COMBINED FINANCIAL STATEMENTS

COMBINED FINANCIAL STATEMENTS AND REPORT OF INDEPENDENT AUDITORS For the years ended and 2008

CONTENTS Page Report of Independent Auditors 1 Combined Statements of Financial Position 2 Combined Statements of Activities 3 Combined Statements of Cash Flows 4 Combined Statements of Functional Expenses 5-6 Notes to the Combined Financial Statements 7-20

REPORT OF INDEPENDENT AUDITORS Board of Directors, Room to Read San Francisco, California We have audited the combined statements of financial position of Room to Read as of December 31, 2009 and 2008, and the related combined statements of activities, cash flows and functional expenses for the years then ended. These financial statements are the responsibility of Room to Read's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects the combined financial position of Room to Read as of and 2008, and the changes in its net assets and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. San Francisco, California April 8, 2010

COMBINED STATEMENTS OF FINANCIAL POSITION as of and 2008 2009 2008 ASSETS Current assets: Cash and cash equivalents $ 7,058,725 $ 6,284,992 Short term investments at fair value 4,865,959 2,904,195 Pledges receivable 1,127,966 616,769 Grants receivable 757,367 340,000 Foreign fundraising partner receivables 186,726 334,173 Other receivables 224,930 183,706 Prepaid expenses and deposits 199,910 115,899 Total current assets 14,421,583 10,779,734 Property and equipment, net of accumulated depreciation 272,602 150,259 Long term investments at fair value 5,965,451 4,421,055 Employee retirement funds, restricted 61,778 65,943 Other assets 135,621 108,594 Total assets $ 20,857,035 $ 15,525,585 LIABILITIES AND NET ASSETS Current liabilities: Accounts payable $ 451,623 $ 188,677 Accrued liabilities 529,520 518,964 Other liabilities 40,541 16,172 Total current liabilities 1,021,684 723,813 Employees' retirement fiduciary liability 61,778 65,943 Total liabilities 1,083,462 789,756 Net Assets: Unrestricted net assets 8,300,764 6,974,057 Temporarily restricted net assets 11,472,809 7,761,772 Total net assets 19,773,573 14,735,829 Total liabilities and net assets $ 20,857,035 $ 15,525,585 The accompanying notes are an integral part of these financial statements 2

COMBINED STATEMENTS OF ACTIVITIES for the years ended and 2008 2009 2008 Temporarily Temporarily Unrestricted Restricted Total Unrestricted Restricted Total Support and Revenue: Foundations $ 623,959 $ 4,785,066 $ 5,409,025 $ 551,342 $ 1,896,477 $ 2,447,819 Corporations 669,007 3,523,445 4,192,452 965,495 4,484,114 5,449,609 Individuals 4,006,890 14,295,708 18,302,598 4,111,273 9,713,026 13,824,299 Schools and other 109,425 242,083 351,508 43,272 393,338 436,610 Donations in kind 4,557,956-4,557,956 4,453,739-4,453,739 Book sales - 29,182 29,182-26,261 26,261 Investment income/(loss) 135,288 104,363 239,651 (398,081) 119,669 (278,412) Other income 70,816-70,816 - - - Net assets released from restrictions 19,268,810 (19,268,810) - 15,904,573 (15,904,573) - Total Support and Revenue 29,442,151 3,711,037 33,153,188 25,631,613 728,312 26,359,925 Operating Expenses: Program services 23,538,965-23,538,965 20,234,684-20,234,684 Management and general 1,824,427-1,824,427 1,686,126-1,686,126 Fundraising 3,038,851-3,038,851 2,280,058-2,280,058 Total Operating Expenses 28,402,243-28,402,243 24,200,868-24,200,868 Changes in net assets 1,039,908 3,711,037 4,750,945 1,430,745 728,312 2,159,057 Translation adjustments 286,799-286,799 (13,941) - (13,941) NET ASSETS: Beginning of year 6,974,057 7,761,772 14,735,829 5,557,253 7,033,460 12,590,713 End of year $ 8,300,764 $ 11,472,809 $ 19,773,573 $ 6,974,057 $ 7,761,772 $ 14,735,829 The accompanying notes are an integral part of these financial statements 3

