PRUDENCE CONSERVANCY, INC.

TABLE OF CONTENTS

Page

Independent Auditor's Report I

Financial Statements:

Statements of Financial Position 2

Statements of Activities 3

Statements of Cash Flows 4

Notes to Financial Statements 5‑9

Supplemental Information:

Schedules of Program and Supporting Services 10

DUFOUR & SCHMITT, LTD

50 EXCHANGE TERRACE TEL (401) 751‑7154

SUITE 310 FAX (401) 421‑7806

PROVIDENCE, R.I. 02903

The Board of Directors

Prudence Conservancy, Inc.

We have audited the accompanying statements of financial position of Prudence Conservancy, Inc. (a nonprofit organization) as of December 31, 2003 and 2002, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the Organization's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of financial misstatement. An audit includes, examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Prudence Conservancy, Inc. as of December 31, 2003 and 2002, and the changes in net assets and cash flows for the years then ended in conformity with generally accepted accounting principles.

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information presented on page 9 is presented for the purpose of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

DUFOUR & SCHMITT, LTD

March 4, 2004

PRUDENCE CONSERVANCY, INC.

STATEMENTS OF FINANCIAL POSITION

December 31, 2003 and 2002

ASSETS 2003 2002

Cash and cash equivalents (note 2 and 7) $ 130,753 150,543

Unconditional promises to give (note 5):

Temporarily restricted 38,430 ‑

Grant receivable ‑ 2,416

Prepaid expense 7,080 3,623

Property and equipment, net of accumulated depreciation of

$30,501 in 2003; $23,325 in 2002 (note 3 and 4) 1,001,685 949,409

Total assets $ 1,177,948 1,105,991

LIABILITIES

Accounts payable $ 1,092 890

Accrued expenses 2,200 1,600

Total liabilities 3,292 2,490

NET ASSETS

Unrestricted 55,482 46,746

Temporarily restricted (note 2) 124,074 113,931

Permanently restricted (note 2) 995,100 942,824

Total net assets 1,174,656 1,103,501

Total liabilities and net assets $ 1,177,948 1,105,991

The accompanying notes are an integral part of these financial statements

PRUDENCE CONSERVANCY, INC.

STATEMENT OF ACTIVITIES

Year ended December 31. 2003 and 2002

2003 2002

Temporarily Permanently

Unrestricted Restricted Restricted Total Total

Revenues, gains, and other support:

Contributions and dues:

Unrestricted (note 6) $ 21,828 21,828 12,564

Restrxied (note 2 and 5) 8,324 62,170 70,494 6,695

Grants 2,274 2,274 8,140

Interest and dividends 172 600 772 2,201

Rental income 1,000 1,000 1,000

Fundraising events 758 758 1,003

Product sales 695 695 1,405

Net assets restricted by board:

Board designated restrictions (note 6) (6,825) 6,825 ‑

Net asse!s released from restrictions:

Restrictions satisfied by payment (59,452) 59,452 ‑ ‑

Total revenue, gains and other

support 28,226 10,143 59,452 97,821 33,008

Expenses:

Program services 4,501 ‑ ‑ 4,501 7,819

Supporting services

Management and general 12,801 7,176 19,977 18,042

Fund-raising and product expense 2,188 2,188 2,727

Total expenses 19,490 ‑ 7,176 26,666 28,588

Change in net assets 8,736 10,143 52,276 71,155 4,420

Net assets at beginning of year 46,746 113,931 942,824 1,103,501 1,099,081

Net assets at end of year $ 55,482 124,074 995,100 1,174,656 1,103,501

The accompanying notes are an integral part of these financial statements

PRUDENCE CONSERVANCY, INC.

STATEMENTS OF CASH FLOWS

Years Ended December 31, 2003 and 2002

2003 2002

Cash flows from operating activities:

Increase in net assets $ 71,155 4,420

Adjustments to reconcile increase in net assets to net cash

provided by operating activities:

Depreciation 7,176 6,271

Decrease (increase) in operating assets:

Uncollected promises to give (38,430) ‑

Grants receivable 2,416 (916)

Prepaid expenses (3,457) (2,083)

Increase (decrease) in operating liabilities:

Accounts payable and accrued expenses 802 279

Net cash provided by operating activities 39,662 7,971

Cash flows from investing activities:

Payments for property and equipment (59,452) (47,274)

Net cash flows used by investing activities (59,452) (47,274)

Net increase in cash and cash equivalents (19,790) (39,303)

Cash and cash equivalents at beginning of year 150,543 189,846

Cash and cash equivalents at end of year $ 130,753 150,543.

