The University had another year of robust operating income. Operating revenue growth, supporting the University's world-class programs, was 9 percent, led by increases in unendowed gifts and patient care. Expenses were well-controlled, registering a 6 percent increase.

The increase in nonoperating results was largely due to favorable financial market conditions that led to strong investment performance for the University's endowment. Investment return, including investment income, endowment spending distribution, and net undistributed investment gains totaled $1.1 billion.

Supporting the goal of high quality education, enrollment remained stable, while a moderate rate increase resulted in a 7 percent increase in gross tuition and fee revenue. In an effort to make higher education more affordable, University-provided scholarships increased $8.1 million to an aggregate $121.9 million or 34 percent of total tuition. These awards of financial aid, which come from unrestricted resources, gifts, and endowments, reduce reported tuition income and are based on academic promise and demonstrated financial need.

Set and monitored by the University's governing Board, the endowment spending distribution rate is designed to preserve endowment value, while providing a consistent revenue stream for the purposes designated by the donors of endowed funds. The aggregate increase in spending was 5 percent. The University received $160.8 million in total cash gifts during the year. Unendowed gifts reported as operating revenue and endowed gifts, reported as nonoperating activity, totaled $175.2 million, and in accordance with accounting rules, they are adjusted for the year- to-year change in pledged gifts to be received in future years.

The University is one of the most respected research institutions in the country. Strong sustained programs have been established in genetics, psychiatry, radiology, immunobiology, infectious diseases, engineering, and the basic sciences of biology and chemistry. In addition to federal sources, many of these programs receive funding from endowments and gifts from generous donors. During 2007 exciting new initiatives commenced in photoacoustic research in the field of biomedical engineering; nanotechnology programs in the Siteman Cancer Center; and in neurology, the Washington University Center for Translational Neuroscience. As one of the leading health-care providers in the region, the University continues to expand services to meet the needs of the community, including provision of increased emergency services as other area hospitals have downsized. Clinical revenues grew by 8 percent in 2007, led by internal medicine, pediatrics, emergency medicine, anesthesiology, orthopedic surgery, and radiol- ogy among other disciplines. Further, the University provides training for residents and interns and medical direction for affiliated hospitals.

Expenditures for instruction and research approximated nearly 80 percent of total costs, in line with prior years. Such expenses reflect the University's continuing commitment to world-class education, research, and patient care. Supporting component costs--academic support, student services, and institutional support--were also incurred in proportions consistent with prior years.

Revenue from auxiliary enterprises --including student housing, dining services, parking, and transportation services--rose 8 percent in 2007, due largely to an increase in room-and-board rates, more students residing in housing, and greater meal plan participation. Auxiliary expenses, including facility-related costs, were 6 percent higher in 2007. The increase relates to expenses incurred to support the greater meal plan participation, to provide new parking on the Danforth Campus, and to maintain off-campus housing properties. A large amount of expense continues to be provided to enhance, update, and maintain the older off-campus housing buildings. As in most recent years, auxiliary enterprises reported an operating loss for 2007 as the University works to improve high-quality accommodations for its students.

To maintain its standard of excellence as a world-class institution, expansion and addition of facilities and updating of equipment are essential. To support this objective, capital expenditures were $201.7 million in 2007, and have averaged $184 million annually since 1999. Costs associated with this growth, i.e. depreciation, financing costs, and the costs of operation and maintenance, have grown at a compound rate of nearly 10 percent over that period, and, in 2007, they represented almost 15 percent of expenses. These facility-related costs represent a significant component of growth in expenses for instruction, research, and academic support-- primary functions of the University.

On the Danforth Campus, the Mildred Lane Kemper Art Museum and the Earl E. and Myrtle E. Walker Hall were completed for the Sam Fox School of Design & Visual Arts. Significant progress has been made on the new Social Science/Law Building as well as the University Center. Other projects during the year included the renovations of Steinberg Hall, West Campus Alumni and Development offices, and the Park House Residence Hall on the South 40, as well as upgrades to campus utilities systems. In addition, several off-campus student apartment buildings were acquired. Improvements to parking facilities continue as the University's first underground parking garage opened and construction was completed on the Snow Way Parking Garage.