COMBINED STATEMENTS OF CASH FLOWS for the years ended and 2008 2009 2008 CASH FLOWS FROM OPERATING ACTIVITIES: Changes in net assets $ 4,750,945 $ 2,159,057 Adjustments to reconcile increase in net assets to net cash provided by operating activities: Depreciation and amortization 72,942 40,565 Donated securities (2,471,515) (823,641) Realized/unrealized (gain)/loss on investments (15,296) 662,899 (Increase)/decrease in operating assets: Pledges receivable (511,197) (586,157) Grants receivable (417,367) 275,239 Foreign fundraising partner receivables 147,447 274,639 Other receivables (41,224) (139,833) Prepaid expenses and deposits (84,011) (34,585) Employee retirement funds 4,165 (14,470) Other assets (27,027) (45,987) Increase/(decrease) in operating liabilities: Accounts payable 262,946 56,922 Accrued liabilities 10,556 (701,858) Employees' retirement fiduciary liability (4,165) 14,470 Other liabilities 24,369 (1,889) Net cash provided by operating activities 1,701,569 1,135,371 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (195,285) (75,425) Purchase of short term investments (4,160,267) (6,444,907) Purchase of long term investments (2,370,691) (7,733,730) Proceeds from sale of short term investments 4,252,149 13,063,684 Proceeds from sale of long term investments 1,259,460 3,337,234 Net cash provided/(used) by investing activities (1,214,635) 2,146,856 Net increase in cash balances 486,934 3,282,227 Effect of foreign exchange translation 286,799 (13,941) CASH AND EQUIVALENTS: Beginning of year 6,284,992 3,016,706 End of year $ 7,058,725 $ 6,284,992 SUPPLEMENTAL INFORMATION: Non-cash investing activity $ 2,471,515 $ 823,641 In-kind Donations $ 4,557,956 $ 4,453,739 The accompanying notes are an integral part of these financial statements 4

COMBINED STATEMENT OF FUNCTIONAL EXPENSES for the year ended Program Services Supporting Services Local Computer and Total Management Reading School Girls' Language Language Program and Room Room Education Publishing Room Services General Fundraising Total US and Regional Personnel Expenses: Salaries and bonuses $ 1,086,437 $ 487,789 $ 443,444 $ 155,205 $ 44,344 $ 2,217,219 $ 1,014,589 $ 1,420,781 $ 4,652,589 Payroll taxes 59,165 26,564 24,149 8,452 2,415 120,745 77,938 145,572 344,255 Employee benefits 170,133 76,386 69,442 24,305 6,944 347,210 142,339 154,950 644,499 In-Country Personnel Expenses: Salaries and bonuses 866,431 389,008 353,643 123,775 35,364 1,768,221-11,915 1,780,136 Employee benefits 212,817 95,550 86,863 30,402 8,687 434,319-1,807 436,126 Total Personnel Expenses 2,394,983 1,075,297 977,541 342,139 97,754 4,887,714 1,234,866 1,735,025 7,857,605 Library program activities 5,504,565 - - - - 5,504,565 - - 5,504,565 Donated books and supplies 4,009,833 - - - - 4,009,833 - - 4,009,833 School construction activities - 3,460,638 - - - 3,460,638 - - 3,460,638 Girls scholarships and access support - - 1,278,447 - - 1,278,447 - - 1,278,447 Local language publishing activities - - - 679,326-679,326 - - 679,326 Computer and language room activities - - - 108,142 108,142 - - 108,142 Accounting and audit fees 9,670 4,342 3,947 1,381 395 19,735-13,324 33,059 Bank and bank card charges 15,508 6,963 6,330 2,215 633 31,649 4,546 176,163 212,358 Conferences and meetings 141,765 49,181 65,057 25,603 4,466 286,072 8,353 47,309 341,734 Depreciation and amortization 23,768 10,671 9,701 3,395 970 48,505 12,699 11,738 72,942 Dues and subscriptions 3,904 1,750 1,591 557 150 7,952 1,459 24,834 34,245 Fundraising events - - - - - - - 258,242 258,242 IT expenses 149,566 67,152 61,047 21,367 6,105 305,237 69,773 72,943 447,953 Insurance 13,623 6,117 5,561 1,946 556 27,803 37,586 5,722 71,111 Legal 8,597 3,860 3,509 1,228 351 17,545 36,017 17,467 71,029 Licensing and filing 4,826 2,167 1,970 690 197 9,850 13,567 7,996 31,413 Marketing 10,678 4,795 4,359 1,526 436 21,794-3,960 25,754 Miscellaneous / other expenses 1,445 649 590 206 59 2,949-6,873 9,822 Monitoring and evaluation 71,155 31,947 29,043 10,165 2,904 145,214 - - 145,214 Office expenses 138,375 62,152 56,501 19,764 5,651 282,443 6,940 9,745 299,128 Other donations-in-kind 165,251 74,194 67,449 23,607 6,745 337,246 50,784 160,287 548,317 Other professional fees 160,229 52,144 55,714 17,067 4,267 289,421 171,058 107,068 567,547 Postage and shipping 11,165 5,069 4,619 2,594 459 23,906 2,588 35,413 61,907 Printing and publications 14,506 6,563 5,919 2,068 594 29,650 3,011 49,938 82,599 Rent / occupancy 268,359 119,776 108,887 38,111 10,889 546,022 108,969 108,969 763,960 Staff development and team support 65,787 30,639 26,818 9,376 2,634 135,254 11,778 12,510 159,542 Staff recruiting 32,235 14,481 13,187 4,662 1,321 65,886 8,641 16,862 91,389 Telephone / communications 84,558 37,918 34,975 12,059 3,558 173,068 5,160 5,619 183,847 Travel 402,232 169,890 161,382 42,431 21,018 796,953 35,537 137,102 969,592 Volunteer support 3,012 1,352 1,229 430 123 6,146 1,095 13,742 20,983 Total Expenses $ 13,709,595 $ 5,299,707 $ 2,985,373 $ 1,263,913 $ 280,377 $ 23,538,965 $ 1,824,427 $ 3,038,851 $ 28,402,243 The accompanying notes are an integral part of these financial statements 5