The accompanying notes are an integral part of these financial statements

PRUDENCE CONSERVANCY, INC.

Notes to Financial Statements

December 31, 2003 and 2002

NOTE I ‑ Nature of Activities and Significant Accounting Policies

Nature of Activities

Prudence Conservancy, Inc. (the Organization) was founded in 1987 in Prudence Island, Rhode Island. Their objectives are: to inform and educate residents of Prudence Island of and on various environmental issues; and to maintain the rural character of Prudence through the acquisition of open spaces properties and its ongoing stewardship role with these properties.

Promises to Give

Contributions are recognized when the donor makes a promise to give to the Organization that is, in substance, unconditional. Contributions that are restricted by the donor are reported as increases in unrestricted net assets if the restriction expires in the fiscal year in which the contributions are recognized. All other donor restricted contributions are reported as increases in temporarily or permanently restricted net assets depending on the nature of the restrictions. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets.

Contributed Services

SFAS 116 sets forth criteria that contributions of services shall be recognized if the services received require specialized skills that are provided by individuals possessing those skills and would typically need to be purchased if not provided by donation. Any other services provided by volunteers that do not meet the above criteria shall not be recognized in the statements of activities.

In year 2003, legal services were donated to the Organization and recognized on the statement of activities.

Estimates

The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

PRUDENCE CONSERVANCY, INC.

Notes to Financial Statements

December 31, 2003 and 2002

NOTE I ‑ Nature of Activities and Significant Accounting Policies (continued)

Property and Equipment

It is the Organization's policy to capitalize property and equipment with a life expectancy of one year or more. Purchased property and equipment is capitalized at cost. Donations of property and equipment are recorded as contributions at their estimated fair value. Such donations are reported as unrestricted contributions unless the donor has restricted the donated asset to a specific purpose. Assets donated with explicit restrictions regarding their use and contributions of cash that must be used to acquire property and equipment are reported as restricted contributions. Absent donor stipulations regarding how long those donated assets must be maintained, the Organization reports expirations of donor restrictions when the donated or acquired assets are placed in service as instructed by the donor. The Organization reclassifies temporarily restricted net assets to unrestricted net assets at that time. Property and equipment are depreciated using the straight‑line method.

Financial Statement Presentation

The Organization has adopted Statement of Financial Accounting Standards (SFAS) No. 117, "Financial Statements of Not‑for‑Profit Organization." Under SFAS No. 117, the Organization is required to report information regarding its financial position and activities according to three classes of net assets; unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. In addition, the Organization is required to present a statement of cash flows.

Contributions

The Organization has also adopted SFAS No. 116, "Accounting for Contributions Received and Contributions Made." Contributions received are recorded as unrestricted, temporarily restricted, or permanently restricted support depending on the existence or nature of any donor restrictions.

Income Taxes

The Organization is a nonprofit organization as described in Section 5 0 1 (c)(3) of the Internal Revenue Code and is exempt from federal and state income taxes.

Cash and Cash Equivalents

For purposes of the statements of cash flows, the Organization considers all highly liquid investments available for current use with an initial maturity of three months or less to be cash equivalents.

PRUDENCE CONSERVANCY, INC.

