Princeton University

Consolidated Financial Statements and Schedules of Expenditures of Federal and State Awards for the Year Ended June 30, 2003 and Independent Auditors’ Reports in Accordance with Government Auditing Standards and Office of Management and Budget Circular A-133 and State of New Jersey Office of Management and Budget Circular 98-07

PRINCETON UNIVERSITY

TABLE OF CONTENTS

Page

CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS’ REPORT

Independent Auditors’ Report 1

Statements of Financial Position 3

Statement of Activities 4

Statements of Cash Flows 5

Notes to Financial Statements 6

SUPPLEMENTARY INFORMATION:

Schedule of Expenditures of Federal Awards 12

Schedule of Expenditures of State Awards 13-15

Notes to Schedules of Expenditures of Federal and State Awards 16

REPORTS FOR THE YEAR ENDED JUNE 30, 2003 IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS, U.S. OFFICE OF MANAGEMENT AND BUDGET CIRCULAR A-133 AND NEW JERSEY OFFICE OF MANAGEMENT AND BUDGET CIRCULAR 98-07:

Independent Auditors’ Report on Compliance and on Internal Control Over Financial Reporting Based Upon the Audit Performed in Accordance with Government Auditing Standards 17

Independent Auditors’ Report on Compliance and Internal Control Over Compliance Applicable to Each Major Federal and State Award Program 18-19

Schedule of Findings and Questioned Costs for the Year Ended June 30, 2003 20

INDEPENDENT AUDITORS’ REPORT

The Board of Trustees Princeton University:

We have audited the accompanying Consolidated Statements of Financial Position of Princeton University (the “University”) as of June 30, 2003 and 2002 and the related Consolidated Statements of Activities and Cash Flows for the year ended June 30, 2003. These financial statements are the responsibility of the University’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The financial statements include certain prior-year summarized comparative information in total, but not by net asset class. Such information does not include sufficient detail to constitute a presentation in conformity with accounting principles generally accepted in the United States of America. Accordingly, such information should be read in conjunction with the University’s financial statements for the year ended June 30, 2002, from which the summarized information was derived.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of 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 statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the University at June 30, 2003 and 2002, and the changes in its net assets and its cash flows for the year ended June 30, 2003 in conformity with accounting principles generally accepted in the United States of America.

Our audits were performed for the purpose of forming an opinion on the basic financial statements of Princeton University taken as a whole. The accompanying supplementary Schedules of Expenditures of Federal and State Awards are presented for the purpose of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations; and New Jersey Office of Management and Budget Circular 98-07, Single Audit Policy for Recipients of Federal Grants, State Grants and State Aid, respectively, and are not a required part of the basic 2003 financial statements. These schedules are the responsibility of the University’s management. Such information has been subjected to the auditing procedures applied in our audit of the basic 2003 financial statements and, in our opinion, is fairly stated in all material respects when considered in relation to the basic 2003 financial statements taken as a whole.

In accordance with Government Auditing Standards, we have also issued our report dated November 1, 2003 on our consideration of Princeton University’s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grants. This report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit.

November 1, 2003

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Princeton UniversityConsolidated Statements of Financial PositionJune 30, 2003 and 2002

AssetsCash $ 24,857 $ 6,408Accounts and accrued interest receivable 58,086 62,982Contributions receivable 116,522 182,485Inventories and deferred charges 51,585 63,141Investments at market value 9,409,100 8,833,300Funds held in trust by others 80,088 79,311Property:

Land 59,908 39,791Buildings and improvements 1,321,256 1,295,774Construction in Progress 230,359 95,332Other property 521,421 508,385Accumulated depreciation (597,492) (567,149)

Total assets $11,275,690 $10,599,760

LiabilitiesAccounts payable $ 53,762 $ 49,812Deposits, advance receipts, and accrued liabilities 38,689 39,693Deposits held in custody for others 120,246 114,790Deferred revenues 43,672 42,427Liability under planned giving agreements 86,911 87,226Federal loan programs 10,465 11,662Indebtedness to third parties 807,150 573,482Accrued postretirement benefits 134,996 122,484

Total liabilities 1,295,891 1,041,576

Net AssetsUnrestricted $ 8,214,405 7,784,206Temporarily restricted 746,078 778,647Permanently restricted 1,019,316 995,331

Total net assets 9,979,799 9,558,184

Total Liabilities and Net Assets $11,275,690 $10,599,760

(dollars in thousands) 2003 2002

See notes to consolidated financial statements.

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Princeton UniversityConsolidated Statement of ActivitiesYear ended June 30, 2003 (with comparative totals for 2002)

See notes to consolidated financial statements.

