new issue – book-entry-only ratings: moody’s...

NEW ISSUE – BOOK-ENTRY-ONLY Ratings: Moody’s “Aaa” PSF Guaranteed (See “RATINGS” and “THE PERMANENT SCHOOL GUARANTEE PROGRAM” herein)

OFFICIAL STATEMENT

September 28, 2004 In the opinion of McCall, Parkhurst & Horton L.L.P., Bond Counsel, interest on the Bonds (as defined below) will be excludable from gross income for federal income tax purposes under statutes, regulations, published rulings and court decisions existing on the date thereof, subject to the matters described under “TAX MATTERS” herein, including the alternative minimum tax on corporations.

$17,595,000

ROBSTOWN INDEPENDENT SCHOOL DISTRICT (Nueces County, Texas)

UNLIMITED TAX SCHOOL BUILDING AND REFUNDING BONDS, SERIES 2004

Dated Date: September 15, 2004 Due: February 15, as shown on inside cover

The $17,595,000 Robstown Independent School District Unlimited Tax School Building and Refunding Bonds, Series 2004 (the “Bonds”) are being issued pursuant to the Constitution and general laws of the State of Texas (the “State”), including Chapter 1207, Texas Government Code, as amended, and Sections 45.001 and 45.003(b)(1) of the Texas Education Code, as amended, an election held in the Robstown Independent School District (the “Issuer” or “District”) on February 7, 2004 and an Order (the “Order”) adopted by the Board of Trustees (the “Board”) of the District. (See “THE BONDS - Authority for Issuance” herein.) The Bonds are payable from an annual ad valorem tax levied, without legal limitation as to rate or amount, on all taxable property located within the District. (See “THE BONDS – Security for Payment” herein.) The Issuer has received conditional approval from the Texas Education Agency for the Bonds to be guaranteed under the State of Texas Permanent School Fund Guarantee Program (hereinafter defined), which will automatically become effective when the Attorney General of Texas approves the Bonds. (See “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM” herein.) See also “STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS” and “CURRENT SCHOOL FINANCE SYSTEM” for a discussion of pending and prior litigation and recent developments in Texas law affecting the financing of school districts in Texas.

Interest on the Bonds will accrue from September 15, 2004 (the “Dated Date”) and will be payable on February 15 and August 15 of each year, commencing February 15, 2005, and will be calculated on the basis of a 360-day year of twelve 30-day months. The definitive Bonds will be issued as fully registered obligations in book-entry form only and when issued will be registered in the name of Cede & Co., as nominee of The Depository Trust Company New York, New York (“DTC”). DTC will act as securities depository. Book-entry interests in the Bonds will be made available for purchase in the principal amount of $5,000 or any integral multiple thereof. Purchasers of the Bonds (“Beneficial Owners”) will not receive physical delivery of certificates representing their interest in the Bonds purchased. So long as DTC or its nominee is the registered owner of the Bonds, the principal of and interest on the Bonds will be payable by The Bank of New York Trust Company, N.A., Jacksonville, Florida, as the initial Paying Agent/Registrar, to the Securities Depository, which will in turn remit such principal and interest to its participants, which will in turn remit such principal and interest to the Beneficial Owners of the Bonds. (See “BOOK-ENTRY-ONLY SYSTEM” herein.) Proceeds from the sale of the Bonds will be used to: (1) refund certain of the District’s outstanding bonds identified on Schedule I attached hereto (the “Refunded Bonds”), (2) construct and equip school buildings in the District, and (3) pay for professional services related to the costs of issuance of the Bonds. (See “THE BONDS - Use of Bond Proceeds “ herein.)

SEE FOLLOWING PAGE FOR STATED MATURITIES, PRINCIPAL AMOUNTS, INTEREST RATES, YIELDS, AND REDEMPTION PROVISIONS FOR THE BONDS

The Bonds are offered for delivery when, as and if issued, and received by the Underwriters subject to the approval of legality by the Attorney General of the State of Texas and the approval of certain legal matters by McCall, Parkhurst & Horton L.L.P., San Antonio, Texas, Bond Counsel. Certain legal matters will be passed upon for the Underwriters by Fulbright & Jaworski L.L.P., San Antonio, Texas, as counsel to the Underwriters. It will be the responsibility of the Underwriters of the Bonds to complete and file the DTC Eligibility Questionnaire. The Bonds are expected to be available for initial delivery through the services of DTC on or about November 18, 2004.

Estrada Hinojosa & Company, Inc. JPMorgan

45522082.2 -ii-

CUSIP PREFIX 771146(1) STATED MATURITY SCHEDULE

(DUE FEBRUARY 15)

$8,765,000 SERIAL BONDS

Stated Maturity

Principal Amount ($)

Interest Rate (%)

Yield (%)

CUSIP No. Suffix(1)

2005 $ 370,000 2.000 1.55 PG6 2006 330,000 2.000 1.73 PH4 2007 1,505,000 5.000 2.13 PJ0 2008 895,000 2.500 2.38 PK7 2009 915,000 2.750 2.71 PL5 2010 320,000 2.750 2.96 PM3 2011 330,000 3.000 3.16 PN1 2012 340,000 3.125 3.31 PP6 2013 350,000 3.250 3.51 PQ4 2014 455,000 3.375 3.63 PR2 2015 375,000 3.625 3.78 PS0 2016 390,000 3.750 3.88 PT8 2017 405,000 3.800 4.03 PU5 2018 420,000 3.875 4.12 PV3 2019 435,000 4.000 4.21 PW1 2020 455,000 4.125 4.30 PX9 2021 475,000 4.200 4.39 PY7

$8,830,000 TERM BONDS

$1,550,000 4.50% Term Bonds due February 15, 2024 Priced to Yield 4.65% QB6(1) $3,165,000 5.25% Term Bonds due February 15, 2029 Priced to Yield 4.74% QG5(1) $4,115,000 5.25% Term Bonds due February 15, 2034 Priced to Yield 4.78% QM2(1)

(Accrued interest from September 15, 2004 to be added) The Bonds are subject to optional and mandatory redemption prior to stated maturity. See “THE BONDS—Redemption Provisions of the Bonds” herein. (1) CUSIP numbers have been assigned to the Bonds by Standard & Poor’s CUSIP Service Bureau, a division of the McGraw Hill Companies, Inc., and are included solely for the convenience of owners of the Bonds. Neither the City, the Financial Advisors, nor the Underwriters shall be responsible for the selection or correctness of the CUSIP numbers set forth herein.

45522082.2 -iii-

ROBSTOWN INDEPENDENT SCHOOL DISTRICT 801 North 1st Street

Robstown, Texas 78380 (361) 767-6600 (Phone)

(361) 387-6316 (Fax)

ELECTED OFFICIALS

Name

Years Served

Term Expires (May)

Occupation

Adolfo Lopez President 9 2005 Foreman Humberto Barrera Vice President 2 2006 Fireman Ismael Gonzalez Secretary 3 2005 Builder Raul Molano Assistant Secretary 1 2007 Business Owner Rosendo Espinoza Board Member 5 2006 Mechanic Oscar Lopez Board Member 1 2007 Business Owner Sonia Vasquez Board Member 1 2007 Clerk

ADMINISTRATION

Name

Position

Length of Service With District

Length of Service In Position

Dr. Roberto Garcia Superintendent 1.5 1.5 Jessie Alejandro Business Manager 18 18

CONSULTANTS AND ADVISORS

Bond Counsel................................................................................................................................. McCall, Parkhurst & Horton L.L.P. San Antonio, Texas Certified Public Accountants....................................................................................................................... John Womack & Co., P.C. Kingsville, Texas Financial Advisor ........................................................................................................................................... M.E. Allison & Co., Inc. San Antonio, Texas

For Additional Information Please Contact:

Dr. Roberto Garcia Mr. Mark Seal

Superintendent of Schools M.E. Allison & Co., Inc. Robstown Independent School District 950 East Basse Road, Second Floor

801 North 1st Street San Antonio, Texas 78209 Robstown, Texas 78380 (210) 930-4000 (Phone) (361) 767-6600 (Phone) (210) 930-4001 (Fax)

(361) 387-0466 (Fax)

45522082.2 -iv-

USE OF INFORMATION IN THE OFFICIAL STATEMENT

This Official Statement, which includes the cover page and the Appendices hereto, does not constitute an offer to sell or the solicitation of an offer to buy in any jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale.

No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon.

The information set forth herein has been obtained from the District and other sources believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as the promise or guarantee of the Financial Advisor. This Official Statement contains, in part, estimates and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates and opinions, or that they will be realized.

The information and expressions of opinion contained herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the District or other matters described. See “CONTINUING DISCLOSURE OF INFORMATION” for a description of the District’s undertaking to provide certain information on a continuing basis.

The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.

THE BONDS ARE EXEMPT FROM REGISTRATION WITH THE SECURITIES AND EXCHANGE COMMISSION AND CONSEQUENTLY HAVE NOT BEEN REGISTERED THEREWITH. THE REGISTRATION, QUALIFICATION, OR EXEMPTION OF THE BONDS IN ACCORDANCE WITH APPLICABLE SECURITIES LAW PROVISIONS OF THE JURISDICTIONS IN WHICH THESE SECURITIES HAVE BEEN REGISTERED, QUALIFIED, OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE THE MARKET PRICE OF THE ISSUE AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

NEITHER THE DISTRICT, ITS FINANCIAL ADVISOR, NOR THE UNDERWRITERS MAKE ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY OR ITS BOOK-ENTRY-ONLY SYSTEM OR THE AFFAIRS OF THE TEXAS EDUCATION AGENCY DESCRIBED UNDER “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM.”

The agreements of the District and others related to the Bonds are contained solely in the contracts described herein. Neither this Official Statement nor any other statement made in connection with the offer or sale of the Bonds is to be construed as constituting an agreement with the purchasers of the Bonds. INVESTORS SHOULD READ THE ENTIRE OFFICIAL STATEMENT, INCLUDING ALL APPENDICES ATTACHED HERETO, TO OBTAIN INFORMATION ESSENTIAL TO MAKING AN INFORMED INVESTMENT DECISION.

45522082.2 -v-

TABLE OF CONTENTS

STATED MATURITY SCHEDULE............................................................................................................... ii ELECTED OFFICIALS .................................................................................................................................. iii ADMINISTRATION....................................................................................................................................... iii CONSULTANTS AND ADVISORS.............................................................................................................. iii USE OF INFORMATION IN THE OFFICIAL STATEMENT ..................................................................... iv SELECTED DATA FROM THE OFFICIAL STATEMENT ........................................................................ vi INTRODUCTORY STATEMENT...................................................................................................................1 THE BONDS.....................................................................................................................................................2 REGISTERED OWNERS’ REMEDIES...........................................................................................................7 BOOK-ENTRY-ONLY SYSTEM ....................................................................................................................8 REGISTRATION, TRANSFER AND EXCHANGE .....................................................................................11 AD VALOREM TAX PROCEDURES ..........................................................................................................12 THE PROPERTY TAX CODE AS APPLIED TO THE DISTRICT .............................................................15 STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS...................................................16 CURRENT SCHOOL FINANCE SYSTEM...................................................................................................19 THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM .............................................................24 TAX RATE LIMITATIONS...........................................................................................................................37 DEBT LIMITATIONS ....................................................................................................................................39 EMPLOYEES’ RETIREMENT PLAN...........................................................................................................39 RATINGS........................................................................................................................................................39 LEGAL MATTERS ........................................................................................................................................39 TAX MATTERS .............................................................................................................................................40 LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS.......................43 INVESTMENT POLICIES .............................................................................................................................43 LITIGATION ..................................................................................................................................................46 REGISTRATION AND QUALIFICATION OF BONDS FOR SALE ..........................................................46 FINANCIAL ADVISOR .................................................................................................................................47 CONTINUING DISCLOSURE OF INFORMATION....................................................................................47 CERTIFICATION OF OFFICIAL STATEMENT .........................................................................................49 GASB 34 STATEMENT.................................................................................................................................49 FORWARD LOOKING STATEMENTS.......................................................................................................50 UNDERWRITING ..........................................................................................................................................50 VERIFICATION OF MATHEMATICAL COMPUTATIONS......................................................................50 CONCLUDING STATEMENT ......................................................................................................................51 SCHEDULE I SCHEDULE OF REFUNDED BONDS ............................................................................... S-1 FINANCIAL INFORMATION OF THE DISTRICT .................................................................................. A-1 GENERAL INFORMATION REGARDING THE DISTRICT AND ITS ECONOMY..............................B-1 AUDITED FINANCIALS.............................................................................................................................C-1 FORM OF OPINION OF BOND COUNSEL.............................................................................................. D-1

45522082.2 -vi-

SELECTED DATA FROM THE OFFICIAL STATEMENT

The selected data is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this page from this Official Statement or to otherwise use it without the entire Official Statement.

The Issuer The Robstown Independent School District (the “District” or “Issuer”) is a political subdivision located in Nueces County, Texas. The District is approximately 87 square miles in area and serves a population of approximately 15,256. The District was created under State statute and is governed by an elected seven-member Board of Trustees (the “Board”) of which each member serves a staggered three-year term. (See APPENDIX B - “General Information Regarding the District and its Economy” herein.)

The Bonds The Bonds are being issued pursuant to the Constitution and general laws of the State of Texas (the “State”), including Chapter 1207, Texas Government Code, as amended, and Sections 45.001 and 45.003(b)(1) of the Texas Education Code, as amended, an election held in the District on February 7, 2004, and an order (the “Order”) adopted by the Board of Trustees (the “Board”). (See “THE BONDS – Authority for Issuance” herein.)

Paying Agent/Registrar and Escrow Agent

The initial Paying Agent/Registrar and Escrow Agent is The Bank of New York Trust Company, N.A., Jacksonville, Florida.

Security for the Bonds The Bonds constitute direct and voted obligations of the Issuer, payable as to

principal and interest from an ad valorem tax levied annually, without legal limitation as to rate or amount, against all taxable property located within the District. (See “THE BONDS – Security for Payment” herein.) See also “STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS” and “CURRENT SCHOOL FINANCE SYSTEM” for a discussion of prior and pending litigation and recent developments in Texas law affecting the financing of school districts in Texas.

Redemption Provision of the Bonds

The Issuer reserves the right, at its sole option, to redeem Bonds stated to mature on or after February 15, 2015 on February 15, 2014, or any date thereafter, in whole or in part, in principal amounts of $5,000 or any integral multiple thereof plus accrued interest to the date fixed for redemption. The Bonds stated to mature on February 15, 2024, February 15, 2029, and February 15, 2034 (the “Term Bonds”) are subject to mandatory sinking fund redemption. (See “THE BONDS - Redemption Provision of the Bonds” herein.)

Guarantee Program for School District Bonds

The District has received conditional approval from the Texas Education Agency for the Bonds to be guaranteed under the Permanent School Fund Guarantee Program, which guarantee will automatically become effective when the Attorney General of the State of Texas approves the Bonds. (See “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM” herein).

45522082.2 -vii-

Possible Changes to the Texas School Finance System

On January 30, 1995, the Texas Supreme Court ruled that the Texas system of public school finance, as amended in 1993, was constitutional in all respects. The Court noted in its opinion the public school finance system could be rendered unconstitutional in the future, but stated that any future determination of unconstitutionality would not affect a district=s authority to levy taxes necessary to retire previously issued bonds. On September 15, 2004, the District Court Judge for the 250th Judicial District in Travis County, Texas, ruled that the State’s school finance system (1) fails to provide an adequate suitable education as required by the State Constitution; (2) forces certain school districts in the State to levy an ad valorem tax at the $1.50 statutory cap on maintenance and operations tax rates, therefore violating the State constitution’s proscription against a Statewide ad valorem tax; and (3) is neither financially efficient nor efficient in the sense of providing for the mandated adequate education nor the statutory regime of accreditation, accountability, and assessment. The judge further stated that he intends to enter an injunction on approximately October 1, 2004 that State funding of public schools cease unless the State legislature conforms the State school finance system to meet State constitutional standards, with the effective date of the injunction to be one year from the date the injunction order is entered. The Texas Attorney General immediately announced that his office would appeal the trial court’s ruling directly to the Texas Supreme Court. The State Legislature (the “Legislature”) is scheduled to meet in regular session beginning in January, 2005. See ASTATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS@ and ACURRENT SCHOOL FINANCE SYSTEM@.

Tax Matters In the opinion of Bond Counsel, the interest on the Bonds will be excludable from gross income of the owners thereof for purposes of federal income taxation under existing law subject to matters discussed herein under “TAX MATTERS”. (See “TAX MATTERS” and Appendix D - “Form of Opinion of Bond Counsel” herein.)

Use of Bond Proceeds Proceeds from the sale of the Bonds will be used to (1) refund certain of the

District’s outstanding bonds identified on Schedule I attached hereto (the “Refunded Bonds”), (2) construct and equip school buildings in the District, and (3) pay for professional services related to the costs of issuance of the Bonds. (See “THE BONDS - Use of Bond Proceeds” herein.)

Ratings The Bonds are rated “Aaa” by Moody’s Investors Service (Moody’s), based upon

the guarantee by Permanent School Fund. The underlying unenhanced rating of the District’s unlimited tax debt is Baa2 by Moody’s (See “RATINGS” herein).

Book-Entry-Only System The Issuer intends to utilize the Book-Entry-Only System of The Depository

Trust Company, New York, New York relating to the method and timing of payment and the method and transfer relating to the Bonds. (See “BOOK-ENTRY-ONLY SYSTEM” herein.)

Payment Record The District has never defaulted on the payment of its tax-supported indebtedness. Future Bond Issues The Issuer does not anticipate the issuance of additional debt in 2004. Delivery When issued, anticipated on or about November 18, 2004. Legality Delivery of the Bonds is subject to the approval by the Attorney General of the State

of Texas and the rendering of an opinion as to legality by McCall, Parkhurst & Horton L.L.P., Bond Counsel, San Antonio, Texas.

45522082.2 -1-

Official Statement RELATING TO

$17,595,000 Robstown Independent School District

(Nueces County, Texas) Unlimited Tax School Building and Refunding Bonds, Series 2004

INTRODUCTORY STATEMENT

This Official Statement provides certain information in connection with the issuance by the Robstown Independent School District (the “District” or “Issuer”) of its $17,595,000 Unlimited Tax School Building and Refunding Bonds, Series 2004 (the “Bonds”) identified on the cover page hereof.

The Issuer is a body corporate and a political subdivision of the State of Texas (the “State”) duly organized and existing under the laws of the State of Texas located in Nueces County, Texas. The Bonds are issued pursuant to the laws of the State of Texas, including Chapter 1207, Texas Government Code, as amended, Sections 45.001 and 45.003(b)(1) of the Texas Education Code, as amended, an election held in the District on February 7, 2004, and an order (the “Order”) adopted by the Board of Trustees (the “Board”) of the District.

All financial and other information presented in this Official Statement has been provided by the District from its records, except for information expressly attributed to other sources. The presentation of information, including tables of receipts from taxes and other sources, is intended to show recent historic information, and is not intended to indicate future or continuing trends in the financial position or other affairs of the District. No representation is made that past experience, as is shown by that financial and other information, will necessarily continue or be repeated in the future.

APPENDIX A CONTAINS FINANCIAL INFORMATION CONCERNING THE DISTRICT, INCLUDING VALUATION, DEBT, ANTICIPATED ADDITIONAL BONDS, TAX DATA, PRINCIPAL TAXPAYERS, OVERLAPPING DEBT, TAX ADEQUACY, CATEGORIES OF ASSESSED VALUE, AND DEBT SERVICE REQUIREMENTS.

There follows in this Official Statement descriptions of the Bonds and the Order, and certain other information about the District and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained by writing the Robstown Independent School District, 801 North 1st Street, Robstown, Texas 78380, and, during the offering period, from the Financial Advisor, M. E. Allison & Co., Inc., 950 East Basse Road, Second Floor, San Antonio, Texas 78209, by electronic mail or upon payment of reasonable copying, mailing, and handling charges.

Unless otherwise indicated, capitalized terms used in this Official Statement have the same meanings assigned to such terms in the Order. This Official Statement speaks only as to its date, and the information contained herein is subject to change. Copies of the Official Statement will be deposited with the Municipal Securities Rulemaking Board, 1900 Duke Street, Suite 600, Alexandria, Virginia 22314. See “CONTINUING DISCLOSURE OF INFORMATION” for a description of the District’s undertaking to provide certain information on a continuing basis.

45522082.2 -2-

THE BONDS

Authority for Issuance

The Bonds are being issued pursuant to the Constitution and general laws of the State of Texas (the “State”), including Chapter 1207, Texas Government Code, as amended, and Sections 45.001 and 45.003(b)(1) of the Texas Education Code, as amended, an election held in the District on February 7, 2004, and the Order.

Refunded Bonds

See Schedule I for a list of the bonds being refunded by the Bonds (the “Refunded Bonds”). The Refunded Bonds, and interest due thereon, are to be paid on the scheduled payment date from funds to be deposited with The Bank of New York Trust Company, N.A., Jacksonville, Florida (the “Escrow Agent”) pursuant to an Escrow and Trust Agreement dated as of the date hereof (the “Escrow Agreement”) between the District and the Escrow Agent.

The Order provides that the District will deposit certain proceeds of the sale of the Bonds along with other lawfully available funds of the District, if any, with the Escrow Agent in the amount necessary to accomplish the discharge and final payment of the Refunded Bonds. Such funds will be held by the Escrow Agent in an escrow fund (the “Escrow Fund”) irrevocably pledged to the payment of principal of and interest on the Refunded Bonds and will be used to purchase certain obligations of the United States of America (the “Federal Securities”). Such maturing principal of and interest on the Federal Securities will not be available to pay the debt service requirements on the Bonds.

Simultaneously with the issuance of the Bonds, the District will give irrevocable instructions to provide notice, if any, to the owners of the Refunded Bonds that the Refunded Bonds will be redeemed prior to stated maturity on which date money will be made available to redeem the Refunded Bonds from money held under the Escrow Agreement.

Grant Thornton LLP, Minneapolis, Minnesota, independent certified public accountants, will verify the calculations which indicate that at the time of delivery the investments in the Escrow Fund will mature at such times and yield interest in such amounts, with other available funds, so that sufficient money will be available from the maturing principal and interest thereof to pay, when due, the principal of and interest on the Refunded Bonds. See “VERIFICATION OF MATHEMATICAL COMPUTATIONS”. The Escrow Agent will hold and administer the Escrow Fund and will apply the maturing principal of and interest on the Federal Securities to payments of principal of and interest on the Refunded Bonds.

By the deposit of the Federal Securities and cash, if any, with the Escrow Agent pursuant to the Escrow Agreement, the District will have affected the defeasance of the Refunded Bonds pursuant to the terms of the orders authorizing the issuance of the Refunded Bonds. It is the opinion of Bond Counsel that, as a result of such defeasance, the Refunded Bonds will no longer be payable from ad valorem taxes but will be payable solely from the principal of and interest on the Federal Securities, if any, and cash on deposit in the Escrow Fund and held for such purpose by the Escrow Agent, and that the Refunded Bonds will be defeased and are not to be included in or considered to be indebtedness of the District for the purpose of a limitation of indebtedness or for any other purpose. See “Appendix D-Form of Opinion of Bond Counsel” herein.

The District has covenanted in the Escrow Agreement to make timely deposits to the Escrow Fund, from lawfully available funds, of any additional amounts required to pay the principal of and interest on the Refunded Bonds if for any reason the cash balance on deposit or scheduled to be on deposit in the Escrow Fund should be insufficient to make such payment.

