increase	in	the	prices,	of	gasoline,	diesel	and	jet	fuel	for	our	aircraft	and	delivery	vehicles	as	a	result	of	war	or	other factors.	We	require	significant	quantities	of	fuel	and	are	exposed	to	the	commodity	price	risk	associated	with	variations	in	the	market	price	for	petroleum products.

•	 Cyclical	and	seasonal	fluctuations	in	our	operating	results	due	to	decreased	demand	for	our	services.

# Item	7A. Quantitative	and	Qualitative	Disclosures	about	Market	Risk

Information	about	market	risk	can	be	found	in	Item	7	of	this	report	under	the	caption	"Market	Risk."

# Item	8. Financial	Statements	and	Supplementary	Data

Our	financial	statements	are	filed	together	with	this	report.	See	the	Index	to	Financial	Statements	and	Financial	Statement	Schedules	on	page	F-1	for	a	list	of	the financial	statements	filed	together	with	this	report.	Supplementary	data	appear	in	Note	17	to	our	financial	statements.

# Item	9. Changes	in	and	Disagreements	with	Accountants	on	Accounting	and	Financial	Disclosure

# None.

# Item	9A. Controls	and	Procedures

# Evaluation	of	Disclosure	Controls	and	Procedures:

As	of	the	end	of	the	period	covered	by	this	report,	management,	including	our	chief	executive	officer	and	chief	financial	officer,	evaluated	the	effectiveness	of	the design	and	operation	of	our	disclosure	controls	and	procedures	and	internal	controls	over	financial	reporting.	Based	upon,	and	as	of	the	date	of,	the	evaluation,	our	chief executive	officer	and	chief	financial	officer	concluded	that	the	disclosure	controls	and	procedures	and	internal	controls	over	financial	reporting	were	effective	to	ensure that	information	required	to	be	disclosed	in	the	reports	we	file	and	submit	under	the	Exchange	Act	is	recorded,	processed,	summarized	and	reported	as	and	when required.

# Changes	in	Internal	Control	over	Financial	Reporting:

There	were	no	changes	in	the	Company's	internal	controls	over	financial	reporting	during	the	quarter	ended	December	31,	2007	that	have	materially	affected,	or are	reasonably	likely	to	materially	affect,	the	Company's	internal	control	over	financial	reporting.

# Management's	Report	on	Internal	Control	Over	Financial	Reporting:

UPS	management	is	responsible	for	establishing	and	maintaining	adequate	internal	controls	over	financial	reporting	for	United	Parcel	Service,	Inc.	and	its subsidiaries	("the	Company").	Based	on	the	criteria	for	effective	internal	control	over	financial	reporting	established	in	Internal	Control—Integrated	Framework	issued by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission,	management	has	assessed	the	Company's	internal	control	over	financial	reporting	as effective	as	of	December	31,	2007.	The	independent	registered	public	accounting	firm	of	Deloitte	&	Touche	LLP,	as	auditors	of	the	consolidated	balance	sheet	of	United Parcel	Service,	Inc.	and	its	subsidiaries	as	of	December	31,	2007	and	the	related	consolidated	statements	of	income,	comprehensive	income	and	cash	flows	for	the	year ended	December	31,	2007,	has	issued	an	attestation	report	on	the	Company's	internal	control	over	financial	reporting,	which	is	included	herein.

# Item	9B. Other	Information

# PART	III

# Item	10. Directors,	Executive	Officers	and	Corporate	Governance

Information	about	our	directors	is	presented	under	the	caption	"Election	of	Directors"	in	our	definitive	Proxy	Statement	for	the	Annual	Meeting	of	Shareowners	to be	held	on	May	8,	2008	and	is	incorporated	herein	by	reference.

Information	about	our	executive	officers	can	be	found	in	Part	I	of	this	report	under	the	caption	"Executive	Officers	of	the	Registrant"	in	accordance	with Instruction	3	of	Item	401(b)	of	Regulation	S-K	and	General	Instruction	G(3)	of	Form	10-K.

Information	about	our	Audit	Committee	is	presented	under	the	caption	"Election	of	Directors—Committees	of	the	Board	of	Directors—Audit	Committee"	in	our definitive	Proxy	Statement	for	the	Annual	Meeting	of	Shareowners	to	be	held	on	May	8,	2008	and	is	incorporated	herein	by	reference.

Information	about	our	Code	of	Business	Conduct	is	presented	under	the	caption	"Where	You	Can	Find	More	Information"	in	Part	I,	Item	1	of	this	report.

Information	about	our	compliance	with	Section	16	of	the	Exchange	Act	of	1934,	as	amended,	is	presented	under	the	caption	"Section	16(a)	Beneficial	Ownership Reporting	Compliance"	in	our	definitive	Proxy	Statement	for	the	Annual	Meeting	of	Shareowners	to	be	held	on	May	8,	2008	and	is	incorporated	herein	by	reference.

# Item	11. Executive	Compensation

Information	about	executive	compensation	is	presented	under	the	captions	"Compensation	Discussion	and	Analysis,"	"Compensation	to	Executive	Officers," "Compensation	of	Directors,"	"Report	of	the	Compensation	Committee"	and	"Compensation	Committee	Interlocks	and	Insider	Participation"	in	our	definitive	Proxy Statement	for	the	Annual	Meeting	of	Shareowners	to	be	held	on	May	8,	2008	and	is	incorporated	herein	by	reference.

# Item	12. Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder	Matters

Information	about	security	ownership	is	presented	under	the	caption	"Beneficial	Ownership	of	Common	Stock"	in	our	definitive	Proxy	Statement	for	the	Annual Meeting	of	Shareowners	to	be	held	on	May	8,	2008	and	is	incorporated	herein	by	reference.

Information	about	our	equity	compensation	plans	is	presented	under	the	caption	"Securities	Authorized	for	Issuance	under	Equity	Compensation	Plans"	in	Part	II, Item	5	of	this	report.

# Item	13. Certain	Relationships	and	Related	Transactions,	and	Director	Independence

Information	about	transactions	with	related	persons	is	presented	under	the	caption	"Related	Person	Transactions"	in	our	definitive	Proxy	Statement	for	the	Annual Meeting	of	Shareowners	to	be	held	on	May	8,	2008	and	is	incorporated	herein	by	reference.

Information	about	director	independence	is	presented	under	the	caption	"Election	of	Directors—Director	Independence"	in	our	definitive	Proxy	Statement	for	the Annual	Meeting	of	Shareowners	to	be	held	on	May	8,	2008	and	is	incorporated	herein	by	reference.

# Item	14. Principal	Accountant	and	Fees	and	Services

Information	about	aggregate	fees	billed	to	us	by	our	principal	accountant	is	presented	under	the	caption	"Principal	Accounting	Firm	Fees"	in	our	definitive	Proxy Statement	for	the	Annual	Meetings	of	Shareowners	to	be	held	on	May	8,	2008	and	is	incorporated	herein	by	reference.

# PART	IV

# Item	15. Exhibits	and	Financial	Statement	Schedules

# (a)	1.	Financial	Statements.

See	the	Index	to	Financial	Statements	on	page	F-1	for	a	list	of	the	financial	statements	filed	with	this	report.

# 2.	Financial	Statement	Schedules.

# 3.	List	of	Exhibits.

See	the	Exhibit	Index	for	a	list	of	the	exhibits	incorporated	by	reference	into	or	filed	with	this	report.

(b)	Exhibits	required	by	Item	601	of	Regulation	S-K.

# (c)	Financial	Statement	Schedules.

# SIGNATURES

Pursuant	to	the	requirements	of	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934,	United	Parcel	Service,	Inc.	has	duly	caused	this	report	to	be	signed	on its	behalf	by	the	undersigned,	thereunto	duly	authorized.

(REGISTRANT)

D.	Scott	Davis

Chairman	and

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	report	has	been	signed	below	by	the	following	persons	on	behalf	of	the	Registrant	and	in the	capacities	and	on	the	dates	indicated.

# UNITED	PARCEL	SERVICE,	INC.	AND	SUBSIDIARIES

# INDEX	TO	FINANCIAL	STATEMENTS

# Item	8—Financial	Statements

# Report	of	Independent	Registered	Public	Accounting	Firm	on	Internal	Control	over	Financial	Reporting

# Board	of	Directors	and	Shareowners

# Atlanta,	Georgia

We	have	audited	the	internal	control	over	financial	reporting	of	United	Parcel	Service,	Inc.	and	subsidiaries	(the	"Company")	as	of	December	31,	2007,	based	on criteria	established	in	Internal	Control—Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission.	The	Company's management	is	responsible	for	maintaining	effective	internal	control	over	financial	reporting	and	for	its	assessment	of	the	effectiveness	of	internal	control	over	financial reporting,	included	in	the	accompanying	Management's	Report	on	Internal	Control	Over	Financial	Reporting.	Our	responsibility	is	to	express	an	opinion	on	the Company's	internal	control	over	financial	reporting	based	on	our	audit.

We	conducted	our	audit	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we plan	and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	effective	internal	control	over	financial	reporting	was	maintained	in	all	material	respects.	Our audit	included	obtaining	an	understanding	of	internal	control	over	financial	reporting,	assessing	the	risk	that	a	material	weakness	exists,	testing	and	evaluating	the	design and	operating	effectiveness	of	internal	control	based	on	the	assessed	risk,	and	performing	such	other	procedures	as	we	considered	necessary	in	the	circumstances.	We believe	that	our	audit	provides	a	reasonable	basis	for	our	opinion.

A	company's	internal	control	over	financial	reporting	is	a	process	designed	by,	or	under	the	supervision	of,	the	company's	principal	executive	and	principal financial	officers,	or	persons	performing	similar	functions,	and	effected	by	the	company's	board	of	directors,	management,	and	other	personnel	to	provide	reasonable assurance	regarding	the	reliability	of	financial	reporting	and	the	preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted accounting	principles.	A	company's	internal	control	over	financial	reporting	includes	those	policies	and	procedures	that	(1)	pertain	to	the	maintenance	of	records	that,	in reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and	dispositions	of	the	assets	of	the	company;	(2)	provide	reasonable	assurance	that	transactions	are recorded	as	necessary	to	permit	preparation	of	financial	statements	in	accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the company	are	being	made	only	in	accordance	with	authorizations	of	management	and	directors	of	the	company;	and	(3)	provide	reasonable	assurance	regarding prevention	or	timely	detection	of	unauthorized	acquisition,	use,	or	disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	the	inherent	limitations	of	internal	control	over	financial	reporting,	including	the	possibility	of	collusion	or	improper	management	override	of	controls, material	misstatements	due	to	error	or	fraud	may	not	be	prevented	or	detected	on	a	timely	basis.	Also,	projections	of	any	evaluation	of	the	effectiveness	of	the	internal control	over	financial	reporting	to	future	periods	are	subject	to	the	risk	that	the	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of compliance	with	the	policies	or	procedures	may	deteriorate.

In	our	opinion,	the	Company	maintained,	in	all	material	respects,	effective	internal	control	over	financial	reporting	as	of	December	31,	2007,	based	on	the	criteria established	in	Internal	Control—Integrated	Framework	issued	by	the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission.

We	have	also	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	consolidated	balance	sheet	of United	Parcel	Service,	Inc.	and	its	subsidiaries	as	of	December	31,	2007,	and	the	related	consolidated	statements	of	income,	comprehensive	income,	and	cash	flows	for the	year	ended	December	31,	2007	and	our	report	dated	February	29,	2008	expressed	an	unqualified	opinion	on	those	financial	statements,	and	included	an	explanatory paragraph	regarding	the	Company's	adoption	of	the	provisions	of	Financial	Accounting	Standards	Board	Interpretation	No.	48,	"Accounting	for	Uncertainty	in	Income Taxes	(an	interpretation	of	FASB	Statement	No.	109),"	on	January	1,	2007,	the	provisions	of	Statement	of	Financial	Accounting	Standards	No.	123	(revised	2004), "Share-Based	Payment,"	on	January	1,	2006,	and	the	recognition	and	disclosure	provisions	of	Statement	of	Financial	Accounting	Standards	No.	158,	"Employers' Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans	(an	amendment	of	FASB	Statements	No.	87,	88,	106,	and	132(R)),"	on	December	31,	2006.

# Deloitte	&	Touche	LLP

# REPORT	OF	INDEPENDENT	REGISTERED	PUBLIC	ACCOUNTING	FIRM

We	have	audited	the	accompanying	consolidated	balance	sheets	of	United	Parcel	Service,	Inc.	and	subsidiaries	(the	"Company")	as	of	December	31,	2007	and 2006,	and	the	related	consolidated	statements	of	income,	comprehensive	income,	and	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2007. These	financial	statements	are	the	responsibility	of	the	Company's	management.	Our	responsibility	is	to	express	an	opinion	on	these	financial	statements	based	on	our audits.

We	conducted	our	audits	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require	that	we plan	and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	the	financial	statements	are	free	of	material	misstatement.	An	audit	includes	examining,	on	a test	basis,	evidence	supporting	the	amounts	and	disclosures	in	the	financial	statements.	An	audit	also	includes	assessing	the	accounting	principles	used	and	significant estimates	made	by	management,	as	well	as	evaluating	the	overall	financial	statement	presentation.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our	opinion.

In	our	opinion,	such	consolidated	financial	statements	present	fairly,	in	all	material	respects,	the	financial	position	of	United	Parcel	Service	Inc.	and	subsidiaries at	December	31,	2007	and	2006,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2007,	in	conformity with	accounting	principles	generally	accepted	in	the	United	States	of	America.

As	described	in	Note	1	to	the	consolidated	financial	statements,	the	Company	adopted	the	provisions	of	Financial	Accounting	Standards	Board	Interpretation No.	48,	"Accounting	for	Uncertainty	in	Income	Taxes	(an	interpretation	of	FASB	Statement	No.	109),"	on	January	1,	2007,	the	provisions	of	Statement	of	Financial Accounting	Standards	No.	123	(revised	2004),	"Share-Based	Payment,"	on	January	1,	2006,	and	the	recognition	and	disclosure	provisions	of	Statement	of	Financial Accounting	Standards	No.	158,	"Employers'	Accounting	for	Defined	Benefit	Pension	and	Other	Postretirement	Plans	(an	amendment	of	FASB	Statements	No.	87,	88, 106,	and	132(R)),"	on	December	31,	2006.

We	have	also	audited,	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States),	the	Company's	internal	control	over financial	reporting	as	of	December	31,	2007,	based	on	the	criteria	established	in	Internal	Control—Integrated	Framework	issued	by	the	Committee	of	Sponsoring Organizations	of	the	Treadway	Commission	and	our	report	dated	February	29,	2008	expressed	an	unqualified	opinion	on	the	Company's	internal	control	over	financial reporting.

# CONSOLIDATED	BALANCE	SHEETS

# (In	millions)

| ASSETS | 2007 | 2006 |
| :--- | :--- | :--- |
| Current\tAssets: |  |  |
| Cash\tand\tcash\tequivalents | $2,027 | $794 |
| Marketable\tsecurities\tand\tshort-term\tinvestments | 577 | 1,189 |
| Accounts\treceivable,\tnet | 6,084 | 5,794 |
| Finance\treceivables,\tnet | 468 | 426 |
| Deferred\tincome\ttax\tassets | 606 | 414 |
| Income\ttaxes\treceivable | 1,256 | 65 |
| Other\tcurrent\tassets | 742 | 695 |
| Total\tCurrent\tAssets | \t 11,760 | 9,377 |
| Property,\tPlant\tand\tEquipment,\tNet | \t 17,663 | \t 16,779 |
| Pension\tand\tPostretirement\tBenefit\tAssets | 4,421 | 2,044 |
| Goodwill | 2,577 | 2,533 |
| Intangible\tAssets,\tNet | 628 | 688 |
| Long-Term\tFinance\tReceivables,\tNet | 431 | 374 |
| Other\tNon-Current\tAssets | 1,562 | 1,415 |
| Total\tAssets | $39,042 | $33,210 |
| LIABILITIES\tAND\tSHAREOWNERS'\tEQUITY |  |  |
| Current\tLiabilities: |  |  |
| Current\tmaturities\tof\tlong-term\tdebt\tand\tcommercial\tpaper | $3,512 | $983 |
| Accounts\tpayable | 1,819 | 1,841 |
| Accrued\twages\tand\twithholdings | 1,414 | 1,303 |
| Dividends\tpayable | 440 | 400 |
| Self-insurance\treserves | 704 | 682 |
| Other\tcurrent\tliabilities | 1,951 | 1,510 |
| Total\tCurrent\tLiabilities | 9,840 | 6,719 |
| Long-Term\tDebt | 7,506 | 3,133 |
| Pension\tand\tPostretirement\tBenefit\tObligations | 4,438 | 2,748 |
| Deferred\tIncome\tTax\tLiabilities | 2,620 | 2,529 |
| Self-Insurance\tReserves | 1,651 | 1,604 |
| Other\tNon-Current\tLiabilities | 804 | 995 |
| Shareowners'\tEquity: |  |  |
| Class\tA\tcommon\tstock\t(349\tand\t401\tshares\tissued\tin\t2007\tand\t2006) | 3 | 4 |
| Class\tB\tcommon\tstock\t(694\tand\t672\tshares\tissued\tin\t2007\tand\t2006) | 7 | 7 |
| Additional\tpaid-in\tcapital | — | — |
| Retained\tearnings | \t 14,186 | \t 17,676 |
| Accumulated\tother\tcomprehensive\tloss | (2,013) | (2,205) |
| Deferred\tcompensation\tobligations | 137 | 147 |
|  | \t 12,320 | \t 15,629 |
| Less:\tTreasury\tstock\t(2\tand\t3\tshares\tin\t2007\tand\t2006) | (137) | (147) |
| Total\tShareowners'\tEquity | \t 12,183 | \t 15,482 |
| Total\tLiabilities\tand\tShareowners'\tEquity | $39,042 | $33,210 |

See	notes	to	consolidated	financial	statements.

