KPMG LLP
2001 M Street NW
Washington, DC 20036

Acting Inspector General, U.S. Department of Commerce and
Under Secretary of Commerce for Intellectual Property and
Director of the U.S. Patent and Trademark Office:

We have audited the accompanying consolidated balance sheets of the U.S. Patent and Trademark Office (USPTO), an agency within the U.S. Department of Commerce, as of September 30, 2007 and 2006, and the related consolidated statements of net cost, changes in net position, cash flows, and combined statements of budgetary resources (hereinafter referred to as “financial statements”) for the years then ended. The objective of our audits was to express an opinion on the fair presentation of these financial statements. In connection with our fiscal year 2007 audit, we also considered the USPTO’s internal control over financial reporting and performance measures and tested the USPTO’s compliance with certain provisions of applicable laws, regulations, and contracts that could have a direct and material effect on these financial statements.

Summary

As stated in our opinion on the financial statements, we concluded that the USPTO’s financial statements as of and for the years ended September 30, 2007 and 2006, are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles.

As discussed in our opinion, the USPTO changed its method of reporting the reconciliation of net cost of operations to budget in fiscal year 2007.

Our consideration of internal control over financial reporting would not necessarily disclose all matters in the internal control that might be material weaknesses as defined in the Internal Control Over Financial Reporting section of this report. We noted no matters involving the internal control and its operation that we considered to be material weaknesses as defined in this report.

We noted no deficiencies involving the design of the internal control over the existence and completeness assertions related to key performance measures.

The results of our tests of compliance with certain provisions of laws, regulations, and contracts disclosed a potential instance of noncompliance with the Anti-Deficiency Act that is required to be reported under Government Auditing Standards, issued by the Comptroller General of the United States, and Office of Management and Budget (OMB) Bulletin No. 07-04, Audit Requirements for Federal Financial Statements.

The following sections discuss our opinion on the USPTO’s financial statements; our consideration of the USPTO’s internal controls over financial reporting and performance measures; our tests of the USPTO’s compliance with certain provisions of applicable laws, regulations, and contracts, and management’s and our responsibilities.

OPINION ON THE FINANCIAL STATEMENTS

We have audited the accompanying consolidated balance sheets of the U.S. Patent and Trademark Office as of September 30, 2007 and 2006, and the related consolidated statements of net cost, changes in net position, cash flows, and the combined statements of budgetary resources for the years then ended.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the U.S. Patent and Trademark Office as of September 30, 2007 and 2006, and its net costs, changes in net position, budgetary resources, and cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 15 to the financial statements, the USPTO changed its method of reporting the reconciliation of net cost of operations to budget in fiscal year 2007.

The information in the Management’s Discussion and Analysis section is not a required part of the financial statements, but is supplementary information required by U.S. generally accepted accounting principles and OMB Circular A-136, Financial Reporting Requirements. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of this information. However, we did not audit this information and, accordingly, we express no opinion on it.

Our audits were conducted for the purpose of forming an opinion on the financial statements taken as a whole. The information in the Other Accompanying Information section on pages 101 through 138 is presented for purposes of additional analysis and is not required as part of the financial statements. This information has not been subjected to auditing procedures and, accordingly, we express no opinion on it.

INTERNAL CONTROL OVER FINANCIAL REPORTING

Our consideration of the internal control over financial reporting was for the limited purpose described in the Responsibilities section of this report and would not necessarily identify all deficiencies in the internal control over financial reporting that might be significant deficiencies or material weaknesses.

A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the USPTO’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with U.S. generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the USPTO’s financial statements that is more than inconsequential will not be prevented or detected by the USPTO’s internal control over financial reporting. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the USPTO’s internal control.

In our fiscal year 2007 audit, we did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses as defined above.

INTERNAL CONTROL OVER PERFORMANCE MEASURES

Our tests of internal control over performance measures, as described in the Responsibilities section of this report, disclosed no deficiencies involving the design of the internal control over the existence and completeness assertions related to key performance measures.

COMPLIANCE AND OTHER MATTERS

Our tests of compliance with certain provisions of laws, regulations, and contracts, as described in the Responsibilities section of this report, exclusive of those referred to in the Federal Financial Management Improvement Act of 1996 (FFMIA), disclosed a potential instance of noncompliance with the Anti-Deficiency Act (ADA) and the Patent and Trademark Office Fee Fairness Act of 1999 that is required to be reported herein under Government Auditing Standards and Office of Management and Budget (OMB) Bulletin No. 07-04, and is described below.