45522082.2 -3-

General Description

The Bonds will mature on the dates and in the principal amounts and will bear interest from the Dated Date at the rates set forth on the inside cover page of this Official Statement. Principal and interest on the Bonds are payable in the manner described herein under “BOOK-ENTRY-ONLY SYSTEM”. In the event the Book-Entry-Only System is discontinued, the interest on the Bonds will be payable to the registered owner as shown on the security register maintained by The Bank of New York Trust Company, N.A., Jacksonville, Florida, as the initial Paying Agent/Registrar, as of the last business day of the month next preceding such interest payment date, by check, mailed first-class, postage prepaid, to the address of such person on the security register or by such other method acceptable to the Paying Agent/Registrar requested by and at the risk and expense of the registered owner. In the event the Book-Entry-Only System is discontinued, principal of the Bonds will be payable at stated maturity or prior redemption upon presentation and surrender thereof at the corporate trust office of the Paying Agent/Registrar.

If the date for the payment of the principal of or interest on the Bonds will be a Saturday, Sunday, a legal holiday or a day when banking institutions in the city where the Paying Agent/Registrar is located are authorized by law or executive order to close, then the date for such payment will be the next succeeding day which is not a Saturday, Sunday, legal holiday or a day on which banking institutions are authorized to close; and payment on such date will have the same force and effect as if made on the original date payment was due.

Redemption Provision of the Bonds

Optional Redemption:

The Bonds maturing on or after February 15, 2015, are subject to redemption prior to their scheduled maturities at the option of the Issuer, in whole or in part, on February 15, 2014, or on any date thereafter at a price equal to par plus accrued interest to the date fixed for redemption. The Bonds, or portions thereof redeemed, will be selected by lot by the Paying Agent/Registrar.

Mandatory Sinking Fund Redemption

The Bonds stated to mature on February 15, 2024, February 15, 2029, and February 15, 2034 (the “Term Bonds”) are subject to scheduled mandatory sinking fund redemption at a redemption price equal to the principal amount thereof plus accrued interest, without premium, to the redemption date on February 15 in the years and principal amounts as follows:

Term Bonds Stated to Mature

on February 15, 2024



Year

Principal

Amount ($) Year

Principal

Amount ($) 2022 495,000 2025 570,000

2023 515,000 2026 600,000

2024 * 540,000 2027 630,000

2028 665,000

2029 * 700,000 *Stated Maturity

45522082.2 -4-



Year

Principal

Amount ($) 2030 740,000

2031 780,000

2032 820,000

2033 865,000

2034 * 910,000

*Stated Maturity

The principal amount of a Term Bond required to be redeemed pursuant to the operation of such mandatory redemption requirements may be reduced, at the option of the District, by the principal amount of any such Term Bond which, prior to the date of mailing of notice of such mandatory redemption, (1) shall have been acquired by the District and delivered to the Paying Agent/Registrar for cancellation, (2) shall have been purchased and canceled by the Paying Agent/Registrar at the request of the District, or (3) shall have been redeemed pursuant to the optional redemption provisions described in the preceding paragraph and not theretofore credited against a mandatory redemption requirement.

Approximately forty-five (45) days prior to each mandatory redemption date Term Bonds are to be mandatorily redeemed, the Paying Agent/Registrar shall select by lot the numbers of the Term Bonds within the applicable Stated Maturity to be redeemed on the next following February 15 from money set aside for that purpose in the Bond Fund maintained for the payment of the Bonds. Any Term Bonds not selected for prior redemption shall be paid on the date of their Stated Maturity.

Notice of Redemption:

At least 30 days prior to the date fixed for any redemption of any Bonds or portions thereof prior to stated maturity, the Issuer shall cause notice of such redemption to be sent by United States mail, first-class postage prepaid, to the registered owner of each Bond or a portion thereof to be redeemed at its address as it appeared on the registration books of the Paying Agent/Registrar on the day such notice of redemption is mailed. By the date fixed for any such redemption, due provision shall be made with the Paying Agent/Registrar for the payment of the required redemption price for the Bonds or portions thereof which are to be so redeemed. If such notice of redemption is given and if due provision for such payment is made, all as provided above, the Bonds or portions thereof which are to be so redeemed thereby automatically shall be treated as redeemed prior to their scheduled maturities, and they shall not bear interest after the date fixed for redemption, and they shall not be regarded as being outstanding except for the right of the registered owner to receive the redemption price from the Paying Agent/Registrar out of the funds provided for such payment.

Bonds of a denomination larger than $5,000 may be redeemed in part ($5,000 or any integral multiple thereof). Any Bond to be partially redeemed must be surrendered in exchange for one or more new Bonds of the same stated maturity and interest rate for the unredeemed portion of the principal. In the event of redemption of less than all of the Bonds of a particular stated maturity, the Paying Agent/Registrar is

45522082.2 -5-

required to select the Bonds of such stated maturity to be redeemed by such random method as it deems fair and appropriate and which may provide for the selection for redemption of portions (equal to any authorized denomination) of the Bonds of a denomination larger than $5,000.

The Paying Agent/Registrar and the Issuer, so long as a Book-Entry-Only System is used for the Bonds, will send any notice of redemption, notice of proposed amendment to the Order or other notices with respect to the Bonds only to DTC. Any failure by DTC to advise any DTC participant, or of any DTC participant or indirect participant to notify the beneficial owner, will not affect the validity of the redemption of the Bonds called for redemption or any other action premised on any such notice. Redemption of portions of the Bonds by the Issuer will reduce the outstanding principal amount of such Bonds held by DTC. In such event, DTC may implement, through its Book-Entry-Only System, a redemption of such Bonds held for the account of DTC participants in accordance with its rules or other agreements with DTC participants and then DTC participants and indirect participants may implement a redemption of such Bonds from the beneficial owners. Any such selection of Bonds to be redeemed will not be governed by the Order and will not be conducted by the Issuer or the Paying Agent/Registrar. Neither the Issuer nor the Paying Agent/Registrar will have any responsibility to DTC participants, indirect participants or the persons for whom DTC participants act as nominees, with respect to the payments on the Bonds or the providing of notice to DTC participants, indirect participants, or beneficial owners of the selection of portions of the Bonds for redemption. (See “BOOK-ENTRY-ONLY SYSTEM” herein.)

Security for Payment

The Bonds are direct obligations of the District and are payable as to both principal and interest from ad valorem taxes to be levied on all taxable property within the District, without legal limitation as to rate or amount. The District has received conditional approval from the Texas Education Agency for the Bonds to be guaranteed under the State of Texas Permanent School Fund Guarantee Program (hereinafter defined), which will automatically become effective when the Attorney General of Texas approves the Bonds. (See “STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS” and “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM”.)

Permanent School Fund Guarantee

In connection with the sale of the Bonds, the District has received conditional approval from the Commissioner of Education for guarantee of the Bonds under the Permanent School Fund Guarantee Program (Chapter 45, Subchapter C, of the Texas Education Code). Subject to meeting certain conditions discussed under the heading “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM” herein, the Bonds will be absolutely and unconditionally guaranteed by the corpus of the Permanent School Fund of the State of Texas. In the event of a payment default by the District, registered owners will receive all payments due from the corpus of the Permanent School Fund.

Legality

The Bonds are offered when, as and if issued, subject to the approval of legality by the Attorney General of the State of Texas and McCall, Parkhurst & Horton L.L.P, San Antonio, Texas, Bond Counsel. (See “LEGAL MATTERS” and “Appendix D - Form of Opinion of Bond Counsel.”)

Payment Record

The Issuer has not defaulted on the payment of its general obligation indebtedness.

45522082.2 -6-

Amendments

The District may amend the Order without the consent of or notice to any registered owners in any manner not detrimental to the interests of the registered owners, including the curing of any ambiguity, inconsistency, or formal defect or omission therein. In addition, the District may, with the written consent of the holders of a majority in aggregate principal amount of the Bonds then outstanding affected thereby, amend, add to, or rescind any of the provisions of the Order; except that, without the consent of the registered owners of all of the Bonds affected, no such amendment, addition, or rescission may (1) change the date specified as the date on which the principal of or any installment of interest on any Bond is due and payable, reduce the principal amount thereof, or the rate of interest thereon, change the place or places at or the coin or currency in which any Bond or interest thereon is payable, or in any other way modify the terms of payment of the principal of or interest on the Bonds, (2) give any preference to any Bond over any other Bond, or (3) reduce the aggregate principal amount of Bonds required for consent to any amendment, addition, or waiver.

Defeasance

The Order provides for the defeasance of the Bonds when payment of the principal of and premium, if any, on the Bonds, plus interest thereon to the due date thereof (whether such due date be by reason of maturity, redemption, or otherwise), is provided by irrevocably depositing with a paying agent, in trust (1) money in an amount sufficient to make such payment and/or (2) Defeasance Securities (hereinafter defined), that will mature as to principal and interest in such amounts and at such times to insure the availability, without reinvestment, of sufficient money to make such payment, and all necessary and proper fees, compensation and expenses of the paying agent for the respective series of Bonds. The District has additionally reserved the right, subject to satisfying the requirements of (1) and (2) above, to substitute other Defeasance Securities originally deposited, to reinvest the uninvested moneys on deposit for such defeasance and to withdraw for the benefit of the District moneys in excess of the amount required for such defeasance. The Order provides that “Defeasance Securities” means (A) direct, noncallable obligations of the United States of America, including obligations that are unconditionally guaranteed by the United States of America, (B) noncallable obligations of an agency or instrumentality of the United States of America, including obligations that are unconditionally guaranteed or insured by the agency or instrumentality and that are rated as to investment quality by a nationally recognized investment rating firm not less than “AAA” or its equivalent, and (C) noncallable obligations of a state or an agency or a county, municipality, or other political subdivision of a state that have been refunded and that are rated as to investment quality by a nationally recognized investment rating firm not less than “AAA” or its equivalent. The District has additionally reserved the right, subject to satisfying the requirements of (1) and (2) above, to substitute other Governmental Obligations for the Governmental Obligations originally deposited, to reinvest the uninvested moneys on deposit for such defeasance and to withdraw for the benefit of the District moneys in excess of the amount required for such defeasance. The defeasance of the Bonds will cancel the Permanent School Fund guarantee. See “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM” herein.

Upon such deposit as described above, such Bonds shall no longer be regarded to be outstanding or unpaid. Provided, however, the District has reserved the option, to be exercised at the time of the defeasance of the Bonds, to call for redemption at an earlier date those Bonds which have been defeased to their maturity date, if the District (i) in the proceedings providing for the firm banking and financial arrangements, expressly reserves the right to call the Bonds for redemption, (ii) gives notice of the reservation of that right to the owners of the Bonds immediately following the making of the firm banking and financial arrangements, and (iii) directs that notice of the reservation be included in any redemption notices that it authorizes.

45522082.2 -7-

Use of Bond Proceeds

Proceeds from the sale of the Bonds will be used to (1) refund certain of the District’s outstanding bonds identified on Schedule I attached hereto (the “Refunded Bonds”), (2) construct and equip school buildings in the District, and (3) pay for professional services related to the costs of issuance of the Bonds.

Sources and Uses of Funds

The proceeds from the sale of the Bonds will be applied approximately as follows:

Sources Principal Amount of Bonds $17,595,000.00 Accrued Interest 133,139.34 Net Original Issue Premium 249,210.60 District Cash Contribution 39,096.17

Total Sources of Funds $18,016,446.11 Uses

Deposit to Project Fund $14,950,000.00 Deposit to Escrow Fund 2,665,337.53 Costs of Issuance 148,108.74 Underwriters’ Discount 119,860.50 Deposit to Interest and Sinking Fund 133,139.34

Total Uses of Funds $18,016,446.11

REGISTERED OWNERS’ REMEDIES

The Order does not establish specific events of default with respect to the Bonds. If the District defaults in the payment of the principal of or interest on any of the Bonds when due, and the State fails to honor the Permanent School Fund Guarantee as hereinafter discussed, or the District defaults in the observance or performance of any of the covenants, conditions, or obligations set forth in the Order, any registered owner is entitled to seek a writ of mandamus from a court of proper jurisdiction requiring the District to make such payment or observe and perform such covenant, obligations, or condition, as well as enforce rights of payment under the Permanent School Fund Guarantee. Such right is in addition to any other rights the registered owners of the Bonds may be provided by the laws of the State of Texas. Under State law there is no right to the acceleration of maturity of the Bonds upon the failure of the District to observe any covenant under the Order. Although a registered owner of Bonds could presumably obtain a judgment against the District if a default occurred in the payment of principal of or interest on any such Bonds, such judgment could not be satisfied by execution against any property of the District. Such registered owner’s only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the District to levy, assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Bonds, as they become due. The enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis. The Order does not provide for the appointment of a trustee to represent the interest of the bondholders upon any failure of the District to perform in accordance with the terms of the Order, or upon any other condition. Furthermore, the District is eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code (“Chapter 9”). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action

45522082.2 -8-

by creditors or bondholders of an entity which has sought protection under Chapter 9. Therefore, should the District avail itself of Chapter 9 protection from creditors, the ability to enforce its security interest would be subject to the approval of the Bankruptcy Court; and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Order and the Bonds are qualified with respect to the customary rights of debtors relative to their creditors.

BOOK-ENTRY-ONLY SYSTEM

This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by The Depository Trust Company (“DTC”), New York, New York, while the Bonds are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The District believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof.

The District cannot and does not give any assurance that (1) DTC will distribute payments of debt service on the Bonds, or redemption or other notices, to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC.

DTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered Bond certificate will be issued for the Bonds, in the aggregate principal amount of such issue, and will be deposited with DTC.

DTC, the world’s largest depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 2 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments from over 85 countries that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC, in turn, is owned by a number of Direct Participants of DTC and Members of the National Securities Clearing Corporation, Government Securities Clearing Corporation, MBS Clearing Corporation, and Emerging Markets Clearing Corporation, (NSCC, GSCC, MBSCC, and EMCC, also subsidiaries of DTCC), as well as by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s highest rating: AAA. The

45522082.2 -9-

DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com.

Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC’s records. The ownership interest of each actual purchaser of each Bond (“Beneficial Owner”) is in turn to be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued.

To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC’s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, tenders, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them.

Redemption notices shall be sent to DTC. If less than all of the Bonds within a maturity are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such maturity to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC’s Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Redemption proceeds, principal, and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the District or Paying Agent/Registrar, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name”, and will be the responsibility of such Participant and not of DTC nor its

45522082.2 -10-

nominee, the Paying Agent/Registrar, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, principal, and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the District or the Paying Agent/Registrar, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to Issuer or Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. The Issuer may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered.

The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the District and the Underwriters believe to be reliable, but neither the District nor the Underwriters take responsibility for the accuracy thereof.

So long as Cede & Co. is the registered owner of the Bonds, the Issuer will have no obligation or responsibility to the DTC. Participants or Indirect Participants, or the persons for which they act as nominees, with respect to payment to or providing of notice to such Participants, or the persons for which they act as nominees.

Use of Certain Terms in Other Sections of this Official Statement

In reading this Official Statement it should be understood that while the Bonds are in the Book-Entry-Only System, references in other sections of this Official Statement to registered owners should be read to include the person for which the Participant acquires an interest in the Bonds, but (i) all rights of ownership must be exercised through DTC and the Book-Entry-Only System, and (ii) except as described above, payment or notices that are to be given to registered owners under the Order will be given only to DTC.

Effect of Termination of Book-Entry-Only System

In the event that the Book-Entry-Only System is discontinued by DTC or the use of the Book-Entry-Only System is discontinued by the District, the following provisions will be applicable to the Bonds. The Bonds may be exchanged for an equal aggregate principal amount of the Bonds in authorized denominations and of the same maturity upon surrender thereof at the principal office for payment of the Paying Agent/Registrar. The transfer of any Bond may be registered on the Security Register maintained by the Paying Agent/Registrar for such purpose only upon the surrender of such Bond to the Paying Agent/Registrar with a duly executed assignment in form satisfactory to the Paying Agent/Registrar. For every exchange or transfer of registration of Bonds, the Paying Agent/Registrar and the District may make a charge sufficient to reimburse them for any tax or other governmental charge required to be paid with respect to such exchange or registration of transfer. The District will pay the fee, if any, charged by the Paying Agent/Registrar for the transfer or exchange. The Paying Agent/Registrar will not be required to transfer or exchange any Bond after its selection for redemption. The District and the Paying Agent/Registrar may treat the person in whose name a Bond is registered as the absolute owner thereof for all purposes, whether such Bond is overdue or not, including for the purpose of receiving payment of, or on account of, the principal of, and interest on, such Bond.

45522082.2 -11-

REGISTRATION, TRANSFER AND EXCHANGE

Paying Agent/Registrar

The initial Paying Agent/Registrar is The Bank of New York Trust Company, N.A., Jacksonville, Florida. In the Order, the District covenants to maintain and provide a Paying Agent/Registrar until the Bonds are duly paid.

Successor Paying Agent/Registrar

Provision is made in the Order for replacing the Paying Agent/Registrar. If the District replaces the Paying Agent/Registrar, such Paying Agent/Registrar shall, promptly upon the appointment of a successor, deliver the Paying Agent/Registrar’s records to the successor Paying Agent/Registrar, and the successor Paying Agent/Registrar shall act in the same capacity as the previous Paying Agent/Registrar. Any successor Paying Agent/Registrar selected by the District shall be a commercial bank or trust company organized under the laws of the United States or any state and duly qualified and legally authorized to serve and perform the duties of the Paying Agent/Registrar for the Bonds. Upon any change in the Paying Agent/Registrar for the Bonds, the District has agreed to promptly cause a written notice thereof to be sent to each registered owner of the Bonds by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar.

Initial Registration

Definitive Bonds will be initially registered and delivered only to CEDE & CO., the nominee of The Depository Trust Company, pursuant to the Book-Entry-Only System described herein.

Future Registration

In the event the Book-Entry-Only System is discontinued, the Bonds may be transferred, registered and assigned on the registration books only upon presentation and surrender of the Bonds to the Paying Agent/Registrar, and such registration and transfer shall be without expense or service charge to the Registered owner, except for any tax or other governmental charges required to be paid with respect to such registration and transfer. A Bond may be assigned by the execution of an assignment form on the Bonds or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. A new Bond or Bonds will be delivered by the Paying Agent/Registrar in lieu of the Bond being transferred or exchanged at the corporate trust office of the Paying Agent/Registrar, or sent by United States registered mail to the new registered owner at the registered owner’s request, risk and expense. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner or assignee of the Registered owner in not more than three (3) business days after the receipt of the Bonds to be canceled in the exchange or transfer and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Bonds registered and delivered in an exchange or transfer shall be in authorized denominations and for a like aggregate principal amount as the Bond or Bonds surrendered for exchange or transfer.

Record Date For Interest Payment

The record date (“Record Date”) for the interest payable on any interest payment date means the close of business on the last business day of the next preceding month. In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a “Special Record Date”) will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received from the District. Notice of the Special Record Date and of the

45522082.2 -12-

scheduled payment date of the past due interest (the “Special Payment Date” which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class, postage prepaid, to the address of each Registered owner of a Bond appearing on the books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice.

Limitation on Transfer of Bonds

Neither the District nor the Paying Agent/Registrar shall be required to issue, transfer or exchange any Bond during the period beginning at the close of business on any Record Date and ending with the next interest payment date or, with respect to any Bond or portion thereof called for redemption prior to maturity, within 30 days prior to its redemption date.

Replacement Bonds

If any Bond is mutilated, destroyed, stolen or lost, a new Bond in the same principal amount as the Bond so mutilated, destroyed, stolen or lost will be issued. In the case of a mutilated Bond, such new Bond will be delivered only upon surrender and cancellation of such mutilated Bond. In the case of any Bond issued in lieu of and substitution for a Bond which has been destroyed, stolen or lost, such new Bond will be delivered only (a) upon filing with the District and the Paying Agent/Registrar a certificate to the effect that such Bond has been destroyed, stolen or lost and proof of the ownership thereof, and (b) upon furnishing the District and the Paying Agent/Registrar with indemnity satisfactory to them. The person requesting the authentication and delivery of a new Bond must pay such expenses as the Paying Agent/Registrar may incur in connection therewith.

AD VALOREM TAX PROCEDURES

Property Tax Code and County Wide Appraisal District

The Texas Property Tax Code (the “Tax Code”) provides for county-wide appraisal and equalization of taxable property values and establishes in each county of the State an appraisal district and an appraisal review board responsible for appraising property for all taxable units within the county. The Nueces County Appraisal District (the “Appraisal District”) is responsible for appraising property within the District as of January 1 of each year. The appraisal values set by the Appraisal District is subject to review and change by the Appraisal Review Board (the “Appraisal Review Board”) of the county, which is appointed by the Appraisal Districts’ Board of Directors. Such appraisal rolls, as approved by the Appraisal Review Board, are used by the District in establishing its tax roll and tax rate.

Property Subject to Taxation by the District

Except for certain exemptions provided by Texas law, all real and certain tangible personal property with a tax situs in the District is subject to taxation by the District. Principal categories of exempt property (including certain exemptions which are subject to local option by the board of trustees) include property owned by the State of Texas or its political subdivisions if the property is used for public purposes; property exempt from ad valorem taxation by federal law, certain improvements to real property and certain tangible personal property located in designated reinvestment zones on which the District has agreed to abate ad valorem taxes, so-called “freeport property” including property detained in the district for up to 175 days for purpose of assembly or other processing, certain household goods, family supplies and personal effects; farm products owned by the producers; certain property of a nonprofit corporation used in scientific research and educational activities benefiting a college or university, and designated historic sites. Other principal categories of exempt property include tangible personal property not held or used for production of

45522082.2 -13-

income, solar and windpowered energy devices; most individually owned automobiles; $10,000 exemption to residential homesteads of persons ages 65 or over and property of disabled veterans or their surviving spouses or children; $15,000 in market value for all residential homesteads (see “Residential Homestead Exemptions” below); and certain classes of intangible property. In addition, except for increases attributable to certain improvements, the District is prohibited by state law from increasing the total ad valorem tax on the residence homestead of persons 65 years of age or older or to disabled persons above the amount of tax imposed in the year such residence qualified for an exemption based on age of the owner. Owners of agricultural and open space land, under certain circumstances, may request valuation of such land on the basis of productive capacity rather than market value. (See “APPENDIX A - FINANCIAL INFORMATION OF THE DISTRICT - ASSESSED VALUATION” for a schedule of the amount of exemptions granted by the District).

The District may elect to participate in a tax increment reinvestment zone if such a zone is created covering an area within the boundaries of the District. Depending on the level of the District’s participation in such a zone, if any, the District’s ability to retain ad valorem taxes collected on the increased assessed valuation of real property in the tax increment reinvestment zone in excess of the tax increment base established for the zone would be limited by the provisions of its participation in the zone. The District may also enter into tax abatement agreements to encourage economic development. Under such agreements, a property owner agrees to construct certain improvements on its property. The District in turn agrees not to levy a tax on all or part of the increased value attributable to the improvements until the expiration of the agreement. The abatement agreement could last for a period of up to 10 years. Credit will not be given by the Commissioner of Education in determining a district’s property value wealth per student for (1) the appraisal value, in excess of the “frozen” value, of property that is located in a tax increment financing zone created after May 31, 1999 (except in certain limited circumstances where the municipality creating the tax increment financing zone gave notice prior to May 31, 1999 to all other taxing units that levy ad valorem taxes in the zone of its intention to create the zone and the zone is created and has its final project and financing plan approved by the municipality prior to August 31, 1999) or (2) for the loss of value of abated property under any abatement agreement entered into after May 31, 1993. Notwithstanding the foregoing, in 2001 the Legislature enacted legislation known as the Texas Economic Development Act, which provides incentives for certain school districts to grant tax abatements on certain eligible property to encourage economic development in their tax base and provides additional State funding for each year of such tax abatement in the amount of the tax credit provided to the taxpayer by the district (see “CURRENT SCHOOL FINANCE SYSTEM – Other State Funding Provisions” herein for a more detailed discussion of such tax abatements).