# STATEMENTS	OF	CONSOLIDATED	INCOME

# (In	millions,	except	per	share	amounts)

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Revenue | $49,692 | $47,547 | $42,581 |
| Operating\tExpenses: |  |  |  |
| Compensation\tand\tbenefits | \t 31,745 | \t 24,421 | \t 22,517 |
| Repairs\tand\tmaintenance | 1,157 | 1,155 | 1,097 |
| Depreciation\tand\tamortization | 1,745 | 1,748 | 1,644 |
| Purchased\ttransportation | 5,902 | 5,496 | 4,075 |
| Fuel | 2,974 | 2,655 | 2,085 |
| Other\toccupancy | 958 | 938 | 872 |
| Other\texpenses | 4,633 | 4,499 | 4,148 |
| Total\tOperating\tExpenses | \t 49,114 | \t 40,912 | \t 36,438 |
| Operating\tProfit | 578 | 6,635 | 6,143 |
| Other\tIncome\tand\t(Expense): |  |  |  |
| Investment\tincome | 99 | 86 | 104 |
| Interest\texpense | (246) | (211) | (172) |
| Total\tOther\tIncome\tand\t(Expense) | (147) | (125) | (68) |
| Income\tBefore\tIncome\tTaxes | 431 | 6,510 | 6,075 |
| Income\tTax\tExpense | 49 | 2,308 | 2,205 |
| Net\tIncome | $382 | $4,202 | $3,870 |
| Basic\tEarnings\tPer\tShare | $0.36 | $3.87 | $3.48 |
| Diluted\tEarnings\tPer\tShare | $0.36 | $3.86 | $3.47 |

# STATEMENTS	OF	CONSOLIDATED	COMPREHENSIVE	INCOME

|  | Years	Ended	December	31, | Years	Ended	December	31, | Years	Ended	December	31, |
| :--- | :--- | :--- | :--- |
|  | 2007 | 2006 | 2005 |
| Net\tincome | $382 | $4,202 | $3,870 |
| Change\tin\tforeign\tcurrency\ttranslation\tadjustment | 190 | 54 | (36) |
| Change\tin\tunrealized\tgain\t(loss)\ton\tmarketable\tsecurities,\tnet\tof\ttax | (3) | 1 | 16 |
| Change\tin\tunrealized\tgain\t(loss)\ton\tcash\tflow\thedges,\tnet\tof\ttax | (318) | (15) | 112 |
| Change\tin\tunrecognized\tpension\tand\tpostretirement\tbenefit\tcosts,\tnet\tof\ttax | 323 | 16 | (14) |
| Comprehensive\tincome | $574 | $4,258 | $3,948 |

# STATEMENTS	OF	CONSOLIDATED	CASH	FLOWS

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Cash\tFlows\tFrom\tOperating\tActivities: |  |  |  |
| Net\tincome | $382 | $4,202 | $3,870 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tnet\tcash\tfrom\toperating\tactivities: |  |  |  |
| Depreciation\tand\tamortization | 1,745 | 1,748 | 1,644 |
| Pension\tand\tpostretirement\tbenefit\texpense | 513 | 568 | 442 |
| Pension\tand\tpostretirement\tbenefit\tcontributions | (687) | (1,625) | (995) |
| Deferred\ttaxes,\tcredits\tand\tother | (249) | 99 | 189 |
| Stock\tcompensation\texpense | 447 | 369 | 234 |
| Self-insurance\treserves | 69 | 180 | 261 |
| Asset\timpairment\tand\tobsolescence\tcharge | 221 | — | — |
| Other\t(gains)\tlosses | 243 | 128 | 170 |
| Changes\tin\tassets\tand\tliabilities,\tnet\tof\teffect\tof\tacquisitions: |  |  |  |
| Accounts\treceivable | (380) | (77) | (789) |
| Income\ttaxes\treceivable | (1,191) | 17 | 440 |
| Other\tcurrent\tassets | (3) | 82 | (160) |
| Accounts\tpayable | (37) | 24 | 158 |
| Accrued\twages\tand\twithholdings | 108 | 12 | 56 |
| Other\tcurrent\tliabilities | 56 | (120) | 273 |
| Other\toperating\tactivities | (114) | (18) | — |
| Net\tcash\tfrom\toperating\tactivities | 1,123 | 5,589 | 5,793 |
| Cash\tFlows\tFrom\tInvesting\tActivities: |  |  |  |
| Capital\texpenditures | (2,820) | (3,085) | (2,187) |
| Proceeds\tfrom\tdisposals\tof\tproperty,\tplant\tand\tequipment | 85 | 75 | 27 |
| Purchases\tof\tmarketable\tsecurities\tand\tshort-term\tinvestments | (9,017) | (9,056) | (7,623) |
| Sales\tand\tmaturities\tof\tmarketable\tsecurities\tand\tshort-term\tinvestments | 9,638 | 9,538 | \t 10,375 |
| Net\t(increase)\tdecrease\tin\tfinance\treceivables | (39) | 68 | 95 |
| Cash\tpaid\tfor\tbusiness\tacquisitions | (2) | (50) | (1,488) |
| Other\tinvesting\tactivities | (44) | 170 | (174) |
| Net\tcash\t(used\tin)\tinvesting\tactivities | (2,199) | (2,340) | (975) |
| Cash\tFlows\tFrom\tFinancing\tActivities: |  |  |  |
| Net\tchange\tin\tshort-term\tdebt | 2,613 | (513) | (287) |
| Proceeds\tfrom\tlong-term\tborrowings | 4,094 | 649 | 128 |
| Repayments\tof\tlong-term\tborrowings | (198) | (90) | (302) |
| Purchases\tof\tcommon\tstock | (2,639) | (2,460) | (2,479) |
| Issuances\tof\tcommon\tstock | 174 | 164 | 164 |
| Dividends | (1,703) | (1,577) | (1,391) |
| Other\tfinancing\tactivities | (44) | (24) | (8) |
| Net\tcash\tprovided\tby\t(used\tin)\tfinancing\tactivities | 2,297 | (3,851) | (4,175) |
| Effect\tOf\tExchange\tRate\tChanges\tOn\tCash\tAnd\tCash\tEquivalents | 12 | 27 | (13) |
| Net\tIncrease\t(Decrease)\tIn\tCash\tAnd\tCash\tEquivalents | 1,233 | (575) | 630 |
| Cash\tAnd\tCash\tEquivalents: |  |  |  |
| Beginning\tof\tperiod | 794 | 1,369 | 739 |
| End\tof\tperiod | $2,027 | $794 | $1,369 |
| Cash\tPaid\tDuring\tThe\tPeriod\tFor: |  |  |  |
| Interest\t(net\tof\tamount\tcapitalized) | $248 | $210 | $169 |
| Income\ttaxes | $1,351 | $2,061 | $1,465 |

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# NOTE	1.	SUMMARY	OF	ACCOUNTING	POLICIES

# Basis	of	Financial	Statements	and	Business	Activities

The	accompanying	financial	statements	include	the	accounts	of	United	Parcel	Service,	Inc.,	and	all	of	its	consolidated	subsidiaries	(collectively	"UPS"	or	the "Company").	All	intercompany	balances	and	transactions	have	been	eliminated.

UPS	concentrates	its	operations	in	the	field	of	transportation	services,	primarily	domestic	and	international	letter	and	package	delivery.	Through	our	Supply Chain	&	Freight	subsidiaries,	we	are	also	a	global	provider	of	specialized	transportation,	logistics,	and	financial	services.

The	preparation	of	financial	statements	in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	of	America	requires	management	to	make estimates	and	assumptions	that	affect	the	reported	amounts	of	assets	and	liabilities	and	disclosure	of	contingent	assets	and	liabilities	at	the	date	of	the	financial statements	and	the	reported	amounts	of	revenues	and	expenses	during	the	reporting	period.	Actual	results	could	differ	from	those	estimates.

# Revenue	Recognition

U.S.	Domestic	and	International	Package	Operations—Revenue	is	recognized	upon	delivery	of	a	letter	or	package,	in	accordance	with	EITF	91-9	"Revenue	and Expense	Recognition	for	Freight	Services	in	Process".

Forwarding	and	Logistics—Freight	forwarding	revenue	and	the	expense	related	to	the	transportation	of	freight	is	recognized	at	the	time	the	services	are performed,	and	presented	in	accordance	with	EITF	99-19	"Reporting	Revenue	Gross	as	a	Principal	Versus	Net	as	an	Agent".	Material	management	and	distribution revenue	is	recognized	upon	performance	of	the	service	provided.	Customs	brokerage	revenue	is	recognized	upon	completing	documents	necessary	for	customs	entry purposes.

Freight—Revenue	is	recognized	upon	delivery	of	a	less-than-truckload	("LTL")	or	truckload	("TL")	shipment,	in	accordance	with	EITF	91-9.

Financial	Services—Income	on	loans	and	direct	finance	leases	is	recognized	on	the	effective	interest	method.	Accrual	of	interest	income	is	suspended	at	the earlier	of	the	time	at	which	collection	of	an	account	becomes	doubtful	or	the	account	becomes	90	days	delinquent.	Income	on	operating	leases	is	recognized	on	the straight-line	method	over	the	terms	of	the	underlying	leases.

# Cash	and	Cash	Equivalents

Cash	and	cash	equivalents	consist	of	highly	liquid	investments	that	are	readily	convertible	into	cash.	We	consider	securities	with	maturities	of	three	months	or less,	when	purchased,	to	be	cash	equivalents.	The	carrying	amount	of	these	securities	approximates	fair	value	because	of	the	short-term	maturity	of	these	instruments.

# Marketable	Securities	and	Short-Term	Investments

Marketable	securities	are	classified	as	available-for-sale	and	are	carried	at	fair	value,	with	related	unrealized	gains	and	losses	reported,	net	of	tax,	as	accumulated other	comprehensive	income	("AOCI"),	a	separate	component	of	shareowners'	equity.	The	amortized	cost	of	debt	securities	is	adjusted	for	amortization	of	premiums and	accretion	of	discounts	to	maturity.	Such	amortization	and	accretion	is	included	in	investment

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS—(Continued)

income,	along	with	interest	and	dividends.	The	cost	of	securities	sold	is	based	on	the	specific	identification	method;	realized	gains	and	losses	resulting	from	such	sales are	included	in	investment	income.

Investment	securities	are	reviewed	for	impairment	in	accordance	with	FASB	Statement	No.	115	"Accounting	for	Certain	Investments	in	Debt	and	Equity Securities"	and	FASB	Staff	Position	("FSP")	115-1	"The	Meaning	of	Other-Than-Temporary	Impairment	and	Its	Application	to	Certain	Investments."	We	periodically review	our	investments	for	indications	of	other	than	temporary	impairment	considering	many	factors,	including	the	extent	and	duration	to	which	a	security's	fair	value has	been	less	than	its	cost,	overall	economic	and	market	conditions,	and	the	financial	condition	and	specific	prospects	for	the	issuer.	Impairment	of	investment	securities results	in	a	charge	to	income	when	a	market	decline	below	cost	is	other	than	temporary.

# Property,	Plant	and	Equipment

Property,	plant	and	equipment	are	carried	at	cost.	Depreciation	and	amortization	are	provided	by	the	straight-line	method	over	the	estimated	useful	lives	of	the assets,	which	are	as	follows:	Vehicles—3	to	15	years;	Aircraft—12	to	30	years;	Buildings—20	to	40	years;	Leasehold	Improvements—terms	of	leases;	Plant	Equipment —6	to	10	years;	Technology	Equipment—3	to	5	years.	The	costs	of	major	airframe	and	engine	overhauls,	as	well	as	routine	maintenance	and	repairs,	are	charged	to expense	as	incurred.	During	2006,	we	reevaluated	the	anticipated	service	lives	of	our	Boeing	757,	Boeing	767,	and	Airbus	A300	fleets,	and	as	a	result	of	this	evaluation, increased	the	depreciable	lives	from	20	to	30	years	and	reduced	the	residual	values	from	30%	to	10%	of	original	cost.	This	change	did	not	have	a	material	effect	on	our results	of	operations.

Interest	incurred	during	the	construction	period	of	certain	property,	plant	and	equipment	is	capitalized	until	the	underlying	assets	are	placed	in	service,	at	which time	amortization	of	the	capitalized	interest	begins,	straight-line,	over	the	estimated	useful	lives	of	the	related	assets.	Capitalized	interest	was	$67,	$48,	and	$32	million for	2007,	2006,	and	2005,	respectively.

# Impairment	of	Long-Lived	Assets

In	accordance	with	the	provisions	of	FASB	Statement	No.	144	"Accounting	for	the	Impairment	or	Disposal	of	Long-Lived	Assets,"	we	review	long-lived	assets for	impairment	when	circumstances	indicate	the	carrying	amount	of	an	asset	may	not	be	recoverable	based	on	the	undiscounted	future	cash	flows	of	the	asset.	If	the carrying	amount	of	the	asset	is	determined	not	to	be	recoverable,	a	write-down	to	fair	value	is	recorded.	Fair	values	are	determined	based	on	quoted	market	values, discounted	cash	flows,	or	external	appraisals,	as	applicable.	We	review	long-lived	assets	for	impairment	at	the	individual	asset	or	the	asset	group	level	for	which	the lowest	level	of	independent	cash	flows	can	be	identified.

UPS	continues	to	operate	all	of	its	other	aircraft	and	continues	to	experience	positive	cash	flow.	No	impairments	of	aircraft	or	other	long-lived	assets	were recognized	in	2006	or	2005.

# Goodwill	and	Intangible	Assets

Costs	of	purchased	businesses	in	excess	of	net	assets	acquired	(goodwill),	and	intangible	assets	are	accounted	for	under	the	provisions	of	FASB	Statement No.	142	"Goodwill	and	Other	Intangible	Assets"	("FAS	142").	Under	FAS	142,	we	are	required	to	test	all	goodwill	for	impairment	at	least	annually,	unless	changes	in circumstances	indicate	an	impairment	may	have	occurred	sooner.	We	are	required	to	test	goodwill	on	a	"reporting	unit"	basis.	A	reporting	unit	is	the	operating	segment unless,	for	businesses	within	that	operating	segment,	discrete	financial	information	is	prepared	and	regularly	reviewed	by	management,	in	which	case	such	a	component business	is	the	reporting	unit.

A	fair	value	approach	is	used	to	test	goodwill	for	impairment.	An	impairment	charge	is	recognized	for	the	amount,	if	any,	by	which	the	carrying	amount	of goodwill	exceeds	its	fair	value.	Fair	values	are	established	using	discounted	cash	flows.	When	available	and	as	appropriate,	comparative	market	multiples	were	used	to corroborate	discounted	cash	flow	results.	Our	annual	impairment	tests	performed	in	2007,	2006,	and	2005	resulted	in	no	goodwill	impairment.

Finite-lived	intangible	assets,	including	trademarks,	licenses,	patents,	customer	lists,	non-compete	agreements,	and	franchise	rights	are	amortized	on	a	straight- line	basis	over	the	estimated	useful	lives	of	the	assets,	which	range	from	2	to	20	years.	Capitalized	software	is	amortized	over	periods	ranging	from	3	to	5	years.

# Self-Insurance	Accruals

We	self-insure	costs	associated	with	workers'	compensation	claims,	automotive	liability,	health	and	welfare,	and	general	business	liabilities,	up	to	certain	limits. Insurance	reserves	are	established	for	estimates	of	the	loss	that	we	will	ultimately	incur	on	reported	claims,	as	well	as	estimates	of	claims	that	have	been	incurred	but	not yet	reported.	Recorded	balances	are	based	on	reserve	levels,	which	incorporate	historical	loss	experience	and	judgments	about	the	present	and	expected	levels	of	cost	per claim.

# Income	Taxes

Income	taxes	are	accounted	for	under	FASB	Statement	No.	109,	"Accounting	for	Income	Taxes"	("FAS	109").	FAS	109	is	an	asset	and	liability	approach	that requires	the	recognition	of	deferred	tax	assets	and	liabilities	for	the	expected	future	tax	consequences	of	events	that	have	been	recognized	in	our	financial	statements	or tax	returns.	In	estimating	future	tax	consequences,	FAS	109	generally	considers	all	expected	future	events	other	than	proposed	changes	in	the	tax	law	or	rates.	Valuation allowances	are	provided	if	it	is	more	likely	than	not	that	a	deferred	tax	asset	will	not	be	realized.

We	recognize	liabilities	for	uncertain	tax	positions	based	on	a	two-step	process.	The	first	step	is	to	evaluate	the	tax	position	for	recognition	by	determining	if	the weight	of	available	evidence	indicates	that	it	is	more	likely	than	not	that	the	position	will	be	sustained	on	audit,	including	resolution	of	related	appeals	or	litigation processes,	if	any.	The	second	step	requires	us	to	estimate	and	measure	the	tax	benefit	as	the	largest	amount	that	is	more	than	50%	likely	to	be	realized	upon	ultimate settlement.	It	is	inherently	difficult	and	subjective	to	estimate	such	amounts,	as	we	have	to	determine	the	probability	of	various	possible	outcomes.	We	reevaluate	these uncertain	tax	positions	on	a	quarterly	basis.	This	evaluation	is	based	on	factors	including,	but	not	limited	to,	changes	in	facts	or	circumstances,	changes	in	tax	law, effectively	settled	issues	under	audit,	and	new	audit	activity.	Such	a	change	in	recognition	or	measurement	would	result	in	the	recognition	of	a	tax	benefit	or	an additional	charge	to	the	tax	provision.

# Foreign	Currency	Translation

We	translate	the	results	of	operations	of	our	foreign	subsidiaries	using	average	exchange	rates	during	each	period,	whereas	balance	sheet	accounts	are	translated using	exchange	rates	at	the	end	of	each	period.	Balance	sheet	currency	translation	adjustments	are	recorded	in	AOCI.	Net	currency	transaction	gains	and	losses	included in	other	operating	expenses	were	pre-tax	gains	(losses)	of	$26,	$23,	and	$(22)	million	in	2007,	2006	and	2005,	respectively.

# Stock-Based	Compensation

Stock-based	compensation	is	accounted	for	under	FASB	Statement	No.	123	(revised	2004),	"Share-Based	Payment"	("FAS	123(R)").	FAS	123(R),	which	was adopted	on	January	1,	2006	using	the	modified-prospective	transition	method,	requires	all	share-based	awards	to	employees	to	be	measured	based	on	their	fair	values	and expensed	over	the	period	during	which	an	employee	is	required	to	provide	service	in	exchange	for	the	award	(the	vesting	period).	Prior	to	January	1,	2006,	we	accounted for	stock-based	compensation	under	the	recognition	and	measurement	provisions	of	FASB	Statement	No.	123,	"Accounting	for	Stock-Based	Compensation".	We	issue employee	share-based	awards	under	the	UPS	Incentive	Compensation	Plan	that	are	subject	to	specific	vesting	conditions;	generally,	the	awards	cliff	vest	or	vest	ratably over	a	five	year	period,	"the	nominal	vesting	period,"	or	at	the	date	the	employee	retires	(as	defined	by	the	plan),	if	earlier.	For	awards	that	specify	an	employee	vests	in the	award	upon	retirement,	we	accounted	for	the	awards	using	the	nominal	vesting	period	approach	prior	to	the	adoption	of	FAS	123(R).	Under	this	approach,	we	record compensation	expense	over	the	nominal	vesting	period.	If	the	employee	retires	before	the	end	of	the	nominal	vesting	period,	any	remaining	unrecognized	compensation expense	is	recorded	at	the	date	of	retirement.

Upon	our	adoption	of	FAS	123(R),	we	revised	our	approach	to	apply	the	non-substantive	vesting	period	approach	to	all	new	share-based	compensation	awards. Under	this	approach,	compensation	cost	is	recognized	immediately	for	awards	granted	to	retirement-eligible	employees,	or	over	the	period	from	the	grant	date	to	the	date retirement	eligibility	is	achieved,	if	that	is	expected	to	occur	during	the	nominal	vesting	period.	We	continue	to	apply	the	nominal	vesting	period	approach	for	any awards	granted	prior	to	January	1,	2006,	and	for	the	remaining	portion	of	the	then	unvested	outstanding	awards.

If	we	had	accounted	for	all	share-based	compensation	awards	granted	prior	to	January	1,	2006	under	the	non-substantive	vesting	period	approach,	the	impact	to our	net	income	and	earnings	per	share	would	have	been	immaterial	for	all	prior	periods.	The	adoption	of	the	non-substantive	vesting	period	approach	reduced	2006	net income	by	$23	million,	or	$0.02	per	diluted	share.

# Derivative	Instruments

Derivative	instruments	are	accounted	for	in	accordance	with	FASB	Statement	No.	133,	"Accounting	for	Derivative	Instruments	and	Hedging	Activities"	("FAS 133"),	as	amended,	which	requires	all	financial	derivative	instruments	to	be	recorded	on	our	balance	sheet	at	fair	value.	Derivatives	not	designated	as	hedges	must	be adjusted	to	fair	value	through	income.	If	a	derivative	is	designated	as	a	hedge,	depending	on	the	nature	of	the	hedge,	changes	in	its	fair	value	that	are	considered	to	be effective,	as	defined,	either	offset	the	change	in	fair	value	of	the	hedged	assets,	liabilities,	or	firm	commitments	through	income,	or	are	recorded	in	AOCI	until	the hedged	item	is	recorded	in	income.	Any	portion	of	a	change	in	a	derivative's	fair	value	that	is	considered	to	be	ineffective,	or	is	excluded	from	the	measurement	of effectiveness,	is	recorded	immediately	in	income.

In	June	2007,	the	EITF	reached	consensus	on	Issue	No.	06-11,	"Accounting	for	Income	Tax	Benefits	of	Dividends	on	Share-Based	Payment	Awards."	EITF	06- 11	requires	that	the	tax	benefit	related	to	dividend	equivalents	paid	on	restricted	stock	units,	which	are	expected	to	vest,	be	recorded	as	an	increase	to	additional	paid-in capital.	EITF	06-11	is	to	be	applied	prospectively	for	tax	benefits	on	dividends	declared	in	fiscal	years

beginning	after	December	15,	2007,	and	we	will	adopt	the	provisions	of	EITF	06-11	beginning	in	the	first	quarter	of	2008.	EITF	06-11	is	not	expected	to	have	a	material impact	on	our	results	of	operations	or	financial	condition.

In	December	2007	the	FASB	issued	Statement	No.	141(R)	"Business	Combinations"	("FAS	141(R)").	FAS	141(R)	requires	the	acquiring	entity	in	a	business combination	to	recognize	the	full	fair	value	of	assets	acquired	and	liabilities	assumed	in	the	transaction	(whether	a	full	or	partial	acquisition);	establishes	the	acquisition- date	fair	value	as	the	measurement	objective	for	all	assets	acquired	and	liabilities	assumed;	requires	expensing	of	most	transaction	and	restructuring	costs;	and	requires the	acquirer	to	disclose	to	investors	and	other	users	all	of	the	information	needed	to	evaluate	and	understand	the	nature	and	financial	effect	of	the	business	combination. FAS	141(R)	applies	prospectively	to	business	combinations	for	which	the	acquisition	date	is	on	or	after	January	1,	2009.	The	impact	of	FAS	No.	141R	on	our consolidated	financial	statements	will	depend	upon	the	nature,	terms	and	size	of	the	acquisitions	we	consummate	after	the	effective	date.