Revenues, gains, and other supportTuition and fees $ 178,960 $178,960 $ 168,402Less scholarships and fellowships (92,894) (92,894) (85,134)

Net tuition and fees 86,066 86,066 83,268Government grants and contracts 176,627 176,627 178,202Private gifts, grants, and contracts 71,121 71,121 70,750Sales and services of auxiliary activities 58,011 58,011 57,886Other sources 16,203 16,203 33,827Investment earnings distributed 304,415 $ 34,149 338,564 326,188

Total revenues, gains, and other support 712,443 34,149 746,592 750,121

Net assets released from restrictions 77,404 (77,404)

Total revenues, gains, and other support 789,847 (43,255) 746,592 750,121

Expenses and lossesEducational and general:

Academic departments and programs 353,938 353,938 329,801Academic support 18,659 18,659 17,259Student services 26,119 26,119 24,504Library 37,482 37,482 35,239General administration and general

institutional support 72,146 72,146 71,819Other student aid 19,285 19,285 16,531Plasma Physics Laboratory 67,695 67,695 73,698

Total educational and general 595,324 595,324 568,851

Auxiliary activities 108,086 108,086 101,384Interest on indebtedness 22,295 22,295 22,687

Total expenses and losses 725,705 725,705 692,922

Excess of revenues over expenses from operations 64,142 (43,255) 20,887 57,199

Nonoperating activitiesAdjustments to planned giving agreements 2,091 $ 3,172 5,263 (3,064)Increase (decrease) in value of assets held

in trust by others 776 776 (9,688)Private gifts, noncurrent 13,905 51,147 12,721 77,773 122,661Net unrealized appreciation (depreciation) on

investments 261,492 (22,551) (1,620) 237,321 (390,493)Investment earnings 395,075 14,148 8,936 418,159 611,643Distribution of prior year investment earnings

for spending (304,415) (34,149) (338,564) (326,188)

Increase from nonoperating activity 366,057 10,686 23,985 400,728 4,871

Increase (decrease) in net assets 430,199 (32,569) 23,985 421,615 62,070Net assets at the beginning of the year 7,784,206 778,647 995,331 9,558,184 9,496,114

Net assets at the end of the year $8,214,405 $746,078 $1,019,316 $9,979,799 $9,558,184

Temporarily Permanently 2003 2002(dollars in thousands) Unrestricted Restricted Restricted Total Total

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Cash flows from operating activities:Change in net assets $ 421,615 $ 62,070Adjustments to reconcile change in net assets to net cashprovided by operating activities:

Depreciation expense 62,315 61,103Property gifts-in-kind (539) (1,279)Adjustments to planned giving agreements (5,263) 3,064Realized gain on investments (95,683) (311,393)Unrealized depreciation (appreciation) on investments (237,321) 390,493Gain on disposal of fixed assets (1,311) (16,801)Contributions received for long-term investment (29,503) (75,409)Changes in operating assets and liabilities:

Decrease in operating assets 81,637 16,989Increase (decrease) in operating liabilities 22,159 (2,000)

Net cash provided by operating activities 218,106 126,837

Cash flows from investing activities:Purchases of property, plant, and equipment (228,400) (167,680)Proceeds from disposal of property, plant, and equipment 4,618 20,625Purchases of investments (5,010,557) (4,603,725)Proceeds from maturities/sales of investments 4,767,760 4,441,745

Net cash used by investing activities (466,579) (309,035)

Cash flows from financing activities:Issuance of indebtedness to third parties 271,970 143,976Payment of debt principal (38,302) (34,867)Contributions received for long-term investment 29,503 75,409Transactions on planned giving agreements 4,948 717Government advances for loan funds (1,197) 374

Net cash provided by financing activities 266,922 185,609

Net increase (decrease) in cash 18,449 3,411

Cash at beginning of year 6,408 2,997

Cash at end of year $ 24,857 $ 6,408

Supplemental disclosures:Interest paid $ 22,295 $ 22,687

Princeton UniversityConsolidated Statements of Cash FlowsYears ended June 30, 2003 and 2002

(dollars in thousands) 2003 2002

See notes to consolidated financial statements.

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Nature of operationsThe Trustees of Princeton University (“the University”)

is a privately endowed, nonsectarian institution of higherlearning. When the University was chartered in 1746 as theCollege of New Jersey, it became the fourth college inBritish North America. It was renamed The Trustees ofPrinceton University in 1896. Originally located inElizabeth, New Jersey, and later located in Newark, NewJersey,the school was moved to Princeton, New Jersey, in1756.

The student body numbers approximately 4,600 under-graduates and 1,800 graduate students in more than60 departments and programs. The University offersinstruction in the liberal arts and sciences and inprofessional programs of the School of Architecture, theSchool of Engineering and Applied Science, and theWoodrow Wilson School of Public and InternationalAffairs. The faculty numbers more than 1,000, includingvisitors and part-time appointments.

Summary of significant accounting policiesThe financial statements of the University are prepared

on the accrual basis and include the accounts of itswholly owned subsidiaries and two foundations controlledby the University. Financial information conforms tothe statements of accounting principles of the FinancialAccounting Standards Board (FASB) and to the Ameri-can Institute of Certified Public Accountants Audit andAccounting Guide for Not-for-Profit Organizations.Relevant pronouncements of the FASB include Statementsof Financial Accounting Standards (“SFAS”) No. 116,Accounting for Contributions Received and ContributionsMade, and SFAS No. 117, Financial Statements ofNot-for-Profit Organizations, issued by the FinancialAccounting Standards Board.

