WASHINGTON -- Thanks to an aggressive campaign of cost-cutting, including a major cut in staff, the Postal Service is finishing the fiscal year in better financial condition than anticipated.

Postmaster General John E. Potter said Friday the agency expects to finish the fiscal year this month with a 1.2 billion loss.

The post office had expected to lose $1.35 billion for the year, and at times after the terrorist attacks and anthrax-by-mail contamination loss estimates threatened to reach several billion dollars.

In addition to the improvement this year, continued cost-cutting and the rate increase that took effect this summer are expected to push the post office into the black in 2003 with a profit of $600 million, he said.

Potter repeated his promise that postal rates won't go up again until at least 2004.

He spoke at the monthly meeting of the Postal Service board of governors. The board met in the same 11th-floor room at postal headquarters where they were gathered a year ago on the day of the terrorist attacks. That meeting was cut short after seeing the smoke rising from the Pentagon across the Potomac River in Virginia.

Richard J. Strasser, the post office's chief financial officer, said Friday the U.S. economy appears to have turned the corner, but the agency isn't expecting a strong rebound. Mail volume continues to be threatened by switching to electronic mail and by strong competition for package business, he noted.

"It's been a white-knuckle year in terms of managing our cash position," said Strasser.

He said the post office expects to finish fiscal 2002 with $66.5 billion in revenues and $67.7 billion in expenses for a loss of $1.2 billion. In 2003, he said, the expectation is for income of $70.4 billion and spending of $69.8 billion, leaving the agency $600 million in the black.

That, Strasser said, will allow the post office to pay off a small part of its accumulated debt, currently about $12 billion.

While Congress and President Bush have provided about $750 million to assist the post office in recovering from the anthrax and terrorist attacks that money has been kept in a separate account for those purposes and is not included in the overall accounting for postal operations.

The post office receives a small federal payment for handling mail for the blind and voters overseas but has not gotten a taxpayer subsidy for operations since 1982.

Potter said the agency is finishing the fiscal year with 23,000 fewer career workers that a year ago and plans to cut another 12,000 positions next year as it takes advantage of improved automation.

Currently the post office has about 753,000 workers, down from an all-time high of 797,795 in 1999. Most of the cuts have been through attrition, Potter said, and that continues to be the plan. He said postal managers work closely with the agency's unions in making changes in staffing and procedures.

Despite the staff cuts, mail service continued to grow with the population rising and new homes and business being built. The post office adds about 1.4 million delivery points each year and currently delivers mail to 121 million homes and businesses.

Potter, in an interview following the board meeting, said the agency is continuing to urge changes in the law to give it more flexibility in operations and pricing.

A postal reform bill died in committee in the House of Representatives this year.

Improvements are being made.

Potter said that thanks to better technology, some 75 percent of handwritten letters can now be read and handled by machines rather than having to be read by people. A newly announced plan would allow small publishers to combine their mailings with larger firms to take advantage of volume discounts, and improve postal efficiency.

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