Welcome to the UPS Investor Relations third quarter 2007earnings conference call. (Operator Instructions) It is now my pleasure to turnthe floor over to your host, Mr. Andy Dolny, Vice President of InvestorRelations. Sir, the floor is yours.

Good morning, everyone and welcome to our earnings call. Asyou probably know, this is my first as Vice President of Investor Relations atUPS. Over the next few months, I'm looking forward getting to know all of you.Shortly Mike Eskew, our CEO, and Scott Davis, our CFO will discuss thirdquarter results and our future expectations. Before they begin, let me cover the Safe Harbor language. Some of the commentswe'll make today are forward-looking statements that address our expectationsfor the future performance or results of operations of the company. Theseanticipated results are subject to risk and uncertainties which are describedin detail in our 2006 Form 10-K and 2007 Form 10-Q reports. These reports areavailable on the UPS investor relations website, or from the Securities andExchange Commission. Today's call is being webcast and will also be available onour investor relations website. I'm sure you've noticed, there was a charge in the quarterfor restructuring the repair business and exiting a specialized road businessin France. Theactivities of the road business were neither scalable nor core to our supplychain services. The pre-tax charge for the quarter was $46 million, or about$0.03 per diluted share. In their remarks today, Mike and Scott will focus on resultsfrom operations excluding this charge, since we believe these results moreaccurately reflect UPS' true performance in the quarter. Now to begin our review, I'll turn the program over to Mike.

Thank you, Andy and good morning, everyone. To most of you,the third quarter of 2007 was just another three months in the annual businesscycle. However to us at UPS, it was a milestone. On August 28th, we celebratedour 100th anniversary. It was a time for us to reflect on our history andheritage, our successes and failures, our challenges and transformations. Butmore than that, it was a time for reinvigoration; to imagine where we will gofrom this threshold, where innovation might take us over the next 100 years.Wherever that might be, I know we're prepared, because the principles on whichthis company was founded will continue to guide us, whatever the future brings. The third quarter was historic, not only for our centennialcelebration, but also for a first in our 80-year history with the Teamsters,reaching a handshake agreement well ahead of the July 31, 2008 expiration date of our current contract.This is a testament to a lot of hard work by UPS and the Teamster leadership. This is a fair contract from many perspectives. It enablesUPS to adapt to the changing business environment; to respond to the needs ofour customers; to aggressively grow the business; and to continue to createopportunities for our people. The contract obviously includes increases towages, healthcare and pension plans. It also allows UPS to withdrawal from themulti-employer pension plan and establish a single employer plan for this groupof employees. UPS will make a one-time, pre-tax payment of $6.1 billion inconnection with this withdrawal. The net after tax amount will be approximately$3.9 billion. We'll make this payment in the fourth quarter upon ratificationof the contract. The ratification process has begun, and should conclude inDecember. If ratified, the new contract will run until July 31, 2013. Both UPS and the Teamstersleadership wholeheartedly endorse the contract and we're confident the majorityof…

Good morning, everyone. UPS turned in strong results for thethird quarter. Earnings per share were up over 9%. Operating profit increasedmore than 11%, with all three segments showing profit improvement. Consolidatedoperating margin improved 98 basis points to 14.4%. Before I discuss the results, let me share our thoughts onthe U.S. smallpackage market, which has been growing slower than the economy. This was againthe case in the third quarter. We believe however that market trends arestarting to improve slowly. Economists estimate that industrial productionnumbers bottomed out in the third quarter and will begin recovering in thefourth. Offsetting this somewhat is consumer spending. Retail salesgrowth is expected to remain weak and is a wildcard going into the holidayshipping season. Looking at the economy, experts anticipate GDP to grow about2% for the year with industrial production about the same. It remains to beseen how quickly the U.S.economy will return to long-term growth trends. So much for the economy; now let's get to our results, startingwith U.S.package operations. As we told you, we expected a slight increase in packagevolume this quarter. In fact, volume increased almost 1% with gains in groundvolume more than offsetting the slight decline in air. Revenue per pieceremained firm. Ground revenue per piece was up 2.4%, with a slight negativefuel surcharge comparison. Air revenue per piece was down; however, adjustingfor the year-over-year change in fuel surcharge, air revenue per piece actuallyimproved. Our U.S.operations team adjusted well to the low volume growth levels, as evidenced bythe segment's 16.3% operating margin. In this type of challenging operatingenvironment, cost control becomes particularly important. We did a good job ofcontrolling semi-variable costs, which make up 30% to 40% of our domestic costsstructure. We focused on reducing costs in all areas of discretionary spending. Similar to last year, domestic results were positivelyimpacted by our safety…

Your first question comes from Gary Chase - Lehman Brothers.

