value of our settlement accounts and result in a gain or loss from revaluation reported in the results from operations. The actual currency used to settle accounts varies by country.

The impact on the statement of operations from this revaluation was a gain of $10 million in 2004, a loss of $9 million in 2003, and a loss of $7 million in 2002. In addition to the year end revaluation, we also recognize gains and losses on our payables and receivables when we settle with foreign postal administrations. The impact on the statement of operations from these settlement losses was $15 million in 2004, $12 million in 2003 and $7 million in 2002.

Supplies, Advances and Prepayments

Supplies, advances and prepayments are primarily composed of our inventories of supplies, motor vehicle parts and parts for mail processing equipment. We value our inventories at the lower of average cost or current market price. Total inventories amounted to $118 million at the end of 2004 and $123 million at the end of 2003.

Property and Equipment

We record property and equipment at what it cost us to acquire the assets, including the interest we pay on the money we borrow to pay for the construction of major capital additions. This interest amounted to $5 million in 2004, $1 million in 2003, and $23 million in 2002. Repairs and maintenance are charged to expense as incurred. This expense amounted to $744 million in 2004, $692 million in 2003 and $577 million in 2002.

We depreciate buildings and equipment over their estimated useful lives, which range from 3 to 75 years, using the straightline method. We amortize leasehold improvements over the period of the lease or the useful life of the improvement, whichever time is shorter.

Impaired Assets

We record losses on long-lived assets when events and circumstances indicate that the assets might be impaired. In accordance with Statement of Financial Accounting Standards (FAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, we have written down our impaired assets to the lower of cost or fair value. In 2004 it was determined that an unused Post Office building in a major city was impaired. A contract granting a prospective buyer an option to buy this building has been signed. This option is contingent on the Postal Service making all necessary repairs to the building. An impairment loss of $24 million was recorded in 2004 in order

to reduce the carrying value of the property to its estimated fair value, including the cost of necessary repairs. No material impairments were recorded in 2003 or 2002.

Allowance for Doubtful Accounts

We provide an allowance for doubtful accounts in our outstanding receivables based on our collection history and an estimate of uncollectible accounts.

Revenue Recognition/Estimated Prepaid Postage

We recognize revenue when service is rendered. Estimated prepaid postage is the amount of cash we estimate that we collected by the end of the year for services that we will perform in the following year. In 2002 after extensive analysis, we changed our estimate of the sampling period for meter customers from 92 days to 30 days to more closely reflect the meter resetting practices of our customers. The impact of this change in estimate was a $113 million reduction of the liability in 2002.

Compensation and Benefits Payable

This is the salaries and benefits we owe to current and retired employees, including the amounts employees have earned but have not yet been paid, current workers' compensation, unemployment costs and health benefits.

Segment Information

We operate in one segment throughout the United States and internationally. Our international operations are not significant.

Deferred Retirement Benefits and Costs

We are an independent establishment of the executive branch of the U.S. government. We provide pension benefits as defined by OPM and, therefore, have a parent-subsidiary type relationship. We account for our participation in the U.S. government sponsored retirement plans as a participant in a multi-employer plan arrangement in accordance with FAS 87, Employers' Accounting For Pension Costs. See notes 6 and 7 for additional information.