Valuation of Property for Taxation

Generally, property in the District must be appraised by the Appraisal District at market value as of January 1 of each year. Once an appraisal roll is prepared and finally approved by the applicable Appraisal Review Board, it is used by the District in establishing its tax rolls and tax rate. Assessments under the Tax Code are based on one hundred percent (100%) of market value, except as described below, and no assessment ratio can be applied.

State law further limits the appraised value of a residence homestead for a tax year to an amount not to exceed the lesser of (1) the market value of the property or (2) the sum of (a) 10% of the appraised value of the property for the last year in which the property was appraised for taxation times the number of years since the property was last appraised, plus (b) the appraised value of the property for the last year in which the property was appraised plus (c) the market value of all new improvements to the property.

45522082.2 -14-

Article VII of the Texas Constitution and the Tax Code permit land designated for agricultural use, open space or timberland to be appraised at its value based on the land’s capacity to produce agricultural or timber products rather than at its fair market value. Landowners wishing to avail themselves of the agricultural use designation must apply for the designation, and the appraiser is required by the Code to act on each claimant’s right to the designation individually. If a claimant receives the designation and later loses it by changing the use of the property or selling it to an unqualified owner, the District can collect taxes for previous years based on the new value, including three years for agricultural use and five years for agricultural open-space land and timberland prior to the loss of the designation.

The Tax Code requires the Appraisal District to implement a plan for periodic reappraisal of property to update appraisal values. The plan must provide for appraisal of all real property in the Appraisal District at least once every three years. The District, at its expense, has the right to obtain from the Appraisal District’s current estimate of appraised values within the District or an estimate of any new property or improvements within the District. While such current estimates of appraisal values may serve to indicate the rate and extent of growth of taxable values within the District, it cannot be used for establishing a tax rate within the District until such time as the Appraisal District chooses to formally include such values on their appraisal rolls.

Residential Homestead Exemptions

The Texas Constitution permits the exemption of certain percentages of the market value of residential homesteads from ad valorem taxation. The Constitution authorizes the governing body of each political subdivision in the state to exempt up to twenty percent (20%) of the market value of all residential homesteads from ad valorem taxation, and permits an additional optional homestead exemption for taxpayers 65 years of age or older and disabled persons of a minimum of $3,000.

At elections held on August 9, 1997 and November 4, 2003, Texas voters approved constitutional amendments which raised the constitutional homestead exemption from $5,000 to $15,000, and allows for the “freeze” on ad valorem taxes on the homestead of person 65 years of age and older or for disabled persons for general elementary and secondary public school purposes to be transferable to a different residence homestead of such person.

District and Taxpayer Remedies

Under certain circumstances, taxpayers and taxing units, including the District, may appeal orders of the Appraisal Review Board by filing a petition for review in district court within 45 days after notice is received that a final order has been entered. In such event, the property value in question may be determined by the court, or by a jury, if requested by any party, or through binding arbitration, if requested by the taxpayer. Additionally, taxing units may bring suit against an Appraisal District to compel compliance with the Tax Code.

Levy and Collection of Taxes

The District is responsible for the collection of its taxes, unless it elects to transfer such functions to another governmental entity. By the later of September 30th or 60 days after the certified appraisal roll is delivered to the District, the rate of taxation is set by the Board of Trustees of the District based upon the valuation of property within the District as of the preceding January 1. Taxes are due October 1, or when billed, whichever comes later, and become delinquent after January 31 of the following year. A delinquent tax incurs a penalty from six percent (6%) to twelve percent (12%) of the amount of the tax, depending on the time of payment, and accrued interest at the rate of one percent (1%) per month. If the tax is not paid by the

45522082.2 -15-

following August 1, an additional penalty of up to twenty percent (20%) may under certain circumstances be imposed by the District. The Tax Code also makes provision for the split payment of taxes, discounts for early payment and the postponement of the delinquency date of taxes under certain circumstances.

District’s Rights in the Event of Tax Delinquencies

Taxes levied by the District are a personal obligation of the owner of the property. The District has no lien for unpaid taxes on personal property but does have a lien for unpaid taxes upon real property, which lien is discharged upon payment. On January 1 of each year, such tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed for the year on the property. The District’s tax lien is on a parity with the tax liens of other such taxing units. A tax lien on real property taxes takes priority over the claims of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien. Personal property, under certain circumstances, is subject to seizure and sale for the payment of delinquent taxes, penalty, and interest.

Except with respect to taxpayers who are 65 years of age or older, at any time after taxes on property become delinquent, the District may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the District must join other taxing units that have claims for delinquent taxes against all or part of the same property. Collection of delinquent taxes may be adversely affected by the amount of taxes owed to other taxing units, by the effects of market conditions on the foreclosure sale price, by taxpayer redemption rights, or by bankruptcy proceedings which restrict the collection of taxpayer debts.

THE PROPERTY TAX CODE AS APPLIED TO THE DISTRICT

The Appraisal District has the responsibility for appraising property in the District as well as other taxing units in the County.

The Appraisal District is governed by a board of seven directors appointed by members of the governing bodies of various political subdivisions within the County.

Property within the District is assessed as of January 1 of each year, taxes become due October 1 of the same year and become delinquent on February 1 of the following year.

The District does not tax personal property not used in the production of income, such as personal automobiles.

The District does collect an additional 20% penalty to defray attorney costs in the collection of delinquent taxes over and above the penalty automatically assessed under the Code.

The District’s taxes are collected by the Nueces County Tax Assessor/Collector.

The District does not allow split payments of taxes and does not give discounts for early payment of taxes.

The District does not participate in a tax increment financing zone. The District does not grant tax abatements.

The District does not grant the additional local option exemption of up to 20% of the market value of residence homesteads.

45522082.2 -16-

The District grants only state mandated $10,000 over 65 exemption and $15,000 homestead exemption.

Charges for penalties and interest on the unpaid balance of delinquent taxes are as follows:

Cumulative Date Penalty Interest (b) Total

February 6% 1% 7% March 7 2 9 April 8 3 11 May 9 4 13 June 10 5 15 July 12(a) 6 18(a)

(a) The District adds an additional fee of 20% for attorney collection expenses assessed after July 1. (b) Interest continues to accrue after July 1 at the rate of 1% per month until paid.

STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS

Recent Litigation Relating to the Texas School Finance System

On September 15, 2004, the District Court Judge for the 250th Judicial District in Travis County, Texas, ruled on remand of the Edgewood V case (as defined and described below under “Funding Changes in Response to Litigation”) that the State’s school finance system (as described below) (1) fails to provide an adequate suitable education as required by the State Constitution; (2) forces certain school districts in the State to levy an ad valorem tax at the $1.50 statutory cap on maintenance and operations tax rates, therefore violating the State constitution’s proscription against a Statewide ad valorem tax; and (3) is neither financially efficient nor efficient in the sense of providing for the mandated adequate education nor the statutory regime of accreditation, accountability, and assessment. The judge further stated that he intends to enter an injunction on approximately October 1, 2004 that State funding of public schools cease unless the State legislature conforms the State school finance system to meet State constitutional standards, with the effective date of the injunction to be one year from the date the injunction order is entered. The Texas Attorney General immediately announced that his office would appeal the trial court’s ruling directly to the Texas Supreme Court. The State Legislature (the “Legislature”) is scheduled to meet in regular session beginning in January, 2005.

Special Legislative Session

The Texas Governor called a special session of the Legislature that convened April 20, 2004, to consider changes to the Texas public school finance system. The special session ended without the enactment of new school finance legislation. The Governor has previously stated that he intends to call an additional special session to address school finance issues, but no date has been announced for the start of that legislative session. Following the ruling of the 250th Judicial District Court discussed above, the Governor reemphasized his intention to seek a legislative solution, but did not comment on whether he still intends to call another special session or wait for the next regular Legislative Session, which begins in January of 2005.

The District can make no representation or prediction regarding the legislation that may be enacted or its effect on the District or the school finance system. See “CURRENT SCHOOL FINANCE SYSTEM” herein for a description of the current school finance system that the District is operating under.

45522082.2 -17-

Funding Changes in Response to Litigation

In 1989, the Texas Supreme Court, in Edgewood Independent School District v. Kirby, 777 S.W.2d 391 (Tex. 1989) (“Edgewood I”), declared the Texas public school finance system then in effect unconstitutional. In Edgewood I, the Court held that the system was not “efficient, “ as required by article VII, section 1 of the Texas Constitution, because it relied heavily on property taxes levied by school districts with grossly disparate property wealth per student. In response to that decision and other Texas Supreme Court decisions, the Legislature enacted laws that modified the public school finance system, and in 1995, the constitutionality of the system, as amended in 1993, was upheld in all respects in an opinion of the Supreme Court of Texas in the matter of Edgewood Independent School District v. Meno, 893 S.W.2d 450 (Tex. 1995) (“Edgewood IV”). In upholding the constitutionality of the school finance system as amended in 1993, the Court noted in its Edgewood IV opinion that the system could be rendered unconstitutional in its entirety in the future, but stated that any future determination of unconstitutionality would not affect a district’s authority to levy taxes necessary to retire previously issued bonds.

Since Edgewood IV, legislative changes to the public school finance system have been made in each subsequent regular session of the Legislature, including the most recent legislative regular session that ended June 2, 2003. In general, the Texas public school finance system gives weight to certain funding factors, such as local property wealth differences, the consideration of which result in greater equity in total funding. In addition, the Legislature has increased the total amount of State funding for school districts. During the 2003 regular session of the Legislature, changes to the existing school finance system were introduced and considered, including repeal of the provisions of the Texas Education Code that form the basis of the current school finance system. See “CURRENT SCHOOL FINANCE SYSTEM - 2003 Texas Legislative Session.”

In Edgewood IV, the Court noted that its “judgment in this case should not be interpreted as a signal that the school finance crisis in Texas is over.” After emphasizing that the challenge to the system then in effect based on inadequate provision for facilities failed only because of an evidentiary void, the Court further suggested that if, in the future, districts in general are effectively forced to levy taxes at the rate of $1.50 per $100 assessed value to provide a general diffusion of knowledge, then the $1.50 cap on maintenance and operation tax rates would operate both as a floor and a ceiling, and the Court would conclude that the Legislature had set an unconstitutional statewide ad valorem tax. The Court also suggested that the constitutionality of the current system of public school finance could additionally be challenged in the future on the basis of any failure by the Legislature to meet its duty to provide for a “general diffusion of knowledge statewide, “ either as a result of inadequate appropriations for education or failing to provide standards for accreditation.

In response to the Court’s criticism of the absence of a method for funding facilities, the Legislature added a “School Facilities Assistance Program “ to the school finance system in 1995, and in 1997 replaced that program with the “Instructional Facilities Allotment “ described under the caption “CURRENT SCHOOL FINANCE SYSTEM - State Funding for Local School Districts” below.

On April 9, 2001, four property wealthy districts filed suit in the 250th District Court of Travis County, Texas against the Texas Education Agency, the Texas State Board of Education, the Texas Commissioner of Education and the Texas Comptroller of Public Accounts in a case styled West Orange-Cove Consolidated Independent School District, et al. v. Alanis, et. al. (“West Orange”). Numerous property-wealthy and property-poor districts have joined the suit as plaintiffs. West Orange challenges the Texas school finance system on the basis that it effectively forces school districts to levy maintenance and operation taxes at the maximum rate of $1.50 per $100 assessed value, thereby resulting in an unconstitutional statewide ad valorem tax. The trial court in West Orange dismissed the suit on defendants’

45522082.2 -18-

motion for summary judgment, holding that the plaintiffs had failed to establish that a sufficient number of school districts were levying the maximum tax rate of $1.50 in an effort to provide an accredited education and that the $1.50 statutory cap did not constitute a statewide property tax. Upon appeal, the Third Court of Appeals in Austin, Texas, affirmed the trial court’s ruling. On May 29, 2003, the Texas Supreme Court reversed the lower courts, finding that summary judgment was granted in error, and remanded the case to the trial court for further proceedings (“Edgewood V”). In its opinion, the Supreme Court expressly disagreed with the trial court’s determination that a constitutional violation could not be alleged because less than half of the school districts in Texas were taxing at the maximum rate. In determining whether there is an unconstitutional “state ad valorem tax”, the Court noted:

“The concern is not the pervasiveness of the tax but the State’s control of it. A state ad valorem tax is just that: one imposed by the State, whether it acts directly or through control of another entity and whether the tax falls on the entire population or only a few. Thus, a single district states a claim . . . if it alleges that it is constrained by the State to tax at a particular rate.”

The Supreme Court also held that a district does not lack standing to sue because it taxes near the statutory cap but not at the statutory cap, stating that a “district taxing a few cents below the maximum rate that can no longer provide an accredited education or general diffusion of knowledge even by raising the rate to the maximum need not do so just to prove the point.” The Court further disagreed with the Third Court of Appeals’ determination that there was, as a matter of law, no evidence that any of the school districts were forced to impose a maximum tax to provide an accredited education as defined by statute or a “general diffusion of knowledge.”

A determination on remand that the current school finance system imposes an unconstitutional state ad valorem tax, if later upheld on appeal, would presumably require the Legislature to significantly alter the Texas system of school finance from the system now in effect.

A second suit, Hopson et al. v. Dallas Independent School District and Highland Park Independent School District, filed April 5, 2001 in the 134th District Court of Dallas County, Texas, (“Hopson”) also challenges the current system of school finance on substantially similar grounds as the claims of the plaintiffs in Edgewood V, and seeks to have Chapter 41 of the Texas Education Code, the chapter that contains the wealth transfer provisions discussed below, declared unconstitutional. Hopson further seeks injunctive relief enjoining and prohibiting districts from paying taxes collected by the districts to or for the benefit of any other district and preventing districts from collecting ad valorem taxes. The case is currently pending, after a change in venue, in district court in Travis County, Texas.

On May 7, 1998, certain plaintiff-intervenors (the “Plaintiffs”) in Edgewood IV filed a Petition for Declaratory and Injunctive Relief in the 250th Judicial District Court of Travis County, Texas. The Plaintiffs seek to have the District Court hold certain legislative changes to the school finance system enacted since the 1993/94 school year to be in violation of the standards approved by the Texas Supreme Court in Edgewood IV and request that the District Court enter appropriate injunctions against their continued implementation. Since the filing of such Petition, no hearings have been held.

The trial court commenced its hearing on the remand of Edgewood V on August 9, 2004. The judge rendered his ruling orally on September 15, 2004, as described above under “Recent Litigation Relating to the Texas School Finance System.” The District can make no representation or prediction concerning the effect of Edgewood V or the other litigation described above or how the Legislature may respond to such litigation, and can make no representation or prediction how such litigation may affect its financial condition or tax revenues.

45522082.2 -19-

Possible Effects of Litigation and Changes in Law on District Obligations

In connection with the pending litigation or prospective court challenges, future courts could again determine that the State’s public school finance system is unconstitutional or the Legislature could enact changes to the finance system which could benefit or be a detriment to a school district depending upon a variety of factors, including the financial strategies that the district has implemented in light of past funding structures. Among other possibilities, the District’s boundaries could be redrawn, taxing powers restricted, State funding reallocated, or local ad valorem taxes replaced with State funding subject to biennial appropriation.. In Edgewood IV, the Texas Supreme Court stated that any future determination of unconstitutionality “would not, however, affect the district’s authority to levy the taxes necessary to retire previously issued bonds, but would instead require the Legislature to cure the system’s unconstitutionality in a way that is consistent with the Contract Clauses of the U.S. and Texas Constitutions (the “Contract Clauses”).” Consistent with the Contract Clauses, in the exercise of its police powers, the State may make such modifications in the terms and conditions of contractual covenants related to the payment of the Bonds as are reasonable and necessary for the attainment of important public purposes. See “STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS - 2003 Texas Legislative Session” for a description of recently enacted legislation affecting the public school finance system.

Although as a matter of law the Bonds, upon issuance and delivery, will be entitled to the protections afforded previously existing contractual obligations under the Contract Clauses, the District can make no representations or predictions concerning the effect of pending or future legislation or litigation, or how such legislation or future court orders may affect the District’s financial condition, revenues or operations.

CURRENT SCHOOL FINANCE SYSTEM

General

The following description of the current school finance system is subject to the provisions of certain recently enacted legislation described below under “2003 Texas Legislative Session.” For a more complete description of school finance and fiscal management in the State of Texas, reference is made to Vernon’s Texas Codes Annotated, Education Code, Chapter 41 through 46, as amended.

To limit disparities in school district funding abilities, the public school finance system (1) compels districts with taxable property wealth per weighted student higher than $305,000 to reduce their wealth to such amount or to divert a portion of their tax revenues to other districts as described below and (2) provides various State funding allotments, including a basic funding allotment and other allotments for “enrichment” of the basic program, for debt service tax assistance and for new facilities construction.

State Funding for Local School Districts

The current public school finance system provides for (1) State guaranteed basic funding allotments per student (“Tier One”) and (2) State guaranteed revenues per student per penny of local tax effort to provide operational funding for an “enriched” educational program (“Tier Two”). Tier One and Tier Two are generally referred to as the Foundation School Program. In addition, the system includes, among other funding allotments, an allotment to subsidize existing debt service up to certain limits (“Tier Three”), the Instructional Facilities Allotment (the “IFA”), and an allotment to pay operational expenses associated with the opening of a new instructional facility. State funding allotments may be altered and adjusted to penalize school districts with high administrative costs and, in certain circumstances, to account for shortages in State appropriations or to allocate available funds in accordance with wealth equalization goals.

45522082.2 -20-

Tier One allotments are intended to provide a basic program of education rated academically acceptable and meeting other applicable legal standards. If needed, the State will subsidize local tax receipts to produce a basic allotment of $2,537 per student in average daily attendance. To receive the State subsidy, a school district must levy an effective property tax of at least $0.86 per $100 of assessed valuation.

Tier Two allotments are intended to guarantee each school district an opportunity to provide a basic program and to supplement that program at a level of its own choice, however Tier Two allotments may not be used for the payment of debt service or capital outlay. Each school district is guaranteed $27.14 per weighted student in State and local funds for each cent of tax effort (excluding the District’s bond debt service tax effort) that a school district levies above the effective rate of $0.86 required for its Tier One local share, not to exceed $0.64 per $100 of assessed valuation.

The IFA guarantees each school district a specified amount per student ($35) in State and local funds for each cent of tax effort to pay principal of and interest on eligible bonds issued to construct, acquire, renovate or improve instructional facilities. To receive an IFA, a school district must apply to the Commissioner in accordance with rules adopted by the Commissioner before issuing the bonds to be paid with State assistance. The total amount of debt service assistance over a biennium for which a district may be awarded is limited to the lesser of (1) the actual debt service payments made by the district in the biennium in which the bonds are issued; or (2) the greater of (a) $100,000 or (b) $250 multiplied by the number of students in average daily attendance. The IFA is also available for lease-purchase agreements and refunding bonds meeting certain prescribed conditions. If the total amount appropriated by the State for IFA in a year is less than the amount of money school districts applying for IFA are entitled to for that year, districts applying will be ranked by the Commissioner by wealth per student, and State assistance will be awarded to applying districts in ascending order of adjusted wealth per student beginning with the district with the lowest adjusted wealth per student. In determining wealth per student for purposes of the IFA, adjustments are made to reduce wealth for certain fast growing districts. Once a district receives an IFA award for bonds, it is entitled to continue receiving State assistance without reapplying to the Commissioner and the guaranteed level of State and local funds per student per cent of tax effort applicable to the bonds may not be reduced below the level provided for the year in which the bonds were issued. See “2003 Texas Legislative Session” regarding IFA funding for the 2003-2004 and 2004-2005 school years.

State financial assistance is provided for certain existing debt issued by school districts (referred to herein as Tier Three) to produce a guaranteed yield of $35.00 (subject to adjustment as described below) in revenue per student per penny of debt service tax levy. The portion of the local debt service rate that may qualify for equalization funding by the State may not exceed $0.29 per $100 of valuation. In general, a district’s bonds are eligible for the allotment if, during the 2002-2003 fiscal year, the district (i) made payments on such bonds or (ii) levied and collected debt taxes for the payment of principal and interest on such bonds. Due to the amount of funds made available for Tier Three Funding in the State’s appropriation legislation for the biennum ending August 31, 2005, eligible bonds with debt service payments made during the fiscal year ending August 31 2001, are entitled to state assistance at the guaranteed yield of $35 in revenue per student per penny of debt service tax levy; however, for eligible bonds with debt service payment occurring after August 31, 2001 and prior to August 31, 2003, Tier Three assistance for such eligible bonds may be less than $35 in revenue per student per penny of debt service tax. A district may not receive Tier Three funding for the principal and interest on a series of otherwise eligible bonds for which the district receives overlapping IFA funding.

A district may also qualify for an allotment for operational expenses associated with opening new instructional facilities. This funding source may not exceed $25,000,000 in one school year on a State-wide basis. For the first school year in which students attend a new instructional facility, a district is entitled to an allotment of $250 for each student in average daily attendance at the facility. For the second school year

45522082.2 -21-

in which students attend that facility, a district is entitled to an allotment of $250 for each additional student in average daily attendance at the facility. The new facility operational expense allotment will be deducted from wealth per student for purposes of calculating a district’s Tier Two State funding.

Other State Funding Provisions

The Texas Economic Development Act provides incentives for certain school districts to grant tax abatements to encourage development in their tax base. A school district is permitted to grant an application for a limitation on appraised value if a statutory minimum investment was reached (calculated based on the size of the school district’s tax base). The limitation on appraised value would last for up to ten years and would only apply to taxes levied for maintenance and operations purposes. The Texas Education Code provides additional State funding for each year of a qualifying tax abatement agreement in the amount of the tax credit provided to the taxpayer by the district.

Local Revenue Sources – Property Tax Authority

The primary source of local funding for school districts is ad valorem taxes levied against the local tax base. School districts are authorized, subject to voter approval, to levy an annual ad valorem tax for maintenance and operations of the district at a rate, subject to limited exceptions, not to exceed $1.50 per $100 assessed valuation and to levy a bond debt service tax that may be unlimited in rate. Many school districts, however, voted their maintenance tax under prior law and may be subject to other limitations on this tax rate. See “TAX RATE LIMITATIONS” herein. The governing body of a school district cannot adopt an annual tax rate which exceeds the district’s “rollback tax rate” without submitting such proposed tax rate to the voters at a referendum election. See “TAX RATE LIMITATIONS – Rollback Tax Rate and Election” herein.

Wealth Transfer Provisions

Under the public school finance system, districts are required to effectively adjust taxable property wealth per weighted student (“wealth per student”) for each school year to no greater than $305,000, (the “equalized wealth level”). A district’s wealth per student for any school year is the taxable value of property in the district in the prior tax year, as adjusted by the Texas Comptroller of Public Accounts for statewide disparities in assessment, divided by the Texas Education Agency’s most recent projection of the district’s weighted students during such school year. A district may effectively reduce its wealth per student either by reducing the amount of taxable property within the district relative to the number of weighted students, by transferring revenue out of the district or by exercising any combination of these remedies.

A district has four options to reduce its wealth per student so that it does not exceed the equalized wealth level.

