official 2007 exchange rate

I went on the US Embassy in London IRS section and they had this in their FAQ:

"What exchange rate should I use when I convert my income to US dollars?"

The 2007 average rate was $2.0018 to £1

Are we allowed to use that, then? I.e. multiply all £ amounts by that factor on the return?

That doesn't seem to be how the IRS sees it.

Have a look at Pub. 54, "Tax Guide for U.S. Citizens and Resident Aliens Abroad":

"You must make all federal income tax determinations in your functional currency. The U.S. dollar is the functional currency for all taxpayers except some qualified business units (QBUs). ...

"Make all income tax determinations in your functional currency. If your functional currency is the U.S. dollar, you must immediately translate into dollars all items of income, expense, etc. (including taxes), that you receive, pay, or accrue in a foreign country and that will affect computation of your income tax. Use the exchange rate prevailing when you receive, pay, or accrue the item."

It's a lot more hassle, yes, but unfortunately it doesn't sound as if it is up for debate. 

Ah, yes. The same Embassy FAQ has a link to a full chart of rates, where they say, "Please note these are unofficial rates and supplied solely for the convenience of our customers." The bold text is original.

I would take this as saying it's a useful check to see if your numbers are realistic.

http://london.usembassy.gov/irs/irsxchng.htm

You can use the average exchange rate for convenience.  For example, if you earn £1000 per week, and multiply each week times that week's exchange rate, you should get the exact same number as if you multiply £52,000 times the average.  I use the average for income earned evenly throughout the year, and the exact exchange rate for unusual and one-time items.  The tax difference is immaterial at sums under £10,000 if you are also filing Forms 2555 and/or 1116 and thus paying no US tax anyways.

There's also the Fedaral Reserve Bank's Foreign Exchange Rates, which basically state the same exact thing.

That's true, Lizzit... If the IRS doesn't especially care that the income reported be "penny perfect," then maybe I don't need to go into as much detail as I have--as long as the income is more or less offset by the foreign income exclusion and there is no tax owed.