The 2006 plan reduces workhours by 42 million below the 2005 total. This would be the sixth out of the last seven years in which we have reduced workhours. The 2006 planned workhour reduction target is equal to approximately 20,000 full-time equivalent employees. The workhour reductions rely primarily on process improvements, rather than on capital investment programs for achievement. Mail volume is projected to increase slightly in 2006 and sizeable efficiency gains have already been realized through workhour reductions.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

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 on the following page, we do not use derivative financial instruments to manage market risks. Additionally, we do not purchase or hold derivative financial instruments for speculative purposes.

Revenue

Revenue is a function of the volume and mix of mail. As noted, mail volume trends have provided a lower revenue-per-piece mix. If this accelerates beyond what has been projected, it will have an adverse effect on revenue.

Economic Risk

Retail sales and employment, key drivers of workshare First-Class Mail and Standard Mail, have grown strongly in the last two years. Recent economic news, however, shows a significant downside risk to economic growth. Increases in energy costs, speculation about the housing market, the double deficits (i.e., the international trade and federal government deficits), unprecedented rates of personal consumption expenditures and non-mortgage consumer credit, and rising interest rates are all cause for concern.

General Inflation Risk

Each of our labor contracts with our largest unions includes provisions granting COLAs. These adjustments are generally granted semi-annually and are linked to increases in the consumer price index (CPI). Nonbargaining employees do not receive COLAs. Because employee compensation represents a significant portion of our annual expenses, an increase in the CPI greater than had been incorporated into our financial plans could be a significant risk to our financial results. We estimate that an increase in the CPI of 0.5% would cause an annualized increase in our COLAs of about $100 million.

Commodity Price Risk

We estimate that we purchase approximately 800 million gallons of fuel each year. Thus fuel prices are a significant part of our expenses.

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 administra-tions for international mail. The majority of our international accounts are accounted for based on International Monetary Fund special drawing rights (SDR). The SDR exchange rate fluctuates daily based on a basket of currencies comprised of the euro, the 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. The actual currency used to settle accounts varies by country based on individual agreements.

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.