First, a district may consolidate by agreement with one or more districts to form a consolidated district. All property and debt of the consolidating districts vest in the consolidated district. After a transition of up to one year the consolidated district is governed by a single board of trustees.

Second, a district may consolidate by agreement with one or more districts to form a consolidated taxing district solely to levy and distribute either maintenance and operation taxes or both maintenance and operation taxes and debt service taxes. Consolidation for these limited purposes must be approved by each consolidating district’s qualified voters. If a consolidated taxing district is formed to fund both maintenance and operation and debt expenses, it may assume the outstanding indebtedness of the component districts (if provided in the agreement), may issue bonds as if it were an independent school district and may levy taxes to pay all such bonds. If a consolidated taxing district is formed for this broader purpose, no component district may levy bond taxes except to pay unassumed obligations issued before creation of the consolidated

45522082.2 -22-

taxing district. If districts consolidate solely for maintenance and operations purposes, then indebtedness remains the separate responsibility of the component districts, and they may continue to levy taxes to pay outstanding and subsequently issued debt.

Third, a district may detach property from its territory for annexation by a property-poor district. After detachment and annexation, the resulting wealth per student of each district must not be greater than the equalized wealth level and the annexing district must have a resulting yield per student per penny of effective tax that is less than $27.14. The annexing district must assume the portion, if any, of the detaching district’s debt that is fixed by agreement or, absent agreement, is determined to be an equitable portion by the commissioners courts in the counties in which the districts are located.

Fourth, a district may educate students from other districts who transfer to the district without charging tuition to such students.

A district has three options to transfer tax revenues from its excess property wealth. First, a district with excess wealth per student may purchase “attendance credits” by paying the tax revenues to the State for redistribution under the Foundation School Program. Second, it can contract to disburse the tax revenues to educate students in another district, if the payment does not result in effective wealth per student in the other district to be greater than the equalized wealth level. Both options to transfer property wealth are subject to approving elections by the transferring district’s qualified voters. Third, a wealthy district may reduce its wealth by paying tuition to a non-wealthy district for the education of students that reside in the wealthy district.

A district may not adopt a tax rate until its effective wealth per student is the equalized wealth level or less. If a final court decision holds any of the preceding permitted remedial options unlawful, districts may exercise any remaining option under a revised schedule approved by the Commissioner.

If a district fails to exercise a permitted option, the Commissioner must reduce the district’s property wealth per student to the equalized wealth level by detaching mineral, utility, industrial, or commercial property from the district and annexing the property to a property-poor district or, if necessary, consolidate the district with a property-poor district. To be eligible to annex detached property, the annexing district must have a resulting yield per student per penny of effective tax that is not more than $27.14. To be subject to consolidation, the district resulting from the consolidation must have an effective wealth per student not greater than the equalized wealth level. Detachment and annexation by the Commissioner must occur by November 8 of each year, and consolidation by the Commissioner must occur as soon after November 8 as practicable. Provisions governing detachment and annexation of taxable property by the Commissioner do not provide for assumption of any of the transferring district’s existing debt.

A district may exceed wealth per student of the equalized wealth level if, after detaching property for annexation or purchasing attendance credits, the additional wealth per student is necessary to maintain 1992-1993 State and local revenues per weighted student for maintenance and operation of the district, less the district’s current year distribution per weighted student from the Available School Fund. To qualify under such provisions, a school district must impose an effective tax rate for maintenance and operation of the district equal to the greater of the district’s current tax rate or $1.50 on the $100 valuation of taxable property.

Possible Effects On The District’s Financial Condition

The District’s wealth per student for the 2003-2004 school year is less than the equalized wealth value. Accordingly, the District has not been required to exercise one of the permitted wealth equalization options.

45522082.2 -23-

As a district with wealth per student less than the equalized wealth value, the District may benefit in the future by agreeing to accept taxable property or funding assistance from or agreeing to consolidate with a property-rich district to enable such district to reduce its wealth per student to the permitted level.

A district’s wealth per student must be tested for each future school year and, if it exceeds the maximum permitted level, must be reduced by exercise of one of the permitted wealth equalization options. Accordingly, if the District’s wealth per student should exceed the maximum permitted level in future school years, it will be required each year to exercise one or more of the wealth reduction options. If the District were to consolidate (or consolidate its tax base for all purposes) with a property-poor district, the outstanding debt of each district could become payable from the consolidated district’s combined property tax base, and the District’s ratio of taxable property to debt could become diluted. If the District were to detach property voluntarily, a portion of its outstanding debt (including the Bonds) could be assumed by the district to which the property is annexed, in which case timely payment of the Bonds could become dependent in part on the financial performance of the annexing district.

2003 Texas Legislative Session

The Regular Session of the Texas Legislature ended June 2, 2003. H.B. 1 and H.B. 3459 are the only significant pieces of legislation adopted during the 2003 legislative session which impact or modify the current school finance system as described below.

H.B. 3459 continues in effect the current school funding structure, including funding allotments under Tier One, Tier Two and Tier Three described under “CURRENT SCHOOL FINANCE SYSTEM—State Funding for Local School Districts.” However, H.B. 3459 contains provisions which repeal Chapters 41, 42 and 46 and Section 45.002 of the Education Code (the foundation for the funding of the current school finance system) effective September 1, 2004 if (i) the Legislature has enacted a school finance system to replace the present system established by Chapters 41, 42, 45 and 46 of the Education Code, (ii) the replacement legislation noted in (i) affirmatively states that the replacement system enacted is a comprehensive school finance system for the entire State and (iii) the replacement system enacted has become law by September 1, 2004.

H.B. 3459 also amended various provisions of the school district health care coverage program that was established in 2001. The District cannot at this time assess the impact such amendments will have on the cost to the District of providing health care coverage.

H.B. 1 includes an appropriation to provide school districts, for school years 2003-2004 and 2004-2005, with $110 more per student per year in weighted average daily attendance than they would be entitled to receive under the finance system in effect for the 2002-2003 school year. H.B. 1 appropriates $55,000,000 for 2003-2004 and $60,000,000 for 2004-2005 for New Tier Three. However, H.B. 3459 provides that to the extent appropriated funds are not sufficient to provide a Tier Three guaranteed yield amount of $35 for eligible bonds with debt service payments occurring after August 31, 2001 and prior to August 31, 2003, the Commissioner is directed to reduce the amount of guaranteed yield for New Tier Three bonds on a pro rated basis. Under H.B. 1, no new money was appropriated for the Instructional Facilities Allotment, however, H.B. 3459 authorizes the Commissioner to use $20,000,000 from the funds appropriated under H.B. 1 for Tier Three allotments for new IFA in the 2004-2005 fiscal year.

As a result of the passage of H.B. 3459, the recent rulings in the West Orange case described above under “STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS,” and any subsequent special legislative session called by the Governor to address school finance, changes may be made to the existing school finance system that could be in effect as early as the 2004-2005 school year. Replacement legislation

45522082.2 -24-

that does not make provision for a constitutionally sufficient public school finance system could be subject to further constitutional challenge in the courts.

THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM

The information below concerning the State Permanent School Fund and the Guarantee Program for School District Bonds has been provided by the Texas Education Agency and is not guaranteed as to accuracy or completeness by, and is not construed as a representation by the District, the Financial Advisor, or the Underwriters.

The District has made application to the Texas Education Agency (the “TEA”) for a Permanent School Fund guarantee of the Bonds and has received conditional approval for the Bonds to be guaranteed under the Guarantee Program (as defined and described below).

Some of the information contained in this Section may include projections or other forward-looking statements regarding future events or the future financial performance of the Texas Permanent School Fund (the “PSF” or the “Fund”). Actual results may differ materially from those contained in any such projections or forward-looking statements.

History and Purpose

The PSF was created with a $2,000,000 appropriation by the Texas Legislature (the “Legislature”) in 1854 expressly for the benefit of the public schools of Texas. The Constitution of 1876 stipulated that certain lands and all proceeds from the sale of these lands should also constitute the PSF. Additional acts later gave more public domain land and rights to the PSF. In 1954, the U.S. Congress gave Texas clear title to its submerged coastal lands to a distance of 10.35 miles. All lands lying within that limit became PSF lands. The proceeds from the sale and the mineral-related rental of these lands including, bonuses, delay rentals and royalty payments, become the corpus of the fund. Prior to the approval by the voters of the State of an amendment to the constitutional provision under which the Fund is established and administered, which occurred on September 13, 2003 (the “2003 Constitutional Amendment”), and which is further described below, the PSF had as its main sources of revenues capital gains from securities transactions and royalties from the sale of oil and natural gas. With the approval of the 2003 Constitutional Amendment, interest and dividends produced by fund investments will be additional revenue to the PSF. The State General Land Office (“GLO”) maintains the land endowment of the Fund on behalf of the Fund.

The Texas Constitution describes the PSF as “permanent” and “perpetual.” Prior to the approval by 2003 Constitutional Amendment, only the income produced by the PSF was to be used to complement taxes in financing public education. The pioneer citizens of Texas made it clear that the corpus of the Fund was to remain inviolate to provide a growing source of income to fund the growing needs of public education.

On November 8, 1983, the voters of the State approved a constitutional amendment that provides for the guarantee of school district bonds by the PSF. On approval by the State Commissioner of Education (the “Commissioner”), bonds properly issued by a school district are fully guaranteed by the corpus of the PSF. See “The Guarantee Program.”

The sole purpose of the PSF is to assist in the funding of public education for present and future generations. Prior to the adoption of the 2003 Constitutional Amendment, all interest and dividends produced by fund investments flowed into the Available School Fund (the “ASF”), where they are distributed to local school districts based on average daily attendance. Any net gains from investments of the Fund accrue to the corpus of the PSF. Prior to the approval by the voters of the State of the 2003 Constitutional Amendment, costs of administering the PSF were allocated to the ASF. With the approval of

45522082.2 -25-

the 2003 Constitutional Amendment, the administrative costs of the Fund have shifted from the ASF to the PSF. In fiscal year 2003, distributions to the ASF amounted to $226.61 per child and the total amount distributed to the ASF was $896.8 million, which included a special payment made in accordance with House Bill 3459 (“HB 3459”) adopted by the 78th Texas Legislature, that concluded on June 2, 2003 (the “2003 Regular Legislative Session”). In addition to shifting the costs of administering the PSF from the ASF to the PSF, the 2003 Constitutional Amendment approved a fundamental change in the way that distributions are made to the ASF from the PSF. The 2003 Constitutional Amendment requires that PSF distributions to the ASF are to be determined using a total-return-based formula instead of the current-income-based formula, which was used from 1964 to the end of the 2003 fiscal year. The implementation of the 2003 Constitutional Amendment insofar as it relates to distributions from the PSF to the ASF commenced on January 2, 2004 when the first distributions were made under the total-return-based formula. With respect to the management of the Fund’s investment portfolio, the single most significant change made to date as a result of the 2003 Constitutional Amendment is the new asset allocation policy adopted by the State Board of Education (the “SBOE”) in February 2004. See “Impact on the Fund of Legislation Enacted During the 2003 Regular Legislative Session.”

Audited financial information for the PSF is provided annually through the PSF Annual Report (the “Annual Report”), which is filed with each designated nationally recognized municipal securities information repository (“NRMSIR”) and the Texas Municipal Advisory Council as a State Information Depository (“SID”). Reference is made to the Annual Report for a description of the financial results of the PSF for the year ended August 31, 2003, the most recent year for which the audited financial information is available. The Annual Report for the year ended August 31, 2003 is incorporated herein and made a part hereof for all purposes, but the Annual Report speaks only as of its date and the TEA has not obligated itself to update the Annual Report. The TEA posts each Annual Report on the TEA web site at www.tea.state.tx.us/psf.

Management and Administration of the Fund

The Texas Constitution and applicable statutes delegate to the SBOE the authority and responsibility for investment of the PSF’s financial assets. In investing the Fund, the SBOE is charged with exercising the judgment and care under the circumstances then prevailing which persons of ordinary prudence, discretion and intelligence exercise in the management of their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income therefrom as well as the probable safety of their capital. The SBOE has adopted a “Statement of Investment Objectives, Policies, and Guidelines of the Texas Permanent School Fund,” which is codified in the Texas Administrative Code beginning at 19 TAC sections 33.1.

The 2003 Constitutional Amendment provides that expenses of managing the PSF are to be paid “by appropriation” from the PSF. In July 2004, the Chair of the SBOE submitted a request to the Texas Attorney General (the “Attorney General”) for a legal opinion regarding three issues arising from the 2003 Constitutional Amendment (the opinion request is available for review and download at the Attorney General’s web site: www.oag.state.tx.us/opinions/requests_ga/RQ0249GA.pdf). Among the issues for which guidance has been requested are whether the SBOE is authorized to incur investment expenditures that exceed the amounts appropriated for that purpose by the Legislature and whether management expenses that are deducted from certain eligible investments of the Fund, such as mutual funds and investment trusts, are subject to appropriation by the Legislature. The Fund has been in the past, and is currently, invested in such investments. The Agency is unable to predict how the Attorney General will respond to the questions included in the opinion request, or when an opinion may be released by the Attorney General. In addition, the Agency cannot predict how or if such opinion would be addressed by the Legislature. For a discussion

45522082.2 -26-

of the current legislative appropriation for Fund expenses, see “Impact on the Fund of Legislation Enacted During the 2003 Regular Legislative Session.”

Texas law assigns control of the Fund’s land and mineral rights to the three-member School Land Board, which consists of the elected Commissioner of the GLO, an appointee of the Governor, and an appointee of the Attorney General. Administrative duties related to the land and mineral rights reside with the GLO, which is under the guidance of the Commissioner of the GLO.

The SBOE contracts with its securities custodial agent to measure the performance of the total return of the Fund. A consultant is typically retained for the purpose of providing consultation with respect to strategic asset allocation decisions and to assist the SBOE in selecting external fund management advisors. The SBOE also contracts with financial institutions for custodial and securities lending services. The SBOE has appointed an Investment Advisory Committee to provide an independent and continual review of investment policies and procedures of the SBOE.

As noted above, the Texas Constitution and applicable statutes make the SBOE responsible for investment of the PSF’s financial assets. By law, the Commissioner is appointed by the Governor, with Senate confirmation, and assists the SBOE, but the Commissioner can neither be hired nor dismissed by the SBOE. The Executive Administrator of the Fund is also hired by and reports to the Commissioner. Moreover, although the Fund’s Executive Administrator and his staff implement the decisions of and provide information to the School Finance/PSF Committee of the SBOE and the full SBOE, the SBOE can neither select nor dismiss the Executive Administrator. TEA’s General Counsel provides legal advice to the Executive Administrator and to the SBOE.

Prior to June 1995, the PSF was invested exclusively by the internal staff of the TEA’s Investments Office, under the direction of the Executive Administrator of the Fund. In June 1995, the SBOE for the first time engaged external managers to invest a portion of the assets of the Fund. The portion of the Fund that is managed by external managers has declined from 39% at August 31, 2002 to 19.7% at June 30, 2004, in large part due to legislative appropriations riders that have reduced the appropriation for the administrative costs of managing the Fund, including, in particular, the payment of fees of external managers. Due to legislative appropriations made during the 2003 Regular Legislative Session, in order to reduce administrative costs of the Fund the SBOE has reduced most external management mandates, and in February 2004 directed staff to transition all remaining external management mandates with passive investment management measures. As of June 30, 2004, the internal management staff of the TEA’s Investments Office managed 80.2% of the financial assets of the Fund.

The Guarantee Program

The Guarantee Program for School District Bonds (the “Guarantee Program”) was authorized by an amendment to the Texas Constitution and by Subchapter C of Chapter 45 of the Texas Education Code (the “Act”). If the conditions for the Guarantee Program are satisfied, the guarantee becomes effective upon approval of the Bonds by the Attorney General and remains in effect until the Bonds are paid or defeased, by a refunding or otherwise.

In the event of default, holders of the Bonds will receive all payments due from the corpus of the PSF. Following a determination that the District will be or is unable to pay maturing or matured principal or interest on any Bond, the Act requires the District to notify the Commissioner not later than the fifth day before the stated maturity date of such Bond or interest payment. Immediately following receipt of such notice, the Commissioner must cause to be transferred from the appropriate account in the PSF to the Paying Agent/Registrar an amount necessary to pay the maturing or matured principal and interest. Upon receipt of

45522082.2 -27-

funds for payment of such principal or interest, the Paying Agent/Registrar must pay the amount due and forward the canceled Bond or evidence of payment of the interest to the State Comptroller of Public Accounts. The Commissioner will instruct the Comptroller of Public Accounts to withhold the amount paid, plus interest, from the first State money payable to the District. The amount withheld will be deposited to the credit of the PSF. The Comptroller must hold such canceled Bond or evidence of payment of the interest on behalf of the PSF. Following full reimbursement of such payment by the District to the PSF with interest, the Comptroller will cancel the Bond or evidence of payment of the interest and forward it to the District.

If the District fails to pay principal or interest on a Bond as it is stated to mature, other amounts not due and payable are not accelerated and do not become due and payable by virtue of the District’s default. The Guarantee Program does not apply to the payment of principal and interest upon a redemption of the Bonds, except upon mandatory sinking fund redemption, and does not apply to the obligation, if any, of a school district under the Bonds to pay a redemption premium on the Bonds.

In the event that two or more payments are made from the PSF on behalf of the District, the Commissioner may request the Attorney General to institute legal action to compel the District and its officers, agents and employees to comply with the duties required of them by law in respect to the payment of the Bonds.

The capacity of the Fund to guarantee bonds under the Guarantee Program is limited in two ways: by State law (the “State Capacity Limit”) and by an Internal Revenue Service (“IRS”) private letter ruling received by the TEA (the “IRS Limit”). Prior to May 20, 2003, the State Capacity Limit was equal to two times the lower of cost or fair market value of the Fund’s assets, exclusive of real estate. On May 20, 2003, the Governor signed into law House Bill 1295 (“HB 1295”), adopted during the 2003 Regular Legislative Session. HB 1295 increases the State Capacity Limit by 25%, to two and one half times the lower of cost or fair market value of the Fund’s assets as estimated by the SBOE and certified by the State Auditor and eliminates the real estate exclusion from the calculation. The capacity of the program is limited to two and one-half times the lower of cost or fair market value of the Fund’s assets adjusted by a factor that excludes additions to the Fund made since May 14, 1989 under the IRS Limit. Thus, the IRS Limit results in a Guarantee Program capacity that is less than both the old and new State Capacity Limit. At August 31, 2003, the capacity of the Guarantee Program under the IRS Limit was $33,388,189,922 and the new State Capacity Limit at that date was $43,256,001,174. At June 30, 2004 (based upon unaudited data), the capacity of the Guarantee Program under the IRS Limit was $34,369,466,489 and the new State Capacity Limit at that date was $45,069,387,986. See the table “Permanent School Fund Guaranteed Bonds” below for data relating to the amount of school district bonds guaranteed under the Guarantee Program.

The TEA has engaged special tax counsel services for the Fund for the purpose of assisting TEA in seeking a new ruling from the IRS that would have the effect of increasing the capacity of the Fund under the IRS Limit to approximately equal the new State Capacity Limit. The TEA is unable to determine the prospects for receiving a favorable ruling, or when it may receive a new ruling from the IRS. Unless the TEA is successful in seeking relief from the current IRS Limit, the current IRS Limit will continue to establish the capacity of the Guarantee Program. Moreover, it is possible that the TEA could seek clarifications or modifications with respect to the IRS Limit, State law or both, from time to time, for the purpose of increasing the ratio of Fund assets to the amount of school district bonds guaranteed under the Guarantee Program.

Since July 1991, when the SBOE amended the regulations that govern the Guarantee Program to broaden the range of bonds that can be guaranteed under the Guarantee Program to encompass most Texas school district bonds, the principal amount of bonds guaranteed under the Guarantee Program has increased sharply. In addition, in recent years a number of factors have caused an increase in the amount of bonds

45522082.2 -28-

issued by school districts in the State. See the table “Permanent School Fund Guaranteed Bonds” below, which reflects the trend of growth of guaranteed bonds for the last five fiscal years. It is expected that the SBOE will modify its regulations during calendar year 2004 to restrict and prioritize access to the Bond Guarantee Program in light of the prospects that the Bond Guarantee Program may reach capacity.

Based upon historical performance of the Fund, the legal restrictions relating to the amount of bonds that may be guaranteed has generally resulted in a lower ratio of guaranteed bonds to available assets as compared to many other types of credit enhancements that may be available for Texas school district bonds. However, changes in the value of the Fund due to changes in securities markets, investment objectives of the Fund, an increase in bond issues by school districts in the State or legal restrictions on the Fund, among other factors, could adversely affect the ratio of Fund assets to guaranteed bonds and the growth of the Fund in general.

The Act requires that the Commissioner prepare, and the SBOE approve, an annual report on the status of the Guarantee Program (the Annual Report). The State Auditor audits the TEA (including the PSF) on an annual basis, as part of the audit of State financial statements. For the years ending on and after August 31, 1998, the State Auditor has separately audited the financial statements of the PSF. The TEA has filed its audited annual report for the year ended August 31, 2003 with each NRMSIR and the Texas SID (as such terms are defined above), and such report and audit, which speak only as of the respective dates thereof, are incorporated herein by reference.

Ratings of Bonds Guaranteed Under the Guarantee Program

Moody’s Investors Service, Standard & Poor’s Ratings Group, and Fitch Ratings rate bonds guaranteed by the PSF “Aaa,” “AAA” and “AAA,” respectively. Not all issuers apply for multiple ratings on their bonds, however. See “Ratings” herein.

Valuation of the PSF and Guaranteed Bonds

Permanent School Fund Valuations Fiscal Year Ended 8/31

Book Value

Market Value 1998 1999 2000 2001 2002

2003(1)

$12,534,828,68914,140,900,82116,801,407,72518,571,380,99917,533,522,66016,938,054,363

$16,296,199,389 19,615,730,341 22,275,586,452 19,021,750,040 17,047,245,212 18,037,320,374

_________________

(1) At June 30, 2004, the Book Value and the Market Value of the Fund were $17,512,937,508 and $19,632,106,789, respectively (based on unaudited data).

45522082.2 -29-

Permanent School Fund Guaranteed Bonds

At 8/31

Principal Amount(1)

1999 2000 2001 2002

2003(2)

$14,400,722,000 17,095,928,584 19,465,822,840 25,950,594,344 29,249,001,443

___________ (1) Represents original principal amount; does not reflect any subsequent accretions in value for compound interest bonds (zero coupon securities). Excludes bonds that have been refunded and released from the Guarantee Program. The TEA does not maintain records of the accreted value of capital appreciation bonds that are guaranteed under the Guarantee Program. (2) At June 30, 2004, the principal amount of bonds guaranteed by the Fund was $31,012,531,417 (based on unaudited data). Discussion and Analysis Pertaining to Fiscal Year Ended August 31, 2003

The following discussion is derived from the Annual Report for the year ended August 31, 2003, including the Message of the Executive Administrator of the Fund (the “Message”) and the Management’s Discussion and Analysis (“MD&A”) contained therein. Reference is made to the Annual Report for the complete Message and MD&A.

