a message from the chief financial officer and executive vice president

declined again this year. As volume falls in First-Class Mail while overall volume and workload increase, it becomes more evident that the mail monopoly no longer has the business value it did at the time of postal reorganization. For the first time in history, in 2005 First-Class Mail is projected to fall below Standard Mail as our largest volume product. The shift in the mail mix from First-Class Mail to lower revenue-per-piece mail classes has resulted in stagnant revenue growth and shrinking contribution. Nonetheless, the costs of universal service will continue to increase.

Public Law 108-18 adjusted our overpaid Civil Service Retirement System (CSRS) payments beginning in 2003, but also shifted to us the cost associated with military service of our employees and imposed on us an escrow requirement starting in 2006. As required by P.L.108-18, we provided detailed proposals to Congress, the President and the Government Accountability Office in which we recommended that the Department of the Treasury resume the obligation to pay the CSRS costs associated with the military service of postal employees. We also recommended that Congress eliminate the escrow requirement for all "savings" realized under P.L.108-18 after 2005, and that these "savings" be used to pre-fund postal retiree health benefits. We are still awaiting resolution of these issues.

By 2005, the "savings" realized under P.L.108-18 will have been fully absorbed by the escalating cost of postal operations. The greatest factors in this rise in costs are increasing personnel compensation costs, driven largely by health benefits inflation and the continuing need to service an ever-larger delivery and retail network. Each of these business drivers, as well as First-Class Mail volume erosion, a growing retiree population and increasing cost pressures are structural in nature and each must be seen as an ongoing reality.

For 2005, our financial plan calls for virtual "breakeven" results, with revenue falling below this year's level due to the continuing shift in the mail mix as our costs continue to escalate. Under our conservative financial plan, a net loss of approximately $200 million in 2005 is forecast.

Our strategy for 2005 is to continue to pursue our transformation strategies, leveraging our resources to build the business. While these strategies have resulted in historic productivity levels and cost savings over the last few years, we must recognize that additional efforts to take costs out of system will require fundamental structural change. This will require public policy which does not interfere with management's decisions to take costs out of the system.

In closing, I would like to thank all of our postal employees for their continued hard work and dedication. Without the efforts of each of them, we could not have achieved this phenomenal financial and operational performance.

Richard J. Strasser, Jr.
Chief Financial Officer and
Executive Vice President