Of greatest impact on us are electronic alternatives to correspondence and transactions, particularly for First-Class Mail items such as business correspondence/forms, 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. 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).

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 we do.

The competitive landscape for postal services is becoming much more global. Foreign postal operators are moving well beyond traditional postal services, offering logistics, financial services, and electronic services. Several European posts have set-up operations in 18 major metropolitan areas nationwide. These operations feature some sales offices and offer mail, parcel, logistics, and financial services to the American market. A significant portion of foreign outbound letters are carried by foreign posts, due to our higher rates, which are driven by our unfavorable international air transportation costs.

Intellectual Property

We own 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 seasonal. Mail volume and revenue tends to be greatest in our first fiscal quarter, the fall mailing season, and lowest during the summer, 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 in Part II, Item 7, page 29, and the Statement of Cash Flows for the years ended September 30, 2005, 2004 and 2003 on page 45.

Customers

We have a very diverse customer base and we are not dependent upon a single customer or small group of customers.

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. We also contract with independent suppliers to 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 response to the continuing threat of biological terrorism, utilizing the mail as the delivery medium, the Board of Governors approved the Biohazard Detection System and the Ventilation Filtration System projects. These projects, which are in the process of being deployed, will provide a level of protection to our employees and customers from potential contamination.

Number of Employees

At year-end, we had 704,716 career employees, substantially all of whom reside in the United States. We also had 98,284 non-career employees. See Operating Statistics on page 56 for additional detail.

Available Information

The United States Postal Service is not subject to the informational requirements of the Securities Exchange Act of 1934 (Exchange Act). We do not file periodic reports, proxy statements or other information with the SEC.

Financial and other information can be accessed on the "About USPS and News" section of our website at usps.com. We make available, free of charge, copies of our annual report, as soon as reasonably practicable after it is produced. Copies of financial and other information are available free of charge by sending a request to:
United States Postal Service
Public Affairs and Communications
475 L’Enfant Plaza, SW
Washington, DC 20260-5241.

Information on our website is not incorporated by reference
in this document.