We have audited the accompanying consolidated statement of financial position of Military Officers Association of America (MOAA) as of Dec. 31, 2002, and the related consolidated statement of activities and cash flows for the year then ended. These financial statements are the responsibility of MOAA’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material 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 statements 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 consolidated financial position of MOAA as of Dec. 31, 2002, and the consolidated changes in its net assets and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States.

Johnson Lambert & Co.
Bethesda, Md.

ASSETS Cash $2,442,081 Receivables: Accounts receivable net of allowance 1,180,920 Student loans net of allowance 19,503,123 Accrued interest receivable 888,044 Total receivables, net 21,572,087 Prepaid and other assets 294,016 Investments, at market: Corporate bonds 40,808,922 U.S. government obligations 8,479,486 Mutual funds and stocks 68,754,369 Total investments 118,042,777 Property, plant, and equipment: 6,937,507 Land 396,034 Accumulated depreciation (2,669,002) Property, plant, and equipment (net) 4,268,505 TOTAL ASSETS $146,619,466

LIABILITIES AND NET ASSETS Liabilities: Accounts payable and accrued expenses $163,161 Split-interest liabilities 658,952 Compensatory time and vacation earned, not taken 725,456 Deferred revenue 102,940 Deferred dues income 3,264,097 Deferred dues on life memberships 36,885,055 Estimated liability of Widows' Trust 23,997,760 Total liabilities 65,797,421 Unrestricted net assets: Reserved for operations 56,751,321 Equipment replacement 376,000 Legislative initiatives 205,000 Total unrestricted net assets 78,643,952 Temporarily restricted net assets - Scholarship Fund 22,184,171 Permanently restricted net assets - Scholarship Fund 1,305,553 Total net assets 80,822,045 TOTAL LIABILITIES AND NET ASSETS $146,619,466

CHANGES IN UNRESTRICTED NET ASSETS Revenue and gains: Membership dues: $6,721,670 Investment income, dividends, and realized gains (losses) 2,071,525 Advertising 2,537,357 TOPS Career Fair 175,047 MOOA Emblem 55,705 Royalties 1,886,656 Rent and other 5,209 Total unrestricted revenue and gains 13,453,169 Net assets released from restriction 148,074 Total revenue, gains, and other support $13,601,243   Expenses: Military Officer Magazine $6,007,289 The Officer Placement Service (TOPS) 1,514,040 Legislative affairs 2,511,768 Benefits Information 1,135,328 Membership services and programs 1,329,639 Member Service Center 1,835,997 Council and Chapter Affairs 1,852,962 Scholarship grants and administration 1,216,071 Governance 581,233 MOAA EdPlus 105,492 Web Base 1,402,817 Life member benefits accrual 2,640,000 Total expenses 22,132,636 Change in unrestricted net assets before change in fair value of investments (8,531,393) Change in fair value of investments (12,780,238) Change in unrestricted net assets $(21,311,631)

CHANGES IN TEMPORARILY RESTRICTED NET ASSETS Contributions $1,977,963 Investment income, dividends, and realized gains (losses), net 76,088 Other income 10,200 Net assets released from restriction (148,074) Increase in temporarily restricted net assets before nonoperating items 1,916,177 Change in fair value of investments (1,464,237) Change in value of split-interest agreements (146,408) Change in temporarily restricted net assets $305,532 Change in net assets (21,006,099) Net assets, beginning of year 101,828,144 NET ASSETS, END OF YEAR $80,822,045

Change in net assets $(21,006,099) Effect of accruals and deferrals 13,729,113 Net cash used in operating activities $(7,276,986)

Proceeds from sales $26,111,050 Purchases of investments and equipment (17,347,652) Net cash provided by investing activities 8,763,398 Change in cash 1,486,412 Cash at beginning of year 955,669 Cash at end of year $2,442,081

Notes to Financial Statements

1. Significant Accounting Policies
   Organization. Military Officers Association of America (“MOAA”) is a nonprofit organization as defined under Section 501(c)(19) of the Internal Revenue Code (“IRC”). MOAA is operated exclusively for purposes beneficial to the interests of the nation and its uniformed services personnel, their dependents, and their survivors.
   