Under SFAS No. 116, unconditional promises to give arerecognized as revenues in the year made, not in the year inwhich the cash is received. The amounts are present-valuedbased on expected collections. Amounts received fromdonors to planned giving programs are shown in part as aliability for the present value of annuity payments to the

donor and the balance as a gift of either temporarily orpermanently restricted net assets.

SFAS No. 117 prescribes the standards for externalfinancial statements and requires not-for-profitorganizations to prepare a statement of financial position(balance sheet), statement of activities, and statementof cash flows. It requires the classification of theorganization’s net assets and its revenues and expenses intothree categories according to the existence or absenceof donor-imposed restrictions—permanently restricted,temporarily restricted, or unrestricted. Changes in eachcategory are reflected in the statement of activities, certainof which are further categorized as nonoperating. Suchactivities primarily reflect transactions of a long-terminvestment or capital nature, including contributionsreceivable in future periods, contributions subject to donor-imposed restrictions, and gains and losses on investments inexcess of the University’s spending rule. Other significantaccounting policies are described elsewhere in these notes.

The preparation of the University’s financial statementsin conformity with generally accepted accounting principlesrequires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the dates ofthe consolidated statements of financial position and thereported amounts of revenue and expense included in theconsolidated statement of activities. Actual results coulddiffer from such estimates.

The prior year financial statements of the Universityinclude certain reclassifications to conform to the currentyear presentation.

InvestmentsAll investments in equity securities with readily deter-minable fair values and all investments in debt securities arereported at fair values. In addition, the University utilizesfair values for reporting other investments, primarily limitedpartnerships and derivatives.

The fair value of marketable equity, debt, and certainderivative securities (which includes both domestic andforeign issues) is generally based upon a combination ofpublished current market prices and exchange rates. The fairvalue of restricted securities and other investments, where

Princeton UniversityNotes to Consolidated Financial StatementsYear ended June 30, 2003

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published market prices are not available, is based onestimated values when practicable, or at a nominal value.

The fair values of limited partnerships have been based onestimates and assumptions determined by the respectivegeneral partners or a valuation committee in the absenceof readily ascertainable market values. A summary ofinvestments at fair value at June 30, 2003 and 2002 is asfollows (in millions):

2003 2002Managed portfolio:

Equity accounts $ 5,611.1 $ 5,284.5Fixed income accounts 1,481.5 1,479.2Limited partnerships 1,695.3 1,624.5

Educational loans and mortgages 276.2 258.7Miscellaneous assets 345.0 186.4

Gross investments 9,409.1 8,833.3Planned Giving investments (213.0) (210.2)Bond proceeds awaiting drawdown (173.8) (25.4)Government funding for student loans (12.4) (14.1)Working capital (279.8) (264.0)

Net Universityinvestment portfolio $ 8,730.1 $ 8,319.6

The composition of net investment return for the yearsended June 30, 2003 and 2002 were as follows (inthousands):

2003 2002

Realized and unrealized gains $ 333,004 $ (79,100)and (losses)

Interest, dividends, andother income 322,476 300,250

Total $ 655,480 $ 221,150

The University follows a spending rule for its endowmentfunds, including funds functioning as endowment, thatprovides for regular increases in spending whilepreserving the long-term purchasing power of theendowment. Earnings available for spending are shown inthe Consolidated Statement of Activities as operatingincome, and the balance as nonoperating income.

As of June 30, 2003 and 2002, the University had loanedcertain securities, returnable on demand, with a marketvalue of $201 and $216 million, respectively, to several

financial institutions that have deposited collateral withrespect to such securities of $208 and $222 million,respectively. The University receives income on theinvested collateral, and also continues to receive interest anddividends from the securities on loan. The collateralreceived in connection with the securities lending programis reduced by the liability to borrowers for financialstatement purposes.

As part of its investment strategy, the University entersinto a variety of financial instruments and strategies,including futures, swaps, options, short sales, and forwardforeign currency exchange contracts. In all cases exceptforward foreign currency exchange and swap contracts,these transactions are traded through securities andcommodities exchanges. The forward foreign currencyexchange and swap contracts are executed with credit-worthy banks and brokerage firms. At June 30, 2003 theUniversity was not engaged in any such financialinvestments.

PropertyLand additions subsequent to June 30, 1973 are reported

at estimated market value at the date of gift, in the case ofgifts, and at cost in all other cases. Land acquired throughJune 30, 1973 is carried at estimated value at that date,computed using municipal tax assessments because it wasnot practicable to determine historical cost or the marketvalue at the date of gift.

Buildings and improvements are stated at cost.Expenditures for operation and maintenance of physicalplant are expensed as incurred.

Items classified as other property at June 30,2003 and2002 consist of the following (in thousands):

2003 2002

Equipment $ 240,416 $ 239,691Rare books 44,536 42,756Library books, periodicals,

and bindings 167,811 157,505Fine arts objects 68,658 68,433

Total $ 521,421 $ 508,385

Equipment, rare books, and library books, periodicals,and bindings are stated at cost. Equipment includes items

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purchased with federal government funds; an indeterminateportion of those items are expected to be transferred to theUniversity at the termination of the respective grant orcontract. In addition to purchases with University funds, theUniversity, since its inception, has received a substantialnumber of fine arts objects from individual gifts andbequests. Art objects acquired through June 30, 1973 arecarried at insurable values at that date because it is notpracticable to determine the historical cost or market valueat the date of gift. Art objects acquired subsequent to June30, 1973 are recorded at cost or fair value at the date of gift.

