# Table	of	Contents

# 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,	2010

¨ 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)

(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

(Zip	Code)

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	whether	the	registrant	has	submitted	electronically	and	posted	on	its	corporate	Web	site,	if	any,	every	Interactive	Data	File	required	to	be	submitted	and	posted	pursuant	to	Rule	405	of Regulation	S-T	during	the	preceding	12	months	(or	for	such	shorter	period	that	the	registrant	was	required	to	submit	and	post	such	files).				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.		þ

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:

Large	accelerated	filer		þ 		 Accelerated	filer		¨ Non-accelerated	filer		¨ Smaller	reporting	company		¨

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	$41,146,287,739	as	of	June	30,	2010.	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	5,	2011	are	incorporated	by	reference	into	Part	III	of	this	report.

# ANNUAL	REPORT	ON	FORM	10-K	FOR	THE	YEAR	ENDED	DECEMBER	31,	2010

# PART	I

|  | UNITED	PARCEL	SERVICE,	INC.<br>ANNUAL	REPORT	ON	FORM	10-K	FOR	THE	YEAR	ENDED	DECEMBER	31,	2010<br>TABLE	OF	CONTENTS<br>PART	I |  |
| :--- | :--- | :--- |
| Item\t1. | Business | 1 |
|  | Overview | 1 |
|  | Operations | 2 |
|  | Products\tand\tServices | 4 |
|  | Technology | 5 |
|  | Sustainability | 6 |
|  | Sales\tand\tMarketing | 7 |
|  | Employees | 7 |
|  | Competition | 8 |
|  | Competitive\tStrengths | 8 |
|  | Government\tRegulation | 9 |
| Item\t1A. | Risk\tFactors | 11 |
| Item\t1B. | Unresolved\tStaff\tComments | 16 |
| Item\t2. | Properties | 16 |
|  | Operating\tFacilities | 16 |
|  | Fleet | 18 |
|  | Safety | 18 |
| Item\t3. | Legal\tProceedings | 19 |
| Item\t4. | Submission\tof\tMatters\tto\ta\tVote\tof\tSecurity\tHolders | 19 |
|  | PART\tII |  |
| Item\t5. | Market\tfor\tRegistrant's\tCommon\tEquity,\tRelated\tStockholder\tMatters\tand\tIssuer\tPurchases\tof\tEquity\tSecurities | 20 |
|  | Shareowner\tReturn\tPerformance\tGraph | 21 |
| Item\t6. | Selected\tFinancial\tData | 22 |
| Item\t7. | Management's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof\tOperations | 23 |
|  | Liquidity\tand\tCapital\tResources | 36 |
|  | Critical\tAccounting\tPolicies\tand\tEstimates | 45 |
| Item\t7A. | Quantitative\tand\tQualitative\tDisclosures\tabout\tMarket\tRisk | 50 |
| Item\t8. | Financial\tStatements\tand\tSupplementary\tData | 53 |
|  | Report\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm\ton\tInternal\tControl\tover\tFinancial\tReporting | 53 |
|  | Report\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm | 54 |
|  | Consolidated\tBalance\tSheets | 55 |
|  | Statements\tof\tConsolidated\tIncome | 56 |
|  | Statements\tof\tConsolidated\tComprehensive\tIncome | 56 |
|  | Statements\tof\tConsolidated\tCash\tFlows | 57 |
|  | Notes\tto\tConsolidated\tFinancial\tStatements | 58 |
| Item\t9. | Changes\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial\tDisclosure | \t112 |
| Item\t9A. | Controls\tand\tProcedures | \t113 |
| Item\t9B. | Other\tInformation | \t113 |
|  | PART\tIII |  |
| Item\t10. | Directors,\tExecutive\tOfficers\tand\tCorporate\tGovernance | \t114 |
| Item\t11. | Executive\tCompensation | \t115 |
| Item\t12. | Security\tOwnership\tof\tCertain\tBeneficial\tOwners\tand\tManagement\tand\tRelated\tStockholder\tMatters | \t115 |
| Item\t13. | Certain\tRelationships\tand\tRelated\tTransactions,\tand\tDirector\tIndependence | \t115 |
| Item\t14. | Principal\tAccounting\tFees\tand\tServices | \t116 |
|  | PART\tIV |  |
| Item\t15. | Exhibits\tand\tFinancial\tStatement\tSchedules | \t117 |

# 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	1.1	million	shipping	customers	to	7.4	million	consignees	in	over	220	countries	and	territories.	In	2010,	we	delivered	an	average	of	15.6	million	pieces	per	day worldwide,	or	a	total	of	3.94	billion	packages.	Total	revenue	in	2010	was	$49.5	billion.

Our	primary	business	is	the	time-definite	delivery	of	packages	and	documents	worldwide.	The	UPS	service	portfolio	also	includes	global	supply	chain	services and	less-than-truckload	transportation,	primarily	in	the	United	States.	We	report	our	operations	in	three	segments:	U.S.	Domestic	Package	operations,	International Package	operations,	and	Supply	Chain	&	Freight	operations.

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

•International	Package	operations	encompass	delivery	of	letters,	documents	and	packages	to	more	than	220	countries	and	territories	worldwide,	including shipments	wholly	outside	the	United	States,	as	well	as	shipments	from	or	to	the	United	States	with	another	country	as	the	destination	or	origin	point.

•Supply	Chain	&	Freight	is	comprised	of	our	forwarding	and	logistics	operations,	UPS	Freight,	and	other	related	businesses.	Our	forwarding	and	logistics business	provides	services	in	more	than	195	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	of	approximately	99,800	vehicles,	which	reaches	all	business	and	residential	zip	codes	in	the contiguous	U.S.	We	also	operate	an	air	fleet	of	527	aircraft,	and	we	are	one	of	the	largest	airlines	in	the	world.	Our	primary	air	hub	is	in	Louisville,	Kentucky.	Regional air	hubs	are	located	in	Hartford,	Connecticut;	Ontario,	California;	Philadelphia,	Pennsylvania;	and	Rockford,	Illinois.	Our	largest	international	air	hub	is	in	Cologne, Germany,	with	other	regional	international	hubs	in	Miami,	Florida;	Canada;	Hong	Kong;	Singapore;	Taiwan;	and	China.

We	operate	a	global	transportation	infrastructure	and	offer	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.				Mixed	economic	results	in	2010,	combined	with	improving	economic	forecasts	as	the	year	ended,	lead	us	to	believe	that	the	following	trends	will allow	us	to	continue	to	grow	our	business	over	the	long-term:

•	 We	expect	the	economic	recovery	to	continue	at	a	modest	pace	in	2011.	Global	economies	continue	to	expand	at	less	than	historical	trends.	The	sovereign debt	crisis	that	plagued	Europe	in	2010	will	continue	to	be	an	area	of	concern	in	2011.

•Just-in-time	inventory	management,	increased	use	of	the	Internet	for	ordering	goods,	and	direct-to-consumer	business	models	require	transportation services	to	be	effective.

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

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	flows.

# 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.	All	packages	are	commingled	throughout	their	journey	through	our network,	except	when	necessary	to	meet	their	specific	service	commitments.

# 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	heavyweight	packages.	Substantially	all	of	our	U.S.	small	package	delivery	services	are	guaranteed.

The	integrated	air	and	ground	pick-up	and	delivery	network	on	which	this	business	is	built	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	2010,	UPS	completed	the	second	phase	of	a	multi-year	expansion	of	the	fully	automated	Worldport ®	air	hub	in	Louisville,	KY,	our	largest	air	hub.	Worldport^® sort	capacity	has	been	expanded	to	416,000	packages	per	hour—a	37%	increase.	This	expansion	enables	more	cost-effective	package	processing	and	enables	the	use	of larger,	more	fuel	efficient	aircraft.

During	the	first	quarter	of	2010,	UPS	completed	a	restructuring	of	its	U.S.	package	operations.	With	this	new	structure,	we	now	have	the	opportunity	to	better deliver	the	value	our	solutions	bring	to	small	and	medium-sized	customers.

In	2009,	we	expanded	our	early	morning	delivery	service.	UPS	now	delivers	earlier	to	more	businesses	and	zip	codes	in	the	United	States,	and	earlier	to	more countries	from	the	United	States,	than	our	competitors.

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	control	costs	through	effective	network	modification	and	limited	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	more	than	220	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	model.

•Through	more	than	two	dozen	alliances	with	Asian	delivery	companies	that	supplement	company-owned	operations,	we	serve	more	than	40	Asia-Pacific countries	and	territories.	One	of	the	fastest	growing	economies	in	the	world,	China,	is	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	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	2008,	we	completed	construction	of	a	new	hub	in	Tamworth,	England,	UPS's	largest	ground	hub	outside	the	U.S.	It	replaced	three	smaller	facilities,	and added	more	capacity	and	better	efficiencies	than	existed	with	the	three	separate	facilities.

•	 Also	in	2008,	we	acquired	our	partner's	interest	in	the	small	package	joint	venture	operation	in	Romania.

•In	2009,	we	expanded	our	presence	in	Eastern	Europe	and	in	Central	Asia	with	the	acquisition	of	our	service	agents	in	Slovenia	and	Turkey,	respectively.

•	 Also	in	2009,	we	set	up	a	joint	venture	in	Dubai	to	coordinate	management	and	growth	of	UPS	express	package,	freight	forwarding	and	contract	logistics services	across	the	Middle	East,	Turkey	and	portions	of	Central	Asia.

•In	2010,	we	established	or	expanded	relationships	with	alliance	partners	in	Vietnam,	Malaysia	and	Indonesia.

•	 Also	in	2010,	we	submitted	an	application	for	a	domestic	service	license	in	China.	We	believe	that	we	will	receive	approval	in	2011.

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

•In	2008,	we	opened	a	new	air	hub	in	Shanghai,	the	first	constructed	in	China	by	a	U.S.	carrier.	It	links	all	of	China	via	Shanghai	to	UPS's	international network	with	direct	service	to	the	Americas,	Europe	and	Asia.	It	also	connects	points	served	in	China	by	UPS.

•	 Also	in	2008,	we	acquired	our	partner's	interest	in	a	small	package	shipping	joint	venture	in	Korea.

•In	2010,	we	opened	a	new	Intra-Asia	air	hub.	The	Shenzhen	Asia-Pacific	Hub,	located	at	Shenzhen	Baoan	International	Airport	in	China's	thriving	Pearl River	Delta,	replaced	a	UPS	hub	in	the	Philippines.	The	hub	represents	an	investment	of	$180	million	and	has	reduced	shipment	time-in-transit	by	at	least	a day	for	customers	in	the	region.

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.	Additionally,	we	plan to	expand	our	non-U.S.	domestic	package	operations	by	continuing	to	build	our	package	delivery	infrastructure	and	through	acquisitions	in	certain	countries.	We	have been	and	will	continue	to	implement	cost,	process	and	technology	improvements	in	our	international	operations.	We	believe	that	both	Europe	and	Asia	offer	significant opportunities	for	long-term	growth.

# Supply	Chain	&	Freight

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

Supply	chains	are	becoming	increasingly	complex.	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	and	brokerage services	with	financial	and	information	services.	We	can	meet	that	demand	because:

•	 We	manage	supply	chains	in	over	195	countries	and	territories,	with	approximately	31	million	square	feet	of	distribution	space	worldwide.

•	 We	focus	on	supply	chain	optimization,	freight	forwarding,	international	trade	and	brokerage	services	for	our	customers	worldwide,	which	include	a	broad range	of	transportation	solutions	including	air,	ocean	and	ground	freight.

•	 We	provide	information	technology	systems	and	distribution	facilities	adapted	to	the	unique	supply	chains	of	specific	industries	such	as	healthcare, technology	and	consumer/retail.	We	call	these	"configurable	solutions."	In	a	configurable	solution,	multiple	customers	share	standardized	information technology	systems	and	processes	as	well	as	a	common	network	of	assets.	A	configurable	solution	is	repeatable	for	multiple	customers	and	has	a	package transportation	component.	For	example,	we	have	a	well	developed	supply	chain	management	capability	for	the	healthcare	sector	that	meets	all	regulatory and	compliance	requirements.

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

UPS	Freight	is	an	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.	This	business	also	offers	a	TL	service.	UPS	Freight	provides	services	through	a	network	of	owned	and	leased	service	centers	and	carrier partnerships.

Our	growth	strategy	is	to	increase	the	number	of	customers	benefiting	from	configurable	supply	chain	solutions,	particularly	in	the	healthcare,	technology,	and retail	sectors,	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	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	express	services	in 55	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	return	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	recent	years.	For	example,	UPS	introduced	a unique	paperless	invoice	service	for	international	small	package	shippers	that	integrates	order	processing,	shipment	preparation	and	commercial	invoice	data	and	then transmits	that	data	to	customs	offices	across	the	globe,	eliminating	the	need	for	paper	commercial	invoices.	Another	offering,	UPS	Returns ®,	is	the	first	industry	offering that	facilitates	international	commerce	for	any	size	customer	by	simplifying	package	returns	to	98	countries	or	territories.	Package	recipients	can	obtain	international return	labels	and	commercial	invoices	via	e-mail,	local	post	or	from	a	UPS	driver	picking	up	the	return	package.

In	2010,	UPS	introduced	UPS	Smart	Pickup ®	a	new	option	for	shippers	who	want	the	convenience	of	a	scheduled	pickup	but	may	not	ship	a	package	everyday. This	is	the	latest	in	a	series	of	UPS	Decision	Green 	offerings,	this	high-tech	service	alerts	UPS	drivers	when	a	pickup	needs	to	be	made. SM

We	provide	our	customers	with	easy	access	to	UPS,	with	over	150,000	domestic	and	international	access	points	including:	40,000	branded	drop-boxes,	1,000	UPS customer	centers,	4,700	independently	owned	and	operated	The	UPS	Store ®	and	Mail	Boxes	Etc. ®	locations	worldwide,	16,000	authorized	shipping	outlets	and commercial	counters,	and	88,400	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	and	less	than	container	load	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,	returns	management,	reverse	logistics	and	cross	docking.

•	 Customs	Brokerage:	customs	clearance,	trade	management	and	international	trade	consulting.

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

•	 UPS	Capital ®:	short-term	working	capital,	government	guaranteed	lending,	global	trade	financing,	credit	cards	and	export	financing.

In	2008,	UPS	launched	a	new,	simplified	global	portfolio	for	shipping	air	freight,	with	guaranteed	day-specific,	door-to-door	service	as	well	as	non-guaranteed service	options.

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.	Significant	service	and	reliability	improvements	for	freight	transportation	enabled	us	to implement	a	no-fee,	guaranteed	delivery	service	in	early	2008	and	we	expanded	it	to	Canadian	deliveries	later	in	the	year.	In	2009,	UPS	Freight	began	offering	door-to- door	service	to	and	from	Mexico,	complete	with	UPS	customs	brokerage	capabilities	and	single	invoicing	for	all	services	between	the	United	States,	Canada,	and Mexico.	In	2010,	UPS	Freight	continued	the	acceleration	of	transit	times	when	150	U.S.	and	Canada	lanes	were	improved.	Over	the	last	two	years,	we	have	made	a	total of	1,100	lane	improvements.

# Technology

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

•	 UPS.com	processes	over	26	million	package	tracking	transactions	daily.	A	growing	number	of	those	tracking	requests	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	Developer	Kit ™	to	their	own	websites	for	direct	use	by	their	customers.	This	allows	users	to access	the	information	they	need	without	leaving	our	customers'	websites.

Technology	is	also	the	foundation	for	process	improvements	within	UPS	that	enhance	productivity,	improve	efficiency	and	reduce	costs.	In	recent	years,	we completed	the	most	comprehensive	improvement	to	our	U.S.	small	package	handling	facilities.	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	fuel	savings.	The re-engineered	system	provides	the	basis	for	unique	customer-focused	services	based	on	the	customer-specific	data	which	powers	the	system.

A	new	technology	we	began	deploying	in	2008	is	telematics,	which	combines	information	from	our	drivers'	hand-held	computers	with	GPS	and	automotive sensors	to	help	us	better	manage	our	ground	fleet	operations.	It	helps	us	improve	vehicle	maintenance,	enhance	safety	and	fine-tune	delivery	and	pick-up	service.	This technology	also	improves	on-road	performance	by	reducing	vehicle	expense,	fuel	consumption,	and	carbon	emissions.	Since	2008,	we	have	equipped	approximately 24,000	of	our	U.S.	vehicles	with	the	sensors	needed	to	achieve	the	benefits	from	this	technology.

# Sustainability

Our	business	strategy	and	corporate	responsibility	strategy	are	substantially	the	same:	to	increase	the	economic	vitality	and	environmental	sustainability	of	the global	economy	by	aggregating	the	shipping	activity	of	millions	of	businesses	and	individuals	worldwide	into	a	single	highly	efficient	logistics	network.	The	website www.sustainability.ups.com	provides	complete	information	on	this	strategy.	This	approach:

•	 Benefits	UPS	by	ensuring	strong	demand	for	our	products	and	services;

•	 Benefits	the	economy	by	making	global	supply	chains	more	efficient	and	less	expensive	by	enabling	businesses	the	ability	to	focus	more	tightly	on	their core	competencies	and	reduce	the	additional	operating	costs	associated	with	moving	their	goods;	and

•	 Benefits	the	environment	by	reducing	the	carbon	intensity	of	global	shipping	activities	and	enabling	UPS	to	leverage	its	own	carbon	efficiency improvements	into	the	supply	chains	of	all	its	customers.

We	continually	strive	to	improve	our	efficiencies	and	reduce	the	overall	energy	and	emissions	intensity	of	our	global	distribution	network.

At	UPS,	we	recognize	our	management	approach	for	avoiding	energy	use	and	emissions	as	"decarbonization	synergy".	This	means	we	simultaneously	pursue multiple	strategies	for	carbon	avoidance,	in	a	way	that	makes	each	one	stronger	and	more	effective	than	it	would	be	on	its	own.	A	simple,	yet	powerful,	example	of decarbonization	synergy	at	UPS	is	our	ability	to	handle	all	categories	of	service	(express,	ground,	domestic,	international,	commercial,	residential)	through	one integrated	pickup	and	delivery	service	system.	We	believe	our	integrated	network	is	a	competitive	advantage,	therefore,	we	are	able	to	use	all	assets	more	efficiently	and achieve	far	greater	carbon	avoidance.

# Sales	and	Marketing

The	UPS	worldwide	sales	organization	is	responsible	for	the	complete	spectrum	of	UPS	products	and	services.	Our	sales	force	includes	specialized	groups	that work	with	our	general	sales	organization	to	support	UPS	subsidiaries	and	specialized	products.

In	early	2010,	we	completed	a	streamlining	of	the	U.S.	Domestic	Package	operations,	and	as	part	of	the	restructuring,	we	expanded	our	outreach	to	customers	by strengthening	local	sales	and	marketing	efforts.

Our	worldwide	marketing	organization,	which	was	also	reorganized	in	2010,	supports	our	global	small	package,	supply	chain	and	freight	businesses.	Our corporate	marketing	function	is	engaged	in	market	and	customer	research,	brand	management,	segment	management,	rate-making	and	revenue	management	policy, pricing,	new	product	development,	product	portfolio	management,	marketing	alliances,	and	technology	marketing,	including	the	non-technical	aspect	of	our	web presence.	Advertising,	public	relations,	brand	management,	and	most	formal	marketing	communications	are	generally	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,	market	analysis	and	opportunity	identification,	segment	management,	and	customer	profitability	management.

In	2011,	we	are	implementing	a	major	sales	force	reorganization	to	better	align	our	sales	resources	with	customer	business	processes	along	industry	verticals.	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.

# Employees

As	of	December	31,	2010,	we	had	approximately	250,000	employees	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,	2013.

We	have	approximately	2,800	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	in November	2006.	We	began	formal	negotiations	with	Teamsters	Local	2727	in	October	2006,	and	have	been	under	the	guidance	of	the	National	Mediation	Board	since January	2008.	In	January	2011,	we	reached	a	tentative	agreement	with	Teamsters	Local	2727	which	will	run	through	November	1,	2013	when	ratified.	In	addition,	the majority	(approximately	3,300)	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	("IAM").	Our	agreement	with	the	IAM	runs	through	July	31,	2014.

We	believe	that	our	relations	with	our	employees	are	good.	We	periodically	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.

Global	Presence.				UPS	serves	more	than	220	countries	and	territories	around	the	world.	We	have	a	presence	in	all	of	the	major	economies	and	are	among	the leaders	in	most	of	them.

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	also	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	1.1	million	pick-up	customers	and	7.4	million delivery	customers	daily.	Cross-selling	small	package,	supply	chain	and	freight	services	across	our	customer	base	is	an	important	growth	mechanism	for	UPS.

Brand	Equity.				We	have	built	a	leading	and	trusted	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,	2010,	we	had	a	balance	of	cash	and marketable	securities	of	approximately	$4.081	billion	and	shareowners'	equity	of	$8.047	billion.	Our	Moody's	and	Standard	&	Poor's	short-term	credit	ratings	are	P-1 and	A-1+,	respectively,	and	our	Moody's	and	Standard	&	Poor's	long-term	credit	ratings	are	Aa3	and	AA-,	respectively.	We	have	a	stable	outlook	from	Moody's	and Standard	&	Poor's.	We	have	a	strong	capacity	to	service	our	obligations.	Our	financial	strength	gives	us	the	resources	to	achieve	global	scale;	to	invest	in	employee development,	technology,	transportation	equipment	and	buildings;	to	pursue	strategic	opportunities	that	facilitate	our	growth;	and	to	return	value	to	our	shareowners	in the	form	of	dividends	and	share	repurchases.

# Government	Regulation

# Air	Operations

The	U.S.	Department	of	Transportation	("DOT"),	the	Federal	Aviation	Administration	("FAA"),	and	the	U.S.	Department	of	Homeland	Security,	through	the Transportation	Security	Administration	("TSA"),	have	regulatory	authority	over	United	Parcel	Service	Co.'s	("UPS	Airlines'")	air	transportation	services.	The	Federal Aviation	Act	of	1958,	as	amended,	is	the	statutory	basis	for	DOT	and	FAA	authority	and	the	Aviation	and	Transportation	Security	Act	of	2001,	as	amended,	is	the	basis for	TSA	aviation	security	authority.

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.	International	operating	rights	for	U.S.	airlines	are	usually	subject	to bilateral	agreement	between	the	U.S.	and	foreign	governments.	UPS	Airlines	has	international	route	operating	rights	granted	by	the	DOT	and	we	may	apply	for additional	authorities	when	those	operating	rights	are	available	and	are	required	for	the	efficient	operation	of	our	international	network.	The	efficiency	and	flexibility	of our	international	air	transportation	network	is	dependent	on	DOT	and	foreign	government	regulations	and	operating	restrictions.

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

FAA	regulations	mandate	an	aircraft	corrosion	control	program,	along	with	aircraft	inspection	and	repair	at	periodic	intervals	specified	by	approved	programs	and procedures,	for	all	aircraft.	Our	total	expenditures	under	these	programs	for	2010	were	$13	million.	The	future	cost	of	repairs	pursuant	to	these	programs	may	fluctuate according	to	aircraft	condition,	age	and	the	enactment	of	additional	FAA	regulatory	requirements.

The	TSA	regulates	various	security	aspects	of	air	cargo	transportation	in	a	manner	consistent	with	the	TSA	mission	statement	to	"protect	the	Nation's transportation	systems	to	ensure	freedom	of	movement	for	people	and	commerce."	UPS	Airlines,	and	specified	airport	and	off	airport	locations,	are	regulated	under	TSA regulations	applicable	to	the	transportation	of	cargo	in	an	air	network.	In	addition,	personnel,	facilities	and	procedures	involved	in	air	cargo	transportation	must	comply with	TSA	regulations.

UPS	Airlines,	along	with	a	number	of	other	domestic	airlines,	participates	in	the	Civil	Reserve	Air	Fleet	("CRAF")	program.	Our	participation	in	the	CRAF program	allows	the	U.S.	Department	of	Defense	("DOD")	to	requisition	specified	UPS	Airlines	wide-body	aircraft	for	military	use	during	a	national	defense	emergency. The	DOD	compensates	us	for	the	use	of	aircraft	under	the	CRAF	program.	In	addition,	participation	in	CRAF	entitles	UPS	Airlines	to	bid	for	military	cargo	charter operations.

# Ground	Operations

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.

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 created	the	Postal	Rate	Commission,	an	independent	agency,	to	recommend	postal	rates.	The	Postal	Accountability	and	Enhancement	Act	of	2006	amended	the	1970	Act to	give	the	re-named	Postal	Regulatory	Commission	revised	oversight	authority	over	many	aspects	of	the	Postal	Service,	including	postal	rates,	product	offerings	and service	standards.	We	sometimes	participate	in	the	proceedings	before	the	Postal	Regulatory	Commission	in	an	attempt	to	secure	fair	postal	rates	for	competitive services.

# Customs

We	are	subject	to	the	customs	laws	in	the	countries	in	which	we	operate,	regarding	the	import	and	export	of	shipments,	including	those	related	to	the	filing	of documents	on	behalf	of	client	importers	and	exporters.

# Environmental

We	are	subject	to	federal,	state,	and	local	environmental	laws	and	regulations	across	all	of	our	business	units.	These	laws	and	regulations	cover	a	variety	of processes,	including,	but	not	limited	to:	proper	storage,	handling,	and	disposal	of	hazardous	and	other	waste;	managing	wastewater	and	storm	water;	monitoring	and maintaining	the	integrity	of	underground	storage	tanks;	complying	with	laws	regarding	clean	air,	including	those	governing	emissions;	protecting	against	and appropriately	responding	to	spills	and	releases;	and	communicating	the	presence	of	reportable	quantities	of	hazardous	materials	to	local	responders.	UPS	has	established site-	and	activity-specific	environmental	compliance	and	pollution	prevention	programs	to	address	our	environmental	responsibilities	and	remain	compliant.	In	addition, UPS	has	created	numerous	programs	which	seek	to	minimize	waste	and	prevent	pollution	within	our	operations.

# Other	Regulations

We	are	subject	to	numerous	other	U.S.	federal	and	state	laws	and	regulations,	in	addition	to	applicable	foreign	laws,	in	connection	with	our	package	and	non- package	businesses	in	the	countries	in	which	we	operate.	These	laws	and	regulations	include	those	enforced	by	U.S.	Customs	and	Border	Protection	and	other	agencies of	the	U.S.	Department	of	Homeland	Security,	the	U.S.	Department	of	Treasury,	the	Federal	Maritime	Commission,	the	U.S.	Food	and	Drug	Administration	and	the	U.S. Department	of	Agriculture.

# 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	our	investor	relations	website,	located	at	www.investors.ups.com,	as	soon	as	reasonably	practicable	after	they	are	filed	with	or	furnished	to	the	Securities and	Exchange	Commission	(the	"SEC").

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	website,	located	at	www.investors.ups.com.	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	website.

See	note	11	to	our	consolidated	financial	statements	for	financial	information	regarding	our	reporting	segments	and	geographic	areas	in	which	we	operate.

Additional	information	about	UPS	is	available	at	www.ups.com.	Our	sustainability	report,	which	describes	our	activities	that	support	our	commitment	to	acting responsibly	and	contributing	to	society,	is	available	at	www.sustainability.ups.com.	We	provide	the	addresses	to	our	internet	sites	solely	for	the	information	of	investors. We	do	not	intend	any	addresses	to	be	active	links	or	to	otherwise	incorporate	the	contents	of	any	website	into	this	report.

# Item	1A. Risk	Factors

# Cautionary	Statement	About	Forward-Looking	Statements

This	report	includes	certain	"forward-looking	statements"	within	the	meaning	of	the	Private	Securities	Litigation	Reform	Act	of	1995.	Statements	in	the	future tense,	and	all	statements	accompanied	by	terms	such	as	"believe,"	"project,"	"expect,"	"estimate,"	"assume,"	"intend,"	"anticipate,"	"target,"	"plan,"	and	variations thereof	and	similar	terms	are	intended	to	be	forward-looking	statements.	We	intend	that	all	forward-looking	statements	we	make	will	be	subject	to	safe	harbor	protection of	the	federal	securities	laws	pursuant	to	Section	27A	of	the	Securities	Act	of	1933	and	Section	21E	of	the	Securities	Exchange	Act	of	1934.

Our	disclosure	and	analysis	in	this	report,	in	our	Annual	Report	to	Shareholders	and	in	our	other	filings	with	the	Securities	and	Exchange	Commission	contain forward-looking	statements	regarding	our	intent,	belief	and	current	expectations	about	our	strategic	direction,	prospects	and	future	results.	From	time	to	time,	we	also provide	forward-looking	statements	in	other	materials	we	release	as	well	as	oral	forward-looking	statements.	Such	statements	give	our	current	expectations	or	forecasts of	future	events;	they	do	not	relate	strictly	to	historical	or	current	facts.	Management	believes	that	these	forward-looking	statements	are	reasonable	as	and	when	made. However,	caution	should	be	taken	not	to	place	undue	reliance	on	any	such	forward-looking	statements	because	such	statements	speak	only	as	of	the	date	when	made.

Forward-looking	statements	are	subject	to	certain	risks	and	uncertainties	that	could	cause	actual	results	to	differ	materially	from	our	historical	experience	and	our present	expectations	or	anticipated	results.	These	risks	and	uncertainties	include,	but	are	not	limited	to,	those	described	below	and	elsewhere	in	this	report	and	those described	from	time	to	time	in	our	future	reports	filed	with	the	SEC.	You	should	consider	the	limitations	on,	and	risks	associated	with,	forward-looking	statements	and not	unduly	rely	on	the	accuracy	of	predictions	contained	in	such	forward-looking	statements.	We	do	not	undertake	any	obligation	to	update	forward-looking	statements to	reflect	events,	circumstances,	changes	in	expectations,	or	the	occurrence	of	unanticipated	events	after	the	date	of	those	statements.

# Risk	Factors

You	should	carefully	consider	the	following	factors,	which	could	materially	affect	our	business,	financial	condition	or	results	of	operations.	You	should	read these	Risk	Factors	in	conjunction	with	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations"	in	Item	7	and	our	Consolidated Financial	Statements	and	related	notes	in	Item	8.	The	risks	described	below	are	not	the	only	risks	facing	our	company.	Additional	risks	and	uncertainties	not	currently known	to	us	or	that	we	currently	deem	to	be	immaterial	also	may	materially	adversely	affect	our	business,	financial	condition	or	results	of	operations.

# General	economic	conditions,	both	in	the	U.S.	and	internationally,	may	adversely	affect	our	results	of	operations.

We	conduct	operations	in	over	220	countries	and	territories.	Our	U.S.	and	international	operations	are	subject	to	normal	cycles	affecting	the	economy	in	general, as	well	as	the	local	economic	environments	in	which	we	operate.	The	factors	that	create	cyclical	changes	to	the	economy	and	to	our	business	are	beyond	our	control,	and it	may	be	difficult	for	us	to	adjust	our	business	model	to	mitigate	the	impact	of	these	factors.	In	particular,	our	business	is	affected	by	levels	of	industrial	production, consumer	spending	and	retail	activity.	To	the	extent	that	the	recovery	from	the	recent	recession	in	the	U.S.	and	in	other	countries	takes	longer	than	anticipated,	our business,	financial	position	and	results	of	operations	could	be	materially	affected.

# We	face	significant	competition	which	could	adversely	affect	our	business,	financial	position	and	results	of	operations.

We	face	significant	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.	Competition	may	also	come	from	other	sources	in	the	future.	Some	of	our competitors	have	cost	and	organizational	structures	that	differ	from	ours	and	may	offer	services	and	pricing	terms	that	we	may	not	be	willing	or	able	to	offer.	If	we	are unable	to	timely	and	appropriately	respond	to	competitive	pressures,	our	business,	financial	position	and	results	of	operations	could	be	adversely	affected.

The	transportation	industry	continues	to	consolidate	and	competition	remains	strong.	As	a	result	of	consolidation,	our	competitors	may	increase	their	market	share and	improve	their	financial	capacity,	and	may	strengthen	their	competitive	positions.	Business	combinations	could	also	result	in	competitors	providing	a	wider	variety	of services	and	products	at	competitive	prices,	which	could	adversely	affect	our	financial	performance.

# Our	business	is	subject	to	complex	and	stringent	regulation	in	the	U.S.	and	internationally.

We	are	subject	to	complex	and	stringent	aviation,	transportation,	environmental,	security,	labor,	employment,	and	other	governmental	laws	and	regulations,	both in	the	U.S.	and	in	the	other	countries	in	which	we	operate.	In	addition,	our	business	is	impacted	by	laws	and	regulations	that	affect	global	trade,	including	tariff	and	trade policies,	export	requirements,	taxes	and	other	restrictions	and	charges.	Changes	in	laws,	regulations	and	the	related	interpretations	may	alter	the	landscape	in	which	we do	business	and	may	affect	our	costs	of	doing	business.	The	impact	of	new	laws	and	regulations	cannot	be	predicted.	Compliance	with	new	laws	and	regulations	may increase	our	operating	costs	or	require	significant	capital	expenditures.	Any	failure	to	comply	with	applicable	laws	or	regulations	in	the	U.S.	or	in	any	of	the	countries	in which	we	operate	could	result	in	substantial	fines	or	possible	revocation	of	our	authority	to	conduct	our	operations,	which	could	adversely	affect	our	financial performance.

# Increased	security	requirements	could	impose	substantial	costs	on	us	and	we	could	be	the	target	of	an	attack	or	have	a	security	breach.

As	a	result	of	concerns	about	global	terrorism	and	homeland	security,	governments	around	the	world	have	adopted	or	may	adopt	stricter	security	requirements	that will	result	in	increased	operating	costs	for	businesses	in

the	transportation	industry.	These	requirements	may	change	periodically	as	a	result	of	regulatory	and	legislative	requirements	and	in	response	to	evolving	threats.	We cannot	determine	the	effect	that	these	new	requirements	will	have	on	our	cost	structure	or	our	operating	results,	and	these	rules	or	other	future	security	requirements	may increase	our	costs	of	operations	and	reduce	operating	efficiencies.	Regardless	of	our	compliance	with	security	requirements	or	the	steps	we	take	to	secure	our	facilities	or fleet,	we	could	be	the	target	of	an	attack	or	security	breaches	could	occur,	which	could	adversely	affect	our	operations	or	our	reputation.

# We	may	be	affected	by	global	climate	change	or	by	legal,	regulatory	or	market	responses	to	such	potential	change.

Concern	over	climate	change,	including	the	impact	of	global	warming,	has	led	to	significant	federal,	state,	and	international	legislative	and	regulatory	efforts	to limit	greenhouse	gas	("GHG")	emissions.	For	example,	in	the	past	several	years,	the	U.S.	Congress	has	considered	various	bills	that	would	regulate	GHG	emissions. While	these	bills	have	not	yet	received	sufficient	Congressional	support	for	enactment,	some	form	of	federal	climate	change	legislation	is	possible	in	the	future.	Even	in the	absence	of	such	legislation,	the	Environmental	Protection	Agency,	spurred	by	judicial	interpretation	of	the	Clean	Air	Act,	may	regulate	GHG	emissions,	especially aircraft	or	diesel	engine	emissions,	and	this	could	impose	substantial	costs	on	us.	These	costs	include	an	increase	in	the	cost	of	the	fuel	and	other	energy	we	purchase	and capital	costs	associated	with	updating	or	replacing	our	aircraft	or	trucks	prematurely.	Until	the	timing,	scope	and	extent	of	any	future	regulation	becomes	known,	we cannot	predict	its	effect	on	our	cost	structure	or	our	operating	results.	Notwithstanding	our	widely	recognized	position	as	a	leader	in	sustainable	business	practices,	it	is reasonably	possible,	however,	that	such	legislation	or	regulation	could	impose	material	costs	on	us.	Moreover,	even	without	such	legislation	or	regulation,	increased awareness	and	any	adverse	publicity	in	the	global	marketplace	about	the	GHGs	emitted	by	companies	in	the	airline	and	transportation	industries	could	harm	our reputation	and	reduce	customer	demand	for	our	services,	especially	our	air	services.

# Strikes,	work	stoppages	and	slowdowns	by	our	employees	could	adversely	affect	our	business,	financial	position	and	results	of	operations.

A	significant	number	of	our	employees	are	employed	under	a	national	master	agreement	and	various	supplemental	agreements	with	local	unions	affiliated	with the	International	Brotherhood	of	Teamsters	and	our	airline	pilots,	airline	mechanics,	ground	mechanics	and	certain	other	employees	are	employed	under	other	collective bargaining	agreements.	Strikes,	work	stoppages	and	slowdowns	by	our	employees	could	adversely	affect	our	ability	to	meet	our	customers'	needs,	and	customers	may do	more	business	with	competitors	if	they	believe	that	such	actions	or	threatened	actions	may	adversely	affect	our	ability	to	provide	services.	We	may	face	permanent loss	of	customers	if	we	are	unable	to	provide	uninterrupted	service,	and	this	could	adversely	affect	our	business,	financial	position	and	results	of	operations.	The	terms	of future	collective	bargaining	agreements	also	may	affect	our	competitive	position	and	results	of	operations.

# We	are	exposed	to	the	effects	of	changing	prices	of	energy,	including	gasoline,	diesel	and	jet	fuel,	and	interruptions	in	supplies	of	these	commodities.

Changing	fuel	and	energy	costs	may	have	a	significant	impact	on	our	operations.	We	require	significant	quantities	of	fuel	for	our	aircraft	and	delivery	vehicles and	are	exposed	to	the	risk	associated	with	variations	in	the	market	price	for	petroleum	products,	including	gasoline,	diesel	and	jet	fuel.	We	mitigate	our	exposure	to changing	fuel	prices	through	our	indexed	fuel	surcharges	and	we	may	also	enter	into	hedging	transactions	from	time	to	time.	If	we	are	unable	to	maintain	or	increase	our fuel	surcharges,	higher	fuel	costs	could	adversely	impact	our	operating	results.	Even	if	we	are	able	to	offset	the	cost	of	fuel	with	our	surcharges,	high	fuel	surcharges	may result	in	a	mix	shift	from	our	higher	yielding	air	products	to	lower	yielding	ground	products	or	an	overall	reduction	in	volume.	If	fuel	prices	rise	sharply,	even	if	we	are successful	in	increasing	our	fuel	surcharge,	we	could	experience	a	lag	time	in	implementing	the	surcharge,	which	could	adversely	affect	our	short-term	operating	results. There	can	be	no	assurance	that	our	hedging	transactions	will	be	effective	to	protect	us

from	changes	in	fuel	prices.	Moreover,	we	could	experience	a	disruption	in	energy	supplies,	including	our	supply	of	gasoline,	diesel	and	jet	fuel,	as	a	result	of	war, actions	by	producers,	or	other	factors	which	are	beyond	our	control,	which	could	have	an	adverse	effect	on	our	business.