Congratulations, Mike and Scott, on the news. Scott, I wonderedif you could just provide a little bit of color on what's going on by businesssegment? There seems to be a lot of concerns out there economically. Are youseeing anything that's troubling? The guidance would suggest that's not thecase.

Gary, it wasstill not a surprising quarter for us, the way the economy performed. I think we expected somewhat muted GDP growthand I think year over year the number is going to come in a little over 2%,which was pretty much the number for the year we're expecting. Industrialproduction, I think we expected would bottom out in the third quarter. Thatappears to be the case; I think most of the economist expect industrialproduction to improve in Q4. As far as across the markets, I think that once again, theservice sector was probably the strongest of the bunch. Beyond that, I thinkthe manufacturing was fairly slow. Retail sales, consumer spending is certainlyan area of concern for all of us as we go forward. As I said earlier, we expect retail sales to be slow, yetthey still should grow in the fourth quarter, as should our package volume. Soagain, a slow but not really declining from what we've seen in the past.

As you look within the supply chain, can you give us alittle bit more color on how these results are being generated? Are you seeingdown side on the freight side that you're able to offset at Menlo, or are youseeing upside on both sides of that?

As we've said earlier Gary,that the first half of the year most of the operating profit, all of theoperating profit improvement came from the forwarding and distribution side ofthe business. We expected in the third quarter to have the LTL kick in and helpon comparisons, and it did; so really, all of the businesses in the thirdquarter showed year-over-year improvements. We're quite pleased with the improvements, in forwarding anddistribution. I think seeing the international air freight forwarding revenuegrow close to market was a very important quarter for us, so we're optimisticon that going forward. So across the board, I thought we saw good improvement.

Your next question comes from Jon Langenfeld – Robert W. Baird.

Scott, can you just talk a little bit about thesemi-variable costs and how long you can keep those under control? Is thatsomething that turns into a headwind here if the environment remains at this 2%type GDP growth?

Jon, I think you've followed us for a long time, and I thinkyear-in and year-out we are doing a very good job of controlling semi-variablecosts. That's a big pull, as we said, 30% to 40% of our expenses was a bignumber. We've done it for as long as I've been around here and Iexpect for as long as I will be around here, we'll see improvements. We'vespent an awful lot of 2007 looking at 2008 and what could be better in 2008.Clearly we talked at the last year's investors’ conference about the sharedservices movement that we've got going. That is something that will generateimprovements for many years to come. So I don't think we're anywhere near thebottom of semi-variable cost savings.

Your long-term earnings growth that you talked about, the 9%to 14%, I'm assuming you need a better environment than 2% GDP growth to hitthat? But if the current environment doesn't change, is mid single-digit orhigher profit growth like you've been achieving here, is that sustainable?

I think that obviously we've had a challenging year in 2007with the economy. Not withstanding that, we're going to hit the middle of our6% to 10% earnings guidance range we gave you, which isn't too far off thebottom of that 9% to 14%. Clearly on the domestic side of our business, growing volumeat flat to 1% puts a lot of pressure on our effective wage rate. We saw lastyear we averaged probably 1.7% effective wage rate increases. This year, we'veaveraged about 3.5%. That puts pressure on domestic margins. So you'll see moreimprovement in earnings performance as the domestic volume grows. But we'reoptimistic that with the improvement in supply chain and freight, withcontinued strength of international package that we can achieve those numbersgoing forward.

Your next question comes from William Greene - MorganStanley.

Scott, can you tell us how much of the improvement in groundyields came from dim weight?

No, we wouldn't quantify. That's just one piece of the rateincreases we did last year. I mean certainly it contributed, but I wouldn't saythat's a primary factor in the ground yield increases.

