Yale University Financial Report2002–2003www.yale.edu/fr02-03

Fiscal years

Five-Year Financial Overview ($ in millions) 2003 2002 2001 2000 1999

Budget Activity Surplus (Deficit) $ — $ — $ — $ — $0.7

Financial Position Highlights:Total assets $14,257.4 $13,358.8 $13,268.7 $12,370.0 $9,347.4Total liabilities 2,029.3 1,624.1 1,393.6 1,416.2 1,336.6

Total net assets $12,228.1 $11,734.7 $11,875.1 $10,953.8 $8,010.8

Endowment:Total investments $11,048.9 $10,522.6 $10,733.3 $10,092.3 $7,221.7Total return on investments 8.8% 0.7% 9.2% 41.0% 12.2%Spending from endowment 4.5% 3.8% 3.4% 3.9% 3.9%

Facilities:Land, buildings and equipment, net

of accumulated depreciation $1,986.1 $1,853.2 $1,582.5 $1,354.5 $1,197.4Disbursements for building projects 207.6 328.2 282.0 191.3 172.8

Debt:For facilities improvements $1,543.9 $1,193.8 $994.3 $1,028.3 $989.9For student loans and other 29.0 29.5 29.5 45.6 45.6

Statement of Activity Highlights:Operating revenue $1,553.7 $1,472.2 $1,352.9 $1,262.1 $1,149.5Operating expenses 1,543.1 1,427.0 1,334.9 1,282.0 1,129.9

Increase (decrease) in net assetsfrom operating activities $10.6 $45.2 $18.0 ($19.9) $19.6

Five-Year Enrollment Statistics 2003 2002 2001 2000 1999

Student Fees:Yale College term bill $35,370 $34,030 $32,880 $31,940 $30,830

Freshmen Enrollment:Freshmen applications 15,466 14,809 12,887 13,270 11,947 Freshmen admitted 2009 2,038 2,084 2,135 2,100Admissions rate 13.0% 13.8% 16.2% 16.1% 17.6%Freshmen enrollment 1,300 1,296 1,352 1,371 1,299 Yield 65.6% 64.7% 66.4% 65.0% 63.0%

Total Enrollment:Yale College 5,307 5,270 5,335 5,340 5,411 Graduate and professional schools 5,853 5,762 5,579 5,512 5,455

Highlights

Front cover:Research associate Irene Kasumba, Postdoctoral fellow Dana Nayduch, and postgraduate associate Youjia Hu are screening bacterial colonies with tsetse DNAfragments in Professor Serap Aksoy’s laboratory at the Department of Epidemiology and Public Health.

Back cover:The 457,000 square foot Anlyan Center for Medical Research and Education, dedicated inMay 2003, contains research facilities for about 700 laboratory scientists, state-of-the-art space for the teaching of anatomy and histology, and a center for advancedresearch in magnetic resonance imaging and spectroscopy. It is named after benefactorsDr. A. John Anlyan '42 B.S., '45 M.D. and Betty Jane Anlyan.

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Message from the Acting Vice President for Finance and Administration

President Levin has made a significant commitmentto enhancing the University’s standing as one of theworld’s premier research institutions in the fields ofscience and technology. As described in this annualreport, Yale is making major investments in programsand facilities in science, medicine, and engineering tosupport the University’s current distinction in the sciences. A byproduct of this work is a growingbiotechnology industry located near the University, aresult of Yale’s success in technology transfer effortsand one of the important ingredients in the renais-sance of New Haven.

In fiscal year 2003, the University’s operating andinvestment results demonstrated continued resiliencyin the less than robust economic environment confronting higher education. Yale balanced its budget by keeping spending within the limits of available resources. While contributions and interestincome declined, there were increases in operatingrevenues from sponsored agreements, medical services, and the endowment which returned 8.8%,provided $470 million to operating activity, and grewto $11 billion for the first time in Yale’s history.

Capital spending for fiscal year 2003 was $207.6million, principally for research and student facilities.A major new research complex, the Anlyan Centerfor Medical Research and Education at the School ofMedicine, was finished this year. Completion of thefinancing for this facility included a significant giftfrom Dr. A. John Anlyan ’42 b.s., ’45 m.d. and BettyJane Anlyan. This 457,000 square foot building willallow Yale to maintain its position as one of the toprecipients of life sciences research grants in thenation. The renovation of Yale’s residential collegesalso continued with the completion this year of the$63.4 million Timothy Dwight College project. Tohelp fund this continuing investment in physicalinfrastructure, the University’s debt load, whichincreased by $350 million during the year, is expectedto grow. Management views the tax-exempt bondmarket as a prudent vehicle to finance these invest-ments, but remains cognizant of the impact that the increase in debt has on operations and overall financial position. The University’s debt to net assetsratio remains strong and will continue to be closely monitored.

With respect to administration, a major effortwas initiated to improve management efficiency,streamline business practices, and reduce expendi-tures not directed to teaching and research. InSeptember of 2003, the University and its two unionssettled contract negotiations, with the Union mem-bership receiving competitive wage and pensionincreases and the University an unprecedented eight-year agreement, an extended contract period whichwill be used to improve labor-management relations.In October 2003, the University issued Standards ofBusiness Conduct, a statement that articulates theethical and legal principles that have long governedbusiness dealings by faculty and staff. It reflects thevalues to which Yale subscribes, and identifies thedocuments that set forth the University policies thataddress these matters. All faculty and staff have beenencouraged to review this new statement, consider it carefully, and continue to act in accordance with its underlying principles and policies.

Yale continues to strive to preserve and enhanceits human, financial, and physical capital to ensurethat the University has the resources available to fulfill its mission of acquiring and transmittingknowledge, and of preparing our students for serviceand leadership roles in society. Yale seeks to create aproductive environment for its employees and pro-vide financial incentives to attract and retain thefinest research, teaching, and administrative staff. The University’s financial capital has in recent yearsbeen enhanced by the superior results of the manage-ment of the endowment, and the maintenance andimprovement of our physical environment, the mag-nificent campus which supports research and learn-ing, continues to be a priority of this administration.

We are most grateful for the dedication of faculty,students, staff, trustees, alumni, and friends whowork together to make Yale a preeminent institutionand to ensure the University’s continuing excellencefor future generations.

Bruce Donald Alexander ’65Acting Vice President for Finance and Administration

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As the University begins its fourth century, thenext generation of the leaders it produces willneed a strong footing in the sciences. Yale isassembling the intellectual capital— and providing the infrastructure— to help answerthe large, complex questions that society will confront.

At the time of Yale’s founding in 1701, a well-educated person would have had at least apassing interest in science and could beexpected to know something about naturalhistory, botany, astronomy, and chemistry, andperhaps a bit of physics as well. But a thor-ough grasp of science was far from requiredfor leadership in most endeavors, includingpolitical and civic life.

As recently as a generation ago, the rela-tion of science to public discourse remainedessentially unchanged. Through the secondhalf of the twentieth century, a citizen—or, forthat matter, a head of state—could well under-stand the implications of the nuclear age with-out comprehending the scientific principles ofnuclear physics. As the twenty-first centuryopens, however, it is no longer possible toappreciate the political and economic conse-quences of newly emerging technologies with-out at least a basic understanding of theirunderlying scientific principles. A compellingexample can be found in the debate over thepotential benefits and dangers of bio-engi-neered food products, a conversation that cannot be joined intelligently without anappreciation of the science behind geneticengineering.

“The world leaders of tomorrow,” saysSusan Hockfield, Provost of the Universityand the William Edward Gilbert Professor ofNeurobiology, “must be conversant in scienceand confident of their ability to understandthe basic principles and the language of evolv-ing technologies.” Moreover, they will be rely-ing on new knowledge created at institutionssuch as Yale to guide them in makinginformed and wise decisions.

Given this new paradigm, and given Yale’stradition of producing leaders in virtuallyevery sphere, the University has recognized thegrowing importance of science and technologyin a liberal arts education and is investing anunprecedented $1 billion to support increasedscholarship and teaching in these areas.Building strength in the sciences is ever morecritical to Yale’s continued preeminenceamong research universities in the United

States and the world. This commitment isintended to produce better research, a richeracademic environment and an improved cur-riculum, not only for science students but alsofor all students whose knowledge of sciencewill be an essential part, if not the focus, oftheir undergraduate or graduate education.

“No investment is more important tosecuring Yale’s position among the world’sleading universities,” says Yale PresidentRichard C. Levin, “and no investment holdsgreater promise for the health and prosperityof the nation and the planet.”

As Yale embarks on its fourth century, it isembracing innovative research and teaching inthe physical and biological sciences, engineer-ing, and the environment. In addition, theUniversity is encouraging collaborations largeand small that cross traditional departmentlines and draw on the insights of diverse fields.This broad approach to complex problems inscience is gaining momentum at a time whenthe boundaries separating many basic disci-plines are beginning to blur. As we discovermore about the physical and chemical proper-ties of molecules, the nature of human inheri-tance, and the application of scientific knowl-edge for improved health and a sustainablefuture, a common vocabulary is evolvingamong investigators at Yale and around theworld. The four examples of interdisciplinarycollaboration that follow draw heavily on thiscommon language.

Translating Life’s

In the emerging fields of genomics and pro-teomics, Yale is particularly well-positioned totranslate the discoveries of basic science intomedical practice that will extend life and alle-viate human suffering. The pioneering dnawork of scientists including Frank Ruddle,Sterling Professor of Molecular, Cellular, andDevelopmental Biology—who popularized theterm “genomics” in a 1987 paper with JohnsHopkins colleague Victor McKusick—gaverise to what is by far the largest and mostambitious research collaboration ever under-taken.

The Human Genome Project began in1990 as an international, fifteen-year effort todetermine the precise sequence of the three bil-lion nucleotide bases that compose humandna. By spelling out the order of these basicbuilding blocks, the project promised toimprove, by orders of magnitude, current

A changing world, grounded in science

Susan Hockfield, the WilliamEdward Gilbert Professor ofNeurobiology, is the first basicscientist to serve as Provost ofthe University. Scientific liter-acy, she says, will be a keyqualification for the next gen-eration of leaders in acade-mia, industry and public life.

“Instruction Book”

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understanding of normal biology as well as ofthe mechanisms and pathways that contributeto human disease.

When the working draft of the humangenetic code was completed ahead of schedulein 2000, genome project leader Francis S.Collins declared that a new era in medicinehad begun. “We have caught the first glimpsesof our instruction book, previously knownonly to God,” said Collins, who received hisdoctorate in physical chemistry from Yale andtrained at the School of Medicine as a fellowin genetics and pediatrics.

This “instruction book” is rapidly beingtransformed into a genetic toolkit for physi-cians of the twenty-first century. Yale facultymembers from the School of Medicine andScience Hill are collaborating on a high-profileeffort to probe the data produced by thegenome project for information about whatthe sequenced genes actually do. “The HumanGenome Project gave us structure,” saysMichael Snyder, the Lewis B. CullmanProfessor and chair of the Department ofMolecular, Cellular, and DevelopmentalBiology. “Now we’re looking for function.”

Professor Snyder heads Yale’s new Centerfor Genomics and Proteomics, which unitesmore than 80 scientists in 18 departments. TheCenter attracted $15 million in funding in2001 from the National Human GenomeResearch Institute, resources that will help payfor state-of-the-art instrumentation for large,multidisciplinary projects. It is part of an over-all commitment of $200 million the Universityhas made to advancing the fields of genomics(the study of all the genes of an organism) andproteomics (the study of all the proteinsexpressed by those genes). “The goal of everygenomics and proteomics project ultimately isto understand how a human being developsfrom a single cell to a multi-trillion celledorganism,” says Professor Snyder. “Under-standing what goes right under normal circumstances and what can go wrong willgive us new avenues for treating disease.”

Examples of this approach can be foundin the work of Dr. Richard P. Lifton, who isSterling Professor and chair of the Departmentof Genetics and a Howard Hughes MedicalInstitute investigator. Dr. Lifton and his collab-orators across Yale and around the globe haveemployed an imaginative approach in the huntfor genes responsible for heart and kidney dis-ease, stroke and osteoporosis. Dr. Lifton,whose team has identified more than twentyhuman disease genes, first studied rare andextreme variants of common disorders such ashypertension as a way of narrowing the searchfor genetic components. In the team’s mostrecent work, they have looked at geneticallyisolated populations in which the incidence ofa recessive disease is higher because of inter-marriage.

Collaborating with physicians andpatients in Iran, Dr. Lifton and Dr. Arya Mani,Associate Research Scientist in InternalMedicine, have narrowed down the geneticcause of a form of congenital heart disease to

Standing at a work station at Yale’s new Center for Genomics and Proteomics onScience Hill, Dr. Richard Lifton (left) and Professor Michael Snyder discuss differences in gene expression on human chromosome 22. The brightly coloredimage on the screen represents data derived from microarray technology, in whichthousands of DNA or protein samples can be analyzed robotically on a single glassslide or silicon chip. The center’s work, which focuses on the relationship ofsequence alterations in DNA to alterations in expressed proteins, addresses thebasic mechanisms of biological function and is becoming a cornerstone of personalized medicine.

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a segment of dna on chromosome 12. (Otherstudies are directed at the genetic causes ofcommon disease in isolated communities inthe Italian Alps, on the Pacific island ofKosrae and in India.) The search for the heartdisease gene is focused on a stretch of dna“only” six million nucleotide bases long, butwith the tools of the genome project andYale’s core facilities, this number is not asdaunting as it once would have been. Indeed,projects that scientists of a generation agowould have devoted years to, such as the map-ping of a single gene, can now be accom-plished in a matter of months.

To support research in the burgeoningareas of genomics and proteomics, the KeckBiotechnology Laboratory, directed byKenneth Williams, Professor (Adjunct) ofMolecular Biophysics and Biochemistry, givesYale investigators access to advanced instru-mentation for nucleic acid syntheses andsequencing, microarray analysis, mass spec-trometry, and other core technologies.Professor Williams is the principal investigatorfor a new proteomics center at Yale funded byan $18 million contract from the NationalHeart, Lung and Blood Institute. Uniting 21faculty members from 12 departments, thecenter will develop methods for the identifica-

tion and modulation of the activities of proteins related to vascular biology,hematopoiesis, and blood pressure regulation.Such research will generate new insights intodiseases such as atherosclerosis and inflamma-tion, and will seek to clarify the basis for resis-tance to chemotherapy and immunologicalrejection of transplanted tissues and organs.