Annual depreciation is calculated on the straight-linemethod over 30 and 40-year lives for buildings andimprovements, 30 years for library books, and 10 and 15years for equipment.

Funds held in trust by othersThe University is the income beneficiary of various trusts

that are held and controlled by independent trustees. Inaddition, the University is the income beneficiary of entitiesthat qualify as supporting organizations under Section509(a)(3) of the U.S. Internal Revenue Code. Funds held intrust by others are recognized at the estimated fair value ofthe assets or the present value of the future cash flows whenthe irrevocable trust is established or the University isnotified of its existence. Funds held in trust by others, statedat fair value, amounted to $80.1 million in 2003 and $79.3million in 2002.

Deferred revenuesDeferred revenues represent advance receipts relating to

the University’s real estate leasing activities. Such amountsare amortized over the term of the related leases.

Indebtedness to third partiesThe debt consists of loans through the New Jersey

Educational Facilities Authority (NJEFA), taxable revenuebonds, commercial paper, various parental loans with theStudent Loan Marketing Association (Sallie Mae) and alocal bank, and various mortgages as follows (in thousands):

NJEFA Revenue BondsDated July 1, 1994, Series A, 5.84%,due in installments through July 2012,net of unamortized discount of $136 7,954Dated July 1, 1995, Series C, 5.08%,due in installments through July 2025,net of unamortized discount of $202 12,978Dated July 1, 1996, Series C, 4.86%due in installments through July 2006,net of unamortized discount of $22 8,628Dated July 1, 1997, Series E, 4.42%,due in installments through July 2007,net of unamortized discount of $26 10,074Dated July 1, 1998, Series E, 4.87%,due in installments through July 2024,net of unamortized discount of $68 16,752Dated July 1, 1998, Series F, 4.44%,due in installments through July 2018,net of unamortized discount of $129 23,596Dated February 15, 1999, Series A, 4.80%,due in installments through July 2029,net of unamortized discount of $335 41,695Dated July 15, 1999, Series B, 4.98%,due in installments through July 2019,net of unamortized discount of $407 43,103Dated June 15, 2000, Series E, 5.35%,due in installments through July 2020,net of unamortized discount of $392 45,088Dated October 15, 2000, Series H, 5.34%,due in installments through July 2030,net of unamortized discount of $1,347 95,203Dated October 17, 2001, Series B, Variable Rate Bonds, due in installments through July 2022 97,500Dated July 26, 2002, Series B, VariableRate Bonds, due in installments throughJuly 2023 100,000Dated June 26, 2003, Series E, 3.94%, due ininstallments through July 2026, net ofunamoritized premium of 7,494 120,004

NJEFA Dormitory Safety Trust Fund BondsDated August 14, 2001, Series 2001A, 4.24%,due in installments through January 2016 10,819

NJEFA Equipment Leasing Fund BondsDated October 11, 2001, Series 2001A, 3.09%,due in installments through August 2009 56

NJEFA Capital Improvement FundDated August 1, 2000, Series A, 5.72%due in installments through August 2020 1,938

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Taxable Revenue BondsDated March 15, 1994, Series 1994C, 6.48%,due in installments through July 2003 1,510

Commercial Paper 118,000

Parental Loans 52,034

Mortgages 218

Total $ 807,150

The proceeds of NJEFA loans were used primarily forrenovation and rehabilitation of University facilitiesand purchases of capital equipment. The proceeds of theTaxable Revenue Bonds were used to advance refundcertain NJEFA loans and to reimburse the University for thecost of renovation and rehabilitation of University facilitiesand purchases of capital equipment in recent years that, dueto statutory limitation, could not be financed with tax-exempt debt.

Subsequent to June 30, 2003 the University issued twoseries of bonds through the NJEFA. The purpose of a 20-year variable rate issue of $75,000,000 was to providefunding for the annual major maintenance, capitalequipment and renovation budget. A 16-year fixed rateissue of $114,495,000 was done as a refunding of olderfixed rate debt. The University intends to issue additionalbonds in the future.

The NJEFA loan agreements entered into through 1998contain certain restrictive covenants with which theUniversity must comply. Specifically, the ratio of availableassets to general liabilities, as defined in the loanagreements, shall be equal to at least two to one. Also, theUniversity pledges tuition and fees received from allstudents up to an amount equal to one and one half times themaximum annual debt service on outstanding NJEFA bondsissued through 1998, in addition to the full faith and creditof the University. The University was in compliance withthese covenants at June 30, 2003.