   The consolidated financial statements include the assets, liabilities, net assets, and activities of The Scholarship Fund of MOAA (“Scholarship Fund”) and TROA EdPlus Inc. (“EdPlus”). All significant intercompany transactions and balances have been eliminated in consolidation. The Scholarship Fund is a nonprofit organization as defined under Section 501(c)(3) of the IRC and is operated exclusively for purposes of providing interest-free student loans and grants to undergraduate students who are children of an MOAA member or of enlisted personnel. Based on the directions of donors, the Scholarship Fund’s revenues and net assets have been classified as temporarily restricted and permanently restricted net assets in these statements. EdPlus is a wholly owned, for-profit subsidiary of MOAA. EdPlus provides signature education loans to MOAA’s members for the benefit of their children, grandchildren, and spouses. On April 1, 2002, the EdPlus board of directors agreed to terminate corporate operations. EdPlus will continue to service existing loans.
   
   Basis of reporting and use of estimates. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
   
   Cash equivalents generally include highly liquid investments with original maturities of three months or less.
   
   Concentrations of credit risk. Financial deposits, which subject MOAA to concentrations of credit risk, consist of demand deposits with federally insured institutions. From time to time, cash balances exceed FDIC insurance limits of $100,000. Management monitors these balances and believes they represent neither unusual nor significant credit risks.
   
   Allowance for doubtful student loans. The Scholarship Fund maintains an allowance for doubtful student loans based on the Scholarship Fund’s historical collection results. Management believes that its allowance for aggregate student loans represents its best estimate of such amounts; however, ultimate results could vary significantly from such amounts. As adjustments become evident, such adjustments are reflected in current activities.
   
   Deferred dues income. One-, two-, and three-year dues are deferred and earned ratably over the respective membership terms. The amount reported as deferred life membership dues is based on estimates of the life expectancy of the members, expected annual costs to service life members, and the long-term earnings rate on the funds held by MOAA. As adjustments to these estimates become evident, such adjustments are reflected in current activities.
   
   Property, plant, and equipment are stated at cost. Building and improvements and furniture and equipment are depreciated on the straight-line basis over the estimated useful lives of the component parts, which range from three to 48 years. Depreciation expense was $578,374.
   
   Net assets. All contributions received by the Scholarship Fund are considered to be available for unrestricted scholarship use unless specifically restricted by the donor. Amounts received that are designated for future periods or restricted by the donor for specific purposes are reported as temporarily restricted or permanently restricted support that increase those net asset classes. Permanently restricted net assets have been restricted by the donor for use in the student loan and grant program. The board of directors has reserved portions of the unrestricted net assets for specific purposes, which are reported as board-designated net assets within the unrestricted net asset classification.
   
   Income taxes. Although MOAA and the Scholarship Fund are tax-exempt, they are subject to income taxes on unrelated business income. EdPlus uses the liability method of accounting for deferred income taxes.

2. Investments

   Total return on investments comprises the following:

   Investment income and dividends	$4,663,714
   Net realized losses	(2,454,062)
   Change in fair value of investments	(14,244,475)
   Investment fees	(62,039)
   Total return on investments	$(12,096,862)

3. Temporarily Restricted and Permanently Restricted Net Assets

   Temporarily restricted and permanently restricted net assets at Dec. 31, 2002, are available for the Scholarship Fund operating purposes as defined under note 1. The net assets released from donor restrictions for the year ended Dec. 31, 2002, are attributable to the Scholarship Fund grants and charges to the allowance for doubtful student loans. During 2002, management examined the restrictions imposed by certain donors on amounts received by the Scholarship Fund in previous years. As a result of this review, reclassifications were made to correctly reflect the temporarily and permanently restricted net assets (below). These changes did not affect total activities or total net assets of the Scholarship Fund.

   	Temporarily restricted	Permanently restricted
   Before reclassification	$15,721,411	$6,324,882
   Reclassification	5,019,329	(5,019,329)
   After Reclassification	$20,740,740	$1,305,553

4. Life Memberships

   For the year ended Dec. 31, 2002, MOAA recognized $18 per life member as life membership dues income. The activity in life member deferred dues liability is as follows for the year ended Dec. 31: 

   Deferred dues on life memberships at beginning of year	$35,623,318
   New life members	1,265,689
   Earnings credit	2,640,000
   Recognition of earned dues	(2,710,911)
   Deferred dues on life memberships at end of year	$36,885,055

5. Member Insurance Programs

   MOAA endorses group life and health insurance programs for its members. An outside administrator and insurance carriers conduct the programs. These programs are not included in these financial statements.
   
