Ratings: S&P: AAA Moodys: Aaa (See RATINGS and The Permanent School Fund Guarantee herein) PRIVATE

PLACEMENT MEMORANDUM Dated: June 24, 2010

TAXABLE NEW ISSUE PHYSICAL DELIVERY The Bonds are not obligations described in Section 103(a) of the Code; accordingly, stated interest paid with respect to the Bonds would be includable in gross income within the meaning of section 61 of the Internal Revenue Code of 1986 (the Code) of each owner thereof. In the opinion of McCall, Parkhurst & Horton L.L.P., Bond Counsel to the District, under statutes, regulations, published rulings and court decisions existing on the date thereof, (i) the Bonds constitute qualified school construction bonds within the meaning of section 54A of the Code, (ii) holders of the Bonds on one or more credit allowance dates (as defined therein), during any taxable year, may claim a federal income tax credit, subject to the limitations of the Code, and (iii) such federal tax credit will be treated as interest includible in gross income of the holder thereof, in accordance with each holders tax status, subject to the matters described under FEDERAL TAX CREDIT and TAX MATTERS herein.

$20,195,000 FRISCO INDEPENDENT SCHOOL DISTRICT (A political subdivision of the State of Texas located in Collin and Denton Counties, Texas) UNLIMITED TAX QUALIFIED SCHOOL CONSTRUCTION BONDS, SERIES 2010 (TAX CREDIT BONDS)
Dated Date: July 15, 2010 Tax Credit Rate: 5.36% Due: As shown on inside cover page Price: 100%

The $20,195,000 Frisco Independent School District Unlimited Tax Qualified School Construction Bonds, Series 2010 (Tax Credit Bonds) (the Bonds) are being issued as qualified school construction bonds within the meaning of section 54F of the Code. The Bonds are issued pursuant to the Constitution and general laws of the State of Texas, particularly Sections 45.001 and 45.003 (b)(1), Texas Education Code, as amended, an election held in the District on May 13, 2006, and an Order passed by the Board of Trustees of the Issuer (the Bond Order). In the Bond Order, the District will delegate pricing of the Bonds and certain other matters to an official of the District (the Pricing Officer), who will approve a Pricing Certificate which will complete the sale of the Bonds (the Bond Order and the Pricing Certificate are collectively referred to as the Order).The Bonds are payable from the proceeds of an ad valorem tax levied, without legal limitation as to rate or amount, against all taxable property located within the Frisco Independent School District (the District). In connection with the sale of the Bonds, 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 "THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM"). The Bonds do not bear interest. The Bonds include a component relating to principal payment (the "Principal Component") and a component relating to a federal income tax credit (the "Tax Credit"), which the registered owner (the "Owner") of the Bonds may claim under the Code, subject to the limitations more fully described herein, on each Tax Credit Allowance Date (as defined herein) against federal income tax liability. The amount of Tax Credit will be treated as interest for federal income tax purposes. United States taxpayers who own Bonds on the Tax Credit Allowance Dates will be entitled to a credit against such taxpayers federal income tax liability equal to 25% of the product of the outstanding principal amount of such Bond on such date multiplied by 5.36% thereafter until maturity or earlier redemption (with the first and last credits with respect to a Bond prorated accordingly). See FEDERAL TAX CREDIT and TAX MATTERS herein. Principal of the Bonds will be payable by the Paying Agent/Registrar (the Paying Agent/Registrar) which initially is the Bank of Texas, N.A., upon presentation and surrender of the Bonds for payment. Proceeds from the sale of the Bonds will be used (i) to construct, renovate and equip schools within the District and (ii) to pay costs of issuance of the Bonds. (See The Bonds Authorization and Purpose). The Bonds are subject to special mandatory redemption prior to maturity as described herein. See THE BONDS Special Mandatory Redemption. The Bonds are not subject to optional redemption prior to maturity. THE BONDS WILL BE SOLD INITIALLY ONLY TO A BANK WITHIN THE DEFINITION OF SECTION 3(A)(2) OF THE SECURITIES ACT OF 1933, ENGAGED IN THE BUSINESS OF PURCHASING SECURITIES SUCH AS THE BONDS WHO HAS EXECUTED AND DELIVERED AN AGREEMENT, STATING AMONG OTHER THINGS, THAT (A) THE PURCHASER HAS HAD A REASONABLE OPPORTUNITY TO REQUEST AND REVIEW SUCH INFORMATION AS IT NEEDS FROM THE DISTRICT IN ORDER TO ENABLE IT TO MAKE ITS PURCHASE DECISION, (B) SUCH PURCHASER HAS MADE THE DECISION TO PURCHASE THE BONDS BASED ON ITS OWN INDEPENDENT INVESTIGATION, AND IT HAS RECEIVED AND REVIEWED THIS PRIVATE PLACEMENT MEMORANDUM AND SUCH OTHER INFORMATION AS IT CONSIDERS NECESSARY TO MAKE AN INFORMED DECISION TO INVEST IN THE BONDS AND (C) THIS PRIVATE PLACEMENT MEMORANDUM IS NOT INTENDED TO PROVIDE ALL OF THE INFORMATION NECESSARY TO MAKE AN INFORMED DECISION TO PURCHASE THE BONDS. The Bonds are offered for delivery when, as and if received by the Placement Agent listed below and subject to the approving opinion of the Attorney General of the State of Texas and the legal opinion of McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel. It is expected that the Bonds will be available for delivery to the purchaser on or about July 15, 2010. Acting as Placement Agent BOSC, Inc. A subsidiary of BOK Financial Corp.