Life at the NanoscalePaul A. Fleury, the Frederick W. BeineckeProfessor of Engineering and Applied Scienceand Dean of the Faculty of Engineering, sees atrace of irony in the sudden rise of nanotech-nology—a nascent field focused on the struc-ture and behavior of materials at the atomiclevel. (A nanometer is a billionth of a meterand about 80,000 times smaller than the diam-eter of a human hair.)

On one hand, nanotechnology is one ofthe most exciting areas in science today, yield-ing critical new information relevant to com-puting, electronics, optics, drug development,and the life sciences. On the other hand, nano-technology has become a catch-all term usedto dress up virtually any research project con-ducted at the scale of molecules. For example,Dean Fleury says, a search of the literature forpapers with the keyword “nano” returns morethan 3,000 articles. Remove “nano” from thearticle titles and the majority lose nothing oftheir meaning.

And yet nanoscience is flourishing forgood reason, especially at Yale, where morethan three dozen faculty members in 14departments are collaborating to find ways tomanipulate materials and control phenomenaat the nanometer scale. “It’s more than just adesignation of scale,” says Dean Fleury.“What’s fascinating is that it is at this atomiclevel that all the scientific disciplines intersect,making interdiciplinary research attractive ifnot imperative.”

Take, for example, the overlapping inter-ests of Mark Reed, the Harold HodgkinsonProfessor of Engineering and Applied Physics,who works at the nanoscale, and those ofRonald R. Breaker, Associate Professor ofMolecular, Cellular, and DevelopmentalBiology, who has probed the dark corners ofan ancient “rna world” that gave rise to life3.5 billion years ago. Professor Reed’s work onmolecular-scale devices capable of turning cur-rent on and off enabled the development ofthe first molecular circuits, featured in thejournal Science as 2001’s “Breakthrough of the

A changing world, grounded in science

Molecular switches of the kind designed by Professor Mark Reed (inset) could beused to design biosensors in collaboration with Professor Ronald Breaker. Physi-cians might use a scanner based on such a technology to check a patient for signsof infection or exposure to toxins. Microarray-based sensors could alert authoritiesto acts of bioterrorism or help first responders evaluate the hazards of a chemicalspill. Above: a representation of a “self-assembled monolayer” of oligomer mole-cules forming a molecular switch.

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Year.” Professor Breaker, who has designedsimple rna and dna switches with the poten-tial to act as biosensors, saw much to begained by collaborating with Reed’s team afew blocks from his own laboratory in KlineBiology Tower.

“We’ve confirmed that biology uses theseswitches extensively. It’s the way some genesare turned on and off,” Professor Breaker saysof these nucleic acid enzymes, which hebelieves can be engineered to detect anythingfrom toxic chemicals to tumor cells to drugmetabolites. “The dream now is to integratethem into the nanodevices that are being fabri-cated in labs such as Mark Reed’s.” For exam-ple, one of Professor Breaker’s enzyme switch-es could be used to open a “nanopore” thatallows current to flow, or to regulate the volt-age carried by a “nanowire” measuring only a

few nanometers in diameter. Physicians mightuse a scanner based on such a technology tocheck a patient for signs of infection or expo-sure to toxins. Microarray-based sensors couldalert authorities to acts of bioterrorism or helpfirst responders evaluate the hazards of achemical spill.

Collaborations such as this have been fos-tered by several informal meetings of Yale’snanotech group, allowing members to stayabreast of what their colleagues in otherdepartments are thinking and doing. It was atone of these meetings two years ago thatProfessors Reed and Breaker started talking.“It’s wonderful to see,” says Dean Fleury,“because faculty don’t necessarily knowwhat’s going on . . . across the campus.”

Graduate student Jeremy Sage is shown adjustingone of the many lasers needed for the experimentused by David DeMille’s group in the PhysicsDepartment, to create the world’s coldest polar mol-ecules. These molecules may be used as the bits in aquantum computer. Within the department, theparticle physicists are exploring phenomena inAstrophysics, the next generation of accelerators,and even higher energies described by superstrings,probing new particles at Fermilab and recreating theextreme conditions of the Early Universe right after

the Big Bang. The nuclear physicists are studyingand classifying exotic nuclei created in the lab andthat occur in stellar objects. The condensed matterand atomic physicists are working on high tempera-ture superconductors and nanostructures, searchingfor exotic new forces in nature, neutrinos and darkmatter, and pursuing the holy grail of quantum com-puters which, when built, could solve in 20 secondscertain problems that would take the conventionalcomputer 15 billion years (the age of the universe) tosolve.

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The Environmental Partnership

Yale’s Environmental Partnership refers to anongoing collaboration among faculty from tenof the University’s schools, departments, andprograms. The diversity of issues related to theenvironment support a rich blend of scholarlyinterests and expertise. For example, JohnWargo, Professor of Environmental RiskAnalysis Policy in Political Science and at theSchool of Forestry & Environmental Studies(fes), and colleagues from the Department ofEpidemiology and Public Health haveexplored the spatial, temporal, and demo-graphic distribution of such environmentalhealth risks as Lyme disease and West Nilevirus, providing a basis for evaluating pastenvironmental and natural resources manage-ment policies, and suggesting legal reform.Linda Schwartz of the School of Nursing incollaboration with colleagues from fes hasfocused on the long-term health consequencesof the chemicals used during the Vietnam War.

Since 1996, a team of researchers at Yale’sCenter for Earth Observation has been moni-toring and interpreting an array of landscapechanges occurring in the Middle East. Thisunique effort brings together the archeological

expertise of Frank Hole, the C.J. MacCurdyProfessor of Anthropology; the weather andclimate knowledge of Ronald Smith, Professorof Geology and Geophysics; and the skills ofan international group of students and post-doctoral associates. The group has used awide variety of satellite images, conventionalclimate data, and supercomputer models ofthe atmospheric storms and climate to distin-guish the landscape changes arising fromhuman activities and from natural climatefluctuation.

The team found that grassland productiv-ity responds strongly to each year’s wet or dryclimate anomalies while also experiencing theimpact of increased grazing as Bedouin fami-lies transport their herds of sheep into thesteppe. Rain-fed agriculture also is influencedby climate fluctuations, as well as nationalagricultural policies and global economicforces. Perhaps most dramatic of these forceshas been the tripling of irrigated agriculturesince 1980. Total irrigation water use in south-eastern Turkey, Syria, and Iraq, largely con-stant for several thousand years, has quicklyrisen to levels comparable with available watersupplies from the Tigris and Euphrates Rivers.This change has forced a shift in the location

A changing world, grounded in science

Dramatic changes in irrigated agriculture are underway in the MiddleEast. The satellite image on the left (1990) shows intense agriculture(red shade on the image) in the narrow floodplain of the Khabur Riverin northeastern Syria. Ten years later (2000), the river has been

dammed, diverting water to new plantations in the higher, dryersteppe. Agriculture in the lower Khabur, with a continuous history ofthousands of years, has ceased. (Image analysis by Benjamin Zaitchikand Professor Frank Hole, Yale Center for Earth Observation.)

1990 2000

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of agriculture. Traditional farming in someriver flood plains and natural swamps hasbeen abandoned in favor of new plantations inthe dryer lands of the steppe. These dramaticchanges, driven by population and climate aswell as national and international economics,confront all in the region with the issue of sustainability.

Engineering a Healthier WorldIn 1996, Yale created an undergraduate majorin biomedical engineering, building on existingfaculty expertise and developing six newcourses on such topics as biomechanics, physi-ological systems, and image analysis. The firstgraduating class of eight students receivedtheir degrees in 1999, and since then, biomed-ical engineering has become the most popular

major within the Faculty of Engineering, send-ing close to seventy-five students on to gradu-ate and medical schools or jobs in industry.

The program itself had a graduation ofsorts in July 2003, when it became Yale’snewest department under the leadership of W.Mark Saltzman, the new chair and GoizuetaFoundation Professor of Chemical andBiomedical Engineering. The expansion of bio-medical engineering at Yale reflects growinginterest in a field that President Levin has said“promises revolutionary opportunities to har-ness technology in the service of humanhealth.” Focused on three main areas—tissueengineering, drug delivery, and imaging tech-nology—the new department has three pri-mary faculty members from the Faculty ofEngineering (with three yet to be recruited)and six from the School of Medicine. Anotherfour faculty members from two departmentsand the Pierce Laboratory hold secondaryappointments. The scope of their researchranges from the development of syntheticmaterials to ferry drugs to hard-to-reach sitesin the brain to projects aimed at restoringnerve function in cases of spinal cord injury,to the creation of new magnetic resonanceimaging technologies for studies of diabetes,dyslexia, and epilepsy.

Professor Saltzman says many of the fac-ulty share an interest in the application ofemerging technologies to the treatment of neu-rological disease. His own work as a facultymember at Johns Hopkins, Cornell, and nowYale centers on the slow release of anti-tumordrugs by means of biodegradable polymers.The department’s newest recruit, AssistantProfessor Erin Lavik, is doing work relevantboth to paralysis and macular degeneration—two clinical areas where the regeneration oftissue would ameliorate currently irreversibleconditions.

Similarly, new approaches to imagingtechnology promise to improve the treatmentof patients with intractable epilepsy. Over thelast twenty-five years, Dr. Dennis D. Spencer,the Harvey and Kate Cushing Professor ofNeurosurgery and Interim Dean of the Schoolof Medicine, has developed surgical techniquesto treat cases that do not respond to anti-seizure medication. Starting in the late 1970s,Dean Spencer and colleagues began monitor-ing epilepsy patients—using a grid of depthelectrodes placed over the exposed cortex ofthe brain for a week or more—to locate themalfunctioning brain tissue from which the

Using depth electrodes to record brain activity, neurosurgeons are able to locateand remove the tissue responsible for epilepsy while leaving critical brain regionsunharmed. Yale scientists are now refining the procedure, hoping to use magneticresonance (MR) imaging to reach the same outcome faster and less invasively.

Above: Electrode data are superimposed over a three-dimensional MR imageof the brain. Eventually such images will be used to guide surgery. Inset: Followingthe current state-of-the-art procedure, Dr. Dennis Spencer prepares to lay down agrid of electrodes for mapping brain function.

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seizures emanate. They also map critical brainregions governing motor and cognitive func-tion that must be avoided during surgery.

Those techniques, developed with collabo-rators in engineering and computerized imag-ing, remain the state-of-the-art treatment forintractable cases of neocortical epilepsy. NowDean Spencer and colleagues are exploring therelationship between an excitatory neurotrans-mitter in the brain called glutamate, which iselevated in the seizure-generating tissue, andthe behavior of glial cells, which are meant tokeep glutamate in check. The researchersadapted their depth electrodes—long, thin sen-sors that measure electrical activity—to mea-sure glutamate by means of microdialyis, tak-ing up minute quantities of brain fluid foranalysis. “We’re the only program in theworld right now that is doing this,” DeanSpencer says. “We’ll be replacing it in the nextyear with biosensors that can measure gluta-mate, lactose, glucose, pH and oxygen—in realtime, while the patient is being recorded. Itwill really give us a dynamic picture of thechemical changes that permit seizures tobegin.”

Faculty in Neurosurgery and DiagnosticRadiology, including Biomedical Engineeringfaculty members James S. Duncan, Lawrence

Staib, Todd Constable, and Douglas Rothman,are working to improve brain imaging withthis group of patients in mind. Funded by a$7.1 million grant from the newly establishedNational Institute of Biomedical Imaging andBioengineering, the group led by ProfessorDuncan is devising systems for superimposingfunctional magnetic resonance imaging (fmri)data on real-time images of the surgical siteduring a procedure. With reflective instru-ments that register video with fmri data, thesurgeon will be able to see precisely where thescalpel is in relation to the diseased tissue, aswell as the critical areas of brain tissue thatmust be avoided. Eventually, Dean Spencerhopes, this will eliminate the need for themore invasive, electrode-grid mapping process.

It may be that the intervention willbecome less invasive still, if ProfessorSaltzman’s materials research can be broughtto bear on the problem. “If one could devise adrug treatment that would repair the damagedtissue,” says Engineering Dean Fleury, “andverify through imaging that it was in the prop-er region and working, traditional surgerymight not be necessary.” Dean Spencer adds:“The components we’re envisioning includecomputer modeling of images to define three-dimensional brain anatomy, the use of stemcells or genetic transfer to repair dysfunctionalglial cells, and bioengineering methods toenable precise delivery of the molecular therapy.”

What makes this all possible, facultymembers across the Yale campus say, is theUniversity’s emphasis on cross-disciplinary col-laboration. “The walls between departmentshere aren’t very high, and that’s an importantkind of atmosphere to have if you want a really successful biomedical engineeringeffort,” says Professor Saltzman. “A lot of thefoot-soldiers in our effort are students, and ifthey can’t move from one laboratory to another, or one department to another, andtake advantage of resources in each one,they’re not going to get very far. Fortunately,Yale is a place where you can really live inboth worlds. You can be an excellent physicalscientist and an excellent biomedical scientist.” �

Department Chair W. Mark Saltzman and Assistant Professor Erin Lavik, ofBiomedical Engineering, examine a sample of polymer wafer used for the slowrelease of chemotherapy agents in the brain following surgery. The newly estab-lished Department of Biomedical Engineering is bringing the sciences of biologyand polymer chemistry together in the development of implantable biodegradablepolymers for drug delivery and for scaffolding to assist repair of damaged tissue.Another group of faculty in the department is developing new imaging systems toguide the neurosurgical treatment of epilepsy.

A changing world, grounded in science

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Yale University has been a major force inAmerican science and engineering for much ofits history. Benjamin Silliman (1779-1864) wasa leading advocate for science at Yale and inthe nation. Josiah Willard Gibbs, Jr. (1839-1903), among the most original and brilliantscientific minds America has ever known, waseducated at Yale (b.a. 1858, ph.d. 1863) and alife-long member of the faculty; his ground-breaking studies of thermodynamics remainauthoritative today. Edward AlexanderBouchet (1852-1918), who graduated fromYale College in 1874 and earned his doctoratein physics from Yale in 1876, was the firstAfrican-American in the United States to earna ph.d. In 1896, Yale physicist Arthur Wrightcreated the first X-ray image in America fol-lowing Roentgen’s discovery in Germany.

