Statement of Activities OPERATING REVENUES

Financial Report Included in the following pages are highlights of the 2016-2017 fiscal year financial results, as well as key excerpts from the University s financial statements. Statement of Financial Position ASSETS The largest categories within the University s $2.4 billion asset balance are investments and capital assets. The University s endowment fund constitutes the majority of the University s investment balance (see Endowment Review ) and experiences growth based on donor support and investment return net of operating distributions. Significant capital projects in process at fiscal year-end include renovations to support experiential learning on the Mountaintop Campus. LIABILITIES The Bonds, Loans, and Notes Payable balance of $396 million comprises the largest liability balance on the consolidated financial statements. The University s debt balance includes a diversified mix of fixed and variable rate, and taxable and tax-exempt obligations. In support of the tax-exempt debt portfolio, the University has entered into interest rate exchange agreements that effectively minimize the variable rate exposure and/or reduce the University s effective interest rate. In Fiscal Year 2017, the University took advantage of the favorable interest environment and issued its 2016 bonds. A $150 million fixed rate taxable debt issue will provide significant financial resources to support strategic infrastructure investments for the next several years. In addition, the University issued its 2016A and 2016B series of debt to legally defease certain debt obligations, thus securing significant refunding savings. NET ASSETS The University s Net Assets balance of $1.8 billion is classified as permanently restricted, temporarily restricted or unrestricted net assets. Permanently restricted net assets are primarily endowment assets whose use is limited by donor-imposed stipulations that neither expire with the passage of time nor can be removed by the University. In most cases, the donors of those assets permit the University to use all or a part of the investment income on those assets for general or specific purposes. The use of temporarily restricted net assets is limited by donor-imposed stipulations that either expire by passage of time or can be fulfilled or removed by actions of the University. A significant portion of temporarily restricted net assets is composed of accumulated gains on permanently restricted endowment funds. Unrestricted net assets are free from donor-imposed restrictions, but have largely been designated for specific purposes by action of the Board of Trustees or University management. Statement of Activities OPERATING REVENUES Net Tuition Revenue and Investment Return comprise the two largest sources of unrestricted operating revenue, representing 48% and 21% of the consolidated total in Fiscal Year 2017. Tuition and fees revenue is reported net of related scholarships. Total financial aid expenditures supporting graduate and undergraduate tuition grew 5.8% to $91.6 million. The University also provides financial aid to offset student living expenses, reported as a deduction from auxiliary enterprises revenues in the consolidated financial statements. Need-based financial aid was provided to more than 38% of undergraduate students, with an average financial aid package of just under $33,400. Operating Investment Return includes $65.7 million of distributed earnings from the University endowment fund. The University s policy for the distribution of endowment earnings is based on a three-year moving average market value that includes a ceiling and floor to insulate program spending from significant market fluctuations. The University experienced a 15% increase in external research funding from federal, state, local and private sources. For the first time since 2012, Lehigh received eight new awards of more than $1 million under the leadership of principal investigators from all four Colleges. OPERATING EXPENSE The University continues to manage its expenses responsibly, aligning institutional resources from all sources to support its mission of education, research and public service. Fiscal year 2017 was the University s 47th consecutive year of positive net operating income. Almost one-half of operating expense falls within the functional expense categories of Instruction and Academic Support, directly supporting the student academic experience. Research expenditures further faculty scholarly inquiry and also provide opportunities for student independent research projects. In fiscal year 2017, University faculty were engaged in close to 600 actively supported research projects. Auxiliary Enterprises provide an active and balanced educational experience by integrating formal studies with the residential environment. Classifying expenses on a natural, rather than functional, basis reveals that salaries and benefits comprise more than one-half of the University s annual operating expense. Resource planning continues to focus on reallocation opportunities and collaborative efforts for the long term. NON-OPERATING ACTIVITY Non-operating activity includes transactions of a long-term investment nature or that indirectly relate to core activities. Examples include contributions restricted for campus improvements, contributions restricted because of donor-imposed stipulations, income and expense resulting from certain fair-value adjustments, the impact of bond defeasance and refunding activities, and investment returns net of earnings distributed for operations. 34 LEHIGH UNIVERSITY 2017 ANNUAL REPORT

