management’s discussion and analysis of financial condition
and results of operations

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Operations

2000 Compared to 1999
The following tables set forth information showing the change in revenue, average daily package volume, and average revenue per piece, both in dollars or amounts and in percentage terms:

			Years ended December 31,				Change
			2000		1999		$	%
Revenue (in millions):
U.S. domestic package
	Next Day Air	$	5,664	$	5,240	$	424	8.1	%
	Deferred		2,910		2,694		216	8.0
	Ground		15,428		14,379		1,049	7.3
Total U.S. domestic package			24,002		22,313		1,689	7.6
International package:
	Domestic		904		924		(20)	(2.2)
	Export		2,837		2,479		358	14.4
	Cargo		425		327		98	30.0
Total international package			4,166		3,730		436	11.7
Non-package:
	UPS Logistics Group		1,021		771		250	32.4
	Other		582		238		344	144.5
Total non-package			1,603		1,009		594	58.9
Consolidated		$	29,771	$	27,052	$	2,719	10.1	%
Average Daily Package Volume (in thousands):							#	%
U.S. domestic package:
	Next Day Air		1,122		1,039		83	8.0	%
	Deferred		914		852		62	7.3
	Ground		10,434		10,016		418	4.2
Total U.S. domestic package			12,470		11,907		563	4.7
International package:
	Domestic		786		711		75	10.5
	Export		368		303		65	21.5
Total international package			1,154		1,014		140	13.8
Consolidated			13,624		12,921		703	5.4	%
Average Revenue Per Piece:							$	%
U.S. domestic package:
	Next Day Air	$	19.87	$	19.86	$	0.01	0.1	%
	Deferred		12.53		12.45		0.08	0.6
	Ground		5.82		5.65		0.17	3.0
Total U.S. domestic package			7.58		7.38		0.20	2.7
International package:
	Domestic		4.53		5.12		(0.59)	(11.5)
	Export		30.35		32.21		(1.86)	(5.8)
Total international package			12.76		13.21		(0.45)	(3.4)
Consolidated		$	8.02	$	7.84	$	0.18	2.3	%
U.S. domestic package revenue increased almost $1.7 billion, or 7.6%, primarily due to volume gains across all product lines, combined with a 2.7% increase in average revenue per piece, which was primarily driven by our Ground products. All products contributed to the revenue increase, with our higher revenue per piece express (Next Day Air and Deferred) products increasing at approximately the same rate (8.1% and 8.0% respectively). Our average daily Ground volume grew at a 4.2% rate for the period, helping to bring our total U.S. average daily package volume to almost 12.5 million pieces. During the first quarter of 2000, we increased rates for standard ground shipments an average of 3.1% for commercial deliveries. The ground residential charge continued to be $1.00 over the commercial ground rate, with an additional delivery area surcharge of $1.50 added to certain less accessible areas. In addition, we increased rates for UPS Next Day Air, UPS Next Day Air Saver, and UPS 2nd Day Air an average of 3.5%. The surcharge for UPS Next Day Air Early A.M. did not change. Rates for international shipments originating in the United States (Worldwide Express, Worldwide Express Plus, UPS Worldwide Expedited and UPS International Standard service) increased by 2.9%. Rate changes for shipments originating outside the United States were made throughout the past year and varied by geographic market. The increase in international package revenue was due to double-digit volume growth for both our domestic and export products, offset by a decline in the revenue per piece for these products. This decline was primarily due to a decline in the value of the Euro relative to the U.S. dollar that occurred during 2000. The value of the Euro averaged $0.92 in 2000 compared to $1.07 in 1999. Overall average daily package volume increased 13.8% for international operations, with our export products, which had an average revenue per piece in excess of $30, increasing at 21.5%. The increase in non-package revenue resulted primarily from the new arrangement for providing excess value package insurance for our customers, as well as continued growth of UPS Logistics Group. Revenue for UPS Logistics Group increased by $250 million, or 32.4%, to over $1 billion for the year ended December 31, 2000. The new arrangement for providing excess value package insurance began in the fourth quarter of 1999. Consequently, this item will have a reduced impact on the comparability of the revenue for our non-package segment in future periods. Operating expenses increased by $2.112 billion, or 9.1%, which was less than our revenue increase of 10.1%. Compensation and benefits expenses, the largest component of this increase, accounted for $1.261 billion of the increase and included a $59 million charge recorded in the first quarter of 2000 relating to the creation of 4,000 new full-time hourly jobs resulting from the 1997 Teamsters contract. Other operating expenses increased $851 million primarily due to higher purchased transportation costs, higher fuel costs, and claims expense associated with the new arrangement for providing excess