Loans with the Student Loan Marketing Association(Sallie Mae) are used for the parental loan program. As ofJune 30, 2003, the amount outstanding was $18.1 million, at

rates ranging from 1.6 percent to 9.9 percent. As collateral,the University pledges these parent loans and additionalstudent loans for which Sallie Mae provides a secondmarket. In fiscal 1999 the University entered into a loanfacility with a local bank to provide funding up to $60 millionfor the parental loan program. Terms to the borrowers aresimilar to the Sallie Mae program in that fixed or variablerates may be selected on a pass-through basis; terms maybe as long as 14 years. At June 30, 2003 the balanceoutstanding was $33.9 million at rates ranging from 2.0percent to 7.4 percent.

In fiscal year 1998 a commercial paper program wasauthorized as an initial step of a financing proposal toprovide construction funds for several approved capitalprojects. The proceeds have permitted construction toproceed until permanent financing from gifts or othersources has been made available. The program has beenauthorized to a maximum level of $120 million. At June 30,2003, $118.0 million was issued through the NJEFA on atax-exempt basis to the investors. Maturities of the debtwere from 28 to 160 days, and the nominal interest rate was1.02 percent. The amount oustanding at June 30 wasentirely paid in July with the proceeds of the NJEFA 2003Series E bonds. Borrowings under the commercial paperprogram of $120.0 million were then available.

Principal payments for each of the next five years andthereafter on debt outstanding at June 30, 2003, excludingcommercial paper, are as follows (in thousands):

Principalpayments

2004 $ 38,3582005 36,0762006 37,1262007 32,4332008 30,393Thereafter 510,334

Subtotal 684,720

Unamortized premium 4,430

Net long-term debt $ 689,150

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The fair value of the University’s long-term debt isestimated based on current notes offered for the same orsimilar issues with similar security, terms, and maturities.At June 30, 2003, the carrying value and the estimated fairvalue of the University’s long-term debt, excludingcommercial paper, were $689.2 million and $711.0 million,respectively. At June 30, 2002, the carrying value and theestimated fair value of the University’s long-term debt,excluding commercial paper, were $498.9 million and$509.8 million, respectively.

Commitments and contingenciesAt June 30, 2003, the University had authorized major

renovation and capital construction projects for more than$580 million including Whitman College ($110 million),the science library ($60 million), Lawrence Apartmentsexpansion ($48 million) and the East Pyne/ChancellorGreen renovation ($41 million). Of the total, approximately$382 million had not yet been expended. Also, theUniversity is obligated under certain limited partnershipagreements to advance additional funding periodically up tospecified levels. At June 30, 2003, the University hadunfunded commitments of $1.459 billion that are likely tobe called through the life of the partnerships.

In July 2002, three members of the RoberstonFoundation Board of Trustees and another Robertson familymember (collectively the “Family Trustees”) commenced alawsuit against the University and the remaining Foundationboard members (collectively the “University Trustees”).The complaint alleges that the University Trustees havebreached their fiduciary duty to the Robertson Foundationby developing “a scheme to transfer control of theinvestment of the Foundation’s assets to PrincetonUniversity Investment Company [Princo].” Additionalclaims include those pertaining to operational aspects andfunding of the Woodrow Wilson School’s graduateprogram. The Family Trustees requested remedies includehaving the endowment removed from the University andtransferred to another educational institution. Discovery inthe lawsuit is ongoing and the outcome cannot bedetermined at this time. The University does not believethat the remedies sought in the lawsuit would, if granted,

have a material impact on the financial operations of theUniversity.

Employee benefit plansEffective January 1, 1994, all faculty and staff who meet

specific employment requirements participate in a definedcontribution plan, which participates in the TeachersInsurance and Annuity Association (TIAA) and CollegeRetirement Equities Fund (CREF). Prior to this date, theUniversity participated in a TIAA and CREF definedcontribution plan for faculty and certain administrativeemployees, while all other employees participated in anoncontributory defined benefit plan. The University’scontributions were $30.8 million for the year ended June 30,2003. The defined contribution plan permits employeecontributions.

Postretirement benefits other than pensionsEffective July 1, 1993, the University adopted the

provisions of SFAS No. 106, Accounting for PostretirementBenefits Other Than Pensions. SFAS 106 requiresemployers to recognize the cost of providing postretirementbenefits for employees over the period of their workingyears. The University has calculated its AccumulatedPostretirement Benefits Obligation (“APBO”) and elected toamortize it over 20 years.

The University provides single coverage health in-surance to its retirees who meet certain eligibilityrequirements. Participants may purchase additionaldependent or premium coverage. The accounting for theplan anticipates future cost-sharing changes to the writtenplan that are consistent with the University’s expressedintent to increase retiree contributions in line with medicalcosts.

The benefits cost for the year consists of the following(in thousands):

Service cost $ 5,060Interest cost 10,485Net amortization of transition amount 3,374

Total $ 18,919

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Retirees $ 77,621Fully eligible active employees 48,840Other active participants 51,372

Total $ 177,833

Reconciliation of funded status (in thousands):Accumulated postretirement benefit obligation

and funded status $ 177,833Unrecognized transition obligation existing

at June 30, 2003 (30,366)Unrecognized net loss (12,471)

Accrued expense at June 30, 2003 $ 134,996

An assumed discount rate of 6.75 percent was used tocalculate the APBO. The assumed health care cost trend rateto be used to calculate the University’s cost of benefits forfiscal 2003 is an increase of 9.5 percent over the costs forfiscal 2002. The cost trend used to calculate the APBOranges downward to 5.0 percent in the year 2012 andthereafter. An increase of 1 percent in the cost trend ratewould raise the APBO to $205.4 million and cause theservice and interest cost components of the net periodic costto be increased by $3.0 million.