A number of Yale faculty and Yale-trainedscientists have garnered the Nobel Prize. InPhysiology/Medicine, for example, JoshuaLederberg, ph.d. 1948, and Edward L. Tatum(a former Yale faculty member) received the1958 Nobel Prize for research on geneticrecombination and the organization of thegenetic material of bacteria, carried out inYale’s Osborn Memorial Laboratories. GeorgeE. Palade, founding chair of the Departmentof Cell Biology, was awarded the 1974 Prizefor discoveries concerning the structural andfunctional organization of the cell. PaulGreengard won the 2000 Prize for work in sig-nal transduction in the nervous system that hebegan at Yale as a professor of pharmacologyin the 1970s and 1980s.

In chemistry, Lars Onsager (a professor atYale from 1934 to 1972) was awarded the 1968Nobel for the discovery of reciprocal relationsunderlying the thermodynamics of irreversibleprocesses. The 1989 Prize was shared bySidney Altman, currently Sterling Professor ofMolecular, Cellular, and DevelopmentalBiology, for the discovery of rna enzymes, or“ribozymes,” a finding that led to a newbranch of molecular biology for treating lethalviruses and repairing genetic defects. EmeritusChemical Engineering Professor John B. Fenn,ph.d. 1940, received the 2002 Prize for pio-neering work done at Yale on the developmentof electrospray ionization as a means of trans-ferring large molecules, such as proteins orpolymers, into a mass spectrometer for struc-tural characterization. The 2002 Nobel Prize inPhysics was awarded to three scientists,including Yale-trained researcher RaymondDavis Jr., ph.d. ’42, for pioneering contribu-

tions to astrophysics, in particular for thedetection of cosmic neutrinos. The similarlyprestigious Fields Medal, given once everyfour years, was awarded in 1978 to GregoryA. Margulis, the Erastus L. DeForest Professorof Mathematics, for his work on discrete sub-groups of Lie groups.

Science Ladder and Research Faculty

Ladder ResearchSchool Faculty Faculty

Faculty of Arts & Sciences 242 94

School of Medicine* 808 384

Forestry & Environmental Science 23 4

School of Nursing 40 4

Our faculty includes many who haveachieved the highest level of distinction. We count among them 67 members of theNational Academy of Sciences, six members ofthe National Academy of Engineering, 32members of the Institute of Medicine, 16Howard Hughes Medical Institute investiga-tors, and nine winners of the National Medalof Science or Technology—including D. AllanBromley, Sterling Professor of the Sciences;Ronald R. Coifman, Phillips Professor ofMathematics; Joan A. Steitz, Sterling Professorof Molecular Biophysics and Biochemistry;and Jerry M. Woodall, the C. Baldwin SawyerProfessor of Electrical Engineering. In April2003, Benoit Mandelbrot, Sterling Professorof Mathematical Sciences, was awarded theJapan Prize for his path-breaking work, whichestablished the field of fractal geometry.Thanks to the enormous productivity of itsscience faculty, Yale ranks ninth among highereducation recipients of funding from theNational Institutes of Health. Another mea-sure of the faculty’s influence comes fromPhiladelphia-based Science Watch/isi, whichanalyzes the impact of authors in 21 fields bytracking citations of their papers. In the mostrecent reports, Yale ranked fifth overall amonguniversities, first in chemistry and engineering,second in immunology, and fifth in psychiatry/psychology. �

Joan A. Steitz

Josiah Willard Gibbs, Jr.

Lars Onsager

Gregory Margulis

Sidney Altman

Science at Yale: a proud tradition

Science Ladder and Research FacultyLadder Research

School Faculty Faculty

Faculty of Arts & Sciences 242 94

School of Medicine* 808 384

Forestry & Environmental Science 23 4

School of Nursing 40 4

*Includes the Department of Epidemiology and Public Health

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A changing world, grounded in science

The Teaching of Science at Yale

Yale College

In the first comprehensive review of the under-graduate curriculum in 30 years, theCommittee on Yale College Education (cyce),chaired by Dean Richard Brodhead and com-posed of 41 faculty, students, and Yale Collegegraduates now enrolled in Yale’s professionalschools, reaffirmed the relevance of a liberalarts education and made recommendations inall areas for strengthening it for the twenty-first century.

In the area of science, the cyce reportunderlined the importance of scientific literacyfor future citizenry and urged the developmentof rigorous and compelling science coursesespecially designed for students who are notgoing on to advanced study in science. Thecommittee called for other changes, includingthe enrichment and expansion of opportunitiesfor research, the development of interdiscipli-nary courses in health and society, the

strengthening of the teaching of science andtechnology in a social context, and a review oflaboratory courses to assure their relevanceand interest. To support these innovations, thecommittee urged the College to build a ScienceTeaching Center that would provide class-rooms close to central campus and other facil-ities to encourage student exploration in tech-nological and scientific fields through coursework as well as extracurricular activities.

“Current Issues in Science” represents thefirst tangible result of the recommendationsregarding science teaching in the cyce report.Designed by cyce committee membersCharles Bailyn (Professor of Astronomy) andDouglas Kankel (Professor of Molecular,Cellular, and Developmental Biology), thiscourse is a 25-student lecture/seminar, inwhich faculty present a series of modules, eachaddressing the scientific content of issues ofcurrent public interest. Among the eight topicscovered are human cloning, global warming,and the search for non-terrestrial life.

One innovation in undergraduate physicsinstruction employs a method known asInteractive Classroom Teaching, currently uti-lized by Professor of Physics and AstronomyMegan Urry, Director of the Yale Center forAstronomy and Astrophysics. In a typical classthe professor poses questions, which the stu-dents answer with electronic polling devices,or clickers. The students’ answers are regis-tered electronically, one per student, and at theend of the voting period, a histogram of theanswers appears. If the answers are mostlycorrect, the professor moves on to a more dif-ficult concept. If the answers are mostlywrong, then the professor needs to give someexplanation of the underlying issue, or possi-bly backtrack to simpler concepts. If theanswers are mixed, a short class discussion isusually sufficient to fill the gaps in under-standing.

Alanna Schepartz, the Milton Harris (’29ph.d.) Professor of Chemistry, has designed anew program for teaching chemical biology tosophomores, thanks in part to a $1 milliongrant awarded by the Howard HughesMedical Institute in the fall of 2002. Her goalis to expose more students to the excitementand creativity of cutting-edge research early intheir college careers. Students will explore oneof the fastest-growing interdisciplinary fields,which draws on the techniques and principlesof chemistry to understand and control biolog-ical processes. The laboratory component of

Blending science and common sense has fueled the success of the Yale Program onAging, led by Dr. Mary E. Tinetti, the Gladys Phillips Crofoot Professor of Medicineand Professor of Epidemiology and Public Health, and Dr. Sharon Inouye, Professorof Internal Medicine and Investigative Medicine. A collaboration of more than 40investigators in Internal Medicine, Epidemiology and Public Health and Psychiatry,the program has applied scientific rigor to explore such real-world health ques-tions as “What puts older people at risk of falling? Of developing delirium? Ofexperiencing difficulty driving?” Yale studies, which were the first to probe thecauses and prevention of such common geriatric health problems, have directlyimproved quality of life for older patients through Dr. Tinetti’s fall-prevention clinic,Dr. Inouye’s Hospital Elder Life Program (HELP), and other innovative efforts. “Ourgoal,” says Dr. Tinetti, “is to help older persons be as independent as possible.” Or,as Dr. Inouye puts it, “to add life to years, not necessarily years to life.”

11

the program will include projects for summer-time research. In designing the new courses,Schepartz also hopes to encourage morewomen to pursue careers in academic research.

Research Opportunities

Yale has made increasing efforts to engageundergraduates in independent research proj-ects early in their careers, through a variety ofprograms tailored to the individual needs ofstudents. Students trained in these programshave published research papers and addressednational and international symposia.

Research Grants and Fellowships: Studentstypically receive funding for their researchthrough a variety of programs, fellowships,and faculty research grants. Most studentsenter research through individual faculty-sponsored research projects, either during theacademic year or in the summer. Each year,external faculty research grants contribute tothe support of the research of more than 300Yale undergraduates. In addition, more than adozen individual fellowship programs areavailable for undergraduate research projects.The Yale Science and Engineering ResearchPresentation Travel Prize, for instance, pro-

vides support for outstanding undergraduateresearchers to attend scientific and profes-sional meetings at which they will presenttheir research findings.

STARS Program: This Science, Technology, and Research Scholars (stars) Program isdesigned to enhance the academic success ofindividuals from groups that have historicallybeen under-represented in the sciences andengineering by identifying and nurturing tal-ented students in each of the undergraduateyears.

Perspectives on Science: This lecture and dis-cussion course was designed for a limitednumber of freshmen who have exceptionallystrong backgrounds in science, engineering

Paul Turner, Assistant Professor in theDepartment of Ecology and EvolutionaryBiology, was named one of the top ten emerg-ing scholars of color and was featured on thecover of Black Issues in Higher Education maga-zine. Turner has a strong interest in the impor-tance of virus evolution for global epidemics,such as HIV/AIDS, and has focused his researchon the exchange of genetic informationbetween viruses that cause infectious disease.Currently, Professor Turner’s laboratory usesmicroorganisms (RNA viruses, DNA viruses, andbacteria) as model systems to address hypothe-ses in ecological and evolutionary biology, espe-cially questions regarding the evolution ofgenetic exchange (sex), virus ecology and evolu-tion, host-parasite interactions, and the evolu-tion of infectious disease.

Research scientist Walter Zawalich with lab assistant Greg Tesz at the School ofNursing. The Zawalich team is working to understand how the beta cell regulatesthe secretion of insulin by exploring how the over-expression or under-expressionof key proteins in the Islets of Langerhans regulates insulin secretion. It is antici-pated that these studies will facilitate the design of surrogate beta cells forgenetic engineering studies to replace those lost in Type 1 diabetes and establishhow these proteins contribute to the changes that occur in Type 2 diabetes.

12

A changing world, grounded in science

and mathematics. About 40 percent of studentscontinue with a paid research project at Yaleduring the summer following the freshmanyear.

BioSTEP program: Yale Biomedical ScienceTraining and Enrichment Program (Biostep)provides intensive, short-term summer researchtraining for undergraduates in order to fosterdiversity and interest in careers in the biomed-ical sciences. Trainees conduct research proj-ects for ten weeks in training sites and labora-tories at the School of Medicine and the VAConnecticut Healthcare System in West Haven.The program is funded by the National Heart,Lung and Blood Institute.

Encouraging Diversity in Biological Sciences:The Graduate School of Arts and Sciences has

launched a new research training initiativeknown as the Yale Post-baccalaureateResearch Education Program (Yale prep) toincrease the number of students from under-represented groups entering biomedical sciencegraduate programs. Yale is one of eight sites inthe country to receive a grant from theNational Institute for General MedicalSciences for this project, which provides $1.9million in funding over five years.

Two Yale programs are open to under-graduate students from other colleges and uni-versities. The School of Medicine is one ofeleven sites nationally for the SummerMedical Education Program, which was

Graduate student Darcy Caulkin is shown working at a glove box in Professor JohnHartwig’s laboratory in the Chemistry Department. In the Department ofChemistry, Professor John Hartwig’s research program is focused on catalysis.Chemical reactions controlled by catalysis make possible a vast number of quality-of-life improvements ranging from Prozac © to perfume, sutures to Subarus andincluding the reduced emissions of modern cars, the abundance of fresh food atour stores, and the new pharmaceuticals that improve our health. Catalysts makechemical reactions occur faster and more selectively; in most cases the reactionsthey induce in minutes or hours would take entire geological periods to occur intheir absence. Research in Professor Hartwig’s group seeks to invent new chemicalreactions that occur by the action of catalysts containing a metal atom, such asrhodium, iridium, or palladium, as the central and reactive element.

From the blueprint in its DNA,a cell manufactures the pro-teins needed to carry out themyriad functions of life. Butfor a protein to function prop-erly, it must first fold into its characteristic,three-dimensional shape. Scientists longbelieved that this folding occurred spontane-ously after synthesis, but work by Dr. ArthurHorwich, Professor of Genetics and Pediatrics,and colleagues revealed a large molecularmachine called a “chaperonin” that is required tohelp the process along. (Misfolded proteins are acause of Alzheimer’s and Lou Gehrig’s diseasesand other disorders.) Since Horwich and col-leagues published their first work on chaper-onins in Nature in 1989, the field has grownenormously, yielding thousands of relatedpapers. Dr. Horwich is one of 16 Howard HughesMedical Institute investigators at Yale. Above: aview of a chaperonin molecule. A protein wouldbe folded in the dome-shaped chamber at thetop of the assembly.

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established by the Robert Wood JohnsonFoundation to promote diversity in medicineby preparing students for the medical schoolapplication process and by giving them aninsider’s view of academic medicine.Approximately 125 students participate in thesix-week summer program. The Yale-HowardScholars Program, initiated by the deans of theSchools of Nursing at Yale and HowardUniversity, is an intensive summer internshipdesigned to increase the interest of risingseniors from underrepresented populations inpursuing advanced careers in nursing. Eachstudent identifies a research question and pur-sues that interest through mentored research,seminars and shadowing advanced practicenurses. The program was identified by theNational Institutes of Health (nih) as a modelpartnership program and has been fundednationally by the nih.

The Graduate School

Graduate programs are an essential element ofYale’s educational programs, and graduate stu-dents play a critical role in the research enter-prise in science. Advanced degrees are offeredin the ten professional schools as well as theGraduate School of Arts and Sciences.Approximately 550 new students enter theGraduate School each year. Students in themaster’s degree programs pursue advancedlevel studies in their chosen field. Doctoralstudents undertake original research or schol-arship, advancing the frontiers of humanknowledge.

