Financial Section Part II

Item 5 – Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities

Not applicable to the United States Postal Service. As an “independent establishment of the executive branch of the Government of the United States,” we do not issue stock or other securities.

Item 6 – Selected financial data

See the Financial History Summary and Selected Quarterly Financial Data sections of this report.

Item 7 – Management’s discussion and analysis of financial condition and results of operations

Cautionary Statements

Forward-looking statements contained in this report represent our best estimates of the trends we know about, the trends we anticipate, and the trends we believe are relevant to our future operations. However, actual results may be different from our estimates. Certain forward-looking statements are included in this report and use such words as “may,” “will,” “expect,” “believe,” “plan,” or other similar terminology. These statements reflect our current expectations regarding future events and operating performance as of the date of this report. These forward-looking statements involve a number of risks and uncertainties.

The following are some of the factors that could cause actual results to differ materially from those expressed in, or underlying, our forward-looking statements: effectiveness of operating initiatives; success in advertising and promotional efforts; changes in national and local business and economic conditions, including their impact on consumer and business confidence; fluctuations in currency exchange and interest rates; labor and other operating costs; oil, fuel and other transportation costs; the effects of war and terrorist activities; competition, including pricing and marketing initiatives and new service offerings by our competitors; consumer preferences or perceptions concerning our service offerings; spending patterns and demographic trends; availability of qualified personnel; severe weather conditions; effects of legal claims; cost and deployment of capital; changes in laws and regulations; costs and delays associated with new regulations imposed by the PRC; and changes in applicable accounting policies and practices. The foregoing list of important factors is not all-inclusive. We have no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make significant judgments and estimates to develop certain amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a thorough process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a large organization. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and new or better information.

The three critical accounting policies that we believe are either the most judgmental, or involve the selection or application of alternative accounting policies, and are material to our financial statements are those relating to workers’ compensation costs, deferred revenue for prepaid postage, and contingent liabilities. Management has discussed the development and selection of these critical accounting policies and estimates with the Audit and Finance Committee of our Board of Governors and with the Board’s independent public accounting firm. In addition, retirement and health benefits costs for our employees and retirees represent a significant portion of our expenses. Any changes in laws or regulations affecting the amounts, timing, or administration of these benefits could have a material effect on our financial position and results of operations. For additional information, see Note 2, Summary of significant accounting policies, in the Notes to the Financial Statements.

Results of Operations

Our financial results in 2007 were a net loss of $5,142 million compared to net income of $900 million in 2006. These results were significantly impacted by P.L.109-435.

In 2007, our total revenue was $74,973 million, compared to $72,817 million in 2006. All classes of mail, with the exception of Periodicals, showed increases mainly as a result of the May rate increase. Standard Mail revenue had the largest increase, $902 million, or 4.5%.

As shown in the chart below, P.L.109-435 added $6.8 billion in net additional expenses in 2007. Without this legislation we would have reported net income of $1,634 million. The major impact of the law was to increase retiree health benefits expense by $8,358 million compared to 2006. As discussed later in this section, other changes to operating expenses included a decrease in compensation and benefits expense of $479 million, and an increase in transportation expenses of $457 million.

On April 6, 2007, we transferred $2,958 million, representing the entire amount of funds held in escrow, as required by P.L.108-18, to the PSRHBF. Since we no longer hold these funds, there was a substantial decrease in interest income for the second half of the year and this will continue into the future.