The past year has proven to be an exciting period in which to serve the American people as a member of Secretary Rice's management team, implementing transformational diplomacy and advancing the President's foreign policy and management agenda. Very few agencies or corporations have the depth and variety of challenges that the men and women of the Department of State face daily as we work to create a more secure, democratic, and prosperous world for the benefit of the American people and the international community.

The Department operates in over 260 locations in 172 countries, while conducting business in 150 currencies and an even larger number of languages. One hundred and eighty-four missions abroad submit business plans each year that demonstrate their achievements and describe their initiatives, while thousands of financial professionals around the globe plan, budget, obligate, disburse, and account for billions of dollars in annual appropriations. Despite these complexities, the Department pursues a commitment to integrity, transparency, and accountability that is the equal of any multi-national corporation.

For the past five years, the President has challenged us to meet new rigorous standards through the President's Management Agenda (PMA). The Department has made great strides in meeting the goals of the PMA, as evidenced by "double green" scores on the scorecard for three of the five USG-wide Presidential initiatives at the end of FY 2005.

The Department has a proud tradition of being effective and accountable stewards of the taxpayer's money. We have obtained unqualified opinions on our annual financial statements from our independent auditors for the better part of the last decade. However, late in FY 2005, the Department became aware of potentially material amounts of Department-owned personal property held by host countries and contractors, including aircraft and spare parts inventories, which had not been reflected in our financial statements. Due to the need for a complete and thorough analysis, the complexity of the matters involved, and the accelerated financial reporting requirements, the Department was unable to satisfy our independent auditors with regard to the presentation of personal property by November 15, 2005.

As a result, and as more fully explained in the Independent Auditor's Report, the independent auditors issued a qualified opinion on our FY 2005 and FY 2004 financial statements released on November 15, 2005, and reported the personal property area as a material weakness in internal controls. Since then, the independent auditors have satisfied themselves about the amounts presented as personal property in our FY 2005 and FY 2004 financial statements and issued an unqualified opinion thereon, dated December 14, 2005, which has cleared the way for updating this Report today.

The independent auditor also identified Information System Security as a material weakness in internal controls due to the vulnerability of our information system networks to unauthorized access. The Department recognizes the importance of effective internal controls and is committed to resolving the material weaknesses identified by the independent auditor as quickly as possible. The Department will implement remedies to these areas and track our progress through the Management Control Steering Committee - the body charged with overseeing the Department's management control program under the Federal Managers' Financial Integrity Act.

The Report that follows details how American diplomacy is helping to transform the world for the better during a time of unprecedented historical change and opportunity. This Report and the achievements that it describes could not have been accomplished without the extraordinary efforts of the Department's dedicated staff.

Sidney L. Kaplan Acting Assistant Secretary for Resource Management and Chief Financial Officer December 15, 2005

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