COMBINED STATEMENT OF FUNCTIONAL EXPENSES for the year ended December 31, 2008 Program Services Supporting Services Local Computer and Total Management Reading School Girls' Language Language Program and Room Room Education Publishing Room Services General Fundraising Total US and Regional Personnel Expenses: Salaries and bonuses $ 758,060 $ 405,474 $ 334,957 $ 176,293 $ 88,146 $ 1,762,930 $ 863,582 $ 978,296 $ 3,604,808 Payroll taxes 46,544 24,896 20,566 10,824 5,412 108,242 66,914 66,252 241,408 Employee benefits 119,958 64,164 53,005 27,897 13,949 278,973 100,574 101,964 481,511 In-Country Personnel Expenses: Salaries and bonuses 742,218 278,596 379,802 226,660 79,226 1,706,502-10,277 1,716,779 Employee benefits 164,071 58,458 83,710 52,104 19,524 377,867-943 378,810 Total Personnel Expenses 1,830,851 831,588 872,040 493,778 206,257 4,234,514 1,031,070 1,157,732 6,423,316 Library program activities 4,073,254 - - - - 4,073,254 - - 4,073,254 Donated books and supplies 4,115,729 - - - - 4,115,729 - - 4,115,729 School construction activities - 2,996,097 - - - 2,996,097 - - 2,996,097 Girls scholarships and access support - - 981,342 - - 981,342 - - 981,342 Local language publishing activities - - - 631,229-631,229 - - 631,229 Computer and language room activities - - - - 315,000 315,000 - - 315,000 Accounting and audit fees 10,505 5,619 4,642 2,443 1,222 24,431 46,095 5,058 75,584 Bank and bank card charges 11,240 6,012 4,966 2,614 1,307 26,139 1,858 240,612 268,609 Conferences and meetings 77,391 41,395 34,196 17,998 8,999 179,979 36,021 47,251 263,251 Depreciation and amortization 9,414 5,035 4,160 2,189 1,095 21,893 12,650 6,022 40,565 Dues and subscriptions 2,655 1,420 1,173 617 309 6,174 1,517 11,484 19,175 Fundraising events - - - - - - - 246,724 246,724 IT expense 116,095 62,097 51,298 26,999 13,501 269,990 51,565 42,200 363,755 Insurance 4,152 2,221 1,834 966 483 9,656 39,597 768 50,021 Legal 6,372 3,408 2,815 1,482 741 14,818 5,529 15,067 35,414 Licensing and filing 6,024 3,222 2,662 1,401 700 14,009 1,305 10,133 25,447 Marketing 2,618 1,401 1,157 609 304 6,089-3,730 9,819 Miscellaneous / other expenses 1,255 671 554 292 146 2,918-3,450 6,368 Monitoring and evaluation 6,782 3,627 2,997 1,577 789 15,772 - - 15,772 New country research costs 108,237 57,894 47,826 25,171 12,586 251,714 - - 251,714 Office expenses 73,872 39,513 32,641 17,180 8,590 171,796 2,082-173,878 Other donations-in-kind 83,140 44,470 36,736 19,335 9,667 193,348 15,617 81,565 290,530 Other professional fees 113,527 60,724 50,163 26,402 13,201 264,017 231,261 121,698 616,976 Postage and shipping 11,148 5,963 4,926 2,593 1,296 25,926 2,452 25,137 53,515 Printing and publications 7,597 4,064 3,357 1,767 883 17,668 3,056 47,915 68,639 Rent / occupancy 185,214 99,068 81,839 43,073 21,537 430,731 122,476 96,248 649,455 Staff development and team support 46,302 24,766 20,459 10,866 5,384 107,777 10,506 8,796 127,079 Staff recruiting 65,959 35,280 29,144 15,339 7,670 153,392 39,150 5,821 198,363 Telephone / communications 47,377 25,330 20,925 11,013 5,507 110,152 12,173 12,535 134,860 Travel 248,833 137,580 110,629 41,365 27,091 565,498 19,501 82,890 667,889 Volunteer support 1,562 835 690 363 182 3,632 645 7,222 11,499 Total Expenses $ 11,267,105 $ 4,499,300 $ 2,405,171 $ 1,398,661 $ 664,447 $ 20,234,684 $ 1,686,126 $ 2,280,058 $ 24,200,868 The accompanying notes are an integral part of these financial statements 6