# Changes	in	exchange	rates	or	interest	rates	may	have	an	adverse	effect	on	our	results.

We	conduct	business	across	the	globe	with	a	significant	portion	of	our	revenue	derived	from	operations	outside	the	United	States.	Our	operations	in	international markets	are	affected	by	changes	in	the	exchange	rates	for	local	currencies,	and	in	particular	the	Euro,	British	Pound	and	Canadian	Dollar.

We	are	exposed	to	changes	in	interest	rates,	primarily	on	our	short-term	debt	and	that	portion	of	our	long-term	debt	that	carries	floating	interest	rates.	The	impact of	a	100-basis-point	change	in	interest	rates	affecting	our	debt	is	discussed	in	the	"Quantitative	and	Qualitative	Disclosures	about	Market	Risk"	section	of	this	report.

We	monitor	and	manage	our	exposures	to	changes	in	currency	exchange	rates	and	interest	rates,	and	make	limited	use	of	currency	exchange	contracts,	over	the counter	option	contracts,	commodity	forwards,	swaps	and	futures	contracts	to	mitigate	the	impact	of	changes	in	currency	values,	but	changes	in	exchange	rates	and interest	rates	cannot	always	be	predicted	or	hedged.

# If	we	are	unable	to	maintain	our	brand	image	and	corporate	reputation,	our	business	may	suffer.

Our	success	depends	in	part	on	our	ability	to	maintain	the	image	of	the	UPS	brand	and	our	reputation	for	providing	excellent	service	to	our	customers.	Service quality	issues,	actual	or	perceived,	even	when	false	or	unfounded,	could	tarnish	the	image	of	our	brand	and	may	cause	customers	to	use	other	companies.	Also,	adverse publicity	surrounding	labor	relations,	environmental	concerns,	security	matters,	political	activities	and	the	like,	or	attempts	to	connect	our	company	to	these	sorts	of issues,	either	in	the	United	States	or	other	countries	in	which	we	operate,	could	negatively	affect	our	overall	reputation	and	acceptance	of	our	services	by	customers. Damage	to	our	reputation	and	loss	of	brand	equity	could	reduce	demand	for	our	services	and	thus	have	an	adverse	effect	on	our	business,	financial	position	and	results of	operations,	and	could	require	additional	resources	to	rebuild	our	reputation	and	restore	the	value	of	our	brand.

# A	significant	privacy	breach	could	adversely	affect	our	business	and	we	may	be	required	to	increase	our	spending	on	data	security.

The	provision	of	service	to	our	customers	and	the	operation	of	our	network	involve	the	storage	and	transmission	of	proprietary	information	and	sensitive	or confidential	data,	including	personal	information	of	customers,	employees	and	others.	Breaches	in	security	could	expose	us,	our	customers	or	the	individuals	affected	to a	risk	of	loss	or	misuse	of	this	information,	resulting	in	litigation	and	potential	liability	for	the	company,	as	well	as	the	loss	of	existing	or	potential	customers,	damage	to our	brand	and	reputation,	or	disruptions	in	our	operations.	In	addition,	the	cost	and	operational	consequences	of	implementing	further	data	protection	measures	could	be significant.

# We	have	invested	in	a	technology	infrastructure	which	supports	our	global	air	and	ground	network	and	is	critical	to	support	our	operations	and	customer	needs. Any	major	disruption	to	this	infrastructure	could	adversely	impact	our	operations,	customers	and	global	commerce.

Our	ability	to	serve	customers	and	to	compete	effectively	depends	to	a	large	part	upon	the	reliability	and	speed	of	our	technology	network.	While	we	have	built	a multi-layered	architecture	to	support	swiftly-expanding	worldwide	operations	and	we	ensure	that	our	infrastructure	is	robust,	reliable	and	redundant,	there	are	risks	of malicious	or	unintentional	disruptions	to	the	Internet	or	our	technology	infrastructure	which	could	adversely	impact	our	operations	and	consequently,	our	customers	and global	commerce.

# We	make	significant	capital	investments	in	our	business	of	which	a	significant	portion	is	tied	to	projected	volume	levels.

We	require	significant	capital	investments	in	our	business	consisting	of	aircraft,	vehicles,	technology,	facilities	and	sorting	and	other	types	of	equipment	to support	both	our	existing	business	and	anticipated	growth.	Forecasting	projected	volume	involves	many	factors	which	are	subject	to	uncertainty,	such	as	general economic	trends,	changes	in	governmental	regulation,	and	competition.	If	we	do	not	accurately	forecast	our	future	capital	investment	needs,	we	could	have	excess capacity	or	insufficient	capacity,	either	of	which	would	negatively	affect	our	revenues	and	profitability.	In	addition	to	forecasting	our	capital	investment	requirements, we	adjust	other	elements	of	our	operations	and	cost	structure	in	response	to	adverse	economic	conditions;	however,	these	adjustments	may	not	be	sufficient	to	allow	us to	maintain	our	operating	margins	in	an	adverse	economy.

# We	derive	a	significant	portion	of	our	revenues	from	our	international	operations	and	are	subject	to	the	risks	of	doing	business	in	emerging	markets.

We	have	significant	international	operations	and	while	the	geographical	diversity	of	our	international	operations	helps	ensure	that	we	are	not	overly	reliant	on	a single	region	or	country,	we	are	continually	exposed	to	changing	economic,	political	and	social	developments	beyond	our	control.	Emerging	markets	are	typically	more volatile	than	those	in	the	developed	world,	and	any	broad-based	downturn	in	these	markets	could	reduce	our	revenues	and	adversely	affect	our	business,	financial position	and	results	of	operations.

# We	are	subject	to	changes	in	markets	and	our	business	plans	that	have	resulted,	and	may	in	the	future	result,	in	substantial	write-downs	of	the	carrying	value	of	our assets,	thereby	reducing	our	net	income.

Our	regular	review	of	the	carrying	value	of	our	assets	has	resulted,	from	time	to	time,	in	significant	impairments,	and	we	may	in	the	future	be	required	to recognize	additional	impairment	charges.	Changes	in	business	strategy,	government	regulations,	or	economic	or	market	conditions	have	resulted	and	may	result	in further	substantial	impairment	write-downs	of	our	intangible	or	other	assets	at	any	time	in	the	future.	In	addition,	we	have	been	and	may	be	required	in	the	future	to recognize	increased	depreciation	and	amortization	charges	if	we	determine	that	the	useful	lives	of	our	fixed	assets	are	shorter	than	we	originally	estimated.	Such	changes could	reduce	our	net	income.

# Employee	health	and	retiree	health	and	pension	benefit	costs	represent	a	significant	expense	to	us.

With	approximately	400,600	employees,	including	approximately	330,600	in	the	U.S.,	our	expenses	relating	to	employee	health	and	retiree	health	and	pension benefits	are	significant.	In	recent	years,	we	have	experienced	significant	increases	in	certain	of	these	costs,	largely	as	a	result	of	economic	factors	beyond	our	control, including,	in	particular,	ongoing	increases	in	health	care	costs	well	in	excess	of	the	rate	of	inflation.	Continued	increasing	health	care	costs,	volatility	in	investment returns	and	discount	rates,	as	well	as	changes	in	laws,	regulations	and	assumptions	used	to	calculate	retiree	health	and	pension	benefit	expenses,	may	adversely	affect	our business,	financial	position,	results	of	operations	or	require	significant	contributions	to	our	pension	plans.

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,	increases	in health	care	costs,	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	could	result	from	our	participation	in	these	plans.

# We	may	be	subject	to	various	claims	and	lawsuits	that	could	result	in	significant	expenditures.

The	nature	of	our	business	exposes	us	to	the	potential	for	various	claims	and	litigation	related	to	labor	and	employment,	personal	injury,	property	damage, business	practices,	environmental	liability	and	other	matters.	Any	material	litigation	or	a	catastrophic	accident	or	series	of	accidents	could	have	a	material	adverse	effect on	our	business,	financial	position	and	results	of	operations.

# We	may	not	realize	the	anticipated	benefits	of	acquisitions,	joint	ventures	or	strategic	alliances.

As	part	of	our	business	strategy,	we	may	acquire	businesses	and	form	joint	ventures	or	strategic	alliances.	Whether	we	realize	the	anticipated	benefits	from	these transactions	depends,	in	part,	upon	the	successful	integration	between	the	businesses	involved,	the	performance	of	the	underlying	operation,	capabilities	or	technologies and	the	management	of	the	transacted	operations.	Accordingly,	our	financial	results	could	be	adversely	affected	by	our	failure	to	effectively	integrate	the	acquired operations,	unanticipated	performance	issues,	transaction-related	charges,	or	charges	for	impairment	of	long-term	assets	that	we	acquire.

# Insurance	and	claims	expenses	could	have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.

We	have	a	combination	of	both	self-insurance	and	high-deductible	insurance	programs	for	the	risks	arising	out	of	the	services	we	provide	and	the	nature	of	our global	operations,	including	claims	exposure	resulting	from	cargo	loss,	personal	injury,	property	damage,	aircraft	and	related	liabilities,	business	interruption	and workers'	compensation.	Workers'	compensation,	automobile	and	general	liabilities	are	determined	using	actuarial	estimates	of	the	aggregate	liability	for	claims	incurred and	an	estimate	of	incurred	but	not	reported	claims,	on	an	undiscounted	basis.	Our	accruals	for	insurance	reserves	reflect	certain	actuarial	assumptions	and	management judgments,	which	are	subject	to	a	high	degree	of	variability.	If	the	number	or	severity	of	claims	for	which	we	are	retaining	risk	increases,	our	financial	condition	and results	of	operations	could	be	adversely	affected.	If	we	lose	our	ability	to	self-insure	these	risks,	our	insurance	costs	could	materially	increase	and	we	may	find	it	difficult to	obtain	adequate	levels	of	insurance	coverage.

# 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	1,000	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	an	additional	776	facilities	that	support	our	freight	forwarding	and logistics	operations.	Our	freight	forwarding	and	logistics	operations	maintain	facilities	with	about	31	million	square	feet	of	floor	space.	We	own	and	operate	a	logistics campus	consisting	of	approximately	3.1	million	square	feet	in	Louisville,	Kentucky.

UPS	Freight	operates	196	service	centers	with	a	total	of	5.6	million	square	feet	of	floor	space.	UPS	Freight	owns	140	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.

Worldport	facility	consists	of	over	5.2	million	square	feet	and	the	site	includes	approximately	596	acres.	In	2009,	we	completed	the	first	phase	of	our	Worldport^® expansion,	which	increased	the	sorting	capacity	of	the	facility	by	15%.	The	final	phase	of	the	Worldport ®	expansion	was	completed	in	2010,	and	increased	the	sorting capacity	to	approximately	416,000	packages	per	hour.	The	expansion	involved	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	total	cost	of	the	expansion	was	over	$1	billion.

We	also	have	regional	air	hubs	in	Hartford,	Connecticut;	Ontario,	California;	Philadelphia,	Pennsylvania;	and	Rockford,	Illinois.	These	hubs	house	facilities	for the	sorting,	transfer	and	delivery	of	packages.	Our	European	air	hub	is	located	in	Cologne,	Germany,	and	we	maintain	Asia-Pacific	air	hubs	in	Shanghai,	China; Shenzhen,	China;	Taipei,	Taiwan;	Hong	Kong;	and	Singapore.	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,	Florida.

Over	the	past	several	years,	UPS	has	made	a	successful	transition	to	become	the	first	wholly-owned	foreign	express	carrier	in	China.	In	2008,	we	opened	the	UPS International	Air	Hub	at	Pudong	International	Airport,	which	was	built	on	a	parcel	totaling	2.4	million	square	feet	with	a	planned	sorting	capacity	of	17,000	packages per	hour.	The	new	hub	links	all	of	China	via	Shanghai	to	UPS's	international	network	with	direct	service	to	the	Americas,	Europe	and	Asia.	It	also	connects	points served	in	China	by	UPS	through	a	dedicated	service	provided	by	Yangtze	River	Express,	a	Chinese	all-cargo	airline.

In	February	2010,	we	opened	a	new	intra-Asia	air	hub	at	Shenzhen	Baoan	International	Airport	in	China.	The	Shenzhen	facility	replaced	our	intra-Asia	air	hub	at Clark	Air	Force	Base	in	the	Philippines,	and	serves	as	our	primary	transit	hub	in	Asia.	The	facility	was	built	on	a	parcel	of	almost	1	million	square	feet,	and	has	a	sorting capacity	of	18,000	packages	per	hour.

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,	2010:

| Description | Owned	and<br>Capital<br>Leases | Chartered<br>From<br>Others | On<br>Order | Under<br>Option |
| :--- | :--- | :--- | :--- | :--- |
| Operating: |  |  |  |  |
| Boeing\t747-400F | 9 | — | 2 | \t — |
| Boeing\t747-400BCF | 2 | — | \t — | \t — |
| Boeing\t757-200 | 75 | — | \t — | \t — |
| Boeing\t767-300 | 39 | — | 20 | \t — |
| Boeing\tMD-11 | 38 | — | \t — | \t — |
| Airbus\tA300-600 | 53 | — | \t — | \t — |
| Other | — | 311 | \t — | \t — |
| Total | 216 | 311 | 22 | \t — |
| Held\tfor\tSale\t/\tDisposal: |  |  |  |  |
| McDonnell-Douglas\tDC-8-73 | 6 | — | \t — | \t — |
| Boeing\t747-100 | 5 | — | \t — | \t — |
| Total | 11 | — | \t — | \t — |

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	2010,	we	took	delivery	of	five	Boeing	767-300F	aircraft.	We	have	firm	commitments	to	purchase	20	Boeing	767-300ER	freighters	to	be	delivered between	2011	and	2013,	and	two	Boeing	747-400F	aircraft	scheduled	for	delivery	during	2011.	We	sold	the	remainder	of	our	McDonnell-Douglas	DC-8-71	and	Boeing 747-200	aircraft	fleets	during	2010.	Additionally,	one	Boeing	747-400F	aircraft	was	destroyed	in	an	accident	in	September	2010.

# Vehicles

We	operate	a	ground	fleet	of	approximately	99,800	package	cars,	vans,	tractors	and	motorcycles.	Our	ground	support	fleet	consists	of	32,100	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	33,800	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 electronically	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	4,000	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

For	a	discussion	of	legal	proceedings	affecting	us	and	our	subsidiaries,	please	see	the	information	under	the	sub-caption	"Contingencies"	of	the	caption "Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations"	included	in	this	report.

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

# Reserved

# 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	2010	and	2009.	Our	class	B	common	stock	is	listed	on	the New	York	Stock	Exchange	under	the	symbol	"UPS."

|  | High | Low | Close | Dividends<br>Declared |
| :--- | :--- | :--- | :--- | :--- |
| 2010: |  |  |  |  |
| First\tQuarter | $64.95 | $55.77 | $64.41 | $0.47 |
| Second\tQuarter | $70.89 | $56.70 | $56.89 | $0.47 |
| Third\tQuarter | $69.50 | $56.47 | $66.69 | $0.47 |
| Fourth\tQuarter | $73.94 | $65.44 | $72.58 | $0.47 |
| 2009: |  |  |  |  |
| First\tQuarter | $56.37 | $37.99 | $49.22 | $0.45 |
| Second\tQuarter | $57.89 | $46.41 | $49.99 | $0.45 |
| Third\tQuarter | $59.61 | $46.78 | $56.47 | $0.45 |
| Fourth\tQuarter | $59.75 | $53.17 | $57.37 | $0.45 |

The	policy	of	our	Board	of	Directors	is	to	declare	dividends	out	of	current	earnings.	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.

On	February	3,	2011,	our	Board	declared	a	dividend	of	$0.52	per	share,	which	is	payable	on	March	2,	2011	to	shareowners	of	record	on	February	14,	2011.	This represents	an	11%	increase	from	the	previous	$0.47	quarterly	dividend	in	2010.

In	January	2008,	the	Board	of	Directors	approved	an	increase	in	our	share	repurchase	authorization	to	$10.0	billion.	Share	repurchases	may	take	the	form	of accelerated	share	repurchases,	open	market	purchases,	or	other	such	methods	as	we	deem	appropriate.	The	timing	of	our	share	repurchases	will	depend	upon	market conditions.	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.

A	summary	of	repurchases	of	our	class	A	and	class	B	common	stock	during	the	fourth	quarter	of	2010	is	as	follows	(in	millions,	except	per	share	amounts):

|  |  |  | Total	Number | May	Yet	be |
| :--- | :--- | :--- | :--- | :--- |
|  | Total\tNumber | Average | of\tShares\tPurchased | Purchased |
|  | 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 | 1.2 | $74.43 | 1.0 | $5,342 |
| November\t1—November\t30 | 1.4 | 67.09 | 1.2 | 5,259 |
| December\t1—December\t31 | 1.3 | 72.16 | 0.9 | 5,194 |
| Total\tOctober\t1—December\t31 | 3.9 | $70.86 | 3.1 |  |

(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	Standard	&	Poor's	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,	2005	in	the	Standard	&	Poor's	500	Index,	the	Dow	Jones	Transportation Average,	and	our	class	B	common	stock.

|  | 12/31/05 | 12/31/06 | 12/31/07 | 12/31/08 | 12/31/09 | 12/31/10 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| United\tParcel\tService,\tInc. | $100.00 | $101.76 | $98.20 | $78.76 | $84.87 | $110.57 |
| Standard\t&amp;\tPoor's\t500\tIndex | $100.00 | $115.79 | $122.16 | $76.96 | $97.33 | $111.99 |
| Dow\tJones\tTransportation\tAverage | $100.00 | $109.82 | $111.38 | $87.52 | $103.79 | $131.59 |

# 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,	2010	(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.

|  | 2010 | 2009 | 2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Selected\tIncome\tStatement\tData |  |  |  |  |  |
| Revenue: |  |  |  |  |  |
| U.S.\tDomestic\tPackage | $29,742 | $28,158 | $31,278 | $30,985 | $30,456 |
| International\tPackage | \t 11,133 | 9,699 | \t 11,293 | \t 10,281 | 9,089 |
| Supply\tChain\t&amp;\tFreight | 8,670 | 7,440 | 8,915 | 8,426 | 8,002 |
| Total\trevenue | \t 49,545 | \t 45,297 | \t 51,486 | \t 49,692 | \t 47,547 |
| Operating\texpenses: |  |  |  |  |  |
| Compensation\tand\tbenefits | \t 26,324 | \t 25,640 | \t 26,063 | \t 31,745 | \t 24,421 |
| Other | \t 17,347 | \t 15,856 | \t 20,041 | \t 17,369 | \t 16,491 |
| Total\toperating\texpenses | \t 43,671 | \t 41,496 | \t 46,104 | \t 49,114 | \t 40,912 |
| Operating\tprofit\t(loss): |  |  |  |  |  |
| U.S.\tDomestic\tPackage | 3,373 | 2,138 | 3,907 | (1,531) | 4,923 |
| International\tPackage | 1,904 | 1,367 | 1,580 | 1,831 | 1,710 |
| Supply\tChain\tand\tFreight | 597 | 296 | (105) | 278 | 2 |
| Total\toperating\tprofit | 5,874 | 3,801 | 5,382 | 578 | 6,635 |
| Other\tincome\t(expense): |  |  |  |  |  |
| Investment\tincome | 3 | 10 | 75 | 99 | 86 |
| Interest\texpense | (354) | (445) | (442) | (246) | (211) |
| Income\tbefore\tincome\ttaxes | 5,523 | 3,366 | 5,015 | 431 | 6,510 |
| Income\ttax\texpense | (2,035) | (1,214) | (2,012) | (49) | (2,308) |
| Net\tincome | $3,488 | $2,152 | $3,003 | $382 | $4,202 |
| Per\tshare\tamounts: |  |  |  |  |  |
| Basic\tearnings\tper\tshare | $3.51 | $2.16 | $2.96 | $0.36 | $3.87 |
| Diluted\tearnings\tper\tshare | $3.48 | $2.14 | $2.94 | $0.36 | $3.86 |
| Dividends\tdeclared\tper\tshare | $1.88 | $1.80 | $1.80 | $1.68 | $1.52 |
| Weighted\taverage\tshares\toutstanding: |  |  |  |  |  |
| Basic | 994 | 998 | 1,016 | 1,057 | 1,085 |
| Diluted | 1,003 | 1,004 | 1,022 | 1,063 | 1,089 |

|  | 2010 | 2009 | As	of	December	31,<br>2008 | 2007 | 2006 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Selected\tBalance\tSheet\tData |  |  |  |  |  |
| Cash\tand\tmarketable\tsecurities | $4,081 | $2,100 | $1,049 | $2,604 | $1,983 |
| Total\tassets | \t 33,597 | \t 31,883 | \t 31,879 | \t 39,042 | \t 33,210 |
| Long-term\tdebt | \t 10,491 | 8,668 | 7,797 | 7,506 | 3,133 |
| Shareowners'\tequity | 8,047 | 7,696 | 6,780 | \t 12,183 | \t 15,482 |

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

Our	U.S.	Domestic	Package,	International	Package,	and	Supply	Chain	&	Freight	segments	were	all	positively	affected	by	the	worldwide	economic	recovery	in 2010.	Our	operating	results	had	deteriorated	in	2008	and	2009,	due	to	the	severity	and	length	of	the	economic	recession.	Growth	in	world	trade,	U.S.	industrial production	and	retail	sales	positively	impacted	volume	in	our	package	delivery,	LTL	and	forwarding	operations	in	2010.	Additionally,	cost	containment	initiatives	and better	network	efficiencies	resulted	in	improving	operating	profit	margins	for	our	small	package	operations.	Our	consolidated	results	are	presented	in	the	table	below:

|  | Year	Ended	December	31, | Year	Ended	December	31, | Year	Ended	December	31, | %	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2010 | 2009 | 2008 | 2010\t/2009 | 2009\t/2008 |
| Revenue\t(in\tmillions) | $49,545 | $45,297 | $51,486 | 9.4% | (12.0)% |
| Operating\tExpenses\t(in\tmillions) | \t 43,671 | \t 41,496 | \t 46,104 | 5.2% | (10.0)% |
| Operating\tProfit\t(in\tmillions) | $5,874 | $3,801 | $5,382 | 54.5% | (29.4)% |
| Operating\tMargin | 11.9% | 8.4% | 10.5% |  |  |
| Average\tDaily\tPackage\tVolume\t(in\tthousands) | \t 15,574 | \t 15,064 | \t 15,539 | 3.4% | (3.1)% |
| Average\tRevenue\tPer\tPiece | $10.24 | $9.83 | $10.70 | 4.2% | (8.1)% |
| Net\tIncome\t(in\tmillions) | $3,488 | $2,152 | $3,003 | 62.1% | (28.3)% |
| Basic\tEarnings\tPer\tShare | $3.51 | $2.16 | $2.96 | 62.5% | (27.0)% |
| Diluted\tEarnings\tPer\tShare | $3.48 | $2.14 | $2.94 | 62.6% | (27.2)% |

# Items	Affecting	Comparability

The	year-over-year	comparisons	of	our	financial	results	are	affected	by	the	following	items	(in	millions):

|  | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- |
| Operating\tExpenses: |  |  |  |
| Restructuring\tCharge | $98 | $— | $— |
| Gain\ton\tSales\tof\tBusinesses | (20) | \t — | \t — |
| Gain\ton\tSale\tof\tReal\tEstate | (109) | \t — | \t — |
| Aircraft\tImpairment\tCharge | \t — | \t 181 | \t — |
| Goodwill\tImpairment\tCharge | \t — | \t — | \t 548 |
| Intangible\tImpairment\tCharge | \t — | \t — | 27 |
| Interest\tExpense:\nCurrency\tRemeasurement\tCharge | \t — | 77 | \t — |
| Income\tTax\tExpense\t(Benefit)\tfrom\tthe\tItems\tAbove | 37 | (94) | \t — |
| Charge\tfor\tChange\tin\tTax\tFiling\tStatus\tfor\tGerman\tSubsidiary | 76 | \t — | \t — |

# Restructuring	Charge

In	2010,	we	streamlined	the	management	structure	in	our	U.S.	Domestic	Package	segment,	and	incurred	a	restructuring	charge	associated	with	this reorganization.	This	pre-tax	charge	totaled	$98	million	($64	million	after-tax),	and	reflects	the	value	of	voluntary	retirement	benefits,	severance	benefits	and	unvested stock	compensation.

# Gain	on	Sales	of	Businesses

In	2010,	we	sold	our	UPS	Logistics	Technologies	business	unit	within	our	Supply	Chain	&	Freight	segment,	and	recognized	a	pre-tax	gain	of	$71	million	($44 million	after-tax).	Also	in	2010,	we	sold	a	specialized	transportation	business	in	Germany	within	our	Supply	Chain	&	Freight	segment,	and	incurred	a	pre-tax	loss	on	the sale	of	$51	million	($47	million	after-tax),	which	includes	a	fair	value	adjustment	loss	due	to	a	financial	guarantee	associated	with	this	business	sale.

# Gain	on	Sale	of	Real	Estate

In	2010,	we	recognized	a	pre-tax	gain	of	$109	million	($61	million	after-tax)	on	the	sale	of	real	estate	within	our	U.S.	Domestic	Package	segment.

# Aircraft	Impairment	Charges

In	2009,	we	completed	an	impairment	assessment	of	our	McDonnell-Douglas	DC-8	aircraft	fleet,	and	recorded	an	impairment	charge	of	$181	million,	which affected	our	U.S.	Domestic	Package	segment.	This	charge,	as	well	as	our	accounting	policies	pertaining	to	long-lived	assets,	is	discussed	further	in	"Critical	Accounting Policies	and	Estimates".

# Goodwill	Impairment	Charge

In	2008,	we	completed	our	annual	goodwill	impairment	testing	and	determined	that	our	UPS	Freight	reporting	unit,	which	was	formed	through	the	acquisition	of Overnite	Corporation	in	2005,	had	a	goodwill	impairment	of	$548	million.	This	charge,	as	well	as	our	accounting	policies	pertaining	to	goodwill,	is	discussed	further	in "Critical	Accounting	Policies	and	Estimates".

# Intangible	Impairment	Charge

In	2008,	we	completed	an	impairment	assessment	on	a	customer	list	intangible	asset	related	to	our	domestic	package	entity	in	the	United	Kingdom.	We	recorded	a $27	million	charge	related	to	this	assessment,	which	is	further	discussed	in	"Critical	Accounting	Policies	and	Estimates".

# Currency	Remeasurement	Charge

During	2009,	we	incurred	a	$77	million	non-cash,	pre-tax	currency	remeasurement	charge	on	certain	foreign	currency	denominated	obligations.

# Charge	for	Change	in	Tax	Filing	Status	for	German	Subsidiary

In	2010,	we	changed	the	tax	status	of	a	German	subsidiary	that	was	taxable	in	the	U.S.	and	its	local	jurisdiction	to	one	that	is	solely	taxed	in	its	local	jurisdiction. As	a	result	of	this	change	in	tax	status,	we	recorded	a	non-cash	charge	of	$76	million	to	income	tax	expense,	which	resulted	primarily	from	the	write-off	of	related deferred	tax	assets	which	will	not	be	realizable	following	the	change	in	tax	status.

# Results	of	Operations—Segment	Review

The	results	and	discussions	that	follow	are	reflective	of	how	our	executive	management	monitors	the	performance	of	our	reporting	segments.	We	supplement	the reporting	of	our	financial	information	determined	under	generally	accepted	accounting	principles	("GAAP")	with	certain	non-GAAP	financial	measures,	including operating	profit,	operating	margin,	pre-tax	income,	net	income	and	earnings	per	share	adjusted	for	the	non-comparable	items	discussed	previously.	We	believe	that	these adjusted	measures	provide	meaningful	information	to	assist	investors	and	analysts	in	understanding	our	financial	results	and	assessing	our	prospects	for

future	performance.	We	believe	these	adjusted	financial	measures	are	important	indicators	of	our	recurring	results	of	operations	because	they	exclude	items	that	may	not be	indicative	of,	or	are	unrelated	to,	our	core	operating	results,	and	provide	a	better	baseline	for	analyzing	trends	in	our	underlying	businesses.

|  | Year	Ended	December	31, | Year	Ended	December	31, | Year	Ended	December	31, | %	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | \t\t\t\t2010 | \t\t\t\t2009 | \t\t\t\t2008 | 2010\t/\t2009 | 2009\t/\t2008 |
| Revenue\t(in\tmillions): |  |  |  |  |  |
| Next\tDay\tAir | $5,835 | $5,456 | $6,559 | 6.9% | (16.8)% |
| Deferred | 2,975 | 2,859 | 3,325 | 4.1% | (14.0)% |
| Ground | \t 20,932 | \t 19,843 | \t 21,394 | 5.5% | (7.2)% |
| Total\tRevenue | $29,742 | $28,158 | $31,278 | 5.6% | (10.0)% |
| Average\tDaily\tPackage\tVolume\t(in\tthousands): |  |  |  |  |  |
| Next\tDay\tAir | 1,205 | 1,198 | 1,186 | 0.6% | 1.0% |
| Deferred | 941 | 957 | 947 | (1.7)% | 1.1% |
| Ground | \t 11,140 | \t 10,895 | \t 11,443 | 2.2% | (4.8)% |
| Total\tAvg.\tDaily\tPackage\tVolume | \t 13,286 | \t 13,050 | \t 13,576 | 1.8% | (3.9)% |
| Average\tRevenue\tPer\tPiece: |  |  |  |  |  |
| Next\tDay\tAir | $19.14 | $18.00 | $21.95 | 6.3% | (18.0)% |
| Deferred | 12.50 | 11.81 | 13.93 | 5.8% | (15.2)% |
| Ground | 7.43 | 7.20 | 7.42 | 3.2% | (3.0)% |
| Total\tAvg.\tRevenue\tPer\tPiece | $8.85 | $8.53 | $9.14 | 3.8% | (6.7)% |
| Operating\tProfit\t(in\tmillions): |  |  |  |  |  |
| Operating\tProfit | $3,373 | $2,138 | $3,907 | 57.8% | (45.3)% |
| Impact\tof\tRestructuring\tCharge | 98 | — | — |  |  |
| Impact\tof\tGain\ton\tSale\tof\tReal\tEstate | (109) | — | — |  |  |
| Impact\tof\tAircraft\tImpairment\tCharge | — | 181 | — |  |  |
| Adjusted\tOperating\tProfit | $3,362 | $2,319 | $3,907 | 45.0% | (40.6)% |
| Operating\tMargin | 11.3% | 7.6% | 12.5% |  |  |
| Adjusted\tOperating\tMargin | 11.3% | 8.2% | 12.5% |  |  |
| Operating\tDays\tin\tPeriod | 253 | 253 | 252 |  |  |

# Volume

In	2010,	our	overall	volume	increased	as	improvements	in	industrial	production	and	retail	sales	increased	overall	demand	in	the	U.S.	small	package	market. Among	our	air	products,	package	volume	increased	as	inventory	rebuilding	in	the	manufacturing	and	retailing	sectors	contributed	to	growth.	However,	our	letter	volume declined	largely	due	to	weakness	in	the	financial	and	other	service	industries.	The	growth	in	ground	volume	was	driven	by	increased	volume	from	the	manufacturing	and retailing	sectors.

In	2009,	our	overall	volume	declined	as	decreases	in	industrial	production	and	retail	sales	reduced	overall	demand	in	the	U.S.	small	package	market.	Our	air product	volume	was	stronger	than	our	ground	volume,	as	our	air	volume	benefited	from	market	share	gains	resulting	from	the	departure	of	a	competitor	in	the	U.S. market,	as	well	as	improving	economic	trends	in	the	latter	half	of	the	year.	The	growth	in	air	volume	was	strongest	in	our	less	time-sensitive	products,	such	as	Next	Day Air	Saver	and	Three	Day	Select.

Volume	trends	improved	in	the	fourth	quarter,	largely	as	a	result	of	overall	economic	improvements,	as	average	daily	volume	for	Next	Day	Air	and	Deferred products	increased	2.8%	and	4.3%,	respectively,	over	2008	levels.	Ground	volume	demonstrated	an	improving	trend	over	the	previous	quarters	despite	a	2.9%	decline	in the	fourth	quarter	compared	with	2008.

# Revenue	Per	Piece

Overall	revenue	per	piece	increased	for	our	ground	and	air	products	in	2010,	largely	due	to	a	combination	of	base	price	increases	and	fuel	surcharge	rate	changes, which	are	discussed	further	below.	The	revenue	per	piece	for	our	air	products	also	improved	as	a	result	of	higher	average	package	weights	and	the	overall	mix	shift	from letters	to	packages.	For	both	our	air	and	ground	products,	revenue	per	piece	was	negatively	affected	by	a	shift	in	product	mix	to	our	less	premium	services,	such	as	Next Day	Air	Saver	and	Ground	Basic.

Revenue	per	piece	for	our	ground	and	air	products	was	impacted	by	an	increase	in	base	rates	that	took	effect	on	January	4,	2010.	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	an	increase	in	the	residential	surcharge,	and an	increase	in	the	delivery	area	surcharge	on	both	residential	and	commercial	services	to	certain	ZIP	codes.	These	rate	changes	are	customary	and	occur	on	an	annual basis.

Revenue	per	piece	for	our	air	products	was	negatively	affected	in	2009	by	a	decline	in	the	fuel	surcharge	rate	for	air	products.	Additionally,	the	revenue	per	piece decline	for	our	air	products	was	impacted	by	lower	average	package	weights	and	a	mix	shift	toward	lower	yielding	products,	reflecting	the	economic	recession	in	the United	States.	The	decline	in	revenue	per	piece	for	our	ground	products	was	primarily	due	to	a	decrease	in	the	fuel	surcharge	rate,	but	was	also	impacted	by	lower average	package	weights.

The	factors	decreasing	revenue	per	piece	for	our	ground	and	air	products	were	partially	offset	by	an	increase	in	base	rates	that	took	effect	on	January	5,	2009.	We increased	the	base	rates	6.9%	on	UPS	Next	Day	Air,	UPS	2nd	Day	Air,	and	UPS	3	Day	Select,	and	5.9%	on	UPS	Ground.	Other	pricing	changes	included	an	increase	in the	residential	surcharge,	and	an	increase	in	the	delivery	area	surcharge	on	both	residential	and	commercial	services	to	certain	ZIP	codes.

The	trend	towards	lower	package	weights	began	to	stabilize	in	the	fourth	quarter,	however	product	mix	within	our	air	and	ground	services	continued	to	adversely impact	revenue	per	piece,	as	the	lower-yielding	products	within	those	categories	represented	a	larger	share	of	our	overall	package	volume.

# Fuel	Surcharges

UPS	applies	a	fuel	surcharge	on	our	domestic	air	and	ground	services.	The	air	fuel	surcharge	is	based	on	the	U.S.	Energy	Department's	Gulf	Coast	spot	price	for	a gallon	of	kerosene-type	jet	fuel,	while	the	ground	fuel	surcharge	is	based	on	the	U.S.	Energy	Department's	On-Highway	Diesel	Fuel	Price.	Based	on	published	rates,	the average	fuel	surcharge	for	domestic	air	and	ground	products	was	as	follows:

|  | Year	Ended	December	31, | Year	Ended	December	31, | Year	Ended	December	31, | %	Point	Change | %	Point	Change |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2010 | 2009 | 2008 | 2010\t/\t2009 | 2009\t/\t2008 |
| Next\tDay\tAir\t/\tDeferred | \t 8.0% | \t 4.0% | 25.2% | 4.0% | (21.2)% |
| Ground | \t 5.6% | \t 3.3% | 8.0% | 2.3% | (4.7)% |

On	January	4,	2010	and	January	5,	2009,	we	modified	the	fuel	surcharge	on	air	services	by	reducing	the	index	used	to	determine	the	fuel	surcharge	by	2%	in	each of	the	two	years.	The	2010	increase	and	2009	decrease	in	the	air	and	ground	fuel	surcharges	are	due	to	the	significant	variations	in	jet	and	diesel	fuel	prices	(in	addition to	the	reduction	in	the	index	on	the	air	surcharge).	Total	domestic	fuel	surcharge	revenue,	net	of	the	impact	of	hedging,	increased	by	$592	million	in	2010,	primarily	due to	the	higher	fuel	surcharge	rates	described	above,	as

well	as	the	increase	in	volume	for	our	air	and	ground	products.	In	2009,	fuel	surcharge	revenue	decreased	by	$1.924	billion	due	to	lower	fuel	surcharge	rates	and	the decline	in	volume	for	our	air	and	ground	products.

# Operating	Profit	and	Margin

Operating	profit	in	2010	was	positively	impacted	by	the	overall	economic	growth	in	the	U.S.,	which	drove	increased	volume	and	yields.	Combined	with	increased network	efficiencies	and	cost	containment	initiatives,	this	resulted	in	strong	operating	leverage.	Network	efficiencies	were	achieved	in	2010,	as	we	adjusted	our	air	and ground	networks	to	better	match	volume	levels,	and	utilized	our	expanded	Worldport	facility	to	utilize	larger	aircraft	as	well	as	increase	package	sorting	efficiency. These	changes	have	resulted	in	cost	savings	through	fewer	aircraft	block	hours,	labor	hours	in	our	operations,	and	vehicle	miles	driven.	Improved	pick-up	and	delivery densities	have	also	increased	productivity	in	our	operations.	In	addition	to	these	factors,	management	salary	costs	declined	as	a	result	of	a	decrease	in	the	total	number	of management	employees	through	attrition	combined	with	voluntary	and	involuntary	workforce	reductions.	The	combination	of	these	factors	led	to	an	increase	in	the operating	margin	in	2010	compared	with	2009.

Operating	profit	in	2009	was	adversely	impacted	by	the	U.S.	economic	recession,	decreased	network	efficiencies	due	to	the	decline	in	volume,	changes	in	package characteristics,	and	a	shift	in	product	mix	away	from	our	premium	services.	Operating	profit	was	also	negatively	impacted	as	we	incurred	a	larger	decline	in	fuel surcharge	revenue	compared	with	the	decline	in	fuel	expense.	We	adjusted	our	air	and	ground	networks	to	better	match	these	lower	volume	levels,	as	well	as	reduced labor	hours	and	employee	headcount,	resulting	in	cost	savings.	Operating	profit	trends	improved	during	the	fourth	quarter	of	2009	due	to	both	improving	volume	trends and	the	positive	impact	of	continued	cost	and	production	efficiencies,	which	combined	to	improve	the	operating	margin	to	10.1%	for	the	quarter.