MATURITY SCHEDULE

Stated Maturity 2/15/2013 2/15/2014 2/15/2015 2/15/2016 2/15/2017 2/15/2018 2/15/2019 2/15/2020

Principal Amount $ 1,345,000 1,345,000 1,345,000 1,345,000 1,345,000 1,345,000 1,345,000 1,345,000

Stated Maturity 2/15/2021 2/15/2022 2/15/2023 2/15/2024 2/15/2025 2/15/2026 2/15/2027

Principal Amount $ 1,345,000 1,345,000 1,345,000 1,350,000 1,350,000 1,350,000 1,350,000

ii

LOCATION OF FRISCO INDEPENDENT SCHOOL DISTRICT

iii

FRISCO INDEPENDENT SCHOOL DISTRICT 6942 Maple Street Frisco, Texas 75034 (469) 633-6000 BOARD OF TRUSTEES Term Expires 2013 2013 2011 2011 2013 2012 2012 Length of Service 6 years 6 years 5 years 8 years 12 years 1 year 7 years

Name Dan Mossakowski, President Renee Ehmke, Vice President Brenda Polk, Secretary Richard Beaver, Trustee Laura Ellison, Trustee John Hoxie, Trustee Buddy Minett, Trustee

Occupation Director of Operations Homemaker Homemaker Director Homemaker Director of Sales Finance Sales

CERTAIN APPOINTED OFFICIALS Length of Service 39 years 30 years 26 years 28 years 20 years 29 years 3 years

Name Dr. Rick Reedy Dr. Debra Nelson Mr. Richard Wilkinson Mr. Doug Zambiasi Ms. Shana McKay Wortham Dr. Linda Bass Dr. Rick Bankston

Position Superintendent Assistant Superintendent for Curriculum & Instruction Assistant Superintendent for Facilities & Finance Assistant Superintendent for Administrative Services Director of Communications Assistant Superintendent for Human Resources Chief Financial Officer CONSULTANTS AND ADVISORS

Bond Counsel ...................................................................................................... McCall, Parkhurst & Horton L.L.P., Dallas, Texas Financial Advisor............................................................................................................... Southwest Securities, Inc., Dallas, Texas Certified Public Accountants............................................................................ Pingleton, Howard & Company, P.C., Frisco, Texas Chief Appraiser ................................................................................................................................. Collin County Appraisal District For additional Information regarding the District, please contact: Dr. Rick Reedy Superintendent Frisco Independent School District 6942 Maple Street Frisco, Texas 75034 Phone: (469) 633-6000 Jim Brooks or Brian Grubbs Southwest Securities, Inc. 1201 Elm Street Suite 3500 Dallas, Texas 75270 Phone: (800) 848-1799