The Permanent School Fund saw significant changes during fiscal year 2003. Among the changes was an increase in the value of the Fund by $1.3 billion or 7.4% (investment assets increased by 6.9%). The Fund’s annual total return of 10.51% exceeded the target policy benchmark adopted by the SBOE for the Fund of 10.45%. This increase was primarily attributable to the increase in the fair value of the Fund’s investments, which was consistent with the increase in value of the markets in which those investments were made. The increase reflects positive investment returns experienced across all Fund asset categories. Fiscal year 2003 represents the first year of increases in the fair values of broad domestic and international equity investments in the past three years. The three year annualized total return for the Fund is -3.38%, while the five year annualized total return for the Fund improved to 5.35% (total return takes into consideration the change in the fair value of the Fund during the year as well as the interest and dividend income generated by the Fund’s investments). The total increase in fair value of the investment portfolio was $1,009.9 million compared to a decrease of $1,970.1 million during the previous fiscal year.

The market value of the Fund’s assets is directly impacted by the performance of the various financial markets in which the assets are invested. The most important factor affecting investment performance is the asset allocation decision made by the SBOE. The Fund’s investment in domestic and international equity securities experienced a positive return of 13.06% during the fiscal year. The domestic large capitalization equity market, as represented by the Standard & Poor’s 500 Stock Index, increased 12.07% for the year. Small and mid capitalization stocks, represented by the Standard & Poor’s 1000 Stock Index, increased 19.75%. Returns in the international developed markets were also positive. The Morgan Stanley Capital International Europe, Australia, Far East Index (MSCI EAFE) plus Canada increased 10.18%.

The Fund’s investment in fixed income securities also produced a positive return, with the Fund’s composite fixed income portfolio producing a total return of 6.04% compared to its benchmark index of

45522082.2 -30-

6.60%. The Fund’s high-grade fixed income portfolio returned 4.79% during the 12-month period ending August 31, 2003, versus 4.36% for the Lehman Brothers Aggregate Index. The high-yield portfolio lagged its benchmark index during the year, returning 16.57% versus 25.63% for the Citigroup High-Yield Cash Pay Index. This under-performance was due to somewhat more restrictive guidelines imposed on the portfolio than those that exist in that index. At August 31, 2003, approximately 30.3% of the Fund’s $6.3 billion high-grade fixed income portfolio was invested in U.S. Treasury notes and bonds, 8.65% in government agencies, 32.58% in mortgage and asset backed securities and 28.49% in corporate bonds. At August 31, 2003 approximately 87% of the Fund’s fixed income securities were classified within the high-grade domestic fixed income allocation, with approximately 13% of the fixed income investments of the Fund in the high yield domestic allocation.

Total fixed income securities decreased by $1.08 billion (-13.06%) during the 2003 fiscal year. This decrease is attributable to the reallocation of approximately $1.05 billion to the equity portfolio. In September 2002, the SBOE moved $250 million from the fixed income portfolio to equities. In April 2003, the SBOE also moved $800 million from the fixed income portfolio to equities. Total cash, receivables, and payables and short-term equivalents decreased by $162 million (-37.56%).

The revenue received from the land endowment increased from $161.1 million in fiscal 2002 to $275.6 million in fiscal 2003, or approximately 71%. The amount of revenue received from the land endowment fluctuates based upon the current prices for oil and natural gas.

As a result of the increase in the fair value of the Fund’s investment portfolio and the increase in land endowment income, the fund balance increased $1,284.8 million during the year ended August 31, 2003. During the previous fiscal year, the fund balance decreased $1,818.0 million.

Income paid to the ASF increased by $132 million or 17.3%. State legislation enacted during the year that directed the Fund to distribute income accrued but not collected as of year end accounted for approximately $127 million of this increase. Income distributed from the PSF to the ASF totaled $897 million in 2003, compared to $765 million in 2002.

At the end of the year, PSF assets guaranteed $29.25 billion in bonds issued by local school districts. During the year, the Guarantee Program generated cost savings for 712 Texas school districts. Since its inception in 1983, the Fund has guaranteed 2,590 school district bond issues totaling $41.9 billion in principal amount. During the 2003 fiscal year, the number of outstanding issues guaranteed under the Guarantee Program increased by 173 (9.9%). The dollar amount of guaranteed school bond issues outstanding increased by $3.3 billion (12.7%). The guarantee capacity of the Fund decreased by $544.9 million (-1.61%) during fiscal year 2003. This is directly attributable to the decrease in the book (cost) value of the Fund’s investment portfolio.

The SBOE made a number of changes within the portfolio during the 2003 fiscal year, including terminating most active domestic equity portfolios and shifting those funds into internally managed index portfolios that replicate the designated investment benchmarks. Additionally, as described above, during the course of the year, the Board rebalanced the portfolio by moving over $1 billion from fixed income to equity investments. The rebalancing was done in two increments, each of which preceded the dramatic rise in the equity markets. As a result, the rebalancing was a major reason that the Fund outperformed its benchmark in fiscal 2003.

During the fiscal year, the SBOE made substantial changes in the management structure of the Fund by sharply reducing the number of active external investment managers. The SBOE terminated all active large cap and small cap equity external management mandates. A portion of the equity emerging manager

45522082.2 -31-

external management mandate was consolidated into the domestic equity small cap external management mandate. The portion of the Fund that had been managed under the active large cap equity and small cap equity external management mandates was reallocated to passively managed large cap equity and small cap equity index funds. Subsequent to fiscal year end, the SBOE also eliminated the domestic high-yield fixed income external management mandate, the remaining portion of the emerging manager equity external management mandate and the international equity external management mandate. The assets managed under the high-yield fixed income external management mandate and the funds in the emerging manager external management mandate were reinvested in the passively managed equity index funds.

The change from active to passive management was made in order to reduce the amount of fees paid to external active investment managers and to improve Fund performance relative to the benchmarks adopted by the SBOE for various asset allocations.

The financial marketplace continues to undergo many changes. Many funds similar to the Fund have begun to invest in the full range of opportunities that exist not only in the domestic market, but also in the global financial markets. As a result of the change to a total return investment objective, the SBOE will continue to monitor the entire range of investment opportunities in order to select those investments that meet the Fund’s objectives for risk, return and income.

Impact on the Fund of Legislation Enacted During the 2003 Regular Legislative Session

As noted above, on September 13, 2003 the voters of the State approved the 2003 Constitutional Amendment. The 2003 Constitutional Amendment provides that the total amount distributed from the Fund to the ASF: (1) in each year of a State fiscal biennium must be an amount that is not more than six percent of the average of the market value of the Fund, excluding real property, on the last day of each of the sixteen State fiscal quarters preceding the Regular Session of the Legislature that begins before that State fiscal biennium, in accordance with the rate adopted by: (a) a vote of two-thirds of the total membership of the SBOE, taken before the Regular Session of the Legislature convenes; or (b) the Legislature by general law or appropriation, if the SBOE does not adopt a rate as provided by clause (a); and (2) over the 10-year period consisting of the current State fiscal year and the nine preceding state fiscal years may not exceed the total return on all investment assets of the Fund over the same ten-year period. For fiscal years 2004 and 2005 House Joint Resolution 68 (“HJR 68”), which proposed the 2003 Constitutional Amendment, requires that the annual distribution equal 4.5% of the average of the PSF market value. As a result, the Fund will distribute $880 million to the ASF in both fiscal 2004 and 2005. It is anticipated that the SBOE will determine the distribution rate from the Fund to the ASF for fiscal years 2006 and 2007 prior to the convening of the 79th Regular Session of the Legislature, which will occur in January 2005.

Since the enactment of a prior amendment to the Texas Constitution in 1964, the investment of the Fund has been managed with the dual objectives of producing current income for transfer to the ASF and growing the Fund for the benefit of future generations. Since the approval of the 1964 amendment, all interest and dividend income from investment of the Fund has been transferred to the ASF to support public schools in the State. As a result of this constitutional framework, the investment of the Fund has included a significant amount of fixed income investments and dividend-yielding equity investments, to produce income for transfer to the ASF. With the approval of the 2003 Constitutional Amendment, a total return distribution basis for the ASF has been implemented, and the SBOE has significantly altered the asset allocations of the Fund in response to the new distribution basis of the Fund.

From October 1994 through the first quarter of the 2000-2001 fiscal year, the asset allocation plans for the Fund targeted a mix of 35% fixed income securities and 65% equity securities. In May 2001, the SBOE opted to increase current income produced by the Fund by modifying the asset allocation policy to increase

45522082.2 -32-

the overall portfolio weighting of fixed income securities to a target of 40% fixed income with equities targeted at 60% of the investment portfolio. In January 2002, the SBOE again modified the asset allocation to a 45%/55% mix of fixed income and equity securities. In February 2004, in light of the total-return-based distribution formula required by the 2003 Constitutional Amendment, the SBOE adopted a new asset allocation for the Fund, which decreased the fixed income target to 25% of Fund investment assets and increased the allocation for equities to 75% of investment assets. At June 30, 2004, the ratio of fixed income to equity investments was approximately 24.6%/75.4% (unaudited).

Under the total-return investment objective, the investment goal of the SBOE is to grow the market value of the Fund to meet the required pay out rate of the Fund while sustaining the market value for purposes of the Guarantee Program and increasing the corpus available for future distribution to the ASF. As described above, the 2003 Constitutional Amendment restricts the annual pay out from the Fund to the total-return on all investment assets of the Fund over a rolling ten-year period. It should be noted that the heavier weighting of equity securities relative to fixed income investments could result in greater volatility of the value of the Fund. Given the greater weighting in the overall portfolio of passively managed investments, it is more likely in the future that the Fund will reflect the general performance returns of the markets in which the Fund is invested. Moreover, while the SBOE may continue to change allocations within the various asset categories of the investment portfolios, and may allocate a portion of Fund assets to investment classes other than fixed income and equities, including hedge funds and real estate and other alternative asset classes, it is assumed that the new distribution formula will result in fewer large-scale reallocations of Fund assets than have occurred in recent years as the SBOE modified Fund asset allocations on a regular basis to produce income for distribution in light of changes in the financial markets.

Notwithstanding the assumption that asset allocations for the Fund will be more consistent after the changes made to implement the 2003 Constitutional Amendment have occurred, the asset allocation of the Fund is subject to change by the SBOE from time to time based upon a number of factors, including recommendations to the SBOE made by internal investment staff and external consultants, changes made by the SBOE without regard to such recommendations and directives of the Legislature. Fund performance may also be affected by factors other than asset allocation, including, without limitation, the general performance of the securities markets in the United States and abroad; political and investment considerations including those relating to socially responsible investing; application of the prudent person investment standard, which may eliminate certain investment opportunities for the Fund; and limitations on the number and compensation of internal and external investment staff, which is subject to Legislative oversight. The Guarantee Program could also be impacted by changes in State or federal law or the implementation of new accounting standards.

In addition to the 2003 Constitutional Amendment, other legislation was enacted during the 2003 Regular Legislative Session that affects or potentially affects the PSF. Among such legislation was the appropriations bill for the State fiscal biennium that began September 1, 2003, which reduced the financial resources available to the SBOE for the external management of the Fund from approximately $22.5 million for the first year of the last biennium to $7 million for current biennium. In general, the appropriations bill that was adopted during the 2003 Regular Legislative Session included wide-ranging austerity measures in response to a projected reduction in State revenues over the current biennium, and in light of the State constitutional balanced budget requirement. The SBOE has taken steps to reduce Fund investment expenses, including placing all assets that were under external management in passively-managed investments that track certain market indices.

Senate Bill 206 (“SB 206”) was enacted during the 2003 Regular Legislative Session to conform to the requirements of the 2003 Constitutional Amendment certain State laws that relate to the administration of the Fund and to the application of moneys derived from certain real estate holdings that are dedicated to the

45522082.2 -33-

support of public schools in the State. Among the changes made by SB 206 is a provision for monthly transfers from the PSF to the ASF, which commenced in January 2004, with each transfer to be in amount of one-twelfth of the annual distribution as determined in accordance with the 2003 Constitutional Amendment. In addition, Senate Bill 1059 enacted Chapter 2263 to the Texas Government Code (the “State Investment Ethics Code”) that governs the ethics and disclosure requirements for financial advisors and other service providers who advise certain State governmental entities, including the PSF. The SBOE has adopted a new ethics rule for the PSF in response to the adoption of the new State Investment Ethics Code. See “Other Events and Disclosures.”

Other Events and Disclosures

In January 2002, following a series of public reports and legislative reviews that questioned the ethical practices of certain members of the SBOE with respect to their oversight of the management of the Fund, among other concerns relating to the Fund, the SBOE requested the State Auditor to administer and manage a fiduciary audit of the Permanent School Fund through a qualified third party. In March 2003, Cortex Applied Research Inc. (“Cortex”), the fiduciary auditor selected by the State Auditor, filed its report with the State Auditor. The report is entitled “A Fiduciary Review of Key Governance & Investment Functions of the Texas Permanent School Fund” and is available for review and download at the State Auditor’s web site: www.sao.state.tx.us/Reports/report.cfm/report/03-026 (the “Fiduciary Audit”). Among other information, the Fiduciary Audit includes sweeping recommendations regarding the PSF’s governance structure, a perceived need for additional guiding parameters and a recommendation for changing the spending and asset allocation policies of the Fund. The implementation of a number of the recommendations made by the fiduciary auditor would require legislative action, and in some cases, approval of additional constitutional amendments. Among the suggestions that would require additional legislative action, is a recommendation to restructure the governance of the Fund, by providing for an appointed board that includes members with investment expertise to administer the Fund, in place of the current elected SBOE. The Fiduciary Audit states that the Legislature, by retaining budget approval and assigning to the Governor the power to appoint the Commissioner of Education, who in turn appoints the Executive Administrator of the Fund, has established an organizational structure that does not support effective fiduciary decision-making with respect to the Fund. The Fiduciary Audit also concluded that the former income-based spending policy of the Fund made it difficult to meet the perceived objective of intergenerational equity of the Fund. As described under “Impact on the Fund of Legislation Enacted During the 2003 Regular Legislative Session,” the adoption of the 2003 Constitutional Amendment will require the implementation of a spending policy that is consistent with certain recommendations made in the Fiduciary Audit. A number of SBOE management decisions relating to the Fund are described in the Fiduciary Audit as examples of past decision making that reflects a lack of sufficient analysis and consideration, and a number of key management decisions made by the SBOE with respect to the Fund since 1997 are characterized by the Fiduciary Audit as imprudent. Finally, the Fiduciary Audit states that there are inadequate mechanisms in place to enforce the SBOE code of ethics that governs the management of the Fund. Among the suggestions made to reduce the administrative costs of the Fund, as well as potential conflicts of interest, are that the SBOE increase the use of internal staff for the investment of the Fund and that it increase the use of passive investment measures that seek to match, rather than outperform, market benchmarks. A number of recommendations to both the Legislature and the SBOE are included in the Fiduciary Audit, although, except with respect to the 2003 Constitutional Amendment, few of the recommendations were enacted into law by the Legislature during the 2003 Regular Legislative Session. The Fiduciary Audit, which was formally presented to the SBOE on July 10, 2003, also includes responses made to a draft of the Fiduciary Audit by four members of the SBOE, some of which disagree with the accounts of alleged fiduciary breaches and other findings and recommendations made in the Fiduciary Audit.

45522082.2 -34-

Since the occurrence of the events described in the Fiduciary Audit, the SBOE has adopted a new code of ethics, which includes prohibitions on sharing confidential information, avoiding conflict of interests and requiring disclosure filings with respect to contributions made or received in connection with the operation or management of the Fund. The code of ethics applies to members of the SBOE as well as to persons who are responsible by contract or by virtue of being a TEA PSF staff member for managing, investing, executing brokerage transactions, providing consultant services, or acting as a custodian of the PSF, and persons who provide investment and management advice to a member of the SBOE, with or without compensation under certain circumstances. The code of ethics is codified in the Texas Administrative Code at 19 TAC sections 33.5 et seq., and is available on the TEA web site at www.tea.state.tx.us/rules/tac/chapter033/index.html. In accordance with the provisions of the State Investment Ethics Code, which was enacted during the 2003 Regular Legislative Session, and which governs ethics disclosure requirements for financial advisors, financial consultants, money investment managers and brokers that provide services to State agencies, the SBOE adopted a new ethics rule for the Fund in November 2003. In accordance with certain provisions of the Texas Education Code, the State Auditor’s Office reviewed the rule changes made by the SBOE and, in a report issued on November 5, 2003, concluded that the new ethics rule did not fully implement the State Investment Ethics Code. In particular, the State Auditor has reported that the new PSF ethics rule covers fewer people and entities than are prescribed in the State Investment Ethics Code. The report of the State Auditor that accompanied the State Auditor’s fiscal year 2003 audit of the Fund stated that the State Investment Ethics Code was not in effect during the 2003 fiscal year, and thus the failure of the SBOE to adopt a rule that the State Auditor deems to be in compliance with the State Investment Ethics Code did not result in a non-compliance event for the period covered by the 2003 audit, but the State Auditor noted that it is possible that the exclusions could cause the PSF to be noncompliant with the State Investment Ethics Code for purposes of the fiscal year 2004 financial audit. The November 2003 report of the State Auditor also stated that in adopting the new rules, the SBOE did not take advantage of its opportunity to address previous comments regarding the Fund’s ethics rule that were suggested by the State Auditor’s Office, the Texas Ethics Commission, and Cortex. During calendar year 2004, the SBOE is expected to consider adopting changes to its ethics rules in an attempt to address the comments of the State Auditor’s Office, but no assurance can be given that such changes will fully address the State Auditor’s concerns regarding the Agency’s ethics rules.

As of August 1, 2004, certain lawsuits were pending against the State and/or the GLO, which challenge the Fund’s title to certain real property and/or past or future mineral income from that property. Reference is made to the Annual Report for a description of such lawsuits that are pending, which may represent contingent liabilities of the Fund.

PSF Continuing Disclosure Undertaking

The SBOE has adopted an investment policy rule (the “TEA Rule”) pertaining to the PSF and the Guarantee Program. The TEA Rule is codified in Section H of the TEA Investment Procedure Manual, which relates to the Guarantee Program. Through the adoption of the TEA Rule and its commitment to guarantee the Bonds, the SBOE has made the following agreement for the benefit of the District and holders and beneficial owners of the Bonds. The TEA (or its successor with respect to the management of the Guarantee Program) is required to observe the agreement for so long as it remains an “obligated person,” within the meaning of Securities and Exchange Commission (“SEC”) Rule 15c2-12 (“Rule 15c2-12”), with respect to the Bonds. Under the agreement, the TEA will be obligated to provide annually certain updated financial information and operating data, and timely notice of specified material events, to certain information vendors. This information will be available to securities brokers and others who subscribe to receive the information from the vendors.

45522082.2 -35-

Annual Reports

The TEA will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the Guarantee Program and the PSF of the general type included in this Official Statement under the heading “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM.” The information also includes the Annual Report. The TEA will update and provide this information within six months after the end of each fiscal year. The TEA will provide the updated information to each NRMSIR and to the SID.

The TEA may provide updated information in full text or may incorporate by reference certain other publicly-available documents, as permitted by Rule 15c2-12. The updated information includes audited financial statements of, or relating to, the State or the PSF, when and if such audits are commissioned and available. Financial statements of the State will be prepared in accordance with generally accepted accounting principles as applied to state governments, as such principles may be changed from time to time, or such other accounting principles as the State Auditor is required to employ from time to time pursuant to State law or regulation. The financial statements of the Fund were prepared to conform to U.S. Generally Accepted Accounting Principles as established by the Governmental Accounting Standards Board.

The Fund is reported by the State of Texas as a permanent fund and accounted for on a current financial resources measurement focus and the modified accrual basis of accounting. Measurement focus refers to the definition of the resource flows measured. Under the modified accrual basis of accounting, all revenues reported are recognized based on the criteria of availability and measurability. Assets are defined as available if they are in the form of cash or can be converted into cash within 60 days to be usable for payment of current liabilities. Amounts are defined as measurable if they can be estimated or otherwise determined. Expenditures are recognized when the related fund liability is incurred.

The State’s current fiscal year end is August 31. Accordingly, the TEA must provide updated information by the last day of February in each year, unless the State changes its fiscal year. If the State changes its fiscal year, the TEA will notify each NRMSIR and any SID of the change.

Material Event Notices

The TEA will also provide timely notices of certain events to certain information vendors. The TEA will provide notice of any of the following events with respect to the Guarantee Program, if such event is material within the meaning of the federal securities laws: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Guarantee Program; (7) modifications to rights of holders of Bonds guaranteed by the Guarantee Program; (8) Bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of Bonds guaranteed by the Guarantee Program; and (11) rating changes. (Neither the Act nor any other law, regulation or instrument pertaining to the Guarantee Program make any provision with respect to the Guarantee Program for bond calls, debt service reserves, credit enhancement, liquidity enhancement, or early redemption.) In addition, the TEA will provide timely notice of any failure by the TEA to provide information, data, or financial statements in accordance with its agreement described above under “Annual Reports.” The TEA will provide each notice described in this paragraph to any SID and to either each NRMSIR or the Municipal Securities Rulemaking Board (“MSRB”).

45522082.2 -36-

Availability of Information from NRMSIRs and SID

The TEA has agreed to provide the foregoing information only to NRMSIRs and any SID. The information will be available to holders of Bonds only if the holders comply with the procedures and pay the charges established by such information vendors or obtain the information through securities brokers who do so.

The Municipal Advisory Council of Texas has been designated by the State of Texas as a SID, and the SEC staff has issued a no-action letter confirming that designation. The address of the Municipal Advisory Council of Texas is 600 West 8th Street, P.O. Box 2177, Austin, Texas 78768-2177, and its telephone number is 512/476-6947.

Limitations and Amendments

The TEA has agreed to update information and to provide notices of material events only as described above. The TEA has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The TEA makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The TEA disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders of Bonds may seek a writ of mandamus to compel the TEA to comply with its agreement.

The continuing disclosure agreement of the TEA is made only with respect to the PSF and the Bond Guarantee Program. The District has made a continuing disclosure undertaking in accordance with Rule 15c2-12 with respect to its obligations arising under Rule 15c2-12 pertaining to financial and operating data concerning the District and notices of material events relating to the Bonds. A description of the District’s undertaking is included elsewhere in this Official Statement.

This continuing disclosure agreement may be amended by the TEA from time to time to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the TEA, but only if (1) the provisions, as so amended, would have permitted an underwriter to purchase or sell Bonds in the primary offering of the Bonds in compliance with Rule 15c2-12, taking into account any amendments or interpretations of Rule 15c2-12 since such offering as well as such changed circumstances and (2) either (a) the holders of a majority in aggregate principal amount of the outstanding bonds guaranteed by the Guarantee Program consent to such amendment or (b) a person that is unaffiliated with the TEA (such as nationally recognized bond counsel) determines that such amendment will not materially impair the interest of the holders and beneficial owners of the bonds guaranteed by the Guarantee Program. The TEA may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provision of Rule 15c2-12 or a court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling bonds guaranteed by the Guarantee Program in the primary offering of such bonds.

Compliance with Prior Undertakings

The TEA has not previously failed to substantially comply with its previous continuing disclosure agreements in accordance with Rule 15c2-12.

45522082.2 -37-

SEC Exemptive Relief

On February 9, 1996, the TEA received a letter from the Chief Counsel of the SEC that pertains to the availability of the “small issuer exemption” set forth in paragraph (d)(2) of Rule 15c2-12. The letter provides that Texas school districts which offer municipal securities that are guaranteed under the Bond Guarantee Program may undertake to comply with the provisions of paragraph (d)(2) of Rule 15c2-12 if their offerings otherwise qualify for such exemption, notwithstanding the guarantee of the school district securities under the Bond Guarantee Program. Among other requirements established by Rule 15c2-12, a school district offering may qualify for the small issuer exemption if, upon issuance of the proposed series of securities, the school district will have not more than $10 million of outstanding municipal securities. The TEA has filed the SEC letter with each NRMSIR and the Texas SID, and reference should be made to the letter for the complete terms and conditions thereof.

