Financial Section Part I

Item 1A – Risk Factors

Our operations and financial results are subject to various risks and uncertainties, including those described below, that could adversely affect our business, financial condition, results of operations, and cash flows. You should also read the rest of this report, including sections entitled “Business” and “Management’s discussion and analysis of financial condition and results of operations,” for a more complete understanding of the risks and uncertainties we confront.

Postal Service Brand

We serve almost every American household and business nearly every day. For the third year in a row, the Ponemon Institute named the Postal Service the most trusted government agency and among the ten most trusted of all organizations. The Postal Service brand represents quality and reliable service to our customers and therefore is a valuable asset. We use our brand extensively in our sales and marketing initiatives, and we take care to defend and protect it. Any event that calls into question this quality and reliability could diminish the value of our brand and potentially adversely affect our business and reputation.

Competition

The Internet continues to dramatically change the communications market. Within the next decade further innovations in 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, automatic deductions, direct deposit, telephone, fax machines, and other electronic communications. The Internet and electronic commerce also have some positive impact on our business by stimulating new uses of postal services, such as package delivery and targeted ad mail.

In addition, major corporations now dominate parcel and express markets. Further, the competitive landscape for postal services is becoming more global. Foreign postal operators are moving outside their geographic borders and expanding beyond their traditional postal services into offering express delivery, logistics, financial, and electronic services. More than a dozen posts, mainly European, 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 services, 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 the outbound market share of our foreign competitors.

Oversight and Regulation

The PRC recently issued regulations pertaining to the new price-setting process, as required by P.L.109-435. In addition, the PRC, in consultation with the U.S. Department of the Treasury and the Postal Service, is required to issue, by December 2008 regulations dictating accounting principles and practices for the Competitive Products Fund required by P.L.109-435. In the event the PRC’s application of these or other regulations delays us from instituting price or classification changes, or if we incur excessive costs in meeting PRC requirements, our results of operations could be adversely affected.

In addition to the PRC, we are subject to a variety of other forms of oversight and scrutiny by Congress, mailer organizations, the media, and the general public. This is an outgrowth of our unique status as a provider of a fundamental service to the American people. We attempt to balance the interests of all these groups with the need for operational efficiency. Our efforts to be responsive to our various stakeholders sometimes adversely impact the speed with which we are able to respond to changes in mail volumes or other operational needs. Any limitations on our ability to take management action could adversely affect our operating and financial results.

Bank Secrecy Act Compliance

In order to combat money laundering and terrorism, Congress enacted a series of laws from 1970 to 2001 that require banks and money services businesses to detect, deter, track, and report certain cash transactions to the U.S. Department of the Treasury. This legislation, together with amendments and promulgated rules and regulations, is known as the Bank Secrecy Act (BSA). The law specifically includes the Postal Service, because we sell postal money orders and provide international funds transfers with our Sure Money product and as such meet the definition of a money service business. As mandated by the BSA, we have established policies and procedures to ensure that we are in compliance with the provisions of the BSA. The impact of the BSA on our operations has not been material.

Do Not Mail Legislation

In 2007, Do Not Mail legislative bills were introduced in 15 state legislatures nationwide. These bills, modeled after the Do Not Call registry, are designed to limit or stop advertising mail from being mailed to households.

Should a state pass Do Not Mail legislation it would result in lost revenue for the Postal Service. While none of the state bills passed during 2007, in seven states the 2007 legislation automatically will be carried over to the 2008 session. The bills in those seven states do not need to be re-introduced in order to be considered.