Fiscal Year 2016-2017 Operating Revenue Sources ($ in thousands) Fiscal Year 2016-2017 Operating Expense by Functional Category 59+10+3+21+4+3 TUITION & AUXILIARIES $ 234,259 59% GRANTS & CONTRACTS 41,173 10% CONTRIBUTIONS 12,163 3% INVESTMENT RETURN 83,515 21% INDEPENDENT OPERATIONS 15,305 4% OTHER SOURCES 10,161 3% $ 396,576 100% ($ in thousands) 39+11+1+9+9+18+10+3 INSTRUCTION $ 150,480 39% RESEARCH 43,348 11% PUBLIC SERVICE 2,595 1% ACADEMIC SUPPORT 35,175 9% STUDENT SERVICES 36,190 9% INSTITUTIONAL SUPPORT 70,348 18% AUXILIARY ENTERPRISES 38,702 10% INDEPENDENT OPERATIONS 10,882 3% $ 387,720 100% Endowment Review The Endowment earned 15.0% for the fiscal year, net of all fees. Much of this performance was driven by healthy stock market gains (the S&P 500 was up 18% for the year), on top of which the Endowment s Public Equity managers outperformed. Performance was generally strong across the rest of the portfolio as well, with the Private Equity and Absolute Return portfolios also seeing double-digit returns. While it is gratifying that the portfolio performed well in a year of a number of new investment initiatives, we are careful to avoid placing too much emphasis on a single year s performance. The steps we are taking are intended to generate attractive returns over multiple years. Fiscal 2017 was an active year for the portfolio and the Investment Office, in which we made progress toward a number of important goals. In January, the Investment Office moved into its new location in midtown Manhattan, which has been highly beneficial as a base for exploring investment opportunities and staying in contact with asset managers and peer institutions. Two new members joined the investment team in New York: Van Tran, who joined from DUMAC (Duke University s Investment Office) as Investment Analyst, and Rika Feng, who joined as Investment Operations Manager after serving in similar roles for the endowments of Columbia University and the Smithsonian. Within the portfolio, we advanced on a number of initiatives. We put in place a new asset allocation, one which seeks to take advantage of Lehigh s ability to take a long-term view and tolerate short-term volatility. In addition, we set road maps for each asset class in the portfolio to guide our investment activity in the coming years. We also have been working diligently on concentrating the portfolio among fewer investment managers, such that each manager in the portfolio can have a larger impact on overall portfolio performance. The objectives we set will be implemented over multiple LIVING LIVES OF CONSEQUENCE 35

years, but we consider our work over the past year to be a strong start. Overall, the past year has been positive on a number of fronts, and we have been fortunate to have very good performance during a year of active transition in the portfolio. Looking ahead, we are cognizant of a market environment offering more muted returns. The rising markets of the last several years have come with rising valuations, which have the effect of lowering expected future returns and reducing the margin of safety available in virtually all types of investments. In this environment, we will continue to maintain discipline and a long-term focus, diversify risk exposures, and remain on the lookout for new managers and areas of investment that can generate outperformance. Lehigh Endowment Target Asset Allocation Adopted 2016 PUBLIC EQUITY 45% PRIVATE EQUITY 20% ABSOLUTE RETURN 20% TREASURIES/CASH 10% REAL ESTATE 5% 45+20+20+10+5 Endowment Fund Growth History $1,600,000,000 $1,200,000,000 $800,000,000 $400,000,000 $ JUN-00 JUN-01 JUN-02 JUN-03 JUN-04 JUN-05 JUN-06 JUN-07 JUN-08 JUN-09 JUN-10 JUN-11 JUN-12 JUN-13 JUN-14 JUN-15 JUN-16 JUN-17 36 LEHIGH UNIVERSITY 2017 ANNUAL REPORT