The growth mainly is coming just from underlying list rateincreases?

Correct.

And when you look atit on a B2B or B2C basis, I assume the B2C is still growing faster than B2B? Isthat correct?

That is correct. It hasn't grown at the pace in 2007 that wesaw in 2006. We said that's one of the factors in the overall small packagemarket being closer to flat this year. It's still growing faster than GDP, butnot at the pace we've seen in the last four or five years. We expect it willget back to that large growth in the near future.

So B2C is not growing faster than the economy is?

B2C is faster than B2B,but not as much of a discrepancy as we saw in the last couple of years.

The $6.1 billion payment you'll make to Central State, are you going to fund all ofthat? In other words, when you roll it out of commercial paper, you'll keep allof it on the balance sheet, or you'll just do the post-tax portion of it?

Initially, it'll be funded entirely with commercial paper,and then when the debt markets are right, we will go out and fund the after-taxportion with long-term debt, so about $3.9 billion of it will be funded aslong-term debt, likely early next year.

Your next question comes from Tom Wadewitz – JP Morgan.

Mike, congratulations on the contract and your retirement. Scott,congratulations on being named the new CEO. If you look at supply chain, you've seen quite a substantial improvementin '07. Can you give us any thoughts on whether that type of trajectory cancontinue in '08? In terms of margin, is 4% a pretty good level to be at forawhile, and it's more growth picking up as opposed to further margin expansion?

Tom, we did 4.6% in the quarter, I think for the year we'llcome in at 4%. I mean it's been a gameof focus and execution, and we really have implemented a number of initiatives.Scott talked about in this talk about revenue management, asset utilization,high tech services and those kinds of things and we're delighted. I thinkthere's a whole lot of upside here, and we think we've got this model going inthe right direction. I don't want to put a lot of pressure on Scott and Andy, butI think there's a whole lot more we can do here.

We're not satisfied at 4% margins. We've said all along thatwe need to get our margins into the 7% to 9% level to generate the economicprofit we expect out of this segment. We're going to improve more in 2008 as wemove to that 7% to 9% area.

If you look at the LTL segment, it's up. The regional, theinterregional, the long haul, all showed double-digit growth in both shipmentsand revenue and the service is great, so I'd look for a lot of upside there.

There's been a lot of movements in exchange rates. I knowyou are pretty leveraged in euros, and also movements in fuel. I wonder if youcould just give some comments on the higher fuel prices and also how thesignificant moves in dollars versus the euro are affecting your business trendsand perhaps reported results, as well?

All three quarters, Tom, have shown the euro about 10 pointsabove last year. So all three quarters, we've certainly had some favorablevariances due to the weak dollar, strong euro. In the third quarter, we didshow benefit from the currency, largely offset by the fuel cost increase wesaw, so I think that there is a benefit internationally due to the currency,but a lot of it was offset by the fuel prices, the fuel surcharges. As pricesclimb quicker, the surcharge takes a while to catch up and that hurts you inthe short term, it'll turn around eventually.

Your next question comes from Edward Wolfe - Bear Stearns.

Congratulations, Mike and Scott. Just a littleclarification. Is it a $6.1 billion initial payment on December 31, or whateverthat day in December is, then over what period of time do you see the taxbenefit from it? What's the interest rate that you're expecting to pay on that$6.1 billion, and then when you flip it over to $3.9 billion?

In the short term it'll probably be a little over 5% oncommercial paper. What the long-term debt markets are at in theJanuary/February timeframe will probably dictate that, but probably in theupper 5% to 6% level is probably a good guess. As far as how quick we get the money back on the tax refund,we frankly got some of it back already, because we didn't make our estimatedtax payments in September, thinking we're going to get this deduction. We willmake another one in January. Probably you can file for a quick refund, and getthe money back in about four months.

As a follow-up, Ithink you noted that exports out of the U.S.were only up mid single-digits below your total export volumes in thirdquarter, but you expect them to pick up in fourth quarter. Can you talk alittle to the weak dollar? I assume thatover time, export could be a positive. Can you talk a little about thosetrends?

