This Plan builds upon the momentum of the 2002 Transformation Plan, while helping to ensure that we can respond to changing customer needs, market requirements, technological developments, and legal requirements. We will continue our commitment to take $1 billion out of the cost base each year through 2010, which, in combination with revenue growth strategies, will sustain our mission of providing universal service at reasonable rates.

Evolutionary Network Development

We will establish Regional Distribution Centers (RDCs) mainly from existing facilities. In addition to other responsibilities, RDCs will consolidate parcel and bundle distribution to take advantage of shape-based processing and automation efficiencies, as well as function as consolidated transfer points for all mail.

We are expanding our transportation surface reach through the creation of Surface Transfer Centers which will provide consolidation opportunities to maximize vehicle capacity and eliminate redundant transportation. For those products that must remain in the air we are creating partnerships that allow us to purchase a low cost air solution. Through these efforts we are creating a flexible logistics network that reduces costs, increases operational effectiveness, and improves the consistency of service.

In the last decade a combination of changes in mail mix/mailer behavior and Postal Service automation capability provides the opportunity to consolidate and streamline postal processing.

In 2005 with the volume of Standard Mail exceeding First-Class Mail, the proportion of mail drop shipped into the postal network in downstream locations continues to increase. With single-piece First-Class Mail volume continuing its eight year decline there are less cancellations and processing at originating processing centers. As workshare First-Class Mail volume increases it, too, bypasses originating operations and is first processed on automation at destinating network facilities.

Further, Postal Service automation has not only provided significant efficiency increases, but it also has higher throughput rates and is more flexible. For example, the new Automated Package Processing System (APPS) sorts bundles and packages. The combination of changes

in our customers’ mail and mailing patterns, and improvements in postal automation provides the opportunity to consolidate processing classes of mail. That consolidation yields less complex transportation network requirements, which will be less expensive.

Outlook

Even before the recent hurricanes took their toll on the economy, we expected economic growth in 2006 to slow down. Hurricanes Katrina and Rita dealt a significant blow to the nation’s energy infrastructure. Oil producing platforms and oil refineries were shut down. The growth in the U.S. economy in the last two years had been largely due to growth in consumer spending and the housing market. Consumer spending growth in 2006 is expected to weaken as energy costs squeeze spending power. The Federal Reserve increased the federal funds rate at its November 2005 meeting indicating that it is more worried about the inflationary risk rather than downside growth risks. Higher interest rates are expected to slow the growth in the housing market.

We requested and the PRC issued a Decision that postage rates be increased by 5.4% across-the board. The new rates, accepted by the Board of Governors on November 14, 2005, will be implemented January 8, 2006.

With the projected 2006 retail sales slowdown and the expected rate increase, we project a lower growth rate for Standard Mail volume and a small volume decline in workshare First-Class Mail. Economy-wide retail sales, an economic indicator for Standard Mail and workshare First-Class Mail, grew 5.0% in 2005, but we expect them to slacken as a result of increased energy prices and interest rates. Increased energy prices reduce consumer’s purchasing power thus diverting consumer expenditures from other goods and services, and higher interest rates will dampen the demand in the housing sector. With decreased mortgage refinancing, less cash is available to consumers for large purchases.

Even with the pause in 2005, we do not foresee a reversal of the multiyear downward trend in total First-Class Mail volume. Looking at single-piece and workshare First-Class Mail volume together, we can see that economic growth has only slowed the declines in First-Class Mail volume and revenue in 2005. With a projected slowdown in economic growth in 2006, our forecast is for First-Class Mail volume to decline in 2006.