1. Organization and Nature of Activities ROOM TO READ Notes to the combined financial statements Room to Read (the Organization) is an international non-governmental organization that believes that world change starts with educated children. We envision a world in which all children can pursue a quality education that enables them to reach their full potential and contribute to their community and the world. Room to Read seeks to transform the lives of millions of children in developing countries by focusing on literacy and gender equality in education. Working in collaboration with local communities, partner organizations and governments, we develop literacy skills and a habit of reading among primary school children, and support girls to complete secondary school with the relevant life skills to succeed in school and beyond. In 2009, Room to Read conducted program operations in seven countries in Asia (Bangladesh, Cambodia, India, Laos, Nepal, Sri Lanka, and Vietnam) and two countries in Africa (South Africa and Zambia). Room to Read was incorporated in the State of Washington in 1999 and moved the organization s headquarters to its current location in San Francisco, California in 2002. Operations are conducted as a registered International Non-Governmental Organization (INGO) under agreements with the local responsible governmental department(s) in certain countries and through locally incorporated affiliates in other countries. In 2009, Room to Read conducted fundraising operations in five countries outside of the US, namely, Hong Kong, United Kingdom, Australia, Singapore and Canada. Operations in these countries are conducted through locally incorporated limited companies or registered charities and foreign affiliates. Room to Read has developed a holistic, multi-pronged approach to helping children gain access to quality educational opportunities. This approach is focused in two main areas: Literacy and Gender Equality in education: Our Literacy Program enables primary school children to become independent readers through: Reading Room Program Room to Read establishes multi-lingual libraries and fills them with local language books published by the Organization or purchased incountry as well as donated English books, creating a colorful space with posters, games, furniture and flooring; Local Language Publishing Program Room to Read sources new content from local writers and illustrators and publishes high-quality local language children s books for distribution throughout our network of schools and libraries; 7

1. Organization and Nature of Activities (continued) School Room Program Room to Read partners with communities to build schools to replace unsafe, dilapidated structures, alleviate overcrowding, or add a new school to a community in need; Our Girls Education Program supports girls to complete secondary school with the skills necessary to negotiate key life decisions. Specifically: Girls Education Program Room to Read funds long-term girls scholarships through secondary school and provides life-skills workshops that support underprivileged girls through secondary school. Room to Read is a results-oriented organization, and by the end of 2009 we had reached an estimated 4.1 million children through the following core activities (unaudited): 2000 08 2009 Cumulative Libraries Established 7,048 2,082 9,130 Local Language and English Books Provided* 5,783,103 1,755,278 7,538,381 New Local Language Titles Published* 327 106 433 School Construction Projects Completed 767 361 1,128 Constructed Libraries Completed 88 48 136 Girls on Long-term Scholarships** 6,817 2,427 9,074 Computer & Language Rooms Established*** 179 0 179 Estimated Number of Children Benefited 3,142,108 924,667 4,066,775 * Room to Read publishes several Local Language titles in bulk and distributes them to both Room to Read Reading Rooms and partner organizations. At, Room to Read held approximately 1.5 million books which will be distributed during 2010. ** Because scholarships are multiple years in length, these totals are on-going. The cumulative number varies from the sum of the various years because of the scholars that leave or graduate. *** Room to Read establishes labs to provide students with vocational skills and employment access. Starting in 2010, we do not plan on adding new projects for this program though we continue to support existing projects. 2. Summary of Significant Accounting Policies A summary of the significant accounting policies, consistently applied in the presentation of the accompanying financial statements is as follows: 8