# International	Package	Operations

|  | Year	Ended	December	31, | Year	Ended	December	31, | Year	Ended	December	31, | %	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2010 | 2009 | 2008 | 2010\t/\t2009 | 2009\t/\t2008 |
| Revenue\t(in\tmillions): |  |  |  |  |  |
| Domestic | $2,365 | $2,111 | $2,344 | 12.0% | (9.9)% |
| Export | 8,234 | \t 7,176 | 8,294 | 14.7% | (13.5)% |
| Cargo | 534 | 412 | 655 | 29.6% | (37.1)% |
| Total\tRevenue | $11,133 | $9,699 | $11,293 | 14.8% | (14.1)% |
| Average\tDaily\tPackage\tVolume\t(in\tthousands): |  |  |  |  |  |
| Domestic | 1,403 | \t 1,218 | 1,150 | 15.2% | 5.9% |
| Export | 885 | 796 | 813 | 11.2% | (2.1)% |
| Total\tAvg.\tDaily\tPackage\tVolume | 2,288 | \t 2,014 | 1,963 | 13.6% | 2.6% |
| Average\tRevenue\tPer\tPiece: |  |  |  |  |  |
| Domestic | $6.66 | $6.85 | $8.09 | (2.8)% | (15.3)% |
| Export | 36.77 | \t 35.63 | 40.48 | 3.2% | (12.0)% |
| Total\tAvg.\tRevenue\tPer\tPiece | $18.31 | $18.23 | $21.50 | 0.4% | (15.2)% |
| Operating\tProfit\t(in\tmillions): |  |  |  |  |  |
| Operating\tProfit | $1,904 | $1,367 | $1,580 | 39.3% | (13.5)% |
| Impact\tof\tIntangible\tImpairment\tCharge | — | — | 27 |  |  |
| Adjusted\tOperating\tProfit | $1,904 | $1,367 | $1,607 | 39.3% | (14.9)% |
| Operating\tMargin | 17.1% | 14.1% | 14.0% |  |  |
| Adjusted\tOperating\tMargin | 17.1% | 14.1% | 14.2% |  |  |
| Operating\tDays\tin\tPeriod | 253 | 253 | 252 |  |  |
| Currency\tTranslation\tBenefit\t/\t(Cost)—(in\tmillions)*: |  |  |  |  |  |
| Revenue | $(24) | $(376) |  |  |  |
| Operating\tProfit | 6 | (23) |  |  |  |

Export	volume	increased	for	2010,	as	the	worldwide	economy	and	world	trade	continued	to	improve.	We	experienced	strong	growth	in	Asia,	where	volume	grew 28%	due	to	a	combination	of	regional	economic	growth	and	geographic	expansion	of	our	service	offerings.	European	export	volume	also	had	strong	growth	for	the	year, increasing	10%	compared	with	the	prior	year,	due	to	market	share	gains,	economic	growth	in	certain	key	markets,	and	an	overall	expansion	of	trade	in	the	European Union.	U.S.	origin	export	volume	also	had	solid	growth	during	the	year.	Our	premium	Worldwide	Express	and	Expedited	products	grew	at	a	relatively	faster	rate	than our	standard	transborder	and	trade	direct	products.

Non-U.S.	domestic	volume	increased	15.2%	for	the	year,	due	in	part	to	the	acquisition	of	Unsped	Paket	Servisi	San	ve	Ticaret	A.S.	("Unsped")	in	Turkey	in	the third	quarter	of	2009.	Excluding	the	acquisition	of	Unsped,	non-U.S.	domestic	volume	increased	9.7%,	led	by	the	strength	in	core	European	markets,	Canada	and Mexico.

Export	volume	declined,	primarily	due	to	weakness	in	the	Asia,	Europe	and	U.S.	export	lanes,	as	the	worldwide	economic	recession	and	slowdown	in	world	trade more	than	offset	market	share	gains.	Transborder	export	volume	was	relatively	stronger	within	the	European	Union	and	North	America	trade	areas,	while	volume	in	the longer	export	trade	lanes	was	comparatively	weaker.	Non-U.S.	domestic	volume	increased	for	the	year,	largely	due	to	the	acquisition	of	Unsped,	as	well	as	volume growth	in	Germany,	France,	Poland	and	Canada.

By	the	fourth	quarter	of	2009,	export	volume	began	to	improve	as	global	trade	and	economic	activity	accelerated.	The	Asia	and	U.S.	export	lanes	demonstrated significant	improvement,	as	those	trade	areas	suffered	a	relatively	greater	decline	in	the	early	part	of	the	year.	Domestic	volume	continued	to	benefit	from	the	Unsped acquisition,	as	well	as	market	share	gains	and	general	economic	improvement	in	Europe	and	the	Americas.	Volume	was	relatively	stronger	in	the	small	and	middle market	customer	segments.

Export	revenue	per	piece	increased	during	2010,	largely	due	to	higher	fuel	surcharge	rates,	base	rate	increases	and	product	mix.	Export	revenue	per	piece increased	as	higher-yielding	products	(such	as	Worldwide	Express	and	Worldwide	Expedited)	grew	at	a	relatively	faster	pace.	In	2010,	we	experienced	an	overall lengthening	of	trade	lanes,	as	inter-regional	trade	increased	(especially	in	our	Asia-to-Europe	and	Asia-to-U.S.	export	lanes),	leading	to	relatively	stronger	growth	for	our premium	products.	The	impact	of	currency,	net	of	hedging,	resulted	in	a	decrease	to	revenue	growth	during	the	year.	Domestic	revenue	per	piece	decreased,	primarily due	to	the	impact	of	lower-yielding	domestic	packages	from	the	Unsped	acquisition.	Total	average	revenue	per	piece	increased	0.7%	for	the	year	on	a	currency-adjusted basis.

On	January	4,	2010,	we	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).	Rate	changes	for	shipments	originating	outside	the	U.S.	were	made	throughout	the	year	and	varied by	geographic	market.

Export	revenue	per	piece	decreased,	largely	due	to	the	adverse	impact	of	currency	exchange	rates,	lower	fuel	surcharge	rates,	and	product	mix,	but	was	partially offset	by	base	rate	increases	that	took	effect	in	the	first

quarter	of	2009.	Currency-adjusted	export	revenue	per	piece	declined	10.1%	for	2009.	Export	revenue	per	piece	was	impacted	by	the	lower	revenue	per	piece transborder	products	comprising	a	relatively	larger	portion	of	our	total	volume,	as	we	experienced	larger	volume	declines	on	some	of	our	longer	export	trade	lanes	with higher	yields.	Domestic	revenue	per	piece	decreased,	which	was	primarily	caused	by	adverse	currency	exchange	rate	fluctuations	(currency-adjusted	domestic	revenue per	piece	declined	7.2%	for	the	year),	as	well	as	the	impact	of	lower	fuel	surcharge	rates.	Total	average	revenue	per	piece	decreased	12.1%	for	the	year	on	a	currency- adjusted	basis.

Export	revenue	per	piece	showed	a	significant	improvement	in	the	fourth	quarter,	as	higher-yielding	trade	lanes,	such	as	Asia	to	Europe	and	Asia	to	North America,	comprised	a	larger	proportion	of	our	total	export	volume.	Revenue	per	piece	in	the	fourth	quarter	benefited	from	a	weaker	U.S.	Dollar,	but	continued	to	be adversely	impacted	by	lower	fuel	surcharge	rates.

On	January	4,	2010	and	January	5,	2009,	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%	in	each	of	the	two	years.	The	fuel	surcharges	for	products	originating	outside	the	United	States	continue	to	be	indexed	to	fuel	prices	in	our different	international	regions,	depending	upon	where	the	shipment	takes	place.	Total	international	fuel	surcharge	revenue	increased	by	$299	million	in	2010,	due	to higher	fuel	surcharge	rates	caused	by	increased	fuel	prices	as	well	as	an	increase	in	international	air	volume.	Fuel	surcharge	revenue	decreased	by	$788	million	in	2009, due	to	lower	fuel	surcharge	rates	caused	by	decreased	fuel	prices,	but	this	was	partially	offset	by	an	increase	in	international	air	volume.

The	increase	in	operating	profit	for	2010	was	primarily	driven	by	volume	increases	in	all	major	regions	and	trade	lanes	worldwide.	The	shift	in	product	mix	to	our higher-margin	premium	services	also	contributed	to	the	increase	in	operating	profits.	Additionally,	network	efficiencies	and	cost	containment	initiatives	created	operating leverage	throughout	our	operations.	These	factors	led	to	an	increase	in	the	operating	margin	in	2010	compared	with	2009.

The	decline	in	operating	profit	for	the	year	was	caused	primarily	by	a	shift	in	product	mix	away	from	our	premium	services,	and	volume	declines	in	some	of	the longer	export	trade	lanes.	Operating	profit	was	also	negatively	impacted	as	we	incurred	a	larger	decline	in	fuel	surcharge	revenue	compared	with	the	decline	in	fuel expense.	To	reduce	costs,	we	adjusted	our	air	network	and	reduced	block	hours	and	flight	segments	in	certain	international	regions.	The	volume	trends	began	to	improve later	in	the	year,	and	in	the	fourth	quarter	operating	profit	increased	19%	(excluding	an	impairment	charge	in	2008),	as	the	impact	of	cost	initiatives	and	network improvements	drove	an	improvement	in	the	operating	margin	to	16.7%.

# Supply	Chain	&	Freight	Operations

|  | Year	Ended	December	31, | Year	Ended	December	31, | Year	Ended	December	31, | %	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2010 | 2009 | 2008 | 2010\t/\t2009 | 2009\t/\t2008 |
| Revenue\t(in\tmillions): |  |  |  |  |  |
| Forwarding\tand\tLogistics | $6,022 | $5,080 | $6,293 | 18.5% | (19.3)% |
| Freight | 2,208 | 1,943 | 2,191 | 13.6% | (11.3)% |
| Other | 440 | 417 | 431 | 5.5% | (3.2)% |
| Total\tRevenue | $8,670 | $7,440 | $8,915 | 16.5% | (16.5)% |
| Freight\tLTL\tStatistics: |  |  |  |  |  |
| Revenue\t(in\tmillions) | $2,002 | $1,807 | $2,062 | 10.8% | (12.4)% |
| Revenue\tPer\tHundredweight | $19.18 | $17.69 | $18.68 | 8.4% | (5.3)% |
| Shipments\t(in\tthousands) | 9,952 | 9,880 | \t 10,036 | 0.7% | (1.6)% |
| Shipments\tPer\tDay\t(in\tthousands) | 39.5 | 39.1 | 39.5 | 1.0% | (1.0)% |
| Gross\tWeight\tHauled\t(in\tmillions\tof\tlbs) | \t 10,440 | \t 10,211 | \t 11,037 | 2.2% | (7.5)% |
| Weight\tPer\tShipment\t(in\tlbs) | 1,049 | 1,033 | 1,100 | 1.5% | (6.1)% |
| Operating\tDays\tin\tPeriod | 252 | 253 | 254 |  |  |
| Operating\tProfit\t(in\tmillions): |  |  |  |  |  |
| Operating\tProfit | $597 | $296 | $(105) | 101.7% | N/A |
| Impact\tof\tGain\ton\tSales\tof\tBusinesses | (20) | — | — |  |  |
| Impact\tof\tGoodwill\tImpairment\tCharge | — | — | 548 |  |  |
| Adjusted\tOperating\tProfit | $577 | $296 | $443 | 94.9% | (33.2)% |
| Operating\tMargin | 6.9% | 4.0% | (1.2)% |  |  |
| Adjusted\tOperating\tMargin | 6.7% | 4.0% | 5.0% |  |  |
| Currency\tTranslation\tBenefit\t/\t(Cost)—(in\tmillions)*: |  |  |  |  |  |
| Revenue | $48 | $(52) |  |  |  |
| Operating\tProfit | 7 | (15) |  |  |  |

* Amount	represents	the	change	compared	to	the	prior	year.

# Revenue

Forwarding	and	logistics	revenue	increased	in	2010,	primarily	due	to	growth	in	the	demand	for	forwarding	as	a	result	of	the	continued	expansion	of	the	worldwide economy,	inventory	rebuilding	and	world	trade.	In	our	forwarding	business,	both	air	freight	and	ocean	freight	experienced	solid	revenue	growth,	due	primarily	to	higher volumes,	fuel	surcharges,	and	other	accessorial	charges.	International	air	freight	tonnage	increased	19%	for	2010	compared	with	the	prior	year.	In	our	logistics	products, we	experienced	growth	in	mail	services	and	distribution	revenue,	with	solid	increases	being	achieved	in	the	healthcare	and	technology	sectors.

Freight	revenue	increased,	primarily	due	to	higher	fuel	surcharge	rates	and	a	base	rate	increase	that	took	effect	in	January	2010.	Average	LTL	shipments	per	day, weight	per	shipment	and	LTL	revenue	per	hundredweight	all	increased	during	the	year,	largely	due	to	our	strategy	of	maintaining	our	focus	on	yields	and	targeting certain	customer	segments.	The	increase	in	LTL	revenue	per	hundredweight	was	primarily	due	to	an	increase	in	base	prices	that	took	effect	in	January	2010,	as	UPS Freight	increased	minimum	charge,	LTL	and	TL	rates	an	average	of	5.7%,	covering	non-contractual	shipments	in	the	United	States,	Canada,	and	Mexico.	An	additional 5.9%	rate	increase	took	effect	October	18,	2010.	Additionally,	LTL	revenue	per	hundredweight	increased	as	a	result	of	higher	fuel	surcharge	rates,	as	total	fuel	surcharge revenue	increased	$105	million	for	the	year	primarily	resulting	from	higher	diesel	fuel	prices.

The	other	businesses	within	Supply	Chain	&	Freight	experienced	an	increase	in	revenue.	A	primary	driver	of	this	increase	was	our	UPS	Customer	Solutions business,	which	provides	a	range	of	services	(e.g.	project	management,	industrial	engineering,	transportation	fleet	services,	distribution	network	analysis,	package engineering,	and	package	visibility).

Forwarding	and	logistics	revenue	decreased	for	the	year,	and	was	caused	primarily	by	weakness	in	demand	for	freight	forwarding	due	to	global	economic weakness	and	declines	in	international	trade.	Forwarding	revenue	declined	in	all	major	transportation	modes,	including	domestic	and	international	air	freight	and	ocean freight,	and	was	impacted	by	lower	volumes,	lower	fuel	surcharges,	and	lower	security	and	other	accessorial	charges.	Logistics	distribution	and	post-sales	service revenue	also	declined,	primarily	resulting	from	the	weak	global	economy,	however	mail	services	revenue	increased	for	the	year.

Freight	revenue	declined,	primarily	due	to	lower	fuel	surcharge	rates	and	a	decline	in	average	daily	LTL	shipments.	Total	LTL	weight	per	shipment	declined	for the	year,	reflecting	the	weak	LTL	market	and	the	ongoing	economic	recession	in	the	United	States	in	2009.	Average	LTL	shipments	per	day	also	declined,	as	market share	gains	were	more	than	offset	by	the	impact	of	the	weak	economy.	LTL	revenue	per	hundredweight	decreased,	primarily	as	a	result	of	the	lower	fuel	surcharge	rates, as	total	fuel	surcharge	revenue	declined	$188	million	for	the	year	primarily	resulting	from	lower	diesel	fuel	prices.	However,	this	decline	was	partially	offset	by	an increase	in	base	prices	that	took	effect	on	January	5,	2009,	as	UPS	Freight	increased	minimum	charge,	LTL	and	TL	rates	an	average	of	5.9%,	covering	non-contractual shipments	in	the	United	States	and	Canada.

The	other	businesses	within	Supply	Chain	&	Freight,	which	include	our	retail	franchising	business	and	our	financial	business,	experienced	a	decline	in	revenue, primarily	caused	by	lower	interest	rates	and	decreased	loan	volume	in	our	financial	business.

Revenue	trends	for	our	forwarding,	logistics,	and	LTL	products	improved	in	the	fourth	quarter	of	2009,	largely	resulting	from	favorable	comparisons	with	the prior	year.	The	change	in	revenue	for	our	forwarding	and	logistics	businesses	benefited	from	the	weaker	U.S.	Dollar	during	the	quarter,	while	revenue	in	the	forwarding and	LTL	units	continued	to	be	adversely	impacted	by	lower	fuel	surcharge	revenue.

Operating	profit	in	the	forwarding	unit	increased	during	2010,	largely	due	to	a	strong	increase	in	tonnage	in	our	air	and	ocean	forwarding	businesses,	but	was partially	offset	by	capacity	constraints	from	outside	carriers	in	the	first	half	of	2010.	Capacity	constraints	led	to	rapidly	escalating	rates	on	air	freight	which	could	not	be passed	on	to	customers	in	a	timely	manner,	resulting	in	a	negative	impact	to	our	operating	profit	and	margin.	This	situation	improved	during	the	second	half	of	2010,	as capacity	constraints	lessened	and	we	were	able	to	implement	revenue	management	plans	which	better	matched	customer	pricing	with	market	conditions.	Our	logistics unit	had	a	solid	increase	in	profitability	for	the	year,	which	was	driven	primarily	by	an	expansion	of	operating	margins	due	to	operating	efficiencies	and	a	focus	on	higher margin	industry	sectors.

Operating	profit	for	our	UPS	Freight	unit	increased	in	2010	compared	with	the	prior	year,	largely	due	to	better	productivity,	and	increases	in	base	pricing	and volume.	Productivity	metrics	increased,	including	increases	in	pickup	and	delivery	stops	per	hour	and	linehaul	utilization.

All	of	the	remaining	businesses	within	this	segment	had	an	operating	profit	during	the	year.	Combined	operating	profit	for	these	businesses	was	lower	in	2010 than	in	2009,	primarily	due	to	the	gain	on	sale	of	substantially	all	our	international	Mail	Boxes	Etc.	operations	during	the	second	quarter	of	2009.

The	lower	operating	profit	in	the	forwarding	unit	was	impacted	by	the	weak	global	demand	for	forwarding	services,	as	well	as	capacity	reductions	by	outside ocean	and	air	freight	carriers.	During	the	latter	half	of	2009	and	particularly	in	the	fourth	quarter,	capacity	constraints	led	to	rapidly	escalating	rates	on	air	freight	which could	not	be	passed	on	to	customers,	resulting	in	a	negative	impact	to	operating	profit	and	margin.	The	operating	profit	for	our	logistics	unit	declined	slightly,	and	was impacted	by	the	loss	incurred	on	the	sale	of	some	non-core	European	logistics	operations.	However,	the	operating	margin	in	this	business	remained	stable,	as	costs	were reduced	commensurate	with	the	decline	in	revenues.

Our	UPS	Freight	unit	reported	improved	profitability	for	2009,	due	to	a	reduction	in	vacation	accruals	resulting	from	modifications	in	vacation	policies	and changes	in	the	workforce	coverage	of	our	individual	plans.	Excluding	this	reduction	in	vacation	liabilities,	the	UPS	Freight	unit	reported	a	small	operating	loss	due	to	the economic	recession	and	difficult	LTL	market	in	the	United	States.

The	combined	operating	income	for	all	of	our	other	businesses	in	this	segment	increased	during	the	year.	The	increase	was	primarily	driven	by	a	gain	on	sale	of substantially	all	of	our	international	Mail	Boxes	Etc.	operations	during	the	second	quarter.

|  | Year	Ended	December	31, | Year	Ended	December	31, | Year	Ended	December	31, | %	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2010 | 2009 | 2008 | 2010\t/\t2009 | 2009\t/\t2008 |
| Operating\tExpenses\t(in\tmillions): |  |  |  |  |  |
| Compensation\tand\tBenefits | $26,324 | $25,640 | $26,063 | 2.7% | (1.6)% |
| Impact\tof\tRestructuring\tCharge | (98) | — | — |  |  |
| Adjusted\tCompensation\tand\tBenefits | \t 26,226 | \t 25,640 | \t 26,063 | 2.3% | (1.6)% |
| Repairs\tand\tMaintenance | 1,131 | 1,075 | 1,194 | 5.2% | (10.0)% |
| Depreciation\tand\tAmortization | 1,792 | 1,747 | 1,814 | 2.6% | (3.7)% |
| Purchased\tTransportation | 6,640 | 5,379 | 6,550 | 23.4% | (17.9)% |
| Fuel | 2,972 | 2,365 | 4,134 | 25.7% | (42.8)% |
| Other\tOccupancy | 939 | 985 | 1,027 | (4.7)% | (4.1)% |
| Other\tExpenses | 3,873 | 4,305 | 5,322 | (10.0)% | (19.1)% |
| Impact\tof\tGain\ton\tSale\tof\tReal\tEstate | 109 | — | — |  |  |
| Impact\tof\tGain\ton\tSales\tof\tBusinesses | 20 | — | — |  |  |
| Impact\tof\tAircraft\tImpairment\tCharge | — | (181) | — |  |  |
| Impact\tof\tGoodwill\tand\tIntangible\tImpairment\tCharges | — | — | (575) |  |  |
| Adjusted\tOther\tExpenses | 4,002 | 4,124 | 4,747 | (3.0)% | (13.1)% |
| Total\tOperating\tExpenses | $43,671 | $41,496 | $46,104 | 5.2% | (10.0)% |
| Adjusted\tTotal\tOperating\tExpenses | \t 43,702 | \t 41,315 | \t 45,529 | 5.8% | (9.3)% |
| Currency\tTranslation\t(Benefit)\tCost | $11 | $(390) |  |  |  |

# Compensation	and	Benefits

The	increase	in	compensation	and	benefits	expense	during	2010	compared	with	2009	was	impacted	by	several	items.	Payroll	costs	increased,	largely	due	to	higher accruals	for	management	incentive	compensation	plans	resulting	from	improved	company	financial	results.	Union	payroll	costs	also	increased	due	to	contractual	wage increases.	These	factors	were	partially	offset	by	a	decline	in	union	labor	hours,	as	well	as	a	reduction	in	management	salary	costs	resulting	from	a	decrease	in	the	total number	of	management	employees	through	attrition	combined	with	voluntary	and	involuntary	workforce	reductions.

Benefits	expense	increased	in	2010,	due	largely	to	increases	in	pension	expense,	health	and	welfare	expense,	and	relocation-related	benefit	costs	for	management employees.	Pension	expense	increases	resulted	primarily	from	higher	union	contribution	rates	for	multi-employer	pension	plans.	The	relocation	benefit	costs	relate	to	the restructuring	of	our	domestic	package	operations	that	occurred	in	the	first	quarter	of	2010.	This	increase	in	health	and	welfare	costs,	which	was	primarily	driven	by health	cost	inflation,	was	somewhat	mitigated	by	reductions	in	the	total	number	of	management	employees	and	union	employees	covered	by	UPS-sponsored	health	and welfare	benefit	plans.

The	decrease	in	compensation	and	benefits	expense	during	2009	compared	with	2008	was	impacted	by	several	items.	A	large	component	of	this	decrease	was related	to	employee	payroll	costs,	as	union	labor	hours	declined	as	a	result	of	lower	U.S.	Domestic	Package	volume,	and	management	payroll	declined	as	a	result	of	a reduction	in	the	total	number	of	management	employees	through	attrition	combined	with	a	wage	freeze.	Benefits	expense	increased	due	to	higher	employee	health	and welfare	program	costs,	which	were	impacted	by	higher	union	contribution	rates,	and	increased	pension	expense.	Pension	expense	increases	resulted	from	higher	union contribution	rates	for	multi-employer	pension	plans,	combined	with	increased	interest	costs,	a	decrease	in	our	expected	return	on	plan	assets	and	the	amortization	of actuarial	losses	for	company-sponsored	plans.	The	interest	cost	grew	due	to	continued	service	accruals,	while	the	decrease	in	expected	return	on	plan	assets	and	the actuarial	losses	were	primarily	due	to	the	negative	asset	returns	experienced	in	2008.	The	overall	increase	in	benefits	expense	was	partially	offset	by	a	freeze	in	the company	contributions	to	our	primary	employee	defined	contribution	savings	plan.

# Repairs	and	Maintenance

Repairs	and	maintenance	expense	increased	in	2010,	largely	due	to	higher	costs	for	maintenance	on	our	vehicle	fleet.	Repairs	and	maintenance	expense	declined in	2009,	largely	due	to	reduced	vehicle	maintenance	expenses	resulting	from	a	reduction	in	miles	driven.

# Depreciation	and	Amortization

Depreciation	and	amortization	expense	increased	in	2010,	primarily	as	a	result	of	depreciation	expense	on	equipment	and	facilities	capitalized	in	conjunction	with the	recent	Worldport	expansion.	Amortization	of	intangible	assets	also	increased	as	a	result	of	new	intangibles	recognized	related	to	the	Unsped	acquisition	in	Turkey	in the	third	quarter	of	2009,	as	well	as	corporate	sponsorships	entered	into	in	2010.

Depreciation	and	amortization	expense	decreased	in	2009,	primarily	as	a	result	of	lower	depreciation	expense	on	equipment	and	facilities,	as	certain	Worldport assets	became	fully	depreciated,	as	well	as	lower	software	amortization	resulting	from	fewer	new	capitalized	software	projects.	These	decreases	were	partially	offset	by higher	depreciation	expense	on	aircraft	and	vehicles,	resulting	from	new	deliveries	in	2008	and	2009.

# Purchased	Transportation

The	increase	in	purchased	transportation	in	2010	was	driven	by	higher	freight	forwarding	volume	and	rates	in	Asia	and	Europe,	as	well	as	increased	fuel	surcharge rates	charged	to	us	by	third-party	carriers	as	a	result	of	higher	fuel	prices.	The	decrease	in	purchased	transportation	in	2009	was	driven	by	a	combination	of	lower	volume in	our	international	package	and	forwarding	businesses,	a	stronger	U.S.	Dollar,	and	decreased	fuel	surcharge	rates	charged	to	us	by	third-party	carriers	as	a	result	of lower	fuel	prices.

The	increase	in	fuel	expense	in	2010	was	caused	primarily	by	higher	prices	for	jet-A	fuel,	diesel,	and	unleaded	gasoline,	as	well	as	a	slight	increase	in	usage	of these	products	in	our	operations.	The	decrease	in	fuel	expense	in	2009	was	impacted	by	significantly	lower	prices	for	jet-A	fuel,	diesel,	and	unleaded	gasoline,	as	well	as lower	usage	of	these	products	in	our	operations.

# Other	Occupancy

The	decrease	in	other	occupancy	expense	in	2010	was	primarily	due	to	decreased	labor	and	overhead	expenses,	and	lower	rent	expense	on	leased	facilities.	The decrease	in	other	occupancy	expense	in	2009	was	primarily	caused	by	lower	electricity	and	natural	gas	costs,	as	well	as	lower	rent	expense.

# Other	Expenses

The	decrease	in	other	expenses	in	2010	was	largely	due	to	reductions	in	bad	debt	expense	and	foreign	currency	transaction	expense,	which	reflected	gains	during 2010	compared	to	losses	in	2009.	Additionally,	we	incurred	a	loss	on	the	sale	of	a	French	repair	business	in	2009.	Additional	expense	reductions	in	2010	were	due	to	cost containment	programs,	including	reductions	in	telecom	costs,	office	supplies,	and	outside	professional	fees.	We	also	incurred	lower	expenses	associated	with	auto liability	insurance	and	customer	claims	for	lost	or	damaged	packages.

The	decline	in	other	expenses	in	2009,	exclusive	of	impairment	charges,	was	due	in	part	to	certain	variable	costs	that	declined	as	a	result	of	lower	package	volume, such	as	the	expense	associated	with	customer	claims	for	lost	or	damaged	packages,	rent	expense	for	transportation	equipment,	cargo	handling	costs,	and	aircraft	landing fees.	Additionally,	certain	other	costs	declined	primarily	as	a	result	of	cost	containment	programs,	such	as	employee	expense	reimbursements,	office	supplies, professional	services,	and	advertising	costs.

|  | Year	Ended	December	31, | Year	Ended	December	31, | Year	Ended	December	31, | %	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2010 | 2009 | 2008 | 2010\t/\t2009 | 2009\t/\t2008 |
| Investment\tIncome\tand\tInterest\tExpense\t(in\tmillions):\nInvestment\tIncome | $3 | $10 | $75 | (70.0)% | (86.7)% |
| Interest\tExpense | $(354) | $(445) | $(442) | (20.4)% | 0.7% |
| Impact\tof\tCurrency\tRemeasurement\tCharge | — | 77 | — |  |  |
| Adjusted\tInterest\tExpense | $(354) | $(368) | $(442) | (3.8)% | (16.7)% |

# Investment	Income

The	decrease	in	investment	income	in	2010	was	primarily	due	to	a	lower	yield	earned	on	our	invested	assets	as	a	result	of	declines	in	short-term	interest	rates	in the	United	States,	as	well	as	higher	impairment	losses	on	our	holdings	of	auction	rate	and	preferred	securities.	The	2009	decline	was	largely	due	to	a	lower	average balance	of	interest-earning	investments,	a	significantly	lower	yield	earned	on	our	invested	assets	as	a	result	of	declines	in	short-term	interest	rates	in	the	United	States, and	a	loss	on	the	fair	value	adjustments	of	certain	investment	partnerships.

During	the	second	quarter	of	2010,	we	recorded	impairment	losses	on	certain	asset-backed	auction	rate	securities.	The	impairment	charge	resulted	from provisions	that	allow	the	issuers	of	the	securities	to	subordinate	our	holdings	to	newly	issued	debt	or	to	tender	for	the	securities	at	less	than	their	par	value.	These securities,	which	had	a	cost	basis	of	$128	million,	were	written	down	to	their	fair	value	of	$107	million	as	of	June	30,	2010,	resulting	in	an	other-than-temporary impairment	of	$21	million.

During	the	second	quarter	of	2009,	we	recorded	impairment	losses	on	certain	perpetual	preferred	securities,	and	an	auction	rate	security	collateralized	by preferred	securities,	issued	by	large	financial	institutions.	The

impairment	charge	resulted	from	conversion	offers	from	the	issuers	of	these	securities	at	prices	well	below	the	stated	redemption	value	of	the	preferred	shares.	These securities,	which	had	a	cost	basis	of	$42	million,	were	written	down	to	their	fair	value	of	$25	million	as	of	June	30,	2009,	resulting	in	an	other-than-temporary impairment	of	$17	million.

# Interest	Expense

The	decrease	in	interest	expense	in	2010	was	primarily	due	to	lower	average	debt	balances,	but	this	was	partially	offset	by	lower	capitalized	interest,	due	to	the recent	completion	of	several	large	construction	projects,	including	our	Worldport	expansion.	Excluding	the	currency	remeasurement	charge,	the	2009	decrease	in	interest expense	was	largely	due	to	lower	average	debt	balances	and	lower	average	interest	rates	incurred	on	variable	rate	debt	and	interest	rate	swaps.

# Income	Tax	Expense

|  | Year	Ended	December	31, | Year	Ended	December	31, | Year	Ended	December	31, | %	Change | %	Change |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2010 | 2009 | 2008 | 2010\t/\t2009 | 2009\t/\t2008 |
| Income\tTax\tExpense | $2,035 | $1,214 | $2,012 | 67.6% | (39.7)% |
| Impact\tof\tCharge\tfor\tChange\tin\tTax\tFiling\tStatus\tfor\tGerman |  |  |  |  |  |
| Subsidiary | (76) | — | — |  |  |
| Impact\tof\tRestructuring\tCharge | 34 | — | — |  |  |
| Impact\tof\tGain\ton\tSales\tof\tBusinesses | (23) | — | — |  |  |
| Impact\tof\tGain\ton\tSale\tof\tReal\tEstate | (48) | — | — |  |  |
| Impact\tof\tAircraft\tImpairment\tCharge | — | 65 | — |  |  |
| Impact\tof\tCurrency\tRemeasurement\tCharge | — | 29 | — |  |  |
| Adjusted\tIncome\tTax\tExpense | $1,922 | $1,308 | $2,012 | 46.9% | (35.0)% |
| Effective\tTax\tRate | 36.8% | 36.1% | 40.1% |  |  |
| Adjusted\tEffective\tTax\tRate | 35.0% | 36.1% | 36.0% |  |  |

The	increase	in	our	effective	tax	rate	in	2010	compared	with	2009	was	attributable	to	the	higher	marginal	tax	rate	applied	to	the	gain	on	the	sale	of	real	estate,	as well	as	the	change	in	the	tax	filing	status	of	a	German	subsidiary	that	occurred	in	the	first	quarter	of	2010.	Additionally,	we	are	currently	unable	to	recognize	the	entire potential	tax	benefit	of	tax	loss	carryforwards	generated	from	the	sale	of	a	Supply	Chain	&	Freight	business	in	Germany	in	the	first	quarter	of	2010.

Excluding	these	items,	our	adjusted	year-to-date	effective	tax	rate	decreased	in	2010	compared	to	2009	primarily	due	to	the	effect	of	having	a	higher	proportion	of our	taxable	income	in	2010	being	subject	to	tax	outside	the	United	States,	where	statutory	tax	rates	are	generally	lower.

Income	tax	expense	declined	primarily	due	to	lower	pre-tax	income.	The	decrease	in	our	effective	tax	rate	was	primarily	due	to	the	goodwill	and	intangible impairment	charges	described	previously,	which	were	not	deductible	for	tax	purposes	and	resulted	in	the	effective	tax	rate	increasing	by	4.1%.	This	was	partially	offset by	an	increase	in	our	first	quarter	2009	income	tax	provision	as	a	result	of	providing	a	valuation	allowance	of	$14	million	against	certain	deferred	tax	assets	in	our International	Package	business.

# Liquidity	and	Capital	Resources

# Operating	Activities

Cash	from	operating	activities	remained	strong	throughout	the	2008	to	2010	time	period.	In	2010,	operating	cash	flow	was	reduced	by	$2.0	billion	in	discretionary contributions	to	our	UPS	Retirement	and	UPS	Pension	Plans,	as	well	as	an	increase	in	working	capital	needs	due	to	underlying	growth	in	our	business.	In	2009, operating	cash	flow	was	adversely	impacted	by	the	decline	in	profitability	for	our	three	reporting	segments.	In	2008,	operating	cash	flow	increased	by	approximately $1.228	billion	due	to	tax	refunds	received	that	year	related	to	our	previous	withdrawal	from	the	Central	States	Pension	Plan.	The	following	table	provides	a	summary	of the	major	items	affecting	our	operating	cash	flows	(in	millions):

|  | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- |
| Net\tincome | $3,488 | $2,152 | $3,003 |
| Non-cash\toperating\tactivities(a) | 4,248 | \t 3,863 | \t 4,539 |
| Pension\tand\tpostretirement\tplan\tcontributions\t(UPS-sponsored\tplans) | (3,240) | (924) | (246) |
| Income\ttax\treceivables\tand\tpayables | (319) | 245 | \t 1,167 |
| Changes\tin\tworking\tcapital\tand\tother\tnoncurrent\tassets\tand\tliabilities | (340) | (137) | (6) |
| Other\toperating\tactivities | (2) | 86 | (31) |
| Net\tcash\tfrom\toperating\tactivities | $3,835 | $5,285 | $8,426 |

(a) Represents	depreciation	and	amortization,	gains	and	losses	on	derivative	transactions	and	foreign	exchange,	deferred	income	taxes,	provisions	for	uncollectible accounts,	pension	and	postretirement	benefit	expense,	stock	compensation	expense,	impairment	charges,	and	other	non-cash	items.

Except	for	the	$2.0	billion	discretionary	contributions	to	our	UPS	Retirement	and	UPS	Pension	plans	in	2010,	contributions	to	our	company-sponsored	pension plans	have	largely	varied	based	on	whether	any	minimum	funding	requirements	are	present	for	individual	pension	plans.	The	remaining	increases	in	contributions	in 2010	and	2009	were	largely	due	to	minimum	funding	requirements	related	to	the	UPS	IBT	Pension	Plan.	As	discussed	further	in	the	"Contractual	Commitments" section,	we	have	minimum	funding	requirements	in	the	next	several	years,	primarily	related	to	the	UPS	IBT	Pension	Plan.	In	January	2011,	we	made	a	$1.2	billion contribution	to	the	UPS	IBT	Pension	Plan,	which	represented	an	acceleration	of	contributions	that	would	have	been	required	in	2011	and	over	$350	million	in contributions	that	would	not	have	been	required	until	after	2011.

# Investing	Activities

Our	primary	uses	of	cash	flows	for	investing	activities	were	for	capital	expenditures,	as	follows	(amounts	in	millions):

|  | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- |
| Net\tcash\tused\tin\tinvesting\tactivities | $654 | $1,248 | $3,179 |
| Capital\tExpenditures: |  |  |  |
| Buildings\tand\tfacilities | $352 | $568 | $968 |
| Aircraft\tand\tparts | 416 | 611 | 852 |
| Vehicles | 339 | 209 | 539 |
| Information\ttechnology | 282 | 214 | 277 |
|  | $1,389 | $1,602 | $2,636 |
| Capital\tExpenditures\tas\ta\t%\tof\tRevenue | 2.8% | 3.5% | 5.1% |
| Other\tInvesting\tActivities: |  |  |  |
| Proceeds\tfrom\tdisposals\tof\tproperty,\tplant\tand\tequipment | $304 | $60 | $147 |
| Net\t(increase)\tdecrease\tin\tfinance\treceivables | $108 | $261 | $(49) |
| Net\t(purchases)\tsales\tof\tmarketable\tsecurities | $30 | $(11) | $(278) |
| Other\tinvesting\tactivities | $293 | $44 | $(363) |

We	have	commitments	for	the	purchase	of	aircraft,	vehicles,	equipment	and	real	estate	to	provide	for	the	replacement	of	existing	capacity	and	anticipated	future growth.	We	generally	fund	our	capital	expenditures	with	our	cash	from	operations.	In	2010,	we	reduced	capital	spending	to	a	level	commensurate	with	our	current anticipated	operating	needs.	Future	capital	spending	for	anticipated	growth	and	replacement	assets	will	depend	on	a	variety	of	factors,	including	economic	and	industry conditions.

The	decline	in	capital	expenditures	on	buildings	and	facilities	primarily	resulted	from	the	completion	of	several	large	hub	construction	and	expansion	projects, including	our	Worldport	hub	expansion,	as	well	as	the	expansion	and	new	construction	projects	at	other	facilities	in	Europe,	Canada	and	China.	In	2009,	we	completed the	first	phase	of	our	Worldport	expansion,	which	increased	the	sorting	capacity	by	15%.	The	final	phase	of	the	Worldport	expansion	was	completed	in	2010,	with	an additional	sorting	capacity	of	approximately	20%.	In	2008,	we	opened	our	new	international	air	hub	in	Shanghai,	China,	and	also	began	construction	of	our	new	intra- Asia	air	hub	in	Shenzhen,	China,	which	became	operational	in	February	2010.

