Financial Section Part I

In other rate and classification activity, on April 2, 2006, the Postal Service implemented a one-year extension of the provisional Repositionable Notes service. On June 1, 2006, a baseline Negotiated Service Agreement (NSA) with Bookspan was implemented. This is the first NSA involving Standard Mail. On September 13, 2006, a one-year extension of the existing NSA with Capital One was implemented, as was a minor classification change involving the eligibility criteria for Periodical rates.

Information on PRC recommended decisions and pending dockets can be obtained at the PRC website www.prc.gov.

Competition

The Internet continues 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 affect the way businesses and consumers interact.

Of greatest impact on us are electronic alternatives to correspondence and transactions, particularly for First-Class Mail items such as business correspondence, bills, statements and customer payments. First-Class Mail volume has already been affected by the Internet, telephone, fax machine and other electronic communications. The Internet and electronic commerce also have a positive impact on our business by stimulating new uses of postal services, such as package delivery and targeted ad mail.

Major corporations now dominate parcel and express markets. Under the current regulatory structure, competitors have far more pricing flexibility to quickly respond to changes in market conditions and to target individual customers for special incentives.

The competitive landscape for postal services is becoming more global. Foreign postal operators are moving outside of their geographic borders and expanding beyond their traditional postal services into offering express delivery, logistics, financial and electronic services. More than a dozen mainly European posts have set up operations in the United States at more than 3,500 locations nationwide. Retail locations, sales offices and full-scale offices of exchange are offering mailing services, parcel, logistics and financial services to the American market. Despite our competitive global products, we have a disadvantage because our international air transportation rates are set by the U.S. government and are not subject to more favorable market-driven rates available to foreign posts. This has contributed to an increase in outbound market share to our foreign competitors.

Intellectual Property

We own 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.