TAX RATE LIMITATIONS

A school district is authorized to levy maintenance and operation taxes subject to approval of a proposition submitted to district voters under Section 45.003 (d), as amended, Texas Education Code. The maximum tax rate that may be approved by voters for maintenance and operations is $1.50 per $100 of assessed valuation. The maximum voted maintenance tax rate for the District is $1.50 per $100 of assessed valuation as approved by the voters at an election held on December 6, 1958, pursuant to the provisions of Texas Revised Civil Statutes Annotated Article 2784e-1, as amended (“Article 2784e-1”). Article 2784e-1 limits the District’s annual, local maintenance and operations tax levy based upon a comparison between the District’s outstanding bonded indebtedness and the District’s taxable assessed value per $100 of assessed valuation. Article 2784e-1 provides for a reduction of $0.10 for each one percent (1%) or major fraction thereof increase in bonded indebtedness beyond seven percent (7%) of assessed value of property in the District. This limitation is capped when the District’s bonded indebtedness is ten percent (10%) (or greater) of the District’s assessed valuation which would result in an annual maintenance and operations tax levy not to exceed $1.20. The Texas Attorney General in reviewing the District’s transcript of proceedings will allow the District to reduce the amount of its outstanding bonded indebtedness by the amount of funds (on a percentage basis) that the District receives in State assistance for the repayment of this bonded indebtedness (for example, if the District anticipates that it will pay 75% of its bonded indebtedness from State assistance, for the purposes of Article 2784e-1, the Texas Attorney General will assume that only 25% of the District’s bonded indebtedness is outstanding and payable from local ad valorem taxes). This administrative determination has not been litigated in a Texas court. Furthermore, a school district cannot annually increase its maintenance tax rate in excess of the district’s “rollback tax rate” without submitting such tax rate to a referendum election and a majority of the voters voting at such election approving the adopted rate. (See “TAX RATE LIMITATIONS * Rollback Tax Rate and Election” herein.)

A school district is also authorized to issue bonds and levy taxes for payment of bonds subject to voter approval of a proposition submitted to the voters under Section 45.003(b)(1), Texas Education Code, as amended, which provides for a tax unlimited as to rate or amount for the support of school district bonded indebtedness. (See “STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS” herein.)

Chapter 45 of the Texas Education Code, as amended, requires a district to demonstrate to the Texas Attorney General that it has the prospective ability to pay debt service on a proposed issue of bonds, together with debt service on other outstanding “new debt” of the district, from a tax levied at a rate of $0.50 per $100 of assessed valuation before bonds may be issued. In demonstrating the ability to pay debt service at a rate of $0.50, a district may take into account State allotments to the district which effectively reduce the district’s local share of debt service. Once the prospective ability to pay such tax has been shown and the bonds are issued, a district may levy an unlimited tax to pay debt service. Taxes levied to pay debt

45522082.2 -38-

service on bonds approved by district voters at an election held on or before April 1, 1991 and issued before September 1, 1992 (or debt issued to refund such bonds) are not subject to the foregoing threshold tax rate test. The Bonds are new debt and are subject to the $0.50 threshold tax rate test. A district may demonstrate its ability to comply with the $0.50 threshold tax rate test by applying the $0.50 tax rate to an amount equal to 90% of projected future taxable value of property in the district, as certified by a registered professional appraiser, anticipated for the earlier of the tax year five years after the current tax year or the tax year in which the final payment for the bonds is due. However, if a district uses projected future taxable values to meet the $0.50 threshold tax rate test and subsequently imposes a tax a tax rate greater than $0.50 per $100 of valuation to pay for bonds subject to the test, then for subsequent bond issues, the Attorney General must find that the district has the projected ability to pay principal and interest on the proposed bonds and all previously issued bonds subject to the $0.50 threshold tax rate test from a tax rate of $0.45 per $100 of valuation. The District has not used projected property values to satisfy this threshold test.

Taxes levied by the District are a personal obligation of the owner of the property. On January 1 of each year, a tax lien attaches to property to secure the payment of all taxes, penalties and interest ultimately imposed for the year on the property. The lien exists in favor of the State and each taxing unit, including the District, having the power to tax the property. The District’s tax lien is on a parity with tax liens of all other such taxing units. A tax lien on real property has priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien. Personal property under certain circumstances is subject to seizure and sale for the payment of delinquent taxes, penalty and interest. At any time after taxes on property become delinquent, the District may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the District must join other taxing units that have claims for delinquent taxes against all or part of the same property. The ability of the District to collect delinquent taxes by foreclosure may be adversely affected by the amount of taxes owed to other taxing units, adverse market conditions, taxpayer redemption rights, or bankruptcy proceedings which restrain the collection of a taxpayer’s debt. Federal bankruptcy law provides that an automatic stay of actions by creditors and other entities, including governmental units, goes into effect with the filing of any petition in bankruptcy. The automatic stay prevents governmental units from foreclosing on property and prevents liens for post-petition taxes from the bankruptcy court. In many cases post-petition taxes are paid as an administrative expense of the estate in bankruptcy or by order of the bankruptcy court.

Rollback Tax Rate and Election

Before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the District, the Board of Trustees adopts a tax rate per $100 taxable value for the current year. The tax rate consists of two components: (1) a rate for funding of maintenance and operation expenditures, and (2) a rate for debt service.

In setting its annual tax rate, the governing body of a school district generally cannot adopt a tax rate exceeding the district’s “rollback tax rate” without approval by a majority of the voters voting at an election approving the higher rate. The rollback tax rate is the sum of (1) the tax rate that, applied to the current tax values, would provide local maintenance and operating funds, when added to Tier One and Tier Two state funds to be distributed to the district for the school year beginning in the current tax year, in the same amount as would have been available to the district in the preceding year if the funding elements of wealth equalization and state funding for the current year had been in effect for the preceding year, (2) the rate of $0.06; and (3) the district’s current debt rate. For tax years 2003 through 2008, the rollback tax rate will also include the tax rate that, applied to current tax values, would impose taxes in an amount sufficient for the district to fund its minimum local effort requirement for employee health care coverage.

45522082.2 -39-

DEBT LIMITATIONS

Under State law, there is no explicit bonded indebtedness limitation, although the tax rate limits described above under “TAX RATE LIMITATIONS” effectively impose a limit on the incurrence of debt. Such tax rate limits require school districts to demonstrate the ability to pay “new debt” from a tax rate of $0.50. In demonstrating compliance with the requirement, a district may take into account State equalization payments and, effective September 1, 1997, if compliance with such requirement is contingent on receiving state assistance, a district may not adopt a tax rate for a year for purposes of paying the principal of and interest on the bonds unless the district credits to the interest and sinking fund of the bond the amount of state assistance received or to be received in that year. The State Attorney General reviews a district’s calculations showing the compliance with such test as a condition to the legal approval of the debt. The Bonds are new debt and subject to this limitation.

EMPLOYEES’ RETIREMENT PLAN

The District’s employees participate in a retirement plan with the State of Texas; the Plan is administered by the Teacher Retirement System of Texas. The District has no pension fund expenditures or liabilities.

Formal collective bargaining agreements relating directly to wages and other conditions of employment are prohibited by State law, as are strikes by teachers. There are various local, state and national organized employee groups who engage in efforts to better terms and conditions of employment of school employees. Some districts have adopted a policy to consult with employer groups with respect to certain terms and conditions of employment. Some examples of these groups are the Texas State Teachers Association, the Texas Classroom Teachers Association, the Association of Texas Professional Educators and the National Education Association.

RATINGS

The Bonds are rated “Aaa” by Moody’s Investors Service (Moody’s), based upon the guarantee by Permanent School Fund. See “THE PERMANENT SCHOOL FUND GUARANTEE” herein. The underlying unenhanced rating of the District’s unlimited tax debt is Baa2 by Moody’s (See “RATINGS” herein). An explanation of the significance of such ratings may be obtained from Moody’s. The rating of the Bonds by Moody’s reflects only the view of such company at the time the ratings are given, and the District makes no representations as to the appropriateness of the rating. There is no assurance that the rating will continue for any given period of time, or that the rating will not be revised downward or withdrawn entirely by Moody’s, if, in the judgment of this company, circumstances so warrant. Any such downward revision or withdrawal of the rating may have an adverse effect on the market price of the Bonds.

The above rating is not a recommendation to buy, sell or hold the Bonds, and such rating may be subject to revision or withdrawal at any time by the rating agency. Any downward revision or withdrawal of the rating may have an adverse effect on the market price of the Bonds.

LEGAL MATTERS

The District will furnish the Underwriters with a complete transcript of proceedings incident to the authorization and issuance of the Bonds, including the unqualified approving legal opinion of the Attorney General of the State of Texas to the effect that the Initial Bond is a valid and legally binding obligation of the District, and based upon examination of such transcript of proceedings, the approval of certain legal matters by Bond Counsel, to the effect that the Bonds, issued in compliance with the provisions of the Order, are valid and legally binding obligations of the District and, subject to the qualifications set forth herein under “TAX MATTERS”, the interest on the Bonds is exempt from federal income taxation under

45522082.2 -40-

existing statutes, published rulings, regulations, and court decisions. Bond Counsel has been retained by and only represents the District. In its capacity as Bond Counsel, McCall, Parkhurst & Horton L.L.P., San Antonio, Texas has reviewed the information under the captions “THE BONDS” (except under the subheadings “Payment Record” and “Sources and Uses of Funds” as to which no opinion is expressed), “REGISTRATION, TRANSFER AND EXCHANGE”, “STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS”, “CURRENT SCHOOL FINANCE SYSTEM”, “TAX MATTERS”, “REGISTRATION AND QUALIFICATION OF BONDS FOR SALE”, “LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS”, AND “CONTINUING DISCLOSURE OF INFORMATION” (except under the subheading “Compliance with Prior Agreements” as to which no opinion is expressed) in the Official Statement and such firm is of the opinion that the information relating to the Bonds and the Order contained under such captions is a fair and accurate summary of the information purported to be shown and that the information and descriptions contained under such captions relating to the provisions of applicable state and federal laws are correct as to matters of law. The customary closing papers, including a certificate to the effect that no litigation of any nature has been filed or is then pending to restrain the issuance and delivery of the Bonds or which would affect the provisions made for their payment or security, or in any manner questioning the validity of the Bonds will also be furnished. The legal fees to be paid Bond Counsel for services rendered in connection with the issuance of Bonds are contingent on the sale and delivery of the Bonds. The legal opinion of Bond Counsel will accompany the bonds deposited with DTC or will be printed on the definitive bonds in the event of the discontinuance of the Book-Entry-Only System. Certain matters will be passed on for the Underwriters by Fulbright & Jaworski L.L.P., San Antonio, Texas. The fee of Fulbright & Jaworski L.L.P., as counsel to the Underwriters, is contingent upon the sale and delivery of the Bonds.

The various legal opinions to be delivered concurrently with the delivery of the Bonds express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of the expression of professional judgment, of the transaction opined upon, or of the future performance of the parties to the transaction. Nor does the rendering of an opinion guarantee the outcome of any legal dispute that may arise out of the transaction.

TAX MATTERS

Opinion

On the date of initial delivery of the Bonds, McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel, will render its opinion that, in accordance with statutes, regulations, published rulings and court decisions existing on the date thereof (“Existing Law”), (1) interest on the Bonds for federal income tax purposes will be excludable from the “gross income” of the holders thereof and (2) the Bonds will not be treated as “specified private activity bonds”, the interest on which would be included as an alternative minimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the “Code”). Except as stated above, Bond Counsel will express no opinion as to any other federal, state or local tax consequences of the purchase, ownership or disposition of the Bonds. See Appendix D -- Form of Opinion of Bond Counsel.

In rendering its opinion, Bond Counsel will rely upon (a) certain information and representations of the District, including information and representations contained in the District’s federal tax certificate, (b) the verification report prepared by Grant Thornton LLP, Certified Public Accountants, and (c) covenants of the District contained in the Bond documents relating to certain matters, including arbitrage and the use of the proceeds of the Bonds and the property financed or refinanced therewith. Although it is expected that the Bonds will qualify as tax-exempt obligations for federal income tax purposes as of the date of issuance, the

45522082.2 -41-

tax-exempt status of the Bonds could be affected by future events. However, future events beyond the control of the District, as well as the failure to observe the aforementioned representations or covenants, could cause the interest on the Bonds to become taxable retroactively to the date of issuance.

The Code and the regulations promulgated thereunder contain a number of requirements that must be satisfied subsequent to the issuance of the Bonds in order for interest on the Bonds to be, and to remain, excludable from gross income for federal income tax purposes. Failure to comply with such requirements may cause interest on the Bonds to be included in gross income retroactively to the date of issuance of the Bonds. The opinion of Bond Counsel is conditioned on compliance by the District with such requirements subsequent to the issuance of the Bonds.

Bond Counsel’s opinion represents its legal judgment based upon its review of Existing Law and the reliance on the aforementioned information, representations and covenants. Bond Counsel’s opinion is not a guarantee of a result. The Existing Law is subject to change by the Congress and to subsequent judicial and administrative interpretation by the courts and the Department of the Treasury. There can be no assurance that such Existing Law or the interpretation thereof will not be changed in a manner which would adversely affect the tax treatment of the purchase, ownership or disposition of the Bonds.

A ruling was not sought from the Internal Revenue Service by the District with respect to the Bonds or the property financed or refinanced with the proceeds of the Bonds. No assurances can be given as to whether or not the Internal Revenue Service will commence an audit of the Bonds, or as to whether the Internal Revenue Service would agree with the opinion of Bond Counsel. If an audit is commenced, under current procedures the Internal Revenue Service is likely to treat the District as the taxpayer and the Bondholders may have no right to participate in such procedure. No additional interest will be paid upon any determination of taxability.

Federal Income Tax Accounting Treatment of Original Issue Discount

The initial public offering price to be paid for one or more maturities of the Bonds (the “Original Issue Discount Bonds”) may be less than the principal amount thereof or one or more periods for the payment of interest on the bonds may not be equal to the accrual period or be in excess of one year. In such event, the difference between (i) the “stated redemption price at maturity” of each Original Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond would constitute original issue discount. The “stated redemption price at maturity” means the sum of all payments to be made on the Bonds less the amount of all periodic interest payments. Periodic interest payments are payments which are made during equal accrual periods (or during any unequal period if it is the initial or final period) and which are made during accrual periods which do not exceed one year.

Under Existing Law, any owner who has purchased such Original Issue Discount Bond in the initial public offering is entitled to exclude from gross income (as defined in section 61 of the Code) an amount of income with respect to such Original Issue Discount Bond equal to that portion of the amount of such original issue discount allocable to the accrual period. For a discussion of certain collateral federal tax consequences, see discussion set forth below.

In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Bond was held by such initial owner) is includable in gross income.

45522082.2 -42-

Under Existing Law, the original issue discount on each Original Issue Discount Bond is accrued daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the date of the Bonds and ratably within each such six-month period) and the accrued amount is added to an initial owner’s basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (a) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (b) the amounts payable as current interest during such accrual period on such Original Issue Discount Bond.

The federal income tax consequences of the purchase, ownership, redemption, sale or other disposition of Original Issue Discount Bonds which are not purchased in the initial offering at the initial offering price may be determined according to rules which differ from those described above. All owners of Original Issue Discount Bonds should consult their own tax advisors with respect to the determination for federal, state and local income tax purposes of the treatment of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Bonds.

Collateral Federal Income Tax Consequences

The following discussion is a summary of certain collateral federal income tax consequences resulting from the purchase, ownership or disposition of the Bonds. This discussion is based on Existing Law, all of which are subject to change or modification, retroactively.

The following discussion is applicable to investors, other than those who are subject to special provisions of the Code, such as financial institutions, property and casualty insurance companies, life insurance companies, owners of interests in a FASIT, individual recipients of Social Security or Railroad Retirement benefits, individuals allowed an earned income credit, certain S corporations with Subchapter C earnings and profits and taxpayers who may be deemed to have incurred or continued indebtedness to purchase tax-exempt obligations.

THE DISCUSSION CONTAINED HEREIN MAY NOT BE EXHAUSTIVE. INVESTORS, INCLUDING THOSE WHO ARE SUBJECT TO SPECIAL PROVISIONS OF THE CODE, SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TREATMENT WHICH MAY BE ANTICIPATED TO RESULT FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF TAX-EXEMPT OBLIGATIONS BEFORE DETERMINING WHETHER TO PURCHASE THE BONDS.

Interest on the Bonds will be includable as an adjustment for “adjusted current earnings” to calculate the alternative minimum tax imposed on corporations by section 55 of the Code. Section 55 of the Code imposes a tax equal to 20 percent for corporations, or 26 percent for noncorporate taxpayers (28 percent for taxable income exceeding $175,000), of the taxpayer’s “alternative minimum taxable income,” if the amount of such alternative minimum tax is greater than the taxpayer’s regular income tax for the taxable year.

Interest on the Bonds may be subject to the “branch profits tax” imposed by section 884 of the Code on the effectively-connected earnings and profits of a foreign corporation doing business in the United States.

45522082.2 -43-

Under section 6012 of the Code, holders of tax-exempt obligations, such as the Bonds, may be required to disclose interest received or accrued during each taxable year on their returns of federal income taxation.

Section 1276 of the Code provides for ordinary income tax treatment of gain recognized upon the disposition of a tax-exempt obligation, such as the Bonds, if such obligation was acquired at a “market discount” and if the fixed maturity of such obligation is equal to, or exceeds, one year from the date of issue. Such treatment applies to “market discount bonds” to the extent such gain does not exceed the accrued market discount of such bonds; although for this purpose, a de minimis amount of market discount is ignored. A “market discount bond” is one which is acquired by the holder at a purchase price which is less than the stated redemption price at maturity or, in the case of a bond issued at an original issue discount, the “revised issue price” (i.e., the issue price plus accrued original issue discount). The “accrued market discount” is the amount which bears the same ratio to the market discount as the number of days during which the holder holds the obligation bears to the number of days between the acquisition date and the final maturity date.

State, Local and Foreign Taxes

Investors should consult their own tax advisors concerning the tax implications of the purchase, ownership or disposition of the Bonds under applicable state or local laws. Foreign investors should also consult their own tax advisors regarding the tax consequences unique to investors who are not United States persons.

LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS

Section 1201.041 of the Public Securities Procedures Act (Chapter 1201, Texas Government Code) provides that the Bonds are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. With respect to investment in the Bonds by municipalities or other political subdivisions or public agencies of the State of Texas, the Public Funds Investment Act, Chapter 2256, Texas Government Code, requires that the Bonds be assigned a rating of “A” or its equivalent as to investment quality by a national rating agency. See “RATINGS” herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Bonds are legal investments for state banks, savings banks, trust companies with at least $1 million of capital, and savings and loan associations. The Bonds are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value.

The District has made no investigation of other laws, rules, regulations or investment criteria which might apply to such institutions or entities or which might limit the suitability of the Bonds for any of the foregoing purposes or limit the authority of such institutions or entities to purchase or invest in the Bonds for such purposes. The District has made no review of laws in other states to determine whether the Bonds are legal investments for various institutions in those states.

INVESTMENT POLICIES

Available District funds are invested as authorized by Texas law and in accordance with investment policies approved by the Board of Trustees. Both State law and the District’s investment policies are subject to change.

45522082.2 -44-

Legal Investments

Under Texas law, the District is authorized to invest in (1) obligations, including letters of credit, of the United States or its agencies and instrumentalities, (2) direct obligations of the State of Texas or its agencies and instrumentalities, (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States, (4) other obligations, the principal of and interest on which are unconditionally guaranteed or insured by, or backed by the full faith and credit of the State of Texas or the United States or their respective agencies and instrumentalities, (5) obligations of states, agencies, counties, cities, and other political subdivisions or any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent, (6) certificates of deposit and shared certificates issued by a state or national bank, a savings bank, or by a state or federal credit union, which is domiciled in the State of Texas that are guaranteed or insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (5) and clause (13) or in any other manner and amount provided by law for District deposits, (7) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1) and deposited at the time the investment is made with the District or with a third party selected and approved by the District, and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas, (8) bankers’ acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency, (9) commercial paper that is rated at least A-1 or P-1 or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank, (10) no-load money market mutual funds registered with and regulated by the Securities and Exchange Commission that have a dollar weighted average portfolio maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share, (11) no-load mutual fund registered with the Securities and Exchange Commission that: have an average weighted maturity of less than two years; invest exclusively in obligations described in the preceding clauses and clause (13), and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent, (12) public funds investment pools that have an advisory board which includes participants in the pool and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent or no lower than investment grade with a weighted average maturity no greater than 90 days, and (13) bonds issued, assumed or guaranteed by the State of Israel. Texas law also permits the District to invest bond proceeds in a guaranteed investment contract subject to the limitations set forth in Chapter 2256, as amended, Texas Government Code.

Effective September 1, 2003, entities such as the District may enter into securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (5) and clause (13) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than A or its equivalent or (c) cash invested in obligations described in clauses (1) through (5) and clause (13) above, clause (9) above and clauses (10) and (11) above, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to such investing entity or a third party designated such investing entity; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less.

45522082.2 -45-

The District may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pool are rated no lower than AAA or AAAm or an equivalent by at least one nationally recognized rating service. The District is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index.

Investment Policies

Under Texas law, the District is required to invest its funds in accordance under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that includes a list of authorized investments for District funds, maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pool fund groups. All District funds must be invested consistent with a formally adopted “Investment Strategy Statement” that specifically addresses each funds’ investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield.

Under Texas law, District investments must be made “with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person’s own affairs, not for speculation, but for investment, considering the probable safety of capital and the probable income to be derived.” At least quarterly the investment officers of the District must submit to the Board of Trustees an investment report detailing (1) the investment position of the District, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, any additions and changes to market value and the ending value of each pooled fund group, (4) the book value and market value of each separately listed asset at the beginning and end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to (a) adopted investment strategy statements and (b) state law. No person may invest District funds without express written authority from the Board of Trustees.

Additional Provisions

Under Texas law the District is additionally required to (1) annually review its adopted policies and strategies, (2) require any investment officers’ with personal business relationships or relative with firms seeking to sell securities to the entity to disclose the relationship and file a statement with the Texas Ethics Commission and the Board of Trustees, (3) require the registered principal of firms seeking to sell securities to the District to (a) receive and review the District’s investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude imprudent investment activities, and (c) deliver a written statement attesting to these requirements, (4) perform an annual audit of the management controls on investments and adherence to the District’s investment policy, (5) provide specific investment training for the Treasurer, Chief Financial Officer and investment officers, (6) restrict reverse repurchase agreements to not more than 90 days and restrict the investments of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement, (7) restrict the investment in non-money market mutual funds of any portion of bond proceeds, reserves and funds held for debt service and to no more than 15% of the entity’s monthly average fund balance, excluding bond proceeds and reserves and other funds held for

45522082.2 -46-

debt service, and (8) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements.

District policies require investments in accordance with applicable state law. All investments which are authorized by State statute, with the exception of bankers’ acceptances, commercial paper, collateralized mortgage obligations, reverse repurchase agreements, no-load money market mutual funds, no-load mutual funds, and bonds issued, assumed or guaranteed by the State of Israel, are acceptable for investment purposes under the District’s Statement of Investment Policy. The District generally invests in obligations of the United States or its agencies and instrumentalities.

Under Texas law, the District may contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the District retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the District must do so by order, ordinance or resolution. The District has not contracted with, and has no present intention of contracting with, any such investment management firm or the State Securities Board to provide such services.