Capital	spending	on	aircraft	over	the	2008	to	2010	period	was	largely	due	to	scheduled	deliveries	of	previous	orders	for	the	Boeing	767-300	and	747-400,	and MD-11	aircraft.	Capital	spending	on	vehicles	was	primarily	for	replacement	assets	in	our	package	delivery	and	LTL	operations.	We	anticipate	that	our	capital expenditures	for	2011	will	be	approximately	$2.2	billion,	or	approximately	4%	of	revenue.	Future	capital	spending	for	anticipated	growth	and	replacement	assets	will depend	on	a	variety	of	factors,	including	economic	and	industry	conditions.

The	increase	in	proceeds	from	the	disposal	of	property,	plant	and	equipment	is	largely	due	to	real	estate	sales	and	the	proceeds	from	insurance	recoveries	in	2010. The	net	change	in	finance	receivables	is	primarily	due	to	customer	paydowns	and	new	loan	origination	activity,	primarily	in	our	commercial	lending,	asset-based	lending and	leasing	portfolios.	The	purchases	and	sales	of	marketable	securities	are	largely	determined	by	liquidity	needs,	and	will	therefore	fluctuate	from	period	to	period.

Other	investing	activities	include	the	cash	settlement	of	derivative	contracts	used	in	our	energy	and	currency	hedging	programs,	the	timing	of	aircraft	purchase contract	deposits	on	our	Boeing	767-300	and	Boeing	747-400	aircraft	orders,	and	changes	in	restricted	cash	balances.	We	maintain	an	escrow	agreement	with	an insurance	carrier	to	guarantee	our	self-insurance	obligations,	and	we	deposited	$95	and	$191	million	in	cash	collateral	with	the	insurance	carrier	under	this	agreement during	2009	and	2008,	respectively.	We	received	(paid)	cash	related	to	purchases	and	settlements	of	energy	and	currency	derivative	contracts	used	in	our	hedging programs	of	$111,	$117,	and	$(208)	million	during	2010,	2009,	and	2008,	respectively.

# Financing	Activities

Our	primary	uses	of	cash	flows	for	financing	activities	are	to	repurchase	shares,	pay	cash	dividends,	and	repay	debt	principal,	as	follows	(amounts	in	millions, except	per	share	data):

|  | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- |
| Net\tcash\tused\tin\tfinancing\tactivities | $(1,346) | $(3,045) | $(6,702) |
| Share\tRepurchases: |  |  |  |
| Cash\texpended\tfor\tshares\trepurchased | $(817) | $(561) | $(3,570) |
| Number\tof\tshares\trepurchased | (12.4) | (10.9) | (53.6) |
| Shares\toutstanding\tat\tyear-end | 991 | 994 | 996 |
| Percent\treduction\tin\tshares\toutstanding | (0.3)% | (0.2)% | (4.3)% |
| Dividends: |  |  |  |
| Dividends\tdeclared\tper\tshare | $1.88 | $1.80 | $1.80 |
| Cash\texpended\tfor\tdividend\tpayments | $(1,818) | $(1,751) | $(2,219) |
| Borrowings: |  |  |  |
| Net\tborrowings\t(repayments)\tof\tdebt\tprincipal | $1,246 | $(522) | $(921) |
| Other\tFinancing\tActivities: |  |  |  |
| Cash\treceived\tfor\tcommon\tstock\tissuances | $218 | $149 | $169 |
| Other\tfinancing\tactivities | $(175) | $(360) | $(161) |
| Capitalization: |  |  |  |
| Total\tdebt\toutstanding\tat\tyear-end | $10,846 | $9,521 | $9,871 |
| Total\tshareowners'\tequity\tat\tyear-end | 8,047 | 7,696 | 6,780 |
| Total\tcapitalization | $18,893 | $17,217 | $16,651 |
| Debt\tto\tTotal\tCapitalization\t% | 57.4% | 55.3% | 59.3% |

In	January	2008,	the	Board	of	Directors	approved	an	increase	in	our	share	repurchase	authorization	to	$10.0	billion.	Share	repurchases	may	take	the	form	of accelerated	share	repurchases,	open	market	purchases,	or	other	such	methods	as	we	deem	appropriate.	The	timing	of	our	share	repurchases	will	depend	upon	market conditions.	As	a	result	of	the	uncertain	economic	environment	in	2010	and	2009,	we	slowed	our	share	repurchase	activity,	and	repurchased	shares	at	a	rate	that approximately	offset	the	dilution	from	our	stock	compensation	programs.	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.	As	of	December	31,	2010,	we	had	$5.194	billion	of	our	share	repurchase	authorization remaining.	In	2011,	we	anticipate	increasing	our	share	repurchase	activity	to	approximately	$2.0	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.	In	2008,	the	Board	of Directors	approved	an	earlier	payment	schedule	for	the	November	dividend	declaration,	as	in	past	years	this	dividend	was	payable	the	following	January.	As	a	result,	a total	of	five	dividend	payments	were	made	in	2008.	In	February	2011,	we	increased	our	quarterly	dividend	payment	from	$0.47	to	$0.52	per	share,	an	11%	increase.

In	2010,	2009,	and	2008,	we	completed	senior	fixed	rate	note	offerings	of	$2.0,	$2.0,	and	$4.0	billion,	respectively.	These	note	offerings	were	used	for	various purposes,	including	discretionary	contributions	to	UPS-sponsored	pension	plans,	the	retirement	of	existing	debt	instruments,	and	the	refinancing	of	commercial	paper that	was	used	to	fund	our	withdrawal	from	the	Central	States	Pension	Plan.

Other	than	commercial	paper,	repayments	of	debt	consisted	primarily	of	scheduled	principal	payments	on	our	capital	lease	obligations,	redemption	of	facilities bonds	and	the	UPS	Notes	program,	and	principal	payments	on	debt	related	to	our	investment	in	certain	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.

Cash	received	from	common	stock	issuances	to	employees	increased	primarily	due	to	additional	stock	option	exercises	in	2010.	The	cash	outflows	in	other financing	activities	is	largely	due	to	repurchases	of	shares	from	employees	to	satisfy	tax	withholding	obligations,	as	well	as	certain	hedging	activities	on	forecasted	debt issuances.	In	conjunction	with	the	senior	fixed	rate	debt	offerings	in	2010,	2009	and	2008,	we	settled	several	interest	rate	derivatives	that	were	designated	as	hedges	of these	debt	offerings,	which	resulted	in	cash	inflows	(outflows)	of	$11,	($243)	and	($84)	million,	respectively.

# Sources	of	Credit

We	are	authorized	to	borrow	up	to	$10.0	billion	under	our	U.S.	commercial	paper	program.	As	of	December	31,	2010,	we	had	$341	million	of	commercial	paper outstanding,	with	an	average	interest	rate	of	0.18%	and	a	weighted	average	maturity	of	14	days.	The	amount	of	commercial	paper	outstanding	in	2011	is	expected	to fluctuate.	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,	2010.

We	maintain	two	credit	agreements	with	a	consortium	of	banks.	One	of	these	agreements	provides	revolving	credit	facilities	of	$1.5	billion,	and	expires	on April	14,	2011.	Interest	on	any	amounts	we	borrow	under	this	facility	would	be	charged	at	90-day	LIBOR	plus	a	percentage	determined	by	quotations	from	Markit Group	Ltd.	for	our	1-year	credit	default	swap	spread,	subject	to	certain	minimum	rates	and	maximum	rates	based	on	our	public	debt	ratings	from	Standard	&	Poor's	and Moody's.	If	our	public	debt	ratings	are	A	/	A2	or	above,	the	minimum	applicable	margin	is	0.50%	and	the	maximum	applicable	margin	is	1.50%;	if	our	public	debt ratings	are	lower	than	A	/	A2,	the	minimum	applicable	margin	is	1.00%	and	the	maximum	applicable	margin	is	2.50%.

The	second	agreement	provides	revolving	credit	facilities	of	$1.0	billion,	and	expires	on	April	19,	2012.	Interest	on	any	amounts	we	borrow	under	this	facility would	be	charged	at	90-day	LIBOR	plus	15	basis	points.	At	December	31,	2010,	there	were	no	outstanding	borrowings	under	either	of	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.	As	of	December	31,	2010	and	for	all	prior	periods	presented,	we	have	satisfied	these	financial	covenants.	These	covenants	limit	the	amount of	secured	indebtedness	that	we	may	incur,	and	limit	the	amount	of	attributable	debt	in	sale-leaseback	transactions,	to	10%	of	net	tangible	assets.	As	of	December	31, 2010,	10%	of	net	tangible	assets	is	equivalent	to	$2.501	billion,	however	we	have	no	covered	sale-leaseback	transactions	or	secured	indebtedness	outstanding. Additionally,	we	are	required	to	maintain	a	minimum	net	worth,	as	defined,	of	$5.0	billion	on	a	quarterly	basis.	As	of	December	31,	2010,	our	net	worth,	as	defined,	was equivalent	to	$14.174	billion.	We	do	not	expect	these	covenants	to	have	a	material	impact	on	our	financial	condition	or	liquidity.

# Guarantees	and	Other	Off-Balance	Sheet	Arrangements

We	do	not	have	guarantees	or	other	off-balance	sheet	financing	arrangements,	including	variable	interest	entities,	which	we	believe	could	have	a	material	impact on	financial	condition	or	liquidity.

# Contractual	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,	2010	(in	millions):

| Commitment	Type | 2011 | 2012 | 2013 | 2014 | 2015 | After	2016 | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Capital\tLeases | $18 | $19 | $19 | $20 | $21 | $112 | $209 |
| Operating\tLeases | 348 | 268 | 205 | 150 | 113 | 431 | 1,515 |
| Debt\tPrincipal | 345 | — | 1,750 | 1,000 | 100 | 7,363 | 10,558 |
| Debt\tInterest | 322 | 321 | 300 | 274 | 269 | 4,940 | 6,426 |
| Purchase\tCommitments | 642 | 463 | 425 | 16 | \t — | — | 1,546 |
| Pension\tFundings | 1,200 | 196 | 752 | 541 | 274 | — | 2,963 |
| Other\tLiabilities | 69 | 67 | 64 | 58 | 43 | 38 | 339 |
| Total | $2,944 | $1,334 | $3,515 | $2,059 | $820 | $12,884 | $23,556 |

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	7	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,	2010.	The	calculations	of debt	interest	take	into	account	the	effect	of	interest	rate	swap	agreements.	For	debt	denominated	in	a	foreign	currency,	the	U.S.	Dollar	equivalent	principal	amount	of	the debt	at	the	end	of	the	year	was	used	as	the	basis	to	calculate	future	interest	payments.

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.	As	of	December	31,	2010,	we	have	firm	commitments	to	purchase	20	Boeing	767-300ER	freighters	to	be	delivered	between	2011	and	2013,	and	two Boeing	747-400F	aircraft	scheduled	for	delivery	during	2011.	These	aircraft	purchase	orders	will	provide	for	the	replacement	of	existing	capacity	and	anticipated	future growth.

Pension	fundings	represent	the	anticipated	required	cash	contributions	that	will	be	made	to	our	qualified	pension	plans.	These	contributions	include	those	to	the UPS	IBT	Pension	Plan,	which	was	established	upon	ratification	of	the	national	master	agreement	with	the	Teamsters,	as	well	as	the	UPS	Pension	Plan.	These	plans	are discussed	further	in	Note	5	to	the	consolidated	financial	statements.	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	these	plans.	To	the	extent that	the	funded	status	of	these	plans	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.	Additionally,	we	have	not	included	minimum	funding	requirements	beyond	2015,	because	these	projected	contributions	are	not reasonably	determinable.

We	are	not	subject	to	any	minimum	funding	requirement	for	cash	contributions	in	2011	in	the	UPS	Retirement	Plan	or	UPS	Pension	Plan.	The	amount	of	any minimum	funding	requirement,	as	applicable,	for	these	plans	could	change	significantly	in	future	periods,	depending	on	many	factors,	including	future	plan	asset	returns and	discount	rates.	A	sustained	significant	decline	in	the	world	equity	markets,	and	the	resulting	impact	on	our	pension	assets	and	investment	returns,	could	result	in	our domestic	pension	plans	being	subject	to	significantly	higher	minimum	funding	requirements.	Such	an	outcome	could	have	a	material	adverse	impact	on	our	financial position	and	cash	flows	in	future	periods.

The	contractual	payments	due	for	"other	liabilities"	primarily	include	commitment	payments	related	to	our	investment	in	certain	partnerships.	The	table	above does	not	include	approximately	$284	million	of	liabilities	for

uncertain	tax	positions	because	we	are	uncertain	if	or	when	such	amounts	will	ultimately	be	settled	in	cash.	In	addition,	we	also	have	recognized	assets	associated	with uncertain	tax	positions	in	excess	of	the	related	liabilities	such	that	we	do	not	believe	a	net	contractual	obligation	exists	to	the	taxing	authorities.	Uncertain	tax	positions are	further	discussed	in	Note	12	to	the	consolidated	financial	statements.

As	of	December	31,	2010,	we	had	outstanding	letters	of	credit	totaling	approximately	$1.580	billion	issued	in	connection	with	routine	business	requirements.	We also	issue	surety	bonds	as	an	alternative	to	letters	of	credit	in	certain	instances,	and	as	of	December	31,	2010,	we	had	$577	million	of	surety	bonds	written.	As	of December	31,	2010,	we	had	unfunded	loan	commitments	totaling	$602	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

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	was	certified	as	a	class	action	in	a	California	federal	court	in	September	2004,	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	1,300	full-time	supervisors.	In August	2005,	the	court	granted	summary	judgment	in	favor	of	UPS	on	all	claims,	and	plaintiffs	appealed	the	ruling.	In	October	2007,	the	appeals	court	reversed	the lower	court's	ruling.	In	April	2008,	the	Court	decertified	the	class	and	vacated	the	trial	scheduled	for	that	month.	After	decertification,	some	plaintiffs	filed	individual lawsuits	raising	the	same	allegations	as	in	the	underlying	class	action.	These	individual	lawsuits	are	in	various	stages.	We	have	denied	any	liability	with	respect	to	these claims	and	intend	to	vigorously	defend	ourselves	in	these	cases.	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	our	subsidiary	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	rebranding	of	Mail	Boxes	Etc.	centers	to	The	UPS	Store,	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.	In	one	of	the	actions,	which	is	pending	in California	state	court,	the	court	certified	a	class	consisting	of	all	Mail	Boxes	Etc.	branded	stores	that	rebranded	to	The	UPS	Store	in	March	2003.	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.

In	Barber	Auto	Sales	v.	UPS,	which	a	federal	court	in	Alabama	certified	as	a	class	action	in	September	2009,	the	plaintiff	asserts	a	breach	of	contract	claim arising	from	UPS's	assessment	of	shipping	charge	corrections	when	UPS	determines	that	the	"dimensional	weight"	of	packages	is	greater	than	reported	by	the	shipper. 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	AFMS	LLC	v.	UPS	and	FedEx	Corporation,	a	lawsuit	filed	in	federal	court	in	the	Central	District	of	California	in	August	2010,	the	plaintiff	asserts	that	UPS and	FedEx	violated	U.S.	antitrust	law	by	conspiring	to	refuse	to	negotiate	with	third	party	negotiators	retained	by	shippers	and/or	to	monopolize	a	so-called	market	for 41

the	time	sensitive	delivery	of	letters	and	packages.	The	Antitrust	Division	of	the	U.S.	Department	of	Justice	("DOJ")	has	informed	us	that	it	has	opened	a	civil investigation	of	our	policies	and	practices	for	dealing	with	third	party	negotiators.	We	are	cooperating	with	this	investigation.	We	deny	any	liability	with	respect	to	these matters	and	intend	to	vigorously	defend	ourselves.	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.

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.

We	file	income	tax	returns	in	the	U.S.	federal	jurisdiction,	most	U.S.	state	and	local	jurisdictions,	and	many	non-U.S.	jurisdictions.	We	have	substantially resolved	all	U.S.	federal	income	tax	matters	for	tax	years	prior	to	2003.	During	the	fourth	quarter	of	2010,	we	received	a	refund	of	$139	million	as	a	result	of	the resolution	of	tax	years	2003	through	2004	with	the	Internal	Revenue	Service	("IRS")	Appeals	Office.	Along	with	the	audit	for	tax	years	2005	through	2007,	the	IRS	is currently	examining	non-income	based	taxes,	including	employment	and	excise	taxes,	which	could	lead	to	proposed	assessments.	The	IRS	has	not	presented	an	official position	with	regard	to	these	taxes	at	this	time,	and	therefore	we	are	not	able	to	determine	the	technical	merit	of	any	potential	assessment.	We	anticipate	receipt	of	the IRS	reports	on	these	matters	by	the	end	of	the	second	quarter	of	2011.	We	have	filed	all	required	U.S.	state	and	local	returns	reporting	the	result	of	the	resolution	of	the U.S.	federal	income	tax	audit	of	the	tax	years	2003	and	2004.	A	limited	number	of	U.S.	state	and	local	matters	are	the	subject	of	ongoing	audits,	administrative	appeals or	litigation.

As	of	December	31,	2010,	we	had	approximately	250,000	employees	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,	2013.	We	have	approximately	2,800	pilots who	are	employed	under	a	collective	bargaining	agreement	with	the	Independent	Pilots	Association	("IPA"),	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	in	November	2006.	We	began	formal	negotiations with	Teamsters	Local	2727	in	October	2006,	and	have	been	under	the	guidance	of	the	National	Mediation	Board	since	January	2008.	In	January	2011,	we	reached	a tentative	agreement	with	Teamsters	Local	2727	which	will	run	through	November	1,	2013	when	ratified.	In	addition,	the	majority	(approximately	3,300)	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	("IAM").	Our	agreement	with	the	IAM	runs	through	July	31,	2014.

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.

In	January	2008,	a	class	action	complaint	was	filed	in	the	United	States	District	Court	for	the	Eastern	District	of	New	York	alleging	price-fixing	activities	relating to	the	provision	of	freight	forwarding	services.	UPS	was	not	named	in	this	case.	On	July	21,	2009,	the	plaintiffs	filed	a	first	amended	complaint	naming	numerous	global freight	forwarders	as	defendants.	UPS	and	UPS	Supply	Chain	Solutions	are	among	the	60	defendants	named	in	the	amended	complaint.	We	intend	to	vigorously	defend ourselves	in	this	case.	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.

# Other	Matters

We	received	a	grand	jury	subpoena	from	the	Antitrust	Division	of	the	DOJ	regarding	the	DOJ's	investigation	into	certain	pricing	practices	in	the	freight forwarding	industry	in	December	2007.

In	October	2007,	June	2008,	and	February	2009,	we	received	information	requests	from	the	European	Commission	("Commission")	relating	to	its	investigation	of certain	pricing	practices	in	the	freight	forwarding	industry,	and	subsequently	responded	to	each	request.	On	February	9,	2010,	UPS	received	a	Statement	of	Objections by	the	Commission.	This	document	contains	the	Commission's	preliminary	view	with	respect	to	alleged	anticompetitive	behavior	in	the	freight	forwarding	industry	by 18	freight	forwarders,	including	UPS.	Although	it	alleges	anticompetitive	behavior,	it	does	not	prejudge	the	Commission's	final	decision,	as	to	facts	or	law	(which	is subject	to	appeal	to	the	European	courts).	The	options	available	to	the	Commission	include	taking	no	action	or	imposing	a	monetary	fine;	the	range	of	any	potential action	by	the	Commission	is	not	reasonably	estimable.	Any	decision	imposing	a	fine	would	be	subject	to	appeal.	UPS	has	responded	to	the	Statement	of	Objections, including	at	a	July	2010	Commission	hearing,	and	we	intend	to	continue	to	vigorously	defend	ourselves	in	this	proceeding.	We	received	an	additional	information request	from	the	Commission	in	January	2011,	and	will	respond	in	due	course.

In	August	2010,	competition	authorities	in	Brazil	opened	an	administrative	proceeding	to	investigate	alleged	anticompetitive	behavior	in	the	freight	forwarding industry.	Approximately	45	freight	forwarding	companies	and	individuals	are	named	in	the	proceeding,	including	UPS,	UPS	SCS	Transportes	(Brasil)	S.A.,	and	a former	employee	in	Brazil.	UPS	will	have	an	opportunity	to	respond	to	these	allegations.

We	also	received	and	responded	to	related	information	requests	from	competition	authorities	in	other	jurisdictions.

We	are	cooperating	with	each	of	these	investigations,	and	intend	to	continue	to	vigorously	defend	ourselves.	At	this	time,	we	are	unable	to	determine	the	amount of	any	liability	that	may	result	from	these	matters	or	whether	any	such	liability	would	have	a	material	adverse	effect	on	our	financial	condition,	results	of	operations	or liquidity.

# Health	Care	Legislation

The	enactment	of	the	"Patient	Protection	and	Affordable	Care	Act"	and	"The	Health	Care	and	Education	Reconciliation	Act	of	2010"	in	2010	will	bring significant	changes	to	the	U.S.	health	care	system.	The	legislation	eliminated	the	tax	deductibility	of	Medicare	Part	D	subsidies	for	retiree	prescription	drug	coverage; however,	this	impact	was	not	material	to	our	financial	results.	We	are	evaluating	the	long-term	impacts	of	this	legislation	on	us.	It	is	difficult	to	estimate	the	impact	due to	the	nature	of	our	workforce,	the	various	years	in	which	certain	provisions	become	applicable,	and	the	fact	that	additional	regulatory	and	rulemaking	actions	will	be occurring.	Our	current	estimate	is	that	we	will	incur	an	additional	$50	to	$65	million	of	annual	expense	beginning	in	2011	associated	with	active	employee	healthcare coverage,	which	is	primarily	due	to	the	multiple	coverage	provisions	of	the	legislation	which	require	the	expansion	of	dependent	coverage	to	age	26,	among	other requirements.	The	December	31,	2010	accumulated	postretirement	benefit	obligation	for	the	postretirement	medical	plans	increased	by	$37	million	due	to	the	excise	tax associated	with	the	legislation.

# Rate	Adjustments

In	October	2010,	we	announced	that	an	increase	in	base	rates	and	changes	in	our	fuel	surcharge	for	package	shipments	that	took	effect	January	3,	2011.	UPS Ground	service	rates	increased	a	net	4.9%	through	a	combination	of	a	5.9%	increase	in	rates	and	a	1%	reduction	in	the	index	used	to	determine	the	ground	fuel surcharge.	UPS	Next	Day	Air,	UPS	2 	Day	Air,	UPS	3	Day	Select,	and	international	air	shipments	originating	in	the	United	States	(including	Worldwide	Express, Worldwide	Express	Plus,	UPS	Worldwide	Expedited	and	UPS	International	Standard	Service)	increased	a	net	4.9%,	through	a	combination	of	a	6.9%	increase	in	base rates	and	a	2%	reduction	in	the	index	used	to	determine	the	air	fuel	surcharge.	These	rate	changes	are	customary	and	occur	on	an	annual	basis.	Rate	changes	for shipments	originating	outside	the	U.S.	are	made	throughout	the	year	and	vary	by	geographic	market. nd

Also	in	October	2010,	we	announced	a	5.9%	general	rate	increase	for	our	UPS	Freight	LTL	unit,	which	took	effect	October	18,	2010.	The	increase	covers	non- contractual	shipments	in	the	U.S.,	Canada	and	Mexico,	and	applies	to	minimum	charge,	LTL	rates	and	accessorial	charges.

# New	Accounting	Pronouncements

# Recently	Adopted	Accounting	Standards

Provisions	within	the	following	accounting	standards	were	adopted	during	the	years	covered	by	these	financial	statements:

Financial	Instruments:	The	Financial	Accounting	Standards	Board	("FASB")	issued	guidance	in	February	2007	that	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,	this	guidance	allowed	for	a	one-time	election	for	existing	positions	upon	adoption,	with	the	transition	adjustment	recorded	to	beginning retained	earnings.	We	adopted	this	standard	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	a	$16	million	reduction	to	retained	earnings	as	of	January	1,	2008.	These investments	are	reported	in	"other	non-current	assets"	on	the	consolidated	balance	sheets.

Compensation-Retirement	Benefits:	We	previously	utilized	the	early	measurement	date	option	available	in	accounting	for	our	pension	and	postretirement	medical benefit	plans,	and	we	measured	the	funded	status	of	our	plans	as	of	September	30	each	year.	Under	guidance	issued	by	the	FASB,	we	were	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.

Beginning	in	2009,	new	guidance	was	adopted	that	required	disclosures	about	plan	assets	of	a	defined	benefit	pension	or	other	postretirement	plan,	investment policies	and	strategies,	major	categories	of	plan	assets,	inputs	and	valuation	techniques	used	to	measure	the	fair	value	of	plan	assets	and	significant	concentrations of	risk	within	plan	assets.	These	disclosures	are	provided	in	Note	5	to	the	consolidated	financial	statements.

Fair	Value	Measurements	and	Disclosures:	The	FASB	issued	guidance	on	fair	value	measurements	that	took	effect	on	January	1,	2008	and	are	presented	in	Notes 2,	3,	4,	5,	and	14	to	the	consolidated	financial	statements.	On	January	1,	2009,	we	implemented	the	previously	deferred	provisions	of	this	guidance	for nonfinancial	assets	and	liabilities	recorded	at	fair	value.	The	accounting	requirements	for	determining	fair	value	when	the	volume	and	level	of	activity	for	an	asset or	liability	have	significantly	decreased,	and	for	identifying	transactions	that	are	not	orderly,	contained	the	FASB's	guidance	were	adopted	on	April	1,	2009,	but had	an	immaterial	impact	on	our	financial	statements.

Derivatives	and	Hedging:	The	FASB	issued	certain	disclosure	requirements	for	derivatives	and	hedging	transactions	that	took	effect	on	January	1,	2009	and	are presented	in	Note	14.

Business	Combinations:	The	FASB	issued	new	accounting	requirements	for	business	combinations,	which	took	effect	on	January	1,	2009.	This	new	guidance	was applied	to	business	combinations	completed	in	2009,	but	had	an	immaterial	impact	on	our	financial	statements.

Consolidation:	The	FASB	issued	accounting	and	presentation	requirements	for	noncontrolling	interests,	which	took	effect	on	January	1,	2009,	however	this	new guidance	had	an	immaterial	impact	on	our	financial	statements.

# Accounting	Standards	Issued	But	Not	Yet	Effective

Accounting	guidance	issued,	but	not	effective	until	after	December	31,	2010,	are	not	expected	to	have	a	significant	effect	on	our	consolidated	financial	position or	results	of	operations.

# 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.

As	discussed	in	Note	8	to	our	consolidated	financial	statements,	we	are	involved	in	various	legal	proceedings	and	contingencies.	We	record	a	liability	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	evaluation.	We	record	a	liability	for	a	loss	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	are	probable	and	estimable,	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,	2010.	In	addition,	we	have	certain	contingent	liabilities that	have	not	been	recognized	as	of	December	31,	2010,	because	a	loss	is	not	reasonably	estimable.

# Goodwill	and	Intangible	Impairment

We	perform	impairment	testing	of	goodwill	for	each	of	our	reporting	units	on	an	annual	basis.	Our	reporting	units	are	comprised	of	the	Europe,	Asia,	and Americas	reporting	units	in	the	International	Package	reporting	segment,	and	the	Forwarding	&	Logistics,	UPS	Freight,	MBE	/	UPS	Store,	and	UPS	Capital	reporting units	in	the	Supply	Chain	&	Freight	reporting	segment.	Our	annual	goodwill	impairment	testing	date	is	October	1 	for	each st

reporting	unit.	The	impairment	test	involves	a	two-step	process.	First,	a	comparison	of	the	fair	value	of	the	applicable	reporting	unit	with	the	aggregate	carrying	values, including	goodwill,	is	performed.	If	the	carrying	amount	of	a	reporting	unit	exceeds	the	reporting	unit's	fair	value,	we	perform	the	second	step	of	the	goodwill impairment	test	to	determine	the	amount	of	impairment	loss.	The	second	step	includes	comparing	the	implied	fair	value	of	the	affected	reporting	unit's	goodwill	with	the carrying	value	of	that	goodwill.

We	primarily	determine	the	fair	value	of	our	reporting	units	using	a	discounted	cash	flow	model	("DCF	model"),	and	supplement	this	with	observable	valuation multiples	for	comparable	companies,	as	applicable.	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.	The	determination	of	whether goodwill	is	impaired	involves	a	significant	level	of	judgment	in	these	assumptions,	and	changes	in	our	business	strategy,	government	regulations,	or	economic	or	market conditions	could	significantly	impact	these	judgments.	We	will	continue	to	monitor	market	conditions	and	other	factors	to	determine	if	interim	impairment	tests	are necessary	in	future	periods.	If	impairment	indicators	are	present	in	future	periods,	the	resulting	impairment	charges	could	have	a	material	impact	on	our	results	of operations.

In	the	fourth	quarter	of	2008,	we	completed	our	annual	goodwill	impairment	testing	and	determined	that	our	UPS	Freight	reporting	unit,	which	was	formed through	the	acquisition	of	Overnite	Corporation	in	2005,	had	a	goodwill	impairment	of	$548	million.	This	impairment	charge	resulted	from	several	factors,	including	a lower	cash	flow	forecast	due	to	a	longer	estimated	economic	recovery	time	for	the	LTL	sector,	and	significant	deterioration	in	equity	valuations	for	other	similar	LTL industry	participants.	At	the	time	of	acquisition	of	Overnite	Corporation,	LTL	equity	valuations	were	higher	and	the	economy	was	significantly	stronger.	We	invested	in operational	improvements	and	technology	upgrades	to	enhance	service	and	performance,	as	well	as	expand	service	offerings.	However,	this	process	took	longer	than initially	anticipated,	and	thus	financial	results	had	been	below	our	expectations.	Additionally,	the	LTL	sector	in	2008	had	been	adversely	impacted	by	the	economic recession	in	the	U.S.,	lower	industrial	production	and	retail	sales,	volatile	fuel	prices,	and	significant	levels	of	price-based	competition.	By	the	fourth	quarter	of	2008, the	combination	of	these	internal	and	external	factors	reduced	our	near	term	expectations	for	this	unit,	leading	to	the	goodwill	impairment	charge.

None	of	the	other	reporting	units	incurred	an	impairment	of	goodwill	in	2008,	nor	did	we	have	any	goodwill	impairment	charges	in	2009	or	2010.	Changes	in	our forecasts	could	cause	book	values	of	our	reporting	units	to	exceed	their	fair	values	in	future	periods,	potentially	resulting	in	a	goodwill	impairment	charge.	A	10% decrease	in	the	estimated	fair	value	of	our	reporting	units	as	of	our	most	recent	goodwill	testing	date	(October	1,	2010)	would	not	result	in	a	goodwill	impairment charge.

All	of	our	recorded	intangible	assets	other	than	goodwill	are	deemed	to	be	finite-lived	intangibles,	and	are	thus	amortized	over	their	estimated	useful	lives. Impairment	tests	for	these	intangible	assets	are	only	performed	when	a	triggering	event	occurs	that	indicates	that	the	carrying	value	of	the	intangible	may	not	be recoverable	based	on	the	undiscounted	future	cash	flows	of	the	intangible.	If	the	carrying	amount	of	the	intangible	is	determined	not	to	be	recoverable,	a	write-down	to fair	value	is	recorded.	Fair	values	are	determined	based	on	a	DCF	model.	As	a	result	of	weak	performance	in	our	domestic	U.K.	package	operations,	we	reviewed	our intangible	assets	for	impairment	within	our	U.K.	domestic	package	entity.	Based	on	prior	performance	and	near-term	projections,	the	value	assigned	to	the	customer	list intangible	asset	acquired	within	the	UK	domestic	package	business	was	determined	to	be	impaired.	This	impairment	was	the	result	of	both	higher	than	anticipated customer	turnover	and	reduced	operating	margins	associated	with	the	acquired	business.	Accordingly,	an	intangible	asset	impairment	charge	of	$27	million	was	recorded for	the	year	ended	December	31,	2008.	No	other	intangible	asset	impairments	were	recognized	in	2008,	nor	were	any	such	impairments	recognized	in	2009	or	2010.

# 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.

# Fair	Value	Measurements

In	the	normal	course	of	business,	we	hold	and	issue	financial	instruments	that	contain	elements	of	market	risk,	including	derivatives,	marketable	securities, finance	receivables,	other	investments,	and	debt.	Certain	of	these	financial	instruments	are	required	to	be	recorded	at	fair	value,	principally	derivatives,	marketable securities,	pension	assets,	and	certain	other	investments.	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.

# Pension	and	Postretirement	Medical	Benefits

As	discussed	in	Note	5	to	our	consolidated	financial	statements,	we	maintain	several	single-employer	defined	benefit	and	postretirement	benefit	plans.	Our pension	and	other	postretirement	benefit	costs	are	calculated	using	various	actuarial	assumptions	and	methodologies.	These	assumptions	include	discount	rates,	health care	cost	trend	rates,	inflation,	compensation	increase	rates,	expected	returns	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,	and	represent	our	best	estimates,	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 have	resulted	in	the	following	increases	(decreases)	on	the	Company's	reported	costs	and	obligations	for	the	year	2010	(in	millions):

|  | 25	Basis	Point<br>Increase | 25	Basis	Point<br>Decrease |
| :--- | :--- | :--- |
| Pension\tPlans |  |  |
| Discount\tRate: |  |  |
| Effect\ton\tnet\tperiodic\tbenefit\tcost | $(86) | $96 |
| Effect\ton\tprojected\tbenefit\tobligation | (805) | 854 |
| Return\ton\tAssets: |  |  |
| Effect\ton\tnet\tperiodic\tbenefit\tcost | (46) | 46 |
| Postretirement\tMedical\tPlans |  |  |
| Discount\tRate: |  |  |
| Effect\ton\tnet\tperiodic\tbenefit\tcost | (6) | 5 |
| Effect\ton\taccumulated\tpostretirement\tbenefit\tobligation | (92) | 96 |
| Health\tCare\tCost\tTrend\tRate: |  |  |
| Effect\ton\tnet\tperiodic\tbenefit\tcost | 3 | (3) |
| Effect\ton\taccumulated\tpostretirement\tbenefit\tobligation | 18 | (19) |

Our	2011	pension	expense	will	be	higher	than	our	2010	expense	due	primarily	to	two	negative	factors:	the	decline	in	discount	rate	used	to	determine	expense	from 6.58%	for	2010	to	5.98%	for	2011,	and	the	required	amortization	of	unrecognized	losses,	the	majority	of	which	relate	to	2008	asset	losses,	outside	of	the	corridor	we utilize	for	accounting	purposes.	These	negative	factors	are	partially	offset	by	the	additional	discretionary	contributions	that	we	made	in	2010	and	2011	that	increased	the expected	return	on	assets	used	for	expense	calculation	purposes.

# Depreciation,	Residual	Value,	and	Impairment	of	Fixed	Assets

As	of	December	31,	2010,	we	had	$17.387	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.

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).

In	2008,	we	had	announced	that	we	were	in	negotiations	with	DHL	to	provide	air	transportation	services	for	all	of	DHL's	express,	deferred	and	international package	volume	within	the	United	States,	as	well	as	air	transportation	services	between	the	United	States,	Canada	and	Mexico.	In	early	April	2009,	UPS	and	DHL mutually	agreed	to	terminate	further	discussions	on	providing	these	services.	Additionally,	our	U.S.	Domestic	Package	air	delivery	volume	had	declined	for	several quarters	as	a	result	of	persistent	economic	weakness	and	shifts	in	product	mix	from	our	premium	air	services	to	our	lower	cost	ground	services.	As	a	result	of	these factors,	the	utilization	of	certain	aircraft	fleet	types	had	declined	and	was	expected	to	be	lower	in	the	future.

Based	on	the	factors	noted	above,	as	well	as	FAA	aging	aircraft	directives	that	would	require	significant	future	maintenance	expenditures,	we	determined	that	a triggering	event	had	occurred	that	required	an	impairment	assessment	of	our	McDonnell-Douglas	DC-8-71	and	DC-8-73	aircraft	fleets.	We	conducted	an	impairment analysis	as	of	March	31,	2009,	and	determined	that	the	carrying	amount	of	these	fleets	was	not	recoverable	due	to	the	accelerated	expected	retirement	dates	of	the aircraft.	Based	on	anticipated	residual	values	for	the	airframes,	engines,	and	parts,	we	recognized	an	impairment	charge	of	$181	million	in	the	first	quarter	of	2009.	The DC-8	fleets	were	subsequently	retired	from	service.

# 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.	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.	Once	it	is	determined	that	the position	meets	the	recognition	threshold,	the	second	step	requires	us	to	estimate	and	measure	the	tax	benefit	as	the	largest	amount	that	is	more	likely	than	not	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	could	result	in	the recognition	of	a	tax	benefit	or	an	additional	charge	to	the	tax	provision.

# Allowance	for	Doubtful	Accounts

Losses	on	accounts	receivable	are	recognized	when	they	are	incurred,	which	requires	us	to	make	our	best	estimate	of	the	probable	losses	inherent	in	our	customer receivables	at	each	balance	sheet	date.	These	estimates

require	consideration	of	historical	loss	experience,	adjusted	for	current	conditions,	trends	in	customer	payment	frequency,	and	judgments	about	the	probable	effects	of relevant	observable	data,	including	present	economic	conditions	and	the	financial	health	of	specific	customers	and	market	sectors.	Our	risk	management	process includes	standards	and	policies	for	reviewing	major	account	exposures	and	concentrations	of	risk.	Deterioration	in	macro	economic	variables	could	result	in	our	ultimate loss	exposures	on	our	accounts	receivable	being	significantly	higher	than	what	we	have	currently	estimated	and	reserved	for	in	our	allowance	for	doubtful	accounts.	Our total	allowance	for	doubtful	accounts	as	of	December	31,	2010	and	2009	was	$127	and	$138	million,	respectively.	Our	total	provision	for	doubtful	accounts	charged	to expense	during	the	years	ended	December	31,	2010,	2009	and	2008	was	$199,	$254	and	$277	million,	respectively.

# Item	7A. Quantitative	and	Qualitative	Disclosures	about	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	commodity,	foreign	exchange,	and	interest	rate	forward	contracts,	options,	and	swaps.	A	discussion	of	our	accounting	policies	for	derivative	instruments	and further	disclosures	are	provided	in	Note	14	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	periodically	use	a combination	of	option	contracts	to	provide	partial	protection	from	changing	fuel	and	energy	prices.	As	of	December	31,	2010	and	2009,	however,	we	had	no	commodity option	contracts	outstanding.