Lehigh University CONSOLIDATED STATEMENT OF FINANCIAL POSITION JUNE 30, 2017 (with comparative financial information for year ended June 30, 2016) ($ in thousands) ASSETS 2017 2016 Cash and cash equivalents $ 23,705 24,930 Accounts receivable, net 17,019 12,946 Inventories 1,503 1,590 Prepaid expenses and other assets 6,017 5,584 Contributions receivable, net 33,901 37,030 Notes receivable, net 11,758 12,767 Investments 1,871,799 1,554,579 Funds held in trust by others 4,553 4,332 Land, buildings, and equipment, net 413,192 401,190 Total assets $ 2,383,447 2,054,948 LIABILITIES AND NET ASSETS Accounts payable and accrued expenses $ 42,308 37,888 Deferred revenues 25,354 23,837 Annuity payment liability 18,431 19,443 Other liabilities 52,257 55,982 Deposits held for others 1,346 1,385 Refundable federal student loan funds 2,018 2,194 Bonds, loans, and notes payable 395,972 240,025 Total liabilities 537,686 380,754 Unrestricted 932,232 839,051 Temporarily restricted 364,188 309,160 Permanently restricted 549,341 525,983 Total net assets 1,845,761 1,674,194 Total liabilities and net assets $ 2,383,447 2,054,948 LIVING LIVES OF CONSEQUENCE 37

Lehigh University CONSOLIDATED STATEMENT OF ACTIVITIES YEAR ENDED JUNE 30, 2017 (with summarized comparative financial information for year ended June 30, 2016) ($ in thousands) SUPPORT AND REVENUES Tuition and fees, net $ 191,329 191,329 185,644 Federal grants and contracts 27,433 27,433 23,597 State and local grants and contracts 6,380 6,380 6,314 Private grants and contracts 7,360 7,360 5,807 Contributions 12,163 12,163 15,090 Investment return 83,515 83,515 82,527 Auxiliary enterprises 42,930 42,930 43,492 Independent operations 15,305 15,305 11,123 Other sources 10,161 1 0,1 6 1 9,543 Gifts and trusts released from restrictions 2,816 (2,816) Total support and revenues 399,392 (2,816) 396,576 383,137 EXPENSES Unrestricted Temporarily restricted Instruction 150,480 150,480 144,281 Research 43,348 43,348 39,285 Public service 2,595 2,595 3,258 Academic support 35,175 35,175 32,460 Student services 36,190 36,190 36,216 Institutional support 70,348 70,348 69,522 Auxiliary enterprises 38,702 38,702 37,757 Independent operations 10,882 10,882 11,240 Total expenses 387,720 387,720 374,019 Operating income (loss) 11,672 (2,816) 8,856 9,1 1 8 2017 Permanently restricted Total 2016 NON-OPERATING ACTIVITY Investment return: University 70,631 51,079 2,977 124,687 (116,764) Independent operations 2,792 2,792 387 Gifts and trusts 8,442 4,360 18,597 31,399 21,531 Gifts and trusts released from restrictions and changes in donor intent (2,552) 2,469 83 Change in fair value of interest rate swaps 12,499 12,499 (3,189) Post-retirement plan changes other than net periodic benefit costs: University 1,039 1,039 (2,559) Independent operations 30 30 (63) Other (11,372) (64) 1,701 (9,735) 2,691 Non-operating income (loss) 81,509 57,844 23,358 162,71 1 (97,966) Change in net assets 93,181 55,028 23,358 171,567 (88,848) NET ASSETS, BEGINNING OF YEAR 839,051 309,160 525,983 1,674,194 1,763,042 NET ASSETS, END OF YEAR $ 932,232 364,188 549,341 1,845,761 1,674,194 38 LEHIGH UNIVERSITY 2017 ANNUAL REPORT