In the four to six years of their doctoralprograms, graduate students learn both thefundamental underpinnings of their subjectsand the cutting-edge techniques and procedures for their study. The principal

The atomic structure of the large ribosomal subunitwas determined recently in a collaborative effortbetween the laboratories of Professors Thomas A.Steitz of the Molecular Biophysics and BiochemistryDepartment and Peter B. Moore of the ChemistryDepartment. Perhaps the most important discoveryin this study was that the RNA rather than the pro-tein component of the ribosome is fundamental tothe process of making proteins. Since RNA can func-

tion as a genome, like DNA, storing information in itssequences, and as an enzyme, RNA solves the “chick-en and the egg” paradox of how first simple lifeforms could be both an enzyme and a genome, wherean enzyme is necessary to copy a genome.Visualization of the structural interactions duringprotein synthesis provides new perspectives for thedesign of novel antibiotics that circumvent theacquired bacterial resistance to current antibiotics.

14

medium of education is through research inwhich students, under the supervision of faculty mentors, apply the scientific method ofhypothesis generation and experimental orcomputational testing to problems at the fore-front of their fields. For undergraduates, theresearch and learning environment is immea-surably enriched by the presence of talentedand motivated graduate students.

Competition for the very best graduatestudents has become increasingly intense asstudents have become more sophisticatedabout emerging technologies and as the num-ber of American students interested in pursu-ing graduate study, particularly in the physicalsciences and engineering, has declined.Graduate programs have responded to thecompetitive environment by a welcomeredesign of programs to meet current students’needs and by increasing financial support forgraduate study.

At Yale, the faculty and departments inthe biological sciences have been particularly

forward-looking in redesigning graduate pro-grams. They have aggressively augmentedstipend support and redesigned the structureof graduate study in the biological and bio-medical sciences to make Yale’s programsmore responsive to evolving trends in researchand teaching. The success of the newCombined Program in the Biological andBiomedical Sciences (bbs) suggests it as amodel for graduate education in other areas ofscience.

The creation of the bbs in 1997 fromtwelve free-standing graduate programsrequired extraordinary discussion, compro-mise, and trust. bbs provides a single point ofentry for all students who want to pursuegraduate education in the biological sciencesat Yale, and includes faculty from thirty-fivedepartments. Students enter the program ininterest-based tracks and, following the first orsecond year of study, choose a laboratory anda departmentally based graduate program inwhich to pursue the Ph.D. degree. The con-joining of disparate programs makes it possi-ble for all students to have access to all of thecourses, seminars, research programs, and fac-ulty across the Faculty of Arts and Sciencesand the Medical School.

One measure of the success of the bbsprogram is the dramatic increase in applica-tions, from 659 in the program’s first year to1,055 in 2003, a 60 percent increase. Whilemore difficult to quantify, the faculty in theprogram report that the quality of studentsmatriculating in the biological sciences hasrisen markedly. �

A changing world, grounded in science

In the Computer Science Department, Assistant Professor Brian Scassellati hasestablished a humanoid robotics lab. It is dedicated to studying a range of issues,from low-level engineering and software systems that allow robots to move ashumans do, to high-level artificial intelligence that allows robots to think likehumans, and to social and psychological developments that allow robots to inter-act with humans in beneficial ways. The latter work involves collaborations withthe Psychology Department and the Medical School on projects to evaluate mod-els of how infants acquire social skills, and to assist in the diagnosis and quantifi-cation of disorders of social development such as autism.

15

Facilities for MultidisciplinaryResearchThe campus is showing the first results of theUniversity’s $1 billion commitment to enhanceits basic science, engineering, and biomedicalresearch facilities. Four new building projects,including two fully completed, offer unprece-dented opportunities for collaboration amonga range of scientific disciplines.

A New Center for Interdisciplinary Study ofthe Environment: Described as a “gateway toScience Hill,” the Class of 1954 EnvironmentalScience Center on Sachem Street lends newsupport to advancing knowledge of the envi-ronment and promoting sustainable environ-mental management and enlightened publicpolicy. The facility, named to honor the Classof 1954’s generous contributions to theUniversity, is designed to encourage collabora-tion among faculty and students pursuingenvironmental studies in various programsand departments, while placing the collectionsof Peabody Museum of Natural History in

close proximity. In addition, the Center pro-vides laboratories, classrooms, offices, andcuratorial spaces. It is the home of the YaleInstitute for Biospheric Studies and accommo-dates faculty and students from the School ofForestry & Environmental Studies and fromthe Faculty of Arts and Sciences departmentsof Ecology and Evolutionary Biology, Geologyand Geophysics, and Anthropology.

Opening of The Anlyan Center: Researcherswill investigate causes and possible treatmentof diseases in the newly inaugurated AnlyanCenter for Medical Research and Education atthe corner of Congress Avenue and CedarStreet at the School of Medicine. The approxi-mately 700 researchers in the facility will focuson the origins and treatment of myriad dis-eases from arthritis and autoimmune disordersto asthma, hypertension, and cancer. Thebuilding also includes state-of-the-art anatomyand teaching labs and an unrivaled MagneticResonance Research Center. In the last twodecades, magnetic resonance has become acrucial tool for the study of tissues and organs

The Anlyan Center D on page 16 map Engineering Research Building C on page 17 map

Class of 1954 Chemistry Research Building B on page 17 mapClass of 1954 Evironmental Science Center A on page 17 map

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Laboratory ofEpidemiology andPublic Health 2

School of Nursing 3 Boyer Center forMolecular Medicine 4

B Wing Extension,Sterling Hall ofMedicine 5

300 George Street 6

Neison and IrvingHarris Building 7

Sterling Hall ofMedicine 8

Laboratory for Surgery,Obstetrics, andGynecology 9

Brady MemorialLaboratory 10

Lauder Hall 11

in living organisms. The technology has allowedbreakthroughs in fields ranging from neuro-surgery to psychiatry, and Yale is at the forefrontof this rapidly developing area.

Expansion of Chemistry Lab Facilities on ScienceHill: In July 2003, construction began on the newClass of 1954 Chemistry Research Building(crb), a state-of-the-art facility incorporatingmodular, flexible, and adaptable design. It willconsolidate laboratories from Kline and SterlingChemistry Laboratories. The new crb, housingorganic and inorganic research that makes inten-sive use of fume hoods, will be ready for occu-pancy in September 2005. A future renovatedSterling laboratory will continue to house theo-retical chemistry research, teaching labs, class-rooms, and administrative functions. It will

house biological teaching labs as well. A futurerenovated Kline laboratory will house biophysicaland physical chemistry research.

Engineering Research Building: A gift from Yalealumnus John Malone ’63 will support construc-tion of Yale’s proposed new EngineeringResearch Building (erb) on a triangular site onthe southeast corner of Prospect and TrumbullStreets in New Haven. The proposed erb hasbeen programmed to flexibly accommodate newbio-engineering research labs, relocated chemicaland physical engineering research labs, their sup-port spaces, a teaching lab, seminar rooms, facul-ty and staff offices, and open offices for graduatestudent workstations. �

2

3

4

1

6

7

8

9

10

11

I Wing, Sterling Hallof Medicine 1

D

5

17

Sterling Chemistry Laboratory 12

Bass Center forMolecular andStructural Biology 13

Kline Biology Tower 14 Sloane PhysicsLaboratory 15

Osborn MemorialLaboratories 17

Kline GeologyLaboratory 19

Sage-Bowers Hall 20 Peabody Museum ofNatural History 21

Arthur K. Watson Hall22

Becton Engineeringand Applied ScienceCenter 23

Leet Oliver MemorialHall 24

Arthur W. WrightNuclear StructureLaboratory 18

Gibbs Laboratories 16

12

13

1415

16

17

18

19

20

21

22

23

24

A

B

C

Yale science research buildings

Yale science research buildings in design or under construction

Other Yale buildings

18

At June 30, 2003, Yale reported total assets of$14.2 billion, liabilities of $2.0 billion, andnet assets of $12.2 billion. Net assetsincreased by $493.4 million during the year,primarily because of the outstanding 8.8%return on the endowment.

Financial Results Overview

$0

$2

$4

$6

$8

$10

$12

fy99 fy00 fy01 fy02 fy03

Net AssetsFive-year trend analysis ($ in billions)

The University, once again, achieved a bal-anced general operating budget, as presentedin the Supplemental Statement of Operations.Total operating revenue increased by 5.5% to$1.55 billion. Increases in the allocation ofendowment spending to operations and rev-enues from grants and contracts were thelargest contributors to this growth. Total oper-ating expenses increased by 8.1% to $1.54 bil-lion. Net assets from operating activitiesincreased $10.6 million during the year.

Perspectives on Science student David Moore standing outside the Cerro-Tololo 4-meter telescope dome in Chile during his summer research internship at the YaleCenter for Astronomy and Astrophysics. Faculty of the Astronomy Department areinvestigating the origin, evolution, and structure of the universe. Its dominant con-stituents, dark matter and dark energy, are being studied currently with the novelQUEST cameras on telescopes in Venezuela and California. Astronomers are study-ing the formation and evolution of stars and galaxies, including our own MilkyWay, and of black holes and other ultra-relativistic phenomena. Much of this workis enabled by a formal collaboration with Chile, where the finest astronomical siteson the planet are found, through joint scientific projects and the SMARTS networkof small telescopes controlled from New Haven. The combination of data fromground-based sites in Chile with data from space missions is particularly fruitful.

19

As shown in the chart below, the Universityderives its operating revenues from five mainsources: student income, grants and contracts,medical services, contributions, and invest-ments. Additional revenues are received froma variety of programs. Operating revenuesfrom all sources totaled $1.55 billion in 2003.

Student IncomeStudent income, which includes revenue fromtuition, fees, and room and board, increased0.6% during 2003 and amounted to $210 mil-lion, or 13.5% of operating revenues. Of thetotal amount, tuition and fees accounted for$273.0 million, a 5.7% increase over 2002.Revenue from room and board increased5.9% to $44.8 million during 2003. Duringthe 2002-03 academic year, 11,160 studentswere enrolled at the University; 5,307 wereundergraduate students attending programs atYale College, and 5,853 were pursuing theirstudies at the Graduate School of Arts andSciences and ten professional schools. (Figuresare based on full-time equivalents.)

Students enrolled in Yale College paid$27,130 for tuition and $8,240 for room andboard, bringing the total term bill to $35,370for the 2002-03 academic year. The increase inthe Yale College term bill was limited to 3.9%over the 2001-02 academic year, a reflectionof the high priority placed on making a YaleCollege education accessible to the broadest

range of students. Students enrolled in theGraduate School of Arts and Sciences paid$24,480 for tuition, a 3.5% increase over the2001-02 academic year.

In accordance with generally acceptedaccounting principles, student income is pre-sented net of certain scholarships and fellow-ships, which totaled $107.4 million and $91.6million for 2003 and 2002, respectively. The17.2% increase over 2002 is due to new finan-cial aid initiatives which reduced the self-helplevel expected of students to cover their educa-tion costs through work or student loans. Thisreduction in self-help generated an increasedneed in scholarships and fellowships.

As it has since 1964, the University main-tained its policy of offering Yale Collegeadmission to qualified U.S. and Canadian citi-zens and permanent residents without regardto family financial circumstances. This “need-blind” admission policy is supported with acommitment to meet in full the demonstratedfinancial need of all such students throughouttheir four undergraduate years. The 2002-03academic year marked the second year in afour-year phased plan to extend the need-blind/full-need based policy to foreign stu-dents. Despite the erosion in federal supportfor student aid, the University is able to main-tain its policies and its competitive position byattracting the very best students.

During the 2002-03 academic year, 2,111Yale College students, representing 40% of eli-gible Yale College enrollment, received finan-cial aid. In the Graduate School of Arts andSciences, 2,201 students, or 97.6% of thoseeligible, received financial aid. In the profes-sional schools, 2,796 students, or 81.5% ofthose eligible, received financial aid. In all,7,108 University students, or 64.8% of totalUniversity eligible enrollment, receivedUniversity-administered student aid in theform of loans, gifts, or a combination of both.

Grant and Contract Income Grant and contract income experienced a9.6% growth from $417.6 million in 2002 to$457.8 million in 2003. The Yale School ofMedicine, which receives 77% of theUniversity’s grant and contract income, reported an increase of 9.3% for 2003, whilethe remaining University sectors had anincrease of 10.8%.

$366 million, or 80% of 2003 grant andcontract income, was received from the federalgovernment in support of Yale’s research and

Operating Revenue

Operating Revenue

20

training programs. The largest federal sponsoris the National Institutes of Health, whichprovided revenues of $281 million during2003, an increase of 9.2% over the prior year.The University also receives significantresearch support from the National ScienceFoundation, the Department of Energy, theDepartment of Defense, and student aidawards from the Department of Education.Non-federal sources, which include founda-tions, voluntary health agencies, corporations,and the State of Connecticut, provide an addi-tional $92 million in research, training, andother purposes.

In addition to funding the direct cost ofsponsored programs, grant and contractawards generally include reimbursement for aportion of the costs related to research labora-tories and other facilities, as well as adminis-trative and support costs incurred for researchand other sponsored activities. These reim-bursements for facility and administrativecosts amounted to $104.9 million in 2003,which is an increase of 9.6% over the prioryear. Recovery of facility and administrativecosts allocable to federally sponsored pro-grams is recorded at rates negotiated with theUniversity’s cognizant agency, the Departmentof Health and Human Services. Yale’s currentrate agreement is effective from July 1, 2002through June 30, 2005.

The primary regulations governing federalgrants and contracts are encompassed inOffice of Management and Budget Circular A-21, Cost Principles for EducationalInstitutions, and Circular A-110, UniformAdministrative Requirements for Grants andAgreements with Institutions of HigherEducation, Hospitals, and Other Non-ProfitOrganizations. The A-21 principles were mod-ified during the 1990’s to impose limits on thetypes and amounts of indirect costs eligible forreimbursement and to mandate more stringentFederal Cost Accounting Standards for bothgrants and contracts.

Medical Services Income Medical services income totaled $229.6 mil-lion in fiscal 2003 and is a significant compo-nent of the University’s operating revenuewhile providing support for the University’smission to preserve and disseminate knowl-edge through research and teaching.

The largest portion of this revenue streamis derived from patient care services provided

by the School of Medicine’s Yale MedicalGroup. Other components include incomefrom diagnostic laboratory services and con-tracts with affiliated hospitals, including Yale-New Haven Hospital, Inc. (ynhh). The 7.5%increase in patient care income during the yearis a result of increased volume of services pro-vided to ynhh and new contracts in the areasof Psychiatry and Internal Medicine. In addi-tion, the Yale Medical Group continues to besuccessful in negotiating with third party man-aged care payers to improve reimbursementschedules and increase efficiencies in patientbilling practices.