value package insurance for our customers. The increase in purchased transportation costs was primarily due to increased business for our international and logistics operations. The 40.1% increase in fuel costs from $681 million to $954 million was due to the increase in fuel prices during 2000 and the additional fuel usage due to the growth in our average daily package volume, partially offset by cost reductions generated by our fuel hedging program. The increase in other operating expenses of $219 million was slightly offset by the $49 million gain we recognized in the first quarter of 2000 from the sale of our UPS Truck Leasing subsidiary. International operating expenses were favorably impacted by the decline in the value of the Euro relative to the U.S. dollar as discussed above. To offset the increasing fuel costs we have experienced over the last several quarters and that we expect to continue into the near future, we implemented a temporary 1.25% fuel surcharge effective August 7, 2000. Approximately $130 million in revenue was recorded in 2000 as a result of the surcharge. Our operating margin, defined as operating profit as a percentage of revenue, improved from 14.4% during 1999 to 15.2% during 2000. This improvement continues our recently reported trends and was favorably impacted by continued product mix improvements and our continued successful efforts in obtaining profitable volume growth. The following table shows the change in operating profit, both in dollars and in percentage terms: Year Ended December 31, Change (in millions) 2000 1999 $ % Operating Segment U.S. domestic package $ 3,929 $ 3,506 $ 423 12.1 % International package 274 232 42 18.1 Non-package 309 167 142 85.0 Consolidated operating profit $ 4,512 $ 3,905 $ 607 15.5 % U.S. domestic package operating profit increased by $423 million, or 12.1%, due to the volume and revenue improvements discussed previously. The improvement in the operating profit of our international package segment of 18.1%, or $42 million, resulted primarily from increased volume and revenue and was realized despite significantly higher fuel costs. This improvement occurred throughout our international regions. The improvement in operating profit for this segment would have been $36 million greater if the impact of currency fluctuations was excluded. The increase in non-package operating profit is largely due to the new arrangement for providing excess value package insurance for our customers, which contributed $183 million of additional operating profit for the year. Also contributing to the operating profit improvement was the $49 million gain we recognized during the first quarter of 2000 from the sale of our UPS Truck Leasing subsidiary. These improvements were offset somewhat by start-up costs associated with UPS Logistics Group’s service parts logistics offering, UPS e-Ventures, UPS Capital Corporation, and other initiatives. The increase in investment income of $330 million for the period is primarily due to two factors. First, in the first quarter of 2000, two companies in which our Strategic Enterprise Fund held investments were acquired by other companies, which caused us to recognize a gain of $241 million. Second, we earned income on the $5.3 billion in net IPO proceeds available for investment prior to the tender offer that was completed in early March 2000 and the $1.2 billion in IPO proceeds that were not utilized for the tender offer. In 1999, we had the net IPO proceeds available for investment from mid-November through the end of the year. We announced a share repurchase program on April 20, 2000 under which we would utilize up to the remaining $1.2 billion not used in the tender offer. As of December 31, 2000, approximately $105 million remained available for share repurchases. Net income for the year ended December 31, 2000 was $2.934 billion, or $2.50 per diluted share, compared to net income of $883 million, or $0.77 per diluted share, for the prior year. Our 2000 results reflect the non-recurring items discussed above, which include the gains on our Strategic Enterprise Fund investments and the sale of our UPS Truck Leasing subsidiary, offset partially by the charge for retroactive costs associated with creating new full-time jobs from existing part-time Teamster jobs. Our 1999 results reflect a tax assessment charge resulting from an unfavorable ruling of the U.S. Tax Court. Excluding these non-recurring transactions for each of these years, adjusted net income for 2000 would have been $2.795 billion, an increase in excess of 20% over adjusted 1999 net income of $2.325 billion. Adjusted diluted earnings per share would have increased from $2.04 in 1999 to $2.38 in 2000. Our fourth quarter of 2000 results reflected a decline in our previously reported growth rates for both revenue and average daily volume. These declines were caused by an overall weakening of the economy.