# Changes	in	Presentation

Certain	prior	year	amounts	have	been	reclassified	to	conform	to	the	current	year	presentation.

# NOTE	2.	MARKETABLE	SECURITIES	AND	SHORT-TERM	INVESTMENTS

The	following	is	a	summary	of	marketable	securities	and	short-term	investments	classified	as	available-for-sale	at	December	31,	2007	and	2006	(in	millions):

|  | Cost | Unrealized<br>Gains | Unrealized<br>Losses | Estimated<br>Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
| 2007 |  |  |  |  |
| U.S.\tgovernment\tand\tagency\tsecurities | $59 | $2 | $— | $61 |
| U.S.\tmortgage\tand\tasset-backed\tsecurities | \t 251 | 2 | 2 | 251 |
| U.S.\tcorporate\tsecurities | \t 152 | 2 | — | 154 |
| U.S.\tstate\tand\tlocal\tmunicipal\tsecurities | 4 | — | — | 4 |
| Other\tdebt\tsecurities | 2 | — | — | 2 |
| Total\tdebt\tsecurities | \t 468 | 6 | 2 | 472 |
| Common\tequity\tsecurities | 2 | — | — | 2 |
| Preferred\tequity\tsecurities | \t 103 | — | — | 103 |
| Current\tmarketable\tsecurities\tand\tshort-term\tinvestments | \t 573 | 6 | 2 | 577 |
| Non-current\tcommon\tequity\tsecurities | 25 | 8 | — | 33 |
| Total\tmarketable\tsecurities\tand\tshort-term\tinvestments | $598 | $14 | $2 | $610 |

|  | Cost | Unrealized<br>Gains | Unrealized<br>Losses | Estimated<br>Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
| 2006 |  |  |  |  |
| U.S.\tgovernment\tand\tagency\tsecurities | $124 | $— | $— | $124 |
| U.S.\tmortgage\tand\tasset-backed\tsecurities | 234 | 1 | 2 | 233 |
| U.S.\tcorporate\tsecurities | 79 | — | 1 | 78 |
| U.S.\tstate\tand\tlocal\tmunicipal\tsecurities | 582 | — | — | 582 |
| Other\tdebt\tsecurities | 2 | — | — | 2 |
| Total\tdebt\tsecurities | \t 1,021 | 1 | 3 | 1,019 |
| Common\tequity\tsecurities | 38 | 10 | — | 48 |
| Preferred\tequity\tsecurities | 122 | — | — | 122 |
| Current\tmarketable\tsecurities\tand\tshort-term\tinvestments | \t 1,181 | 11 | 3 | 1,189 |
| Non-current\tcommon\tequity\tsecurities | 24 | 8 | — | 32 |
| Total\tmarketable\tsecurities\tand\tshort-term\tinvestments | $1,205 | $19 | $3 | $1,221 |

The	gross	realized	gains	on	sales	of	marketable	securities	totaled	$23,	$12,	and	$2	million	in	2007,	2006,	and	2005,	respectively.	The	gross	realized	losses	totaled $9,	$21,	and	$12	million	in	2007,	2006,	and	2005,	respectively.	Impairment	losses	recognized	on	marketable	securities	and	short-term	investments	totaled	$16	million during	2005,	with	no	such	losses	recognized	in	2007	or	2006.

The	following	table	presents	the	age	of	gross	unrealized	losses	and	fair	value	by	investment	category	for	all	securities	in	a	loss	position	as	of	December	31,	2007 (in	millions):

|  | Less	Than	12	Months | Less	Than	12	Months | 12	Months	or	More | 12	Months	or	More | Total | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Fair | Unrealized | Fair | Unrealized | Fair | Unrealized |
|  | Value | Losses | Value | Losses | Value | Losses |
| U.S.\tgovernment\tand\tagency\tsecurities | $ — | $— | $— | $— | $—\t\t\t\t $— | $—\t\t\t\t $— |
| U.S.\tmortgage\tand\tasset-backed\tsecurities | 22 | — | 56 | 2 | 78 | 2 |
| U.S.\tcorporate\tsecurities | 15 | — | 12 | — | 27 | — |
| U.S.\tstate\tand\tlocal\tmunicipal\tsecurities | \t — | — | \t — | — | \t — | — |
| Other\tdebt\tsecurities | \t — | — | \t — | — | \t — | — |
| Total\tdebt\tsecurities | 37 | — | 68 | 2 | \t 105 | 2 |
| Common\tequity\tsecurities | \t — | — | \t — | — | \t — | — |
| Preferred\tequity\tsecurities | \t — | — | 2 | — | 2 | — |
|  | $37 | $— | $70 | $2 | $107 | $2 |

The	unrealized	losses	in	the	mortgage	and	asset-backed	securities	relate	to	various	fixed	income	securities,	and	are	primarily	due	to	changes	in	market	interest rates.	We	have	both	the	intent	and	ability	to	hold	the	securities	contained	in	the	previous	table	for	a	time	necessary	to	recover	the	cost	basis.

The	amortized	cost	and	estimated	fair	value	of	marketable	securities	and	short-term	investments	at	December	31,	2007,	by	contractual	maturity,	are	shown	below (in	millions).	Actual	maturities	may	differ	from	contractual	maturities	because	the	issuers	of	the	securities	may	have	the	right	to	prepay	obligations	without	prepayment penalties.

| UNITED	PARCEL	SERVICE,	INC.	AND	SUBSIDIARIES<br>NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS—(Continued) |  |  |
| :--- | :--- | :--- |
|  | Cost | Estimated\nFair\tValue |
| Due\tin\tone\tyear\tor\tless | $10 | $10 |
| Due\tafter\tone\tyear\tthrough\tthree\tyears | \t 146 | 148 |
| Due\tafter\tthree\tyears\tthrough\tfive\tyears | 22 | 22 |
| Due\tafter\tfive\tyears | \t 290 | 292 |
|  | \t 468 | 472 |
| Equity\tsecurities | \t 130 | 138 |
|  | $598 | $610 |

# NOTE	3.	FINANCE	RECEIVABLES

The	following	is	a	summary	of	finance	receivables	at	December	31,	2007	and	2006	(in	millions):

|  | 2007 | 2006 |
| :--- | :--- | :--- |
| Commercial\tterm\tloans | $351 | $280 |
| Investment\tin\tfinance\tleases | \t 143 | \t 138 |
| Asset-based\tlending | \t 309 | \t 273 |
| Receivable\tfactoring | \t 109 | \t 131 |
| Gross\tfinance\treceivables | \t 912 | \t 822 |
| Less:\tAllowance\tfor\tcredit\tlosses | (13) | (22) |
| Balance\tat\tDecember\t31 | $899 | $800 |

Outstanding	receivable	balances	at	December	31,	2007	and	2006	are	net	of	unearned	income	of	$30	and	$29	million,	respectively.

When	we	"factor"	(i.e.,	purchase)	a	customer	invoice	from	a	client,	we	record	the	customer	receivable	as	an	asset	and	also	establish	a	liability	for	the	funds	due	to the	client,	which	is	recorded	in	accounts	payable	on	the	consolidated	balance	sheet.	The	following	is	a	reconciliation	of	receivable	factoring	balances	at	December	31, 2007	and	2006	(in	millions):

Non-earning	finance	receivables	were	$42	and	$23	million	at	December	31,	2007	and	2006,	respectively,	of	which	$19	and	$2	million	are	U.S.	government guaranteed	portions	of	loans.	The	following	is	a	rollforward	of	the	allowance	for	credit	losses	on	finance	receivables	(in	millions):

|  | 2007 | 2006 |
| :--- | :--- | :--- |
| Balance\tat\tJanuary\t1 | $22 | $20 |
| Provisions\tcharged\tto\toperations | 2 | 8 |
| Charge-offs,\tnet\tof\trecoveries | (11) | (6) |
| Balance\tat\tDecember\t31 | $13 | $22 |

The	carrying	value	of	finance	receivables	at	December	31,	2007,	by	contractual	maturity,	is	shown	below	(in	millions).	Actual	maturities	may	differ	from contractual	maturities	because	some	borrowers	have	the	right	to	prepay	these	receivables	without	prepayment	penalties.

Based	on	interest	rates	for	financial	instruments	with	similar	terms	and	maturities,	the	estimated	fair	value	of	finance	receivables	is	approximately	$895	and	$795 million	as	of	December	31,	2007	and	2006,	respectively.	At	December	31,	2007,	we	had	unfunded	loan	commitments	totaling	$860	million,	consisting	of	standby	letters of	credit	of	$117	million	and	other	unfunded	lending	commitments	of	$743	million.

# NOTE	4.	PROPERTY,	PLANT	AND	EQUIPMENT

Property,	plant	and	equipment	as	of	December	31	consists	of	the	following	(in	millions):

|  | 2007 | 2006 |
| :--- | :--- | :--- |
| Vehicles | $5,295 | $4,970 |
| Aircraft\t(including\taircraft\tunder\tcapitalized\tleases) | 13,541 | 13,162 |
| Land | 1,056 | 1,026 |
| Buildings | 2,837 | 2,667 |
| Leasehold\timprovements | 2,604 | 2,496 |
| Plant\tequipment | 5,537 | 5,230 |
| Technology\tequipment | 1,699 | 1,673 |
| Equipment\tunder\toperating\tleases | 153 | 142 |
| Construction-in-progress | 889 | 715 |
|  | 33,611 | 32,081 |
| Less:\tAccumulated\tdepreciation\tand\tamortization | (15,948) | (15,302) |
|  | $17,663 | $16,779 |

# NOTE	5.	EMPLOYEE	BENEFIT	PLANS

We	sponsor	various	retirement	and	pension	plans,	including	defined	benefit	and	defined	contribution	plans	which	cover	our	employees	worldwide.	In	the	U.S.	we maintain	the	following	defined	benefit	pension	plans:	UPS	Retirement	Plan,	UPS	Pension	Plan,	UPS	IBT	Pension	Plan,	and	several	non-qualified	plans	including	the UPS	Excess	Coordinating	Benefit	Plan.	Effective	January	1,	2006,	the	qualified	defined	benefit	plans	covering	Overnite	and	Motor	Cargo	employees	were	merged	with the	UPS	Retirement	Plan	and	UPS	Pension	Plan.

We	also	sponsor	various	defined	benefit	plans	covering	certain	of	our	International	employees.	The	majority	of	our	International	obligations	are	for	defined benefit	plans	in	Canada	and	the	United	Kingdom	(including	the	Lynx	acquisition	in	2005).	In	addition,	many	of	our	International	employees	are	covered	by	government- sponsored	retirement	and	pension	plans.	We	are	not	directly	responsible	for	providing	benefits	to	participants	of	government-sponsored	plans.

The	UPS	Retirement	Plan	is	noncontributory	and	includes	substantially	all	eligible	employees	of	participating	domestic	subsidiaries	who	are	not	members	of	a collective	bargaining	unit.	This	plan	generally	provides	for	retirement	benefits	based	on	average	compensation	levels	earned	by	employees	prior	to	retirement.	Benefits payable	under	this	plan	are	subject	to	maximum	compensation	limits	and	the	annual	benefit	limits	for	a	tax	qualified	defined	benefit	plan	as	prescribed	by	the	Internal Revenue	Service.

The	UPS	Excess	Coordinating	Benefit	Plan	is	a	non-qualified	plan	that	provides	benefits	to	participants	in	the	UPS	Retirement	Plan	for	amounts	that	exceed	the benefit	limits	described	above.

The	UPS	Pension	Plan	is	noncontributory	and	includes	certain	eligible	employees	of	participating	domestic	subsidiaries	and	members	of	collective	bargaining units	that	elect	to	participate	in	the	plan.	This	plan	provides	for	retirement	benefits	based	on	service	credits	earned	by	employees	prior	to	retirement.

We	also	sponsor	postretirement	medical	plans	in	the	U.S.	that	provide	health	care	benefits	to	our	retirees	who	meet	certain	eligibility	requirements	and	who	are not	otherwise	covered	by	multi-employer	plans.	Generally,	this	includes	employees	with	at	least	10	years	of	service	who	have	reached	age	55	and	employees	who	are eligible	for	postretirement	medical	benefits	from	a	Company-sponsored	plan	pursuant	to	collective	bargaining	agreements.	We	have	the	right	to	modify	or	terminate certain	of	these	plans.	These	benefits	have	been	provided	to	certain	retirees	on	a	noncontributory	basis;	however,	in	many	cases,	retirees	are	required	to	contribute	all	or	a portion	of	the	total	cost	of	the	coverage.

Our	national	master	agreement	with	the	International	Brotherhood	of	Teamsters	("Teamsters")	allowed	us,	upon	ratification,	to	withdraw	employees	from	the Central	States,	Southeast	and	Southwest	Areas	Pension	Fund	("Central	States	Pension	Fund"),	a	multi-employer	pension	plan,	and	to	establish	a	jointly	trusteed	single- employer	plan	("UPS	IBT	Pension	Plan")	for	this	group	of	employees.	We	recorded	a	pre-tax	charge	of	$6.100	billion	to	establish	our	withdrawal	liability	upon ratification	of	the	national	master	agreement,	and	made	a	$6.100	billion	payment	to	the	Central	States	Pension	Fund	in	December	2007.	In	connection	with	the	national master	agreement	and	upon	establishment	of	the	UPS	IBT	Pension	Plan,	we	restored	certain	benefit	levels	to	our	employee	group	within	the	new	plan,	which	resulted	in the	initial	recognition	of	a	$1.701	billion	pension	liability	and	a	corresponding	$1.062	billion	reduction	of	AOCI	and	$639	million	reduction	of	deferred	tax	liabilities.

# Net	Periodic	Benefit	Cost

Information	about	net	periodic	benefit	cost	for	the	pension	and	postretirement	benefit	plans	is	as	follows	(in	millions):

|  |  |  |  |  | U.S.	Postretirement |  |  | International |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | U.S.\tPension\tBenefits | U.S.\tPension\tBenefits | U.S.\tPension\tBenefits | Medical\tBenefits | Medical\tBenefits | Medical\tBenefits | Pension\tBenefits | Pension\tBenefits | Pension\tBenefits |
|  | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 |
| Net\tPeriodic\tCost: |  |  |  |  |  |  |  |  |  |
| Service\tcost | $520 | $474 | $374 | $101 | $102 | $92 | $31 | $24 | $14 |
| Interest\tcost | 835 | 726 | 612 | \t 182 | \t 170 | \t 170 | 31 | 26 | 16 |
| Expected\treturn\ton\tassets | (1,302) | (1,106) | (922) | (46) | (43) | (38) | (31) | (22) | (13) |
| Amortization\tof: |  |  |  |  |  |  |  |  |  |
| Transition\tobligation | 3 | 3 | 3 | \t — | \t — | \t — | \t — | \t — | \t — |
| Prior\tservice\tcost | 57 | 36 | 37 | (8) | (8) | (7) | 1 | 1 | 1 |
| Actuarial\t(gain)\tloss | 109 | 148 | 68 | 22 | 29 | 31 | 5 | 7 | 4 |
| Settlements\t/\tcurtailments | — | — | \t — | 3 | \t — | \t — | \t — | 1 | \t — |
| Net\tperiodic\tbenefit\tcost | $222 | $281 | $172 | $254 | $250 | $248 | $37 | $37 | $22 |

# Actuarial	Assumptions

The	table	below	provides	the	weighted-average	actuarial	assumptions	used	to	determine	the	net	periodic	benefit	cost.

|  |  |  |  |  | Postretirement |  |  | International |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Pension\tBenefits | Pension\tBenefits | Pension\tBenefits | Medical\tBenefits | Medical\tBenefits | Medical\tBenefits | Pension\tBenefits | Pension\tBenefits | Pension\tBenefits |
|  | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 | 2007 | 2006 | 2005 |
| Discount\trate | 6.00% | 5.75% | 6.25% | 6.00% | 5.75% | 6.25% | 4.97% | 4.93% | 5.76% |
| Rate\tof\tcompensation\tincrease | 4.50% | 4.00% | 4.00% | N/A | N/A | N/A | 3.40% | 3.94% | 3.46% |
| Expected\treturn\ton\tassets | 8.96% | 8.96% | 8.96% | 9.00% | 9.00% | 9.00% | 7.53% | 7.67% | 7.68% |

The	table	below	provides	the	weighted-average	actuarial	assumptions	used	to	determine	the	benefit	obligations	of	our	plans.

|  | Pension	Benefits | Pension	Benefits | Postretirement<br>Medical	Benefits | Postretirement<br>Medical	Benefits | International<br>Pension	Benefits | International<br>Pension	Benefits |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | \t\t\t\t2007 | \t\t\t\t2006 | \t\t\t\t2007 | \t\t\t\t2006 | \t\t\t\t2007 | \t\t\t\t2006 |
| Discount\trate | 6.47% | 6.00% | 6.25% | 6.00% | 5.56% | 4.96% |
| Rate\tof\tcompensation\tincrease | 4.50% | 4.50% | N/A | N/A | 3.64% | 3.79% |

Our	pension	and	other	postretirement	benefit	costs	are	calculated	using	various	actuarial	assumptions	and	methodologies	as	prescribed	by	Statement	of	Financial Accounting	Standards	No.	87,	"Employers'	Accounting	for	Pensions"	and	Statement	of	Financial	Accounting	Standards	No.	106,	"Employers'	Accounting	for Postretirement	Benefits	Other	than	Pensions."	These	assumptions	include	discount	rates,	expected	return	on	plan	assets,	health	care	cost	trend	rates,	inflation,	rate	of compensation	increases,	mortality	rates,	and	other	factors.	Actuarial	assumptions	are	reviewed	on	an	annual	basis.

A	discount	rate	is	used	to	determine	the	present	value	of	our	future	benefit	obligations.	For	U.S.	plans,	the	discount	rate	is	determined	by	matching	the	expected cash	flows	to	a	yield	curve	based	on	long-term,	high	quality	fixed	income	debt	instruments	available	as	of	the	measurement	date.	For	international	plans,	the	discount rate	is	selected	based	on	high	quality	fixed	income	indices	available	in	the	country	in	which	the	plan	is	domiciled.	These	assumptions	are	updated	each	year.

An	assumption	for	return	on	plan	assets	is	used	to	determine	the	expected	return	on	asset	component	of	net	periodic	benefit	cost	for	the	fiscal	year.	This assumption	for	our	U.S.	plans	was	developed	using	a	long-term	projection	of	returns	for	each	asset	class,	and	taking	into	consideration	our	target	asset	allocation.	For	our U.S.	plans,	the	10-year	U.S.	Treasury	yield	is	the	foundation	for	all	other	asset	class	returns,	and	various	risk	premiums	are	added	to	determine	the	expected	return	for each	allocation.

For	plans	outside	the	U.S.,	consideration	is	given	to	local	market	expectations	of	long-term	returns.	Strategic	asset	allocations	are	determined	by	country,	based on	the	nature	of	liabilities	and	considering	the	demographic	composition	of	the	plan	participants.

Health	care	cost	trends	are	used	to	project	future	postretirement	benefits	payable	from	our	plans.	For	year-end	2007	obligations,	future	postretirement	medical benefit	costs	were	forecasted	assuming	an	initial	annual	increase	of	9.0%,	decreasing	to	5.0%	by	the	year	2012	and	with	consistent	annual	increases	at	those	ultimate levels	thereafter.

