Market Risk Disclosure

     In the normal course of business, we are exposed to market risk from changes in commodity prices, certain foreign currency exchange rate fluctuations and interest rates. With the limited exception explained below, we do not use derivative financial instruments to manage market risks. Additionally, we do not purchase or hold derivative financial instruments for speculative purposes.

Commodity Price Risk

     We are exposed to changes in commodity prices primarily for diesel fuel, unleaded gasoline and aircraft fuel for transportation of the mails and natural gas for heating facilities. We currently do not use derivative commodity instruments to manage the risk of changes in energy prices.

Foreign Currency Exchange Rate Risk

     We have foreign currency risk related to the settlement of terminal dues and transit fees with foreign postal administrations for international mail. The majority of our international accounts are denominated in Special Drawing Rights (SDRs). The SDR exchange rate fluctuates daily based on a basket of currencies comprised of the euro, Japanese yen, the pound sterling and the U.S. dollar. Changes in the relative value of these currencies will increase or decrease the value of our settlement accounts and result in a gain or loss from revaluation reported in the results of operations. The actual currency used to settle accounts varies by country.

     We purchase the required currency at the time of settlement, but when we know the timing and the amount of scheduled payments in advance, we may purchase short duration forward contracts. In 2003 we purchased short term forward contracts for Canadian dollars representing approximately $34 million for provisional payments to Canada under a previous

year bilateral agreement. We completed the delivery of funds under these contracts before the end of the year.

On average, every one of our 56,776 mail handlers moved 3.56 million pieces of mail in 2003.

     We adjust the reported international payables and receivables to reflect their value based on the SDR rate in effect at year end. This revaluation resulted in a loss of $9 million in 2003 solely due to the change in the SDR rate from 2002. In addition to the year end revaluation, we also recognize gains and losses on our receivables and payables when we settle with foreign postal administrations. Due to our status as a net international debtor, coupled with the decline in the dollar relative to the SDR, in 2003 we recognized $12 million in settlement-related net losses on foreign exchange. We do not use derivative financial instruments to manage the risk of changes in the SDR.

Interest Rate Risk

     As described in Note 5 of the Notes to the Financial Statements, we refinanced all of our outstanding long term Federal Financing Bank debt with short term debt in 2003. We have not used derivative financial instruments to manage risk related to interest rate fluctuations for debt instruments.

Legal Proceedings

     We are subject to various claims and liabilities that arise in the ordinary and normal course of postal operations. These claims generally cover labor, tort and contract disputes and are regularly reviewed by management and, where significant, by the Audit and Finance Committee of the Board of Governors and/or the full Board of Governors. In our evaluation, no single claim is material to our financial statements taken as a whole. We have incorporated into our financial statements of September 30, 2003 the estimated impact of those claims we think it is probable we will pay.