In	the	fourth	quarter	of	2008,	we	terminated	several	energy	derivatives	and	received	$87	million	in	cash.	This	transaction	was	reported	in	other	investing	activities in	the	statements	of	consolidated	cash	flows.	As	these	derivatives	qualified	for	hedge	accounting,	were	designated	as	hedges,	and	maintained	their	effectiveness,	the gains	associated	with	these	hedges	were	recognized	in	income	over	the	original	term	of	the	hedges,	which	extended	through	the	first	quarter	of	2009.

# 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	forecasted	cash	flow	currency	exposures.	These	derivative	instruments	generally	cover	forecasted	foreign	currency	exposures	for periods	of	12	to	24	months.	Additionally,	we	utilize	cross-currency	interest	rate	swaps	to	hedge	the	currency	risk	inherent	in	the	interest	and	principal	payments associated	with	foreign	currency	denominated	debt	obligations.	The	term	of	these	swap	agreements	is	commensurate	with	the	underlying	debt	obligations.

# Interest	Rate	Risk

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	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.	The notional	amount,	interest	payment,	and	maturity	dates	of	the	swaps	match	the	terms	of	the	associated	debt.	We	also	utilize

forward	starting	swaps	and	similar	instruments	to	lock	in	all	or	a	portion	of	the	borrowing	cost	of	anticipated	debt	issuances.	Our	floating	rate	debt	and	interest	rate swaps	subject	us	to	risk	resulting	from	changes	in	short-term	(primarily	LIBOR)	interest	rates.

We	also	are	subject	to	interest	rate	risk	with	respect	to	our	pension	and	postretirement	benefit	obligations,	as	changes	in	interest	rates	will	effectively	increase	or decrease	our	liabilities	associated	with	these	benefit	plans,	which	also	results	in	changes	to	the	amount	of	pension	and	postretirement	benefit	expense	recognized	in future	periods.

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.	Additionally,	we	hold	a	portfolio	of	finance	receivables	that	accrue	income	at	fixed	and	floating	rates	of	interest.

# Equity	Price	Risk

We	hold	investments	in	various	common	equity	securities	that	are	subject	to	price	risk.	These	securities	are	primarily	in	the	form	of	equity	index	funds.

# 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	financial	institutions	that	meet	established	credit guidelines.	We	do	not	expect	to	incur	any	material	losses	as	a	result	of	counterparty	default.

# Sensitivity	Analysis

The	following	analysis	provides	quantitative	information	regarding	our	exposure	to	commodity	price	risk,	foreign	currency	exchange	risk,	interest	rate	risk,	and equity	price	risk	embedded	in	our	existing	financial	instruments.	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.	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.	Additionally,	changes	in	the	fair	value	of	foreign currency	derivatives	and	commodity	derivatives	are	offset	by	changes	in	the	cash	flows	of	the	underlying	hedged	foreign	currency	and	commodity	transactions.

| (in	millions) | 2010 | 2009 |
| :--- | :--- | :--- |
| Change\tin\tFair\tValue: |  |  |
| Currency\tDerivatives(1) | $(89) | $(16) |
| Change\tin\tAnnual\tExpense: |  |  |
| Variable\tRate\tDebt(2) | $10 | $14 |
| Interest\tRate\tDerivatives(2) | $58 | $38 |

(1) The	potential	change	in	fair	value	from	a	hypothetical	10%	weakening	of	the	U.S.	Dollar	against	local	currency	exchange	rates	across	all	maturities.

(2) The	potential	change	in	annual	interest	expense	resulting	from	a	hypothetical	100	basis	point	increase	in	short-term	interest	rates,	applied	to	our	variable	rate	debt and	swap	instruments	(excluding	hedges	of	anticipated	debt	issuances).

The	sensitivity	of	our	pension	and	postretirement	benefit	obligations	to	changes	in	interest	rates	is	quantified	in	"Critical	Accounting	Policies	and	Estimates".	The sensitivity	in	the	fair	value	and	interest	income	of	our	marketable	securities	due	to	changes	in	equity	prices	and	interest	rates,	respectively,	was	not	material	as	of December	31,	2010	or	2009.	The	sensitivity	in	the	fair	value	and	interest	income	of	our	finance	receivables	due	to	changes	in	interest	rates	was	also	not	material	as	of December	31,	2010	or	2009.

# Item	8. Financial	Statements	and	Supplementary	Data

# Report	of	Independent	Registered	Public	Accounting	Firm

# 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,	2010,	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,	2010,	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,	2010,	and	the	related	statements	of	consolidated	income,	comprehensive	income	(loss),	and	cash flows	for	the	year	ended	December	31,	2010	and	our	report	dated	February	28,	2011	expressed	an	unqualified	opinion	on	those	financial	statements.

We	have	audited	the	accompanying	consolidated	balance	sheets	of	United	Parcel	Service,	Inc.	and	subsidiaries	(the	"Company")	as	of	December	31,	2010	and 2009,	and	the	related	statements	of	consolidated	income,	comprehensive	income	(loss),	and	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31, 2010.	These	consolidated	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,	2010	and	2009,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2010,	in	conformity with	accounting	principles	generally	accepted	in	the	United	States	of	America.

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,	2010,	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	28,	2011	expressed	an	unqualified	opinion	on	the	Company's	internal	control	over	financial reporting.

# UNITED	PARCEL	SERVICE,	INC.	AND	SUBSIDIARIES

# CONSOLIDATED	BALANCE	SHEETS

# (In	millions)

| ASSETS | 2010 | 2009 |
| :--- | :--- | :--- |
| Current\tAssets: |  |  |
| Cash\tand\tcash\tequivalents | $3,370 | $1,542 |
| Marketable\tsecurities | 711 | 558 |
| Accounts\treceivable,\tnet | 5,627 | 5,369 |
| Finance\treceivables,\tnet | 203 | 287 |
| Deferred\tincome\ttax\tassets | 659 | 585 |
| Income\ttaxes\treceivable | 287 | 266 |
| Other\tcurrent\tassets | 712 | 668 |
| Total\tCurrent\tAssets | \t 11,569 | 9,275 |
| Property,\tPlant\tand\tEquipment,\tNet | \t 17,387 | \t 17,979 |
| Goodwill | 2,081 | 2,089 |
| Intangible\tAssets,\tNet | 599 | 596 |
| Non-Current\tFinance\tReceivables,\tNet | 288 | 337 |
| Non-Current\tInvestments\tand\tRestricted\tCash | 458 | 533 |
| Other\tNon-Current\tAssets | 1,215 | 1,074 |
| Total\tAssets | $33,597 | $31,883 |
| LIABILITIES\tAND\tSHAREOWNERS'\tEQUITY |  |  |
| Current\tLiabilities: |  |  |
| Current\tmaturities\tof\tlong-term\tdebt\tand\tcommercial\tpaper | $355 | $853 |
| Accounts\tpayable | 1,974 | 1,766 |
| Accrued\twages\tand\twithholdings | 1,505 | 1,416 |
| Self-insurance\treserves | 725 | 757 |
| Other\tcurrent\tliabilities | 1,343 | 1,447 |
| Total\tCurrent\tLiabilities | 5,902 | 6,239 |
| Long-Term\tDebt | \t 10,491 | 8,668 |
| Pension\tand\tPostretirement\tBenefit\tObligations | 4,663 | 5,457 |
| Deferred\tIncome\tTax\tLiabilities | 1,870 | 1,293 |
| Self-Insurance\tReserves | 1,809 | 1,732 |
| Other\tNon-Current\tLiabilities | 815 | 798 |
| Shareowners'\tEquity: |  |  |
| Class\tA\tcommon\tstock\t(258\tand\t285\tshares\tissued\tin\t2010\tand\t2009) | 3 | 3 |
| Class\tB\tcommon\tstock\t(735\tand\t711\tshares\tissued\tin\t2010\tand\t2009) | 7 | 7 |
| Additional\tpaid-in\tcapital | — | 2 |
| Retained\tearnings | \t 14,164 | \t 12,745 |
| Accumulated\tother\tcomprehensive\tloss | (6,195) | (5,127) |
| Deferred\tcompensation\tobligations | 103 | 108 |
| Less:\tTreasury\tstock\t(2\tshares\tin\t2010\tand\t2009) | (103) | (108) |
| Total\tEquity\tfor\tControlling\tInterests | 7,979 | 7,630 |
| Noncontrolling\tInterests | 68 | 66 |
| Total\tShareowners'\tEquity | 8,047 | 7,696 |
| Total\tLiabilities\tand\tShareowners'\tEquity | $33,597 | $31,883 |

# STATEMENTS	OF	CONSOLIDATED	INCOME

# (In	millions,	except	per	share	amounts)

|  | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- |
| Revenue | $49,545 | $45,297 | $51,486 |
| Operating\tExpenses: |  |  |  |
| Compensation\tand\tbenefits | \t 26,324 | \t 25,640 | \t 26,063 |
| Repairs\tand\tmaintenance | 1,131 | 1,075 | 1,194 |
| Depreciation\tand\tamortization | 1,792 | 1,747 | 1,814 |
| Purchased\ttransportation | 6,640 | 5,379 | 6,550 |
| Fuel | 2,972 | 2,365 | 4,134 |
| Other\toccupancy | 939 | 985 | 1,027 |
| Other\texpenses | 3,873 | 4,305 | 5,322 |
| Total\tOperating\tExpenses | \t 43,671 | \t 41,496 | \t 46,104 |
| Operating\tProfit | 5,874 | 3,801 | 5,382 |
| Other\tIncome\tand\t(Expense): |  |  |  |
| Investment\tincome | 3 | 10 | 75 |
| Interest\texpense | (354) | (445) | (442) |
| Total\tOther\tIncome\tand\t(Expense) | (351) | (435) | (367) |
| Income\tBefore\tIncome\tTaxes | 5,523 | 3,366 | 5,015 |
| Income\tTax\tExpense | 2,035 | 1,214 | 2,012 |
| Net\tIncome | $3,488 | $2,152 | $3,003 |
| Basic\tEarnings\tPer\tShare | $3.51 | $2.16 | $2.96 |
| Diluted\tEarnings\tPer\tShare | $3.48 | $2.14 | $2.94 |

# STATEMENTS	OF	CONSOLIDATED	COMPREHENSIVE	INCOME	(LOSS)

|  | Years	Ended	December	31, | Years	Ended	December	31, |  |
| :--- | :--- | :--- | :--- |
|  | 2010 | 2009 | 2008 |
| Net\tincome | $3,488 | $2,152 | $3,003 |
| Change\tin\tforeign\tcurrency\ttranslation\tadjustment | (105) | 75 | (119) |
| Change\tin\tunrealized\tgain\t(loss)\ton\tmarketable\tsecurities,\tnet\tof\ttax | 39 | 33 | (69) |
| Change\tin\tunrealized\tgain\t(loss)\ton\tcash\tflow\thedges,\tnet\tof\ttax | (39) | (93) | 143 |
| Change\tin\tunrecognized\tpension\tand\tpostretirement\tbenefit\tcosts,\tnet\tof\ttax | (963) | 500 | (3,597) |
| Comprehensive\tincome\t(loss) | $2,420 | $2,667 | $(639) |

See	notes	to	consolidated	financial	statements.

# STATEMENTS	OF	CONSOLIDATED	CASH	FLOWS

|  | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- |
| Cash\tFlows\tFrom\tOperating\tActivities: |  |  |  |
| Net\tincome | $3,488 | $2,152 | $3,003 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tnet\tcash\tfrom\toperating\tactivities: |  |  |  |
| Depreciation\tand\tamortization | 1,792 | 1,747 | 1,814 |
| Pension\tand\tpostretirement\tbenefit\texpense | 903 | 872 | 726 |
| Pension\tand\tpostretirement\tbenefit\tcontributions | (3,240) | (924) | (246) |
| Self-insurance\treserves | 45 | 47 | 87 |
| Deferred\ttaxes,\tcredits\tand\tother | 1,002 | 471 | 187 |
| Stock\tcompensation\texpense | 519 | 430 | 516 |
| Asset\timpairment\tcharges | — | 181 | 575 |
| Other\t(gains)\tlosses | (13) | 115 | 634 |
| Changes\tin\tassets\tand\tliabilities,\tnet\tof\teffect\tof\tacquisitions: |  |  |  |
| Accounts\treceivable | (532) | (30) | 197 |
| Income\ttaxes\treceivable | (146) | 27 | 1,161 |
| Other\tcurrent\tassets | (60) | 136 | (144) |
| Accounts\tpayable | 265 | (107) | 87 |
| Accrued\twages\tand\twithholdings | 98 | (102) | 44 |
| Other\tcurrent\tliabilities | (284) | 184 | (184) |
| Other\toperating\tactivities | (2) | 86 | (31) |
| Net\tcash\tfrom\toperating\tactivities | 3,835 | 5,285 | 8,426 |
| Cash\tFlows\tFrom\tInvesting\tActivities: |  |  |  |
| Capital\texpenditures | (1,389) | (1,602) | (2,636) |
| Proceeds\tfrom\tdisposals\tof\tproperty,\tplant\tand\tequipment | 304 | 60 | 147 |
| Purchases\tof\tmarketable\tsecurities | (2,490) | (2,251) | (3,391) |
| Sales\tand\tmaturities\tof\tmarketable\tsecurities | 2,520 | 2,240 | 3,113 |
| Net\t(increase)\tdecrease\tin\tfinance\treceivables | 108 | 261 | (49) |
| Other\tinvesting\tactivities | 293 | 44 | (363) |
| Net\tcash\tused\tin\tinvesting\tactivities | (654) | (1,248) | (3,179) |
| Cash\tFlows\tFrom\tFinancing\tActivities: |  |  |  |
| Net\tchange\tin\tshort-term\tdebt | (481) | (1,738) | (2,016) |
| Proceeds\tfrom\tlong-term\tborrowings | 2,195 | 3,160 | 3,613 |
| Repayments\tof\tlong-term\tborrowings | (468) | (1,944) | (2,518) |
| Purchases\tof\tcommon\tstock | (817) | (561) | (3,570) |
| Issuances\tof\tcommon\tstock | 218 | 149 | 169 |
| Dividends | (1,818) | (1,751) | (2,219) |
| Other\tfinancing\tactivities | (175) | (360) | (161) |
| Net\tcash\tused\tin\tfinancing\tactivities | (1,346) | (3,045) | (6,702) |
| Effect\tOf\tExchange\tRate\tChanges\tOn\tCash\tAnd\tCash\tEquivalents | (7) | 43 | (65) |
| Net\tIncrease\t(Decrease)\tIn\tCash\tAnd\tCash\tEquivalents | 1,828 | 1,035 | (1,520) |
| Cash\tAnd\tCash\tEquivalents: |  |  |  |
| Beginning\tof\tperiod | 1,542 | 507 | 2,027 |
| End\tof\tperiod | $3,370 | $1,542 | $507 |
| Cash\tPaid\tDuring\tThe\tPeriod\tFor: |  |  |  |
| Interest\t(net\tof\tamount\tcapitalized) | $340 | $390 | $359 |
| Income\ttaxes | $1,312 | $443 | $760 |

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# NOTE	1.	SUMMARY	OF	ACCOUNTING	POLICIES

# Basis	of	Financial	Statements	and	Business	Activities

The	accompanying	consolidated	financial	statements	have	been	prepared	in	accordance	with	accounting	principles	generally	accepted	in	the	United	States ("GAAP").	The	accompanying	consolidated	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.

# Use	of	Estimates

The	preparation	of	our	consolidated	financial	statements	requires	the	use	of	estimates	and	assumptions	that	affect	the	reported	amounts	of	assets	and	liabilities, the	reported	amounts	of	revenues	and	expenses	and	the	disclosure	of	contingencies.	Estimates	have	been	prepared	on	the	basis	of	the	most	current	and	best	information, and	actual	results	could	differ	materially	from	those	estimates.

# Revenue	Recognition

U.S.	Domestic	and	International	Package	Operations—Revenue	is	recognized	upon	delivery	of	a	letter	or	package.

Forwarding	and	Logistics—Freight	forwarding	revenue	and	the	expense	related	to	the	transportation	of	freight	are	recognized	at	the	time	the	services	are performed.	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.

We	utilize	independent	contractors	and	third	party	carriers	in	the	performance	of	some	transportation	services.	In	situations	where	we	act	as	principal	party	to	the transaction,	we	recognize	revenue	on	a	gross	basis;	in	circumstances	where	we	act	as	an	agent,	we	recognize	revenue	net	of	the	cost	of	the	purchased	transportation.

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.

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS—(Continued)

# 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	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.

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.

# Accounts	Receivable

Losses	on	accounts	receivable	are	recognized	when	they	are	incurred,	which	requires	us	to	make	our	best	estimate	of	the	probable	losses	inherent	in	our	customer receivables	at	each	balance	sheet	date.	These	estimates	require	consideration	of	historical	loss	experience,	adjusted	for	current	conditions,	trends	in	customer	payment frequency,	and	judgments	about	the	probable	effects	of	relevant	observable	data,	including	present	economic	conditions	and	the	financial	health	of	specific	customers and	market	sectors.	Our	risk	management	process	includes	standards	and	policies	for	reviewing	major	account	exposures	and	concentrations	of	risk.

Our	total	allowance	for	doubtful	accounts	as	of	December	31,	2010	and	2009	was	$127	and	$138	million,	respectively.	Our	total	provision	for	doubtful	accounts charged	to	expense	during	the	years	ended	December	31,	2010,	2009	and	2008	was	$199,	$254	and	$277	million,	respectively.

# Inventories

Jet	fuel,	diesel,	and	unleaded	gasoline	inventories	are	valued	at	the	lower	of	average	cost	or	market.	Fuel	and	other	materials	and	supplies	inventories	are recognized	as	inventory	when	purchased,	and	then	charged	to	expense	when	used	in	our	operations.	Total	inventories	were	$319	and	$281	million	as	of	December	31, 2010	and	2009,	respectively,	and	are	included	in	"other	current	assets"	on	the	consolidated	balance	sheet.

# 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—6	to	15	years;	Aircraft—12	to	30	years;	Buildings—20	to	40	years;	Leasehold	Improvements—terms	of	leases;	Plant	Equipment —6	to	8 	1/4	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.

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	$18,	$37	and	$48	million for	2010,	2009,	and	2008,	respectively.

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.

# Goodwill	and	Intangible	Assets

Costs	of	purchased	businesses	in	excess	of	net	identifiable	assets	acquired	(goodwill),	and	indefinite-lived	intangible	assets	are	tested	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.	We	primarily	determine	the	fair	value	of	our	reporting	units	using	a	discounted	cash	flow	model,	and	supplement	this	with	observable valuation	multiples	for	comparable	companies,	as	applicable.

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.

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.

# Pension	and	Postretirement	Benefits

We	incur	certain	employment-related	expenses	associated	with	pension	and	postretirement	medical	benefits.	These	pension	and	postretirement	medical	benefit costs	for	company-sponsored	benefit	plans	are	calculated	using	various	actuarial	assumptions	and	methodologies,	including	discount	rates,	expected	returns	on	plan assets,

health	care	cost	trend	rates,	inflation,	compensation	increase	rates,	mortality	rates,	and	other	factors.	Actuarial	assumptions	are	reviewed	on	an	annual	basis,	unless circumstances	require	an	interim	remeasurement	date	for	any	of	our	plans.

We	participate	in	a	number	of	trustee-managed	multi-employer	pension	and	health	and	welfare	plans	for	employees	covered	under	collective	bargaining agreements.	Our	contributions	to	these	plans	are	determined	in	accordance	with	the	respective	collective	bargaining	agreements.	We	recognize	expense	for	the contractually	required	contribution	for	each	period,	and	we	recognize	a	liability	for	any	contributions	due	and	unpaid	(included	in	"other	current	liabilities").

Income	taxes	are	accounted	for	on	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	consolidated	financial	statements	or	tax	returns.	In	estimating	future	tax	consequences,	we	generally	consider 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.	Once	it	is	determined	that	the	position	meets	the	recognition	threshold,	the	second	step	requires	us	to	estimate	and	measure	the	tax	benefit	as	the	largest amount	that	is	more	likely	than	not	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 could	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	$7,	$(45)	and	$46	million	in	2010,	2009	and	2008,	respectively.

# Stock-Based	Compensation

All	share-based	awards	to	employees	are	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).	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.	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.

Our	financial	assets	and	liabilities	measured	at	fair	value	on	a	recurring	basis	have	been	categorized	based	upon	a	fair	value	hierarchy.	Level	1	inputs	utilize quoted	prices	in	active	markets	for	identical	assets	or	liabilities.	Level	2	inputs	are	based	on	other	observable	market	data,	such	as	quoted	prices	for	similar	assets	and liabilities,	and	inputs	other	than	quoted	prices	that	are	observable,	such	as	interest	rates	and	yield	curves.	Level	3	inputs	are	developed	from	unobservable	data	reflecting our	own	assumptions,	and	include	situations	where	there	is	little	or	no	market	activity	for	the	asset	or	liability.

Certain	non-financial	assets	and	liabilities	are	measured	at	fair	value	on	a	nonrecurring	basis,	including	property,	plant,	and	equipment,	goodwill,	and	intangible assets.	These	assets	are	not	measured	at	fair	value	on	a	recurring	basis;	however,	they	are	subject	to	fair	value	adjustments	in	certain	circumstances,	such	as	when	there	is evidence	of	an	impairment.	A	general	description	of	the	valuation	methodologies	used	for	assets	and	liabilities	measured	at	fair	value,	including	the	general classification	of	such	assets	and	liabilities	pursuant	to	the	valuation	hierarchy,	is	included	in	each	footnote	with	fair	value	measurements	present.

# Derivative	Instruments

All	financial	derivative	instruments	are	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.

Provisions	within	the	following	accounting	standards	were	adopted	during	the	years	covered	by	these	consolidated	financial	statements:

Financial	Instruments:	The	Financial	Accounting	Standards	Board	("FASB")	issued	guidance	in	February	2007	that	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,	this	guidance	allowed	for	a	one-time	election	for	existing	positions	upon	adoption,	with	the	transition	adjustment	recorded	to	beginning retained	earnings.	We	adopted	this	standard	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	a	$16

million	reduction	to	retained	earnings	as	of	January	1,	2008.	These	investments	are	reported	in	"other	non-current	assets"	on	the	consolidated	balance	sheets.

Fair	Value	Measurements	and	Disclosures:	The	FASB	issued	guidance	on	fair	value	measurements	that	took	effect	on	January	1,	2008	and	are	presented	in	Notes 2,	3,	4,	5,	and	14	to	the	consolidated	financial	statements.	On	January	1,	2009,	we	implemented	the	previously	deferred	provisions	of	this	guidance	for nonfinancial	assets	and	liabilities	recorded	at	fair	value.	The	accounting	requirements	for	determining	fair	value	when	the	volume	and	level	of	activity	for	an	asset or	liability	have	significantly	decreased,	and	for	identifying	transactions	that	are	not	orderly,	contained	the	FASB's	guidance	were	adopted	on	April	1,	2009,	but had	an	immaterial	impact	on	our	consolidated	financial	statements.

Business	Combinations:	The	FASB	issued	new	accounting	requirements	for	business	combinations,	which	took	effect	on	January	1,	2009.	This	new	guidance	was applied	to	business	combinations	completed	in	2009,	but	had	an	immaterial	impact	on	our	consolidated	financial	statements.

Consolidation:	The	FASB	issued	accounting	and	presentation	requirements	for	noncontrolling	interests,	which	took	effect	on	January	1,	2009,	however	this	new guidance	had	an	immaterial	impact	on	our	consolidated	financial	statements.

Accounting	pronouncements	issued,	but	not	effective	until	after	December	31,	2010,	are	not	expected	to	have	a	significant	effect	on	our	consolidated	financial position	or	results	or	operations.

# Changes	in	Presentation

Certain	prior	year	amounts	have	been	reclassified	to	conform	to	the	current	year	presentation.	These	reclassifications	had	no	impact	on	our	financial	position	or results	of	operations.

# NOTE	2.	CASH	AND	INVESTMENTS

The	following	is	a	summary	of	marketable	securities	classified	as	available-for-sale	at	December	31,	2010	and	2009	(in	millions):

|  | Cost | Unrealized<br>Gains | Unrealized<br>Losses | Estimated<br>Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
| 2010 |  |  |  |  |
| Current\tmarketable\tsecurities: |  |  |  |  |
| U.S.\tgovernment\tand\tagency\tdebt\tsecurities | $207 | $1 | $(2) | $206 |
| Mortgage\tand\tasset-backed\tdebt\tsecurities | \t 220 | 3 | (1) | 222 |
| Corporate\tdebt\tsecurities | \t 179 | 5 | (1) | 183 |
| U.S.\tstate\tand\tlocal\tmunicipal\tdebt\tsecurities | 33 | — | — | 33 |
| Other\tdebt\tand\tequity\tsecurities | 62 | 5 | — | 67 |
| Current\tmarketable\tsecurities | \t 701 | 14 | (4) | 711 |
| Non-current\tmarketable\tsecurities: |  |  |  |  |
| Mortgage\tand\tasset-backed\tdebt\tsecurities | 79 | 2 | (2) | 79 |
| U.S.\tstate\tand\tlocal\tmunicipal\tdebt\tsecurities | 49 | 2 | (6) | 45 |
| Common\tequity\tsecurities | 20 | 14 | — | 34 |
| Preferred\tequity\tsecurities | 16 | 1 | (3) | 14 |
| Non-current\tmarketable\tsecurities | \t 164 | 19 | (11) | 172 |
| Total\tmarketable\tsecurities | $865 | $33 | $(15) | $883 |

|  | Cost | Unrealized<br>Gains | Unrealized<br>Losses | Estimated<br>Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
| 2009 |  |  |  |  |
| Current\tmarketable\tsecurities: |  |  |  |  |
| U.S.\tgovernment\tand\tagency\tdebt\tsecurities | $126 | $— | $(1) | $125 |
| Mortgage\tand\tasset-backed\tdebt\tsecurities | \t 158 | 2 | (1) | 159 |
| Corporate\tdebt\tsecurities | \t 213 | 6 | — | 219 |
| U.S.\tstate\tand\tlocal\tmunicipal\tdebt\tsecurities | 22 | — | — | 22 |
| Other\tdebt\tand\tequity\tsecurities | 28 | 5 | — | 33 |
| Current\tmarketable\tsecurities | \t 547 | 13 | (2) | 558 |
| Non-current\tmarketable\tsecurities: |  |  |  |  |
| Mortgage\tand\tasset-backed\tdebt\tsecurities | \t 150 | — | (38) | 112 |
| U.S.\tstate\tand\tlocal\tmunicipal\tdebt\tsecurities | \t 115 | — | (26) | 89 |
| Common\tequity\tsecurities | 21 | 10 | — | 31 |
| Preferred\tequity\tsecurities | 16 | — | (1) | 15 |
| Non-current\tmarketable\tsecurities | \t 302 | 10 | (65) | 247 |
| Total\tmarketable\tsecurities | $849 | $23 | $(67) | $805 |

The	gross	realized	gains	on	sales	of	marketable	securities	totaled	$24,	$16	and	$19	million	in	2010,	2009,	and	2008,	respectively.	The	gross	realized	losses	totaled $18,	$12	and	$10	million	in	2010,	2009	and	2008,	respectively.	Impairment	losses	recognized	on	marketable	securities	and	short-term	investments	totaled	$21,	$17	and $23	million	during	2010,	2009	and	2008	(discussed	further	below),	respectively.

# Auction	Rate	Securities

At	December	31,	2010,	we	held	$144	million	in	principal	value	of	investments	in	auction	rate	securities.	Some	of	these	investments	take	the	form	of	debt securities,	and	are	structured	as	direct	obligations	of	local	governments	or	agencies	(classified	as	"U.S.	state	and	local	municipal	debt	securities").	Other	auction	rate security	investments	are	structured	as	obligations	of	asset-backed	trusts	(classified	as	"Mortgage	and	asset-backed	debt	securities"),	generally	all	of	which	are collateralized	by	student	loans	and	are	guaranteed	by	the	U.S.	Government	or	through	private	insurance.	The	remaining	auction	rate	securities	take	the	form	of	preferred stock,	and	are	collateralized	by	securities	issued	directly	by	large	corporations	or	money	market	securities.	Substantially	all	of	our	investments	in	auction	rate	securities maintain	investment-grade	ratings	of	BBB	/	Baa	or	higher	by	Standard	&	Poor's	Rating	Service	("Standard	&	Poor's")	and	Moody's	Investors	Service	("Moody's"), respectively.

During	the	first	quarter	of	2008,	market	auctions,	including	auctions	for	substantially	all	of	our	auction	rate	securities	portfolio,	began	to	fail	due	to	insufficient buyers.	As	a	result	of	the	persistent	failed	auctions,	and	the	uncertainty	of	when	these	investments	could	successfully	be	liquidated	at	par,	we	reclassified	all	of	our investments	in	auction	rate	securities	to	non-current	marketable	securities,	as	noted	in	the	table	above,	as	of	March	31,	2008.	As	market	auctions	have	continued	to	fail, we	have	retained	the	non-current	classification	of	these	securities	as	of	December	31,	2010.	The	securities	for	which	auctions	have	failed	will	continue	to	accrue	interest and	be	auctioned	at	each	respective	reset	date	until	the	auction	succeeds,	the	issuer	redeems	the	securities,	or	the	securities	mature.	During	2010,	auction	rate	securities with	a	par	value	of	$44	million	were	successfully	auctioned,	resulting	in	their	liquidation	with	no	realized	gain	or	loss.

Historically,	the	par	value	of	the	auction	rate	securities	approximated	fair	value	due	to	the	frequent	resetting	of	the	interest	rate.	While	we	will	continue	to	earn interest	on	these	investments	in	failed	auction	rate	securities	(often	at	the	maximum	contractual	interest	rate),	the	estimated	fair	value	of	the	auction	rate	securities	no longer	approximates	par	value	due	to	the	lack	of	liquidity.	We	estimated	the	fair	value	of	these	securities	after	considering	several	factors,	including	the	credit	quality	of the	securities,	the	rate	of	interest	received	since	the	failed	auctions	began,	the	yields	of	securities	similar	to	the	underlying	auction	rate	securities,	and	the	input	of broker-dealers	in	these	securities.	As	a	result,	we	recorded	an	after-tax	unrealized	loss	of	approximately	$4	million	on	these	securities	as	of	December	31,	2010	in	other comprehensive	income	($6	million	pre-tax),	reflecting	the	decline	in	the	estimated	fair	value	of	these	securities.

# Investment	Other-Than-Temporary	Impairments

During	the	second	quarter	of	2010,	we	recorded	impairment	losses	on	certain	asset-backed	auction	rate	securities.	The	impairment	charge	resulted	from provisions	that	allow	the	issuers	of	the	securities	to	subordinate	our	holdings	to	newly	issued	debt	or	to	tender	for	the	securities	at	less	than	their	par	value.	These securities,	which	had	a	cost	basis	of	$128	million,	were	written	down	to	their	fair	value	of	$107	million	as	of	June	30,	2010,	as	an	other-than-temporary	impairment.	The $21	million	total	impairment	charge	during	the	second	quarter	was	recorded	as	a	loss	in	investment	income	(loss)	on	the	statement	of	consolidated	income.

During	the	second	quarter	of	2009,	we	recorded	impairment	losses	on	certain	perpetual	preferred	securities,	and	an	auction	rate	security	collateralized	by preferred	securities,	issued	by	large	financial	institutions.	The	impairment	charge	results	from	conversion	offers	from	the	issuers	of	these	securities	at	prices	well	below the	stated	redemption	value	of	the	preferred	shares.	These	securities,	which	had	a	cost	basis	of	$42	million,	were	written	down	to	their	fair	value	of	$25	million	as	of June	30,	2009,	as	an	other-than-temporary	impairment.	The	$17	million	total	impairment	charge	during	the	second	quarter	was	recorded	as	a	loss	in	investment	income (loss)	on	the	statement	of	consolidated	income.

During	the	third	quarter	of	2008,	we	recorded	impairment	losses	on	two	auction	rate	securities	that	were	collateralized	by	preferred	stock	issued	by	the	Federal National	Mortgage	Association	("FNMA")	and	the	Federal	Home	Loan	Mortgage	Corporation	("FHLMC").	The	impairment	resulted	from	actions	by	the	U.S. Department	of	the	Treasury	and	the	Federal	Housing	Finance	Agency	to	place	FNMA	and	FHLMC	under	conservatorship.	Additionally,	we	recorded	impairment	losses on	a	municipal	auction	rate	security	and	on	holdings	of	several	medium	term	notes	issued	by	Lehman	Brothers	Inc.,	which	declared	bankruptcy	during	the	third	quarter of	2008.	We	do	not	hold	any	other	securities	in	any	of	these	entities.	The	total	of	these	credit-related	impairment	losses	during	the	year	was	$23	million,	which	was recorded	as	a	loss	in	investment	income	(loss)	on	the	statement	of	consolidated	income.

For	the	remaining	auction	rate	securities	and	other	debt	securities,	we	have	concluded	that	no	additional	other-than-temporary	impairment	losses	existed	as	of December	31,	2010.	In	making	this	determination,	we	considered	the	financial	condition	and	prospects	of	the	issuer,	the	magnitude	of	the	losses	compared	with	the investments'	cost,	the	probability	that	we	will	be	unable	to	collect	all	amounts	due	according	to	the	contractual	terms	of	the	security,	the	credit	rating	of	the	security,	and our	ability	and	intent	to	hold	these	investments	until	the	anticipated	recovery	in	market	value	occurs.

# Unrealized	Losses

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,	2010 (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\tdebt\tsecurities | $75 | $(2) | $— | $— | $75 | $(2) |
| Mortgage\tand\tasset-backed\tdebt\tsecurities | 93 | (1) | 28 | (2) | \t 121 | (3) |
| Corporate\tdebt\tsecurities | 65 | (1) | \t — | — | 65 | (1) |
| U.S.\tstate\tand\tlocal\tmunicipal\tdebt\tsecurities | \t — | — | 21 | (6) | 21 | (6) |
| Other\tdebt\tsecurities | 3 | — | \t — | — | 3 | — |
| Total\tdebt\tsecurities | 236 | (4) | 49 | (8) | \t 285 | (12) |
| Common\tequity\tsecurities | \t — | — | \t — | — | \t — | — |
| Preferred\tequity\tsecurities | \t — | — | 6 | (3) | 6 | (3) |
|  | $236 | $(4) | $55 | $(11) | $291 | $(15) |

The	unrealized	losses	in	the	U.S.	state	and	local	municipal	securities,	preferred	equity	securities,	and	mortgage	and	asset-backed	securities	primarily	relate	to	the auction	rate	securities	discussed	previously.	The	unrealized	losses	for	the	non-auction	rate	securities	within	those	categories	are	primarily	related	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.

# Maturity	Information

The	amortized	cost	and	estimated	fair	value	of	marketable	securities	at	December	31,	2010,	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.

|  |  | Estimated |
| :--- | :--- | :--- |
|  | Cost | Fair\tValue |
| Due\tin\tone\tyear\tor\tless | $102 | $102 |
| Due\tafter\tone\tyear\tthrough\tthree\tyears | \t 213 | 215 |
| Due\tafter\tthree\tyears\tthrough\tfive\tyears | 52 | 52 |
| Due\tafter\tfive\tyears | \t 443 | 441 |
|  | \t 810 | 810 |
| Equity\tsecurities | 55 | 73 |
|  | $865 | $883 |

# Restricted	Cash

Restricted	cash	and	cash	equivalents	relate	to	our	self-insurance	requirements.	In	2008,	we	entered	into	an	escrow	agreement	with	an	insurance	carrier	to guarantee	our	self-insurance	obligations.	This	agreement	requires	us	to	provide	cash	collateral	to	the	insurance	carrier,	which	is	classified	as	other	non-current	assets	on our	consolidated	balance	sheets.	Additional	cash	collateral	provided	is	reflected	in	other	investing	activities	in	the	statements	of	consolidated	cash	flows.	This	restricted cash	is	invested	in	money	market	funds	and	similar	cash	equivalent	type	assets.	As	of	December	31,	2010	and	2009,	we	had	$286	million	in	restricted	cash.

Marketable	securities	utilizing	Level	1	inputs	include	active	exchange-traded	equity	securities	and	equity	index	funds,	and	most	U.S.	Government	debt	securities, as	these	securities	all	have	quoted	prices	in	active	markets.	Marketable	securities	utilizing	Level	2	inputs	include	non-auction	rate	asset-backed	securities,	corporate bonds,	and	municipal	bonds.	These	securities	are	valued	using	market	corroborated	pricing,	matrix	pricing,	or	other	models	that	utilize	observable	inputs	such	as	yield curves.

We	have	classified	our	auction	rate	securities	portfolio	as	utilizing	Level	3	inputs,	as	their	valuation	requires	substantial	judgment	and	estimation	of	factors	that are	not	currently	observable	in	the	market	due	to	the	lack	of	trading	in	the	securities.	The	valuation	may	be	revised	in	future	periods	as	market	conditions	evolve.	These securities	were	valued	as	of	December	31,	2010	considering	several	factors,	including	the	credit	quality	of	the	securities,	the	rate	of	interest	received	since	the	failed auctions	began,	the	yields	of	securities	similar	to	the	underlying	auction	rate	securities,	and	the	input	of	broker-dealers	in	these	securities.

We	maintain	holdings	in	certain	investment	partnerships	that	are	measured	at	fair	value	utilizing	Level	3	inputs	(classified	as	"other	investments"	in	the	tables below,	and	as	"Other	Non-Current	Assets"	in	the	consolidated	balance	sheets).	These	partnership	holdings	do	not	have	any	quoted	prices,	nor	can	they	be	valued	using inputs	based	on	observable	market	data.	These	investments	are	valued	internally	using	a	discounted	cash	flow	model	based	on	each	partnership's	financial	statements and	cash	flow	projections.