Assumed	health	care	cost	trends	have	a	significant	effect	on	the	amounts	reported	for	the	U.S.	postretirement	medical	plans.	A	one-percent	change	in	assumed health	care	cost	trend	rates	would	have	the	following	effects	(in	millions):

# Benefit	Obligations	and	Fair	Value	of	Plan	Assets

The	following	table	provides	a	reconciliation	of	the	changes	in	the	plans'	benefit	obligations	and	fair	value	of	plan	assets	as	of	our	measurement	date	on September	30	(in	millions):

|  | U.S.	Pension	Benefits | U.S.	Pension	Benefits | U.S.	Postretirement<br>Medical	Benefits | U.S.	Postretirement<br>Medical	Benefits | Pension<br>Benefits | Pension<br>Benefits |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 |
| Benefit\tObligations: |  |  |  |  |  |  |
| Net\tbenefit\tobligation\tat\tOctober\t1,\tprior\tyear | $13,558 | $12,299 | $ 2,992 | $2,927 | $551 | $ 476 |
| Service\tcost | 520 | 474 | 101 | 102 | 31 | 24 |
| Interest\tcost | 835 | 726 | 182 | 170 | 31 | 26 |
| Gross\tbenefits\tpaid | (342) | (304) | (190) | (158) | (11) | (13) |
| Plan\tparticipants'\tcontributions | — | — | 12 | 13 | 2 | 2 |
| Plan\tamendments | 1,722 | 309 | 47 | — | \t — | \t — |
| Actuarial\t(gain)/loss | (824) | 54 | 8 | (62) | (95) | (5) |
| Foreign\tcurrency\texchange\trate\tchanges | — | — | — | — | 46 | 40 |
| Curtailments\tand\tsettlements | — | — | — | — | (6) | (4) |
| Other | — | — | 1 | — | 25 | 5 |
| Net\tbenefit\tobligation\tat\tSeptember\t30 | $15,469 | $13,558 | $ 3,153 | $2,992 | $574 | $ 551 |
| Fair\tValue\tof\tPlan\tAssets: |  |  |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets\tat\tOctober\t1,\tprior\tyear | $15,374 | $12,943 | $551 | $509 | $348 | $ 266 |
| Actual\treturn\ton\tplan\tassets | 2,445 | 1,310 | 73 | 50 | 37 | 36 |
| Employer\tcontributions | 477 | 1,425 | 152 | 137 | 56 | 35 |
| Plan\tparticipants'\tcontributions | — | — | 12 | 13 | 2 | 2 |
| Gross\tbenefits\tpaid | (342) | (304) | (190) | (158) | (11) | (13) |
| Acquired\tbusinesses\t/\tOther | — | — | — | — | \t — | 3 |
| Foreign\tcurrency\texchange\trate\tchanges | — | — | — | — | 32 | 23 |
| Curtailments\tand\tsettlements | — | — | — | — | 6 | (4) |
| Fair\tvalue\tof\tplan\tassets\tat\tSeptember\t30 | $17,954 | $15,374 | $598 | $551 | $470 | $ 348 |

# Funded	Status

The	following	table	discloses	the	funded	status	of	our	plans	as	of	our	measurement	date	on	September	30	and	the	amounts	recognized	in	our	balance	sheet	as	of year-end,	on	a	pre-tax	basis	(in	millions):

|  | U.S.	Pension	Benefits | U.S.	Pension	Benefits | U.S.	Postretirement<br>Medical	Benefits | U.S.	Postretirement<br>Medical	Benefits | International<br>Pension	Benefits | International<br>Pension	Benefits |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2007 | 2006 | 2007 | 2006 | \t\t\t\t2007 | \t\t\t\t2006 |
| Funded\tStatus: |  |  |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets\tat\tSeptember\t30 | $17,954 | $15,374 | $598 | $551 | $470 | $348 |
| Benefit\tobligation\tat\tSeptember\t30 | (15,469) | (13,558) | (3,153) | (2,992) | (574) | (551) |
| Funded\tStatus\tat\tSeptember\t30 | 2,485 | 1,816 | (2,555) | (2,441) | (104) | (203) |
| Employer\tcontributions\tin\tthe\tfourth\tquarter | 4 | 9 | 25 | 20 | 24 | 22 |
| Funded\tStatus\tat\tDecember\t31 | $2,489 | $1,825 | $(2,530) | $(2,421) | $(80) | $(181) |
| Amounts\tNot\tYet\tRecognized\tin\tNet\tPeriodic\tCost: |  |  |  |  |  |  |
| Unrecognized\tnet\ttransition\tobligation | 9 | 12 | — | — | — | — |
| Unrecognized\tnet\tprior\tservice\tcost\t/\t(benefit) | 2,197 | 532 | (51) | (106) | 13 | 12 |
| Unrecognized\tnet\tactuarial\tloss | 113 | 2,189 | 683 | 727 | 5 | 110 |
| Net\tunrecognized\tcost\tat\tDecember\t31 | $2,319 | $2,733 | $632 | $621 | $18 | $122 |
| Amounts\tRecognized\tin\tour\tBalance\tSheet: |  |  |  |  |  |  |
| Pension\tand\tpostretirement\tbenefit\tassets | $4,406 | $2,043 | $—\t\t\t\t $— | $—\t\t\t\t $— | $15 | $1 |
| Other\tcurrent\tliabilities | (36) | (19) | (65) | (52) | (3) | (2) |
| Pension\tand\tpostretirement\tbenefit\tobligations | (1,881) | (199) | (2,465) | (2,369) | (92) | (180) |
| Accumulated\tother\tcomprehensive\tloss | 2,319 | 2,733 | 632 | 621 | 18 | 122 |
| Net\tasset\t/\t(liability)\tat\tDecember\t31 | $4,808 | $4,558 | $(1,898) | $(1,800) | $(62) | $(59) |

The	accumulated	benefit	obligation	for	our	pension	plans	as	of	September	30,	2007	and	2006	was	$14.419	and	$12.481	billion,	respectively.	In	general,	we	use	a measurement	date	of	September	30	for	our	pension	and	postretirement	benefit	plans	with	the	primary	exception	of	the	UPS	IBT	Pension	Plan,	which	has	a	measurement date	of	December	31.	Under	the	provisions	of	FAS	158,	we	will	be	required	to	use	a	December	31	measurement	date	for	all	of	our	pension	and	postretirement	benefit plans	beginning	in	2008.

Employer	contributions	and	benefits	paid	under	the	pension	plans	include	$19	and	$24	million	paid	from	employer	assets	in	2007	and	2006,	respectively. Employer	contributions	and	benefits	paid	(net	of	participant	contributions)	under	the	postretirement	medical	benefit	plans	include	$80	and	$72	million	paid	from employer	assets	in	2007	and	2006,	respectively.

At	September	30,	2007	and	2006,	the	projected	benefit	obligation,	the	accumulated	benefit	obligation,	and	the	fair	value	of	plan	assets	for	pension	plans	with	a projected	benefit	obligation	in	excess	of	plan	assets	and	for	pension	plans	with	an	accumulated	benefit	obligation	in	excess	of	plan	assets	were	as	follows	(in	millions):

|  | Projected	Benefit	Obligation | Projected	Benefit	Obligation | Accumulated	Benefit	Obligation | Accumulated	Benefit	Obligation |
| :--- | :--- | :--- | :--- | :--- |
|  | Exceeds\tthe\tFair\tValue\tof\nPlan\tAssets | Exceeds\tthe\tFair\tValue\tof\nPlan\tAssets | Exceeds\tthe\tFair\tValue\tof\nPlan\tAssets | Exceeds\tthe\tFair\tValue\tof\nPlan\tAssets |
| As\tof\tSeptember\t30 | \t\t\t\t2007 | \t\t\t\t2006 | \t\t\t\t2007 | \t\t\t\t2006 |
| U.S.\tPension\tBenefits |  |  |  |  |
| Projected\tbenefit\tobligation | $1,920 | $227 | $1,920 | $227 |
| Accumulated\tbenefit\tobligation | 1,883 | 176 | 1,883 | 176 |
| Fair\tvalue\tof\tplan\tassets | — | — | — | — |
| International\tPension\tBenefits |  |  |  |  |
| Projected\tbenefit\tobligation | $180 | $551 | $180 | $541 |
| Accumulated\tbenefit\tobligation | 150 | 453 | 150 | 448 |
| Fair\tvalue\tof\tplan\tassets | 99 | 347 | 99 | 342 |

The	accumulated	postretirement	benefit	obligation	exceeds	plan	assets	for	all	of	our	U.S.	postretirement	benefit	plans.

# Accumulated	Other	Comprehensive	Income

The	amounts	in	AOCI	expected	to	be	amortized	and	recognized	as	a	component	of	net	periodic	benefit	cost	in	2008	are	as	follows	(in	millions):

|  |  | U.S.	Postretirement | International	Pension |
| :--- | :--- | :--- | :--- |
|  | U.S.\tPension\tBenefits | Medical\tBenefits | Benefits |
| Transition\tobligation | $4 | $— | $— |
| Prior\tservice\tcost\t/\t(benefit) | 185 | (4) | 1 |
| Actuarial\tloss | 8 | 19 | — |
|  | $197 | $15 | $1 |

# Plan	Asset	Investment	Policy

The	asset	allocation	for	our	U.S.	pension	and	other	postretirement	plans	as	of	September	30,	2007	and	2006	and	the	target	allocation	as	of	September	30,	2007,	by asset	category,	are	as	follows:

|  | Weighted	Average | Plan	Assets	at |  |
| :--- | :--- | :--- | :--- |
|  | Target\tAllocation | September\t30, | September\t30, |
|  | 2007 | 2007 | 2006 |
| Equity\tsecurities | 55%\t–\t\t65% | 59.0% | 61.5% |
| Debt\tsecurities | 20%\t–\t30% | 25.0% | 26.5% |
| Real\testate\t/\tother | 10%\t–\t15% | 16.0% | 12.0% |
| Total |  | 100.0% | 100.0% |

Equity	securities	include	UPS	Class	A	shares	of	common	stock	in	the	amounts	of	$460	million	(2.5%	of	total	plan	assets)	and	$440	million	(2.8%	of	total	plan assets),	as	of	September	30,	2007	and	2006,	respectively.

The	applicable	benefit	plan	committees	establish	investment	guidelines	and	strategies,	and	regularly	monitor	the	performance	of	the	funds	and	portfolio	managers. Our	investment	strategy	with	respect	to	pension	assets	is	to	invest	the	assets	in	accordance	with	applicable	laws	and	regulations.	The	long-term	primary	objectives	for our	pension	assets	are	to	(1)	provide	for	a	reasonable	amount	of	long-term	growth	of	capital,	without	undue	exposure	to	risk;	and	protect	the	assets	from	erosion	of purchasing	power,	and	(2)	provide	investment	results	that	meet	or	exceed	the	plans'	actuarially	assumed	long-term	rate	of	return.

# Expected	Cash	Flows

Information	about	expected	cash	flows	for	the	pension	and	postretirement	benefit	plans	is	as	follows	(in	millions):

|  | U.S.<br>Pension	Benefits | U.S.	Postretirement<br>Medical	Benefits | International	Pension<br>Benefits |
| :--- | :--- | :--- | :--- |
| Employer\tContributions: |  |  |  |
| 2008\t(expected)\tto\tplan\ttrusts | $101 | $— | $32 |
| 2008\t(expected)\tto\tplan\tparticipants | 17 | 67 | 7 |
| Expected\tBenefit\tPayments: |  |  |  |
| 2008 | $367 | $158 | $13 |
| 2009 | 435 | 173 | 15 |
| 2010 | 499 | 188 | 16 |
| 2011 | 569 | 203 | 17 |
| 2012 | 644 | 212 | 20 |
| 2013\t-\t2017 | 4,549 | 1,294 | 129 |

Expected	benefit	payments	for	pensions	will	be	primarily	paid	from	plan	trusts.	Expected	benefit	payments	for	postretirement	medical	benefits	will	be	paid	from plan	trusts	and	corporate	assets.	Our	funding	policy	for	U.S.	plans	is	to	contribute	amounts	annually	that	are	at	least	equal	to	the	amounts	required	by	applicable	laws	and regulations,	or	to	directly	fund	payments	to	plan	participants,	as	applicable.	International	plans	will	be	funded	in	accordance	with	local	regulations.	Additional discretionary	contributions	will	be	made	when	deemed	appropriate	to	meet	the	long-term	obligations	of	the	plans.

# Other	Plans

We	also	contribute	to	several	multi-employer	pension	plans	for	which	the	previous	disclosure	information	is	not	determinable.	Amounts	charged	to	operations	for pension	contributions	to	these	multi-employer	plans	were	$7.642,	$1.405,	and	$1.234	billion	during	2007,	2006,	and	2005,	respectively.	The	2007	amount	includes	the $6.100	billion	payment	to	withdraw	from	the	Central	States	Pension	Fund,	as	previously	discussed.

We	also	contribute	to	several	multi-employer	health	and	welfare	plans	that	cover	both	active	and	retired	employees	for	which	the	previous	disclosure	information is	not	determinable.	Amounts	charged	to	operations	for	contributions	to	multi-employer	health	and	welfare	plans	were	$919,	$862,	and	$798	million	during	2007,	2006, and	2005,	respectively.

We	also	sponsor	a	defined	contribution	plan	for	all	employees	not	covered	under	collective	bargaining	agreements.	The	Company	matches,	in	shares	of	UPS common	stock,	a	portion	of	the	participating	employees'	contributions.	Matching	contributions	charged	to	expense	were	$128,	$113,	and	$105	million	for	2007,	2006, and	2005,	respectively.

Contributions	are	also	made	to	defined	contribution	money	purchase	plans	under	certain	collective	bargaining	agreements.	Amounts	charged	to	expense	were	$72, $62,	and	$55	million	for	2007,	2006,	and	2005,	respectively.

# NOTE	6.	GOODWILL	AND	INTANGIBLE	ASSETS

The	following	table	indicates	the	allocation	of	goodwill	by	reportable	segment	(in	millions):

|  | U.S.	Domestic | International | Supply	Chain	&amp; |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Package | Package | Freight | Consolidated |
| December\t31,\t2005\tbalance | $— | $290 | $2,259 | $2,549 |
| Acquired | — | 28 | 4 | 32 |
| Purchase\tAccounting\tAdjustments | — | (39) | (60) | (99) |
| Currency\t/\tOther | — | 11 | 40 | 51 |
| December\t31,\t2006\tbalance | — | $290 | $2,243 | $2,533 |
| Acquired | — | — | 2 | 2 |
| Purchase\tAccounting\tAdjustments | — | — | — | — |
| Currency\t/\tOther | — | 5 | 37 | 42 |
| December\t31,\t2007\tbalance | $— | $295 | $2,282 | $2,577 |

The	goodwill	acquired	in	the	International	Package	segment	during	2006	resulted	primarily	from	the	purchase	of	the	express	operations	of	Sinotrans	Air Transportation	Development	Co.	Ltd.	in	China,	offset	by	adjustments	to	the	purchase	price	allocation	of	Lynx	Express	Delivery	Ltd.	The	decrease	in	goodwill	for	the Supply	Chain	&	Freight	segment	during	2006	resulted	primarily	from	finalizing	the	purchase	price	allocation	of	Overnite	Corp.	The	currency	/	other	balance	includes the	translation	effect	on	goodwill	from	fluctuations	in	currency	exchange	rates,	as	well	as	escrow	reimbursements	from	acquisitions	completed	previously.	See	Note	7 for	further	discussion	of	these	business	acquisition	transactions.

The	following	is	a	summary	of	intangible	assets	at	December	31,	2007	and	2006	(in	millions):

|  | Gross	Carrying<br>Amount | Accumulated<br>Amortization | Net	Carrying<br>Value | Weighted-<br>Average<br>Amortization<br>Period	(in<br>years) |
| :--- | :--- | :--- | :--- | :--- |
| December\t31,\t2007: |  |  |  |  |
| Trademarks,\tlicenses,\tpatents,\tand\tother | $75 | $(54) | $21 | 4.2 |
| Customer\tlists | 162 | (40) | 122 | 10.5 |
| Franchise\trights | 110 | (35) | 75 | 20.0 |
| Capitalized\tsoftware | 1,663 | (1,253) | 410 | 3.2 |
| Total\tIntangible\tAssets,\tNet | $2,010 | $(1,382) | $628 | 4.7 |
| December\t31,\t2006: |  |  |  |  |
| Trademarks,\tlicenses,\tpatents,\tand\tother | $80 | $(37) | $43 |  |
| Customer\tlists | 159 | (24) | 135 |  |
| Franchise\trights | 108 | (29) | 79 |  |
| Capitalized\tsoftware | 1,576 | (1,145) | 431 |  |
| Total\tIntangible\tAssets,\tNet | $1,923 | $(1,235) | $688 |  |

Amortization	of	intangible	assets	was	$236,	$255,	and	$255	million	during	2007,	2006	and	2005,	respectively.	Expected	amortization	of	finite-lived	intangible assets	recorded	as	of	December	31,	2007	for	the	next	five	years	is	as	follows	(in	millions):	2008—$167;	2009—$109;	2010—$67;	2011—$23;	2012—$20. Amortization	expense	in	future	periods	will	be	affected	by	business	acquisitions,	software	development,	and	other	factors.

# NOTE	7.	BUSINESS	ACQUISITIONS	AND	DISPOSITIONS

In	December	2004,	we	agreed	with	Sinotrans	Air	Transportation	Development	Co.,	Ltd.	("Sinotrans")	to	acquire	direct	control	of	the	international	express operations	in	23	cities	within	China,	and	to	purchase	Sintotrans'	interest	in	our	current	joint	venture	in	China.	As	of	December	31,	2006,	we	had	made	all	cash	payments under	the	purchase	agreement,	a	total	of	$114	million,	and	had	taken	direct	control	of	operations	in	all	23	locations.	The	operations	acquired	are	reported	within	our International	Package	reporting	segment.

In	May	2005,	we	acquired	Messenger	Service	Stolica	S.A.	("Stolica"),	one	of	the	leading	parcel	and	express	delivery	companies	in	Poland.	Stolica's	operating results	are	included	in	our	International	Package	reporting	segment.

In	August	2005,	we	acquired	Overnite	Corporation	("Overnite")	for	approximately	$1.225	billion	in	cash.	Overnite	offers	a	variety	of	LTL	and	TL	services	to more	than	60,000	customers	in	North	America.	The	operating	results	of	Overnite,	which	is	now	known	as	UPS	Freight,	are	included	in	our	Supply	Chain	&	Freight reporting	segment.

In	September	2005,	we	acquired	Lynx	Express	Ltd.	("Lynx")	for	approximately	$68	million	in	cash.	Lynx	Express	was	one	of	the	largest	independent	parcel carriers	in	the	United	Kingdom.	Lynx	also	offers	customers	a	broad	suite	of	logistics	and	spare	parts	logistics	services.	The	operating	results	of	Lynx	are	included	in	our International	Package	reporting	segment.

Pro	forma	results	of	operations	have	not	been	presented	for	any	of	these	acquisitions	because	the	effects	of	these	transactions	were	not	material	on	either	an individual	or	aggregate	basis.	The	results	of	operations	of	each	acquired	company	are	included	in	our	statements	of	consolidated	income	from	the	date	of	acquisition. The	purchase	price	allocations	of	acquired	companies	can	be	modified	up	to	one	year	after	the	date	of	acquisition.

# NOTE	8.	DEBT	OBLIGATIONS	AND	COMMITMENTS

Debt	obligations,	as	of	December	31,	consist	of	the	following	(in	millions):

|  | 2007 | 2006 |
| :--- | :--- | :--- |
| 8.38%\tdebentures | $761 | $731 |
| Commercial\tpaper | 7,366 | 791 |
| Floating\trate\tsenior\tnotes | 441 | 441 |
| Capital\tlease\tobligations | 479 | 230 |
| Facility\tnotes\tand\tbonds | 435 | 437 |
| UPS\tNotes | 513 | 379 |
| Pound\tSterling\tnotes | 989 | 979 |
| Other\tdebt | 34 | 128 |
| Total\tdebt | \t 11,018 | \t 4,116 |
| Less\tcurrent\tmaturities | (3,512) | (983) |
| Long-term\tdebt | $7,506 | $3,133 |

On	January	22,	1998,	we	exchanged	$276	million	of	an	original	$700	million	in	debentures	for	new	debentures	of	equal	principal	with	a	maturity	of	April	1, 2030.	The	new	debentures	have	the	same	interest	rate	as	the	8.38%	debentures	due	2020	until	April	1,	2020,	and,	thereafter,	the	interest	rate	will	be	7.62%	for	the	final 10	years.	The	2030	debentures	are	redeemable	in	whole	or	in	part	at	our	option	at	any	time.	The	redemption	price	is	equal	to	the	greater	of	100%	of	the	principal	amount and	accrued	interest	or	the	sum	of	the	present	values	of	the	remaining	scheduled	payout	of	principal	and	interest	thereon	discounted	to	the	date	of	redemption	at	a benchmark	treasury	yield	plus	five	basis	points	plus	accrued	interest.	The	remaining	$424	million	of	2020	debentures	are	not	subject	to	redemption	prior	to	maturity. Interest	is	payable	semiannually	on	the	first	of	April	and	October	for	both	debentures	and	neither	debenture	is	subject	to	sinking	fund	requirements.	The	fixed	obligations associated	with	the	debentures	are	swapped	to	floating	rates,	based	on	six	month	LIBOR	plus	a	spread.	Including	the	effect	of	the	swaps,	the	average	interest	rate	paid	on the	debentures	for	2007	and	2006	was	7.99%	and	8.00%,	respectively.

