Financial Section Part I

In our operations, we established broad new internal processes for quality control and timely cross-functional hand-offs. We began live tests with our Flats Sequencing System, the next step in postal mail processing automation. A filing was submitted to the PRC for an advisory opinion on our delivery network redesign. This will support the need for an evolutionary network design. We also started multiple efforts to improve the accuracy and quality of mailing addresses.

The full text of our Strategic Transformation Plan 2006–2010 is available at www.USPS.com.

Services (Products)

The Postal Service is the centerpiece of the U.S. mailing industry. We provide a wide variety of services and products to meet almost any mailing need. Some of our major services and products are:

FIRST-CLASS MAIL

Includes postcards, letters, or any other advertisement or merchandise up to 13 ounces. This service (or Express Mail or Priority Mail) is required for personal correspondence, handwritten or typewritten letters and bills or statements of account.

PRIORITY MAIL

This 1–3-day non-guaranteed delivery service is typically used to send documents, gifts and merchandise.

EXPRESS MAIL

This overnight money-back guaranteed service includes tracking, proof of delivery and insurance up to $100. Delivery is offered to most destinations and is available 365 days a year with no extra charge for weekend and holiday delivery.

PERIODICALS

Offered for newspaper, magazine and newsletter distribution and requires prior authorization by the Postal Service.

STANDARD MAIL

Is offered for any item, including advertisements and merchandise weighing less than 16 ounces that are not required to be sent using First-Class Mail. Standard Mail is typically used for bulk advertising to multiple delivery addresses. Content restrictions apply for authorized nonprofit mailers.

PACKAGE SERVICES

Are offered for any merchandise or printed matter weighing up to 70 pounds. These services include Parcel Post, Bound Printed Matter, Library Mail and Media Mail.

SPECIAL SERVICES

Offer a variety of enhancements that add value to mail by providing added security, proof of delivery or loss recovery. These services include: Certified Mail, Registered Mail, Delivery Confirmation, Signature Confirmation and insurance up to $1,000.

MONEY ORDERS

Are offered as a safe, convenient and economical alternative to sending cash through the mail. They can be purchased at any Post Office as well as from any rural route carrier. Postal money orders are available for any amount up to $1,000 and are restricted to a daily purchase limit of $10,000 per customer. Money orders can be cashed at any Post Office or can be deposited or negotiated at financial institutions. Money orders are replaced if damaged, lost or stolen.

Rate and Classification Activity

The PRC is an independent establishment of the executive branch of the United States government. The PRC reviews our proposals to establish and change domestic mail rates, fees and mail classifications. The PRC holds public hearings and issues recommended decisions to the Board of Governors of the Postal Service, who approve, reject, or, in some cases modify the PRC’s recommendations. The PRC is also authorized to issue advisory opinions concerning proposed changes in the nature of postal services that affect service on a nationwide or substantially nationwide basis, to recommend decisions regarding rate complaints by interested parties and to report regarding complaints that parties are not receiving postal services in accordance with the policies of the Postal Reorganization Act. The PRC is also responsible for promulgating rules and regulations and establishing procedures deemed necessary and proper to carry out their functions and obligations.

On January 8, 2006, the Postal Service implemented an average 5.4% postage rate increase across all rate classifications in order to generate revenues to partially fund the escrow requirements set forth in the Postal Civil Service Retirement System Funding Reform Act of 2003, Public Law 108-18 (P.L.108-18).

On May 3, 2006, the Postal Service filed a request with the PRC to increase prices by an average of 8.5%. This request is not across-the-board, but it better aligns our prices with our costs. The filing also includes numerous innovative classification proposals. The most sweeping of these classification proposals is more extensive shape-based pricing. The last rate case of this nature was in 2001. The filing also contains a proposal for a “forever” stamp. This stamp would be sold at the prevailing First-Class Mail single-piece letter rate. Consumers would be able to use this stamp for the prevailing First-Class single-piece rate forever. Other proposals are designed to reduce “undeliverable as addressed” First-Class Mail, improve the handling of Periodicals and enhance our insurance offerings. The PRC has 10 months from the filing date to submit its findings to the Board of Governors for its review.