Item 1. Business

Financial Information about Segments

We operate in one segment throughout the United States and internationally.

Narrative Description of Business

Overview

The United States Postal Service (we) commenced operations on July 1, 1971, as an independent entity of the executive branch of the United States government. Under the Postal Reorganization Act, we have a legal mandate to offer a "fundamental service" to the American people on a "fair and equitable basis." We fulfill this legal mandate to offer universal service at a fair price by offering a variety of classes of mail services without undue discrimination among our many customers. This means that within each class of mail our price does not unreasonably vary by customer for the levels of service we provide.

We serve individual and commercial customers throughout the nation. We compete for business in the communications, distribution and delivery, advertising and retail markets. The rates and fees for postal services are subject to a regulatory review process controlled by the independent Postal Rate Commission (PRC).

Our mailing services (products) are distributed through our more than 37,000 Post Offices, stations and branches, contract postal units, our website usps.com and a large network of consignees. We deliver mail to 142 million city, rural, Post Office box, and highway delivery points. We conduct our significant operations primarily in the domestic market, with international operations representing less than 3% of our total revenue.

Our labor force is primarily represented by the American Postal Workers Union, National Association of Letter Carriers, National Postal Mail Handlers Union and National Rural Letter Carriers Association. Approximately 90% of our career employees are covered by collective bargaining agreements. By law, we consult with management organizations representing most of the employees not covered by collective bargaining agreements. These consultations provide an opportunity to participate directly in the planning, development, and implementation of programs and policies affecting non-bargaining employees in the field. The management organizations include the National Association of Postal Supervisors, the National League of Postmasters, and the National Association of Postmasters of the United States. We participate in federal employee benefit programs as required by statute, for retirement, and workers’ compensation.

Although we are not subject to regulation by the Securities and Exchange Commission (SEC), we comply voluntarily with the financial reporting requirements of the SEC to the extent that these requirements may be reasonably applied to a non-publicly traded, government-owned entity with a mandate to break even over time. Therefore, this report excludes certain SEC reporting elements normally included in a Form 10-K. Specifically, we have excluded: Item 4, Submission of Matters to a Vote of Security Holders; Item 5, Market for Registrant’s Common Equity and Related Stockholder Matters; and Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Strategy

Since publication of our 2002 Transformation Plan, we have delivered on our promise of focus and results.

Our new Strategic Transformation Plan 2006-2010 builds on the foundation of the earlier plan and continues its momentum. In 2002 we were emerging from the multiple shocks of an economic slowdown, September 11, and the anthrax attacks. Mail volume fell, and America’s confidence in the mail was undermined. The 2002 Transformation Plan became our roadmap to recovery. It re-instilled confidence among our employees and set challenging but achievable targets in service and cost management. Productivity growth has been steady and strong. We have reduced complement by more than 80,000 through attrition and have realized cumulative savings of more than $15 billion through the end of 2005. Better service and stable rates have attracted new business. Advertising mail volume is up 10% in two years. To date, increases in advertising mail revenue have offset losses caused by competitive, technological changes that are moving communications, bills and payments online.

In our Strategic Transformation Plan 2006-2010, we commit to making further advances in service, productivity, and employee engagement. We will maintain a tight focus on our core products to ensure that universal, affordable postal services continue to have the power to promote communication, reach key audiences, and help bind America together. We are committed to continue taking $1 billion out of our cost base each year through 2010 while employing equally aggressive measures to grow the business.