Current Investments

As of August 31, 2004 the carrying amount of the District’s deposits (cash, certificates of deposit, and interest bearing savings accounts included in temporary investments) were as follows:

Cash $ 441,982.25 TexPool 6,794,696.52 Total $7,236,678.77

The market value of such investments (as determined by the District by reference to published quotations, dealer bids, and comparable information) was approximately 100% of their book value. No funds of the District are invested in derivative securities, i.e., securities whose rate of return is determined by reference to some other instrument, index, or commodity.

LITIGATION

Except as disclosed in this Official Statement, the District is not a party to any litigation or other proceedings pending or, to its knowledge, threatened, in any court, agency or other administrative body (either state or federal) which, if decided adversely to the District, would have a material adverse effect on the financial statements of the District.

REGISTRATION AND QUALIFICATION OF BONDS FOR SALE

No registration statement relating to the Bonds has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2). The Bonds have not been approved or disapproved by the Securities and Exchange Commission, nor has the Securities and Exchange Commission passed upon the accuracy or adequacy of the Official Statement. The Bonds have not been registered or qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been registered or qualified under the securities acts of any other jurisdiction. The District assumes no responsibility for registration or qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for registration

45522082.2 -47-

or qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration or qualification provisions.

FINANCIAL ADVISOR

M. E. Allison & Co., Inc. is employed as Financial Advisor to the District to assist in the issuance of the Bonds. In this capacity, the Financial Advisor has compiled certain data relating to the Bonds that is contained in this Official Statement. The Financial Advisor has not independently verified any of the data contained herein or conducted a detailed investigation of the affairs of the District to determine the accuracy or completeness of this Official Statement. Because of their limited participation, the Financial Advisor assumes no responsibility for the accuracy or completeness of any of the information contained herein. The fee of the Financial Advisor for services with respect to the Bonds is contingent upon the issuance and sale of the Bonds. In the normal course of business, the Financial Advisor may from time to time sell investment securities to the District for the investment of bond proceeds or other funds of the District upon the request of the District.

The Financial Advisor has provided the following sentence for inclusion in this Official Statement. The Financial Advisor has reviewed the information in this Official Statement in accordance with, and as part of, its responsibilities to the District, and, as applicable, to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Financial Advisor does not guarantee the accuracy or completeness of such information.

CONTINUING DISCLOSURE OF INFORMATION

In the Order, the District has made the following agreement for the benefit of the holders and beneficial owners of the Bonds. The District is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the District will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to certain information vendors. This information will be available to securities brokers and others who subscribe to receive the information from the vendors. See “THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM” for a description of the continuing disclosure undertaking to provide certain updated financial information and operating data annually with respect to the Permanent School Fund and the State of Texas, as the case may be, and to provide timely notice of specified material events related to the guarantee to certain information vendors.

Annual Reports

The District will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes quantitative financial information and operating data with respect to the District of the general type included in this Official Statement in Table 1 herein and Appendix A, Tables 1 through 8, and in Appendix C. The District will update and provide this information within six months after the end of each fiscal year commencing 2004. The District will provide the updated information to each nationally recognized municipal securities information repository (“NRMSIR”) and to any state information depository (“SID”) that is designated by the State of Texas and approved by the staff of the United States Securities and Exchange Commission (the “SEC”).

The District may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-12. The updated information will include audited financial statements, if the District commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the District will provide unaudited

45522082.2 -48-

financial statements by the required time and audited financial statements when and if the audit report becomes available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix C or such other accounting principles as the District may be required to employ from time to time pursuant to state law or regulation.

The District’s current fiscal year end is August 31. Accordingly, it must provide updated information by the last day of February in each year, unless the District changes its fiscal year. If the District changes its fiscal year, it will notify each NRMSIR and the SID of the change.

Material Event Notices

The District will also provide timely notices of certain events to certain information vendors. The District will provide notice of any of the following events with respect to the Bonds, if such event is material to a decision to purchase or sell Bonds; (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Bonds; (7) modifications to rights of holders of the Bonds; (8) Bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds; and (11) rating changes. (Neither the Bonds nor the Order make any provision for debt service reserves, credit enhancement (except with respect to the Permanent School Fund Guarantee), or liquidity enhancement). In addition, the District will provide timely notice of any failure by the District to provide information, data, or financial statements in accordance with its agreement described above under “Annual Reports”. The District will provide each notice described in this paragraph to any SID and to either each NRMSIR or the Municipal Securities Rulemaking Board (“MSRB”).

Availability of Information from NRMSIRs and SID

The District has agreed to provide the foregoing information only to NRMSIRs and the SID. The information will be available to holders of Bonds only if the holders comply with the procedures and pay the charges established by such information vendors or obtain the information through securities brokers who do so.

The Municipal Advisory Council of Texas has been designated by the State of Texas as a SID, and the SEC staff has issued a no action letter confirming that designation. The address of the Municipal Advisory Council is 600 West 8th Street, Post Office Box 2177, Austin, Texas 78768-2177, and its telephone number is (512) 476-6949.

Limitations and Amendments

The District has agreed to update information and to provide notices of material events only as described above. The District has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The District makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The District disclaims any contractual or tort liability for damages resulting in whole or in part from any breach of its continuing disclosure agreement or from any statement made pursuant to its agreement, although holders or beneficial owners of Bonds may seek a writ of mandamus to compel the District to comply with its agreement.

45522082.2 -49-

The District may amend its continuing disclosure agreement to adapt to changed circumstances that arise from a change in legal requirements, a change in law, or a change in the identity, nature, status, or type of operations of the District, if the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and either the holders of a majority in aggregate principal amount of the outstanding Bonds consent or any person unaffiliated with the District (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the beneficial owners of the Bonds. The District may also repeal or amend these provisions if the SEC amends or repeals the applicable provisions of the Rule or any court of final jurisdiction enters judgment that such provisions of the Rule are invalid, but in either case only if and to the extent that the provisions of this sentence would not prevent an underwriter from lawfully purchasing or selling Bonds in the primary offering of the Bonds giving effect to (a) such provisions as so amended and (b) any amendments or interpretations of the Rule. If the District amends its agreement, it must include with the next financial information and operating data provided in accordance with its agreement described above under “Annual Reports” an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of information and data provided.

Compliance with Prior Agreements

The District first became obligated in 1997, upon the issuance of its Unlimited Tax School Building Bonds, Series 1997 and Unlimited Tax Refunding Bonds, Series 1997 (collectively, the A1997 Bonds@), to make annual disclosure of certain financial information in accordance with SEC Rule 15c2-12. The District failed to comply with its annual disclosure requirements for the years 2001 through 2004. On September 20, 2004, the District made a filing of noncompliance with the SID and the NRMSIRs which included audits required to be filed in the years 2001 through 2004 and updated, through the District=s fiscal year ending in August 31, 2003, all quantitative financial information and operating data with respect to the District of the general type included in the Official Statement relating to the 1997 Bonds. The District has instituted new internal policies to ensure future annual compliance with its continuing disclosure requirements.

CERTIFICATION OF OFFICIAL STATEMENT

At the time of payment for and delivery of the Bonds, the Underwriters will be furnished a certificate, executed by proper officers, acting in their official capacity, to the effect that to the best of their knowledge and belief: (a) the description and statements of or pertaining to the District contained in its Official Statement, and any addenda, supplement or amendment thereto, on the date of such Official Statement, on the date of the sale of said Bonds and on the date of the initial delivery of the Bonds, were and are true and correct in all material respects; (b) insofar as the District and its affairs, including its financial affairs, are concerned, such Official Statement did not and does not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of circumstances under which they are made, not misleading; (c) insofar as the description and statements, including financial data, of or pertaining to entities, other than the District, and their activities contained in such Official Statement are concerned, such statements and data have been obtained from sources which the District believes to be reliable and that the District has no reason to believe that they are untrue in any material respect; and (d) there has been no material adverse change in the financial condition of the District since August 31, 2003, the date of the last audited financial statements of the District.

GASB 34 STATEMENT

In June 1999, the Governmental Accounting Standards Board (“GASB”) issued Statement No. 34, “Basic Financial Statements – and Management’s Discussion and Analysis – for State and Local Governments”

45522082.2 -50-

(“GASB 34”). The objective of GASB 34 is to enhance the clarity and usefulness of the general-purpose external financial reports of state and local governments to its citizenry, legislature and oversight bodies, and investors and creditors. The District implemented GASB 34 beginning with its fiscal year ending August 31, 2002. While adoption of GASB 34 has altered the presentation of the District’s financial information, District management does not believe that adoption of GASB 34 has had any material adverse impact on the District’s financial position, results of operation, or cash flows.

FORWARD LOOKING STATEMENTS

The statements contained in this Official Statement, and in any other information provided by the District, that are not purely historical, are forward-looking statements, including statements regarding the District’s expectations, hopes, intentions, or strategies regarding the future. Readers should not place undue reliance on forward-looking statements. All forward looking statements included in this Official Statement are based on information available to the District on the date hereof, and the District assumes no obligation to update any such forward-looking statements. It is important to note that the District’s actual results could differ materially from those in such forward-looking statements.

The forward-looking statements herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in social, economic, business, industry, market, legal and regulatory circumstances and conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors, and legislative, judicial and other governmental authorities and officials. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive, and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the District. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement would prove to be accurate.

UNDERWRITING

The Underwriters have agreed, subject to certain customary conditions, to purchase the Bonds at a price equal to the initial offering prices to the public, as shown on the inside cover page hereof, less an Underwriters’ discount of $119,860.50. The Underwriters’ obligations are subject to certain conditions precedent, and it will be obligated to purchase all of the Bonds, if any Bonds are purchased. The Bonds may be offered and sold to certain dealers and others at prices lower than such public offering prices, and such public prices may be changed, from time to time, by the Underwriters.

The Underwriters have provided the following sentence for inclusion in this Official Statement. The Underwriters have reviewed the information in this Official Statement in accordance with their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information.

VERIFICATION OF MATHEMATICAL COMPUTATIONS

The arithmetical accuracy of certain computations included in the schedules provided by Estrada Hinojosa & Company, Inc. was examined by Grant Thornton LLP, Minneapolis, Minnesota, certified public accountants. Such computations were based solely on assumptions and information supplied by Estrada Hinojosa & Company, Inc. Grant Thornton LLP has restricted its procedures to examining the arithmetical accuracy of certain computations and has not made any study or evaluation of the assumptions and

45522082.2 -51-

information on which the computations are based, and accordingly, has not expressed an opinion on the data used, the reasonableness of the assumptions, or the achievability of the forecasted outcome. The report of Grant Thornton LLP will be relied upon by Bond Counsel in rendering their opinion with respect to the exclusion of interest on the Bonds for federal income tax purposes and with respect to the defeasance of the Refunded Bonds.

CONCLUDING STATEMENT

No person has been authorized to give any information or to make any representations other than those contained in this Official Statement, and if given or made, such other information or representations must not be relied upon as having been authorized by the District. This Official Statement does not constitute an offer to sell or solicitation of an offer to buy in any state in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make such offer of solicitation.

The information set forth herein has been obtained from the District’s records, audited financial statements and other sources which are considered to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will ever be realized. All of the summaries of the statutes, documents and the Order contained in this Official Statement are made subject to all of the provisions of such statutes, documents, and the Order. These summaries do not purport to be complete statements of such provisions and reference is made to such summarized documents for further information. Reference is made to official documents in all respects.

The Order authorizing the issuance of the Bonds will also approve the form and content of this Official Statement and any addenda, supplement or amendment thereto and authorize its further use in the re-offering of the Bonds by the Underwriters.

This Official Statement has been approved by the Board for distribution in accordance with the provisions of the Securities and Exchange Commission’s rule codified at 17 C.F.R. Section 240.15c2-12, as amended.

ATTEST: /s/ Adolfo Lopez President, Board of Trustees Robstown Independent School District /s/ Ismael Gonzalez Secretary, Board of Trustees Robstown Independent School District

45522082.2 Schedule-1

SCHEDULE I

SCHEDULE OF REFUNDED BONDS

Bond Maturity Date Interest Rate (%) Par Amount ($) Call Date Call Price Unlimited Tax School Building Bonds, Series 1994: 02/15/2006 4.60 $ 25,000 02/15/2005 100.00 02/15/2007 4.70 675,000 02/15/2005 100.00

Unlimited Tax School Building and Refunding Bonds, Series 1994: 02/15/2014 6.90 95,000 02/15/2005 100.00

Unlimited Tax Refunding Bonds, Series 1995: 02/15/2006 6.00 35,000 02/15/2005 100.00 02/15/2007 6.10 555,000 02/15/2005 100.00 02/15/2008 6.20 590,000 02/15/2005 100.00 02/15/2009 6.30 625,000 02/15/2005 100.00 TOTAL $2,600,000

45522082.2 A-1

APPENDIX A FINANCIAL INFORMATION OF THE DISTRICT

ASSESSED VALUATION TABLE 1

2004 Assessed Valuation (100% of Actual) $314,988,399(a) Less Exemptions: Homesteads (local option and State mandated $15,000) 45,257,361Disabled and Deceased Veterans 2,343,589Over 65 and Other 8,289,414Reduction for Agricultural Land use 31,557,915Under $500 16,427Prorated Exempt Property 138,116Freeport 606,6662004 Net Taxable Assessed Valuation $226,778,9112003 Net Taxable Assessed Valuation $198,705,812District Bond Debt Payable from Ad Valorem Taxes (1) $29,535,582(b) Ratio of Total Tax Supported Debt to 2004 Net Taxable Assessed Valuation 13.02%Interest and Sinking Fund Balance (as of 9-30-2003) $882,854

2003-2004 Population as Estimated by the District - 15,256 Per Capita 2004 Net Taxable Assessed Valuation - $14,864

Per Capita Total Direct Tax Debt - $1,936 (a) As certified by the Nueces County Appraisal District. (b) Includes the Bonds and excludes the Refunded Bonds. (Preliminary, subject to change)

(1) The District expects to continue to receive an allocation of the State of Texas’ Instructional Facilities Allotment pursuant to Chapter 46, as amended, Texas Education Code in an approximate annual amount equal to $1,104,332. This amount would be the maximum amount that the District could receive with respect to the Bonds. Upon receipt of these funds, the District is required to immediately deposit these funds into the interest and sinking fund created for the Bonds. Any remaining funds necessary to pay the District’s debt service requirements will be transferred from lawfully available funds currently on deposit in the District’s interest and sinking fund or other lawfully available funds.

45522082.2 A-2

ASSESSED VALUATION AND NET TAXABLE ASSESSED VALUATION 2001 THROUGH 2004

TABLE 2

2003-04 2002-03 2001-02 2000-01 TOTAL ASSESSED VALUATION $284,660,783 $281,851,692 $270,363,424 $255,430,820LESS EXEMPTIONS: Homestead (including local option and State Mandated)

47,522,666 43,775,059 43,882,178 40,416,223

Disabled and Deceased Veterans 2,120,902 1,751,396 1,625,945 1,531,929Over 65 and Other 7,337,306 6,741,536 6,496,637 5,803,566Agricultural Land Use 28,974,097 28,784,618 27,850,240 31,181,816HB 366 Total Exemptions 85,954,971 81,052,609 79,855,000 78,933,534NET TAXABLE ASSESSED VALUATION

$198,705,812 $200,799,083 $190,508,424 $176,497,286

TAX DATA TABLE 3

Net Assessed Valuation and Gross Bond Debt Comparison

Fiscal Year

(8/31)

Net Assessed

Valuation

Gross Bond

Debt

Debt Ratio 1995 $180,765,529 $14,545,924 8.05% 1996 180,565,277 15,214,447 8.43% 1997 180,415,364 14,669,448 8.13% 1998 183,015,808 13,804,448 7.54% 1999 167,876,783 20,249,383 12.06% 2000 171,141,688 19,299,383 11.28% 2001 176,497,286 18,314,383 10.38% 2002 190,508,424 17,269,383 9.06% 2003 200,799,083 16,179,383 8.06% 2004 198,705,812 15,029,383 7.56% 2005 (1) 226,778,911 29,535,582 (2) 13.02%

(1) FY 2005, Preliminary, subject to change (2) Includes the Bonds and excludes the Refunded Bonds

45522082.2 A-3

PROPERTY TAX LEVIES AND COLLECTION RATES TABLE 4

Tax Year Net Assessed

Valuation ($)

Tax Rate ($)

Current (%)

Total (%) Year

Ended 1994 180,765,529 1.5139 85.28 92.17 8/31/19951995 180,565,277 1.569 88.43 98.97 8/31/19961996 180,415,364 1.569 87.55 94.44 8/31/19971997 183,015,808 1.569 90.08 98.99 8/31/19981998 167,876,783 1.561 87.98 99.25 8/31/19991999 171,141,688 1.614 90.56 98.32 8/31/20002000 176,497,286 1.614 89.62 95.81 8/31/20012001 190,508,424 1.614 90.13 98.74 8/31/20022002 200,799,083 1.614 90.18 100.04 8/31/20032003 198,705,812 1.614 (In process of Collection) 8/31/2004

TAX RATE DISTRIBUTION TABLE 5

2003 2002 2001 2000 1999

Local Maintenance $1.500 $1.483 $1.473 $1.473 $1.473 Interest & Sinking Fund 0.114 0.131 0.141 0.141 0.141 Total Local Tax Rate $1.614 $1.614 $1.614 $1.614 $1.614

Property within the District is assessed as of January 1 of each year; taxes become due October 1 of the same year and become delinquent on February 1 of the following year. Split payments of tax bills are permitted and discounts for early payment of taxes are not allowed. Current and total collections, as shown above, are for the fiscal year and exclude penalties and interest. SCHEDULE OF DELINQUENT TAXES RECEIVABLE TABLE 6

Year Ended August 31

Ending Balance August 31, 2003

1994 $53,056 1995 60,597 1996 69,422 1997 66,839 1998 68,699 1999 78,744 2000 105,453 2001 122,341 2002 180,438 2003 355,826

45522082.2 A-4

TAXABLE ASSESSED VALUATIONS TABLE 7

Taxable Appraised Value for Fiscal Year Ended August 31, 2004 2003 2002 % of % of % of

Category Amount Total Amount Total Amount Total Real, Residential, Single-Family $129,951,544 45.65% $119,558,334 42.42% $115,360,841 42.67%Real, Residential, Multi-Family 1,681,038 0.59% 1,430,606 0.51% 1,451,317 0.54%Real, Vacant Lots/Tracts 6,912,168 2.43% 6,508,441 2.31% 6,641,807 2.46%Real, Acreage (Land Only) 45,287,266 15.91% 45,683,895 16.21% 44,304,963 16.39%Real, Farm and Ranch Improvements 8,043,978 2.83% 7,928,697 2.81% 7,769,053 2.87%Real, Commercial & Industrial 33,839,532 11.89% 33,913,347 12.03% 31,801,394 11.76%Real, Oil, Gas and Other Mineral Reserves 2,032,030 0.71% 6,280,150 2.23% 4,377,210 1.62%Tangible Personal, Vehicles - 0.00% - 0.00% - 0.00%Real and Intangible Personal, Banks - 0.00% - 0.00% - 0.00%Real and Intangible Personal, Utilities 22,789,000 8.01% 22,074,840 7.83% 21,347,152 7.90%Tangible Personal, Business 30,943,842 10.87% 35,405,937 12.56% 34,868,578 12.90%Tangible Personal, Other 1,454,500 0.51% 1,308,176 0.46% 860,299 0.32%Special Inventory 1,725,885 0.61% 1,759,269 0.62% 1,580,810 0.58%Total Appraised Value Before Exemptions 284,660,783 100.00% 281,851,692 100.00% 270,363,424 100.00%Less: Total Exemptions/Reductions 85,954,971 81,052,609 79,855,000 Net Taxable Assessed Value $198,705,812 $200,799,083 $190,508,424

2001 2000 1999 % of % of % of

Category Amount Total Amount Total Amount Total Real, Residential, Single-Family $105,453,915 41.18% $101,270,846 40.65% $97,832,672 39.64%Real, Residential, Multi-Family 1,202,761 0.47% 1,151,086 0.46% 1,070,622 0.43%Real, Vacant Lots/Tracts 6,439,831 2.51% 6,602,141 2.65% 6,553,542 2.66%Real, Acreage (Land Only) 46,621,128 18.21% 46,272,583 18.58% 47,975,304 19.44%Real, Farm and Ranch Improvements 8,054,855 3.15% 8,572,189 3.44% 9,759,353 3.95%Real, Commercial & Industrial 31,478,669 12.29% 30,398,243 12.20% 30,444,386 12.34%Real, Oil, Gas and Other Mineral Reserves 2,286,800 0.89% 2,168,900 0.87% 4,271,290 1.73%Tangible Personal, Vehicles - 0.00% - 0.00% - 0.00%Real and Intangible Personal, Banks - 0.00% - 0.00% - 0.00%Real and Intangible Personal, Utilities 21,158,515 8.26% 20,401,021 8.19% 21,357,245 8.65%Tangible Personal, Business 30,385,047 11.87% 31,544,220 12.66% 27,023,890 10.95%Tangible Personal, Other 926,250 0.36% 717,850 0.29% 513,600 0.21%Special Inventory 2,056,578 0.80% - 0.00% - 0.00%Total Appraised Value Before Exemptions 256,064,349 100.00% 249,099,079 100.00% 246,801,904 100.00%Less: Total Exemptions/Reductions 78,933,534 77,770,838 76,584,230 Net Taxable Assessed Value $177,130,815 $171,328,241 $170,217,674

45522082.2 A-5

PRINCIPAL TAXPAYERS TABLE 8

Name of Taxpayer

Nature of Property

2003-2004 Taxable Assessed Valuation

% of 2003-2004 Taxable

Assessed Valuation

Verison Southwest Telephone Utility $7,943,520 4.00%Texas Ecologist Inc Oil and Gas 4,871,316 2.45%Cudd Pressure Control Oil Well Service 3,664,468 1.84%Robstown Hardware Co Inc Commercial 3,048,579 1.53%AEP Texas Central Co Commercial 2,368,300 1.19%Crosstex Energy Services LTD Energy 2,231,790 1.12%Union Pacific RR Co Railroad 2,071,640 1.04%Butt H E Grocery Co Grocery 1,900,714 0.96%Citicapital Comm Leasing Banking 1,718,373 0.86%Highway Travel Center Inc Travel 1,511,217 0.76%

$31,329,917 15.77%

NON-FUNDED DEBT TABLE 9 The District has entered into various capital leases as permitted by the provisions of the Texas Education Code. Commitments under capitalized lease agreements and short term notes provide for minimum future principal payments as follows:

Year Ending August 31: Leases

2004 $66,2932005 64,8952006 65,0452007 31,4172008 7,524

Total Minimum Payments $235,174Less Amount Representing Interest 33,132Present Value of Net Minimum Lease Payments $202,042

The effective interest rate on capital leases ranges from 4.4% to 5.5% Included in leases payable is $76,707 which is for technology equipment purchased with ESEA Title 1 grant funds. Debt service is to be paid with continuing ESEA title 1 grant appropriations.