Promises to giveAt June 30, 2003 and 2002 the University had received

from donors unconditional promises to give contributions ofamounts receivable in the following periods (in thousands):

2003 2002Less than one year $ 23,791 $ 69,978One to five years 86,637 81,587More than five years 27,380 60,300

Total 137,808 211,865

Less unamortized discount 21,286 29,380

Net amount $ 116,522 $182,485

The amounts promised have been discounted at a ratefor intermediate-term funds to take into account the timevalue of money. Current year promises are included inrevenue as additions to temporarily or permanentlyrestricted net assets, as determined by the donors.

In addition, the University has received from donorspromises to give $8.1 million, which are conditioned uponthe raising of matching gifts from other sources and othercriteria. These amounts will be recognized as income in theperiods in which the conditions have been fulfilled.

Net assetsNet assets are categorized as unrestricted, temporarily

restricted, and permanently restricted. The unrestrictedcategory contains, in addition to expendable funds, amountsdedicated to special programs, invested in plant andequipment, and designated for other related purposes.Temporarily restricted net assets are those that may be spentafter the occurrence of an event or time certain, andpermanently restricted net assets cannot be spent.

Fair value of financial instrumentsExcept as set forth elsewhere in these notes, the

University’s other financial instruments are carried in thebalance sheet at amounts that approximate their fair values.

The APBO at June 30, 2003 consisted of actuariallydetermined obligations to the following categories ofemployees (in thousands):

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PRINCETON UNIVERSITY

SCHEDULE OF EXPENDITURES OF FEDERAL AWARDSYEAR ENDED JUNE 30, 2003

FormallyFederal Grantor/Pass-Through Federal CFDA Federal Grantor/Program Title Number Expenditures

Research and Development: Department of Energy 81.RD 75,421,519$ Department of Health and Human Services 93.RD 33,557,583 National Science Foundation 47.RD 27,966,100 National Aeronautics and Space Administration 43.RD 5,953,142 Air Force 12.RD 4,453,953 Navy 12.RD 4,362,357 Defense Advanced Research Projects Agency 12.RD 3,780,197 Army 12.RD 3,716,758 Department of Commerce 11.RD 2,504,421 National Endowment for the Arts 05.RD 341,121 Department of Education 84.RD 323,309 Environmental Protection Agency 66.RD 287,749 Department of the Interior 15.RD 250,899

Amount of Funds Passed Through from Other Institutions: Defense Advanced Research Projects Agency 12.RD 2,601,332 National Aeronautics and Space Administration 43.RD 1,719,078 National Science Foundation 47.RD 1,635,217 Department of Health and Human Services 93.RD 1,413,103 Army 12.RD 1,396,607 Department of Energy 81.RD 1,254,291 Navy 12.RD 770,683 Air Force 12.RD 546,701 Department of the Interior 15.RD 353,191 Department of Commerce 11.RD 78,762 Federal Aviation Administration 20.RD 74,494 Environmental Protection Agency 66.RD 59,397 Department of Agriculture 10.RD 55,149 Federal Emergency Management Agency 83.RD 28,369 National Endowment for the Humanities 06.RD 13,444 Agency for International Development 02.RD 2,128

Total Research and Development 174,921,054

Student Financial Assistance: Federal Perkins Loan Program (Note 2) 84.038 51,000 Federal Family Education Loan Program (Note 3) 84.032 Federal Work-Study Program 84.033 891,896 Federal Supplemental Educational Opportunity Grant Program 84.007 1,377,036 Federal Pell Grant Program 84.063 968,500

Total Student Financial Assistance 3,288,432

TOTAL FEDERAL AWARDS 178,209,486$

See notes to schedules of expenditures of federal and state awards.

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PRINCETON UNIVERSITY

SCHEDULE OF EXPENDITURES OF STATE AWARDSYEAR ENDED JUNE 30, 2003

Research and Development Grant No./ CurrentReference Grant Grant Year

State Grantor/Program Title Number Award Period Expenditures

New Jersey Commission on Cancer Research (NJCCR):

Fellowship Grant LOA 02-2011-CCR-N-O 281,100$ 07/01/01 - 06/30/03 137,266$ Fellowship Grant 02-2401-CCR-NO 297,600 06/15/02 - 06/14/04 158,881 Fellowship Grant 5322149 2,800 06/24/02 - 09/20/02 300 Fellowship Grant 5322149 2,800 06/24/02 - 09/20/02 300 Fellowship Grant 03-2011-CCR-EO 182,100 06/01/03 - 05/31/05 Fellowship Grant 5574353 4,350 07/01/03 - 08/31/03 4,350