# Commercial	Paper:

The	weighted	average	interest	rate	on	the	commercial	paper	outstanding	as	of	December	31,	2007	and	2006,	was	4.36%	and	5.20%,	respectively.	At December	31,	2007,	we	have	classified	$4.0	billion	of	our	commercial	paper	balance	as	long-term	debt,	due	to	the	issuance	of	fixed	rate	notes	subsequent	to December	31,	2007.	In	2006,	the	entire	commercial	paper	balance	was	classified	as	a	current	liability.	The	amount	of	commercial	paper	outstanding	in	2008	is	expected to	fluctuate.	We	are	authorized	to	borrow	up	to	$10.0	billion	under	the	U.S.	commercial	paper	program	we	maintain	as	of	December	31,	2007.	We	also	maintain	a European	commercial	paper	program	under	which	we	are	authorized	to	borrow	up	to	€1.0	billion	in	a	variety	of	currencies,	however	no	amounts	were	outstanding	under this	program	as	of	December	31,	2007.

# Floating	Rate	Senior	Notes:

The	floating	rate	senior	notes	bear	interest	at	one-month	LIBOR	less	45	basis	points.	The	average	interest	rates	for	2007	and	2006	were	4.85%	and	4.66%, respectively.	These	notes	are	callable	at	various	times	after	30	years	at	a	stated	percentage	of	par	value,	and	putable	by	the	note	holders	at	various	times	after	10	years	at a	stated	percentage	of	par	value.	The	notes	have	maturities	ranging	from	2049	through	2053.

# Capital	Lease	Obligations:

We	have	certain	aircraft	subject	to	capital	leases.	Some	of	the	obligations	associated	with	these	capital	leases	have	been	legally	defeased.	The	recorded	value	of aircraft	subject	to	capital	leases,	which	are	included	in	Property,	Plant	and	Equipment	is	as	follows	as	of	December	31	(in	millions):

These	capital	lease	obligations	have	principal	payments	due	at	various	dates	from	2008	through	2021.

# Facility	Notes	and	Bonds:

We	have	entered	into	agreements	with	certain	municipalities	to	finance	the	construction	of,	or	improvements	to,	facilities	that	support	our	U.S.	Domestic	Package and	Supply	Chain	&	Freight	operations	in	the	United	States.	These	facilities	are	located	around	airport	properties	in	Louisville,	KY;	Dallas,	TX;	Philadelphia,	PA;	and Dayton,	OH.	Under	these	arrangements,	we	enter	into	a	lease	or	loan	agreement	that	covers	the	debt	service	obligations	on	the	bonds	issued	by	the	municipalities,	as follows:

•	 Bonds	with	a	principal	balance	of	$149	million	issued	by	the	Louisville	Regional	Airport	Authority	associated	with	our	Worldport	facility	in	Louisville, KY.	The	bonds,	which	are	due	in	January	2029,	bear	interest	at	a	variable	rate,	and	the	average	interest	rates	for	2007	and	2006	were	3.62%	and	3.43%, respectively.

•	 Bonds	with	a	principal	balance	of	$43	million	issued	by	the	Louisville	Regional	Airport	Authority	associated	with	our	air	freight	facility	in	Louisville,	KY. The	bonds	were	issued	in	November	2006	and	are	due	in	November	2036.	The	bonds	bear	interest	at	a	variable	rate,	and	the	average	interest	rates	for	2007 and	2006	were	3.62%	and	3.77%	(from	the	time	of	issuance	in	November	2006),	respectively.

•	 Bonds	with	a	principal	balance	of	$29	million	issued	by	the	Dallas	/	Forth	Worth	International	Airport	Facility	Improvement	Corporation	associated	with our	Dallas,	TX	airport	facilities.	The	bonds	are	due	in	May	2032	and	bear	interest	at	a	variable	rate,	however	the	variable	cash	flows	on	the	obligation	have been	swapped	to	a	fixed	5.11%.

•	 Bonds	with	a	principal	balance	of	$100	million	issued	by	the	Delaware	County,	Pennsylvania	Industrial	Development	Authority	associated	with	our Philadelphia,	PA	airport	facilities.	The	bonds,	which	are	due	in	December	2015,	bear	interest	at	a	variable	rate,	and	the	average	interest	rates	for	2007	and 2006	were	3.54%	and	3.34%,	respectively.

•	 Bonds	with	a	principal	balance	of	$108	million	issued	by	the	city	of	Dayton,	OH	associated	with	the	Dayton	airport	facility,	$62	million	of	which	is	due	in 2009	and	the	remaining	$46	million	is	due	in	2018.	The	balance	due	in	2018	is	callable	beginning	in	2008.	The	bond	principal	due	in	2018	bears	interest	at a	fixed	rate	of	5.63%,	while	the	bond	principal	due	in	2009	bears	interest	at	fixed	rates	ranging	from	6.05%	to	6.20%.

# UPS	Notes:

The	UPS	Notes	program	involves	the	periodic	issuance	of	fixed	rate	notes	in	$1,000	increments	with	various	terms	and	maturities.	At	December	31,	2007,	the coupon	rates	of	the	outstanding	notes	varied	between	3.00%	and	6.20%,	and	the	interest	payments	are	made	either	monthly,	quarterly	or	semiannually.	The	maturities	of the	notes	range	from	2008	to	2027.	Substantially	all	of	the	fixed	obligations	associated	with	the	notes	were	swapped	to	floating	rates,	based	on	different	LIBOR	indices plus	or	minus	a	spread.	The	average	interest	rate	payable	on	the	swaps	for	2007	and	2006	was	4.83%	and	4.73%,	respectively.

# Pound	Sterling	Notes:

The	Pound	Sterling	notes	were	issued	in	2001	with	a	principal	balance	of	£500	million,	accrue	interest	at	a	5.50%	fixed	rate,	and	are	due	on	February	12,	2031.	In May	2007,	we	completed	an	exchange	offer	for	the	existing	notes.	Holders	of	£434	million	of	the	notes	accepted	the	exchange	offer,	and	as	a	result,	these	notes	were exchanged	for	new	notes	with	a	principal	amount	of	£455	million,	bearing	interest	at	5.13%	and	due	in	February	2050.	The	new	notes	are	callable	at	our	option	at	a redemption	price	equal	to	the	greater	of	100%	of	the	principal	amount	and	accrued	interest,	or	the	sum	of	the	present	values	of	the	remaining	scheduled	payout	of principal	and

interest	thereon	discounted	to	the	date	of	redemption	at	a	benchmark	U.K.	government	bond	yield	plus	15	basis	points	and	accrued	interest.	The	£66	million	of	existing notes	that	were	not	exchanged	continue	to	bear	interest	at	5.50%	and	are	due	in	2031.	We	accounted	for	the	exchange	in	accordance	with	EITF	96-19	"Debtor's Accounting	for	a	Modification	or	Exchange	of	Debt	Instruments",	and	as	such,	no	gain	or	loss	was	recognized	upon	the	completion	of	this	transaction.

# Other	Debt:

The	other	debt	balance	primarily	relates	to	loans	entered	into	in	conjunction	with	our	investment	in	various	partnerships.	Substantially	all	of	this	debt	is	classified as	a	current	liability.	The	implied	interest	rates	on	this	debt	range	from	3.20%	to	6.43%.

# Other	Information

Based	on	the	borrowing	rates	currently	available	to	the	Company	for	long-term	debt	with	similar	terms	and	maturities,	the	fair	value	of	long-term	debt,	including current	maturities,	is	approximately	$11.238	and	$4.391	billion	as	of	December	31,	2007	and	2006,	respectively.

We	lease	certain	aircraft,	facilities,	equipment	and	vehicles	under	operating	leases,	which	expire	at	various	dates	through	2108.	Certain	of	the	leases	contain escalation	clauses	and	renewal	or	purchase	options.	Rent	expense	related	to	our	operating	leases	was	$896,	$912,	and	$843	million	for	2007,	2006,	and	2005, respectively.

The	following	table	sets	forth	the	aggregate	minimum	lease	payments	under	capital	and	operating	leases,	the	aggregate	annual	principal	payments	due	under	our long-term	debt,	and	the	aggregate	amounts	expected	to	be	spent	for	purchase	commitments	(in	millions).

|  | Capital | Operating | Debt | Purchase |
| :--- | :--- | :--- | :--- | :--- |
| Year | Leases | Leases | Principal | Commitments |
| 2008 | $108 | $378 | $3,426 | $1,306 |
| 2009 | 73 | 325 | 83 | 791 |
| 2010 | 91 | 237 | 40 | 729 |
| 2011 | 31 | 166 | 33 | 698 |
| 2012 | 31 | 116 | 26 | 304 |
| After\t2012 | 285 | 560 | 6,919 | — |
| Total | 619 | $1,782 | $10,527 | $3,828 |
| Less:\timputed\tinterest | (140) |  |  |  |
| Present\tvalue\tof\tminimum\tcapitalized\tlease\tpayments | 479 |  |  |  |
| Less:\tcurrent\tportion | (86) |  |  |  |
| Long-term\tcapitalized\tlease\tobligations | $393 |  |  |  |

In	November	2007,	we	filed	a	shelf	registration	statement	under	which	we	may	issue	debt	securities	in	the	United	States.	In	January	2008,	we	completed	an offering	of	$1.750	billion	of	4.50%	senior	notes	due	January	2013,	$750	million	of	5.50%	senior	notes	due	January	2018,	and	$1.500	billion	of	6.20%	senior	notes	due January	2038.	All	of	the	notes	pay	interest	semiannually,	and	allow	for	redemption	of	the	notes	by	UPS	at	any	time	by	paying	the	greater	of	the	principal	amount	or	a "make-whole"	amount,	plus	accrued	interest.	After	pricing	and	underwriting	discounts,	we	received	a	total	of	$3.961	billion	in	cash	proceeds	from	the	offering.	The

proceeds	from	the	offering	were	used	to	reduce	our	outstanding	commercial	paper	balance.	The	annual	principal	payments	due	under	our	debt	obligations	in	the	table above	reflect	the	January	2008	issuance	of	long-term	debt	and	refunding	of	commercial	paper.

As	of	December	31,	2007,	we	had	outstanding	letters	of	credit	totaling	approximately	$2.177	billion	issued	in	connection	with	routine	business	requirements.

We	maintain	three	credit	agreements	with	a	consortium	of	banks,	two	of	which	provide	revolving	credit	facilities	of	$1.0	billion	each,	with	one	expiring	April	17, 2008	and	the	other	April	19,	2012,	and	the	third	providing	a	revolving	credit	facility	of	$7.0	billion	and	expiring	on	October	17,	2008.	Interest	on	any	amounts	we borrow	under	these	facilities	would	be	charged	at	90-day	LIBOR	plus	15	basis	points.	At	December	31,	2007,	there	were	no	outstanding	borrowings	under	these facilities.

Our	existing	debt	instruments	and	credit	facilities	do	not	have	cross-default	or	ratings	triggers,	however	these	debt	instruments	and	credit	facilities	do	subject	us	to certain	financial	covenants.	These	covenants	generally	require	us	to	maintain	a	$3.0	billion	minimum	net	worth	and	limit	the	amount	of	secured	indebtedness	available	to the	company.	These	covenants	are	not	considered	material	to	the	overall	financial	condition	of	the	company,	and	all	covenant	tests	were	passed	as	of	December	31,	2007.

# NOTE	9.	LEGAL	PROCEEDINGS	AND	CONTINGENCIES

UPS	and	Mail	Boxes	Etc.,	Inc.	are	defendants	in	various	lawsuits	brought	by	franchisees	who	operate	Mail	Boxes	Etc.	centers	and	The	UPS	Store	locations. These	lawsuits	relate	to	the	re-branding	of	Mail	Boxes	Etc.

centers	to	The	UPS	Store,	the	The	UPS	Store	business	model,	the	representations	made	in	connection	with	the	rebranding	and	the	sale	of	The	UPS	Store	franchises,	and UPS's	sale	of	services	in	the	franchisees'	territories.	We	have	denied	any	liability	with	respect	to	these	claims	and	intend	to	defend	ourselves	vigorously.	At	this	time,	we have	not	determined	the	amount	of	any	liability	that	may	result	from	these	matters	or	whether	such	liability,	if	any,	would	have	a	material	adverse	effect	on	our	financial condition,	results	of	operations,	or	liquidity.

As	of	December	31,	2007,	we	had	approximately	246,000	employees	employed	under	a	national	master	agreement	and	various	supplemental	agreements	with local	unions	affiliated	with	the	Teamsters.	In	September	2007,	we	reached	a	new	national	master	agreement	with	the	Teamsters,	which	was	ratified	in	December	2007. The	new	agreement	provides	for	wage	increases	as	well	as	contributions	to	healthcare	and	pension	plans,	and	most	economic	provisions	of	the	new	five	year	agreement will	take	effect	on	August	1,	2008,	with	the	exception	of	our	withdrawal	from	the	Central	States	Pension	Fund,	as	discussed	in	Note	5.	We	have	approximately	2,900 pilots	who	are	employed	under	a	collective	bargaining	agreement	with	the	Independent	Pilots	Association,	which	becomes	amendable	at	the	end	of	2011.	Our	airline mechanics	are	covered	by	a	collective	bargaining	agreement	with	Teamsters	Local	2727,	which	became	amendable	on	November	1,	2006.	We	began	formal	negotiations with	Teamsters	Local	2727	on	October	2,	2006.	In	addition,	the	majority	of	our	ground	mechanics	who	are	not	employed	under	agreements	with	the	Teamsters	are employed	under	collective	bargaining	agreements	with	the	International	Association	of	Machinists	and	Aerospace	Workers	(approximately	2,900).	These	agreements run	through	July	31,	2009.

# NOTE	10.	SHAREOWNERS'	EQUITY

# Capital	Stock,	Additional	Paid-In	Capital,	and	Retained	Earnings

We	maintain	two	classes	of	common	stock,	which	are	distinguished	from	each	other	by	their	respective	voting	rights.	Class	A	shares	of	UPS	are	entitled	to	10 votes	per	share,	whereas	Class	B	shares	are	entitled	to	one	vote	per	share.	Class	A	shares	are	primarily	held	by	UPS	employees	and	retirees,	and	these	shares	are	fully convertible	into	Class	B	shares	at	any	time.	Class	B	shares	are	publicly	traded	on	the	New	York	Stock	Exchange	(NYSE)	under	the	symbol	"UPS."	Class	A	and	B shares	both	have	a	$0.01	par	value,	and	as	of	December	31,	2007,	there	were	4.6	billion	Class	A	shares	and	5.6	billion	Class	B	shares	authorized	to	be	issued. Additionally,	there	are	200	million	preferred	shares,	with	no	par	value,	authorized	to	be	issued;	as	of	December	31,	2007,	no	preferred	shares	had	been	issued.

The	following	is	a	rollforward	of	our	common	stock,	additional	paid-in	capital,	and	retained	earnings	accounts	(in	millions,	except	per	share	amounts):

|  | 2007 | 2007 | 2006 | 2006 | 2005 | 2005 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Shares | Dollars | Shares | Dollars | Shares | Dollars |
| Class\tA\tCommon\tStock |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | 401 | $4 | 454 | $5 | 515 | $5 |
| Common\tstock\tpurchases | (18) | (1) | (17) | — | (16) | — |
| Stock\taward\tplans | 3 | — | 3 | — | 2 | — |
| Common\tstock\tissuances | 3 | — | 2 | — | 3 | — |
| Conversions\tof\tClass\tA\tto\tClass\tB\tcommon\tstock | (40) | — | (41) | (1) | (50) | — |
| Class\tA\tshares\tissued\tat\tend\tof\tyear | 349 | $3 | 401 | $4 | 454 | $5 |
| Class\tB\tCommon\tStock |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | 672 | $7 | 646 | $6 | 614 | $6 |
| Common\tstock\tpurchases | (18) | — | (15) | — | (18) | — |
| Conversions\tof\tClass\tA\tto\tClass\tB\tcommon\tstock | 40 | — | 41 | 1 | 50 | — |
| Class\tB\tshares\tissued\tat\tend\tof\tyear | 694 | $7 | 672 | $7 | 646 | $6 |
| Additional\tPaid-In\tCapital |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear |  | $— |  | $— |  | $417 |
| Stock\taward\tplans |  | 462 |  | 371 |  | 335 |
| Common\tstock\tpurchases |  | (627) |  | (539) |  | (922) |
| Common\tstock\tissuances |  | 165 |  | 168 |  | 170 |
| Balance\tat\tend\tof\tyear |  | $— |  | $— |  | $— |
| Retained\tEarnings |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear |  | $17,676 |  | $17,037 |  | $16,192 |
| Net\tincome |  | 382 |  | 4,202 |  | 3,870 |
| Adoption\tof\tFIN\t48 |  | (104) |  | — |  | — |
| Dividends\t($1.68,\t$1.52,\tand\t$1.32\tper\tshare) |  | (1,778) |  | (1,647) |  | (1,468) |
| Common\tstock\tpurchases |  | (1,990) |  | (1,916) |  | (1,557) |
| Balance\tat\tend\tof\tyear |  | $14,186 |  | $17,676 |  | $17,037 |

The	adoption	of	FIN	48	is	discussed	further	in	Note	13.

For	the	years	ended	December	31,	2007,	2006	and	2005,	we	repurchased	a	total	of	35.9,	32.6,	and	33.9	million	shares	of	Class	A	and	Class	B	common	stock	for $2.618,	$2.455,	and	$2.479	billion,	respectively.	In	January	2008,	our	Board	of	Directors	authorized	an	increase	in	our	share	repurchase	authority	to	$10.0	billion. Unless	terminated	earlier	by	the	resolution	of	our	Board,	the	program	will	expire	when	we	have	purchased	all	shares	authorized	for	repurchase	under	the	program.

# Accumulated	Other	Comprehensive	Income	(Loss)

We	incur	activity	in	AOCI	for	unrealized	holding	gains	and	losses	on	available-for-sale	securities,	foreign	currency	translation	adjustments,	unrealized	gains	and losses	from	derivatives	that	qualify	as	hedges	of	cash	flows,	and	unrecognized	pension	and	postretirement	benefit	costs.	The	activity	in	AOCI	is	as	follows	(in	millions):

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Foreign\tcurrency\ttranslation\tgain\t(loss): |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $(109) | $(163) | $(127) |
| Aggregate\tadjustment\tfor\tthe\tyear | 190 | 54 | (36) |
| Balance\tat\tend\tof\tyear | 81 | (109) | (163) |
| Unrealized\tgain\t(loss)\ton\tmarketable\tsecurities,\tnet\tof\ttax: |  |  |  |
| Balance\tat\tbeginning\tof\tyear | 12 | 11 | (5) |
| Current\tperiod\tchanges\tin\tfair\tvalue\t(net\tof\ttax\teffect\tof\t$4,\t$(3),\tand\t$0) | 6 | (4) | \t — |
| Reclassification\tto\tearnings\t(net\tof\ttax\teffect\tof\t$(5),\t$3,\tand\t$10) | (9) | 5 | 16 |
| Balance\tat\tend\tof\tyear | 9 | 12 | 11 |
| Unrealized\tgain\t(loss)\ton\tcash\tflow\thedges,\tnet\tof\ttax: |  |  |  |
| Balance\tat\tbeginning\tof\tyear | 68 | 83 | (29) |
| Current\tperiod\tchanges\tin\tfair\tvalue\t(net\tof\ttax\teffect\tof\t$(177),\t$(4),\tand\t$81) | (294) | (7) | 135 |
| Reclassification\tto\tearnings\t(net\tof\ttax\teffect\tof\t$(14),\t$(5),\tand\t$(14)) | (24) | (8) | (23) |
| Balance\tat\tend\tof\tyear | (250) | 68 | 83 |
| Unrecognized\tpension\tand\tpostretirement\tbenefit\tcosts,\tnet\tof\ttax: |  |  |  |
| Balance\tat\tbeginning\tof\tyear | (2,176) | (95) | (81) |
| Reclassification\tto\tearnings\t(net\tof\ttax\teffect\tof\t$73,\t$0,\tand\t$0) | 122 | — | \t — |
| Unrecognized\tnet\tactuarial\tgain\t(net\tof\ttax\teffect\tof\t$776,\t$0,\tand\t$0) | 1,305 | — | \t — |
| Unrecognized\tprior\tservice\tcost\t(net\tof\ttax\teffect\tof\t$(665),\t$0,\tand\t$0) | (1,104) | — | \t — |
| Minimum\tpension\tliability\tadjustment\t(net\tof\ttax\teffect\tof\t$0,\t$11,\tand\t$(8)) | — | 16 | (14) |
| FAS\t158\ttransition\tadjustment\t(net\tof\ttax\teffect\tof\t$0,\t$(1,258),\tand\t$0) | — | (2,097) | \t — |
| Balance\tat\tend\tof\tyear | (1,853) | (2,176) | (95) |
| Accumulated\tother\tcomprehensive\tincome\t(loss)\tat\tend\tof\tyear | $(2,013) | $(2,205) | $(164) |

As	discussed	in	Note	1,	we	adopted	the	recognition	and	disclosure	provisions	of	FAS	158	on	December	31,	2006.	The	adoption	of	FAS	158	required	us	to eliminate	the	previous	minimum	pension	liability	charge	to	AOCI,	and	to	record	a	charge,	net	of	tax,	to	AOCI	representing	the	unrecognized	pension	and	postretirement benefit	costs	as	of	December	31,	2006.