While academic medical centers continueto experience the economic pressures ofdecreased reimbursement rates and increasingcost of services to provide quality health care,the University has been able, through innova-tive and efficient management, to keep its clin-ical operations at break-even during this diffi-cult period. The University must identify effi-ciencies and implement streamlined techniquesto continue to provide health care to the com-munity and to perform the clinical researchthat will help current and future generationsmaintain and improve health.

The cost of malpractice insurance isbecoming an increasing burden in the healthcare market. Costs of the settlement of claimsare increasing to unprecedented levels. Whileprevention techniques, including targeted riskmanagement awareness programs and patientsafety initiatives are being implemented andrefined, the benefits of these techniques cannotcompletely control the external factors whichlead to these increasing costs to health careproviders.

Allocation of Endowment Spending fromFinancial Capital Each year, a portion of accumulated endow-ment investment returns is allocated to operat-ing net assets to support operational activity.The level of spending is computed in accor-dance with the endowment spending policybased on a spending formula that has theeffect of smoothing year-to-year marketswings. Endowment investment returns allo-cated to operating activities increased by13.3% to $470.1 million. This importantsource of revenue represents 30.3% of totaloperating income this year and has becomethe largest source of operating revenue for theUniversity. The performance of the endow-

Operating Revenue

21

ment investment portfolio and the endowmentspending policy are discussed in detail in theendowment section of this report.

Other Investment Income Other investment income of $17.4 million rep-resents interest, dividends, and gains on invest-ments held outside of the endowment.

ContributionsContributions revenue from Operating,Physical, and Financial activities totaled$174.1 million for 2003. This represents a22% decrease from 2002’s revenue of $223.5million. Lower contributions were not unex-pected since prior year activities included sev-eral large, one-time gifts.

Publications and Other IncomePublications income is earned primarilythrough Yale University Press, a separatelyendowed unit within the University. The Presspublished approximately 300 titles in 2003and has approximately 3,500 titles in print.Many of these books are winners of prizes,including four Pulitzer Prizes. Yale Pressauthors are academic and professional peoplefrom all over the world. One of the 2003 pub-lications was Benjamin Franklin, a New YorkTimes best seller by Edmund Morgan, SterlingProfessor Emeritus of History at YaleUniversity. In 2002, Yale Press publishedanother New York Times best seller, Taliban,by Ahmed Rashid. Income from the Press was$24.0 million in 2003, which was an increaseof 6.2% from revenue of $22.6 million in2002.

Grant and Contract IncomeTen-year trend analysis ($ in millions)

School of Medicine Clinical Income by Department

22

Operating expenses totaled $1.5 billion for theyear. The largest component of expenses,salaries and wages and employee benefits, rose7.8%. This category of expense represents58.3% of total University operating costs.Other items of interest were a 27% increase inutilities and an 11.4% increase in deprecia-tion. Higher fuel prices and the harsh winterwere responsible for the increase in utilities.

Operating Expenses

The completion of several major capital proj-ects caused the increase in depreciation.

In accordance with generally acceptedaccounting principles, Yale reports its operat-ing expenses by functional classification on theStatement of Activities. The largest functionalexpenses, organized research, and instructionand department research, increased by 10%.Together, these costs represent 48% of totaloperating expenses. The increase was theresult of higher federal funding for researchand the University’s commitment to investingin faculty and new programs in education.

Faculty and Staff CompensationThe University employs approximately 3,200faculty, 3,500 managerial and professionalstaff, and 4,000 unionized clerical, technical,service, and maintenance personnel, based onfull-time equivalents. Total salaries and wagesand related employee benefits were $899.7million in 2003, which is a 7.8% increasefrom 2002. These increases were in line withthe University’s overall plans to maintain mod-erate growth and competitive position withpeer institutions. Faculty salaries, which com-prise 45.4% of total compensation, rose 7.6%in 2003. Since competition for the most quali-fied candidates is keen among academic insti-tutions and private sector organizations, com-pensation packages must be competitive inorder to recruit and retain faculty of the high-est caliber. The University has also made it apriority to ensure that the salary and benefitprograms for staff are equitable and competi-tive with the marketplace.

The cost of providing employee benefits,including various pension, postretirementhealth, and insurance plans in addition tosocial security and other statutory benefits,amounted to $181.4 million, an increase of10.4% from 2002.

Other ExpensesExpenses other than compensation reportedby natural classification on the SupplementalStatement of Operations include materials andsupplies, services, utilities, student aid, intereston indebtedness, depreciation expense, andother operating expenses. These itemsaccounted for $643.4 million in 2003, up8.6% from 2002.

Operating Expenses by Natural Classification

Operating Expenses by Functional Classification

23

The University continued its extensive capitalimprovements campaign aimed at renovatingexisting facilities and selectively adding newfacilities. Spending on capital projects totaled$207.6 million during 2003.

As in previous years, capital spending wasconcentrated on the School of Medicine andthe residential colleges. The School of Medi-cine accounted for more than a quarter of the

University’s 2003 capital expenditures primar-ily because $27.6 million was spent to com-plete the Anlyan Center (formerly called theCongress Avenue Building) which, at 457,000gross square feet, is the University’s thirdlargest building behind the Payne WhitneyGymnasium and Sterling Memorial Library.The Medical School’s Amistad Garage wasalso completed in 2003. This is the first phaseof a project that will ultimately provide clini-cal office space in addition to the new parkingstructure.

Spending for the residential colleges alsoconsumed a large proportion of total capitalresources, demonstrating the University’s con-tinuing commitment to fully refurbish itsundergraduate residential facilities. In 2003Timothy Dwight was completed, joiningBerkeley, Branford, and Saybrook as havingbeen fully or nearly fully renovated.Significant spending ($14 million) was direct-ed to the renovation of Vanderbilt Hall, afreshman residence hall (which was completedin time for the start of the 2003-04 academicyear). The renovations of Davenport andPierson Colleges were in the design phase in2003, while the renovations of Silliman andTrumbull entered the planning phases. Morseand Stiles, the two most recently built colleges,and Calhoun have had more recent attentionand, therefore, will require a smaller invest-ment when they are renovated. That leavesJonathan Edwards as the last college requiringa comprehensive renovation. Attention willturn to restoring Jonathan Edwards followingthe renovations of Silliman and Trumbull.

Science facilities continue to be a focus ofrenovation and new construction. In 2003,rehabilitation work was underway or com-pleted for several existing buildings, includingKline Biology Tower, Osborn Memorial Lab,and the Peabody Museum. At the same time,plans for three new buildings progressed. The Molecular, Cellular and DevelopmentalBiology building moved into the planningphase, while the Chemistry Research Buildingand Engineering Research Building progressedto the design phase. These state-of-the-artbuildings are key components in Yale’s strategy to enhance its competitiveness in thesciences.

Yale continued to address needs in otherareas of the University, consistent with itsstrategy of modernizing all areas of the campus. The Sterling Divinity Quadrangle wasfully renovated in 2003. The Arts area

Physical Capital

$0

$50

$100

$150

$200

$250

$300

$350

fy 75 fy 80 fy 85 fy 90 fy 95 fy 03

Renovations Acquisitions and new construction

Capital Spending by Campus Area

Capital Disbursements($ in millions; in 2003 dollars)

received attention as well, with a focus on anumber of construction projects involving theYale University Art Gallery; the School of

Architecture, the Arts Library, and the Depart-ment of Art History. Finally, the Universityspent $13.2 million during 2003 for utilitiesexpansion and improvements in order to sup-port existing and new buildings.

The University continues to rely heavilyon the extraordinary generosity of itsalumni/ae and friends. Gifts for facilities in2003 totaled $17.2 million. The University has set gift targets for many of its projects andhas been the beneficiary of an outstandingresponse from donors. Portions of the resi-dential college renovations, Sprague Hall, andindeed, nearly all of the University’s recentmajor renovation undertakings have beenfunded through gifts.

The other major source of financing forUniversity projects is debt. The Universityissued $350 million in tax-exempt debt inJanuary 2003 through the Connecticut Healthand Educational Facilities Authority. Totaloutstanding facility debt for the University isnow $1.54 billion. The University continues tobenefit from advantageous interest rate condi-tions through its substantial variable-rate debtprogram, but has hedged a significant portionof its interest rate exposure with taxable inter-est rate swaps. As of June 30, 2003, Yale had$480 million in swaps outstanding associatedwith debt-financing building projects. Throughthe combination of direct issuance and swaps,the portfolio is now approximately 67% fixedand 33% variable.

Although the University relies on the liq-uidity of its own portfolio to fund any returnof variable-rate bonds, it has entered into arevolving credit arrangement totaling $200million to serve as a backup liquidity facility.With the exception of its taxable commercialpaper, which can be retired at will, and certainsmall borrowings, all of the University’s debtis in the form of bullet maturities due between2027 and 2096; that is, the debt matures in asingle or a few years at the end of its life.

The University continues to enjoy thehighest bond ratings available: AAA fromStandard and Poor’s and Aaa from Moody’s.

24

Physical Capital

Geology graduate student Alana Kawakami stands within a box canyon in theBlack Mountains, California. The course sediments in this photograph are part ofan apron of debris that was shed by this still-rising mountain range on the marginof Death Valley. Over the last five years the Department of Geology andGeophysics has rejuvenated the traditional strengths of the department in geo-chemistry, the study of mountain building, paleontology, geophysics, and theearth’s oceans and atmosphere. The department has hired ten new geologists.Each of these scientists is an expert in a critical area such as earthquakes, thedynamics of the earth, processes and materials deep below the earth’s surface, theflow of ice and of the atmosphere, past and present climate, the evolution of earlylife-forms, the biology of microscopic organisms living in extreme environments,paleomagnetism, or the history of change in the atmosphere. Yet each also has theability to collaborate on a broader range of research initiatives. Faculty renewal hasled to a significant increase of postdoctoral researchers and graduate students andhas been coupled with an ongoing renewal of G&G computer and laboratory facili-ties as well. A new isotope laboratory with four mass spectrometers in the recentlybuilt Environmental Science Center integrates them into the teaching and researchmissions of the department.

25

Endowment

The Endowment supports both current andfuture academic programs of the University.To balance these current and future needs,Yale adopted investment and spending policiesdesigned to preserve Endowment asset valueswhile providing a substantial flow of income

to the operating budget. At June 30, 2003, theEndowment, including assets held in trust andbeneficial interest in trust assets, stood atmore than $11.0 billion, after providing $470million to the operating budget during theyear.

Investment PerformanceFor the year ended June 30, 2003, theEndowment achieved an 8.8% investmentreturn. During the past decade, theEndowment earned an annualized 16.0%return, placing the University at the top of theuniverse of institutional funds. Yale’s disci-plined and diversified asset allocation policiescombined with strong active managementadded substantial value to the Endowment.

Over the ten years ended June 30, 2003,Yale’s superior investment returns added $4.7billion relative its composite passive bench-mark and $5.2 billion relative to the meanreturn of a broad universe of colleges and universities.

Endowment SpendingThe Endowment spending policy, the meansby which Endowment earnings are allocatedto operations, balances the competing objec-tives of providing a stable flow of income tothe operating budget and protecting the realvalue of the Endowment over time. Thespending policy attempts to achieve these twoobjectives by using a long-term spending ratetarget combined with a smoothing rule, whichadjusts spending gradually in response tochanges in Endowment market value. Thespending rate approved by the YaleCorporation currently stands at 5.0%. Thesmoothing rule and the diversified nature ofthe Endowment mitigate the impact of short-term market volatility.

The Endowment provided $470 million tocurrent operations in 2003, representing30.3% of the University’s operating revenuesfor the year. Ten years ago, Endowment distri-butions contributed approximately $119 mil-lion, or 14% of the budget. Over the pastdecade, Endowment distributions increased atan annualized rate of nearly 15%.

Asset AllocationAsset allocation proves critical to successfulEndowment performance. Yale’s asset alloca-tion policy combines tested theory andinformed market judgment to balance invest-ment risks with the need for high returns.

Endowment Fund AllocationFiscal Year 2003

Growth of $1,0001993-2003

26

The need to provide resources for currentoperations as well as preserve the purchasingpower of assets dictates investing for highreturns, causing the Endowment to be biasedtoward equity. In addition, the Endowment’svulnerability to inflation directs the Universityaway from fixed income and toward equityinstruments. Hence, over 90% of theEndowment is invested in some form of equi-ty, through domestic and international securi-ties, real estate, and private equity.

Over the past 15 years, Yale significantlyreduced the Endowment’s exposure to tradi-tional domestic marketable securities, reallo-cating assets to nontraditional asset classes. In1988, nearly three-quarters of the Endowmentwas committed to U.S. stocks, bonds, andcash. Today, this percentage is approximately22.5%. Foreign equity, private equity, absolutereturn strategies, and real assets now represent77.5% of the Endowment.

The heavy allocation to nontraditionalasset classes stems from the diversifying powerthey provide to the portfolio as a whole.Alternative assets, by their nature, tend to beless efficiently priced than traditional mar-ketable securities, providing an opportunity toexploit market inefficiencies through activemanagement. Today’s actual and target portfolios have significantly higher expectedreturns and lower volatility than 1988’sportfolio.