The	following	table	presents	information	about	our	investments	measured	at	fair	value	on	a	recurring	basis	as	of	December	31,	2010	and	2009,	and	indicates	the fair	value	hierarchy	of	the	valuation	techniques	utilized	to	determine	such	fair	value	(in	millions).

|  | Active<br>Markets	for<br>Identical<br>Assets<br>(Level	1) | Significant<br>Other<br>Observable<br>Inputs<br>(Level	2) | Significant<br>Unobservable<br>Inputs<br>(Level	3) | Balance	as	of<br>December	31,	2010 |
| :--- | :--- | :--- | :--- | :--- |
| 2010 |  |  |  |  |
| Marketable\tSecurities: |  |  |  |  |
| U.S.\tGovernment\tand\tAgency\tDebt\tSecurities | $206 | $— | $— | $206 |
| Mortgage\tand\tAsset-Backed\tDebt\tSecurities | — | 222 | 79 | 301 |
| Corporate\tDebt\tSecurities | — | 183 | — | 183 |
| U.S.\tState\tand\tLocal\tMunicipal\tDebt\tSecurities | — | 33 | 45 | 78 |
| Other\tDebt\tand\tEquity\tSecurities | 41 | 60 | 14 | 115 |
| Total\tMarketable\tSecurities | 247 | 498 | 138 | 883 |
| Other\tinvestments | — | — | 267 | 267 |
| Total | $247 | $498 | $405 | $1,150 |

|  | Quoted<br>Prices	in<br>Active<br>Markets	for<br>Identical<br>Assets<br>(Level	1) | Significant<br>Other<br>Observable<br>Inputs<br>(Level	2) | Significant<br>Unobservable<br>Inputs<br>(Level	3) | Balance	as	of<br>December	31,	2009 |
| :--- | :--- | :--- | :--- | :--- |
| 2009 |  |  |  |  |
| Marketable\tSecurities: |  |  |  |  |
| U.S.\tGovernment\tand\tAgency\tDebt\tSecurities | $125 | $— | $— | $125 |
| Mortgage\tand\tAsset-Backed\tDebt\tSecurities | — | 159 | 112 | 271 |
| Corporate\tDebt\tSecurities | — | 219 | — | 219 |
| U.S.\tState\tand\tLocal\tMunicipal\tDebt\tSecurities | — | 22 | 89 | 111 |
| Other\tDebt\tand\tEquity\tSecurities | 54 | 10 | 15 | 79 |
| Total\tMarketable\tSecurities | 179 | 410 | 216 | 805 |
| Other\tinvestments | — | — | 301 | 301 |
| Total | $179 | $410 | $517 | $1,106 |

The	following	table	presents	the	changes	in	the	above	Level	3	instruments	measured	on	a	recurring	basis	for	the	year	ended	December	31,	2010	(in	millions).

|  | Marketable | Other |  |
| :--- | :--- | :--- | :--- |
|  | Securities | Investments | Total |
| Balance\ton\tJanuary\t1,\t2010 | $216 | $301 | $517 |
| Transfers\tinto\t(out\tof)\tLevel\t3 | — | — | \t — |
| Net\trealized\tand\tunrealized\tgains\t(losses): |  |  |  |
| Included\tin\tearnings\t(in\tinvestment\tincome) | (27) | (34) | (61) |
| Included\tin\taccumulated\tother\tcomprehensive\tincome\t(pre-tax) | 59 | — | 59 |
| Purchases | — | — | \t — |
| Settlements | (110) | — | (110) |
| Balance\ton\tDecember\t31,\t2010 | $138 | $267 | $405 |

# NOTE	3.	FINANCE	RECEIVABLES

The	following	is	a	summary	of	finance	receivables	at	December	31,	2010	and	2009	(in	millions):

|  | 2010 | 2009 |
| :--- | :--- | :--- |
| Commercial\tterm\tloans | $266 | $305 |
| Other\tfinancing\treceivables | \t 245 | \t 350 |
| Gross\tfinance\treceivables | \t 511 | \t 655 |
| Less:\tAllowance\tfor\tcredit\tlosses | (20) | (31) |
| Balance\tat\tDecember\t31 | $491 | $624 |

Our	finance	receivables	portfolio	consists	of	two	product	groups:	commercial	term	loans	and	other	financing	receivables.	Other	financing	receivables	consist	of investments	in	finance	leases,	asset-based	lending,	and	receivable	factoring.	Outstanding	receivable	balances	at	December	31,	2010	and	2009	are	net	of	unearned	income of	$15	and	$19	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.	As	of	December	31,	2010	and	2009,	the	amounts	due to	clients	under	our	factoring	programs	were	$71	and	$88	million,	respectively.

The	following	is	a	rollforward	of	the	allowance	for	credit	losses	on	finance	receivables	(in	millions):

|  | 2010 | 2009 |
| :--- | :--- | :--- |
| Balance\tat\tJanuary\t1 | $31 | $25 |
| Provisions\tcharged\tto\toperations | 10 | 25 |
| Charge-offs,\tnet\tof\trecoveries | (21) | (19) |
| Balance\tat\tDecember\t31 | $20 | $31 |

We	use	a	multiple	tier	risk	assessment	matrix	to	grade	and	monitor	asset	quality.	The	primary	assessments	are	made	to	determine	the	degree	of	risk	that	an	obligor may	default	in	principal	or	interest	payments	and	the	potential	range	of	loss	in	the	event	of	default.	The	risk	assessment	categories	are:

•	 U.S.	Government	Guaranteed—Payments	are	guaranteed	by	the	Small	Business	Administration	or	U.S.	Department	of	Agriculture,	and	no	loss	is	likely.

•Acceptable	Risk—Payments	are	current,	and	no	loss	is	likely.

•Sub-Standard	Risk—In	default	or	high	probability	of	default,	but	loss	is	unlikely.

•	 Classified—In	default,	loss	is	probable,	specific	allowance	for	loss	is	assigned.

The	following	is	an	allocation	of	the	finance	receivables	portfolio	by	risk	rating	category	as	of	December	31,	2010	(in	millions):

       The	following	is	an	aging	analysis	of	our	finance	receivables	as	of	December	31,	2010	(in	millions):

|  | Past	Due | Past	Due | Due | Current | Receivables |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Commercial\tterm\tloans: |  |  |  |  |  |
| U.S.\tGovernment\tguaranteed | $2 | $2 | $63 | $31 | $98 |
| Other\tunguaranteed | — | 8 | 15 | 145 | 168 |
| Other\tfinancing\treceivables | 2 | 1 | 2 | 240 | 245 |
| Total\tfinance\treceivables | $4 | $11 | $80 | $416 | $511 |

The	following	is	an	analysis	of	impaired	finance	receivables	as	of	December	31,	2010	(in	millions):

|  |  | Unpaid |  | Average | Interest |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Recorded | Principal | Related | Recorded | Income |
|  | Investment | Balance | Allowance | Investment | Recognized |
| Impaired\tloans\twith\trelated\tallowance | $16 | $30 | $8 | $17 | $1 |
| Impaired\tloans\twith\tno\trelated\tallowance | 11 | 41 | — | 12 | — |
| Impaired\tloans\twith\tU.S.\tgovernment\tguarantee | 73 | 73 | — | 80 | 2 |
| Total\timpaired\tloans | $100 | $144 | $8 | $109 | $3 |

The	carrying	value	of	finance	receivables	at	December	31,	2010,	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	$491	and	$623 million	as	of	December	31,	2010	and	2009,	respectively.	At	December	31,	2010,	we	had	unfunded	loan	commitments	totaling	$602	million,	consisting	of	standby	letters of	credit	of	$93	million	and	other	unfunded	lending	commitments	of	$509	million.

During	2009,	impaired	finance	receivables	with	a	carrying	amount	of	$13	million	were	written	down	to	a	net	fair	value	of	$8	million,	based	on	the	fair	value	for the	related	collateral	which	was	determined	using	unobservable	inputs	(Level	3).

# NOTE	4.	PROPERTY,	PLANT	AND	EQUIPMENT

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

|  | 2010 | 2009 |
| :--- | :--- | :--- |
| Vehicles | $5,519 | $5,480 |
| Aircraft\t(including\taircraft\tunder\tcapitalized\tleases) | 14,063 | 13,777 |
| Land | 1,081 | 1,079 |
| Buildings | 3,102 | 3,076 |
| Building\tand\tleasehold\timprovements | 2,860 | 2,800 |
| Plant\tequipment | 6,656 | 6,371 |
| Technology\tequipment | 1,552 | 1,591 |
| Equipment\tunder\toperating\tleases | 122 | 145 |
| Construction-in-progress | 265 | 488 |
|  | 35,220 | 34,807 |
| Less:\tAccumulated\tdepreciation\tand\tamortization | (17,833) | (16,828) |
|  | $17,387 | $17,979 |

We	continually	monitor	our	aircraft	fleet	utilization	in	light	of	current	and	projected	volume	levels,	aircraft	fuel	prices,	and	other	factors.	In	2008,	we	announced that	we	were	in	negotiations	with	DHL	to	provide	air	transportation	services	for	all	of	DHL's	express,	deferred	and	international	package	volume	within	the	United States,	as	well	as	air	transportation	services	between	the	United	States,	Canada	and	Mexico.	In	early	April	2009,	UPS	and	DHL	mutually	agreed	to	terminate	further discussions	on	providing	these	services.	Additionally,	our	U.S.	Domestic	Package	air	delivery	volume	had	declined	for	several	quarters	as	a	result	of	persistent	economic weakness	and	shifts	in	product	mix	from	our	premium	air	services	to	our	lower	cost	ground	services.	As	a	result	of	these	factors,	the	utilization	of	certain	aircraft	fleet types	had	declined	and	was	expected	to	be	lower	in	the	future.

Based	on	the	factors	noted	above,	as	well	as	FAA	aging	aircraft	directives	that	would	require	significant	future	maintenance	expenditures,	we	determined	that	a triggering	event	had	occurred	that	required	an	impairment	assessment	of	our	McDonnell-Douglas	DC-8-71	and	DC-8-73	aircraft	fleets.	We	conducted	an	impairment analysis	as	of	March	31,	2009,	and	determined	that	the	carrying	amount	of	these	fleets	was	not	recoverable	due	to	the	accelerated	expected	retirement	dates	of	the aircraft.	Based	on	anticipated	residual	values	for	the	airframes,	engines,	and	parts,	we	recognized	an	impairment	charge	of	$181	million	in	the	first	quarter	of	2009.	This charge	is	included	in	the	caption	"Other	expenses"	in	the	statement	of	consolidated	income,	and	impacted	our	U.S.	Domestic	Package	segment.	The	DC-8	fleets	were subsequently	retired	from	service.	We	currently	continue	to	utilize	and	operate	all	of	our	other	aircraft	fleets.

The	impaired	airframes,	engines,	and	parts	had	a	net	carrying	value	of	$192	million,	and	were	written	down	to	an	aggregate	fair	value	of	$11	million.	The	fair values	for	the	impaired	airframes,	engines,	and	parts	were	determined	using	unobservable	inputs	(Level	3).

# NOTE	5.	EMPLOYEE	BENEFIT	PLANS

We	sponsor	various	retirement	and	pension	plans,	including	defined	benefit	and	defined	contribution	plans	which	cover	our	employees	worldwide.

# U.S.	Pension	Benefits

In	the	U.S.	we	maintain	the	following	single-employer	defined	benefit	pension	plans:	UPS	Retirement	Plan,	UPS	Pension	Plan,	UPS	IBT	Pension	Plan,	and	the UPS	Excess	Coordinating	Benefit	Plan,	a	non-qualified	plan.

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,	as	well	as	certain	employees	covered	by	a	collective	bargaining	agreement.	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	certain	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	generally	provides	for	retirement	benefits	based	on	service	credits	earned	by	employees	prior	to	retirement.

The	UPS	IBT	Pension	Plan	is	noncontributory	and	includes	employees	that	were	previously	members	of	the	Central	States,	Southeast	and	Southwest	Areas Pension	Fund	("Central	States	Pension	Fund"),	a	multi-employer	pension	plan,	in	addition	to	other	eligible	employees	who	are	covered	under	certain	collective bargaining	agreements.

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	establish	this	jointly	trusteed	single-employer	plan	for	this	group	of	employees.	We	recorded	a	pre-tax	charge	of	$6.1	billion	to	establish our	withdrawal	liability	upon	ratification	of	the	national	master	agreement,	and	made	a	$6.1	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.

The	withdrawal	liability	was	based	on	computations	performed	by	independent	actuaries	employed	by	the	Central	States	Pension	Fund,	in	accordance	with	the plan	document	and	the	applicable	requirements	of	the	Employee	Retirement	Income	Security	Act	of	1974	("ERISA").	We	negotiated	our	withdrawal	from	the	Central States	Pension	Fund	as	part	of	our	national	master	agreement	with	the	Teamsters,	which	included	other	modifications	to	hourly	wage	rates,	healthcare	and	pension benefits,	and	work	rules.	We	sought	to	negotiate	our	withdrawal	from	the	Central	States	Pension	Fund,	as	we	believed	the	fund	would	likely	continue	to	have	funding challenges,	and	would	present	a	risk	to	UPS	of	having	to	face	higher	future	contribution	requirements	and	a	risk	to	the	security	of	the	pension	benefits	of	those	UPS employees	who	participated	in	the	fund.	We	believe	that	we	benefited	financially	from	the	ability	to	achieve	a	ratified	national	master	agreement	seven	months	before the	expiration	of	the	previous	agreement,	as	well	as	by	gaining	better	control	over	the	future	cost	and	funding	of	pension	benefits	by	limiting	our	obligations	solely	to UPS	Teamster	employees	through	the	new	UPS	IBT	Pension	Plan.	As	the	UPS	IBT	Pension	Plan	matures,	we	believe	that	it	will	become	cost	beneficial	from	a	cash flow	and	earnings	standpoint	compared	with	having	remained	in	the	Central	States	Pension	Fund.

# U.S.	Postretirement	Medical	Benefits

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.

# International	Pension	Benefits

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.	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.

# Multi-Employer	Benefit	Plans

We	also	contribute	to	several	multi-employer	pension	plans	for	which	the	subsequent	disclosure	information	is	not	determinable.	Amounts	charged	to	operations for	pension	contributions	to	these	multi-employer	plans	were	$1.186,	$1.125	and	$1.069	billion	during	2010,	2009,	and	2008,	respectively.

We	also	contribute	to	several	multi-employer	health	and	welfare	plans	that	cover	both	active	and	retired	employees	for	which	the	subsequent	disclosure information	is	not	determinable.	Amounts	charged	to	operations	for	contributions	to	multi-employer	health	and	welfare	plans	were	$1.066	billion,	$1.031	billion	and $990	million	during	2010,	2009,	and	2008,	respectively.

# Defined	Contribution	Plans

We	also	sponsor	several	defined	contribution	plans	for	all	employees	not	covered	under	collective	bargaining	agreements,	and	for	certain	employees	covered under	collective	bargaining	agreements.	The	Company	matches,	in	shares	of	UPS	common	stock	or	cash,	a	portion	of	the	participating	employees'	contributions.	In early	2009,	we	suspended	the	company	matching	contributions	to	the	primary	employee	defined	contribution	plan.	A	revised	program	of	company	matching contributions	was	reinstated	effective	January	1,	2011.	Matching	contributions	charged	to	expense	were	$4,	$21,	and	$116	million	for	2010,	2009	and	2008, respectively.	The	reinstatement	of	matching	contributions	is	expected	to	increase	annual	expense	by	approximately	$75	million	beginning	in	2011.

Contributions	are	also	made	to	defined	contribution	money	purchase	plans	under	certain	collective	bargaining	agreements.	Amounts	charged	to	expense	were	$78, $80	and	$78	million	for	2010,	2009,	and	2008,	respectively.

# Net	Periodic	Benefit	Cost

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

|  | U.S.	Pension	Benefits | U.S.	Pension	Benefits | U.S.	Pension	Benefits | Medical	Benefits | U.S.	Postretirement |  | Pension	Benefits | International |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 |
| Net\tPeriodic\tCost: |  |  |  |  |  |  |  |  |  |
| Service\tcost | $723 | $689 | $707 | $86 | $85 | $96 | $24 | $17 | $26 |
| Interest\tcost | 1,199 | 1,130 | 1,051 | \t 214 | \t 211 | \t 202 | 34 | 28 | 31 |
| Expected\treturn\ton\tassets | (1,599) | (1,488) | (1,517) | (22) | (27) | (49) | (36) | (26) | (35) |
| Amortization\tof: |  |  |  |  |  |  |  |  |  |
| Transition\tobligation | — | 4 | 5 | \t — | \t — | \t — | \t — | \t — | \t — |
| Prior\tservice\tcost | 172 | 178 | 184 | 4 | 6 | (4) | 1 | 1 | 1 |
| Actuarial\t(gain)\tloss | 78 | 46 | 8 | 16 | 14 | 20 | 3 | \t — | \t — |
| Other | — | 3 | — | \t — | \t — | \t — | 6 | 1 | \t — |
| Net\tperiodic\tbenefit\tcost | $573 | $562 | $438 | $298 | $289 | $265 | $32 | $21 | $23 |

# Actuarial	Assumptions

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

|  | U.S.	Pension	Benefits | U.S.	Pension	Benefits | U.S.	Pension	Benefits | Medical	Benefits | U.S.	Postretirement |  | Pension	Benefits | International |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 | 2010 | 2009 | 2008 |
| Discount\trate | \t6.58% | \t6.75% | \t6.47% | \t6.43% | \t6.66% | \t6.25% | \t5.84% | \t6.17% | \t5.57% |
| Rate\tof\tcompensation\tincrease | \t4.50% | \t4.50% | \t4.50% | \tN/A | \tN/A | \tN/A | \t3.62% | \t3.65% | \t3.64% |
| Expected\treturn\ton\tassets | \t8.75% | \t8.96% | \t8.96% | \t8.75% | \t9.00% | \t9.00% | \t7.25% | \t7.09% | \t7.54% |

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

|  | 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 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 |
| Discount\trate | 5.98% | 6.58% | 5.77% | 6.43% | \t5.36% | \t5.84% |
| Rate\tof\tcompensation\tincrease | 4.50% | 4.50% | \t N/A | N/A | \t3.57% | \t3.62% |

A	discount	rate	is	used	to	determine	the	present	value	of	our	future	benefit	obligations.	In	2008	and	prior	years,	the	discount	rate	for	U.S.	plans	was	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.	In	2008,	we reduced	the	population	of	bonds	from	which	the	yield	curve	was	developed	to	better	reflect	bonds	we	would	more	likely	consider	to	settle	our	obligations.	In	2009,	we further	enhanced	this	process	for	plans	in	the	U.S.	by	using	a	bond	matching	approach	to	select	specific	bonds	that	would	satisfy	our	projected	benefit	payments.	We believe	the	bond	matching	approach	more	closely	reflects	the	process	we	would	employ	to	settle	our	pension	and	postretirement	benefit	obligations.	These	modifications had	an	impact	of	increasing	the	pension	benefits	and

postretirement	medical	benefits	discount	rate	on	average	31	and	51	basis	points	for	2009	and	25	and	17	basis	points	for	2008.	For	2010,	each	basis	point	increase	in	the discount	rate	decreases	the	projected	benefit	obligation	by	approximately	$32	million	and	$4	million	for	pension	and	postretirement	medical	benefits,	respectively.	For our	international	plans,	the	discount	rate	is	determined	by	matching	the	expected	cash	flows	of	a	sample	plan	of	similar	duration	to	a	yield	curve	based	on	long-term, high	quality	fixed	income	debt	instruments	available	as	of	the	measurement	date.	These	assumptions	are	updated	annually.

An	assumption	for	expected	return	on	plan	assets	is	used	to	determine	a	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.	The	expected	return	for	each asset	class	is	a	function	of	passive,	long-term	capital	market	assumptions	and	excess	returns	generated	from	active	management.	The	capital	market	assumptions	used	are provided	by	independent	investment	advisors,	while	excess	return	assumptions	are	supported	by	historical	performance,	fund	mandates	and	investment	expectations.	In addition,	we	compare	the	expected	return	on	asset	assumption	with	the	average	historical	rate	of	return	these	plans	have	been	able	to	generate.

For	the	UPS	Retirement	Plan,	we	use	a	market-related	valuation	method	for	recognizing	investment	gains	or	losses.	Investment	gains	or	losses	are	the	difference between	the	expected	and	actual	return	based	on	the	market-related	value	of	assets.	This	method	recognizes	investment	gains	or	losses	over	a	five	year	period	from	the year	in	which	they	occur,	which	reduces	year-to-year	volatility	in	pension	expense.	Thus,	a	portion	of	the	investment	losses	we	incurred	during	2008	will	be	deferred through	2012.	Our	expense	in	future	periods	will	be	impacted	as	gains	or	losses	are	recognized	in	the	market-related	value	of	assets.

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	2010	U.S.	plan	obligations,	future	postretirement medical	benefit	costs	were	forecasted	assuming	an	initial	annual	increase	of	7.5%,	decreasing	to	5.0%	by	the	year	2017	and	with	consistent	annual	increases	at	those ultimate	levels	thereafter.

Assumed	health	care	cost	trends	can	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	had	the	following	effects	on	2010	results	(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	the	respective	measurement	dates in	each	year	(in	millions).

|  |  |  | U.S.	Postretirement | U.S.	Postretirement | Pension |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | U.S.\tPension\tBenefits | U.S.\tPension\tBenefits | Medical\tBenefits | Medical\tBenefits | Benefits | Benefits |
|  | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 |
| Benefit\tObligations: |  |  |  |  |  |  |
| Net\tbenefit\tobligation\tat\tbeginning\tof\tyear | $17,763 | $16,303 | $3,336 | $3,166 | $575 | $438 |
| Service\tcost | 723 | 689 | 86 | 85 | 24 | 17 |
| Interest\tcost | 1,199 | 1,130 | 214 | 211 | 34 | 28 |
| Gross\tbenefits\tpaid | (574) | (504) | (207) | (202) | (13) | (12) |
| Plan\tparticipants'\tcontributions | — | — | 17 | 16 | 1 | 1 |
| Plan\tamendments | (7) | 1 | 8 | (21) | \t — | \t — |
| Actuarial\t(gain)/loss | 2,238 | 141 | 142 | 80 | 58 | 53 |
| Foreign\tcurrency\texchange\trate\tchanges | — | — | — | — | (4) | 49 |
| Curtailments\tand\tsettlements | — | — | — | — | (1) | (3) |
| Other | — | 3 | 1 | 1 | 6 | 4 |
| Net\tbenefit\tobligation\tat\tend\tof\tyear | $21,342 | $17,763 | $3,597 | $3,336 | $680 | $575 |
| Fair\tValue\tof\tPlan\tAssets: |  |  |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets\tat\tbeginning\tof\tyear | $15,351 | $12,809 | $298 | $349 | $481 | $343 |
| Actual\treturn\ton\tplan\tassets | 2,215 | 2,258 | 30 | 44 | 48 | 60 |
| Employer\tcontributions | 3,100 | 788 | 95 | 91 | 45 | 45 |
| Plan\tparticipants'\tcontributions | — | — | 17 | 16 | 1 | 1 |
| Gross\tbenefits\tpaid | (574) | (504) | (207) | (202) | (13) | (12) |
| Foreign\tcurrency\texchange\trate\tchanges | — | — | — | — | \t — | 44 |
| Curtailments\tand\tsettlements | — | — | — | — | (1) | (3) |
| Other | — | — | — | — | \t — | 3 |
| Fair\tvalue\tof\tplan\tassets\tat\tend\tof\tyear | $20,092 | $15,351 | $233 | $298 | $561 | $481 |

# Funded	Status

The	following	table	discloses	the	funded	status,	as	of	the	respective	measurement	dates	in	each	year,	of	our	plans	and	the	amounts	recognized	in	our	balance	sheet as	of	December	31	(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 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 |
| Funded\tStatus: |  |  |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets | $20,092 | $15,351 | $233 | $298 | $561 | $481 |
| Benefit\tobligation | (21,342) | (17,763) | (3,597) | (3,336) | (680) | (575) |
| Funded\tstatus\trecognized\tat\tDecember\t31 | $(1,250) | $(2,412) | $(3,364) | $(3,038) | $(119) | $(94) |
| Funded\tStatus\tAmounts\tRecognized\tin\tour\tBalance\tSheet: |  |  |  |  |  |  |
| Other\tnon-current\tassets | $42 | $—\t\t\t\t\t $—\t\t\t\t\t $— | $—\t\t\t\t\t $—\t\t\t\t\t $— | $—\t\t\t\t\t $—\t\t\t\t\t $— | $1 | $15 |
| Other\tcurrent\tliabilities | (11) | (11) | (99) | (87) | (3) | (4) |
| Pension\tand\tpostretirement\tbenefit\tobligations | (1,281) | (2,401) | (3,265) | (2,951) | (117) | (105) |
| Net\tasset\t(liability)\tat\tDecember\t31 | $(1,250) | $(2,412) | $(3,364) | $(3,038) | $(119) | $(94) |
| Amounts\tRecognized\tin\tAOCI: |  |  |  |  |  |  |
| Unrecognized\tnet\tprior\tservice\tcost | $(1,660) | $(1,839) | $(113) | $(109) | $(8) | $(9) |
| Unrecognized\tnet\tactuarial\tloss | (6,833) | (5,289) | (702) | (584) | (114) | (70) |
| Gross\tunrecognized\tcost\tat\tDecember\t31 | (8,493) | (7,128) | (815) | (693) | (122) | (79) |
| Deferred\ttax\tasset\tat\tDecember\t31 | 3,193 | 2,680 | 306 | 261 | 31 | 22 |
| Net\tunrecognized\tcost\tat\tDecember\t31 | $(5,300) | $(4,448) | $(509) | $(432) | $(91) | $(57) |

The	accumulated	benefit	obligation	for	our	pension	plans	as	of	the	measurement	dates	in	2010	and	2009	was	$20.241	and	$16.968	billion,	respectively.

Benefit	payments	under	the	pension	plans	include	$14	and	$15	million	paid	from	employer	assets	in	2010	and	2009,	respectively.	Benefit	payments	(net	of participant	contributions)	under	the	postretirement	medical	benefit	plans	include	$94	and	$90	million	paid	from	employer	assets	in	2010	and	2009,	respectively.	Such benefit	payments	from	employer	assets	are	also	categorized	as	employer	contributions.

At	December	31,	2010	and	2009,	the	projected	benefit	obligation,	the	accumulated	benefit	obligation,	and	the	fair	value	of	plan	assets	for	pension	plans	with	an accumulated	benefit	obligation	in	excess	of	plan	assets	were	as	follows	(in	millions):

|  | Project	Benefit	Obligation | Project	Benefit	Obligation | Accumulated	Benefit	Obligation | Accumulated	Benefit	Obligation |
| :--- | :--- | :--- | :--- | :--- |
|  | Exceeds\tthe\tFair\tValue\tof\t\tPlan\nAssets | Exceeds\tthe\tFair\tValue\tof\t\tPlan\nAssets | Exceeds\tthe\tFair\tValue\tof\tPlan\nAssets | Exceeds\tthe\tFair\tValue\tof\tPlan\nAssets |
|  | \t\t\t\t2010 | \t\t\t\t2009 | \t\t\t\t2010 | \t\t\t\t2009 |
| U.S.\tPension\tBenefits |  |  |  |  |
| Projected\tbenefit\tobligation | $3,227 | $17,763 | $3,227 | $4,995 |
| Accumulated\tbenefit\tobligation | 3,195 | 4,963 | 3,195 | 4,963 |
| Fair\tvalue\tof\tplan\tassets | 1,934 | 15,351 | 1,934 | 2,962 |
| International\tPension\tBenefits |  |  |  |  |
| Projected\tbenefit\tobligation | $662 | $346 | $362 | $82 |
| Accumulated\tbenefit\tobligation | 323 | 69 | 323 | 69 |
| Fair\tvalue\tof\tplan\tassets | 543 | 237 | 257 | 18 |

The	decrease	in	U.S.	pension	benefits	amounts	where	the	projected	benefit	obligation	exceeds	the	fair	value	of	plan	assets	is	due	to	the	funded	status	for	both	the UPS	Retirement	Plan	and	UPS	Pension	Plan	changing	from	liabilities	at	December	31,	2009	to	assets	at	December	31,	2010.

The	accumulated	postretirement	benefit	obligation	exceeds	plan	assets	for	all	of	our	U.S.	postretirement	medical	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	2011	are	as	follows	(in	millions):

|  |  | U.S.	Postretirement | International	Pension |
| :--- | :--- | :--- | :--- |
|  | U.S.\tPension\tBenefits | Medical\tBenefits | Benefits |
| Prior\tservice\tcost\t/\t(benefit) | $170 | $7 | $1 |
| Actuarial\tloss | 283 | 21 | 4 |
|  | $453 | $28 | $5 |

For	all	of	our	benefit	plans,	we	utilize	a	corridor	approach	for	determining	the	amount	of	unrecognized	net	gain	or	loss	that	will	be	required	to	be	amortized	in	the following	year.	The	corridor	is	equal	to	10%	of	the	greater	of	the	projected	benefit	obligation	or	the	market-related	value	of	plan	assets	as	of	the	beginning	of	the	year.

# Pension	and	Postretirement	Plan	Assets

The	applicable	benefit	plan	committees	establish	investment	guidelines	and	strategies,	and	regularly	monitor	the	performance	of	the	funds	and	portfolio	managers. Our	investment	guidelines	address	the	following	items:	governance,	general	investment	beliefs	and	principles,	investment	objectives,	specific	investment	goals,	process for	determining/maintaining	the	asset	allocation	policy,	long-term	asset	allocation,	rebalancing,	investment	restrictions/prohibited	transactions,	portfolio	manager structure	and	diversification	(which	addresses	limits	on	the	amount	of	investments	held	by	any	one	manager	to	minimize	risk),	portfolio	manager	selection	criteria,	plan evaluation,	portfolio	manager	performance	review	and	evaluation	and	risk	management	(including	various	measures	used	to	evaluate	risk	tolerance).

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,	with	prudent	exposure	to	risk;	and	protect	the	assets	from	erosion	of purchasing	power;	(2)	provide	investment	results	that	meet	or	exceed	the	plans'	expected	long-term	rate	of	return;	and	(3)	match	the	duration	of	the	liabilities	and	assets of	the	plans	to	reduce	the	potential	risk	of	large	employer	contributions	being	necessary	in	the	future.	The	plans	strive	to	meet	these	objectives	by	employing	portfolio managers	to	actively	manage	assets	within	the	guidelines	and	strategies	set	forth	by	the	benefit	plan	committees.	These	managers	are	evaluated	by	comparing	their performance	to	applicable	benchmarks.

The	fair	values	of	U.S.	pension	and	postretirement	benefit	plan	assets	by	asset	category	as	of	December	31,	2010	are	presented	below	(in	millions),	as	well	as	the percentage	that	each	category	comprises	of	our	total	plan	assets	and	the	respective	target	allocations.

|  | Level	1 | Level	2 | Level	3 | Total<br>Assets | Percentage	of<br>Plan	Assets	-<br>2010 | Percentage	of<br>Plan	Assets	-<br>2009 | Target<br>Allocation<br>2010 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Asset\tCategory: |  |  |  |  |  |  |  |
| Cash\tand\tcash\tequivalents | $— | $579 | $— | $579 | 2.9% | 1.9% | 0-5% |
| Equity\tSecurities: |  |  |  |  |  |  |  |
| U.S.\tLarge\tCap | 4,897 | — | — | 4,897 |  |  |  |
| U.S.\tSmall\tCap | 874 | — | — | 874 |  |  |  |
| International\tCore | 1,219 | 920 | — | 2,139 |  |  |  |
| Emerging\tMarkets | 528 | 281 | — | 809 |  |  |  |
| International\tSmall\tCap | 117 | 196 | — | 313 |  |  |  |
| Total\tEquity\tSecurities | 7,635 | \t 1,397 | — | 9,032 | 44.4 | 54.1 | 40-60 |
| Fixed\tIncome\tSecurities: |  |  |  |  |  |  |  |
| U.S.\tGovernment\tSecurities | 3,502 | 313 | — | 3,815 |  |  |  |
| Corporate\tBonds | 608 | \t 1,694 | 193 | 2,495 |  |  |  |
| Mortgage-Backed\tSecurities | — | 50 | — | 50 |  |  |  |
| Total\tFixed\tIncome\tSecurities | 4,110 | \t 2,057 | 193 | 6,360 | 31.3 | 23.8 | 20-40 |
| Other\tInvestments: |  |  |  |  |  |  |  |
| Hedge\tFunds | — | — | \t 2,023 | 2,023 | 10.0 | 8.2 | 5-15 |
| Real\tEstate | 98 | 135 | 789 | 1,022 | 5.0 | 4.7 | 1-10 |
| Private\tEquity | — | — | \t 1,309 | 1,309 | 6.4 | 7.3 | 1-10 |
| Total\tU.S.\tPlan\tAssets | $11,843 | $4,168 | $4,314 | $20,325 | 100.0% | 100.0% | 100% |

Equity	securities	include	UPS	class	A	shares	of	common	stock	in	the	amounts	of	$346	million	(1.7%	of	total	plan	assets)	and	$351	million	(2.2%	of	total	plan assets),	as	of	December	31,	2010	and	December	31,	2009,	respectively.

Pension	assets	utilizing	Level	1	inputs	include	fair	values	of	equity	investments,	corporate	debt	instruments,	and	U.S.	government	securities	that	were	determined by	closing	prices	for	those	securities	traded	on	national	stock	exchanges,	while	securities	traded	in	the	over-the-counter	market	and	listed	securities	for	which	no	sale	was reported	on	the	valuation	date	are	valued	at	the	mean	between	the	last	reported	bid	and	asked	prices.

Level	2	assets	include	certain	bonds	that	are	valued	based	on	yields	currently	available	on	comparable	securities	of	other	issues	with	similar	credit	ratings, mortgage-backed	securities	that	are	valued	based	on	cash	flow	and	yield	models	using	acceptable	modeling	and	pricing	conventions,	and	certain	investments	that	are pooled	with	other	investments	held	by	the	trustee	in	a	commingled	employee	benefit	trust	fund.	The	investments	in	the	commingled	funds	are	valued	by	taking	the percentage	owned	by	the	respective	plan	in	the	underlying	net	asset	value	of	the	trust	fund,	which	was	determined	in	accordance	with	the	paragraph	above.

Certain	investments'	estimated	fair	value	is	based	on	unobservable	inputs	that	are	not	corroborated	by	observable	market	data	and	are	thus	classified	as	Level	3. These	investments	include	commingled	funds

comprised	of	corporate	and	government	bonds,	hedge	funds,	real	estate	investments	and	private	equity	funds.	The	commingled	funds	are	valued	using	net	asset	values, adjusted,	as	appropriate,	for	investment	fund	specific	inputs	determined	to	be	significant	to	the	valuation.	Investments	in	hedge	funds	are	valued	using	reported	net	asset values	as	of	December	31.	These	assets	are	primarily	invested	in	a	portfolio	of	diversified,	direct	investments	and	funds	of	hedge	funds.	Real	estate	investments	and private	equity	funds	are	valued	using	fair	values	per	the	most	recent	partnership	audited	financial	reports,	adjusted	as	appropriate	for	any	lag	between	the	date	of	the financial	reports	and	December	31.	The	real	estate	investments	consist	of	U.S.	and	non-U.S.	real	estate	investments	and	are	broadly	diversified.	The	fair	values	may,	due to	the	inherent	uncertainty	of	valuation	for	those	alternative	investments,	differ	significantly	from	the	values	that	would	have	been	used	had	a	ready	market	for	the alternative	investments	existed,	and	the	differences	could	be	material.

At	December	31,	2010	approximately	$3.766	billion	of	the	plan	assets	are	held	in	comingled	stock	funds	that	each	hold	U.S.	and	international	public	market securities.	The	plan	held	the	right	to	liquidate	its	positions	in	these	commingled	stock	funds	at	any	time,	subject	only	to	a	brief	notification	period.	No	unfunded commitment	existed	with	respect	to	these	commingled	stock	funds	at	December	31,	2010.

The	plan	holds	approximately	$2.098	billion	of	its	investments	in	limited	partnership	interests	in	various	private	equity	and	real	estate	funds.	Limited	provision exists	for	the	redemption	of	these	interests	by	the	general	partners	that	invest	these	funds	until	the	end	of	the	term	of	the	partnerships,	typically	ranging	between	12	and 18	years	from	the	date	of	inception.	An	active	secondary	market	exists	for	similar	partnership	interests,	although	no	particular	value	(discount	or	premium)	can	be guaranteed.	At	December	31,	2010,	unfunded	commitments	to	such	limited	partnerships	totaling	approximately	$585	million	are	expected	to	be	contributed	over	the remaining	investment	period,	typically	ranging	between	three	and	six	years.

Approximately	$2.023	billion	of	the	plan	investments	are	held	in	hedge	funds	that	pursue	multiple	strategies	to	diversify	risk	and	reduce	volatility.	Most	of	these funds	require	two	to	three	months	notice	for	redemptions	and	allow	them	to	occur	either	quarterly	or	semi-annually,	while	others	allow	for	redemption	after	only	a	brief notification	period	with	no	restriction	on	redemption	frequency.	No	unfunded	commitments	existed	with	respect	to	these	hedge	funds.

The	fair	value	measurement	of	plan	assets	using	significant	unobservable	inputs	(Level	3)	changed	during	2010	due	to	the	following	(in	millions):

|  | Corporate<br>Bonds | Hedge<br>Funds | Real<br>Estate | Private<br>Equity | Total |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Balance\ton\tJanuary\t1,\t2010 | $201 | $1,284 | $550 | $1,145 | $3,180 |
| Actual\tReturn\ton\tAssets: |  |  |  |  |  |
| Assets\tHeld\tat\tEnd\tof\tYear | (5) | 129 | \t 100 | 177 | 401 |
| Assets\tSold\tDuring\tthe\tYear | 13 | 10 | \t — | 1 | 24 |
| Purchases | 41 | 711 | \t 152 | 149 | \t 1,053 |
| Sales | (57) | (111) | (13) | (163) | (344) |
| Settlements | — | — | \t — | — | — |
| Transfers\tInto\t(Out\tof)\tLevel\t3 | — | — | \t — | — | — |
| Balance\ton\tDecember\t31,\t2010 | $193 | $2,023 | $789 | $1,309 | $4,314 |

The	fair	value	disclosures	above	have	not	been	provided	for	our	international	pension	benefits	plans	since	asset	allocations	are	determined	and	managed	at	the individual	country	level.	However,	in	general,	the	asset	allocations	for	these	plans	(approximately	65%	equity	securities,	30%	debt	securities	and	5%	cash)	are	similar	to

our	U.S.	plans.	The	amount	of	assets	having	significant	unobservable	inputs	(Level	3),	if	any,	in	these	plans	would	be	immaterial	to	our	financial	statements.

# 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: |  |  |  |
| 2011\t(expected)\tto\tplan\ttrusts | $1,200 | $— | $41 |
| 2011\t(expected)\tto\tplan\tparticipants | 12 | 102 | 2 |
| Expected\tBenefit\tPayments: |  |  |  |
| 2011 | $611 | $213 | $14 |
| 2012 | 690 | 226 | 16 |
| 2013 | 772 | 246 | 17 |
| 2014 | 862 | 228 | 18 |
| 2015 | 958 | 244 | 21 |
| 2016\t-\t2020 | 6,483 | 1,436 | 142 |

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.	The	2011	(expected)	to	plan	trusts contribution	of	$1.2	billion	for	U.S.	pension	benefits	was	made	in	January	2011.	Additional	discretionary	contributions	may	be	made	when	deemed	appropriate	to	meet the	long-term	obligations	of	the	plans.	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.