2. Summary of Significant Accounting Policies - continued Combined financial statements The 2009 financial statements include the accounts of Room to Read and its affiliated organizations; Room to Read India Private Limited, Room to Read South Africa, Room to Read Zambia, Room to Read Asia Regional, Room to Read Australia, Room to Read Canada, Room to Read (Hong Kong) Limited, Room to Read Singapore and Room to Read UK Limited. The accounts of these organizations have been combined in these financial statements. All significant inter-organizational transactions and balances have been eliminated. Basis of Financial Presentation The accompanying combined financial statements have been prepared on the accrual basis of accounting and in conformity with accounting principles generally accepted in the United States of America applicable to nonprofit organizations, including the Accounting Standards Codification 958, Financial Statements of Not-for-Profit Organizations. Under the provisions of Accounting Standards Codification 958, net assets, revenues, expenses, gains and losses are classified based on the existence or absence of donorimposed restrictions. Accordingly, the net assets of Room to Read and changes therein are classified and reported as follows: Unrestricted Net Assets Net assets that are not subject to donor-imposed restrictions, but may be designated for specific purposes by action of the Board of Directors or otherwise limited by contractual arrangements with outside parties. At and 2008, Room to Read had unrestricted net assets of $8,300,764 and $6,974,057 respectively. Temporarily Restricted Net Assets Net assets that are subject to donor-imposed restrictions that can be fulfilled either by actions of Room to Read pursuant to those stipulations and/or expire with the passage of time. At and 2008, Room to Read had temporarily restricted net assets of $11,472,809 and $7,761,772 respectively. Permanently Restricted Net Assets Net assets that are subject to donor-imposed restrictions that Room to Read maintains. Generally, the donors of these assets permit Room to Read to use all or part of the income earned on related investments for general or specific purposes. At and 2008, Room to Read had no permanently restricted net assets. 9

2. Summary of Significant Accounting Policies - continued Basis of Financial Presentation - continued Revenues are reported as increases in unrestricted net assets unless the use of the related assets is limited by donor-imposed restrictions. Expenses are reported as decreases in unrestricted net assets. Expirations of temporary restrictions on net assets (i.e. the donor stipulated purpose has been fulfilled and/or the stipulated time period has elapsed) are reported as reclassifications between the applicable classes of net assets. In addition, Room to Read groups contributions into four categories: Foundation, Corporation, Individual, School and Other. Corporate donations include donations from corporate foundations. Individuals donations include donor advised funds, individuals, and family foundations. Schools and Others include schools, clubs, non-governmental organizations and religious institutions. Fair Value of Financial Instruments On January 1, 2008, Room to Read adopted Accounting Standards Codification 820, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. In February 2008, the FASB Staff Position (FSP) delayed the effective date of Accounting Standard Codification 820 for all non-financial assets and non-financial liabilities, excluding those assets that are recognized or disclosed at fair value on a recurring basis for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. On January 1, 2008, Room to Read adopted Accounting Standards Codification 825, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of Accounting Standards Codification 320. A provision of Codification 825 permits an entity to measure financial instruments and certain other items at estimated fair value. Most of the provisions of Accounting Standards Codification 825 are elective; however, the amendment to Accounting Standards Codification 320, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities that own trading and available-for-sale securities. The fair value option created by Accounting Standards Codification 825 permits an entity to measure eligible items at fair value as of specified election dates. The fair value option (a) may generally be applied instrument by instrument, (b) is irrevocable unless a new election date occurs, and (c) must be applied to the entire instrument and not to only a portion of the instrument. The adoption of Accounting Standards Codification 825 did not have a significant impact on Room to Read s results of operations and financial condition. 10