June CurrentAsset Class 2003 Target

Domestic equity 14.9% 15.0%Fixed income 7.4% 7.5%Foreign equity 14.6% 15.0%Absolute return 25.1% 25.0%Private equity 14.9% 17.5%Real assets 20.9% 20.0%Cash 2.1% 0.0%

Total 100.0% 100.0%

Endowment

Yale EndowmentAsset classes versus benchmarks: annualized returnsnet of fees for ten years ended June 30, 2003

27

28

Yale University Statements of Financial PositionJune 30, 2003 and June 30, 2002 ($ in thousands)

2003 2002

Assets:Cash and cash equivalents $ 422,561 $272,267Accounts receivable, net 98,598 96,973Contributions receivable, net 208,409 205,600Student notes receivable, net 68,761 81,318Investments, at market value 11,277,379 10,670,437Beneficial interest in trust assets 106,601 80,628Other assets 88,970 98,366Land, buildings and equipment, net

of accumulated depreciation 1,986,111 1,853,209

Total assets $ 14,257,390 $13,358,798

Liabilities:Accounts payable and accrued liabilities $ 246,105 $ 193,331 Advances under grants and contracts and other deposits 60,263 61,553 Accrued employee benefit liabilities 43,299 45,142 Liabilities under split-interest agreements 74,532 69,127 Bonds and notes payable 1,572,885 1,223,240Advances from Federal government for student loans 32,256 31,720

Total liabilities 2,029,340 1,624,113

Net assets:Unrestricted 6,700,281 6,419,547 Temporarily restricted 4,003,675 3,910,190 Permanently restricted 1,524,094 1,404,948

Total net assets 12,228,050 11,734,685

Total liabilities and net assets $ 14,257,390 $ 13,358,798

Detail of net assets:Temporarily Permanently

Unrestricted Restricted Restricted 2003 2002

Endowment and student loan $ 3,855,174 $ 3,538,223 $ 1,524,094 $ 8,917,491 $ 8,416,321Funds functioning as endowment 2,051,177 95,218 - 2,146,395 2,110,689Physical capital investment 507,037 207,076 - 714,113 794,311 Operating:Accumulated general budget deficit (70,904) - - (70,904) (70,904)Designated and restricted for specific purposes 357,797 163,158 - 520,955 484,268

$ 6,700,281 $ 4,003,675 $ 1,524,094 $ 12,228,050 $ 11,734,685

The accompanying notes are an integral part of these financial statements.

29

Yale University Statement of Activitiesfor the year ended June 30, 2003 with summarized information for the year ended June 30, 2002($ in thousands)

Temporarily Permanently Unrestricted Restricted Restricted 2003 2002

OperatingRevenues and reclassifications:

Student income, net $ 210,397 $ - $ - $ 210,397 $ 209,040Grant and contract income, primarily for research

and training 457,827 - - 457,827 417,638 Medical services income 229,589 - - 229,589 213,568 Contributions 18,486 45,719 - 64,205 86,024 Allocation of endowment spending

from financial capital 144,697 325,400 - 470,097 415,020 Other investment income 17,434 - - 17,434 26,544 Publications income 24,466 - - 24,466 22,930 Other income 79,732 - - 79,732 81,478

Total revenues and gains 1,182,628 371,119 - 1,553,747 1,472,242 Net assets released from restrictions 372,486 (372,486) - - -

Total revenues and reclassifications 1,555,114 (1,367) - 1,553,747 1,472,242

Expenses: Instruction and departmental research 433,466 - - 433,466 396,405 Organized research 313,129 - - 313,129 282,248Patient care and other related services 227,084 - - 227,084 218,435 Libraries and other academic support 140,827 - - 140,827 130,151 Student aid and services 222,948 - - 222,948 204,298 Public service 98,836 - - 98,836 91,672 Administration and other institutional support 106,886 - - 106,886 103,780

Total expenses 1,543,176 - - 1,543,176 1,426,989

Increase (decrease) in net assets from operating activities 11,938 (1,367) - 10,571 45,253

Non-operatingPhysical capital:

Contributions - 17,244 - 17,244 37,119 Unrealized (loss) on swap contracts (57,823) - - (57,823) (10,252)Other increases 953 - - 953 2,895 Net assets released from restrictions 110,486 (110,486) - - -

Increase (decrease) in net assets from physical capital activities 53,616 (93,242) - (39,626) 29,762

Financial capital:Contributions 55 3,082 89,544 92,681 100,393 Total endowment return, net of management fees 275,848 621,678 2,225 899,751 41,402 Other increases (decreases) (55,291) 27,999 27,377 85 57,820 Allocation of endowment spending to operating (144,697) (325,400) - (470,097) (415,020)Net assets released from restrictions 139,265 (139,265) - - -

Increase (decrease) in net assets from financial capital activities 215,180 188,094 119,146 522,420 (215,405)

Total increase (decrease) in net assets 280,734 93,485 119,146 493,365 (140,390)Net assets, beginning of year 6,419,547 3,910,190 1,404,948 11,734,685 11,875,075

Net assets, end of year $6,700,281 $4,003,675 $1,524,094 $12,228,050 $11,734,685

The accompanying notes are an integral part of these financial statements.

30

Yale University Supplemental Statement of Operationsfor the year ended June 30, 2003 with summarized information for the year ended June 30, 2002($ in thousands)

Unrestricted

General DesignatedOperating for Specific Temporarily

Budget Purposes Totals Restricted 2003 2002

Revenues and reclassifications:Student income, net $205,962 $ 4,435 $ 210,397 $ - $ 210,397 $ 209,040 Grant and contract income,

primarily for research and training 104,929 352,898 457,827 - 457,827 417,638 Medical services income 22,199 207,390 229,589 - 229,589 213,568 Contributions 18,486 - 18,486 45,719 64,205 86,024 Allocation of endowment spending

from financial capital 99,631 45,066 144,697 325,400 470,097 415,020Other investment income 14,152 3,282 17,434 - 17,434 26,544 Publications income 87 24,379 24,466 - 24,466 22,930 Other income and transfers 84,798 (5,066) 79,732 - 79,732 81,478

Total revenues and gains 550,244 632,384 1,182,628 371,119 1,553,747 1,472,242 Net assets released from

restrictions and designations 124,381 248,105 372,486 (372,486) - -

Total revenues and reclassifications 674,625 880,489 1,555,114 (1,367) 1,553,747 1,472,242

Operating expenses and other decreases:Salaries and wages 304,093 414,240 718,333 - 718,333 670,241 Employee benefits 71,836 109,531 181,367 - 181,367 164,240 Materials and supplies 60,903 79,897 140,800 - 140,800 133,619 Services 59,948 91,520 151,468 - 151,468 144,251 Utilities 38,476 237 38,713 - 38,713 30,451 Student aid 14,611 34,201 48,812 - 48,812 43,880 Other operating expenditures 21,489 74,462 95,951 - 95,951 87,680 Interest on indebtedness 48,889 - 48,889 - 48,889 45,956 Depreciation and amortization expense 54,380 64,463 118,843 - 118,843 106,671

Total operating expenses 674,625 868,551 1,543,176 - 1,543,176 1,426,989

Increase (decrease) in net assets from operating activities $ - $ 11,938 $ 11,938 $ (1,367) $ 10,571 $ 45,253

The accompanying notes are an integral part of these financial statements

31

Yale University Statements of Cash Flowsfor the years ended June 30, 2003 and 2002 ($ in thousands)

2003 2002

Operating activities:Change in net assets $493,365 $(140,390)Adjustments to reconcile change in net assets to net cash provided by (used in) operating activities:

Depreciation and amortization 118,843 106,671 Net endowment (gains) losses and other increases (620,734) 255,328 Contributions restricted for physical and financial capital (95,788) (107,882)Other adjustments 4,538 (1,639)Changes in assets and liabilities that provide (use) cash:

(Increase) decrease in accounts receivable (1,625) 5,384 (Increase) in contributions receivable (2,809) (45,809)(Increase) decrease in other operating assets 2,134 (944)Increase in accounts payable, accrued

liabilities and deposits and advances 67,403 23,892

Net cash (used in) provided by operating activities (34,673) 94,611

Investing activities:Student loans repaid 15,505 11,421Proceeds from sale of student loans 20,307 12,945Student loans granted (24,272) (22,819)Purchases related to capitalized software costs and other assets (5,034) (9,243)Proceeds from sale of investments 6,176,541 4,488,158 Purchases of investments (6,188,722) (4,488,452)Purchases of land, buildings and equipment (260,280) (366,241)

Net cash used in investing activities (265,955) (374,231)

Financing activities:Contributions restricted for physical and financial capital 95,788 107,882Contributions received for split-interest agreements 6,524 9,069 Payments made under split-interest agreements (2,503) (6,900)Proceeds from long-term debt 350,000 287,595 Repayments of long-term debt (617) (88,111)Interest earned and advances from Federal government for student loans 1,730 1,336

Net cash provided by financing activities 450,922 310,871

Net increase in cash and cash equivalents 150,294 31,251 Cash and cash equivalents at beginning of year 272,267 241,016

Cash and cash equivalents at end of year $422,561 $272,267

The accompanying notes are an integral part of these financial statements.

32

returns on the related investments over time for general orspecific purposes.

The University’s measure of operations as presented in theStatement of Activities includes income from tuition andfees, grants and contracts, medical services, contributionsfor operating programs, the allocation of endowment spend-ing and other revenues. Operating expenses are reported onthe Statement of Activities by functional categories, afterallocating costs for operation and maintenance of plant,interest on indebtedness and depreciation expense.

The University presents non-operating activity as physicalcapital and financial capital, within the Statement ofActivities. The physical capital section includes contribu-tions and other activities related to land, buildings andequipment that are not included in the University’s measureof operations. Similarly, the financial capital section includescontributions, investment returns and other activities relatedto endowment and student loan net assets utilized for long-term investment purposes. Financial capital also encompass-es expendable contributions and the related accumulatedappreciation that have been designated to function asendowment (i.e., funds functioning as endowment) by theYale Corporation.

Administration of the University's endowment is subject tothe general provisions of the Uniform Management ofInstitutional Funds Act (umifa or “the Act”). Under theprovisions of this State law, a governing board may appro-priate for expenditure, for the uses and purposes for whichan endowment fund is established, so much of the netappreciation as is deemed prudent based on standards estab-lished by the Act. While a governing board must exerciseordinary business care in the appropriation of such appreci-ation, the general provisions of umifa do not mandate thatinstitutions retain endowment gains permanently. Generallyaccepted accounting principles require institutions that aresubject to general umifa provisions to report gains onendowment assets as increases in unrestricted net assets ortemporarily restricted net assets based on the absence orexistence of donor-imposed restrictions.

The Supplemental Statement of Operations, which is notrequired by generally accepted accounting principles, pro-vides additional detail of the University’s operating resultsby segregating activities that are an integral part of theUniversity’s general operating budget from other activitiesthat are internally designated for specific purposes or uses.Expenses are reported by natural classification on theSupplemental Statement of Operations for informationalpurposes.

Recognizing the critical importance of maintaining its physi-cal capital as well as its financial capital over many genera-tions, the University began in the mid-1990’s to allocatefunds directly from the operating budget to a capital main-tenance account. Significant effort has gone into estimatingan annual equilibrium level funding target for internal pur-poses that would allow Yale’s facilities to be maintained in

Yale UniversityNotes to Financial Statements

1. Significant Accounting Policies

a. GeneralYale University (“the University”) is a private, not-for-profitinstitution of higher education located in New Haven,Connecticut. The University provides educational servicesprimarily for students and trainees at the undergraduate,graduate and postdoctoral levels, and performs research,training and other services under grants, contracts andother similar agreements with agencies of the Federal gov-ernment and other sponsoring organizations. TheUniversity’s academic organization includes Yale College,the Graduate School of Arts and Sciences, ten professionalschools and a variety of research institutions and museums.The largest professional school is the Yale School ofMedicine, which conducts medical services in support of itsteaching and research missions.

b. Basis of PresentationThe financial statements of Yale University include theaccounts of all academic and administrative departments ofthe University, and certain affiliated organizations that arecontrolled by the University.

Financial statements of private, not-for-profit organizationsmeasure aggregate net assets based on the absence or exis-tence of donor-imposed restrictions. Three categories of netassets serve as the foundation of the accompanying financialstatements. These classes are labeled unrestricted, temporar-ily restricted and permanently restricted net assets. Briefdefinitions of the three net asset classes are presented below:

Unrestricted Net Assets - Net assets derived from tuitionand other institutional resources that are not subject toexplicit donor-imposed restrictions. Unrestricted net assetsalso include a portion of the appreciation on endowmentinvestments as described in subsequent paragraphs of thisnote.

Temporarily Restricted Net Assets - Net assets that are sub-ject to explicit donor-imposed restrictions on the expendi-ture of contributions or income and gains on contributedassets. The temporary restrictions may expire due to thepassage of time or the incurrence of expenditures that fulfillthe donor-imposed restrictions. Temporarily restricted netassets are generally established in support of schools ordepartments of the University, often for specific purposessuch as professorships, research, faculty support, scholar-ships and fellowships, library and art museums, buildingconstruction and other specific purposes.

Permanently Restricted Net Assets - Net assets that are sub-ject to explicit donor-imposed stipulations that they bemaintained permanently by the University. Generally, thedonors of these assets permit the University to use the

33

excellent condition on a consistent basis, thus avoidingdeferred maintenance and the need to make catch-up invest-ments in facilities at a later date. While not an exact sci-ence, an estimate of the full capital replacement equilibriumlevel for 2003 is $141 million. The University spent $161million on the renovation of its facilities in 2003, of which$83 million was provided from operating funds, and theremainder from capital gifts and debt. Over time, it is theUniversity’s intent to increase the annual funding of capitalreplacement costs from the operating budget until suchfunding reaches the estimated full capital replacement equi-librium level.

c. Cash and Cash EquivalentsCash and cash equivalents are recorded at fair value andinclude institutional money market funds and similar tem-porary investments with maturities of three months or less.Cash and cash equivalents representing investments pur-chased with endowment net assets are reported as invest-ments. At June 30, 2003 cash and cash equivalents classi-fied as investments were $303.2 million.

d. InvestmentsThe University’s investments are recorded in the financialstatements at fair value. The value of publicly traded fixedincome and equity securities is based upon quoted marketprices and exchange rates, if applicable. The fair value ofsignificant direct real estate investments is determined fromperiodic valuations prepared by independent appraisers.

Fair values for certain private equity and real estate invest-ments held through limited partnerships or commingledfunds are estimated by the respective external investmentmanagers if market values are not readily ascertainable.These valuations necessarily involve assumptions and methods that are reviewed by the University’s InvestmentsOffice. The University records the cost of managing itsendowment portfolio as a decrease in financial capital within the appropriate net asset class in the Statement ofActivities.