# NOTE	6.	BUSINESS	ACQUISITIONS,	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,\t2008\tbalance | $— | $288 | $1,698 | $1,986 |
| Acquired | — | 82 | — | 82 |
| Disposals | — | — | (6) | (6) |
| Currency\t/\tOther | — | 4 | 23 | 27 |
| December\t31,\t2009\tbalance | $— | $374 | $1,715 | $2,089 |
| Acquired | — | — | — | — |
| Purchase\tAccounting\tAdjustments | — | 5 | (2) | 3 |
| Currency\t/\tOther | — | (2) | (9) | (11) |
| December\t31,\t2010\tbalance | $— | $377 | $1,704 | $2,081 |

# Business	Acquisitions

The	increase	to	goodwill	in	the	International	Package	segment	during	2010	was	due	to	adjustments	to	the	purchase	price	allocation	for	Unsped	Paket	Servisi	San ve	Ticaret	A.S.	("Unsped"),	which	was	acquired	in

August	2009.	This	was	offset	by	the	decrease	in	the	International	Package	and	Supply	Chain	&	Freight	segments	due	to	the	impact	of	the	strengthening	U.S.	Dollar	on the	translation	of	non-U.S.	Dollar	goodwill	balances.

The	goodwill	acquired	in	the	International	Package	segment	in	2009	was	primarily	due	to	the	acquisition	of	Unsped,	as	discussed	further	below.	We	also	acquired an	agent	in	Slovenia	during	the	second	quarter	of	2009.	The	increase	in	goodwill	in	the	Supply	Chain	&	Freight	segment	was	due	to	the	impact	of	fluctuations	in	the U.S.	Dollar	with	other	currencies	on	the	translation	of	non-U.S.	Dollar	goodwill	balances,	partially	offset	by	the	allocation	of	goodwill	to	the	sale	of	certain	non-U.S. Mail	Boxes	Etc.	franchise	relationships.

In	August	2009,	we	completed	the	formation	of	a	new	joint	venture	headquartered	in	Dubai	to	develop	and	grow	UPS	express	package,	freight	forwarding	and contract	logistics	services	across	the	Middle	East,	Turkey	and	portions	of	Central	Asia.	We	own	80%	of	this	joint	venture,	and	we	consolidate	the	financial	statements	of the	joint	venture.	In	conjunction	with	the	formation	of	this	joint	venture,	the	joint	venture	acquired	the	small	package	operations	of	Unsped,	our	existing	service	agent	in Turkey.	We	contributed	certain	existing	UPS	operations	in	the	region	to	the	new	joint	venture,	along	with	cash	consideration	of	$40	million	and	an	additional	$40	million that	will	be	due	on	a	deferred	basis.	We	maintain	an	option	to	purchase	the	remaining	20%	of	the	joint	venture,	and	the	joint	venture	partner	maintains	a	put	option	to require	us	to	purchase	the	remaining	20%	interest.	Upon	exercise	of	the	call	or	put	option,	a	payment	of	$20	million	will	be	required.	An	additional	payment	may	be	due depending	upon	the	earnings	of	the	joint	venture.	The	20%	portion	of	the	joint	venture	that	we	do	not	own,	which	represents	temporary	equity,	is	recorded	as	a noncontrolling	interest	in	shareowners'	equity.	The	express	package	business	operations	of	Unsped	are	included	in	our	International	Package	segment,	while	the	freight forwarding	business	of	Unsped	is	included	in	our	Supply	Chain	&	Freight	segment.

Pro	forma	results	of	operations	have	not	been	presented	for	these	acquisitions,	because	the	effects	of	these	transactions	were	not	material.	The	results	of	operations of	these	acquired	companies	have	been	included	in	our	statements	of	consolidated	income	from	the	date	of	acquisition.

# Goodwill	Impairment

We	test	our	goodwill	for	impairment	annually,	as	of	October	1 ,	on	a	reporting	unit	basis.	Our	reporting	units	are	comprised	of	the	Europe,	Asia,	and	Americas reporting	units	in	the	International	Package	reporting	segment,	and	the	Forwarding	&	Logistics,	UPS	Freight,	MBE	/	UPS	Store,	and	UPS	Capital	reporting	units	in	the Supply	Chain	&	Freight	reporting	segment.	The	impairment	test	involves	a	two-step	process.	First,	a	comparison	of	the	fair	value	of	the	applicable	reporting	unit	with	the aggregate	carrying	values,	including	goodwill,	is	performed.	We	primarily	determine	the	fair	value	of	our	reporting	units	using	a	discounted	cash	flow	model,	and supplement	this	with	observable	valuation	multiples	for	comparable	companies,	as	applicable.	If	the	carrying	amount	of	a	reporting	unit	exceeds	the	reporting	unit's	fair value,	we	perform	the	second	step	of	the	goodwill	impairment	test	to	determine	the	amount	of	impairment	loss.	The	second	step	includes	comparing	the	implied	fair value	of	the	affected	reporting	unit's	goodwill	with	the	carrying	value	of	that	goodwill.

In	the	fourth	quarter	of	2008,	we	completed	our	annual	goodwill	impairment	testing	and	determined	that	our	UPS	Freight	reporting	unit,	which	was	formed through	the	acquisition	of	Overnite	Corporation	in	2005,	had	a	goodwill	impairment	of	$548	million	which	is	included	in	the	caption	"other	expenses"	in	the consolidated	income	statement.	This	impairment	charge	resulted	from	several	factors,	including	a	lower	cash	flow	forecast	due	to	a	longer	estimated	economic	recovery time	for	the	LTL	sector,	and	significant	deterioration	in	equity	valuations	for	other	similar	LTL	industry	participants.	At	the	time	of	acquisition	of	Overnite	Corporation, LTL	equity	valuations	were	higher	and	the	economy	was	significantly	stronger.	We	invested	in	operational	improvements	and	technology	upgrades	to	enhance	service and	performance,	as	well	as	expand	service	offerings.	However,	this	process	took	longer	than	initially	anticipated,	and	thus	financial	results	have	been	below	our

expectations.	Additionally,	the	LTL	sector	in	2008	was	adversely	impacted	by	the	economic	recession	in	the	U.S.,	lower	industrial	production	and	retail	sales,	volatile fuel	prices,	and	significant	levels	of	price-based	competition.	By	the	fourth	quarter	of	2008,	the	combination	of	these	internal	and	external	factors	reduced	our	near	term expectations	for	this	unit,	leading	to	the	goodwill	impairment	charge.

None	of	the	other	reporting	units	incurred	an	impairment	of	goodwill	in	2008,	nor	did	we	have	any	goodwill	impairment	charges	in	2010	or	2009.	Cumulatively, our	Supply	Chain	&	Freight	reporting	segment	has	recorded	goodwill	impairment	charges	of	$622	million,	while	our	International	and	U.S.	Domestic	Package	segments have	not	recorded	any	impairment	charges.

# Intangible	Assets

The	following	is	a	summary	of	intangible	assets	at	December	31,	2010	and	2009	(in	millions):

|  | Gross	Carrying<br>Amount | Accumulated<br>Amortization | Net	Carrying<br>Value | Period<br>(in	years) |
| :--- | :--- | :--- | :--- | :--- |
| December\t31,\t2010: |  |  |  |  |
| Trademarks,\tlicenses,\tpatents,\tand\tother | $187 | $(50) | $137 | 4.8 |
| Customer\tlists | 99 | (59) | 40 | 9.1 |
| Franchise\trights | 109 | (52) | 57 | 20.0 |
| Capitalized\tsoftware | 1,927 | (1,562) | 365 | 3.1 |
| Total\tIntangible\tAssets,\tNet | $2,322 | $(1,723) | $599 | 4.3 |
| December\t31,\t2009: |  |  |  |  |
| Trademarks,\tlicenses,\tpatents,\tand\tother | $132 | $(9) | $123 |  |
| Customer\tlists | 107 | (52) | 55 |  |
| Franchise\trights | 109 | (46) | 63 |  |
| Capitalized\tsoftware | 1,812 | (1,457) | 355 |  |
| Total\tIntangible\tAssets,\tNet | $2,160 | $(1,564) | $596 |  |

All	of	our	recorded	intangible	assets	other	than	goodwill	are	deemed	to	be	finite-lived	intangibles,	and	are	thus	amortized	over	their	estimated	useful	lives. Impairment	tests	for	these	intangible	assets	are	only	performed	when	a	triggering	event	occurs	that	indicates	that	the	carrying	value	of	the	intangible	may	not	be recoverable.	In	2008,	as	a	result	of	weak	performance	in	our	domestic	package	operations	in	the	United	Kingdom,	we	reviewed	our	long-lived	assets,	including intangible	assets,	for	impairment	within	our	U.K.	domestic	package	entity.	Based	on	prior	performance	and	near-term	projections,	the	value	assigned	to	the	customer	list intangible	asset	acquired	within	the	U.K.	domestic	package	business	was	determined	to	be	impaired.	This	impairment	was	the	result	of	both	higher	than	anticipated customer	turnover	and	reduced	operating	margins	associated	with	the	acquired	business.	Accordingly,	an	intangible	asset	impairment	charge	of	$27	million	was	recorded for	the	year	ended	December	31,	2008,	which	is	included	in	the	caption	"other	expenses"	in	the	consolidated	income	statement.	There	were	no	impairments	of	intangible assets	in	2009	or	2010.

Amortization	of	intangible	assets	was	$224,	$185	and	$202	million	during	2010,	2009	and	2008,	respectively.	Expected	amortization	of	finite-lived	intangible assets	recorded	as	of	December	31,	2010	for	the	next	five	years	is	as	follows	(in	millions):	2011—$238;	2012—$177;	2013—$106;	2014—$35;	2015—$12. Amortization	expense	in	future	periods	will	be	affected	by	business	acquisitions,	software	development,	licensing	agreements,	sponsorships	and	other	factors.

# NOTE	7.	DEBT	OBLIGATIONS	AND	COMMITMENTS

The	carrying	value	of	our	debt	obligations,	as	of	December	31,	consists	of	the	following	(in	millions):

|  | Maturity | 2010 | 2009 |
| :--- | :--- | :--- | :--- |
| Commercial\tpaper | 2011 | $341 | $672 |
| 4.50%\tsenior\tnotes | 2013 | 1,815 | \t 1,773 |
| 3.875%\tsenior\tnotes | 2014 | 1,061 | \t 1,023 |
| 5.50%\tsenior\tnotes | 2018 | 795 | 758 |
| 5.125%\tsenior\tnotes | 2019 | 1,032 | 991 |
| 8.375%\tdebentures | 2020 | 453 | 455 |
| 3.125%\tsenior\tnotes | 2021 | 1,464 | — |
| 8.375%\tdebentures | 2030 | 284 | 284 |
| 6.20%\tsenior\tnotes | 2038 | 1,480 | \t 1,480 |
| 4.875%\tsenior\tnotes | 2040 | 488 | — |
| Floating\trate\tsenior\tnotes | \t2049\t–\t2053 | 386 | 409 |
| Capital\tlease\tobligations | \t2011\t–\t2021 | 160 | 369 |
| Facility\tnotes\tand\tbonds | \t2015\t–\t2036 | 320 | 320 |
| UPS\tNotes |  | — | 175 |
| Pound\tSterling\tnotes | \t2031\t/\t2050 | 764 | 791 |
| Other\tdebt | \t2011\t–\t2012 | 3 | 21 |
| Total\tdebt |  | \t 10,846 | \t 9,521 |
| Less\tcurrent\tmaturities |  | (355) | (853) |
| Long-term\tdebt |  | $10,491 | $8,668 |

# Commercial	Paper

The	weighted	average	interest	rate	on	the	commercial	paper	outstanding	as	of	December	31,	2010	and	2009	was	0.18%	and	0.10%,	respectively.	As	of December	31,	2010,	the	entire	commercial	paper	balance	was	classified	as	a	current	liability.	The	amount	of	commercial	paper	outstanding	in	2011	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,	2010.	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,	2010.

# Fixed	Rate	Senior	Notes

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.	We	subsequently	entered	into	interest rate	swaps	on	portions	of	the	2013	and	2018	notes,	which	effectively	converted	the	fixed	interest	rates	on	the	notes	to	variable	LIBOR-based	interest	rates.	The	average interest	rate	payable	on	the	notes,	including	the	impact	of	the	interest	rate	swaps,	for	2010	and	2009,	respectively,	was	2.42%	and	2.51%	for	the	2013	notes,	and	2.22% and	2.16%	for	the	2018	notes.

In	March	2009,	we	completed	an	offering	of	$1.0	billion	of	3.875%	senior	notes	due	April	2014	and	$1.0	billion	of	5.125%	senior	notes	due	April	2019.	These notes	pay	interest	semiannually,	and	we	may	redeem	the	notes	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	$1.989	billion	in	cash	proceeds	from	the	offering.	The	proceeds	from	the	offering	were	used	for general	corporate	purposes,	including	the	reduction	of	our	outstanding	commercial	paper	balance.	We	subsequently	entered	into	interest	rate	swaps	on	the	2014	and portions	of	the	2019	notes,	which	effectively	converted	the	fixed	interest	rates	on	the	notes	to	variable	LIBOR-based	interest	rates.	The	average	interest	rate	payable	on the	notes,	including	the	impact	of	the	interest	rate	swaps,	for	2010	and	2009,	respectively,	was	1.02%	and	1.02%	for	the	2014	notes,	and	1.69%	and	1.93%	for	the	2019 notes.

In	November	2010,	we	completed	an	offering	of	$1.5	billion	of	3.125%	senior	notes	due	January	2021	and	$500	million	of	4.875%	senior	notes	due	November 2040.	These	notes	pay	interest	semiannually,	and	we	may	redeem	the	notes	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	$1.972	billion	in	cash	proceeds	from	the	offering.	The	proceeds	from	the	offering	were used	to	make	contributions	to	our	primary	domestic	pension	plans.	We	subsequently	entered	into	interest	rate	swaps	on	the	2021	notes,	which	effectively	converted	the fixed	interest	rates	on	the	notes	to	variable	LIBOR-based	interest	rates.	The	average	interest	rate	payable	on	the	2021	notes,	including	the	impact	of	the	interest	rate swaps,	for	2010	was	1.76%.

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	8.375%	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.

# Floating	Rate	Senior	Notes

The	floating	rate	senior	notes	bear	interest	at	one-month	LIBOR	less	45	basis	points.	The	average	interest	rates	for	2010	and	2009	were	0.00%	and	0.01%, 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.	In	2010,	we	redeemed	notes	with	a	principal	value	of	$23	million	after	put options	were	exercised	by	the	note	holders.

# 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	2011	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,	Kentucky;	Dallas,	Texas;	and Philadelphia,	Pennsylvania.	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, Kentucky.	The	bonds,	which	are	due	in	January	2029,	bear	interest	at	a	variable	rate,	and	the	average	interest	rates	for	2010	and	2009	were	0.22%	and 0.31%,	respectively.

•	 Bonds	with	a	principal	balance	of	$43	million	issued	by	the	Louisville	Regional	Airport	Authority	associated	with	our	air	freight	facility	in	Louisville, Kentucky.	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	2010	and	2009	were	0.24%	and	0.25%,	respectively.

•	 Bonds	with	a	principal	balance	of	$29	million	issued	by	the	Dallas	/	Forth	Worth	International	Airport	Facility	Improvement	Corporation	associated	with our	Dallas,	Texas	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,	Pennsylvania	airport	facilities.	The	bonds,	which	are	due	in	December	2015,	bear	interest	at	a	variable	rate,	and	the	average	interest	rates	for 2010	and	2009	were	0.20%	and	0.20%,	respectively.

In	October	2009,	$62	million	in	facility	notes	and	bonds	matured,	and	an	additional	$46	million	that	were	originally	scheduled	to	mature	in	2018	were	called	for early	redemption.	The	bonds	were	issued	by	the	city	of	Dayton,	Ohio	and	were	associated	with	a	Dayton	airport	facility.

# UPS	Notes

The	UPS	Notes	program	involved	the	periodic	issuance	of	fixed	rate	notes	in	$1,000	increments	with	various	terms	and	maturities.	Some	of	the	fixed	obligations associated	with	the	notes	were	previously	swapped	to

floating	rates,	based	on	different	LIBOR	indices	plus	or	minus	a	spread.	The	average	interest	rate	payable	on	the	notes,	including	the	effect	of	any	associated	interest	rate swaps,	for	2009	was	3.95%.	In	2010,	all	of	the	remaining	outstanding	notes	were	called	for	early	redemption.

# 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	maintain	cross-currency	interest	rate	swaps	to	hedge	the foreign	currency	risk	associated	with	the	bond	cash	flows.	The	average	fixed	interest	rate	payable	on	the	swaps	is	5.72%.

# 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	5.20%	to	6.40%.

We	lease	certain	aircraft,	facilities,	land,	equipment	and	vehicles	under	operating	leases,	which	expire	at	various	dates	through	2055.	Certain	of	the	leases	contain escalation	clauses	and	renewal	or	purchase	options.	Rent	expense	related	to	our	operating	leases	was	$615,	$622,	and	$834	million	for	2010,	2009,	and	2008, 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 |
| 2011 | $18 | $348 | $345 | $642 |
| 2012 | 19 | 268 | — | 463 |
| 2013 | 19 | 205 | 1,750 | 425 |
| 2014 | 20 | 150 | 1,000 | 16 |
| 2015 | 21 | 113 | 100 | — |
| After\t2015 | 112 | 431 | 7,363 | — |
| Total | 209 | $1,515 | $10,558 | $1,546 |
| Less:\timputed\tinterest | (49) |  |  |  |
| Present\tvalue\tof\tminimum\tcapitalized\tlease\tpayments | 160 |  |  |  |
| Less:\tcurrent\tportion | (10) |  |  |  |
| Long-term\tcapitalized\tlease\tobligations | $150 |  |  |  |

As	of	December	31,	2010,	we	had	outstanding	letters	of	credit	totaling	approximately	$1.580	billion	issued	in	connection	with	our	self-insurance	reserves	and other	routine	business	requirements.	We	also	issue	surety	bonds	as	an	alternative	to	letters	of	credit	in	certain	instances,	and	as	of	December	31,	2010,	we	had	$577 million	of	surety	bonds	written.

# Available	Credit

# Fair	Value	of	Debt

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	$11.355	and	$10.216	billion	as	of	December	31,	2010	and	2009,	respectively.

# NOTE	8.	LEGAL	PROCEEDINGS	AND	CONTINGENCIES

In	AFMS	LLC	v.	UPS	and	FedEx	Corporation,	a	lawsuit	filed	in	federal	court	in	the	Central	District	of	California	in	August	2010,	the	plaintiff	asserts	that	UPS and	FedEx	violated	U.S.	antitrust	law	by	conspiring	to	refuse	to	negotiate	with	third	party	negotiators	retained	by	shippers	and/or	to	monopolize	a	so-called	market	for the	time	sensitive	delivery	of	letters	and	packages.	The	Antitrust	Division	of	the	U.S.	Department	of	Justice	("DOJ")	has	informed	us	that	it	has	opened	a	civil investigation	of	our	policies	and	practices	for	dealing	with	third	party	negotiators.	We	are	cooperating	with	this	investigation.	We	deny	any	liability	with	respect	to	these matters	and	intend	to	vigorously	defend	ourselves.	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.

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.

# NOTE	9.	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,	2010,	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	authorized	to	be	issued,	with	a	par	value	of	$0.01	per	share;	as	of	December	31,	2010,	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):

|  | 2010 | 2010 | 2009 | 2009 | 2008 | 2008 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Shares | Dollars | Shares | Dollars | Shares | Dollars |
| Class\tA\tCommon\tStock |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | 285 | $3 | 314 | $3 | 349 | $3 |
| Common\tstock\tpurchases | (6) | — | (10) | — | (11) | — |
| Stock\taward\tplans | 6 | — | 5 | — | 6 | — |
| Common\tstock\tissuances | 3 | — | 4 | — | 3 | — |
| Conversions\tof\tclass\tA\tto\tclass\tB\tcommon\tstock | (30) | — | (28) | — | (33) | — |
| Class\tA\tshares\tissued\tat\tend\tof\tyear | 258 | $3 | 285 | $3 | 314 | $3 |
| Class\tB\tCommon\tStock |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | 711 | $7 | 684 | $7 | 694 | $7 |
| Common\tstock\tpurchases | (6) | — | (1) | — | (43) | — |
| Conversions\tof\tclass\tA\tto\tclass\tB\tcommon\tstock | 30 | — | 28 | — | 33 | — |
| Class\tB\tshares\tissued\tat\tend\tof\tyear | 735 | $7 | 711 | $7 | 684 | $7 |
| Additional\tPaid-In\tCapital |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear |  | $2 |  | $— |  | $— |
| Stock\taward\tplans |  | 398 |  | 381 |  | 497 |
| Common\tstock\tpurchases |  | (649) |  | (569) |  | (694) |
| Common\tstock\tissuances |  | 249 |  | 190 |  | 197 |
| Balance\tat\tend\tof\tyear |  | $— |  | $2 |  | $— |
| Retained\tEarnings |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear |  | $12,745 |  | $12,412 |  | $14,186 |
| Net\tincome\tattributable\tto\tcontrolling\tinterests |  | 3,488 |  | 2,152 |  | 3,003 |
| Cumulative\tadjustment\tfor\taccounting\tchanges |  | — |  | — |  | (60) |
| Dividends\t($1.88,\t$1.80,\tand\t$1.68\tper\tshare) |  | (1,909) |  | (1,819) |  | (1,853) |
| Common\tstock\tpurchases |  | (160) |  | — |  | (2,864) |
| Balance\tat\tend\tof\tyear |  | $14,164 |  | $12,745 |  | $12,412 |

On	January	1,	2008,	we	recognized	a	$44	million	reduction	to	retained	earnings	as	a	result	of	changing	our	measurement	date	under	new	accounting	guidance related	to	retirement	benefits.	Also	on	January	1,	2008,	we	recognized	a	$16	million	reduction	to	retained	earnings	as	a	result	of	adopting	a	new	accounting	standard	for financial	instruments.	These	accounting	changes	are	discussed	further	in	Note	1.

For	the	years	ended	December	31,	2010,	2009	and	2008,	we	repurchased	a	total	of	12.4,	10.9	and	53.6	million	shares	of	class	A	and	class	B	common	stock	for $809	million,	$569	million	and	$3.558	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.	As	of	December	31,	2010,	we	had	$5.194	billion	of	our	share	repurchase	authorization	remaining.

# 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):

|  | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- |
| Foreign\tcurrency\ttranslation\tgain\t(loss): |  |  |  |
| Balance\tat\tbeginning\tof\tyear | $37 | $(38) | $81 |
| Aggregate\tadjustment\tfor\tthe\tyear | (105) | 75 | (119) |
| Balance\tat\tend\tof\tyear | (68) | 37 | (38) |
| Unrealized\tgain\t(loss)\ton\tmarketable\tsecurities,\tnet\tof\ttax: |  |  |  |
| Balance\tat\tbeginning\tof\tyear | (27) | (60) | 9 |
| Current\tperiod\tchanges\tin\tfair\tvalue\t(net\tof\ttax\teffect\tof\t$17,\t$3,\tand\t$(33)) | 30 | 25 | (78) |
| Reclassification\tto\tearnings\t(net\tof\ttax\teffect\tof\t$6,\t$5,\tand\t$5) | 9 | 8 | 9 |
| Balance\tat\tend\tof\tyear | 12 | (27) | (60) |
| Unrealized\tgain\t(loss)\ton\tcash\tflow\thedges,\tnet\tof\ttax: |  |  |  |
| Balance\tat\tbeginning\tof\tyear | (200) | (107) | (250) |
| Current\tperiod\tchanges\tin\tfair\tvalue\t(net\tof\ttax\teffect\tof\t$(4),\t$4,\tand\t$(33)) | (7) | 6 | (54) |
| Reclassification\tto\tearnings\t(net\tof\ttax\teffect\tof\t$(19),\t$(60),\tand\t$118) | (32) | (99) | 197 |
| Balance\tat\tend\tof\tyear | (239) | (200) | (107) |
| Unrecognized\tpension\tand\tpostretirement\tbenefit\tcosts,\tnet\tof\ttax: |  |  |  |
| Balance\tat\tbeginning\tof\tyear | (4,937) | (5,437) | (1,853) |
| Reclassification\tto\tearnings\t(net\tof\ttax\teffect\tof\t$104,\t$93,\tand\t$81) | 170 | 156 | 133 |
| Net\tactuarial\tgain\t(loss)\tand\tprior\tservice\tcost\tresulting\tfrom\tremeasurements\tof\tplan\tassets\tand\tliabilities\t(net\tof\ttax |  |  |  |
| effect\tof\t$(670),\t$214,\tand\t$(2,235)) | (1,133) | 344 | (3,717) |
| Balance\tat\tend\tof\tyear | (5,900) | (4,937) | (5,437) |
| Accumulated\tother\tcomprehensive\tincome\t(loss)\tat\tend\tof\tyear | $(6,195) | $(5,127) | $(5,642) |

# 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,	2010,	2009, and	2008	is	as	follows	(in	millions):

|  | 2010 | 2010 | 2009 | 2009 | 2008 | 2008 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Shares | Dollars | Shares | Dollars | Shares | Dollars |
| Deferred\tCompensation\tObligations |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear |  | $108 |  | $121 |  | $137 |
| Reinvested\tdividends |  | 4 |  | 3 |  | 5 |
| Options\texercise\tdeferrals |  | 1 |  | \t — |  | \t — |
| Benefit\tpayments |  | (10) |  | (16) |  | (21) |
| Balance\tat\tend\tof\tyear |  | $103 |  | $108 |  | $121 |
| Treasury\tStock |  |  |  |  |  |  |
| Balance\tat\tbeginning\tof\tyear | (2) | $(108) | (2) | $(121) | (2) | $(137) |
| Reinvested\tdividends | \t — | (4) | \t — | (3) | \t — | (5) |
| Options\texercise\tdeferrals | \t — | (1) | \t — | \t — | \t — | \t — |
| Benefit\tpayments | \t — | 10 | \t — | 16 | \t — | 21 |
| Balance\tat\tend\tof\tyear | (2) | $(103) | (2) | $(108) | (2) | $(121) |

# Noncontrolling	Interests

We	have	noncontrolling	interests	in	certain	consolidated	subsidiaries	in	our	International	Package	and	Supply	Chain	&	Freight	segments.	The	noncontrolling interests	acquired	in	2009	primarily	relate	to	the	formation	of	a	joint	venture	in	Dubai	that	will	operate	in	the	Middle	East,	Turkey,	and	portions	of	the	Central	Asia region,	as	discussed	in	Note	6.	The	activity	related	to	our	noncontrolling	interests	is	presented	below	(in	millions):

|  | 2010 | 2009 |
| :--- | :--- | :--- |
| Noncontrolling\tInterests |  |  |
| Balance\tat\tbeginning\tof\tperiod | $66 | $— |
| Acquired\tnoncontrolling\tinterests | 2 | 66 |
| Dividends\tattributable\tto\tnoncontrolling\tinterests | \t — | \t — |
| Net\tincome\tattributable\tto\tnoncontrolling\tinterests | \t — | \t — |
| Balance\tat\tend\tof\tperiod | $68 | $66 |

# NOTE	10.	STOCK-BASED	COMPENSATION

# Incentive	Compensation	Plan

The	UPS	Incentive	Compensation	Plan	permits	the	grant	of	nonqualified	and	incentive	stock	options,	stock	appreciation	rights,	restricted	stock	and	stock	units, restricted	performance	shares	and	units,	and	management	incentive	awards	to	eligible	employees.	The	number	of	shares	reserved	for	issuance	under	the	Incentive Compensation	Plan	is	80	million.	Each	share	issued	pursuant	to	an	option	and	each	share	issued	subject	to	the

exercised	portion	of	a	stock	appreciation	right	will	reduce	the	share	reserve	by	one	share.	Each	share	issued	pursuant	to	restricted	stock	and	stock	units,	and	restricted performance	shares	and	units,	will	reduce	the	share	reserve	by	2.76	shares.	As	of	December	31,	2010,	management	incentive	awards,	stock	options,	restricted performance	units,	and	restricted	stock	units	had	been	granted	under	the	Incentive	Compensation	Plan.	We	had	48	million	shares	available	to	be	issued	under	the Incentive	Compensation	Plan	as	of	December	31,	2010.

# 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	per	share,	over	the entire	three	year	performance	award	cycle.

As	of	December	31,	2010,	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,\t2010 | 13,881 | $58.82 |  |  |
| Vested | (5,801) | 62.33 |  |  |
| Granted | 5,966 | 66.11 |  |  |
| Reinvested\tDividends | 404 | N/A |  |  |
| Forfeited\t/\tExpired | (339) | 57.16 |  |  |
| Nonvested\tat\tDecember\t31,\t2010 | 14,111 | $60.51 | 2.06 | $1,024 |
| RSUs\tExpected\tto\tVest | 13,649 | $60.49 | 2.01 | $991 |

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	2010,	2009,	and	2008	was	$66.11,	$56.57,	and	$46.56,	respectively.	The	total	fair	value	of	RSUs	vested	was	$368,	$246,	and	$141	million	in	2010,	2009, and	2008,	respectively.	As	of	December	31,	2010,	there	was	$620	million	of	total	unrecognized	compensation	cost	related	to	nonvested	RSUs.	That	cost	is	expected	to be	recognized	over	a	weighted	average	period	of	3	years	and	8	months.

# 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	have	been	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,\t2010 | 17,198 | $67.52 |  |  |
| Exercised | (1,819) | 58.48 |  |  |
| Granted | 184 | 67.18 |  |  |
| Forfeited\t/\tExpired | (261) | 66.16 |  |  |
| Outstanding\tat\tDecember\t31,\t2010 | 15,302 | $68.62 | 3.87 | $79 |
| Options\tVested\tand\tExpected\tto\tVest | 15,181 | $68.52 | 3.85 | $79 |
| Exercisable\tat\tDecember\t31,\t2010 | 11,193 | $66.68 | 3.01 | $71 |

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:

|  | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- |
| Expected\tdividend\tyield | 2.70% | 3.25% | 2.39% |
| Risk-free\tinterest\trate | 3.30% | 3.22% | 3.79% |
| Expected\tlife\tin\tyears | 7.5 | 7.5 | 7.5 |
| Expected\tvolatility | \t 23.59% | \t 23.16% | \t 22.24% |
| Weighted\taverage\tfair\tvalue\tof\toptions\tgranted | $14.83 | $10.86 | $16.77 |

Expected	volatilities	are	based	on	the	historical	returns	on	our	stock	and	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	$60,	$27,	and	$46	million	during	2010,	2009,	and	2008,	respectively,	from	option	holders	resulting	from	the	exercise	of	stock	options.	We received	a	tax	benefit	of	$4,	$1,	and	$4	million	during	2010,	2009,	and	2008,	respectively,	from	the	exercise	of	stock	options,	which	is	reported	as	cash	from	financing activities	in	the	cash	flow	statement.

The	total	intrinsic	value	of	options	exercised	during	2010,	2009,	and	2008	was	$18,	$5,	and	$13	million,	respectively.	As	of	December	31,	2010,	there	was	$11 million	of	total	unrecognized	compensation	cost	related	to	nonvested	options.	That	cost	is	expected	to	be	recognized	over	a	weighted	average	period	of	1	year	and	6 months.

The	following	table	summarizes	information	about	stock	options	outstanding	and	exercisable	at	December	31,	2010:

|  | 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 |
| $50.01\t-\t$60.00 | 1,302 | 1.81 | \t 56.68 | 1,098 | \t 56.83 |
| $60.01\t-\t$70.00 | 4,396 | 2.16 | \t 61.58 | 4,211 | \t 61.34 |
| $70.01\t-\t$80.00 | 7,393 | 4.82 | \t 71.22 | 5,279 | \t 71.34 |
| $80.01\t-\t$90.00 | 2,211 | 5.33 | \t 80.92 | 605 | \t 81.01 |
|  | 15,302 | 3.87 | $68.62 | 11,193 | $66.68 |

# 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,	2010,	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,\t2010 | 6,361 | $67.25 |  |  |
| Vested | (2,611) | 67.99 |  |  |
| Granted | 2,088 | 67.18 |  |  |
| Reinvested\tDividends | 207 | N/A |  |  |
| Forfeited\t/\tExpired | (127) | 66.77 |  |  |
| Nonvested\tat\tDecember\t31,\t2010 | 5,918 | $67.11 | 1.64 | $430 |
| RPUs\tExpected\tto\tVest | 6,029 | $67.15 | 1.66 | $438 |

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	2010,	2009,	and 2008	was	$67.18,	$55.83,	and	$71.06,	respectively.	The	total	fair	value	of	RPUs	vested	during	2010,	2009,	and	2008	was	$155,	$72,	and	$83	million,	respectively.	As	of December	31,	2010,	there	was	$186	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	4	months.

# Discounted	Employee	Stock	Purchase	Plan

We	maintain	an	employee	stock	purchase	plan	for	all	eligible	employees,	which	was	modified	in	2009.	Under	the	modified	plan,	shares	of	UPS	class	A	common stock	may	be	purchased	at	quarterly	intervals	at	95%	of	the	NYSE	closing	price	of	UPS	class	B	common	stock	on	the	last	day	of	each	quarterly	period.	Prior	to	the modification	in	the	second	quarter	of	2009,	shares	could	be	purchased	at	quarterly	intervals	at	90%	of	the	lower	of	the	NYSE	closing	price	of	the	UPS	class	B	common stock	on	the	first	or	the	last	day	of	each	quarterly	period.	Employees	purchased	1.5,	0.6,	and	1.9	million	shares	at	average	prices	of	$57.98,	$44.30,	and	$55.27	per	share during	2010,	2009,	and	2008,	respectively.	Subsequent	to	the	modification,	the	plan	is	no	longer	considered	to	be	compensatory,	and	therefore	no	compensation	cost	is measured	for	the	modified	employees'	purchase	rights.	Prior	to	the	modification,	compensation	cost	was	measured	for	the	fair	value	of	employees'	purchase	rights	under our	discounted	employee	stock	purchase	plan	using	the	Black-Scholes	option	pricing	model,	and	we	determined	the	weighted	average	fair	value	of	the	employee purchase	rights	to	be	$7.52	and	$8.85	per	share	for	2009	and	2008,	respectively.

# NOTE	11.	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	220	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	includes	our	forwarding	and	logistics	operations,	UPS	Freight,	and	other	aggregated	business	units.	Our	forwarding	and	logistics business	provides	services	in	more	than	195	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,	and certain	investment	partnerships.

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

|  | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- |
| Revenue: |  |  |  |
| U.S.\tDomestic\tPackage | $29,742 | $28,158 | $31,278 |
| International\tPackage | \t 11,133 | 9,699 | \t 11,293 |
| Supply\tChain\t&amp;\tFreight | 8,670 | 7,440 | 8,915 |
| Consolidated | $49,545 | $45,297 | $51,486 |
| Operating\tProfit\t(Loss): |  |  |  |
| U.S.\tDomestic\tPackage | $3,373 | $2,138 | $3,907 |
| International\tPackage | 1,904 | 1,367 | 1,580 |
| Supply\tChain\t&amp;\tFreight | 597 | 296 | (105) |
| Consolidated | $5,874 | $3,801 | $5,382 |
| Assets: |  |  |  |
| U.S.\tDomestic\tPackage | $18,425 | $18,572 | $18,796 |
| International\tPackage | 6,228 | 5,882 | 5,723 |
| Supply\tChain\t&amp;\tFreight | 6,283 | 6,620 | 6,775 |
| Unallocated | 2,661 | 809 | 585 |
| Consolidated | $33,597 | $31,883 | $31,879 |
| Depreciation\tand\tAmortization\tExpense: |  |  |  |
| U.S.\tDomestic\tPackage | $1,174 | $1,064 | $1,031 |
| International\tPackage | 443 | 500 | 588 |
| Supply\tChain\t&amp;\tFreight | 175 | 183 | 195 |
| Consolidated | $1,792 | $1,747 | $1,814 |

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

|  | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- |
| U.S.\tDomestic\tPackage: |  |  |  |
| Next\tDay\tAir | $5,835 | $5,456 | $6,559 |
| Deferred | 2,975 | 2,859 | 3,325 |
| Ground | \t 20,932 | \t 19,843 | \t 21,394 |
| Total\tU.S.\tDomestic\tPackage | \t 29,742 | \t 28,158 | \t 31,278 |
| International\tPackage: |  |  |  |
| Domestic | 2,365 | 2,111 | 2,344 |
| Export | 8,234 | 7,176 | 8,294 |
| Cargo | 534 | 412 | 655 |
| Total\tInternational\tPackage | \t 11,133 | 9,699 | \t 11,293 |
| Supply\tChain\t&amp;\tFreight: |  |  |  |
| Forwarding\tand\tLogistics | 6,022 | 5,080 | 6,293 |
| Freight | 2,208 | 1,943 | 2,191 |
| Other | 440 | 417 | 431 |
| Total\tSupply\tChain\t&amp;\tFreight | 8,670 | 7,440 | 8,915 |
| Consolidated | $49,545 | $45,297 | $51,486 |

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

Long-lived	assets	include	property,	plant	and	equipment,	pension	and	postretirement	benefit	assets,	long-term	investments,	goodwill,	and	intangible	assets.

No	countries	outside	of	the	United	States,	nor	any	individual	customers,	provided	10%	or	more	of	consolidated	revenue	in	2010,	2009	or	2008.

