Cambridge University's latest financial projections put it £10 million in the red by 2005. But this week its internal financial watchdog attacked it for persistently publishing misleading and confusing financial information.

The university council's annual report on the Chest - its "unrestricted" income, including grants from funding and research councils and income from fees - forecasts deficits beyond 2002 of £6 million for two years, rising to £10 million in 2005. This assumes modest growth in student numbers and increased research income.

Cambridge is to urgently develop an action plan to include increasing the volume of research and improving the rate of recovery of overhead costs on research grants. It is already drawing up a new mission statement, which some academics fear could endanger smaller departments.

The estimated Chest deficit, which excluded Cambridge's "non-Chest" income from trust funds and other special funds, for the current financial year was worse than originally thought, the council report says.

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It shows a deficit of £4.4 million on a Chest income of £186.5 million, increasing to £5.1 million in 2001-02 on an income of just under £200 million. It expects £129 million for 2001-02 from the Higher Education Funding Council for England, up 6.2 per cent on this year. This includes a 2.9 per cent increase in the teaching grant to £50.9 million, and a 2.3 per cent increase in its quality research income.

The university expects its endowment income to remain static at £7.8 million and its income from academic fees and support grants to increase by just under 5 per cent to £39.3 million.

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Expenditure is set to increase by more than 7 per cent in 2001-02 to £204.4 million, the report says, with money going to new building works and increased staff costs.

In a separate report, Cambridge's board of scrutiny criticises what it describes as a recurring theme of the university's annual reports - the persistent failure to ensure financial accounts comply with the Accounting Standards Board's Statement of Recommended Practice.

The board said: "As (Cambridge) continues to receive substantial amounts of public funds, it ought to publish its financial information in a form that aids comparison with other UK universities."

• Cambridge's board of scrutiny has warned that inequalities at the university are growing.

Four months after external consultants highlighted a "macho" culture at the university, propagated by a predominately white, male elite, the board has warned of a widening gap between the highest paid staff and the lowest.

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In the past year, there has been a 75 per cent increase in the number of non-clinical staff paid between £50,000 and £60,000, a four-fold increase in those paid between £60,000 and £70,000 and a doubling of the number of staff earning more than £70,000. "In contrast, in the same period the salaries of university lecturers rose, roughly, in line with the rate of inflation," the board said.

Moves to attract top researchers from outside the university should be considered in the context of the equality agenda, the board said. It said that it was a "distinct possibility" that a special payments plan to attract and retain top academics "is creating unequal pay between men and women".

The board made a total of 11 recommendations for improvement.