The University invests its endowment investment portfolioand allocates the related earnings for expenditure in accor-dance with the total return concept. A distribution ofendowment return that is independent of the cash yield andappreciation of investments earned during the year is pro-vided for program support. The University has adopted anendowment spending policy designed specifically to stabilizeannual spending levels and to preserve the real value of theendowment portfolio over time. The spending policyattempts to achieve these two objectives by using a long-term targeted spending rate combined with a smoothingrule, which adjusts spending gradually to changes in theendowment market value. The Yale Corporation approveda long-term targeted spending rate of 5.0 percent effectivebeginning in fiscal 1996. The actual rate of spending for2003 and 2002, when measured against the previous year’smarket value, was 4.47 percent and 3.82 percent, respec-tively. Actual rates have been lower than long-term targetsin recent years due to strong investment returns.

e. DerivativesDerivative financial instruments are recorded at fair valuewith the resulting gain or loss recognized in the Statementof Activities.

f. Land, Buildings and EquipmentLand, buildings and equipment are generally stated at costand are presented net of accumulated depreciation. Annualdepreciation is calculated on a straight-line basis over usefullives ranging from 15 to 50 years for buildings andimprovements and 4 to 12 years for furnishings and equip-ment.

g. Other AssetsCapitalized software and bond issuance costs are catego-rized within other assets in the financial statements. Bondissuance costs are amortized over the term of the relateddebt and capitalized software costs are amortized over theestimated useful lives of the software, ranging from 5 to 10years.

h. CollectionsCollections at Yale include works of art, literary works, his-torical treasures and artifacts that are maintained in theUniversity’s museums and libraries. These collections areprotected and preserved for public exhibition, education,research and the furtherance of public service. Purchases ofsuch collections are recorded as operating expenses in theperiod in which the items are acquired.

i. Split-Interest AqreementsThe University’s split-interest agreements with donors con-sist primarily of charitable gift annuities, pooled incomefunds and irrevocable charitable remainder trusts for whichthe University serves as trustee. Assets are invested and pay-ments are made to donors and/or other beneficiaries inaccordance with the respective agreements.

Contribution revenues for charitable gift annuities and char-itable remainder trusts are recognized at the dates the agree-ments are established. In addition, the present values of theestimated future payments to be made to the beneficiariesunder these agreements are recorded as liabilities. Forpooled income funds, contribution revenue is recognizedupon establishment of the agreement at the fair value of theestimated future receipts, discounted for the estimated timeperiod until culmination of the agreement. The discountrates used to calculate these liabilities approximated a risk-free rate.

j. Beneficial Interest in Trust AssetsThe University is the beneficiary of certain perpetual trustsand charitable remainder trusts held and administered byothers. The estimated fair value of trust assets are recog-nized as assets and as gift revenue when the trusts are estab-lished or when reported to the University.

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k. Tuition and FeesTuition and fees revenue, which is included in studentincome on the Statement of Activities, is generated from anenrolled student population of approximately 11,200. Theundergraduate population of 5,307 is a diverse groupattracted from across the United States and from many for-eign countries. Foreign students account for approximately8 percent of the undergraduate population. Net tuition rev-enue from undergraduate enrollment represents approxi-mately 62 percent of total net tuition revenue.

The University maintains a policy of offering qualifiedapplicants admission to Yale College without regard tofinancial circumstance as well as meeting in full the demon-strated financial need of those admitted. Student need in allprograms throughout the University is generally fulfilledthrough a combination of scholarships and fellowships,loans and employment during the academic year. Tuitionand fees have been reduced by certain scholarships and fel-lowships in the amounts of $107.4 million and $91.6 mil-lion in 2003 and 2002, respectively.

l. ContributionsUnconditional promises to give that are expected to be col-lected within one year are recorded at their net realizablevalue. Amounts expected to be collected in future years arerecorded at the present value of estimated future cash flows.The discounts on those contributions are computed using arisk-free interest rate applicable to the year in which thepromise is received. Amortization of the discount is includ-ed in contribution revenue. Conditional promises to give arenot included as support until such time as the conditionsare substantially met. A facilities and administrative chargeis assessed against current use gifts when received.

m. Grant and Contract IncomeThe University receives grant and contract income fromgovernmental and private sources. In 2003 and 2002, grantand contract income received from the Federal governmenttotaled $365.7 million and $334.7 million, respectively. TheUniversity recognizes revenue associated with the directcosts of sponsored programs as the related costs areincurred. Recovery of facilities and administrative costs ofFederally sponsored programs is at rates negotiated with theUniversity's cognizant agency, the Department of Healthand Human Services. The University and the Federal gov-ernment are currently operating under an agreement thatestablishes facilities and administrative cost reimbursementrates under Federal grants and contracts through June 30,2005.

n. Medical Services IncomeThe University has agreements with third-party payors,including health maintenance organizations, that providepayment for medical services at amounts different fromstandard rates established by the University. Medical ser-vices income is reported net of contractual allowances fromthird-party payors and others for services rendered, andfurther adjusted for estimates of uncollectible amounts.

o. Net Assets Released from RestrictionsReclassification of net assets is based upon the satisfactionof the purpose for which the net assets were restricted orthe completion of a time stipulation. Restricted contribu-tions and net investment returns earned are reported astemporarily restricted support and reclassified to unrestrict-ed when any donor-imposed restrictions are satisfied.Restricted net assets associated with physical capital assetsare reclassified to unrestricted net assets when the capitalasset is placed in service.

p. Use of EstimatesThe preparation of financial statements in conformity withgenerally accepted accounting principles requires manage-ment to make estimates and judgments that affect thereported amounts of assets and liabilities and disclosures ofcontingencies at the date of the financial statements and ofrevenues and expenses recognized during the reporting peri-od. Actual results could differ from those estimates.

q. 2002 Financial Statement PresentationComparative summarized information for the year endedJune 30, 2002 presented in the Statement of Activities doesnot include sufficient detail by net asset class to constitute apresentation in conformity with generally accepted account-ing principles. In addition, certain amounts have beenreclassified to conform to the current-year presentation.

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2. Investments

As described in Note 1d, investments are generally shownin the financial statements at market or appraised value.The market values of the University's investments (exclud-ing non-endowment cash and cash equivalents as describedin Note 1c) are presented below, as of June 30, in thou-sands of dollars:

2003 2002

Endowment:Domestic equities $ 1,694,521 $ 1,604,276Absolute return 2,728,955 2,752,881Private equities 1,626,159 1,494,589Fixed-income 813,820 931,245Real assets 2,425,809 2,270,289International equities 1,590,718 1,331,647

10,879,982 10,384,927

Assets held in trust: 62,308 57,109

Other investments:Fixed-income 257,367 141,698Other 77,722 86,703

335,089 228,401

Total Investments $11,277,379 $10,670,437

Fixed income investments in the non-endowment portfolioinclude $172.2 million of chefa x proceeds at June 30,2003 and $114.4 million of chefa v proceeds at June 30,2002 available for approved construction and campus reno-vation projects.

The University’s split-interest assets as described in footnote1i and included in investments comprise the following com-ponents, in thousands of dollars:

2003 2002

Charitable gift annuities $ 63,220 $ 58,588Pooled income funds 23,269 24,652Charitable remainder trusts 62,308 57,109

$ 148,797 $ 140,349

The University has developed a diversified endowmentinvestment portfolio with a strong orientation to equityinvestments and to strategies designed to take advantage ofmarket inefficiencies. The University’s investment objectivesare guided by its asset allocation policy and are achieved inpartnership with external investment managers operatingthrough a variety of vehicles, including separate accounts,limited partnerships and commingled funds.

The University may employ derivatives and other strategiesto (1) hedge against market risks, (2) arbitrage mispricingsof related securities and (3) replicate long or short positionsmore cost effectively. Accordingly, derivatives in the invest-ment portfolio may include currency forward contracts,interest rate and currency swaps, call and put options, debt

and equity futures contracts, equity swaps and other vehi-cles that may be appropriate in certain circumstances. SinceYale does not strive for higher returns through market tim-ing or by making leveraged market bets, derivatives are notused for speculation.

Yale’s derivative positions directly held at June 30, 2003included interest rate swaps, and currency forward con-tracts. The market value of these derivatives was $29.9 mil-lion. A gain of $8.1 million related to these transactions isincluded within total endowment return in the Statement ofActivities. Derivatives held by limited partnerships and com-mingled investment trusts in which Yale invests pose no off-balance sheet risk to the University due to the limited liabil-ity structure of the investments.

Certain investment transactions, including derivative finan-cial instruments, necessarily involve counterparty creditexposure. Such exposure is monitored regularly by theUniversity’s Investments Office in accordance with estab-lished credit policies and other relevant criteria.

At June 30, 2003, approximately 60.0 percent of theUniversity’s endowment investments were invested in limit-ed partnerships or limited liability corporations. Under theterms of certain limited partnership agreements for privateequity and real estate investments, the University is obligat-ed to remit additional funding periodically as capital callsare exercised. At June 30, 2003, the University had uncalledcommitments of approximately $2.2 billion. Such commit-ments are generally called over a period of years and con-tain fixed expiration dates or other termination clauses.

The University has various sources of internal liquidity at itsdisposal, including cash, cash equivalents and marketabledebt and equity securities. If called upon on June 30, 2003,management estimates that it could have liquidated approx-imately $2.9 billion to meet short-term needs.

36

A summary of the University’s total investment return asreported in the Statement of Activities is presented below, inthousands of dollars:

2003 2002

Investment income $289,143 $357,380Realized and unrealized gains (losses),

net of investment management fees 610,608 (315,978)

Return on the endowment $899,751 $ 41,402Other investment income 17,434 26,544

Total return on investments $917,185 $ 67,946

Endowment investment returns totaling $470.1 million and$415.0 million were allocated to operating activities in2003 and 2002, respectively, using the spending policydescribed in Note 1d.

3. Accounts Receivable

Accounts receivable from the following sources were out-standing at June 30, in thousands of dollars:

2003 2002

Medical services $ 35,582 $ 30,795Grants and contracts 38,479 36,405Investment income receivable 10,273 12,733Affiliated organizations 14,020 10,350Yale University Press receivables 5,528 7,752Other 11,445 11,763

115,327 109,798Less: Allowance for

doubtful accounts (16,729) (12,825)

$ 98,598 $ 96,973

Medical services receivables are net of an allowance forcontractual reserves in the amount of $28.0 million and$26.1 million at June 30, 2003 and 2002, respectively.

The University and Yale-New Haven Hospital (“theHospital”) are parties to an affiliation agreement that estab-lishes guidelines for the operation of activities between thesetwo separate organizations. These guidelines set forth eachorganization’s responsibility under the common goal ofdelivering comprehensive patient care services. Under theterms of the arrangement, the Hospital is responsible forproviding a clinical setting and clinical support for theUniversity to carry out its teaching and research missions.The University provides professional services from facultyof the Yale School of Medicine and a variety of otheradministrative and clinical services.

The net receivable from the Hospital amounted to $6.1 mil-lion and $4.5 million at June 30, 2003 and 2002, respec-tively. Balances are settled in the ordinary course of busi-ness.

4. Contributions Receivable

Contributions receivable consists of the following uncondi-tional promises to give as of June 30, in thousands of dollars:

2003 2002

Purpose:Endowment $ 66,508 $ 58,740Capital purposes 126,820 121,914Operating programs 81,160 95,734

Gross unconditional promises to give 274,488 276,388

Less: Discount (30,922) (34,961)Allowance for uncollectible

accounts (35,157) (35,827)

Net unconditional promises to give $208,409 $205,600

Amounts due in:Less than one year $ 47,360 $ 42,461One to five years 172,961 173,463More than five years 54,167 60,464

Total $274,488 $276,388

Discount rates used to calculate the present value of contri-butions receivable ranged from .98 percent to 6.60 percentat June 30, 2003, and from 2.83 percent to 6.60 percent atJune 30, 2002.

5. Student Notes Receivable

Student notes and interest receivable at June 30, in thou-sands of dollars, include:

2003 2002

Stafford Loan Program $14,306 $25,069Perkins Loan Program 32,442 34,186YSL Loan Program 20,059 19,583Other student loan notes 5,019 5,523

71,826 84,361Less: Allowance for doubtful accounts (3,065) (3,043)

$68,761 $81,318

Student notes receivable include donor-restricted andFederally-sponsored student loans with mandated interestrates and repayment terms subject to significant restrictionsas to their transfer and disposition. Yale Student Loans(ysl) are made with University funds to meet demonstratedneeds in excess of all other sources of student loan borrow-ings. Interest accrues at fixed rates upon loan initiation.Amounts received from the Federal government to fund aportion of the Perkins student loans are ultimately refund-able to the Federal government and have been reported asrefundable advances in the Statements of Financial Position.The fair value of student loan instruments could not bedetermined without incurring excessive costs.

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8. Bonds and Notes Payable

Bonds and notes payable of the University at June 30, inthousands of dollars, consist of:

2003 2002

Facilities financing $1,543,885 $1,193,807Student loan financing 29,000 29,158Other - 275

$1,572,885 $1,223,240

Total interest expense incurred on indebtedness was $52.4million and $49.4 million in 2003 and 2002, respectively.Interest capitalized to land, buildings and equipment totaled$2.7 million in both 2003 and 2002.

a. FacilitiesThe University has entered into various agreements to financeits facilities additions, renovations and improvements. Bondsand notes payable outstanding for such purposes at June 30,in thousands of dollars, include:

Effective PrincipalInterest Rate Year of Outstanding

2003 Maturity 2003 2002

Connecticut Health and Educational Facilities Authority(chefa) tax-exempt bonds

Series S 1.19% 2027 $135,865 $ 135,865Series T 1.15% 2029 250,000 250,000Series U 1.13% 2033 250,000 250,000Series V 1.15% 2036 200,000 200,000Series W 5.13% 2027 87,672 87,595Series X 2.18% 2037/2042 350,000 -

Total chefa bonds 1,273,537 923,460Medium-term notes 7.38% 2096 113,388 113,380Taxable commercial

paper 1.50% 2003 152,094 151,758Other notes

payable 3.00%-7.90% 2004/2020 4,866 5,209

$1,543,885 $1,193,807

In January of 2003, the University issued $350 million ofSeries X tax-exempt bonds. The proceeds will be used tofinance qualifying capital projects. Series X bonds consist of1) $100 million Series X-1 bonds at a fixed interest rate of5%. Series X-1 bonds mature on July 1, 2042, and are sub-ject to an optional redemption on July 1, 2013; 2) $125 mil-lion Series X-2 variable rate bonds, currently bearing interestat a weekly rate; 3) $125 million Series X-3 variable ratebonds, currently bearing interest at a daily rate. Series X-2and X-3 bonds mature on July 1, 2037. Series X-2 and X-3bonds may be converted to other variable rate modes or to afixed rate at the discretion of the University. Series X-2 bondsmay be tendered for purchase on any business day with sevendays notice. Series X-3 bonds may be tendered for purchaseon any business day.