45522082.2 A-6

DEBT SERVICE REQUIREMENTS TABLE 10 Outstanding Debt Service (1) The Bonds Grand Total Debt Requirements Principal Interest Total Principal Interest Total Principal Interest Total

2005 $479,994 $1,252,286 $1,732,280 $ 370,000 $693,697 $1,063,697 $ 849,994 $1,945,983 $2,795,977 2006 410,238 1,263,342 1,673,580 330,000 750,096 1,080,096 740,238 2,013,438 2,753,676 2007 187,643 418,430 606,073 1,505,000 709,171 2,214,171 1,692,643 1,127,601 2,820,244 2008 531,611 766,727 1,298,338 895,000 660,359 1,555,359 1,426,611 1,427,085 2,853,696 2009 520,602 779,366 1,299,968 915,000 636,590 1,551,590 1,435,602 1,415,956 2,851,558 2010 660,387 1,285,651 1,946,038 320,000 619,609 939,609 980,387 1,905,259 2,885,646 2011 632,455 1,308,983 1,941,438 330,000 610,259 940,259 962,455 1,919,241 2,881,696 2012 611,745 1,329,443 1,941,188 340,000 599,996 939,996 951,745 1,929,439 2,881,184 2013 597,876 1,347,562 1,945,438 350,000 588,996 938,996 947,876 1,936,558 2,884,434 2014 1,207,741 648,197 1,855,938 455,000 575,631 1,030,631 1,662,741 1,223,827 2,886,568 2015 400,131 1,570,807 1,970,938 375,000 561,156 936,156 775,131 2,131,962 2,907,093 2016 398,984 1,574,454 1,973,438 390,000 547,046 937,046 788,984 2,121,500 2,910,484 2017 394,584 1,575,272 1,969,856 405,000 532,039 937,039 799,584 2,107,311 2,906,895 2018 396,723 1,574,040 1,970,763 420,000 516,206 936,206 816,723 2,090,246 2,906,969 2019 400,575 1,575,325 1,975,900 435,000 499,369 934,369 835,575 2,074,694 2,910,269 2020 405,298 1,569,971 1,975,269 455,000 481,284 936,284 860,298 2,051,255 2,911,553 2021 416,121 1,562,748 1,978,869 475,000 461,925 936,925 891,121 2,024,673 2,915,794 2022 422,939 1,553,505 1,976,444 495,000 440,813 935,813 917,939 1,994,317 2,912,256 2023 512,808 700,442 1,213,250 515,000 418,088 933,088 1,027,808 1,118,530 2,146,338 2024 524,031 690,469 1,214,500 540,000 394,350 934,350 1,064,031 1,084,819 2,148,850 2025 534,977 674,773 1,209,750 570,000 367,238 937,238 1,104,977 1,042,011 2,146,988 2026 548,119 665,881 1,214,000 600,000 336,525 936,525 1,148,119 1,002,406 2,150,525 2027 745,000 30,000 775,000 630,000 304,238 934,238 1,375,000 334,238 1,709,238 2028 -- -- -- 665,000 270,244 935,244 665,000 270,244 935,244 2029 -- -- -- 700,000 234,413 934,413 700,000 234,413 934,413 2030 -- -- -- 740,000 196,613 936,613 740,000 196,613 936,613 2031 -- -- -- 780,000 156,713 936,713 780,000 156,713 936,713 2032 -- -- -- 820,000 114,713 934,713 820,000 114,713 934,713 2033 -- -- -- 865,000 70,481 935,481 865,000 70,481 935,481 2034 -- -- -- 910,000 23,888 933,888 910,000 23,888 933,888 Total $11,940,582 $25,717,668 $37,658,250 $17,595,000 $13,371,741 $30,966,741 $29,535,582 $39,089,409 $68,624,991

(1) Excludes the Refunded Bonds

45522082.2 A-7

Tax Adequacy (1)

Maximum Principal and Interest Requirements (Fiscal Year 2021)

$2,915,794

Average Principal and Interest Requirements $2,287,500

$1.55 Tax Rate @ 95 % Collection Rate produces (based on 2003 Net Assessed Valuation of $198,705,812)

$2,916,505

(1) The District has received and allocation of the State of Texas’ Instructional Facilities Allotment pursuant to Chapter 46, as amended, Texas Education Code in approximate amount equal to $385,306 and estimates $746,035 on the series 2004 Bonds for a total of $1,131,341. This would be the maximum amount that the District could receive with respect to the Bonds. Upon receipt of these funds, the District is required to immediately deposit these funds into the interest and sinking fund created for the Bonds. Any remaining funds necessary to pay the Districts’ debt service requirements will be transferred from lawfully available funds on deposit in the District’s interest and sinking fund. OVERLAPPING DEBT TABLE 11

Other taxing units that have boundaries which overlap the District have outstanding debt paid from ad valorem taxes levied on property within the District. These taxing units are independent of the District and may incur borrowing to finance their expenditures. The following statement of direct and estimated overlapping ad valorem tax bonds was developed from information contained in the “Texas Municipal Reports” published by the Municipal Advisory Council of Texas. Except for the amounts relating to the District, the District has not independently verified the accuracy or completeness of such information, and no person should rely upon such information as being accurate or complete. Furthermore, certain of the entities listed below may have issued additional bonds since the dates stated below, and such entities may have programs requiring the future issuance of substantial amounts of additional bonds, the amount of which cannot be determined. The following table reflects the estimated share of overlapping funded debt of these various taxing bodies.

Taxing Jurisdiction

Estimated Total Funded

Debt

%

Applicable

Overlapping

Funded Debt (1)

Nueces County $109,803,689 1.65% $1,811,761 Nueces County Drainage District No. 2 -- 86.40% -- Nueces County Hospital District 17,895,210 1.65% 295,271 Port of Corpus Christi Authority -- 1.71% -- City of Robstown 3,890,770 100.00% 3,890,770 South Texas Water Authority -- 1.82% -- Total Overlapping Funded Debt $5,997,802 Robstown Independent School District Outstanding General Obligations $29,535,582 (2) Total Direct and Estimated Overlapping $35,533,384 Ratio of Direct and Overlapping Funded Debt to 2004 Taxable Assessed Valuation

15.67%

Per Capita Direct and Estimated Overlapping Funded Debt $2,329 (1) As of August 31, 2003 (2) Includes the Bonds but excludes the Refunded Bonds

45522082.2 A-8

FINANCIAL INFORMATION TABLE 12

The following summary of the District’s results of operation reflects the District’s historical performance under prior systems of school finance in Texas. For descriptions of the prior systems, the revised current system, and how the District’s future financial performance may be affected by the revised system and ongoing litigation, see “STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS” and “CURRENT SCHOOL FINANCE SYSTEM” herein. For the fiscal year ended August 31, 2002, the District implemented the new reporting requirements of GASB Statements Nos. 33 through 37. As a result, an entirely new financial model has been implemented. For comparative purposes see the following page for prior years under the old model.

For fiscal Year Ended August 31 Revenues 2003 2002 Local, Intermediate, and Out-of-State $3,526,427 $3,042,048 State Program Revenues 20,696,612 20,617,176 Federal Program Revenues 281,339 290,088 Total Revenues $24,504,378 $23,949,312

Expenditures Instruction $13,674,141 $12,729,479 Instructional Resources and Media 411,167 377,890 Curriculum and Staff Development 31,834 23,538 Instructional Leadership 914,847 893,528 School Leadership 1,512,793 1,432,126 Guidance, Counseling, & Evaluation Services 608,304 602,720 Social Work Services 57,241 55,385 Health Services 186,931 218,220 Student Transportation 393,727 375,373 Food Services -0- -0- Extracurricular Activities 867,640 752,177 General Administration 1,006,926 904,579 Plant Maintenance and Operations 3,296,206 2,976,522 Security and Monitoring Services 269,562 231,903 Data Processing Services 169,807 165,622 Community Services 53,843 8,635 Principal on Long Term Debt 95,541 139,657 Interest on Long Term Debt 14,891 3,552 Bond Issuance Cost and Fees 4,074 -0- Capital Outlay 963,768 1,440 Payments to Juvenile justice Alternative Education Programs 20,503 14,609 Total Expenditures $24,553,746 $21,906,955

Excess (Deficiency) Revenues Over Expenditures $ (49,368) $2,042,357

Other Financing Sources and (Uses) Proceeds from Capital Leases $ 83,946 Non-Current Proceeds 630,134 Operating Transfers In 986,689 846,396 Operating Transfers Out (977,391) (1,626,480) Total Other Financing Sources and (Uses) 723,378 (780,084) Net Change in Fund Balance $ 674,010 $1,262,273

Fund Balances – Beginning 3,247,556 1,985,283 Prior Period Adjustment 989,689 -0- Fund Balances - Beginning, As Restated 4,237,245 -0- Fund Balances Ending $4,911,255 (1) $3,247,556

Source: District’s Annual Financial Reports (1) District administration anticipates that the unaudited General Fund balance as of August 31, 2004 will be approximately $5,411,255

45522082.2 A-9

The following summary of the District’s results of operation reflects the District’s historical performance under prior systems of school finance in Texas. For descriptions of the prior systems, the revised current system, and how the District’s future financial performance may be affected by the revised system and ongoing litigation, see “STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS” and “CURRENT SCHOOL FINANCE SYSTEM” herein.

Fiscal Year Ending August 31 2001 2000 1999Revenues: Total Local and Intermediate Sources $ 2,856,615 $ 2,818,421 1,522,679 State Program Revenues 19,826,876 19,388,824 19,370,672 Federal Program Revenues 196,905 93,118 194,215 Total Revenues $22,880,396 $22,300,363 $21,087,566 Expenditures: Current: Instruction and Instructional-Related Services $13,342,322 $13,645,440 $12,515,851 Instructional and School Leadership 2,333,363 2,192,381 2,346,432 Support Services – Student (Pupil) 1,947,975 2,053,734 1,980,095 Administrative Support Services 806,588 740,943 931,939 Support Services – Nonstudent Based 3,330,423 3,129,451 3,162,877 Ancillary Services 21,760 13,513 15,638 Debt Service 188,447 130,449 137,363 Capital Outlay 18,550 61,697 -- Total Expenditures $21,989,428 $21,967,608 $21,090,195 Excess (deficiency) of revenues Over (Under) Expenditures $ 890,968 $ 332,755 $ (2,629) Other Resources 928,388 809,770 1,185,451 Other (Uses) (1,448,864) (1,628,204) (1,289,030) Excess (Deficiency) of revenues and Other Resources $ 370,492 $ (485,679) $ (106,208) Fund balance – September 1 (Beginning) 1,614,791 2,100,470 2,206,678 Fund balance – August 31 (Ending) $1,985,283 $1,614,791 $2,100,470

45522082.2 A-10

[This page intentionally left blank]

45522082.2 B-1

APPENDIX B GENERAL INFORMATION REGARDING THE DISTRICT AND ITS ECONOMY

General

Robstown Independent School District lies in the Coastal Bend area, fifteen miles west of Corpus Christi. The District has a diversified economy supported by agriculture, manufacturing and petroleum production. The District is in one of the richest agricultural sections of the state, and the City of Robstown is a trading center and shipping point for the area. The City had a 2000 census of 12,727, increasing .96% since 1990. Many residents are employed in the nearby Corpus Christi industrial area.

Facilities and Staff

The District has one high school, one junior high school, an alternative learning center, one intermediate school and four elementary schools. The District has 678 full time employees, including 270 teachers, 27 administrators, 91 teaching assistants, 30 clerks, 55 cafeteria workers, 44 campus custodians, 150 other support personnel plus 11 part-time workers.

Campus Capacity Current Enrollment Estimated Date of Construction Robstown High School 1,200 980 1960 Alternative Learning Center 200 70 1987 Seal Junior High School 870 538 1940 Ortiz Intermediate School 750 565 1987 San Pedro Elementary School 460 320 1953 Lotspeich Elementary School 645 359 1956 Hattie Martin Elementary School 600 332 1980 Salazar Elementary School 680 712 1940 Average Daily Attendance History

School Year Average Daily Attendance

1981-82 4,033 1982-83 4,087 1983-84 4,207 1984-85 4,215 1985-86 4,267 1986-87 4,299 1987-88 4,231 1988-89 4,086 1989-90 3,998 1990-91 3,850 1991-92 3,959 1992-93 3,977 1993-94 4,000 1994-95 3,936 1995-96 3,965 1996-97 4,022 1997-98 3,870 1998-99 3,902 1999-00 3,817 2000-01 3,709 2001-02 3,596 2002-03 3,512 2003-04 3,475

45522082.2 B-2

Nueces County

Nueces County was created and organized in 1846 from San Patricio County. The economy is diversified by petroleum, agriculture, tourism, coastal shipping, manufacturing and a military complex. Principal sources of agricultural income include beef, swine, sheep, horses, wheat, grain and corn. Nueces County was the state’s third leading producer of sorghum in 2001.

The 2000 census for the County was 313,645, an increase of 7.3% since 1990. Retail sales for 2003 totaled $4.0 billion. County-wide employment was 143,100 with earnings of $1.06 billion in the second quarter of 2003 as reported by the Texas Employment Commission. The total 2003 Effective Buying Income was $5.0 billion with a median of $34,095 per household as compared to the state median of $37,641. A total of 72.5% of the households had Effective Buying Incomes in excess of $20,000, while 27.5% had incomes below $20,000.

Minerals produced in Nueces County include oil, gas, cement, lime, sand and gravel. There were 667,345 barrels of oil and 61 billion cubic feet of natural gas recovered in 2001. The Corpus Christi Ship Channel handled 83 million tons of cargo in 2000. This makes it the second largest port in the state and the fifth largest port in the nation. Texas A&M University-Corpus Christi and Del Mar College had a combined fall 2003 enrollment of 19,323. Tourists are attracted by the mild winter climates, Padre Island National Seashore, and the Texas State Aquarium. Corpus Christi Naval Air Station employed 5,452 persons in 2000.

The City of Corpus Christi is the county seat and principal commercial center of Nueces County. Industries in the county include petrochemical and aluminum plants, clothing manufacturing, seafood processing, electronics, telecommunications, offshore drilling equipment, zinc processing and military activities. Other cities within Nueces County include Agua Dulce, Aransas Pass, Bishop Driscoll, Port Aransas and Robstown.

Employment

The following tables provide certain information relating to civilian employment in the Corpus Christi Metropolitan Statistical Area for the periods July 2004, June 2004, and July 2003:

July 2004 June 2004 July 2003

Civil Labor Force 184,800 186,900 186,200

Unemployment 13,200 14,200 13,800

Percent Unemployment 7.2% 7.6% 7.4%

Total Employment 171,600 172,700 172,400

45522082.2 B-3

Nonagricultural Wage and Salary Employment

July 2004 June 2004 July 2003

INDUSTRY TOTAL 158,200 160,900 159,400

Natural Resource and Mining 3,000 2,900 2,800

Construction 13,300 13,800 13,900

Manufacturing 11,600 11,700 11,900

Wholesale Trade 4,700 4,600 4,900

Retail Trade 17,600 17,600 17,800

Transportation, Warehouse and Utilities 5,100 5,000 5,200

Information 2,600 2,700 2,700

Financial Activities 7,500 7,500 7,600

Professional & Business Services 15,100 15,200 15,200

Education & Health Services 24,200 24,300 24,000

Leisure & Hospitality 18,000 18,100 17,800

Other Services 6,700 6,700 6,600

Government 28,800 30,800 29,000

____________________ Source: Texas Employment Commission, Texas Labor Market Review August 2004.

45522082.2 B-4

[This page intentionally left blank.]

45522082.2 C-1

APPENDIX C AUDITED FINANCIALS

The information contained in this appendix consists of certain audited FINANCIAL STATEMENTS OF THE ROBSTOWN INDEPENDENT SCHOOL DISTRICT

FOR THE FISCAL YEAR ENDED AUGUST 31, 2003

45522082.2 C-2


45522082.2 D-1

APPENDIX D FORM OF OPINION OF BOND COUNSEL

45522082.2 D-2


DRAFT DATED OCTOBER 5, 2004

LAW OFFICES

McCALL, PARKHURST & HORTON L.L.P.717 NORTH HARW OOD 700 N. ST. MARY'S STREET 600 CONGRESS AVENUE

NINTH FLOOR 1525 ONE RIVERW ALK PLACE 1250 ONE AMERICAN CENTER

DALLAS, TEXAS 75201-6587 SAN ANTONIO, TEXAS 78205-3503 AUSTIN, TEXAS 78701-3248TELEPHONE: 214 754-9200 TELEPHONE: 210 225-2800 TELEPHONE: 512 478-3805

FACSIMILE: 214 754-9250 FACSIMILE: 210 225-2984 FACSIMILE: 512 472-0871

November __, 2004

ROBSTOWN INDEPENDENT SCHOOL DISTRICTUNLIMITED TAX SCHOOL BUILDING AND REFUNDING BONDS, SERIES 2004

DATED AS OF SEPTEMBER 15, 2004IN THE AGGREGATE PRINCIPAL AMOUNT OF $17,595,000

AS BOND COUNSEL FOR THE ROBSTOWN INDEPENDENT SCHOOL DISTRICT(the "District") in connection with the issuance of the bonds described above (the "Bonds"), we haveexamined into the legality and validity of the Bonds, which bear interest from the dates specifiedin the text of the Bonds until maturity or prior redemption at the rates and payable on the dates asstated in the text of the Bonds, and which mature on February 15 in each of the years 2005 through2021, inclusive, and in the years 2024, 2029 and 2034, with the Bonds maturing on and afterFebruary 15, 2015, being subject to optional redemption prior to maturity on February 15, 2014, andon any date thereafter, and with the Bonds maturing in the years 2024, 2029 and 2034 being subjectto mandatory sinking fund redemption, all in accordance with the terms and conditions stated in thetext of the Bonds.

WE HAVE EXAMINED the applicable and pertinent provisions of the Constitution andlaws of the State of Texas and a transcript of certified proceedings of the District, and other pertinentinstruments authorizing and relating to the issuance of the Bonds including (i) the order authorizingthe issuance of the Bonds (the "Order"), (ii) the Escrow Agreement, dated as of September 15, 2004,between the District and The Bank of New York Trust Company, N.A., Jacksonville, Florida, asEscrow Agent (the "Escrow Agreement"), (iii) the report and mathematical verifications of GrantThornton, LLP, certified public accountants, with respect to the adequacy of certain escrowed fundsto accomplish the refunding purposes of the Bonds (the "Verification Report"), (iv) one of each ofthe executed Bonds (as defined in the Order, being Bond No. T-1), and (v) the District's Federal TaxCertificate of even date herewith.

BASED ON SAID EXAMINATION, IT IS OUR OPINION that the Escrow Agreement hasbeen duly authorized, executed and delivered by the District and constitutes a binding andenforceable agreement in accordance with its terms and that the "Refunded Bonds" (as defined inthe Order) being refunded by a portion of the proceeds of the Bonds are outstanding under the orderauthorizing their issuance only for the purpose of receiving the funds provided by, and are securedsolely by and payable solely from, the Escrow Agreement and the cash and investments, includingthe income therefrom, held by the Escrow Agent pursuant to the Escrow Agreement. In renderingthis opinion, we have relied upon the verifications contained in the Verification Report as to thesufficiency of the cash and investments deposited pursuant to the Escrow Agreement for the purposeof paying the principal of, redemption premium, if any, and interest on the Refunded Bonds.

Robstown Independent School DistrictUnlimited Tax School Building and Refunding Bonds, Series 2004November __, 2004Page 2

IT IS FURTHER OUR OPINION that the Bonds have been authorized, issued anddelivered in accordance with law; that the Bonds constitute valid and legally binding generalobligations of the District in accordance with their terms except as the enforceability thereof maybe limited by bankruptcy, insolvency, reorganization, moratorium, liquidation and other similar lawsnow or hereafter enacted relating to creditors' rights generally; that the District has the legalauthority to issue the Bonds and to repay the Bonds; and that ad valorem taxes sufficient to providefor the payment of the interest on and principal of the Bonds, as such interest comes due, and as suchprincipal matures, have been levied and ordered to be levied against all taxable property in theDistrict, and have been pledged for such payment, without limit as to rate or amount.

IT IS FURTHER OUR OPINION, except as discussed below, that the interest on the Bondsis excludable from the gross income of the owners for federal income tax purposes under thestatutes, regulations, published rulings and court decisions existing on the date of this opinion. Weare further of the opinion that the Bonds are not "specified private activity bonds" and that,accordingly, interest on the Bonds will not be included as an individual or corporate alternativeminimum tax preference item under section 57(a)(5) of the Internal Revenue Code of 1986 (the"Code"). In expressing the aforementioned opinions, we have relied on the Verification Report, andwe have further relied on, and assumed compliance by the District with, certain representations andcovenants regarding the use and investment of the proceeds of the Bonds. We call your attentionto the fact that failure by the District to comply with such representations and covenants may causethe interest on the Bonds to become includable in gross income retroactively to the date of issuanceof the Bonds.

WE CALL YOUR ATTENTION TO THE FACT that the interest on tax-exempt obligations,such as the Bonds, is (a) included in a corporation's alternative minimum taxable income forpurposes of determining the alternative minimum tax imposed on corporations by section 55 of theCode, (b) subject to the branch profits tax imposed on foreign corporations by section 884 of theCode, and (c) included in the passive investment income of an S corporation and subject to the taximposed by section 1375 of the Code.

EXCEPT AS STATED ABOVE, we express no opinion as to any other federal, state or localtax consequences of acquiring, carrying, owning or disposing of the Bonds.

OUR SOLE ENGAGEMENT in connection with the issuance of the Bonds is as BondCounsel for the District, and, in that capacity, we have been engaged by the District for the solepurpose of rendering an opinion with respect to the legality and validity of the Bonds and thedefeasance of the Refunded Bonds under the Constitution and laws of the State of Texas, and withrespect to the exclusion from gross income of the interest on the Bonds for federal income taxpurposes, and for no other reason or purpose. The foregoing opinions represent our legal judgmentbased upon a review of existing legal authorities that we deem relevant to render such opinions andare not a guarantee of a result. We have not been requested to investigate or verify, and have notindependently investigated or verified any records, data, or other material relating to the financialcondition or capabilities of the District, or the disclosure thereof in connection with the sale of theBonds, and have not assumed any responsibility with respect thereto. We express no opinion and

Robstown Independent School DistrictUnlimited Tax School Building and Refunding Bonds, Series 2004November __, 2004Page 3

make no comment with respect to the marketability of the Bonds and have relied solely oncertificates executed by officials of the District as to the current outstanding indebtedness of, andassessed valuation of taxable property within, the District. Our role in connection with the District'sOfficial Statement prepared for use in connection with the sale of the Bonds has been limited asdescribed therein.

OUR OPINIONS ARE BASED ON EXISTING LAW, which is subject to change. Suchopinions are further based on our knowledge of facts as of the date hereof. We assume no duty toupdate or supplement our opinions to reflect any facts or circumstances that may thereafter cometo our attention or to reflect any changes in any law that may thereafter occur or become effective.Moreover, our opinions are not a guarantee of result and are not binding on the Internal RevenueService (the "Service"); rather, such opinions represent our legal judgment based upon our reviewof existing law and in reliance upon the representations and covenants referenced above that wedeem relevant to such opinions. The Service has an ongoing audit program to determine compliancewith rules that relate to whether interest on state or local obligations is includable in gross incomefor federal income tax purposes. No assurance can be given whether or not the Service willcommence an audit of the Bonds. If an audit is commenced, in accordance with its current publishedprocedures the Service is likely to treat the District as the taxpayer. We observe that the District hascovenanted not to take any action, or omit to take any action within its control, that if taken oromitted, respectively, may result in the treatment of interest on the Bonds as includable in grossincome for federal income tax purposes.

Respectfully,

45504711.5 D-4


45504711.5

M. E. ALLISON & CO., INC.950 East Basse Road, Second Floor

San Antonio, Texas 78209Financial Advisor

new issue – book-entry-only ratings: moody’s...

Documents