Absolutely. The weak dollar certainly should generate moreexports out of the U.S.I think the small package market maybe hasn't shown as much of it as the overallexport growth has been. A lot of the growth has been Boeing airplanes, thattype of growth, commodities like grain, that type of thing; although we'restill seeing solid growth in the U.S.small package export market. I think the fact that you saw our export volume dropslightly, about 10% this quarter was actually more of a U.S.import issue. We've seen very strong growth out of Asiaover the last several years, still great growth, in the upper teens thisquarter, but that's below the 25% that we saw last quarter. That's primarily U.S.imports being a little weak due to the economy here.

Your next question comes from Scott Flower - Banc of AmericaSecurities.

Congratulations, Mike and Scott both. In terms of the exportrates, if I look at the currency adjusted rates, they were down about 1.5%. Isthat a mix issue? What is going on when I look at some of the currency adjustedexport rates on small package?

Scott it's verysimilar to what you saw in the last couple of quarters. Rates didn't changemuch. It's primarily mix. It's the transporter business in Europeis growing at a real fast rate; a shorter distance and lower revenue per piece.As you would expect, Europe to the rest of the world islow due to the strength of the euro, and as we said, we didn't see quite asmuch growth out of Asia to the U.S.because of the weak U.S.economy. That's long range, high revenue piece product. But nothing other thana little bit of mix switch there.

Obviously you talked about nudging down CapEx expectationsfor this year. Can you give us some sense of is that just going to roll into'08 from a deferral standpoint, or are there some things you actually diddiminish in terms of where you wanted to invest in different businesses basedon the economic outlook?

I think the reductionwas primarily vehicles in the U.S.for this year. That's obviously tied to the volume growth. The small packagemarket has not grown very much in 2007 lessening our need for new vehicles. As we go forward, as I said, I guess for a while now, westill expect our CapEx range to be at the low end of our normal 5% to 8%revenue spend. I don't see that changingdramatically in 2008.

Your next question comes from Jason Seidl - Credit Suisse.

Congratulations Scott and Mike. Scott, I think you mentioned thatinternational margins were negatively impacted by both fuel and the newflights. If you exclude those two items what would the margins look like?

Better. I haven't calculated it out, but certainly thatwould have had a fairly pretty dramatic impact on the margins.

Would you have been on par with last year?

We would have been.

A big piece of it.

When you give your outlook for the full year for supply chain,you mentioned 4% margins. Are including or excluding that charge from France?

We'll be excludingthat charge from France.

Excluding the chargefrom France.

Remember, we started the year looking at 2% to 3% margins,and last quarter we said 3%, at least 3%; so now we're at 4%.

We're 4% right now. We just hit 4.6%, excluding.

Fuel for the fourth quarter, I'm assuming you're factoring that in, howmuch of an impact do you think negatively that's going to have on the numbers?

It depends on wherethe costs go in the short term. Clearly by December, with our fuel surchargenumber it is going to be up much higher than it's been, due to the fact thefuel prices have been up the last couple of months. Now what I can't tell is fuel going to be $100 a barrel or$70 a barrel by December? That'll drive the impact on P&L, where fuel costswill be. But currently the surcharge revenue is increasing due to the fact thatcost have run up the last several months.

Your next question comes from Ken Hoexter - Merrill Lynch.

Good morning and congratulations as well to both of you. I don't think you mentioned, on the less than truckloadside, on the overnight side, did you mention what the revenue per hundredweight had done? It sounded like had you said volumes were up double-digits.

It's up 9.9%.

Revenue per 100weight was?

Yes. A lot of that isthe mix of the customers. We've won a lot of mid-sized companies as well as nationalaccounts which has helped drive that revenue per hundred weight.

Revenue per hundred weight was up 9.9%, and tonnage was updouble-digits?

Tonnage was up 1.9%. Shipments were up 13%.

Tonnage was 1.9%?

Weight per shipment is down.

Are you still not giving any contract details? You talked abit about the employees. Can you talk about wages going forward, wages orbenefits?

The ballots are out late this week. We're going to let ourpeople take a look at it. That’s been our pattern, we let the people see itfirst.

I know that everybodyout there would like to have more of the details, but as Mike said really, it'sonly fair to our people to let them get the ballots and see the details firstand make their decisions. After the ratification clearly we'll be able tocommunicate some of the financial impacts of the contract to all of you.