6. Other Assets

Other assets at June 30, in thousands of dollars, include:

2003 2002

Software costs, net of accumulated amortization $62,555 $70,514

Inventories 13,780 14,046Bond issue costs, net of

accumulated amortization 5,726 5,029Other notes receivable 844 1,021Deferred expenses 6,065 7,756

$88,970 $98,366

Amortization expense included in operating expensesamounted to $12.3 million and $11.7 million in 2003 and2002, respectively.

7. Land, Buildings and Equipment

Land, buildings and equipment at June 30, less accumulat-ed depreciation, in thousands of dollars, are as follows:

2003 2002

Land and real estate improvements $ 74,759 $ 72,045Buildings 2,306,086 1,876,308Equipment 360,183 423,514Construction in progress 171,223 404,113

2,912,251 2,775,980Less: Accumulated depreciation (926,140) (922,771)

$1,986,111 $1,853,209

Depreciation expense included in operating expensesamounted to $106.5 million and $94.9 million in 2003 and2002, respectively.

38

chefa Series W bonds bear interest at a fixed interest rateof 5.125%. The proceeds of Series W were used to refi-nance chefa Series Q and R bonds of $87,600,000. Yaleexercised its option to redeem the series Q and R bonds,which had a 6% fixed interest rate, on June 17, 2002. Therefinancing required the payment of a call premium in theamount of $1.7 million. Series W bonds mature on July 1,2027, and are subject to an optional redemption in July of2009. The original issuance discount associated with thisissuance is $1,924,680, which will be amortized over the25-year life of the bond.

chefa Series V bonds currently bear interest at a daily rateand mature on July 1, 2036. The bonds may be convertedfrom a daily rate period to other variable rate modes or toa fixed rate mode at the discretion of the University. Thebonds may be tendered for purchase on any business day.

chefa Series U bonds and one-half of Series T currentlybear interest at a weekly rate. The bonds may be convertedfrom the weekly rate period to other variable-rate modes orto a fixed-rate mode at the discretion of the University. Inthe weekly mode, bonds may be tendered for purchase onany business day with seven days notice. On September 4,2001, the University converted half of chefa Series T froma weekly mode to a daily mode. Series T bonds in dailymode may be tendered for purchase on any business day.

chefa Series S bonds currently bear interest at a moneymarket municipal rate and are outstanding for varyinginterest rate periods of 270 days or less. The bonds may beconverted from the money market mode to other variablerate modes or to a fixed rate mode at the discretion of theUniversity. In the current money market mode, bonds maybe tendered for purchase at the end of each rate period.

Medium-term notes in the amount of $113.4 million arerecorded net of a discount at June 30, 2003. The notesmature in the year 2096, with a call provision in the year2026. The bonds bear interest at a fixed rate of 7.375%.

Commercial paper consists of notes issued in the short-termtaxable market, and is sold at a discount from par. Thematurities of individual notes are issued in ranges from oneday to no more than one year, and fall on average in arange of sixty to ninety days.

Scheduled maturities of the facilities bonds and notespayable for the next five fiscal years, in thousands of dollars, are as follows:

2004 $3492005 2522006 1502007 1622008 175

Commercial paper borrowings have no scheduled maturi-ties. The University may choose to retire some or all of theoutstanding commercial paper over the next five years.

During fiscal year 2003, the University entered into a 364-day revolving credit agreement totaling $200 million to pro-vide alternative liquidity to support Yale’s variable ratedemand notes.

b. Student LoanCommercial paper utilized to finance student loan notes was$29.0 million in 2003 and $29.2 million in 2002, with aneffective interest rate of 1.50% for 2003 and 2.50% for2002.

c. Interest Rate SwapsThe University has entered into various interest rate swapagreements to manage the interest cost and risk associatedwith its variable rate debt portfolios. During fiscal year2003, Yale entered into additional swap agreements withnotional principal amounts totaling $25 million. Under theterms of these agreements, the University pays fixed rates,ranging from 4.64% to 6.54%, determined at inception,and receives the 3-month libor on the respective notionalprincipal amounts. The following schedule presents swapagreements in force related to this strategy at June 30, 2003in thousands of dollars:

Notional Market Net Interest Expense ExpirationAmount Value 2003 2002 Date

Facilities $480,000 $(77,483) $20,015 $15,524 2004-2041Student

loan - - 497 280

$480,000 $(77,483) $20,512 $15,804

These financial instruments involve counterparty creditexposure. The counterparties for these swap transactionsare major financial institutions that meet the University’scriteria for financial stability and credit-worthiness.

d. Fair ValueThe fair value of the University's fixed rate bonds, $351.0million at June 30, 2003, is estimated based on quoted mar-ket prices for the same or similar issues. The carrying valueof commercial paper and variable rate bonds and notespayable, which reflects varying interest rate periods, onaverage 90 days, approximates fair value because of theshort-term maturity of these instruments.

39

9. Pension Plans—Defined Contribution

The University maintains the Yale University RetirementAnnuity Plan as a contributory plan for faculty and certainstaff employees. Participants may direct employee andemployer contributions to the Teachers’ Insurance andAnnuity Association (tiaa) and College Retirement EquitiesFund (cref), as well as other investment options. Pensionexpense for this plan was $41.5 million and $37.7 millionin 2003 and 2002, respectively.

10. Pension and Postretirement Plans —Defined Benefit

The University has a noncontributory, defined benefit pen-sion plan for staff employees. Benefits are based on years ofparticipation and the employee’s highest annual rate ofearnings during the last five years of employment. Annualcontributions to the plan are made by the University basedupon calculations prepared by the plan’s actuary.

The University provides comprehensive health care benefitsfor retired employees and their eligible dependents througha defined benefit plan. While the University’s subsidy ofthese costs differs among retiree groups, substantially allemployees who meet minimum age and service require-ments and retire from the University are eligible for thesebenefits.

The University has created a trust to provide for the fund-ing of postretirement medical benefits. Annual contribu-tions are determined by the University and are deposited tothe trust quarterly.

Net periodic benefit cost for defined benefit plans includesthe following components, in thousands of dollars:

Net periodic Pension Postretirementbenefit cost for the Benefits Benefitsfiscal year ended 2003 2002 2003 2002

Service cost $ 9,038 $ 8,402 $ 9,555 $ 7,560Interest cost 20,596 19,435 16,829 14,038Expected return on

plan assets (35,350) (31,496) (10,917) (9,207)Net amortization

- Transition obligation 517 587 3,976 3,976- Prior service cost 1,206 1,251 - -- Net (gain) loss (4,018) (2,870) 3,602 2,121

Net periodic(benefit) cost $ (8,011) $(4,691) $23,045 $ 18,488

The following table sets forth the Pension andPostretirement plans’ funded status and provides a reconcili-ation to the accrued liability reported in the Statements ofFinancial Position at June 30, in thousands of dollars:

Pension PostretirementBenefits Benefits

Plans’ Funded Status 2003 2002 2003 2002

Change in benefit obligation:Benefit obligation,

beginning of year $298,949 $288,317 $ 245,274 $ 204,984- Service cost, excluding assumedadministration expenses 8,637 8,002 9,385 7,410

- Interest cost 20,596 19,435 16,829 14,038- Benefit payments (13,149) (12,634) (9,971) (8,017)- Assumption changes 33,343 - 20,282 23,974- Amendments 13 - 5,728 -- (Gain) loss 1,919 (4,171) 6,533 2,885

Benefit obligation, end of year $350,308 $298,949 $ 294,060 $ 245,274

Change in plan assets:Market value,

beginning of year $419,934 $420,899 $ 109,282 $ 93,624- Actual return

on plan assets 39,863 12,046 5,760 9,806- University

contributions - - 23,174 14,032- Benefits and

expenses paid (13,829) (13,011) (10,232) (8,180)

Market value, end of year $445,968 $419,934 $ 127,984 $ 109,282

Funded status $ 95,660 $120,985 $(166,076)$(135,992)Unrecognized

transition obligation - 517 39,757 43,732Benefit payments advanced - - 2,051 3,221Unrecognized net

(gain) loss (88,293) (123,340) 108,658 80,196Unrecognized prior

service cost 8,724 9,918 5,728 -

Prepaid (accrued) benefit cost included in the Statements of Financial Position $ 16,091 $ 8,080 $ (9,882)$ (8,843)

Changes in assumptions during the current year affectingthe benefit obligations of the plans are as follows:

Pension Postretirement

Discount rate - from 7% to 6.25% $33,343 $31,190

Cost of living adjustment - from 4% to 3% - (7,958)

Eliminate Medicare risk hmo participation - (2,950)

40

In June 2002 the change in the projected health care costtrend assumption and the extension of the date when theultimate trend rate will be achieved resulted in a $23.9 mil-lion increase in the benefit obligation of the Postretirementplan.

Assumptions used in determining the net periodic costs ofthe Pension and Postretirement plans are:

2003 2002

Weighted-average discount rate 7.00% 7.00%Expected long-term rate of return 9.25% 9.25%Compensation increase 4.50% 4.50%Health care cost increase 10.00% 6.00%

Assumptions used in determining the obligation of thePension and Postretirement plans are:

2003 2002

Weighted-average discount rate 6.25% 7.00%Increase in future compensation levels 4.50% 4.50%Projected health care cost trend rate 9.00% 10.00%Ultimate trend rate 5.00% 5.00%Year ultimate trend rate is achieved 2008 2008

The expected return assumption will be decreased to 8.5%for fiscal 2004. This change will have the effect of increas-ing expense by $3.1 million for the pension plan and $1.0million for the postretirement plan in fiscal 2004.

The health care cost trend rate assumption has a significanteffect on the amounts reported. For 2003, a 1 percentchange in the health care cost trend rate structure wouldcause the Postretirement plan’s benefit obligation at June30, 2003 to change by approximately 11.7 percent andwould also cause the sum of the service cost and interestcost components of postretirement expense to change byapproximately 14.0 percent.

11. Subsequent Event

On September 18, 2003 the University announced an eight-year contract settlement with Locals 34 and 35 of the HotelEmployees and Restaurant Employees International Union.The contract includes scheduled wage increases of 3.6% to4.6% per year over the next four years escalating by 1% ayear over the remainder of the contract. Increases in pen-sion benefits, including other employee groups, are expect-ed to have the effect of increasing next year’s pensionexpense by $10.8 million. In addition, settlement paymentswill be made to all employees represented by these Unions.The settlement payment amounted to approximately $12.0million and has been included as an accrued liability atJune 30, 2003 and an operating expense of $6 million forfiscal year 2003 and 2002, respectively.

12. Commitments and Contingencies

The University is involved in various legal actions arising inthe normal course of activities and is subject to periodicaudits and inquiries by various regulatory agencies.Although the ultimate outcome is not determinable at thistime, management, after taking into consideration advice oflegal counsel, believes that the resolution of these pendingmatters will not have a materially adverse effect, individ-ually or in the aggregate, upon the University’s financialstatements.

In the normal course of business, the University leases facili-ties under non-cancellable operating leases. Minimum leasepayments under these agreements over the next five years,in thousands of dollars, are as follows:

2004 $7,1512005 5,4772006 4,7792007 4,1392008 3,617

The University has entered into certain agreements to guar-antee the debt and financial commitments of others. Underthese agreements if the original debt holder defaults on thedebt the University may be required to satisfy all or part ofthe remaining obligation. The total amount of these guaran-tees is approximately $18 million at June 30, 2003.

Design: Strong Cohen /A. Damour

Printing supervision: Yale Printing and Graphic Services

Photo credits: front cover, pages 2, 3, 8, 10 and 11Michael Marsland

Page 7 insert: Robert Lisak

Page 12 insert: John Curtis

PresidentRichard Charles Levin, B.A., B.LITT.,PH.D.

FellowsHis Excellency the Governorof Connecticut, ex officio

Her Honor the Lieutenant Governorof Connecticut, ex officio

George Leonard Baker, Jr., B.A., M.B.A.Palo Alto, California

Edward Perry Bass, B.S.Fort Worth, Texas

Roland Whitney Betts, B.A., J.D.New York, New York

Benjamin Solomon Carson, Sr., B.A.,M.D.Baltimore, Maryland

Gerhard Casper, L L.M., P H.D.Atherton, California

Susan Crown, B.A., M.A.Chicago, Illinois

Charles Daniel Ellis, B.A., M.B.A., PH.D.Greenwich, Connecticut

Holcombe Tucker Green, Jr., B.A., LL.B. Atlanta, Georgia

Maya Ying Lin, B.A., M.ARCH., D FA H (Hon.)New York, New York

Linda Anne Mason, B.A., M.B.A.Belmont, Massachusetts

Victoria Matthews, B.A., M.DIV., T H.M. Edmonton, Alberta, Canada

Indra Krishnamurthy Nooyi, M.P.P.M.Greenwich, Connecticut

Barrington Daniels Parker, Jr., B.A., LL.B.Stamford, Connecticut

John Ennis Pepper, Jr., B.A., M.A.Cincinnati, Ohio

Theodore Ping Shen, B.A., M.B.A.Brooklyn Heights, New York

Janet Louise Yellen, B.A., P H.D.Berkeley, California

The Officersof Yale University

PresidentRichard Charles Levin, B.A., B.LITT.,P H.D.

ProvostSusan Hockfield, B.A., PH.D.

Vice President and SecretaryLinda Koch Lorimer, B.A., J.D.

Vice President and Director, New Haven and State Affairs andActing Vice President for Finance and Administration Bruce Donald Alexander, B.A., J.D.

Vice President for DevelopmentCharles James Pagnam, B.S.

Vice President and General Counsel Dorothy Kathryn Robinson, B.A., J.D.

The President and Fellows of Yale University

Associate Vice President FinanceJanet H. Ackerman

Acting Associate Vice PresidentFacilitiesJohn H. Bollier

Associate Vice President StudentFinancial & Administrative ServicesErnst D. Huff

Interim Associate Vice PresidentAdministrationJanet E. Lindner

Director ITS & University ChiefInformation OfficerPhilip Long

Director AuditingRobert F. McNeil

Assistant Vice Presidentand ControllerCary B. Scapillato

Finance and Administration Staff