2. Summary of Significant Accounting Policies - continued Fair Value of Financial Instruments - continued Room to Read s financial instruments consist principally of cash and cash equivalents, prepaid expenses, notes receivables, other assets, accounts payable, and accrued expenses. Room to Read believes all of the financial instruments recorded values approximate current fair value. Cash and Cash Equivalents Cash and cash equivalents consists of cash in banks, money market funds and highly liquid investments with original maturities of three months or less at the date of acquisition. Revenue Recognition, Grants, Pledges and Other Receivables Contributions are recognized at the earlier of when Room to Read is made aware of the donor s unconditional intent to give or when received in cash or other property. Room to Read recognizes revenue from unconditional grants and contributions when written notification of the commitment (promise) is received from the donor. Promises received as of the end of a year for which the cash had not been received, are reported as pledges and grants receivable in the accompanying statement of financial position. Room to Read reports contributions as temporarily restricted if they are received with donor stipulations that limit the use of the donated assets. When a donor-imposed restriction expires, that is, when a stipulated time restriction ends or a purpose restriction is accomplished, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. All grants, contributions, pledges, and other receivables are considered to be fully collectible; accordingly no allowance for doubtful accounts is recorded. Property and Equipment All assets created or established in partnership with various communities are considered as community-owned and as such are not maintained on the Room to Read balance sheet. Room to Read capitalizes all property and equipment acquisitions in excess of $10,000. Property and equipment are recorded at cost when purchased. Donated property and equipment are recorded at the fair value on the date of donation. Maintenance and repairs are charged to expense as incurred. Expenditures that increase the value or productive capacity of assets are capitalized. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets as follows: 11

2. Summary of Significant Accounting Policies - continued Property and Equipment - continued Computer software Equipment Three years Five years When property and equipment are retired, sold, or otherwise disposed of the asset s carrying amount and related depreciation are removed from the accounts and any gain or loss is recognized in operations. Tax-exempt Status Room to Read is exempt from federal and state income taxes under Internal Revenue Code Section 501(c)(3) and California Revenue and Taxation Code Section 23701d. In addition, Room to Read has received a ruling from the Internal Revenue Service that it is not classified as a private foundation under Section 509(a) of the Internal Revenue Code. Contributions Contributions are recognized when the donor makes a promise to give that is, in substance, unconditional. In accordance with Accounting Standards Codification 958-605, Accounting for Contributions Received and Contributions Made, contributions that are restricted by the donor are reported as increases in unrestricted net assets only 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 restriction. When a restriction expires, temporarily restricted net assets are reclassified to unrestricted net assets. Functional Allocation of Expenses Expenses are charged to programs and supporting services on the basis of material and human resources allocated towards the implementation of various programs as well as estimates made by Room to Read s management. Foreign Currency Translation Financial statements of foreign branch offices and affiliates, where the local currency is the functional currency, are translated into U.S. dollars using period-end exchange rates for assets and liabilities and average exchange rates during the period for income and expenses. Cumulative translation adjustments associated with net assets or liabilities are reported in the Changes in Net Assets. Exchange rate gains or losses related to foreign currency transactions are recognized in the statement of activities as incurred, and are not material for any year shown. 12

2. Summary of Significant Accounting Policies - continued Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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. Such estimates include the useful life of depreciable assets, estimates of uncollectible accounts receivables, exchange gains and losses, and the value of donated books and services. Accordingly, actual results could differ from those estimates. 3. Concentrations of Risk Room to Read maintains its cash balances at banks and brokerage houses in the United States. Room to Read also maintains cash balances in other countries in order to facilitate its operations in those countries. U.S. bank balances are insured by the Federal Deposit Insurance Corporation up to $250,000. At, Room to Read had uninsured U.S. bank balances of $4,776,136 and overseas bank balances of $2,606,751. In addition, there was $5,171,648 in money market funds. 4. Property and Equipment Property and equipment is summarized as follows: 2009 2008 Equipment $ 112,659 $ 49,783 Computer software 292,486 160,099 405,145 209,882 Less: Accumulated depreciation and amortization (132,543) (59,623) Total property and equipment $ 272,602 $150,259 Depreciation expense was $72,942 (2008: $40,565). 5. Fair Value of Financial Instruments As defined in Accounting Standards Codification 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price methodology). Accounting Standards Codification 820 establishes a framework for measuring fair value that includes a hierarchy used to classify inputs used in measuring fair value. The hierarchy prioritizes inputs to valuation techniques used to measure fair value into three levels which are either observable or unobservable. Observable inputs reflect market data obtained from independent sources while unobservable inputs reflect an entity s view of market assumptions in the absence of observable market information. 13