Potential Anti-Deficiency Act Violation. In fiscal year 2007, we were informed that in fiscal year 2005, obligations related to the processing of patent applications temporarily exceeded fees collected related to these applications. As a result, fees intended for use in processing trademark registrations were used temporarily to fund patent obligations. The U.S. Department of Commerce Office of General Counsel is reviewing this matter to determine whether a violation of the Anti-Deficiency Act and the Patent and Trademark Fee Fairness Act of 1999 occurred, but a conclusion has not yet been reached. Since OGC’s review is not complete, the outcome of this matter, and any resulting ramifications, is not presently known.

The results of our tests of FFMIA disclosed no instances in which the USPTO’s financial management systems did not substantially comply with the three requirements discussed in the Responsibilities section of this report.

RESPONSIBILITIES

Management’s Responsibilities. The United States Code Title 31 Section 3515 and 9106 require agencies to report annually to Congress on their financial status and any other information needed to fairly present their financial position and results of operations. To meet these reporting requirements, the USPTO prepares and submits financial statements in accordance with OMB Circular A-136.

Management is responsible for the financial statements, including:

Preparing the financial statements in conformity with U.S. generally accepted accounting principles;
Preparing the Management’s Discussion and Analysis (including the performance measures);
Establishing and maintaining effective internal controls over financial reporting; and
Complying with laws, regulations, and contracts applicable to the USPTO.

In fulfilling this responsibility, management is required to make estimates and judgments to assess the expected benefits and related costs of internal control policies.

Auditors’ Responsibilities. Our responsibility is to express an opinion on the fiscal year 2007 and 2006 financial statements of the USPTO based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Bulletin No. 07-04. Those standards and OMB Bulletin No. 07-04 require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the USPTO’s internal control over financial reporting. Accordingly, we express no such opinion.

An audit also includes:

Examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements;
Assessing the accounting principles used and significant estimates made by management; and
Evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

In planning and performing our fiscal year 2007 audit, we considered the USPTO’s internal control over financial reporting by obtaining an understanding of the USPTO’s internal control, determining whether internal controls had been placed in operation, assessing control risk, and performing tests of controls as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements. We limited our internal control testing to those controls necessary to achieve the objectives described in Government Auditing Standards and OMB Bulletin No. 07-04. We did not test all internal controls relevant to operating objectives as broadly defined by the Federal Managers’ Financial Integrity Act of 1982. The objective of our audit was not to express an opinion on the effectiveness of the USPTO’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the USPTO’s internal control over financial reporting.

As required by OMB Bulletin No. 07-04 in our fiscal year 2007 audit, with respect to internal control related to performance measures determined by management to be key and reported in the Management’s Discussion and Analysis section, we obtained an understanding of the design of internal controls relating to the existence and completeness assertions and determined whether these internal controls had been placed in operation. We limited our testing to those controls necessary to report deficiencies in the design of internal control over key performance measures in accordance with OMB Bulletin No. 07-04. However, our procedures were not designed to provide an opinion on internal control over reported performance measures and, accordingly, we do not provide an opinion thereon.

As part of obtaining reasonable assurance about whether the USPTO’s fiscal year 2007 financial statements are free of material misstatement, we performed tests of the USPTO’s compliance with certain provisions of laws, regulations, and contracts, noncompliance with which could have a direct and material effect on the determination of the financial statement amounts, and certain provisions of other laws and regulations specified in OMB Bulletin No. 07-04, including certain provisions referred to in FFMIA. We limited our tests of compliance to the provisions described in the preceding sentence, and we did not test compliance with all laws, regulations, and contracts applicable to the USPTO. However, providing an opinion on compliance with laws, regulations, and contracts was not an objective of our audit and, accordingly, we do not express such an opinion.

Under OMB Bulletin No. 07-04 and FFMIA, auditors are required to report whether the USPTO’s financial management systems substantially comply with (1) Federal financial management systems requirements, (2) applicable Federal accounting standards, and (3) the United States Government Standard General Ledger at the transaction level. To meet this requirement, we performed tests of compliance with FFMIA Section 803(a) requirements.

This report is intended solely for the information and use of the USPTO’s and the Department of Commerce’s management, the U.S. Department of Commerce’s Office of Inspector General, OMB, the U.S. Government Accountability Office, and the U.S. Congress and is not intended to be and should not be used by anyone other than these specified parties.