   The underwriters of these programs are holding unassigned reserves amounting to approximately $5.8 million at Dec. 31, 2002. The primary purpose of these funds is to provide for unfavorable experience and to minimize the effects of inflation on the premiums charged to the groups. Through contracts with the insurance carriers, MOAA may withdraw certain amounts each year or upon termination of the program. The use of these funds is without restriction; however, any withdrawals may be subject to income taxation.
   
   MOAA has established a liability, The Retired Officers Association Widows’ and Dependents’ Health Benefit Trust (“Widows’ Trust”), to pay health insurance claims for eligible members and dependents. The population of eligible beneficiaries was limited in 1981 when the plan was frozen, allowing no new participants. The related investments and liability are reported in MOAA’s financial statements.
   
   Management performs valuation analyses of the Widow’s Trust liability based on participant life expectancies, remarriage assumptions, estimated future claim counts, projected inflation in claims expenses and other related expenses, and the assumed long-term earnings rate on the funds held by MOAA. Management believes the accrued liability is adequate to cover the ultimate cost of claims; however, because of the uncertainty from various sources, actual experience may not conform to the assumptions used in determining the estimated amounts for such liability. As adjustments become necessary, they are reflected in current operations. The activity for the Widows’ Trust liability for the year ended Dec. 31 is as follows:

   Estimated liability at beginning of year	$24,812,584
   Claims paid	(814,824)
   Estimated liability at end of year	$23,997,760

6. Pension Plans

   MOAA has a group annuity contract that provides defined retirement benefits to all eligible employees. Funded status of the plan as of Dec. 31 was:

   Projected benefit obligation	$4,690,394
   Plan assets at fair value	3,642,445
   Funded status	(1,047,949)
   Prepaid pension	752,327
   Employer contributions	500,000
   Net periodic pension cost	482,445
   Benefits paid	$1,771,139

   The following assumptions were used in developing the plan costs and obligations for the year ended Dec. 31: Discount rate, 6.75 percent; rate of compensation increases, 4 percent; and expected long-term rate of return on plan assets, 7.5 percent.
   
   MOAA also sponsors a defined contribution plan that covers salaried employees of MOAA and its subsidiaries with a scheduled minimum of 17.5 hours per week. Employees may contribute up to 20 percent of their annual compensation tax-free to the plan each year, up to IRS limitations. Additionally, MOAA may make discretionary matching contributions. Upon enrollment in the plan, employees immediately vest 100 percent with regards to MOAA’s discretionary matching contributions. MOAA’s discretionary matching contributions were $148,726 for 2002.

7. Split-Interest Agreements

   The Scholarship Fund is the trustee of two charitable remainder unitrusts at Dec. 31, 2002. The terms of the trust agreements provide for annuities to be paid for life to each beneficiary named by the contributor. Upon the death of the last beneficiaries, the trusts terminate and the net assets of the trusts pass to the Scholarship Fund. The total fair value of the assets of the charitable remainder unitrusts was $551,860 at Dec. 31, 2002. The estimated present value of the annuities payable by the Scholarship Fund was $410,739 as of Dec. 31, 2002.
   
   In addition, the Scholarship Fund administers 19 charitable gift annuities as of Dec. 31, 2002. The terms of the trust agreements provide for an annuity to be paid for life to each beneficiary named by the contributor. The total fair value of the assets was $275,718 at Dec. 31, 2002. The estimated present value of annuities payable pursuant to the charitable gift annuity agreements was $248,213 as of Dec. 31, 2002. 
   
   The present values of the liabilities discussed above were calculated using a discount rate of 4 percent for 2002 and actuarial life expectancies based on the ages of the beneficiaries.
   
   Total unrestricted contribution income of $97,001 was recognized in the statement of activities in 2002.

8. Student Loans

   Student loans, which are evidenced by executed notes receivable, are reported net of an allowance for doubtful accounts of $188,545 as of Dec. 31, 2002. Student loan write-offs totaled $3,733 in 2002.

9.  Organizational Name Changes
   
   During 2002, the board of directors of TROA and the TROA Scholarship Fund voted to change the name of the association and its scholarship fund to Military Officers Association of America and The Scholarship Fund of MOAA, respectively.