# Deferred	Compensation	Obligations	and	Treasury	Stock

We	maintain	a	deferred	compensation	plan	whereby	certain	employees	were	previously	able	to	elect	to	defer	the	gains	on	stock	option	exercises	by	deferring	the shares	received	upon	exercise	into	a	rabbi	trust.	The	shares	held	in	this	trust	are	classified	as	treasury	stock,	and	the	liability	to	participating	employees	is	classified	as "deferred	compensation	obligations"	in	the	shareowners'	equity	section	of	the	balance	sheet.	The	number	of	shares	needed	to	settle	the	liability	for	deferred compensation	obligations	is	included	in	the	denominator	in	both	the	basic	and	diluted	earnings	per	share	calculations.	Employees	are	generally	no	longer	able	to	defer the	gains	from	stock	options	exercised	subsequent	to	December	31,	2004.	Activity	in	the	deferred	compensation	program	for	the	years	ended	December	31,	2007,	2006, and	2005	is	as	follows	(in	millions):

|  | 2007 | 2007 | 2006 | 2006 | 2005 | 2005 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Shares | Dollars | Shares | Dollars | Shares | Dollars |
| Deferred\tCompensation\tObligations |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear |  | $147 |  | $161 |  | $169 |
| Reinvested\tdividends |  | 4 |  | 4 |  | 4 |
| Option\texercise\tdeferrals |  | — |  | — |  | — |
| Benefit\tpayments |  | (14) |  | (18) |  | (12) |
| Balance\tat\tend\tof\tyear |  | $137 |  | $147 |  | $161 |
| Treasury\tStock |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | (3) | $(147) | (3) | $(161) | (3) | $ (169) |
| Reinvested\tdividends | — | (4) | — | (4) | — | (4) |
| Option\texercise\tdeferrals | — | — | — | — | — | — |
| Benefit\tpayments | 1 | 14 | — | 18 | — | 12 |
| Balance\tat\tend\tof\tyear | (2) | $(137) | (3) | $(147) | (3) | $ (161) |

# NOTE	11.	STOCK-BASED	COMPENSATION

# Incentive	Compensation	Plan

The	UPS	Incentive	Compensation	Plan	permits	the	grant	of	nonqualified	stock	options,	incentive	stock	options,	stock	appreciation	rights,	restricted	stock, performance	shares,	performance	units,	and	management	incentive	awards	to	eligible	employees.	The	number	of	shares	reserved	for	issuance	under	the	Plan	is 112	million,	with	the	number	of	shares	reserved	for	issuance	as	restricted	stock	limited	to	34	million.	As	of	December	31,	2007,	management	incentive	awards,	stock options,	restricted	performance	units,	and	restricted	stock	units	had	been	granted	under	the	Incentive	Compensation	Plan.

# Management	Incentive	Awards	&	Restricted	Stock	Units

Persons	earning	the	right	to	receive	management	incentive	awards	are	determined	annually	by	the	Compensation	Committee	of	the	UPS	Board	of	Directors.	Our management	incentive	awards	program	provides	that	half	of	the	annual	management	incentive	award,	with	certain	exceptions,	be	made	in	restricted	stock	units ("RSUs"),	which	generally	vest	over	a	five-year	period.	The	other	half	of	the	award	is	in	the	form	of	cash	or	unrestricted	shares	of	class	A	common	stock	and	is	fully vested	at	the	time	of	grant.	These	management	incentive	awards	are	generally	granted	in	the	fourth	quarter	of	each	year.

Upon	vesting,	RSUs	result	in	the	issuance	of	the	equivalent	number	of	UPS	class	A	common	shares	after	required	tax	withholdings.	Except	in	the	case	of	death, disability,	or	retirement,	RSUs	granted	for	our

management	incentive	awards	generally	vest	over	a	five	year	period	with	approximately	20%	of	the	award	vesting	at	each	anniversary	date	of	the	grant.	The	entire	grant is	expensed	on	a	straight-line	basis	over	the	requisite	service	period.	All	RSUs	granted	are	subject	to	earlier	cancellation	or	vesting	under	certain	conditions.	Dividends earned	on	management	incentive	award	RSUs	are	reinvested	in	additional	RSUs	at	each	dividend	payable	date.

We	also	award	RSUs	in	conjunction	with	our	long-term	incentive	performance	awards	program	to	certain	eligible	employees.	The	RSUs	ultimately	granted	under the	long-term	incentive	performance	award	will	be	based	upon	the	achievement	of	certain	performance	measures,	including	growth	in	consolidated	revenue	and operating	return	on	invested	capital,	each	year	during	the	performance	award	cycle,	and	other	measures,	including	growth	in	consolidated	earnings,	over	the	entire	three year	performance	award	cycle.

As	of	December	31,	2007,	we	had	the	following	RSUs	outstanding,	including	reinvested	dividends:

|  |  | Average | Weighted	Average	Remaining |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Shares | Grant\tDate | Contractual\tTerm | Aggregate\tIntrinsic |
|  | (in\tthousands) | Fair\tValue | (in\tyears) | Value\t(in\tmillions) |
| Nonvested\tat\tJanuary\t1,\t2007 | 7,561 | $73.82 |  |  |
| Vested | (1,855) | 73.71 |  |  |
| Granted | 4,507 | 74.94 |  |  |
| Reinvested\tDividends | 154 | N/A |  |  |
| Forfeited\t/\tExpired | (385) | 73.97 |  |  |
| Nonvested\tat\tDecember\t31,\t2007 | 9,982 | 74.34 | 2.37 | $706 |
| RSUs\tExpected\tto\tVest | 9,431 | 74.31 | 2.31 | $667 |

The	fair	value	of	each	RSU	is	the	New	York	Stock	Exchange	("NYSE")	closing	price	on	the	date	of	grant.	The	weighted-average	grant	date	fair	value	of	RSUs granted	during	2007,	2006,	and	2005	was	$74.94,	$74.87,	and	$72.82,	respectively.	The	total	fair	value	of	RSUs	vested	was	$145	million,	$82	million,	and	$0	in	2007, 2006,	and	2005,	respectively.	As	of	December	31,	2007,	there	was	$529	million	of	total	unrecognized	compensation	cost	related	to	nonvested	RSUs.	That	cost	is expected	to	be	recognized	over	a	weighted	average	period	of	4	years	and	1	month.

# Nonqualified	Stock	Options

We	maintain	fixed	stock	option	plans,	under	which	options	are	granted	to	purchase	shares	of	UPS	class	A	common	stock.	Stock	options	granted	in	connection with	the	Incentive	Compensation	Plan	must	have	an	exercise	price	at	least	equal	to	the	NYSE	closing	price	of	UPS	class	B	common	stock	on	the	date	the	option	is granted.

Persons	earning	the	right	to	receive	stock	options	are	determined	each	year	by	the	Compensation	Committee.	Except	in	the	case	of	death,	disability,	or	retirement, options	granted	under	the	Incentive	Compensation	Plan	prior	to	2008	are	generally	exercisable	three	to	five	years	from	the	date	of	grant	and	before	the	expiration	of	the option	10	years	after	the	date	of	grant.	Beginning	in	2008,	option	awards	will	be	made	to	a	more	limited	group	of	employees,	and	options	granted	will	generally	vest	over a	five	year	period	with	approximately	20%	of	the	award	vesting	at	each	anniversary	date	of	the	grant.	All	options	granted	are	subject	to	earlier	cancellation	or	exercise under	certain	conditions.	Option	holders	may	exercise	their	options	via	the	tender	of	cash	or	class	A	common	stock,	and	new	class	A	shares	are	issued	upon	exercise. Options	granted	to	eligible	employees	will	generally	be	granted	annually	during	the	second	quarter	of	each	year	at	the	discretion	of	the	Compensation	Committee.

The	following	is	an	analysis	of	options	to	purchase	shares	of	class	A	common	stock	issued	and	outstanding:

|  |  | Average | Weighted	Average	Remaining |  |
| :--- | :--- | :--- | :--- | :--- |
|  | Shares\n(in\tthousands) | Exercise\nPrice | Contractual\tTerm\n(in\tyears) | Aggregate\tIntrinsic\nValue\t(in\tmillions) |
| Outstanding\tat\tJanuary\t1,\t2007 | 18,882 | $64.75 |  |  |
| Exercised | (1,851) | 57.03 |  |  |
| Granted | 2,736 | 70.90 |  |  |
| Forfeited\t/\tExpired | (544) | 69.68 |  |  |
| Outstanding\tat\tDecember\t31,\t2007 | 19,223 | $66.23 | 5.96 | $114 |
| Exercisable\tat\tDecember\t31,\t2007 | 8,829 | $59.87 | 4.13 | $99 |
| Options\tExpected\tto\tVest | 10,118 | $71.45 | 7.43 | $16 |

The	fair	value	of	each	option	grant	is	estimated	using	the	Black-Scholes	option	pricing	model.	The	weighted	average	assumptions	used,	by	year,	and	the	calculated weighted	average	fair	values	of	options	are	as	follows:

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Expected\tdividend\tyield | 2.28% | 1.80% | 1.60% |
| Risk-free\tinterest\trate | 4.65% | 5.13% | 4.18% |
| Expected\tlife\tin\tyears | 7.5 | 7.0 | 7.0 |
| Expected\tvolatility | \t 19.15% | \t 18.42% | \t 18.21% |
| Weighted\taverage\tfair\tvalue\tof\toptions\tgranted | $16.85 | $21.05 | $17.33 |

Expected	volatilities	are	based	on	the	historical	returns	on	our	stock	and,	due	to	our	limited	history	of	being	a	publicly-traded	company,	an	index	of	peer companies,	as	well	as	the	implied	volatility	of	our	publicly-traded	options.	The	expected	dividend	yield	is	based	on	the	recent	historical	dividend	yields	for	our	stock, taking	into	account	changes	in	dividend	policy.	The	risk-free	interest	rate	is	based	on	the	term	structure	of	interest	rates	at	the	time	of	the	option	grant.	The	expected	life represents	an	estimate	of	the	period	of	time	options	are	expected	to	remain	outstanding,	and	we	have	relied	upon	a	combination	of	the	observed	exercise	behavior	of	our prior	grants	with	similar	characteristics,	the	vesting	schedule	of	the	grants,	and	an	index	of	peer	companies	with	similar	grant	characteristics.

We	received	cash	of	$52,	$30,	and	$21	million	during	2007,	2006,	and	2005,	respectively,	from	option	holders	resulting	from	the	exercise	of	stock	options.	We received	a	tax	benefit	of	$9,	$12,	and	$5	million	during	2007,	2006,	and	2005,	respectively,	from	the	exercise	of	stock	options.	The	adoption	of	FAS	123(R)	required	us to	change	the	statement	of	cash	flow	classification	of	these	tax	benefits,	and	as	a	result,	these	tax	benefits	are	reported	as	cash	from	financing	activities	rather	than	cash from	operating	activities.

The	total	intrinsic	value	of	options	exercised	during	2007,	2006,	and	2005	was	$31,	$45,	and	$24	million,	respectively.	As	of	December	31,	2007,	there	was	$77 million	of	total	unrecognized	compensation	cost	related	to	nonvested	options.	That	cost	is	expected	to	be	recognized	over	a	weighted	average	period	of	3	years	and	3 months.

The	following	table	summarizes	information	about	stock	options	outstanding	and	exercisable	at	December	31,	2007:

|  | Options	Outstanding | Options	Outstanding | Options	Outstanding | Options	Exercisable | Options	Exercisable |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Average |  | Average |
|  | Shares | Average\tLife | Exercise | Shares | Exercise |
| Exercise\tPrice\tRange | (in\tthousands) | (in\tyears) | Price | (in\tthousands) | Price |
| $30.00\t-\t$50.00 | 1,190 | 1.86 | $49.95 | 1,190 | $49.95 |
| $50.01\t-\t$60.00 | 2,587 | 3.21 | \t 56.97 | 2,587 | \t 56.97 |
| $60.01\t-\t$70.00 | 5,642 | 4.76 | \t 61.17 | 3,823 | \t 60.59 |
| $70.01\t-\t$80.00 | 7,486 | 7.75 | \t 71.22 | 1,008 | \t 71.27 |
| $80.01\t-\t$120.00 | 2,318 | 8.28 | \t 81.11 | 221 | \t 82.87 |
|  | 19,223 | 5.96 | $66.23 | 8,829 | $59.87 |

# Restricted	Performance	Units

We	issue	restricted	performance	units	("RPUs")	under	the	Incentive	Compensation	Plan.	Upon	vesting,	RPUs	result	in	the	issuance	of	the	equivalent	number	of UPS	class	A	common	shares	after	required	tax	withholdings.	Persons	earning	the	right	to	receive	RPUs	are	determined	each	year	by	the	Compensation	Committee. Except	in	the	case	of	death,	disability,	or	retirement,	all	RPUs	granted	prior	to	2008	vest	five	years	after	the	date	of	grant.	Beginning	in	2008,	RPU	awards	granted	will generally	vest	over	a	five	year	period	with	approximately	20%	of	the	award	vesting	at	each	anniversary	date	of	the	grant.	All	RPUs	granted	are	subject	to	earlier cancellation	or	vesting	under	certain	conditions.	Dividends	earned	on	RPUs	are	reinvested	in	additional	restricted	performance	units	at	each	dividend	payable	date. RPUs	granted	to	eligible	employees	will	generally	be	granted	annually	during	the	second	quarter	of	each	year	at	the	discretion	of	the	Compensation	Committee.

As	of	December	31,	2007,	we	had	the	following	RPUs	outstanding,	including	reinvested	dividends:

|  |  | Weighted |  |  |
| :--- | :--- | :--- | :--- | :--- |
|  |  | Average | Weighted\tAverage\tRemaining |  |
|  | Shares | Grant\tDate | Contractual\tTerm | Aggregate\tIntrinsic |
|  | (in\tthousands) | Fair\tValue | (in\tyears) | Value\t(in\tmillions) |
| Nonvested\tat\tJanuary\t1,\t2007 | 3,669 | $71.64 |  |  |
| Vested | (269) | 71.00 |  |  |
| Granted | 1,113 | 70.90 |  |  |
| Reinvested\tDividends | 107 | N/A |  |  |
| Forfeited\t/\tExpired | (203) | 71.23 |  |  |
| Nonvested\tat\tDecember\t31,\t2007 | 4,417 | 71.50 | 2.47 | $312 |
| RPUs\tExpected\tto\tVest | 4,062 | 71.44 | 2.33 | $287 |

The	fair	value	of	each	RPU	is	the	NYSE	closing	price	on	the	date	of	grant.	The	weighted-average	grant	date	fair	value	of	RPUs	granted	during	2007,	2006,	and 2005	was	$70.90,	$80.88,	and	$72.07,	respectively.	The	total	fair	value	of	RPUs	vested	during	2007,	2006,	and	2005	was	$19,	$13,	and	$13	million,	respectively.	As	of December	31,	2007,	there	was	$131	million	of	total	unrecognized	compensation	cost	related	to	nonvested	RPUs.	That	cost	is	expected	to	be	recognized	over	a	weighted average	period	of	3	years	and	3	months.

# Discounted	Employee	Stock	Purchase	Plan

We	maintain	an	employee	stock	purchase	plan	for	all	eligible	employees.	Under	the	plan,	shares	of	UPS	class	A	common	stock	may	be	purchased	at	quarterly intervals	at	90%	of	the	lower	of	the	NYSE	closing	price	of

UPS	class	B	common	stock	on	the	first	or	the	last	day	of	each	quarterly	period.	Employees	purchased	1.8,	1.9,	and	2.0	million	shares	at	average	prices	of	$64.20,	$66.64, and	$64.54	per	share	during	2007,	2006,	and	2005,	respectively.	Compensation	cost	is	measured	for	the	fair	value	of	employees'	purchase	rights	under	our	discounted employee	stock	purchase	plan	using	the	Black-Scholes	option	pricing	model.

The	weighted	average	assumptions	used	and	the	calculated	weighted	average	fair	value	of	employees'	purchase	rights	granted,	are	as	follows:

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Expected\tdividend\tyield | 2.13% | 1.79% | 1.62% |
| Risk-free\tinterest\trate | 4.60% | 4.59% | 2.84% |
| Expected\tlife\tin\tyears | 0.25 | 0.25 | 0.25 |
| Expected\tvolatility | \t 16.26% | \t 15.92% | \t 15.46% |
| Weighted\taverage\tfair\tvalue\tof\tpurchase\trights* | $9.80 | $10.30 | $9.46 |

* Includes	the	10%	discount	from	the	market	price.

Expected	volatilities	are	based	on	the	historical	price	volatility	on	our	publicly-traded	class	B	shares.	The	expected	dividend	yield	is	based	on	the	recent	historical dividend	yields	for	our	stock,	taking	into	account	changes	in	dividend	policy.	The	risk-free	interest	rate	is	based	on	the	term	structure	of	interest	rates	on	U.S.	Treasury securities	at	the	time	of	the	option	grant.	The	expected	life	represents	the	three	month	option	period	applicable	to	the	purchase	rights.

# NOTE	12.	SEGMENT	AND	GEOGRAPHIC	INFORMATION

We	report	our	operations	in	three	segments:	U.S.	Domestic	Package	operations,	International	Package	operations,	and	Supply	Chain	&	Freight	operations. Package	operations	represent	our	most	significant	business	and	are	broken	down	into	regional	operations	around	the	world.	Regional	operations	managers	are	responsible for	both	domestic	and	export	operations	within	their	geographic	area.

Domestic	Package	operations	include	the	time-definite	delivery	of	letters,	documents,	and	packages	throughout	the	United	States.

International	Package	operations	include	delivery	to	more	than	200	countries	and	territories	worldwide,	including	shipments	wholly	outside	the	United	States,	as well	as	shipments	with	either	origin	or	distribution	outside	the	United	States.	Our	International	Package	reporting	segment	includes	the	operations	of	our	Europe,	Asia, and	Americas	operating	segments.

# Supply	Chain	&	Freight

Supply	Chain	&	Freight	includes	our	forwarding	and	logistics	operations,	UPS	Freight,	and	other	aggregated	business	units.	Our	forwarding	and	logistics business	provides	services	in	more	than	175	countries	and	territories	worldwide,	and	includes	supply	chain	design	and	management,	freight	distribution,	customs brokerage,	mail	and	consulting	services.	UPS	Freight	offers	a	variety	of	LTL	and	TL	services	to	customers	in	North	America.	Other	aggregated	business	units	within	this segment	include	Mail	Boxes,	Etc.	(the	franchisor	of	Mail	Boxes,	Etc.	and	The	UPS	Store)	and	UPS	Capital.

In	evaluating	financial	performance,	we	focus	on	operating	profit	as	a	segment's	measure	of	profit	or	loss.	Operating	profit	is	before	investment	income,	interest expense,	and	income	taxes.	The	accounting	policies	of	the	reportable	segments	are	the	same	as	those	described	in	the	summary	of	accounting	policies	(see	Note	1),	with certain	expenses	allocated	between	the	segments	using	activity-based	costing	methods.	Unallocated	assets	are	comprised	primarily	of	cash,	marketable	securities,	short- term	investments,	and	equity-method	real	estate	investments.