Total New Jersey Commission on Cancer Research 770,750 301,097

New Jersey Commission on Science and Technology:

Variable Thrust Segmented Electrode Hall Thruster 01-2042-007-26 1,050,000$ 09/01/00 - 08/31/03 389,727$ NJ Ctr for Pervasive Computing 01-2042-007-22 1,167,483 09/01/00 - 08/31/03 324,041 NJ Ctr for Optoelectronics 01-2042-007-05 400,000 02/01/01 - '07/31/02 17,825 Res. Consortium for Industrialization of Lg. Agrea Electronics 01-2042-007-30 1,500,000 01/01/01 - 06/30/04 683,023 Closed-Loop Machines for Bio-Network ID Control 01-2042-008-12 50,000 09/01/01 - 08/31/02 49,804 Center for Bio-Molecular Applications of Nanoscale Structrues 02-2042-007-08 500,000 02/01/02 - 01/31/03 437,896 Development of p53-MDMD Drug Interactions 02-2042-007-02 240,000 04/01/02 - 03/31/03 120,494 Center for Molecular & Bio-Molecular Imaging 02-2042-007-13 1,200,000 01/01/02 - 12/31/04 745,440 Center for Embedded System On a-Chip Design 02-2042-007-09 500,000 09/01/01 - 08/31/02 303,212 Center for Ultrafast Laser Applications 02-2042-007-04 525,000 10/01/01 - 09/30/02 240,599 R + D Excellence 03-2042-007-05 500,000 09/01/02 - 08/31/03 201,801 Center for Bio-Molecular Applications of Nanoscale Structrues 03-2042-007-02 500,000 02/01/03 - 01/31/04 79,960 Embedded System-on-a-chip Design 03-2042-007-11 500,000 09/01/00 - 08/31/03 314,825

Total New Jersey Commission on Science and Technology 8,632,483 3,908,647

PRINCETON UNIVERSITY

SCHEDULE OF EXPENDITURES OF STATE AWARDSYEAR ENDED JUNE 30, 2003

Research and Development Grant No./ Current Reference Grant Grant Year

State Grantor/Program Title Number Award Period Expenditures

New Jersey Department of Higher Education:

Capacity-Bldg. Funds for Biomedical/High Tech Research 02-801040-04 576,439$ 09/28/01 - 06/30/03 527,983$ Capacity-Bldg. Funds for Biomedical/High Tech Research 01-801040-04 713,733 11/17/00 - 06/30/03 122,644 Eisenhower Professional Development 01-BZ04-C03 245,762 09/01/01 - 08/31/02 75,305 Teacher Preparation Quality & Capacity Initiative 02-809190QC-12 32,242 07/27/01 - 06/30/04 24,392 Eisenhower Professional Development 02-BZ05-C03 247,296 12/01/02 - 06/30/04 143,834

Total New Jersey Department of Higher Education 1,815,472 894,158

New Jersey Office of Emergency Management:

Data Manager NJ HAZUS Work Group Ltr. 12/22/00 40,000 12/01/00 - 09/10/02 19,804

Total New Jersey Office of Emergency Management 40,000 19,804

TOTAL RESEARCH AND DEVELOPMENT 11,258,705$ 5,123,706$

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PRINCETON UNIVERSITY

SCHEDULE OF EXPENDITURES OF STATE AWARDSYEAR ENDED JUNE 30, 2003

Student Financial Aid Grant No./ Current Reference Grant Grant YearNumber Award Period Expenditures

New Jersey Department of Higher Education:

New Jersey Garden State Distinguished Scholars FY2003 NONE 287,785 INDEFINITE 287,785 New Jersey Tuition Aid FY2003 NONE 200,000 INDEFINITE 200,000

Total Student Financial Aid 487,785 487,785

TOTAL STATE AWARDS 11,756,490$ 5,621,491$

See notes to schedules of expenditures of federal and state awards.

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PRINCETON UNIVERSITY

NOTES TO SCHEDULES OF EXPENDITURES OF FEDERAL AND STATE AWARDS YEAR ENDED JUNE 30, 2003

1. The purpose of the Schedules of Expenditures of Federal and State Awards (the “Schedules”) is to present a summary of the activities of Princeton University (the “University”) for the year ended June 30, 2003 which have been financed by the U.S. Government and the State of New Jersey. For purposes of the Schedules, Federal and State awards include all federal and state assistance and procurement relationships entered into directly between the University and the Federal government or the State of New Jersey and sub-awards from non-federal and non-state organizations made under federally or state sponsored agreements. Because the Schedules present only a selected portion of the activities of the University, they are not intended to and do not present either the financial position, changes in net assets or cash flows of the University.

The accounting principles followed by the University in preparing the Schedules are as follows:

• Sponsored Research and Other Awards—Expenditures for direct costs are recognized as incurred using the accrual method of accounting and the cost accounting principles contained in the U.S. Office of Management and Budget Circular A-21, Cost Principles for Educational Institutions. Under those cost principles, expenditures also include a portion of costs associated with general university activities (indirect costs) which are allocated to Federal and State awards under negotiated formulas commonly referred to as facilities and administrative cost rates. Credit disbursement amounts typically result from grant or contract closing adjustments or transfers.

