Modest was something of an understatement. Revenue at An Post grew by £26 million (#33 million) to £451.2 million but operating profits fell £2.8 million to £7.7 million. This meant profit margins fell to 1.7 per cent from 2.5 per cent in 1999. A year ago, the group's chief executive, Mr John Hynes, described the 1999 margin as "completely inadequate".

But the bad news did not stop there. As expected, An Post reported a loss on its post office business "for the first time in many years". The exact loss was not revealed in its 70-page annual report, though it is believed to be about £3 million. An earlier forecast by the company of an £8.9 million loss proved wrong.

If the group's forecasts for the 2000-2004 period are correct, the deficit will grow to more than £13 million this year with mounting losses accumulating to £82 million in five years.

It is a grave situation. The group held an extraordinary general meeting with senior officials from the Department of Public Enterprise and Department of Finance yesterday to inform them of its increasingly difficult position.

Returns from core activities are increasingly inadequate, An Post said. Citing high inflation and an increasing wage bill, the group's chairman Mr Stephen O'Connor warned that "cost increases which outstrip the growth in revenue cannot be sustained and are seriously detrimental to the future of An Post".

Letter post price increases can no longer be avoided, he added. Pointing out that the cost of a stamp has not increased since 1990, An Post has submitted an application for a price rise on international mail to the Director of Telecommunications Regulation, Ms Etain Doyle, who now overseas its business. When that process is ended, it will seek a price rise for domestic post.

Inflation has risen 29 per cent since 1990, but senior managers said at a briefing that the group would not seek an increase of that scale from Ms Doyle. Mr Hynes declined to reveal the precise rise the company has sought.

Ms Doyle's regulation of the business is a new departure and her decision will have a crucial bearing on An Post's viability going forward.

Of more immediate importance, however, will be the Government's decision on the future funding of the post office network.

Described as technically insolvent in a study by the industrial relations consultant, Mr Phil Flynn, that business is now the subject of a separate analysis by an Inter-Departmental group of civil servants appointed by the Minister for Public Enterprise, Ms O'Rourke. An Post said yesterday that it expected that group to report to Ms O'Rourke by the end of this month.

Yet the reality is that senior Government figures are already familiar with Mr Flynn's report and, as such, they are fully aware of the group's position. Mr Flynn said the cash crisis was not confined to the rural network and his overall assessment was that An Post cannot reconcile its necessity to trade effectively with an obligation by the Government not to close any sub-post offices. He said there was no option but for the Government to subsidise the business.

It was a theme taken up yesterday by Mr Hynes. Stating that the group cannot continue to shoulder operating losses, he said: "We want a sustainable post office network - that will involve a subsidy."

Mr Hynes rejected suggestions that the company should use its cash reserves of £160 million to fund the business. "That would be the equivalent of putting the furniture in the fire."

A Government decision on funding, if taken, will have a strong impact on An Post's strategic options. The group wants to report to Government on this matter in the autumn. While Mr Hynes said it will give equal consideration to the possibility of going it alone as to a strategic alliance, he noted that postal companies without international links would be increasingly marginalised as the Europe-wide industry consolidates.

He said it was "fair" to conclude that An Post would not conclude a deal until uncertainty over the funding of its post office network was resolved. It is an assessment likely to a shared by Deutsche Post and the Dutch operator, TNT Post Group, who are believed to be on top of Mr Hynes's list of preferred partners.

On the plus side, the group wants to invest £35 million each year in the business and plans spending £100 million by 2003 to develop automated "mail hubs" in Dublin, Cork, Portlaoise and Athlone.