5. Fair Value of Financial Instruments - continued The level in the fair value hierarchy within which the fair value measurement falls is determined based on the lowest level input that is significant to the fair value measurement. The three levels of the fair value hierarchy defined by Accounting Standard Codification 820 are as follows: Level 1: Fair value is based on unadjusted quoted prices in active markets that are accessible to Room to Read for identical assets or liabilities. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. These generally provide the most reliable evidence and are used to measure fair value whenever available. Room to Read s Level 1 assets and liabilities include exchange traded equities. Valuations are obtained from readily available pricing sources for market transactions involving identical assets. Level 2: Fair value is based upon significant inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable for substantially the full term of the asset or liability through corroboration with observable market data as of the reporting date. Level 2 inputs include quoted market prices in active markets for similar assets and liabilities, quoted market prices in markets that are not active for identical or similar assets or liabilities, model-derived valuations whose inputs are observable or whose significant value drivers are observable and other observable inputs. Level 3: Fair value is based on significant unobservable inputs which reflect the entity s or third party pricing service assumptions about the assumptions market participants would use in pricing an asset or liability. Valuations are estimated based on non-binding broker prices or internally developed valuation models or methodologies, discounted cash flow models and other similar techniques. The following table sets forth the Organization s assets and liabilities that are measured at fair value on a recurring basis as of the December 31, 2009: Description Level 1 Level 2 Level 3 Total Stocks $ 9,791 $ - $ - $ 9,791 Mutual equity funds 638,070 - - 638,071 Bonds and bond mutual funds 5,011,901 - - 5,011,901 Money market mutual funds 5,171,648 - - 5,171,648 Total $10,831,410 $ - $ - $10,831,410 14

6. Short-Term Investments ROOM TO READ At and 2008 short-term investments consisted of the following: 2009 2008 Fair Fair Cost Value Cost Value Stocks $ 9,920 $ 9,791 $ 4,146 $ 4,479 Mutual equity funds 386,516 336,445 719,534 503,924 Bonds and bond mutual funds 410,360 407,802 - - Money market mutual funds 4,111,921 4,111,921 2,395,792 2,395,792 $4,918,717 $4,865,959 $3,119,472 $2,904,195 Long-term investments, which are intended to fund our long-term commitment toward Girls' Education Program Scholars, increased to $5,965,451 (2008: $4,421,055). In 2009, donor restricted contributions for scholarships amounted to $3,962,812 (2008: $3,054,304). At and 2008 long-term investments consisted of the following: 2009 2008 Fair Fair Cost Value Cost Value Bonds and bond mutual funds $4,653,800 $4,604,099 $4,044,498 $4,081,526 Money market mutual funds 1,059,727 1,059,727 339,529 339,529 Mutual equity funds 346,513 301,625 - - Investment income consisted of the following: $6,060,040 $5,965,451 $4,384,027 $4,421,055 2009 2008 Interest and dividends $210,773 $ 384,487 Gains/(losses) on securities 28,878 (662,899) Net investment income/(loss) $239,651 $(278,412) 15

7. Temporarily Restricted Net Assets ROOM TO READ Temporarily restricted net assets are available for the following purposes: 2009 2008 Girls Education Program $ 5,965,451 $4,421,055 Program General 2,845,234 1,447,226 Local Language Publishing 1,318,331 827,742 Reading Room 740,312 453,329 School Room 442,109 361,842 M&E Capacity Building 85,804 - Other Geographical Expansion 64,199 115,694 Fundraising Capacity Building 11,369 50,000 Computer Room - 84,884 8. Retirement Plan Total $11,472,809 $7,761,772 Room to Read offers a 401(k) plan to all of its United States employees. Employees are eligible upon employment. For employees making salary reduction contributions to Room to Read s 401(k) plan, Room to Read matches United States employee contributions on a dollar-for-dollar basis up to 6% of an employee s compensation. Internationally, Room to Read complies with local laws in providing employer contributions for all employees via government run retirement plans where applicable. Room to Read also matches 10% of an employee's salary in certain overseas countries where there is no government mandated retirement scheme. Where such amounts are controlled by Room to Read, they are recorded on the balance sheet as employee retirement funds and the related fiduciary liability, otherwise they are expensed as an employee benefit. At and 2008 this liability was $61,778 and $65,943 respectively. Worldwide retirement expense was $355,133 and $306,926 in 2009 and 2008 respectively. 16