# NOTE	12.	INCOME	TAXES

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

|  | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- |
| Current: |  |  |  |
| U.S.\tFederal | $776 | $715 | $1,510 |
| U.S.\tState\tand\tLocal | 119 | 30 | 173 |
| Non-U.S. | 161 | 147 | 155 |
| Total\tCurrent | \t 1,056 | 892 | \t 1,838 |
| Deferred: |  |  |  |
| U.S.\tFederal | 893 | 231 | 115 |
| U.S.\tState\tand\tLocal | 106 | 32 | 4 |
| Non-U.S. | (20) | 59 | 55 |
| Total\tDeferred | 979 | 322 | 174 |
| Total | $2,035 | $1,214 | $2,012 |

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

|  | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- |
| United\tStates | $4,780 | $3,027 | $4,547 |
| Non-U.S. | 743 | 339 | 468 |
|  | $5,523 | $3,366 | $5,015 |

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:

|  | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- |
| 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) | 2.4 | 1.4 | 2.5 |
| Non-U.S.\ttax\trate\tdifferential | (0.7) | (1.5) | 1.0 |
| Nondeductible/nontaxable\titems | 0.3 | 0.9 | 5.1 |
| U.S.\tfederal\ttax\tcredits | (1.8) | (3.2) | (3.0) |
| Other | 1.6 | 3.5 | (0.5) |
| Effective\tincome\ttax\trate | 36.8% | 36.1% | 40.1% |

In	the	third	quarter	of	2010,	we	recognized	a	$40	million	tax	benefit	associated	with	the	release	of	a	valuation	allowance	against	deferred	tax	assets	in	our international	package	operations,	partially	offset	by	tax	provided	for	interest	earned	on	refunds.

In	the	first	quarter	of	2010,	we	changed	the	tax	status	of	a	German	subsidiary	that	was	taxable	in	the	U.S.	and	its	local	jurisdiction	to	one	that	is	taxed	solely	in	its local	jurisdiction.	This	change	was	made	primarily	to	allow	for	more	flexibility	in	funding	this	subsidiary's	operations	with	local	liquidity	sources,	improve	the	cash	flow position	in	the	U.S.,	and	help	mitigate	future	currency	remeasurement	risk.	As	a	result	of	this	change	in	tax	status,	we	recorded	a	non-cash	charge	of	$76	million,	which resulted	primarily	from	the	write-off	of	related	deferred	tax	assets	which	will	not	be	realizable	following	the	change	in	tax	status.

In	the	fourth	quarter	of	2008,	we	completed	our	annual	goodwill	impairment	testing	and	determined	that	our	UPS	Freight	reporting	unit,	which	was	formed through	the	acquisition	of	Overnite	Corporation	in	2005,	had	a	goodwill	impairment	of	$548	million.	The	impairment	was	not	deductible	for	tax	purposes	and	therefore negatively	impacted	our	effective	tax	rate	in	2008.

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

|  | 2010 | 2009 |
| :--- | :--- | :--- |
| Property,\tplant\tand\tequipment | $3,335 | $3,141 |
| Goodwill\tand\tintangible\tassets | 853 | 791 |
| Other | 562 | 401 |
| Gross\tdeferred\ttax\tliabilities | \t 4,750 | \t 4,333 |
| Other\tpostretirement\tbenefits | \t 1,055 | 990 |
| Pension\tplans | 809 | 956 |
| Loss\tand\tcredit\tcarryforwards\t(non-U.S.\tand\tstate) | 295 | 315 |
| Insurance\treserves | 655 | 634 |
| Vacation\tpay\taccrual | 191 | 186 |
| Stock\tcompensation | 242 | 244 |
| Other | 568 | 589 |
| Gross\tdeferred\ttax\tassets | \t 3,815 | \t 3,914 |
| Deferred\ttax\tassets\tvaluation\tallowance | (207) | (237) |
| Net\tdeferred\ttax\tasset | \t 3,608 | \t 3,677 |
| Net\tdeferred\ttax\tliability | $1,142 | $656 |
| Amounts\trecognized\tin\tthe\tbalance\tsheet: |  |  |
| Current\tdeferred\ttax\tassets | $659 | $585 |
| Current\tdeferred\ttax\tliabilities\t(included\tin\tother\tcurrent\tliabilities) | $28 | $2 |
| Non-current\tdeferred\ttax\tassets\t(included\tin\tother\tnon-current\tassets) | $97 | $54 |
| Non-current\tdeferred\ttax\tliabilities | $1,870 | $1,293 |

We	have	U.S.	state	and	local	operating	loss	and	credit	carryforwards	as	follows	(in	millions):

The	operating	loss	carryforwards	expire	at	varying	dates	through	2030.	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	$908	million	as	of	December	31,	2010,	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	$2.725	billion	at	December	31,	2010.	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.

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

|  | Tax | Interest | Penalties |
| :--- | :--- | :--- | :--- |
| Balance\tat\tJanuary\t1,\t2008 | $355 | $75 | $6 |
| Additions\tfor\ttax\tpositions\tof\tthe\tcurrent\tyear | 28 | — | 1 |
| Additions\tfor\ttax\tpositions\tof\tprior\tyears | 63 | 33 | 5 |
| Reductions\tfor\ttax\tpositions\tof\tprior\tyears\tfor: |  |  |  |
| Changes\tbased\ton\tfacts\tand\tcircumstances | (46) | (9) | (2) |
| Settlements\tduring\tthe\tperiod | (9) | (2) | — |
| Lapses\tof\tapplicable\tstatute\tof\tlimitations | (3) | — | — |
| Balance\tat\tDecember\t31,\t2008 | 388 | 97 | 10 |
| Additions\tfor\ttax\tpositions\tof\tthe\tcurrent\tyear | 41 | — | — |
| Additions\tfor\ttax\tpositions\tof\tprior\tyears | 76 | 27 | 2 |
| Reductions\tfor\ttax\tpositions\tof\tprior\tyears\tfor: |  |  |  |
| Changes\tbased\ton\tfacts\tand\tcircumstances | (214) | (34) | (3) |
| Settlements\tduring\tthe\tperiod | (23) | (4) | — |
| Lapses\tof\tapplicable\tstatute\tof\tlimitations | (2) | — | (1) |
| Balance\tat\tDecember\t31,\t2009 | 266 | 86 | 8 |
| Additions\tfor\ttax\tpositions\tof\tthe\tcurrent\tyear | 16 | — | — |
| Additions\tfor\ttax\tpositions\tof\tprior\tyears | 45 | 25 | 2 |
| Reductions\tfor\ttax\tpositions\tof\tprior\tyears\tfor: |  |  |  |
| Changes\tbased\ton\tfacts\tand\tcircumstances | (27) | (10) | (3) |
| Settlements\tduring\tthe\tperiod | (6) | (3) | — |
| Lapses\tof\tapplicable\tstatute\tof\tlimitations | (10) | (3) | — |
| Balance\tat\tDecember\t31,\t2010 | $284 | $95 | $7 |

The	total	amount	of	gross	unrecognized	tax	benefits	as	of	December	31,	2010,	2009	and	2008	that,	if	recognized,	would	affect	the	effective	tax	rate	was	$283, $243,	and	$206	million,	respectively.	We	also	had	gross	recognized	tax	benefits	of	$326,	$329,	and	$583	million	recorded	as	of	December	31,	2010,	2009	and	2008, respectively,	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	consolidated	balance	sheets.	Additionally,	we	have	recognized	a	receivable	for	interest	of	$32,	$56,	and	$135	million	for	the	recognized	tax	benefits associated	with	outstanding	refund	claims	as	of	December	31,	2010,	2009	and	2008,	respectively.	Our	continuing	practice	is	to	recognize	interest	and	penalties associated	with	income	tax	matters	as	a	component	of	income	tax	expense.

We	file	income	tax	returns	in	the	U.S.	federal	jurisdiction,	most	U.S.	state	and	local	jurisdictions,	and	many	non-U.S.	jurisdictions.	We	have	substantially resolved	all	U.S.	federal	income	tax	matters	for	tax	years	prior	to

2003.	During	the	fourth	quarter	of	2010,	we	received	a	refund	of	$139	million	as	a	result	of	the	resolution	of	tax	years	2003	through	2004	with	the	Internal	Revenue Service	("IRS")	Appeals	Office.	Along	with	the	audit	for	tax	years	2005	through	2007,	the	IRS	is	currently	examining	non-income	based	taxes,	including	employment and	excise	taxes,	which	could	lead	to	proposed	assessments.	The	IRS	has	not	presented	an	official	position	with	regard	to	these	taxes	at	this	time,	and	therefore	we	are not	able	to	determine	the	technical	merit	of	any	potential	assessment.	We	anticipate	receipt	of	the	IRS	reports	on	these	matters	by	the	end	of	the	second	quarter	of	2011. We	have	filed	all	required	U.S.	state	and	local	returns	reporting	the	result	of	the	resolution	of	the	U.S.	federal	income	tax	audit	of	the	tax	years	2003	and	2004.	A	limited number	of	U.S.	state	and	local	matters	are	the	subject	of	ongoing	audits,	administrative	appeals	or	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	and	the	allocation	of	income	and	expense	between tax	jurisdictions.	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	13.	EARNINGS	PER	SHARE

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

|  | 2010 | 2009 | 2008 |
| :--- | :--- | :--- | :--- |
| Numerator:\nNet\tincome\tattributable\tto\tcommon\tshareowners | $3,488 | $2,152 | $3,003 |
| Denominator: |  |  |  |
| Weighted\taverage\tshares | 991 | 995 | \t 1,014 |
| Deferred\tcompensation\tobligations | 2 | 2 | 2 |
| Vested\tportion\tof\trestricted\tshares | 1 | 1 | — |
| Denominator\tfor\tbasic\tearnings\tper\tshare | 994 | 998 | \t 1,016 |
| Effect\tof\tdilutive\tsecurities: |  |  |  |
| Restricted\tperformance\tunits | 3 | 2 | 2 |
| Restricted\tstock\tunits | 6 | 4 | 3 |
| Stock\toptions | — | — | 1 |
| Denominator\tfor\tdiluted\tearnings\tper\tshare | \t 1,003 | \t 1,004 | \t 1,022 |
| Basic\tearnings\tper\tshare | $3.51 | $2.16 | $2.96 |
| Diluted\tearnings\tper\tshare | $3.48 | $2.14 | $2.94 |

Diluted	earnings	per	share	for	the	years	ended	December	31,	2010,	2009,	and	2008	exclude	the	effect	of	11.1,	17.4,	and	11.7	million	shares,	respectively,	of common	stock	that	may	be	issued	upon	the	exercise	of	employee	stock	options	because	such	effect	would	be	antidilutive.

# NOTE	14.	DERIVATIVE	INSTRUMENTS	AND	RISK	MANAGEMENT

# Risk	Management	Policies

We	are	exposed	to	market	risk,	primarily	related	to	foreign	exchange	rates,	commodity	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	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.

# Credit	Risk	Management

The	forward	contracts,	swaps,	and	options	discussed	below	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	banks	and	financial	institutions	that	meet	established	credit	guidelines, and	monitoring	counterparty	credit	risk	to	prevent	concentrations	of	credit	risk	with	any	single	counterparty.

We	have	agreements	with	some	of	our	counterparties	containing	early	termination	rights	and	bilateral	collateral	provisions,	whereby	security	is	required	if	market risk	exposure	exceeds	a	specified	threshold	amount	or	credit	ratings	fall	below	certain	levels.	As	of	December	31,	2010,	we	had	not	posted	nor	received	any	collateral under	these	contractual	provisions.	The	remaining	counterparty	agreements	contain	early	termination	rights	but	no	bilateral	collateral	provisions.

We	have	not	historically	incurred,	and	do	not	expect	to	incur	in	the	future,	any	losses	as	a	result	of	counterparty	default.

# Accounting	Policy	for	Derivative	Instruments

We	recognize	all	derivative	instruments	as	assets	or	liabilities	in	the	balance	sheet	at	fair	value.	The	accounting	for	changes	in	the	fair	value	of	a	derivative instrument	depends	on	whether	it	has	been	designated	and	qualifies	as	part	of	a	hedging	relationship	and,	further,	on	the	type	of	hedging	relationship.	For	those derivative	instruments	that	are	designated	and	qualify	as	hedging	instruments,	a	company	must	designate	the	derivative,	based	upon	the	exposure	being	hedged,	as	a	cash flow	hedge,	a	fair	value	hedge,	or	a	hedge	of	a	net	investment	in	a	foreign	operation.

A	cash	flow	hedge	refers	to	hedging	the	exposure	to	variability	in	expected	future	cash	flows	that	is	attributable	to	a	particular	risk.	For	derivative	instruments	that are	designated	and	qualify	as	a	cash	flow	hedge,	the	effective	portion	of	the	gain	or	loss	on	the	derivative	instrument	is	reported	as	a	component	of	AOCI,	and reclassified	into	earnings	in	the	same	period	during	which	the	hedged	transaction	affects	earnings.	The	remaining	gain	or	loss	on	the	derivative	instrument	in	excess	of the	cumulative	change	in	the	present	value	of	future	cash	flows	of	the	hedged	item,	or	hedge	components	excluded	from	the	assessment	of	effectiveness,	are	recognized in	the	income	statement	during	the	current	period.

A	fair	value	hedge	refers	to	hedging	the	exposure	to	changes	in	the	fair	value	of	an	existing	asset	or	liability	on	the	balance	sheet	that	is	attributable	to	a	particular risk.	For	derivative	instruments	that	are	designated	and	qualify	as	a	fair	value	hedge,	the	gain	or	loss	on	the	derivative	instrument	is	recognized	in	the	income	statement during	the	current	period,	as	well	as	the	offsetting	gain	or	loss	on	the	hedged	item.

A	net	investment	hedge	refers	to	the	use	of	cross	currency	swaps,	forward	contracts,	or	foreign	currency	denominated	debt	to	hedge	portions	of	our	net investments	in	foreign	operations.	For	hedges	that	meet	the	effectiveness	requirements,	the	net	gains	or	losses	attributable	to	changes	in	spot	exchange	rates	are	recorded in	the	cumulative	translation	adjustment	within	other	AOCI.	The	remainder	of	the	change	in	value	of	such	instruments	is	recorded	in	earnings.

# Types	of	Hedges

# Commodity	Risk	Management

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	on	our	business.	We	periodically	enter	into	option	contracts	on	energy	commodity	products	to	manage	the	price	risk	associated	with	forecasted transactions	involving	refined	fuels,	principally	jet-A,	diesel,	and	unleaded	gasoline.	The	objective	of	the	hedges	is	to	reduce	the	variability	of	cash	flows,	due	to changing	fuel	prices,	associated	with	the	forecasted	transactions	involving	those	products.	We	have	designated	and	account	for	these	contracts	as	cash	flow	hedges	of	the underlying	forecasted	transactions	involving	these	fuel	products	and,	therefore,	the	resulting	gains	and	losses	from	these	hedges	are	recognized	as	a	component	of	fuel expense	or	revenue	when	the	underlying	transactions	occur.

# Foreign	Currency	Risk	Management

To	protect	against	the	reduction	in	value	of	forecasted	foreign	currency	cash	flows	from	our	international	package	business,	we	maintain	a	foreign	currency	cash flow	hedging	program.	Our	most	significant	foreign	currency	exposures	relate	to	the	Euro,	the	British	Pound	Sterling,	and	the	Canadian	Dollar.	We	hedge	portions	of our	forecasted	revenue	denominated	in	foreign	currencies	with	option	contracts.	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	transactions	occur.

We	have	foreign	currency	denominated	debt	obligations	and	capital	lease	obligations	associated	with	our	aircraft.	For	some	of	these	debt	obligations	and	leases, we	hedge	the	foreign	currency	denominated	contractual	payments	using	cross-currency	interest	rate	swaps,	which	effectively	convert	the	foreign	currency	denominated contractual	payments	into	U.S.	Dollar	denominated	payments.	We	have	designated	and	account	for	these	swaps	as	cash	flow	hedges	of	the	forecasted	contractual payments	and,	therefore,	the	resulting	gains	and	losses	from	these	hedges	are	recognized	in	the	income	statement	when	the	currency	remeasurement	gains	and	losses	on the	underlying	debt	obligations	and	leases	are	incurred.

# 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.	The	notional	amount,	interest	payment,	and	maturity	dates	of	the	swaps	match	the	terms	of	the	associated	debt	being	hedged.	Interest	rate	swaps	allow	us to	maintain	a	target	range	of	floating	rate	debt	within	our	capital	structure.

We	have	designated	and	account	for	interest	rate	swaps	that	convert	fixed	rate	interest	payments	into	floating	rate	interest	payments	as	hedges	of	the	fair	value	of the	associated	debt	instruments.	Therefore,	the	gains	and	losses	resulting	from	fair	value	adjustments	to	the	interest	rate	swaps	and	fair	value	adjustments	to	the associated	debt	instruments	are	recorded	to	interest	expense	in	the	period	in	which	the	gains	and	losses	occur.	We	have	designated	and	account	for	interest	rate	swaps that	convert	floating	rate	interest	payments	into	fixed	rate	interest	payments	as	cash	flow	hedges	of	the	forecasted	payment	obligations.	The	gains	and	losses	resulting from	fair	value	adjustments	to	the	interest	rate	swap	are	recorded	to	AOCI.

We	periodically	hedge	the	forecasted	fixed-coupon	interest	payments	associated	with	anticipated	debt	offerings,	using	forward	starting	interest	rate	swaps,	interest rate	locks,	or	similar	derivatives.	These	agreements	effectively	lock	a	portion	of	our	interest	rate	exposure	between	the	time	the	agreement	is	entered	into	and	the	date when	the	debt	offering	is	completed,	thereby	mitigating	the	impact	of	interest	rate	changes	on	future	interest	expense.	These	derivatives	are	settled	commensurate	with the	issuance	of	the	debt,	and	any	gain	or	loss	upon	settlement	is	amortized	as	an	adjustment	to	the	effective	interest	yield	on	the	debt.

# Outstanding	Positions

The	notional	amounts	of	our	outstanding	derivative	positions	were	as	follows:

|  | December	31,	2010<br>Notional	Value | December	31,	2010<br>Notional	Value | December	31,	2009<br>Notional	Value | December	31,	2009<br>Notional	Value |
| :--- | :--- | :--- | :--- | :--- |
| Currency\tHedges: |  |  |  |  |
| Euro | €1,732 | €1,732 | €1,372 | €1,372 |
| British\tPound\tSterling | £ | 871 | £ | 692 |
| Canadian\tDollar | C$ | 289 | C$ | 228 |
| Interest\tRate\tHedges: |  |  |  |  |
| Fixed\tto\tFloating\tInterest\tRate\tSwaps | $6,000 | $6,000 | $3,751 | $3,751 |
| Floating\tto\tFixed\tInterest\tRate\tSwaps | $53 | $53 | $28 | $28 |

As	of	December	31,	2010,	we	had	no	outstanding	commodity	hedge	positions.	The	maximum	term	over	which	we	are	hedging	exposures	to	the	variability	of	cash flow	is	39	years.

# Balance	Sheet	Recognition

The	following	table	indicates	the	location	on	the	balance	sheet	in	which	our	derivative	assets	and	liabilities	have	been	recognized,	and	the	related	fair	values	of those	derivatives	(in	millions).	The	table	is	segregated	between	those	derivative	instruments	that	qualify	and	are	designated	as	hedging	instruments	and	those	that	are not,	as	well	as	by	type	of	contract	and	whether	the	derivative	is	in	an	asset	or	liability	position.

| Asset	Derivatives | Balance	Sheet	Location | Hierarchy<br>Level | December	31,	2010<br>Fair	Value | December	31,	2009<br>Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
| Derivatives\tdesignated\tas\thedges: |  |  |  |  |
| Foreign\texchange\tcontracts | \tOther\tcurrent\tassets | \t Level\t2 | $36 | $63 |
| Interest\trate\tcontracts | Other\tnon- |  |  |  |
|  | current\tassets | \t Level\t2 | 182 | 74 |
| Total\tAsset\tDerivatives |  |  | $218 | $137 |

| Liability	Derivatives | Balance	Sheet	Location | Hierarchy<br>Level | December	31,	2010<br>Fair	Value | December	31,	2009<br>Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
| Derivatives\tdesignated\tas\thedges: |  |  |  |  |
| Foreign\texchange\tcontracts | Other\tcurrent |  |  |  |
|  | liabilities | \t Level\t2 | $(9) | $— |
| Foreign\texchange\tcontracts | Other\tnon- |  |  |  |
|  | current\tliabilities | \t Level\t2 | (99) | (51) |
| Interest\trate\tcontracts | Other\tnon-current |  |  |  |
|  | liabilities | \t Level\t2 | (29) | (13) |
| Derivatives\tnot\tdesignated\tas\thedges: |  |  |  |  |
| Interest\trate\tcontracts | Other\tnon-current |  |  |  |
|  | liabilities | \t Level\t2 | (1) | (2) |
| Foreign\texchange\tcontracts | Other\tcurrent |  |  |  |
|  | liabilities | \t Level\t2 | (3) | — |
| Total\tLiability\tDerivatives |  |  | $(141) | $(66) |

# Income	Statement	Recognition

The	following	table	indicates	the	amount	and	location	in	the	income	statement	in	which	derivative	gains	and	losses,	as	well	as	the	related	amounts	reclassified from	AOCI,	have	been	recognized	for	those	derivatives	designated	as	cash	flow	hedges	for	the	years	ended	December	31,	2010	and	2009	(in	millions):

| Derivative	Instruments	in	Cash<br>Flow	Hedging	Relationships | 2010	Amount	of<br>Gain	(Loss)<br>Recognized	in<br>OCI	on<br>Derivative<br>(Effective<br>Portion) | 2009	Amount	of<br>Gain	(Loss)<br>Recognized	in<br>OCI	on<br>Derivative<br>(Effective<br>Portion) | Location	of	Gain<br>(Loss)	Reclassified<br>from	Accumulated<br>OCI	into	Income<br>(Effective	Portion) | 2010	Amount	of<br>Gain	(Loss)<br>Reclassified	from<br>Accumulated<br>OCI	into	Income<br>(Effective<br>Portion) | 2009	Amount	of<br>Gain	(Loss)<br>Reclassified	from<br>Accumulated<br>OCI	into	Income<br>(Effective<br>Portion) |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Interest\trate\tcontracts | $7 | $127 | Interest\tExpense | $(18) | $(15) |
| Foreign\texchange\tcontracts | (48) | (42) | Interest\tExpense | (27) | (4) |
| Foreign\texchange\tcontracts | 30 | (75) | Revenue | 96 | 96 |
| Commodity\tcontracts | — | — | Revenue | — | 82 |
| Total | $(11) | $10 |  | $51 | $159 |

As	of	December	31,	2010,	$55	million	of	pre-tax	losses	related	to	cash	flow	hedges	that	are	currently	deferred	in	AOCI	are	expected	to	be	reclassified	to	income over	the	12	month	period	ended	December	31,	2011.

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.	The	amount	of ineffectiveness	recognized	in	income	on	derivative	instruments	designated	in	cash	flow	hedging	relationships	was	immaterial	for	the	years	ended	December	31,	2010, 2009	and	2008.

The	following	table	indicates	the	amount	and	location	in	the	income	statement	in	which	derivative	gains	and	losses,	as	well	as	the	associated	gains	and	losses	on the	underlying	exposure,	have	been	recognized	for	those	derivatives	designated	as	fair	value	hedges	for	the	years	ended	December	31,	2010	and	2009	(in	millions):

Additionally,	we	maintain	some	interest	rate	swap	and	foreign	exchange	forward	contracts	that	are	not	designated	as	hedges.	These	interest	rate	swap	contracts	are intended	to	provide	an	economic	hedge	of	a	portfolio	of	interest	bearing	receivables,	however	the	income	statement	impact	of	these	hedges	was	not	material	for	any period	presented.	These	foreign	exchange	forward	contracts	are	intended	to	provide	an	economic	offset	to	foreign	currency	remeasurement	risks	for	certain	assets	and liabilities	in	our	balance	sheet.	The	following	is	a	summary	of	the	amounts	recorded	in	the	statements	of	consolidated	income	related	to	fair	value	changes	and settlements	of	these	foreign	currency	forward	contracts	not	designated	as	hedges	for	the	years	ended	December	31,	2010	and	2009	(in	millions):

| Derivative	Instruments	Not	Designated	in<br>Hedging	Relationships | Location	of	Gain<br>(Loss)	Recognized<br>in	Income | 2010	Amount<br>of	Gain<br>(Loss)<br>Recognized	in<br>Income | 2009	Amount<br>of	Gain<br>(Loss)<br>Recognized	in<br>Income |
| :--- | :--- | :--- | :--- |
| Foreign\tExchange\tContracts | \tOther\tOperating\tExpenses | $13 | $(15) |

Our	foreign	currency,	interest	rate,	and	energy	derivatives	are	largely	comprised	of	over-the-counter	derivatives,	which	are	primarily	valued	using	pricing	models that	rely	on	market	observable	inputs	such	as	yield	curves,	currency	exchange	rates,	and	commodity	forward	prices,	and	therefore	are	classified	as	Level	2.	The	fair values	of	our	derivative	assets	and	liabilities	as	of	December	31,	2010	and	2009	by	hedge	type	are	as	follows	(in	millions):

|  | Quoted	Prices	in<br>Active	Markets	for<br>Identical	Assets<br>(Level	1) | Other<br>Observable<br>Inputs<br>(Level	2) | Significant<br>Unobservable<br>Inputs<br>(Level	3) | Balance	as	of<br>December	31,	2010 |
| :--- | :--- | :--- | :--- | :--- |
| 2010: |  |  |  |  |
| Assets |  |  |  |  |
| Foreign\tExchange\tContracts | $— | $36 | $— | $36 |
| Interest\tRate\tContracts | — | 182 | — | 182 |
| Total | $— | $218 | $— | $218 |
| Liabilities |  |  |  |  |
| Foreign\tExchange\tContracts | $— | $111 | $— | $111 |
| Interest\tRate\tContracts | — | 30 | — | 30 |
| Total | $— | $141 | $— | $141 |

|  | Quoted	Prices	in<br>Active	Markets	for<br>Identical	Assets<br>(Level	1) | Significant<br>Other<br>Observable<br>Inputs<br>(Level	2) | Significant<br>Unobservable<br>Inputs<br>(Level	3) | Balance	as	of<br>December	31,	2009 |
| :--- | :--- | :--- | :--- | :--- |
| 2009: |  |  |  |  |
| Assets |  |  |  |  |
| Foreign\tExchange\tContracts | $— | $63 | $— | $63 |
| Interest\tRate\tContracts | — | 74 | — | 74 |
| Total | $— | $137 | $— | $137 |
| Liabilities |  |  |  |  |
| Foreign\tExchange\tContracts | $— | $51 | $— | $51 |
| Interest\tRate\tContracts | — | 15 | — | 15 |
| Total | $— | $66 | $— | $66 |

# NOTE	15.	RESTRUCTURING	COSTS	AND	BUSINESS	DISPOSITIONS

We	have	incurred	restructuring	costs	associated	with	the	termination	of	employees,	facility	consolidations	and	other	costs	directly	related	to	restructuring initiatives.	These	initiatives	have	resulted	from	the	integration	of	acquired	companies,	as	well	as	restructuring	activities	associated	with	cost	containment	and	operational efficiency	programs.	Additionally,	we	have	sold	or	shut-down	certain	non-core	business	units	in	2010,	and	recorded	gains	or	losses	upon	the	sale,	as	well	as	costs associated	with	each	transaction.

# Supply	Chain	&	Freight—Germany

In	February	2010,	we	completed	the	sale	of	a	specialized	transportation	and	express	freight	business	in	Germany	within	our	Supply	Chain	&	Freight	segment.	As part	of	the	sale	transaction,	we	incurred	certain	costs

associated	with	employee	severance	payments,	other	employee	benefits,	transition	services,	and	leases	on	operating	facilities	and	equipment.	Additionally,	we	have provided	a	guarantee	for	a	period	of	two	years	for	certain	employee	benefit	payments	being	assumed	by	the	buyer.	We	recorded	a	pre-tax	loss	of	$51	million	($47 million	after-tax)	for	this	transaction	in	2010,	which	included	the	costs	associated	with	the	sale	transaction	and	the	fair	value	of	the	guarantee.	This	loss	is	recorded	in	the caption	"other	expenses"	in	the	statements	of	consolidated	income.

# Supply	Chain	&	Freight—United	States

In	December	2010,	we	completed	the	sale	of	our	UPS	Logistics	Technologies,	Inc.	business	unit,	which	produced	transportation	routing	and	fleet	management systems.	We	recognized	a	$71	million	pre-tax	gain	on	the	sale	($44	million	after	tax),	which	is	included	in	the	caption	"other	expenses"	in	the	consolidated	income statement,	and	is	included	in	the	results	of	our	Supply	Chain	&	Freight	segment.	The	operating	results	of	the	UPS	Logistics	Technologies,	Inc	business	unit	were	not material	to	our	consolidated	or	segment	operating	results	in	any	of	the	periods	presented.

# U.S.	Domestic	Package	Restructuring

In	an	effort	to	improve	performance	in	the	U.S.	Domestic	Package	segment,	we	announced	a	program	to	streamline	our	domestic	management	structure	in January	2010.	As	part	of	this	restructuring,	we	reduced	the	number	of	domestic	districts	and	regions	in	our	U.S.	small	package	operation	in	order	to	better	align	our operations	geographically	and	allow	more	local	decision-making	and	resources	to	be	deployed	for	our	customers.	Effective	in	April	2010,	we	reduced	our	U.S.	regions from	five	to	three	and	our	U.S.	districts	from	46	to	20.	The	restructuring	eliminated	approximately	1,800	management	and	administrative	positions	in	the	U.S. Approximately	1,100	employees	were	offered	voluntary	severance	packages,	while	other	impacted	employees	received	severance	benefits	based	on	length	of	service, and	access	to	support	programs.	We	recorded	a	pre-tax	charge	of	$98	million	($64	million	after-tax)	in	the	first	quarter	of	2010	related	to	the	costs	of	this	program, which	reflects	the	value	of	voluntary	retirement	benefits,	severance	benefits	and	unvested	stock	compensation.	In	2010,	we	incurred	additional	costs	related	to	the relocation	of	employees	and	other	restructuring	activities,	however	those	costs	were	offset	by	savings	from	the	staffing	reductions.

# NOTE	16.	QUARTERLY	INFORMATION	(unaudited)

|  | First	Quarter | First	Quarter | Second	Quarter | Second	Quarter | Third	Quarter | Third	Quarter | Fourth	Quarter | Fourth	Quarter |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 |
| Revenue: |  |  |  |  |  |  |  |  |
| U.S.\tDomestic\tPackage | $7,102 | $6,949 | $7,269 | $6,789 | $7,291 | $6,868 | $8,080 | $7,552 |
| International\tPackage | 2,639 | 2,240 | 2,771 | 2,246 | 2,676 | 2,422 | 3,047 | 2,791 |
| Supply\tChain\t&amp;\tFreight | 1,987 | 1,749 | 2,164 | 1,794 | 2,225 | 1,863 | 2,294 | 2,034 |
| Total\trevenue | \t 11,728 | \t 10,938 | \t 12,204 | \t 10,829 | \t 12,192 | \t 11,153 | \t 13,421 | \t 12,377 |
| Operating\tprofit: |  |  |  |  |  |  |  |  |
| U.S.\tDomestic\tPackage | 562 | 384 | 748 | 476 | 1,020 | 514 | 1,043 | 764 |
| International\tPackage | 427 | 294 | 521 | 293 | 419 | 313 | 537 | 467 |
| Supply\tChain\t&amp;\tFreight | 53 | 40 | 133 | 126 | 177 | 102 | 234 | 28 |
| Total\toperating\tprofit | 1,042 | 718 | 1,402 | 895 | 1,616 | 929 | 1,814 | 1,259 |
| Net\tincome | $533 | $401 | $845 | $445 | $991 | $549 | $1,119 | $757 |
| Earnings\tper\tshare: |  |  |  |  |  |  |  |  |
| Basic | $0.54 | $0.40 | $0.85 | $0.45 | $1.00 | $0.55 | $1.13 | $0.76 |
| Diluted | $0.53 | $0.40 | $0.84 | $0.44 | $0.99 | $0.55 | $1.11 | $0.75 |

First	quarter	2010	U.S.	Domestic	Package	operating	profit	includes	a	$98	million	restructuring	charge	related	to	the	reorganization	of	our	domestic	management structure,	as	discussed	in	Note	15.	First	quarter	2010	Supply	Chain	&	Freight	operating	profit	includes	a	$38	million	loss	on	the	sale	of	a	specialized	transportation business	in	Germany,	also	discussed	in	Note	15.	Additionally,	first	quarter	2010	net	income	includes	a	$76	million	charge	to	income	tax	expense,	resulting	from	a change	in	the	tax	filing	status	of	a	German	subsidiary,	as	discussed	in	Note	12.	The	combined	impact	of	these	items	reduced	net	income	by	$175	million,	basic	earnings per	share	by	$0.17,	and	diluted	earnings	per	share	by	$0.18.

Third	quarter	2010	U.S.	Domestic	Package	operating	profit	includes	a	$109	million	gain	on	the	sale	of	real	estate.	This	gain	increased	net	income	by	$61	million, and	basic	and	diluted	earnings	per	share	by	$0.06.

Fourth	quarter	2010	Supply	Chain	&	Freight	operating	profit	includes	a	$71	million	gain	on	the	sale	of	UPS	Logistics	Technologies	and	a	$13	million	loss	related to	a	financial	guarantee	associated	with	the	specialized	transportation	business	sold	in	the	first	quarter	of	2010,	which	are	discussed	in	Note	15.	The	combined	impact	of these	items	increased	net	income	by	$32	million,	basic	earnings	per	share	by	$0.04,	and	diluted	earnings	per	share	by	$0.03.

First	quarter	2009	U.S.	Domestic	Package	operating	profit	includes	the	$181	million	impairment	charge	on	our	McDonnell-Douglas	DC-8-71	and	DC-8-73 airframes,	engines,	and	parts,	as	discussed	in	Note	4.	This	charge	reduced	first	quarter	net	income	by	$116	million,	and	basic	and	diluted	earnings	per	share	by	$0.12.

Second	quarter	2009	interest	expense	includes	a	$77	million	charge	for	the	remeasurement	of	certain	obligations	denominated	in	foreign	currencies,	in	which hedge	accounting	was	not	able	to	be	applied.	This	charge	reduced	second	quarter	net	income	by	$48	million,	basic	earnings	per	share	by	$0.04,	and	diluted	earnings	per share	by	$0.05.

# 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	and	is	accumulated	and	communicated	to	our	management,	including	the	Chief	Executive	Officer	and	Chief	Financial	Officer,	as	appropriate	to	allow	timely decisions	regarding	required	disclosure.

# 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,	2010	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,	2010.	The	independent	registered	public	accounting	firm	of	Deloitte	&	Touche	LLP,	as	auditors	of	the	consolidated	balance	sheets	of United	Parcel	Service,	Inc.	and	its	subsidiaries	as	of	December	31,	2010	and	the	related	consolidated	statements	of	income,	comprehensive	income	and	cash	flows	for the	year	ended	December	31,	2010,	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

# Executive	Officers	of	the	Registrant

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	5,	2011	and	is	incorporated	herein	by	reference.

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	5,	2011	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	5,	2011	and	is	incorporated	herein	by	reference.

# Item	11. Executive	Compensation

Information	about	executive	compensation	is	presented	under	the	captions	"Compensation	Discussion	and	Analysis,"	"Compensation	of	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	5,	2011	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	5,	2011	and	is	incorporated	herein	by	reference.

Information	about	our	equity	compensation	plans	is	presented	under	the	caption	"Equity	Compensation	Plans"	in	our	definitive	Proxy	Statement	for	the	Annual Meeting	of	Shareowners	to	be	held	on	May	5,	2011	and	is	incorporated	herein	by	reference.

# 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	5,	2011	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	5,	2011	and	is	incorporated	herein	by	reference.

# Item	14. Principal	Accounting	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	5,	2011	and	is	incorporated	herein	by	reference.

# PART	IV

# Item	15. Exhibits	and	Financial	Statement	Schedules

# (a)	1.	Financial	Statements.

See	Item	8	for	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.

# EXHIBIT	INDEX

†(1)		Amendment	No.	1	to	the	UPS	Retirement	Plan.

		10.3 — UPS	Savings	Plan,	as	Amended	and	Restated	(incorporated	by	reference	to	Exhibit	10.3	to	2008	Annual	Report	on	Form	10-K).

(1)				Amendment	No.	1	to	the	UPS	Savings	Plan	(incorporated	by	reference	to	Exhibit	10.1	to	2009	Annual	Report	on	Form	10-K).

†(3)		Amendment	No.	3	to	the	UPS	Savings	Plan.

(1)				Amendment	No.	17	to	the	UPS	Qualified	Stock	Ownership	Plan	and	Trust	Agreement	(incorporated	by	reference	to	Exhibit	10.9(17)	to	2008 Annual	Report	on	Form	10-K).

		10.9 — 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).

(5)				Form	of	Restricted	Stock	Unit	Award	Agreement	for	the	2007	Long-Term	Incentive	Performance	Awards	under	the	Incentive	Compensation Plan	(incorporated	by	reference	to	Exhibit	10.1	to	Form	8-K,	filed	on	March	7,	2007).

(6)				Form	of	First	Amendment	to	Restricted	Stock	Award	Agreement	for	Non-Management	Directors	under	the	Incentive	Compensation	Plan (incorporated	by	reference	to	Exhibit	10.4	to	Quarterly	Report	on	Form	10-Q	for	the	Quarter	Ended	September	30,	2007).

(7)				Form	of	Restricted	Stock	Unit	Award	Agreement	for	the	2008	Long-Term	Incentive	Performance	Awards	under	the	Incentive	Compensation Plan	(incorporated	by	reference	to	Exhibit	10.1	to	Form	8-K,	filed	on	March	20,	2008).

(8)				Form	of	Restricted	Stock	Unit	Award	Agreement	for	the	2009	Long-Term	Incentive	Performance	Awards	under	the	Incentive	Compensation Plan	(incorporated	by	reference	to	Exhibit	10.1	to	Form	8-K,	filed	on	February	17,	2009).

(1)				Amendment	No.	1	to	the	Discounted	Employee	Stock	Purchase	Plan	(incorporated	by	reference	to	Exhibit	10.12(1)	to	the	2005	Annual Report	on	Form	10-K).

††101 — The	following	financial	information	from	the	Annual	Report	on	Form	10-K	for	the	year	ended	December	31,	2010,	formatted	in	XBRL (Extensible	Business	Reporting	Language):	(i)	the	Consolidated	Balance	Sheets,	(ii)	the	Consolidated	Statements	of	Income,	(iii)	the	Consolidated Statements	of	Comprehensive	Income,	(iv)	the	Consolidated	Statements	of	Cash	Flows,	and	(v)	the	Notes	to	the	Consolidated	Financial Statements.

† Filed	herewith.

†† Furnished	electronically	herewith.



Question: what percentage of contractual obligations and commitments in total are debt principal and debt interest?
Calculation: debt_principal_obligations = 10558
debt_interest_obligations = 6426
total_contractual_obligations = debt_principal_obligations + debt_interest_obligations
percent_contractual_obligations = total_contractual_obligations / 23556
answer = percent_contractual_obligations * 100
Answer: 72%