Segment	information	as	of,	and	for	the	years	ended,	December	31	is	as	follows	(in	millions):

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Revenue: |  |  |  |
| U.S.\tDomestic\tPackage | $30,985 | $30,456 | $28,610 |
| International\tPackage | \t 10,281 | 9,089 | 7,977 |
| Supply\tChain\t&amp;\tFreight | 8,426 | 8,002 | 5,994 |
| Consolidated | $49,692 | $47,547 | $42,581 |
| Operating\tProfit\t(Loss): |  |  |  |
| U.S.\tDomestic\tPackage | $(1,531) | $4,923 | $4,493 |
| International\tPackage | 1,831 | 1,710 | 1,494 |
| Supply\tChain\t&amp;\tFreight | 278 | 2 | 156 |
| Consolidated | $578 | $6,635 | $6,143 |
| Assets: |  |  |  |
| U.S.\tDomestic\tPackage | $23,756 | $19,274 | $20,572 |
| International\tPackage | 5,994 | 5,496 | 4,931 |
| Supply\tChain\t&amp;\tFreight | 7,606 | 7,150 | 7,116 |
| Unallocated | 1,686 | 1,290 | 2,328 |
| Consolidated | $39,042 | $33,210 | $34,947 |
| Depreciation\tand\tAmortization\tExpense: |  |  |  |
| U.S.\tDomestic\tPackage | $979 | $989 | $1,005 |
| International\tPackage | 546 | 547 | 491 |
| Supply\tChain\t&amp;\tFreight | 220 | 212 | 148 |
| Consolidated | $1,745 | $1,748 | $1,644 |

Revenue	by	product	type	for	the	years	ended	December	31	is	as	follows	(in	millions):

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| U.S.\tDomestic\tPackage: |  |  |  |
| Next\tDay\tAir | $6,738 | $6,778 | $6,381 |
| Deferred | 3,359 | 3,424 | 3,258 |
| Ground | 20,888 | 20,254 | 18,971 |
| Total\tU.S.\tDomestic\tPackage | 30,985 | 30,456 | 28,610 |
| International\tPackage: |  |  |  |
| Domestic | 2,177 | 1,950 | 1,588 |
| Export | 7,488 | 6,554 | 5,856 |
| Cargo | 616 | 585 | 533 |
| Total\tInternational\tPackage | 10,281 | 9,089 | 7,977 |
| Supply\tChain\t&amp;\tFreight: |  |  |  |
| Forwarding\tand\tLogistics | 5,911 | 5,681 | 4,859 |
| Freight | 2,108 | 1,952 | 797 |
| Other | 407 | 369 | 338 |
| Total\tSupply\tChain\t&amp;\tFreight | 8,426 | 8,002 | 5,994 |
| Consolidated | $49,692 | $47,547 | $ 42,581 |

Geographic	information	as	of,	and	for	the	years	ended,	December	31	is	as	follows	(in	millions):

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| United\tStates: |  |  |  |
| Revenue | $37,741 | $36,805 | $ 33,987 |
| Long-lived\tassets | $21,662 | $18,659 | $ 19,704 |
| International: |  |  |  |
| Revenue | $11,951 | $10,742 | $8,594 |
| Long-lived\tassets | $5,189 | $4,800 | $4,044 |
| Consolidated: |  |  |  |
| Revenue | $49,692 | $47,547 | $ 42,581 |
| Long-lived\tassets | $26,851 | $23,459 | $ 23,748 |

In	2007,	we	modified	the	allocation	of	certain	air	products	between	the	U.S.	origin	and	International	origin	revenue	data	presented	above.	As	a	result,	we	have reclassified	approximately	$2.360	and	$2.116	billion	in	2006	and	2005	revenue,	respectively,	from	International	to	U.S.	origin	services,	to	be	consistent	with	the	2007 presentation.	Long-lived	assets	include	property,	plant	and	equipment,	pension	and	postretirement	benefit	assets,	long-term	investments,	goodwill,	and	intangible	assets.

# NOTE	13.	INCOME	TAXES

The	income	tax	expense	(benefit)	for	the	years	ended	December	31	consists	of	the	following	(in	millions):

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Current: |  |  |  |
| U.S.\tFederal | $35 | $1,674 | $1,683 |
| U.S.\tState\tand\tLocal | 67 | 217 | 176 |
| Non-U.S. | 107 | 129 | 135 |
| Total\tCurrent | 209 | \t 2,020 | \t 1,994 |
| Deferred: |  |  |  |
| U.S.\tFederal | (79) | 291 | 211 |
| U.S.\tState\tand\tLocal | (36) | 33 | 6 |
| Non-U.S. | (45) | (36) | (6) |
| Total\tDeferred | (160) | 288 | 211 |
| Total | $49 | $2,308 | $2,205 |

Income	before	income	taxes	includes	the	following	components	(in	millions):

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| United\tStates | $ (32) | $6,020 | $5,738 |
| Non-U.S. | \t 463 | 490 | 337 |
|  | $431 | $6,510 | $6,075 |

A	reconciliation	of	the	statutory	federal	income	tax	rate	to	the	effective	income	tax	rate	for	the	years	ended	December	31	consists	of	the	following:

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Statutory\tU.S.\tfederal\tincome\ttax\trate | 35.0% | 35.0% | 35.0% |
| U.S.\tstate\tand\tlocal\tincome\ttaxes\t(net\tof\tfederal\tbenefit) | 0.5 | 2.2 | 2.0 |
| Non-U.S.\ttax\trate\tdifferential | (21.6) | (1.2) | 0.2 |
| Nondeductible/nontaxable\titems | 3.1 | 1.4 | (0.1) |
| U.S.\tfederal\ttax\tcredits | (22.0) | (2.0) | (1.3) |
| Other | 16.5 | 0.1 | 0.5 |
| Effective\tincome\ttax\trate | 11.5% | 35.5% | 36.3% |

During	the	third	quarter	of	2006,	we	recognized	a	$52	million	reduction	of	income	tax	expense	related	to	favorable	developments	with	certain	U.S.	federal	tax contingency	matters	involving	non-U.S.	operations.

Deferred	tax	liabilities	and	assets	are	comprised	of	the	following	at	December	31	(in	millions):

|  | 2007 | 2006 |
| :--- | :--- | :--- |
| Property,\tplant\tand\tequipment | $2,864 | $2,802 |
| Goodwill\tand\tintangible\tassets | 636 | 578 |
| Pension\tplans | 693 | 579 |
| Other | 355 | 343 |
| Gross\tdeferred\ttax\tliabilities | \t 4,548 | \t 4,302 |
| Other\tpostretirement\tbenefits | 890 | 789 |
| Loss\tand\tcredit\tcarryforwards\t(non-U.S.\tand\tstate) | 189 | 130 |
| Insurance\treserves | 606 | 586 |
| Vacation\tpay\taccrual | 185 | 171 |
| Other | 738 | 659 |
| Gross\tdeferred\ttax\tassets | \t 2,608 | \t 2,335 |
| Deferred\ttax\tassets\tvaluation\tallowance | (56) | (43) |
| Net\tdeferred\ttax\tassets | \t 2,552 | \t 2,292 |
| Net\tdeferred\ttax\tliability | $1,996 | $2,010 |
| Amounts\trecognized\tin\tthe\tbalance\tsheet: |  |  |
| Current\tdeferred\ttax\tasset | $605 | $414 |
| Non-current\tdeferred\ttax\tasset | $19 | $105 |
| Non-current\tdeferred\ttax\tliabilities | $2,620 | $2,529 |

As	of	December	31,	2007,	we	have	U.S.	state	&	local	operating	loss	and	credit	carryforwards	of	approximately	$1.773	billion	and	$68	million,	respectively.	The operating	loss	carryforwards	expire	at	varying	dates	through	2027.	The	state	credits	can	be	carried	forward	for	periods	ranging	from	three	years	to	indefinitely.	We	also have	non-U.S.	loss	carryforwards	of	approximately	$793	million	as	of	December	31,	2007,	the	majority	of	which	may	be	carried	forward	indefinitely.	As	indicated	in	the table	above,	we	have	established	a	valuation	allowance	for	certain	non-U.S.	and	state	loss	carryforwards,	due	to	the	uncertainty	resulting	from	a	lack	of	previous	taxable income	within	the	applicable	tax	jurisdictions.

Undistributed	earnings	of	our	non-U.S.	subsidiaries	amounted	to	approximately	$1.720	billion	at	December	31,	2007.	Those	earnings	are	considered	to	be indefinitely	reinvested	and,	accordingly,	no	U.S.	federal	or	state	deferred	income	taxes	have	been	provided	thereon.	Upon	distribution	of	those	earnings	in	the	form	of dividends	or	otherwise,	we	would	be	subject	to	U.S.	income	taxes	and	withholding	taxes	payable	in	various	non-U.S.	jurisdictions,	which	could	potentially	be	offset	by foreign	tax	credits.	Determination	of	the	amount	of	unrecognized	deferred	U.S.	income	tax	liability	is	not	practicable	because	of	the	complexities	associated	with	its hypothetical	calculation.

We	adopted	FIN	48	on	January	1,	2007.	The	cumulative	effect	of	adopting	this	standard	was	to	recognize	a	$104	million	decrease	in	the	January	1,	2007	balance of	retained	earnings.

The	following	table	summarizes	the	activity	related	to	our	unrecognized	tax	benefits	(in	millions):

As	of	December	31,	2007,	the	total	amount	of	gross	unrecognized	tax	benefits	that,	if	recognized,	would	affect	the	effective	tax	rate	was	$134	million.	We	also had	gross	recognized	tax	benefits	of	$567	million	recorded	as	of	December	31,	2007	associated	with	outstanding	refund	claims	for	prior	tax	years.	Therefore,	we	had	a net	receivable	recorded	with	respect	to	prior	year	income	tax	matters	in	the	accompanying	balance	sheets.

Our	continuing	practice	is	to	recognize	interest	and	penalties	associated	with	income	tax	matters	as	a	component	of	income	tax	expense.	Related	to	the	uncertain tax	benefits	noted	above,	we	accrued	penalties	of	$5	million	and	interest	of	$36	million	during	2007.	As	of	December	31,	2007,	we	have	recognized	a	liability	for penalties	of	$6	million	and	interest	of	$75	million.	Additionally,	we	have	recognized	a	receivable	for	interest	of	$116	million	for	the	recognized	tax	benefits	associated with	outstanding	refund	claims.

We	file	income	tax	returns	in	the	U.S.	federal	jurisdiction,	most	U.S.	state	and	local	jurisdictions,	and	many	non-U.S.	jurisdictions.	As	of	December	31,	2007,	we had	substantially	resolved	all	U.S.	federal	income	tax	matters	for	tax	years	prior	to	1999.	In	the	third	quarter	of	2007,	we	entered	into	a	Joint	Stipulation	to	Dismiss	the case	with	the	Department	of	Justice,	effectively	withdrawing	our	refund	claim	related	to	the	1994	disposition	of	a	subsidiary	in	France.	The	write-off	of	previously recognized	tax	receivable	balances	associated	with	the	1994	French	matter	resulted	in	a	$37	million	increase	in	income	tax	expense	for	the	quarter.	However,	this increase	was	offset	by	the	impact	of	favorable	developments	with	various	other	U.S.	federal,	U.S.	state,	and	non-U.S.	contingency	matters.	In	February	2008,	the	IRS completed	its	audit	of	the	tax	years	1999	through	2002	with	only	a	limited	number	of	issues	that	will	be	considered	by	the	IRS	Appeals	Office	by	2009.	The	IRS	is	in	the final	stages	of	completing	its	audit	of	the	tax	years	2003	through	2004.	We	anticipate	that	the	IRS	will	conclude	its	audit	of	the	2003	and	2004	tax	years	by	2009.	With few	exceptions,	we	are	no	longer	subject	to	U.S.	state	and	local	and	non-U.S.	income	tax	examinations	by	tax	authorities	for	tax	years	prior	to	1999,	but	certain	U.S. state	and	local	matters	are	subject	to	ongoing	litigation.

A	number	of	years	may	elapse	before	an	uncertain	tax	position	is	audited	and	ultimately	settled.	It	is	difficult	to	predict	the	ultimate	outcome	or	the	timing	of resolution	for	uncertain	tax	positions.	It	is	reasonably	possible	that	the	amount	of	unrecognized	tax	benefits	could	significantly	increase	or	decrease	within	the	next twelve	months.	Items	that	may	cause	changes	to	unrecognized	tax	benefits	include	the	timing	of	interest	deductions,	the	deductibility	of	acquisition	costs,	the consideration	of	filing	requirements	in	various	states,	the	allocation	of	income	and	expense	between	tax	jurisdictions	and	the	effects	of	terminating	an	election	to	have	a foreign	subsidiary	join	in	filing	a	consolidated	return.	These	changes	could	result	from	the	settlement	of	ongoing	litigation,	the	completion	of	ongoing	examinations,	the expiration	of	the	statute	of	limitations,	or	other	unforeseen	circumstances.	At	this	time,	an	estimate	of	the	range	of	the	reasonably	possible	change	cannot	be	made.

# NOTE	14.	EARNINGS	PER	SHARE

The	following	table	sets	forth	the	computation	of	basic	and	diluted	earnings	per	share	(in	millions	except	per	share	amounts):

|  | 2007 | 2006 | 2005 |
| :--- | :--- | :--- | :--- |
| Numerator:\nNet\tincome | $382 | $4,202 | $3,870 |
| Denominator: |  |  |  |
| Weighted\taverage\tshares | \t 1,055 | \t 1,082 | \t 1,110 |
| Deferred\tcompensation\tobligations | 2 | 3 | 3 |
| Denominator\tfor\tbasic\tearnings\tper\tshare | \t 1,057 | \t 1,085 | \t 1,113 |
| Effect\tof\tdilutive\tsecurities: |  |  |  |
| Restricted\tperformance\tunits | 2 | 1 | 1 |
| Restricted\tstock\tunits | 2 | 1 | — |
| Stock\toptions | 2 | 2 | 2 |
| Denominator\tfor\tdiluted\tearnings\tper\tshare | \t 1,063 | \t 1,089 | \t 1,116 |
| Basic\tearnings\tper\tshare | $0.36 | $3.87 | $3.48 |
| Diluted\tearnings\tper\tshare | $0.36 | $3.86 | $3.47 |

Diluted	earnings	per	share	for	the	years	ended	December	31,	2007,	2006,	and	2005	exclude	the	effect	of	8.9,	6.3,	and	5.9	million	shares,	respectively,	of	common stock	that	may	be	issued	upon	the	exercise	of	employee	stock	options	because	such	effect	would	be	antidilutive.

# NOTE	15.	DERIVATIVE	INSTRUMENTS	AND	RISK	MANAGEMENT

We	are	exposed	to	market	risk,	primarily	related	to	foreign	exchange	rates,	commodity	prices,	equity	prices,	and	interest	rates.	These	exposures	are	actively monitored	by	management.	To	manage	the	volatility	relating	to	certain	of	these	exposures,	we	enter	into	a	variety	of	derivative	financial	instruments.	Our	objective	is	to reduce,	where	it	is	deemed	appropriate	to	do	so,	fluctuations	in	earnings	and	cash	flows	associated	with	changes	in	foreign	currency	rates,	commodity	prices,	equity prices,	and	interest	rates.	It	is	our	policy	and	practice	to	use	derivative	financial	instruments	only	to	the	extent	necessary	to	manage	exposures.	As	we	use	price	sensitive instruments	to	hedge	a	certain	portion	of	our	existing	and	anticipated	transactions,	we	expect	that	any	loss	in	value	for	those	instruments	generally	would	be	offset	by increases	in	the	value	of	those	hedged	transactions.

We	do	not	hold	or	issue	derivative	financial	instruments	for	trading	or	speculative	purposes.

# Commodity	Price	Risk	Management

We	are	exposed	to	changes	in	the	prices	of	refined	fuels,	principally	jet-A,	diesel,	and	unleaded	gasoline.	Currently,	the	fuel	surcharges	that	we	apply	to	our domestic	and	international	package	and	LTL	services	are	the	primary	means	of	reducing	the	risk	of	adverse	fuel	price	changes.	Additionally,	we	use	a	combination	of options	contracts	to	provide	partial	protection	from	changing	fuel	and	energy	prices.	The	net	fair	value	of	such	contracts	subject	to	price	risk,	excluding	the	underlying exposures,	as	of	December	31,	2007	and	2006	was	an	asset	(liability)	of	$(179)	and	$10	million,	respectively.	We	have	designated	and	account	for	these	contracts	as	cash

flow	hedges,	and	to	the	extent	the	hedges	remain	effective,	the	resulting	gains	and	losses	from	these	hedges	are	recognized	in	the	income	statement	when	the	underlying fuel	or	energy	product	being	hedged	is	consumed.

In	the	second	quarter	of	2006,	we	terminated	several	energy	derivatives	and	received	$229	million	in	cash,	which	is	reported	in	other	investing	activities	in	the statement	of	cash	flows.	These	derivatives	were	designated	as	hedges	of	forecasted	cash	outflows	for	purchases	of	fuel	products.	As	these	derivatives	maintained	their effectiveness	and	qualified	for	hedge	accounting,	the	gains	associated	with	these	hedges	were	recognized	in	income	over	the	original	term	of	the	hedges	through	the	end of	2007.

# Foreign	Currency	Exchange	Risk	Management

We	have	foreign	currency	risks	related	to	our	revenue,	operating	expenses,	and	financing	transactions	in	currencies	other	than	the	local	currencies	in	which	we operate.	We	are	exposed	to	currency	risk	from	the	potential	changes	in	functional	currency	values	of	our	foreign	currency	denominated	assets,	liabilities,	and	cash	flows. Our	most	significant	foreign	currency	exposures	relate	to	the	Euro,	the	British	Pound	Sterling,	and	the	Canadian	Dollar.	We	use	a	combination	of	purchased	and	written options	and	forward	contracts	to	hedge	currency	cash	flow	exposures.	As	of	December	31,	2007	and	2006,	the	net	fair	value	of	the	hedging	instruments	described	above was	an	asset	(liability)	of	$(42)	and	$30,	respectively.	We	have	designated	and	account	for	these	contracts	as	cash	flow	hedges	of	anticipated	foreign	currency denominated	revenue	and,	therefore,	the	resulting	gains	and	losses	from	these	hedges	are	recognized	as	a	component	of	international	package	revenue	when	the underlying	sales	occur.

# Interest	Rate	Risk	Management

Our	indebtedness	under	our	various	financing	arrangements	creates	interest	rate	risk.	We	use	a	combination	of	derivative	instruments,	including	interest	rate swaps	and	cross-currency	interest	rate	swaps,	as	part	of	our	program	to	manage	the	fixed	and	floating	interest	rate	mix	of	our	total	debt	portfolio	and	related	overall	cost of	borrowing.	These	swaps	are	entered	into	concurrently	with	the	issuance	of	the	debt	that	they	are	intended	to	modify,	and	the	notional	amount,	interest	payment,	and maturity	dates	of	the	swaps	match	the	terms	of	the	associated	debt.	Interest	rate	swaps	allow	us	to	maintain	a	target	range	of	floating	rate	debt.

We	have	designated	and	account	for	these	contracts	as	either	hedges	of	the	fair	value	of	the	associated	debt	instruments,	or	as	hedges	of	the	variability	in	expected future	interest	payments.	Any	periodic	settlement	payments	are	accrued	monthly,	as	either	a	charge	or	credit	to	interest	expense,	and	are	not	material	to	net	income.	The net	fair	value	of	our	interest	rate	swaps	at	December	31,	2007	and	2006	was	a	liability	of	$94	and	$79	million,	respectively.

# Credit	Risk	Management

# Derivatives	Not	Designated	As	Hedges

Derivatives	not	designated	as	hedges	primarily	consist	of	a	small	portfolio	of	stock	warrants	in	public	and	private	companies	that	are	held	for	investment purposes.	These	warrants	are	recorded	at	fair	value,	and	the	impact	of	these	warrants	on	our	results	was	immaterial	for	2007,	2006	and	2005.

# Income	Effects	of	Derivatives

In	the	context	of	hedging	relationships,	"effectiveness"	refers	to	the	degree	to	which	fair	value	changes	in	the	hedging	instrument	offset	corresponding	changes	in the	hedged	item.	Certain	elements	of	hedge	positions	cannot	qualify	for	hedge	accounting	under	FAS	133	whether	effective	or	not,	and	must	therefore	be	marked	to market	through	income.	Both	the	effective	and	ineffective	portions	of	gains	and	losses	on	hedges	are	reported	in	the	income	statement	category	related	to	the	hedged exposure.	Ineffectiveness	included	in	the	income	statement	was	a	loss	of	$12	million	for	2007,	and	was	immaterial	for	2006	and	2005.	The	elements	excluded	from	the measure	of	effectiveness	were	immaterial	for	2007,	2006	and	2005.

