This report presents findings of an investigation of the use of federal research and development grant funds by the University of California system in its payments to graduate student researchers (GSRs). Specifically, the study examined whether: (1) compensation paid to GSRs was in accordance with guidelines of the Office of Management and Budget; (2) foreign GSRs were receiving a larger share of federal research funds than resident GSRs; (3) the university's treatment of GSR compensation for federal income tax purposes was consistent with charging such money to federal grants; and (4) oversight provided by the Department of Health and Human Services (HHS) was adequate. Relevant findings indicated: (1) the university charged federal sponsored research $19.3 million for compensation in excess of what it paid first-level postdoctoral researchers for comparable work; (2) foreign GSRs received a larger proportionate share of total tuition and fee remission costs charged against federal grants than did resident GSRs; (3) no conclusion could be reached concerning proper tax treatment of tuition remission provided to GSRs; and (4) HHS ensured that the institution had not requested GSR compensation to exceed certain caps. A letter from the Internal Revenue Service explaining tax treatment of tuition remission is appended. (DB)