Notes to Financial Statements

December 31, 2003 and 2002

NOTE 2 ‑ Restrictions of Net Assets

Restrictions on net assets at the end of 2003 and 2002 are related to: (1) temporarily restricted ‑ funds raised through the Farnham Farm Project which is a specified giving program to assist the organization in purchasing, improving, and maintaining this historically and ecologically significant farm; Funds donated for the purpose of renovating the barn at Farnham Farm for a community room; and an endowment for specific donations to the endowment and for memorials voted by the board which are not otherwise designated. (2) permanently restricted ‑ donated property which has been generally restricted by the donee for the purpose of protecting island land from development. Included in the cash and cash equivalents on the Statements of Financial Position, are temporarily restricted funds totaling as follows:

2003 2002

Endowment Fund $ 22,456 19,269

Renovation Fund 25,662 70,347

Farnham Farm Fund 27,108 24,315

$ 75,226 113,931

NOTE 3 ‑ Property & Equipment

Property and equipment consist of the following:

2003 2002

Land $ 738,485 738,485

Building 283,714 224,262

Furniture & equipment 9,987 9,987

1,032,186 972,734

Accumulated depreciation 30,501 23,325

$ 1,001,684 949,409

Depreciation expense for 2003 and 2002 was $7,176 and $6,271, respectively.

PRUDENCE CONSERVANCY, INC.

Notes to Financial Statements

December 31, 2003 and 2002

NOTE 4 ‑ Farnham Farm Project

On December 9, 1998, the Organization purchased the property from Albert Jiacovelli for $350,000. The purchase price was funded by a payment of $76,412, a mortgage note in the amount of $175,000 as discussed in notes 3 and 4, and a contribution by Albert Jiacovelli in the form of a reduction in the purchase price of $ 100,000.

The historic property will serve as headquarters for the Organization and the Prudence Historical Society, and as a focal point for stewardship, educational and recreational programs available to the island community.

A large portion of the building contents were also donated to the Organization by Mr. Jiacovelli. The Organization was unable to obtain a valuation for the personal property; therefore, no amount has been recorded in the accompanying financial statements.

In 2002 and 2003, the Organization completed planned renovations on the barn totaling $50,637 and 45,712 respectively.

The Organization engaged a planner and facilitator to develop a master plan for restoration and adaptive reuse of Farnham farm buildings. A portion of the fee was funded from a grant provided by Preserve Rhode Island ‑ Citizens Bank mini‑grant program.

The Organization has begun the complete restoration and renovation of the farm buildings. The Organization estimates that this project will cost approximately four hundred and twenty five thousand dollars ($425,000). The Organization is working to raise this over the next four years through pledges and pursuing matching funds from foundations and the state and federal government. As of December 31, 2003, the Organization has received donations and pledges totaling $ 68,540,

NOTE 5 ‑ Unconditional Promises to Give

The Organization has accounted for the doubtful collection of the capital campaign receivables by providing a reserve in the amount of $ 4,270 for 2003.

Unconditional Promises to Give $ 42,700

Less‑ Allowance for Unconditional Promises (4,270)

Net Unconditional Promises to Give $ 38,430

Receivables in less than one year $ 13,050

Receivable in one to five years 25,380

Net Unconditional Promises to Give $ 38,430

PRUDENCE CONSERVA NCY, INC.

Notes to Financial Statements

December 31, 2003 and 2002

NOTE 6 ‑ Memorial Contributions

In 2003, the board of directors voted to transfer the memorial donations received in 2002 into the endowment fund with the exception that funds donated in the memory of Margaret Beck be used to restore Sarah's Path. The fund transferred is as follows:

Transferred to Endowment Fund $ 1,075

Used for Restoration of Sarah's Path 5,750

$ 6,825

NOTE 7 ‑ Concentration of Credit Risks

The organization maintains a bank account at a local bank. Accounts at an institution are insured by the Federal Deposit Insurance Corp. (FDIC) up to $ 100,000. At December 3 1, 2003 the organization had no uninsured cash balances. The Organization also invests a majority of its cash at a local broker/dealer. The Organization does not believe that it is exposed to any significant credit risk in connection with these funds, since the broker/dealer invests primarily in U.S. Treasury securities.

NOTE 8 ‑ Lease to use Coast Guard Real Property

The Organization has entered into a lease agreement, expiring on March 31, 2006, with the United States Coast Guard. The lease agreement permits the Organization to repair, maintain and secure Prudence Island Lighthouse in accordance with the provisions of the National Historic Preservation Act. The organization will conduct educational tours, hold fund raising events with and for the benefit of the general public. The Organization is responsible for improvements, repairs and maintenance of the lighthouse and is not permitted to use Coast Guard utilities. Based upon the Organization's non‑profit nature and its intended use of the licensed facility there is no charge for this license.