Competition

The Internet and the World Wide Web continue to dramatically change the communications market. Within the next decade further innovations such as mobile commerce, broadband, interactive TV, data mining software, and new printing technologies will change the way businesses and consumers interact. While hard copy mail retains tremendous effectiveness, there is little doubt that its share of the overall communications market will shrink.

Of greatest impact on us are electronic alternatives to business correspondence and transactions, particularly for First-Class Mail items such as bills, statements, and payments. First-Class Mail volumes have already been affected by the telephone, fax machine, Internet, and other electronic communications.

The Internet is also forcing us into greater competition with the private sector by changing the mix of mail. The Internet and electronic commerce are stimulating utilization of other postal products, such as package delivery and targeted ad mail. These products are subject to competition from traditional sources (e.g., newspaper and TV ads and other package delivery firms).

We are losing share in the overall delivery services market. Major corporations now dominate parcel and express markets. Under the current regulatory structure, competitors have far more flexibility to respond to changes in market conditions and to target specific customers than does the Postal Service.

The competitive landscape for postal services is becoming much more global. Foreign postal operators such as Deutsche Post World Net (DPWN) (Germany) and TNT Post Group (TPG) (the Netherlands) are moving well beyond traditional postal services, offering logistics, financial services, and electronic services. Four foreign posts - DPWN, TPG, Consignia (United Kingdom), and La Poste (France) - have limited operations in 18 major metropolitan centers nationwide, including New York, Boston, Washington, DC, Houston, Salt Lake City, Los Angeles, San Francisco, and Seattle. These operations feature some sales offices and offer mail, parcel, logistics, and financial services to the American market. DPWN recently acquired a controlling interest in DHL, the leading global express company, originally a U.S. firm. DPWN owns one of the largest global freight forwarders, also based in the United States.

Intellectual property

The Postal Service owns valuable intellectual property including trademarks, service marks, patents, copyrights, trade secrets and other proprietary information.

We routinely generate intellectual property in the course of developing and improving our systems, products, and operations.

Seasonal Operations

Our operations are somewhat seasonal. Mail volume and revenue tend to be greatest in our first fiscal quarter and lowest in our fourth quarter.

Working Capital Practices

Information about our working capital practices is included in Management's Discussion and Analysis of Financial Condition and Results of Operations for the years ended September 30, 2004, 2003 and 2002 in Part II, Item 7, pages 19 through 31, and the Statement of Cash Flows for the years ended September 30, 2004, 2003 and 2002 on page 38.

Customers

Our business is not dependent upon a single customer or small group of customers.

Backlog

We do not have any backlog.

Government Contracts

No material portion of our business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the U.S. government.

Research and Development

We operate a research and development facility in Virginia. While research and development activities are important to our business, these expenditures are not material. Independent suppliers also conduct research activities that benefit us.

Environmental Matters

We are not aware of any federal, state or local environmental laws or regulations that will materially affect our financial results or competitive position or result in material capital expenditures. However, we cannot predict the effect on our operations of possible future environmental legislation or regulations.

In October 2001, the United States became the target of biological terrorism, utilizing the mail as the delivery medium. In response to the continuing threat, the Board of Governors approved the Biohazard Detection System and the Ventilation Filtration System projects. These projects will provide a level of protection to our employees and customers from potential contamination.