Can you tell us if there are any major differences than whatwe've seen in the past in term of wages and benefits?

As we said, we'll let all the ballots be cast, and thenwe'll share the details with you.

Scott, when we were over in Japanyou had said that there was always a need to get more routes into it and getmore business, it sounds like you have some more flights going in. Are yougoing to start increasing spend or capital dollars in Japanto build out that network more?

Nagoya routeswill probably not be up and running until the summer of next year, it's goingto take us a while to get the gateway ready, but we're very excited about the possibilitiesof the U.S. to Nagoyaflights and tying that it into our new Shanghaihub. So clearly we'll continue to make some infrastructureinvestments in Japanand throughout Asia. But we think it's going to be agreat return by doing that.

We've been spending a lot of money in Japanthe last couple of years are as we round out that operation.

Your next question comes from David Ross - Stifel Nicolaus.

Good morning,gentlemen. I wanted to ask a little bit about the growth in bundling. Do youhave any numbers for the number of customers who currently use UPS freight and groundnow versus they used only one of those services a year ago, and what the growthlooks like?

We talked about on the LTL side that of the growth, 60% camefrom existing customers and 40% from new customers. Most of those new customersare obviously UPS customers that are adding LTL services. That will quantify,but clearly that is where a lot of that growth is, and why we're outperformingthe LTL markets so dramatically is the ability to bring this new service to theUPS customer base.

Also on the otheroperating expenses line item in the quarter, it declined about a $100 million yearover year, showed a nice improvement. Is that part of the cost reductionsyou're going after? I just want to know the sustainability of that number.

Well it's definitelypart of those cost reductions. If you recall last year we had a wage hour settlement in the third quarter of 2006 ofabout $87 million. So you take that out, we were flat to down a little bit, butthat was the biggest driver. Variable cost savings show up in that line.

Your next question comes from David Campbell - Thomas Davis.

This might be the first time that a CFO has been promoted toCEO at UPS. Maybe this means you're going to get better numbers going forward.

By the way, it's notthe first time, David. But you're right, I hope the numbers get better goingforward.

Expect such, David.

I think it's greatnews. Congratulations. The bad news and the horrible impact on human life in Southern California with these fires. Do you have any thoughts on what itdoes to your business in the fourth quarter?

It's a little tooearly to tell right now. We've got some folks out of their homes, and we'vebeen watching our people right now, and it's just hard to quantify the businessaspects at this point.

Right. The thirdquarter tax rate was low, I thought. Do you think the fourth quarter will beback up to 38%?

I think we've beenrunning, David, at about 36.25% tax rate for probably the last year-and-a-half.We think the effective tax rate going forward is 36%, so a little bit lowerthen we've been running.

The $46 million charge in the third quarter, was that incompensation cost?

$46 million is in mostly compensation and benefits, correct.

Your final question comes from John Mims - BB&T CapitalMarkets. John Mims - BB&T Capital Markets: Good morning, guys. Real quickly, I know you've discussed Japanand China, butcould you break down international business by region and highlight any pocketsof strength, and particularly pockets of weakness you've seen, or where youexpect to see the most growth going forward?

We've had a pretty sterling record of strong growth in both Europeand Asia for many years. As we've talked about a lot oftimes, Europe since 1997 has only had four quarters wehaven't grown double-digit in export volume growth , it showed again in thelast quarter. So we're still seeing strength in Europe. Asia,we expect to see strong growth for many years to come out of Asia.The only softness growing out of Asia, upper teens asopposed to 25% the previous quarter. A little softer, but again that's drivenby the U.S.imports being a little bit weaker this quarter. I think going forward we're very confident that around theworld we're going to see strong growth. We'd like to see a little better growthout of South America still, but we'll expect that goingforward.

I would now like to turn the call back over to Mr. AndyDolny.

To summarize, here are the key points I'd like you toremember. Our financial strength is outstanding. We posted strong third quarterresults with earnings per share up over 9%. All three business segmentsreported profit gains. For the year, we expect earnings per share to be between$4.13 and $4.19. Thank you for joining us today, and we look forward toseeing you soon.