As	of	December	31,	2007,	$296	million	in	pre-tax	losses	related	to	cash	flow	hedges	that	are	currently	deferred	in	OCI	are	expected	to	be	reclassified	to	income over	the	12	month	period	ending	December	31,	2008.	The	actual	amounts	that	will	be	reclassified	to	income	over	the	next	12	months	will	vary	from	this	amount	as	a result	of	changes	in	market	conditions.	No	amounts	were	reclassified	to	income	during	2007	in	connection	with	forecasted	transactions	that	were	no	longer	considered probable	of	occurring.

At	December	31,	2007,	the	maximum	term	of	derivative	instruments	that	hedge	forecasted	transactions	was	2	years.

# Fair	Value	of	Financial	Instruments

At	December	31,	2007	and	2006,	our	financial	instruments	included	cash	and	cash	equivalents,	marketable	securities	and	short-term	investments,	accounts receivable,	finance	receivables,	accounts	payable,	short-term	and	long-term	borrowings,	and	commodity,	interest	rate,	foreign	currency,	and	equity	options,	forwards, and	swaps.	The	fair	values	of	cash	and	cash	equivalents,	accounts	receivable,	and	accounts	payable	approximate	carrying	values	because	of	the	short-term	nature	of these	instruments.	The	fair	value	of	our	marketable	securities	and	short-term	investments	is	disclosed	in	Note	2,	finance	receivables	in	Note	3,	and	debt	instruments	in Note	8.

# NOTE	16.	RESTRUCTURING	COSTS	AND	RELATED	EXPENSES

In	connection	with	recent	acquisitions	and	integration	initiatives,	we	have	incurred	restructuring	costs	associated	with	the	termination	of	employees,	facility consolidations	and	other	costs	directly	related	to	the	restructuring	initiatives	implemented.	These	costs	have	resulted	from	the	integration	of	our	Menlo	Worldwide Forwarding	and	Lynx	acquisitions	as	well	as	restructuring	activities	associated	with	our	Supply	Chain	Solutions	operations.	For	specific	restructuring	costs	recognized in	conjunction	with	the	cost	from	acquisitions,	we	have	accounted	for	these	costs	in	accordance	with	EITF	95-3,	"Recognition	of	Liabilities	Assumed	in	Connection with	a	Purchase	Business	Combination."	All	other	restructuring	costs	have	been	accounted	for	in	accordance	with	SFAS	No.	146,	"Accounting	for	Costs	Associated	with Exit	or	Disposal	Activities"	and	SFAS	No.	144,	"Accounting	for	the	Impairment	or	Disposal	of	Long-Lived	Assets."

# Menlo	Worldwide	Forwarding

In	February	2005,	we	announced	our	intention	to	transfer	the	heavy	air	freight	operations	at	our	facility	in	Dayton,	Ohio	(acquired	with	the	operations	of	Menlo Worldwide	Forwarding	in	December	2004)	to	other	UPS	facilities	over	approximately	12	to	18	months.	This	action	was	taken	to	remove	redundancies	between	the Dayton	air	freight	facility	and	existing	UPS	transportation	networks,	and	thus	provide	efficiencies	and	better	leverage	the	current	UPS	infrastructure	in	the	movement	of air	freight.	During	the	third	quarter	of	2005,	we	finalized	our

plans	to	exit	the	Dayton	facility,	as	well	as	various	other	acquired	facilities,	and	accrued	certain	costs	related	to	employee	severance,	lease	terminations,	and	related items.	As	part	of	this	restructuring	program,	the	recorded	value	of	the	Dayton	facility	was	reduced	to	its	fair	market	value	as	of	the	date	of	the	acquisition.	These	accrued costs,	and	related	reductions	in	the	fair	value	of	recorded	assets,	resulted	in	an	adjustment	of	$160	million	to	the	amount	of	goodwill	initially	recorded	in	the	Menlo Worldwide	Forwarding	acquisition.

Additionally,	we	incurred	costs	related	to	integration	activities,	such	as	employee	relocations,	the	moving	of	inventory	and	fixed	assets,	and	the	consolidation	of information	systems,	and	these	amounts	were	expensed	as	incurred.	We	completed	the	majority	of	our	integration	activities	for	the	air	freight	restructuring	program	in the	fourth	quarter	of	2006.	The	remaining	restructuring	liabilities	primarily	represent	costs	that	will	continue	to	be	incurred	under	various	long-term	contracts	without any	economic	benefit	to	our	Company.

Set	forth	below	is	a	summary	of	activity	related	to	the	air	freight	restructuring	program	and	resulting	liability	for	the	year	ended	December	31,	2007	(in	millions):

|  | Employee | Asset | Facility |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Severance | Impairment | Consolidation | Other | Total |
| Balance\tat\tJanuary\t1,\t2005 | $— | $— | $— | $— | $— |
| Costs\taccrued | 31 | 56 | 48 | 25 | \t 160 |
| Cash\tspent | (7) | — | (1) | \t — | (8) |
| Charges\tagainst\tassets | — | (56) | — | \t — | (56) |
| Balance\tat\tDecember\t31,\t2005 | 24 | — | 47 | 25 | 96 |
| Cash\tspent | (17) | — | (3) | (10) | (30) |
| Charges\tagainst\tassets | — | — | — | \t — | \t — |
| Reversals,\tcurrency,\tand\tother | (7) | — | (4) | (2) | (13) |
| Balance\tat\tDecember\t31,\t2006 | $— | $— | $40 | $13 | $53 |
| Cash\tspent | — | — | (3) | (4) | (7) |
| Charges\tagainst\tassets | — | — | — | \t — | \t — |
| Reversals,\tcurrency,\tand\tother | — | — | (5) | (1) | (6) |
| Balance\tat\tDecember\t31,\t2007 | $— | $— | $32 | $8 | $40 |

Employee	severance	costs	related	to	severance	packages	for	approximately	550	people.	These	packages	were	involuntary	and	were	formula-driven	based	on	salary levels	and	past	service.	The	separations	spanned	the	entire	business	unit,	including	the	operations,	information	technology,	finance,	and	business	development	functions. Asset	impairment	charges	resulted	from	establishing	new	carrying	values	for	assets	which	were	abandoned.	Impaired	assets	consisted	primarily	of	the	Menlo	Worldwide Forwarding	facility	in	Dayton,	Ohio,	which	we	closed	in	June	2006.	Facility	consolidation	costs	are	associated	with	terminating	operating	leases	on	offices,	warehouses, and	other	acquired	facilities	as	well	as	other	maintenance	costs	associated	with	certain	facilities.	Other	costs	consist	primarily	of	costs	associated	with	the	termination	of certain	acquired	legal	entities	and	joint	ventures,	as	well	as	environmental	remediation	costs.

# Lynx	Express	Ltd.

In	conjunction	with	our	integration	of	the	Lynx	business,	in	2006	we	implemented	a	series	of	initiatives	to	reduce	operating	costs	and	maximize	the	efficiencies	of the	UPS	network	in	the	United	Kingdom.	These	initiatives	include	closing	existing	hubs	and	constructing	a	consolidated	sorting	facility	as	well	as	establishing	a

European	shared	service	center	in	Poland.	As	a	result	of	these	initiatives,	we	accrued	certain	costs	related	to	employee	severance,	lease	terminations	and	other	facility costs	as	well	as	recorded	a	reduction	in	the	fair	value	of	certain	assets	acquired.	The	restructuring	costs	that	impacted	the	acquired	Lynx	business	resulted	in	an adjustment	to	goodwill	of	$7	million	in	2006.	The	remaining	integration	costs	for	this	restructuring	program,	including	facility	costs	associated	with	capacity	expansion, will	be	recognized	as	expense	when	incurred.	We	anticipate	completing	this	integration	program	during	2008	at	which	time	certain	hubs	will	be	closed	and	the	new consolidated	sorting	facility	will	be	fully	operational.

# Supply	Chain	Solutions

In	an	effort	to	rationalize	our	cost	structure	and	focus	on	profitable	revenue	growth,	we	initiated	a	restructuring	plan	for	our	Supply	Chain	Solutions	forwarding	& logistics	operations	in	the	fourth	quarter	of	2006.	This	restructuring	involved	a	reduction	of	non-operating	expenses	by	approximately	20%,	including	a	reduction	in	non- operating	staff	of	approximately	1,400	people.	During	2006,	$12	million	in	costs	were	accrued	related	to	employee	severance.

In	the	third	quarter	of	2007,	we	initiated	a	restructuring	plan	for	our	forwarding	and	logistics	operations	in	France.	The	objective	of	this	restructuring	plan	was	to reduce	our	forwarding	and	logistics	cost	structure	and	focus	on	profitable	revenue	growth	in	the	Europe	region.	The	restructuring	principally	consisted	of	an employment	reduction	program	which	included	a	voluntary	termination	phase	followed	by	an	involuntary	termination	phase.	The	employment	reduction	program	was ratified	by	our	company's	trade	union	representatives	in	France	in	July	2007	and	communicated	to	employees	immediately	following	the	ratification.	Employees participating	in	this	program	are	entitled	to	severance	benefits,	including	certain	bonuses	for	employees	participating	in	the	voluntary	termination	phase.	These	severance benefits	are	formula-driven	and	are	in	accordance	with	French	statutory	laws	as	well	as	the	applicable	collective	bargaining	agreements.	The	employment	reduction program	resulted	in	103	employees	accepting	the	voluntary	termination	offer	and	342	positions	identified	for	the	involuntary	termination	program.	The	restructuring	also included	costs	incurred	related	to	contract	terminations	for	leased	facilities,	vehicles	and	equipment	as	well	as	impairment	charges	associated	with	long-lived	assets.	We have	recorded	a	restructuring	charge	of	$42	million	related	to	severance	costs	and	$4	million	for	impairments	and	other	contract	termination	costs.	We	anticipate completing	this	restructuring	plan	during	2008.

# UPS	Special	Voluntary	Separation	Opportunity

In	December	2006,	we	offered	a	special	voluntary	separation	opportunity	("SVSO")	to	approximately	640	employees	who	work	in	non-operating	functions.	This program	was	established	to	improve	the	efficiency	of	non-operating	processes	by	eliminating	duplication	and	sharing	expertise	across	the	company.	The	SVSO	ended	in February	2007,	and	195,	or	30%	of	eligible	employees,	accepted	the	offer.	As	a	result,	we	recorded	a	charge	to	expense	of	approximately	$68	million	in	the	first	quarter of	2007,	to	reflect	the	cash	payout	and	the	acceleration	of	stock	compensation	and	certain	retiree	healthcare	benefits	under	the	SVSO	program.	The	cash	payout	in	the first	quarter	of	2007	totaled	$35	million,	and	we	expect	to	pay	$28	million	in	the	first	quarter	of	2008	related	to	this	program.	The	$68	million	charge	is	included	in	the caption	"Compensation	and	benefits"	in	the	Statement	of	Consolidated	Income,	of	which	$53	million	impacted	our	U.S.	Domestic	Package	segment,	$8	million impacted	our	Supply	Chain	&	Freight	segment,	and	$7	million	impacted	our	International	Package	segment.

# NOTE	17.	QUARTERLY	INFORMATION	(unaudited)

|  | First	Quarter | First	Quarter | Second	Quarter | Second	Quarter | Third	Quarter | Third	Quarter | Fourth	Quarter | Fourth	Quarter |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 | 2007 | 2006 |
| Revenue: |  |  |  |  |  |  |  |  |
| U.S.\tDomestic\tPackage | $7,552 | $7,463 | $7,579 | $7,462 | $7,545 | $7,402 | $8,309 | $8,129 |
| International\tPackage | 2,385 | 2,161 | 2,500 | 2,233 | 2,529 | 2,251 | 2,867 | 2,444 |
| Supply\tChain\t&amp;\tFreight | 1,969 | 1,897 | 2,110 | 2,041 | 2,131 | 2,009 | 2,216 | 2,055 |
| Total\trevenue | 11,906 | 11,521 | 12,189 | 11,736 | 12,205 | 11,662 | 13,392 | 12,628 |
| Operating\tprofit\t(loss): |  |  |  |  |  |  |  |  |
| U.S.\tDomestic\tPackage | 941 | 1,185 | 1,192 | 1,234 | 1,228 | 1,208 | (4,892) | 1,296 |
| International\tPackage | 371 | 395 | 475 | 414 | 428 | 387 | 557 | 514 |
| Supply\tChain\t&amp;\tFreight | 46 | (25) | 98 | 47 | 52 | (19) | 82 | (1) |
| Total\toperating\tprofit\t(loss) | 1,358 | 1,555 | 1,765 | 1,695 | 1,708 | 1,576 | (4,253) | 1,809 |
| Net\tincome\t(loss) | $843 | $975 | $1,104 | $1,061 | $1,076 | $1,038 | $(2,641) | $1,128 |
| Earnings\t(loss)\tper\tshare: |  |  |  |  |  |  |  |  |
| Basic | $0.79 | $0.89 | $1.04 | $0.98 | $1.02 | $0.96 | $(2.52) | $1.05 |
| Diluted | $0.78 | $0.89 | $1.04 | $0.97 | $1.02 | $0.96 | $(2.52) | $1.04 |

First	quarter	2007	operating	profit	includes	the	aircraft	impairment	charge	of	$221	million	as	discussed	in	Note	1	($159	million	U.S.	Domestic	Package	and	$62 million	International	Package),	and	the	SVSO	charge	of	$68	million	as	discussed	in	Note	16	($53	million	U.S.	Domestic	Package,	$7	million	International	Package,	and $8	million	Supply	Chain	&	Freight).	The	after-tax	impact	of	these	two	charges	reduced	first	quarter	2007	net	income	by	$184	million,	which	reduced	basic	earnings	per share	by	$0.17,	and	diluted	earnings	per	share	by	$0.18.

Third	quarter	2007	operating	profit	includes	the	$46	million	charge	related	to	the	restructuring	of	our	France	forwarding	and	logistics	operations	within	our Supply	Chain	&	Freight	reporting	segment,	as	discussed	in	Note	16.	The	after-tax	impact	of	this	charge	reduced	third	quarter	2007	net	income	by	$31	million,	which reduced	basic	and	diluted	earnings	per	share	by	$0.03.

Fourth	quarter	2007	operating	profit	includes	the	$6.100	billion	charge	in	the	U.S.	Domestic	Package	segment	related	to	the	withdrawal	from	the	Central	States Pension	Fund,	as	discussed	in	Note	5.	The	after-tax	impact	of	this	charge	reduced	fourth	quarter	2007	net	income	by	$3.772	billion,	which	reduced	basic	earnings	per share	by	$3.60	and	diluted	earnings	per	share	by	$3.59.

# EXHIBIT	INDEX

4.13 — Selling	Agent	Agreement	relating	to	UPS	Notes	with	maturities	of	9	months	or	more	from	date	of	issue	(incorporated	by	reference	to	Exhibit	10.1	to Form	8-K	filed	November	21,	2006)	and	Form	of	Note	(incorporated	by	reference	to	Exhibit	4.1	to	Form	8-K	filed	September	12,	2003).

(3)									Amendment	No.	3	to	the	UPS	Savings	Plan	(incorporated	by	reference	to	Exhibit	10.4	to	Quarterly	Report	on	Form	10-Q	for	the	Quarter Ended	March	31,	2005).

		10.4 — Credit	Agreement	(364-Day	Facility)	dated	April	19,	2007	among	United	Parcel	Service,	Inc.,	the	initial	lenders	named	therein,	Citigroup	Global Markets	Inc.	and	J.P.	Morgan	Securities	Inc.	as	joint	arrangers	and	book	managers,	Barclays	Bank	PLC,	BNP	Paribas,	Mellon	Bank	N.A.,	and	Wells Fargo	Bank,	N.A.	as	co-documentation	agents,	Citibank,	N.A.	as	administrative	agent,	and	JPMorgan	Chase	Bank,	N.A.,	as	syndication	agent (incorporated	by	reference	to	Exhibit	10.1	to	Form	10-Q	for	the	Quarter	Ended	March	31,	2007).

		10.5 — Credit	Agreement	(5-Year	Facility)	dated	April	19,	2007	among	United	Parcel	Service,	Inc.,	the	initial	lenders	named	therein,	Citigroup	Global Markets	Inc.	and	J.P.	Morgan	Securities	Inc.	as	joint	arrangers	and	book	managers,	Barclays	Bank	PLC,	BNP	Paribas,	Mellon	Bank	N.A.,	and	Wells Fargo	Bank,	N.A.	as	co-documentation	agents,	Citibank,	N.A.	as	administrative	agent,	and	JPMorgan	Chase	Bank,	N.A.,	as	syndication	agent (incorporated	by	reference	to	Exhibit	10.1	to	Form	10-Q	for	the	Quarter	Ended	March	31,	2007).

		10.6 — Credit	Agreement	(364-Day	Facility)	dated	October	19,	2007	among	United	Parcel	Service,	Inc.,	the	initial	lenders	named	therein,	Citigroup	Global Markets	Inc.	as	arranger	and	book	manager,	and	Citibank,	N.A.	as	administrative	agent	(incorporated	by	reference	to	Exhibit	10.1	to	the	Current Report	on	Form	8-K	filed	on	October	23,	2007).

		10.7 — UPS	Excess	Coordinating	Benefit	Plan	(incorporated	by	reference	to	Exhibit	10.8	to	2003	Annual	Report	on	Form	10-K).

		10.8 — UPS	1996	Stock	Option	Plan,	as	amended	and	restated	(incorporated	by	reference	to	Exhibit	10.9	to	2003	Annual	Report	on	Form	10-K).

# Exhibit

# No. Description

10.9 — UPS	Qualified	Stock	Ownership	Plan	and	Trust	Agreement	(incorporated	by	reference	to	Exhibit	4.1	to	Registration	Statement	No.	333-67479,	filed November	18,	1998).

(1)									Amendment	No.	1	to	the	UPS	Qualified	Stock	Ownership	Plan	and	Trust	Agreement	(incorporated	by	reference	to	Exhibit	10.19(1)	to	1999 Annual	Report	on	Form	10-K).

(4)									Amendment	No.	4	to	the	UPS	Qualified	Stock	Ownership	Plan	and	Trust	Agreement	(incorporated	by	reference	to	Exhibit	10.19(4)	to	2000 Annual	Report	on	Form	10-K).

(5)									Amendment	No.	5	to	the	UPS	Qualified	Stock	Ownership	Plan	and	Trust	Agreement	(incorporated	by	reference	to	Exhibit	10.8(5)	to	2001 Annual	Report	on	Form	10-K).

(8)									Amendment	No.	8	to	the	UPS	Qualified	Stock	Ownership	Plan	and	Trust	Agreement	(incorporated	by	reference	to	Exhibit	10.10(8)	to	2003 Annual	Report	on	Form	10-K).

(10)						Amendment	No.	10	to	the	UPS	Qualified	Stock	Ownership	Plan	and	Trust	Agreement	(incorporated	by	reference	to	Exhibit	10.5	to	Quarterly Report	on	Form	10-Q	for	the	Quarter	Ended	March	31,	2005).

†	(11)		Amendment	No.	11	to	the	UPS	Qualified	Stock	Ownership	Plan	and	Trust	Agreement.

10.10 — Form	of	United	Parcel	Service,	Inc.	Incentive	Compensation	Plan	(incorporated	by	reference	to	the	registration	statement	on	Form	S-4	(No.	333- 83349),	filed	on	July	21,	1999,	as	amended).

(1)									Form	of	Non-Qualified	Stock	Option	Award	Agreement	and	Restricted	Performance	Unit	Award	Agreement	(incorporated	by	reference	to Exhibit	10.11(1)	to	2004	Annual	Report	on	Form	10-K).

(2)									Form	of	Restricted	Stock	Award	Agreement	(incorporated	by	reference	to	Exhibit	10.7	to	Quarterly	Report	on	Form	10-Q	for	the	Quarter Ended	March	31,	2005).

(3)									Form	of	Nonqualified	Stock	Option	Award	Agreement	(incorporated	by	reference	to	Exhibit	10.1	to	the	Current	Report	on	Form	8-K,	filed on	May	5,	2006).

(4)									Form	of	Restricted	Performance	Unit	Award	Agreement	(incorporated	by	reference	to	Exhibit	10.2	to	the	Current	Report	on	Form	8-K	filed on	May	5,	2006).

† Filed	herewith.



Question: what portion of total expected cash outflow for capital leases is due in 2018?
Calculation: capital_leases_2008 = 108
operating_leases_2008 = 378
debt_principal_2008 = 3426
debt_interest_2008 = 329
purchase_commitments_2008 = 1306
pension_fundings_2008 = 101
other_liabilities_2008 = 78
total_obligations_2008 = 619
percent_obligations_2008 = capital_leases_2008 / total_obligations_2008
answer = percent_obligations_2008 * 100
Answer: 17.4%