9. Commitments In 2006, Room to Read entered into a sublease agreement for its global office facilities in San Francisco, California expiring on September 29, 2011, with an option to extend the lease for five years. In early 2008, Room to Read canceled its 2006 office lease without penalty, and entered into a new sublease in San Francisco expiring on March 20, 2010. In December 2009, Room to Read entered into a new master lease for its existing global office space. The lease commences on termination of the existing sublease and expires March 31, 2015. Minimum future lease payments at under this lease and leases on country offices are as follows: Year ended December 31: 2010 $ 565,672 2011 536,401 2012 446,923 2013 383,567 2014 396,460 2015 99,921 $2,428,944 Worldwide rental expense for 2009 and 2008 was $763,960 and $649,455 respectively. 10. Related Parties In 2008, Room to Read received contributions from a related party Room to Read (UK), a charitable organization registered in the United Kingdom. The expenses of Room to Read (UK) were not combined in the 2008 financial statements. Room to Read (UK) was restructured as Room to Read UK Limited in 2009 which allows full consolidation. Contributions received by Room to Read (UK) during the year ended December 31, 2008, were remitted to Room to Read quarterly and amounted to $2,364,038. Room to Read (UK) had operating expenses of $210,770 that were deducted from revenues prior to remittance to the US. A member of the Organization s Board of Directors is an employee of Ironmark Law Group, PLLC (Ironmark) of Seattle, Washington which provides legal services to Room to Read. Certain legal services are covered by a monthly retainer and other projects are based on hourly fees. Fees charged to Room to Read are 50% of the usual and customary rate. For the year ended and 2008, Room to Read incurred total expenses of $20,756 and $17,933, respectively, in legal fees with Ironmark. 17

11. Components of Combined Financial Statements A. Combined International Non-Governmental Organizations Room to Read operates in certain countries under agreements with the local responsible governmental agency. Expenses incurred as part of Room to Read s mission are as follows: 2009 2008 Room to Read Sri Lanka $ 3,174,360 $ 3,166,535 Room to Read Nepal 3,052,418 3,475,670 Room to Read Laos 2,778,020 2,556,996 Room to Read Cambodia 1,748,163 1,845,250 Room to Read Vietnam 1,528,904 1,344,958 Room to Read Africa Regional 332,516 181,796 Room to Read Bangladesh 315,346 18,150 Total $12,929,727 $12,589,355 The above entities, registered in their respective countries, are governed by the US board of directors or trustees. B. Combined Affiliates Expenses incurred through combined affiliated entities as part of Room to Read s mission are as follows: 2009 2008 Room to Read South Africa $2,407,769 $1,398,997 Room to Read India 2,300,359 2,163,706 Room to Read Zambia 2,117,788 935,739 Room to Read Asia Regional 1,079,524 844,256 Room to Read Hong Kong 322,634 191,220 Room to Read United Kingdom 269,981 - Room to Read Australia 58,136 - Room to Read Singapore 20,929 - Room to Read Canada 16,578 - Total $8,593,698 $5,533,918 The above entities, registered in their respective countries, are governed by a local board of directors or trustees. Room to Read, the U.S. organization, is represented on each board and the legal relationship between the two entities is detailed in the appropriate foreign affiliate agreement. 18

12. Donations In Kind ROOM TO READ Donations in kind meeting the criteria of Accounting Standards Codification 958-605 are recorded as contributions at their estimated fair value on the date of receipt and are recorded as income and expense. During the year ended, donations in kind consisted of the following: 2009 2008 English language books $4,009,833 $4,115,729 Office program software 356,375 206,448 Materials and services 140,798 15,399 Rent 36,815 24,508 Office furniture, equipment and vehicles 14,135 47,480 Donated air travel - 44,175 Total $4,557,956 $4,453,739 Supporting our commitment to low overhead, Credit Suisse generously donates office space for our Hong Kong office and our United Kingdom affiliate. Contributions received in the form of corporate stock are valued at fair value at the date of receipt. Room to Read s policy is to sell the stock shortly after receipt and any gain or loss on sale is reflected as realized gain or loss in the statement of activities. For the year ended and 2008, contributions of stock amounted to $2,471,515 and $823,641, respectively, and are included in the statement of activities. Room to Read also receives donated services from a variety of unpaid volunteers. As required under Accounting Standards Codification 958-605, no amounts have been recognized in the accompanying statement of activities for these services as they do not meet the criteria for recognition. 13. Subsequent Events In May 2009, the FASB issued authoritative guidance on subsequent events which established general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. It requires the disclosure of the date through which subsequent events have been evaluated as well as the basis for that date. The guidance was effective prospectively for interim or annual financial periods ending after June 15, 2009. The Company has evaluated all subsequent events through April 8, 2010, the date of this report, and determined there are no material recognized or unrecognized subsequent events. 19

14. Reclassifications ROOM TO READ Donations from individuals and fundraising expenses in the financial statements for the year ended December 31, 2008 have been reclassified to conform to the 2009 presentation. Such reclassifications have had no effect on the net assets or changes in net assets as previously reported. As Previously As Reported Change Restated Donations from individuals $13,363,195 $461,104 $13,824,299 Fundraising expenses 1,818,954 461,104 2,280,058 20