• Student Financial Assistance—Expenditures are recognized on the accrual basis for awards made to students and allowable administrative expenses of running such programs.

2. The University administers the following federal loan program:

Outstanding Disbursements Federal CapitalBalance for the Contribution for

CFDA at Year Ended the Year EndedNumber June 30, 2003 June 30, 2003 June 30, 2003

Federal Perkins Loan Program 84.038 14,498,690$ 1,113,586$ 270,583$

The above disbursements include loans to students of $1,062,586 and administrative costs of $51,000 for the year ended June 30, 2003.

3. During the fiscal year ended June 30, 2003, the University processed the following amount of new loans under the Federal Family Education Loan Program (which includes Federal Stafford Loans, Federal Parents’ Loans for Undergraduate Students, and Federal Supplemental Loans for Students):

CFDA Number Authorized

Federal Family Education Loan Program 84.032 2,935,083$

* * * * * *

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INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE AND ON INTERNAL CONTROL OVER FINANCIAL REPORTING BASED UPON THE AUDIT PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

The Board of Trustees Princeton University:

We have audited the consolidated financial statements of Princeton University as of and for the year ended June 30, 2003, and have issued our report thereon dated November 1, 2003. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States.

Compliance

As part of obtaining reasonable assurance about whether Princeton University's consolidated financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grants, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance that are required to be reported under Government Auditing Standards.

Internal Control Over Financial Reporting

In planning and performing our audit, we considered Princeton University's internal control over financial reporting in order to determine our auditing procedures for the purpose of expressing our opinion on the consolidated financial statements and not to provide assurance on the internal control over financial reporting. Our consideration of the internal control over financial reporting would not necessarily disclose all matters in the internal control over financial reporting that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over financial reporting and its operation that we consider to be material weaknesses.

This report is intended for the information of the audit committee, board of trustees, management and federal and state awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties.

November 1, 2003

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INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE AND INTERNAL CONTROL OVER COMPLIANCE APPLICABLE TO EACH MAJOR FEDERAL AND STATE AWARD PROGRAM

The Board of Trustees Princeton University:

Compliance

We have audited the compliance of Princeton University with the types of compliance requirements described in the U. S. Office of Management and Budget (“OMB”) Circular A-133 Compliance Supplement and the New Jersey Office of Management and Budget Circular 98-07 State Grant Compliance Supplement that are applicable to each of its major federal and state programs for the year ended June 30, 2003. Princeton University's major federal and state programs are identified in the summary of auditor's results section of the accompanying Schedule of Findings and Questioned Costs. Compliance with the requirements of laws, regulations, contracts, and grants applicable to each of its major federal and state programs is the responsibility of Princeton University's management. Our responsibility is to express an opinion on Princeton University's compliance based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations; and New Jersey Office of Management and Budget Circular 98-07, Single Audit Policy for Recipients of Federal Grants, State Grants and State Aid. Those standards, OMB Circular A-133, and New Jersey Circular 98-07 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal or state program occurred. An audit includes examining, on a test basis, evidence about Princeton University's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination on Princeton University’s compliance with those requirements.

In our opinion, Princeton University complied, in all material respects, with the requirements referred to above that are applicable to each of its major federal and state programs for the year ended June 30, 2003.

Internal Control Over Compliance

The management of Princeton University is responsible for establishing and maintaining effective internal control over compliance with requirements of laws, regulations, contracts, and grants applicable to federal and state programs. In planning and performing our audit, we considered Princeton University's internal control over compliance with requirements that could have a direct and material effect on a major federal or state program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133 and New Jersey Circular 98-07.

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Our consideration of the internal control over compliance would not necessarily disclose all matters in the internal control that might be material weaknesses. A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that noncompliance with applicable requirements of laws, regulations, contracts and grants that would be material in relation to a major federal or state program being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions. We noted no matters involving the internal control over compliance and its operation that we consider to be material weaknesses.

This report is intended for the information of the audit committee, board of trustees, management and federal and state awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than those specified parties.

March 24, 2004

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PRINCETON UNIVERSITY

SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED JUNE 30, 2003

Part I - Summary of Auditors’ Results

Financial Statements

Type of auditors’ report issued: Unqualified

Internal control over financial reporting:

Material weakness identified? _______yes X no

Reportable condition identified not considered to be material weakness? _______yes X N/A

Noncompliance material to financial statements noted? _______yes X no

Federal and State Awards

Internal control over major programs:

Material weakness identified? _______yes X no

Reportable condition identified not considered to be material weakness? _______yes X N/A

Type of auditors’ report issued on compliance for major programs: Unqualified

Any audit findings disclosed that are required to be reported in accordance with Circular A-133 section .510(a)? yes X no

Identification of major programs:

Research and Development cluster

Dollar threshold used to distinguish between Type A and Type B programs $ 3,000,000

Auditee qualified as low-risk auditee? X yes no

Part II - Financial Statement Findings Section

No reportable findings were identified.

Part III - Federal Awards Findings and Questioned Costs Section

No reportable findings were identified.

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