On the Medical Campus, the Northwest Tower, at the corner of Kingshighway Boulevard and Children's Place was completed early in the fiscal year and was in service much of 2007. At year end, the Center for Orthopedic and Sports Medicine was nearing completion and occupancy. Numerous renovation projects were completed, including the Center for Clinical Imaging Research in the radiology department and major office renovations for obstetrics and gynecology in the Maternity Hospital. Substantial additions also were made to parking facilities as construction was completed on the new Metro Garage and expansion of the Clayton Garage. Our donors' generous gifts, ongoing operating funds, and reserves provided funding for these state-of-the-art facilities. In addition, during 2007, the University issued $231.0 million in new bonds: $104 million will support many of the projects mentioned above; $127 million was used to refund existing bonds, resulting in significant savings of future interest costs.

Financial Summary

Washington University's endowment is an important financial resource that provides a dependable and growing source of revenue for University programs and operations. During fiscal 2007, spending from the endowment was $197 million; contributing 10.5 percent of the year's operating revenues. Endowments for scholarships, professorships, research, the libraries, and facilities enable the University to attract and retain outstanding faculty and students. Unrestricted endowments provide an additional revenue source beyond tuition, patient revenue, research grants, and gifts for the support of academic programs.

On June 30, 2007, the market value of the endowment, including life income funds, was $5.66 billion. This is an increase of approximately $900 million from the start of the fiscal year.

The endowment posted a net investment return of 20.1 percent for the year. The key drivers of this strong performance were the endowment's exposures to international and domestic publicly traded equities as well as absolute return and hedge funds. Their respective contributions to the endowment were due to strong returns in each of these asset classes in combination with significant allocations within the endowment. Specifically, the international equity program registered a return of 30.2 percent, while domestic equities earned 21.4 percent for the year. Absolute return and hedge funds returned 19.0 percent in total. Together these three programs comprised nearly 73 percent of the total market value during the year.

In addition, each of these programs outperformed their respective asset class benchmarks.

The real asset portfolio and private equity and venture capital programs also realized strong returns, but contributed less due to their smaller allocations. In particular, the real asset portfolio, which includes real estate investments and other inflation hedging assets, returned 22.8 percent, while the private equity and venture capital program returned 18.7 percent. Together, these assets comprised almost 13 percent of the endowment during the year. Real assets also outperformed their asset class benchmark, although the private equity/venture capital portfolio modestly underperformed its benchmark return.

Fixed-income securities posted relatively modest returns during the year. Nominal fixed-income securities earned 6.2 percent during the year, while inflation-indexed bonds returned 4.1 percent. Their combined exposure averaged about 13 percent of the portfolio, and in total, their performance was flat relative to their benchmark.

During fiscal 2007, a major change was made to the governance and oversight of the endowment with the formation of the Washington University Investment Management Company. University trustee John H. Biggs is the chairman of the new management entity, which reports to the University Board of Trustees. Kimberly Gayle Walker was named to the position of chief investment officer with responsibility for providing leadership for the University's investment organization.

A new committee of the University Board of Trustees, the Asset Manage-ment Committee, now has responsibility for endowment spending policy and the determination of the annual spending rate. This committee also oversees the investment of the University's operating funds and other non-endowed financial resources.

Institutions Ranked by Fiscal Year 2006 Market Value of Endowment Assets (000s) *

1 Harvard University  28,915,706
2 Yale University  18,030,600
3 Stanford University  14,084,676
4 University of Texas System  13,234,848
5 Princeton University  13,044,900
6 Massachusetts Institute of Technology  8,368,066
7 Columbia University  5,937,814
8 University of California  5,733,621
9 University of Michigan  5,652,262
10 The Texas A&M University System and Foundations  5,642,978
11 University of Pennsylvania  5,313,268
12 Northwestern University  5,140,668
13 Emory University  4,870,019
14 University of Chicago  4,867,003
15 Washington University in St. Louis  4,684,737
16 Duke University  4,497,718
17 University of Notre Dame  4,436,624
18 Cornell University  4,321,199
19 Rice University  3,986,664
20 University of Virginia  3,618,172

* as of June 30, 2006, according to the 2006 National Association of College and University Business Officers Endowment Study, excluding life income funds