iv

USE OF INFORMATION This Private Placement Memorandum, 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 Private Placement Memorandum, 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 Private Placement Memorandum 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 Private Placement Memorandum 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" herein for a description of the Districts undertaking to provide certain information on a continuing basis. The cover page contains certain information for general reference only and is not intended as a summary of this offering. Investors should read the entire Private Placement Memorandum, including all appendices attached hereto, to obtain information essential to making an informed investment decision. NEITHER THE DISTRICT NOR ITS FINANCIAL ADVISOR MAKES ANY REPRESENTATION OR WARRANTY WITH RESPECT TO THE INFORMATION CONTAINED IN THIS PRIVATE PLACEMENT MEMORANDUM REGARDING TEXAS EDUCATION AGENCY ("TEA") DESCRIBED UNDER "THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM" HEREIN, AS SUCH INFORMATION HAS BEEN FURNISHED BY TEA. 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 THE BONDS HAVE BEEN REGISTERED, QUALIFIED OR EXEMPTED SHOULD NOT BE REGARDED AS A RECOMMENDATION THEREOF.

[This page is intentionally left blank.]

TABLE OF CONTENTS MATURITY SCHEDULE .......................................................... II USE OF INFORMATION ......................................................... V TABLE OF CONTENTS ......................................................... VI PRIVATE PLACEMENT MEMORANDUM SUMMARY............. I INTRODUCTORY STATEMENT .............................................. 1 PLAN OF FINANCE ................................................................. 1 THE BONDS ............................................................................ 1 AUTHORIZATION AND PURPOSE ................................................ 1 GENERAL DESCRIPTION ........................................................... 1 NO OPTIONAL REDEMPTION ..................................................... 1 SPECIAL MANDATORY REDEMPTION .......................................... 2 SELECTION OF BONDS FOR MANDATORY REDEMPTION ............... 2 NOTICE OF MANDATORY REDEMPTION ...................................... 2 SECURITY ............................................................................... 3 PERMANENT SCHOOL FUND GUARANTEE................................... 3 LEGALITY................................................................................ 3 PAYMENT RECORD .................................................................. 3 SOURCES AND USES OF FUNDS ................................................ 3 AMENDMENTS ......................................................................... 3 DEFEASANCE OF BONDS .......................................................... 3 REGISTERED OWNERS' REMEDIES .................................... 4 REGISTRATION, TRANSFER AND EXCHANGE ................... 4 AD VALOREM TAX PROCEDURES ....................................... 5 FEDERAL TAX CREDIT .......................................................... 8 CURRENT PUBLIC SCHOOL FINANCE SYSTEM ............... 11 TAX RATE LIMITATIONS ......................................................14 DEBT LIMITATIONS ..............................................................15 EMPLOYEES RETIREMENT PLAN AND OTHER POSTEMPLOYMENT BENEFITS .................................................15 RATINGS................................................................................15 LEGAL MATTERS .................................................................16 TAX MATTERS ......................................................................16 GENERAL ..............................................................................16 OPINION ...............................................................................17 FEDERAL TAX CREDIT ............................................................17 CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO U.S. HOLDERS ......................................17 REGISTRATION AND QUALIFICATION OF BONDS FOR SALE ...................................................................................18 LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS.................................................18 INVESTMENT AUTHORITY AND PRACTICES OF THE DISTRICT ............................................................................18 THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM ..........................................................................20 FINANCIAL ADVISOR ...........................................................28 PLACEMENT AGENT ............................................................28 AUTHENTICITY OF FINANCIAL INFORMATION .................29 LITIGATION ...........................................................................29 CONTINUING DISCLOSURE OF INFORMATION ................29 FORWARD LOOKING STATEMENTS ..................................29 CONCLUDING STATEMENT.................................................29

Financial Information of the District .............................................................................................................................................. Appendix A General Information Regarding Frisco Independent School District, the City of Frisco, and Collin County, Texas ................... .Appendix B Form of Legal Opinion of Bond Counsel ...................................................................................................................................... Appendix C Report of examination for the period Ended June 30, 2009 ........................................................................................................ Appendix D

The cover page hereof, the section entitled Selected Data from the Private Placement Memorandum Summary, this Table of Contents and the Appendices attached hereto are part of this Private Placement Memorandum.

vi

PRIVATE PLACEMENT MEMORANDUM SUMMARY This summary is subject in all respects to the more complete information and definitions contained or incorporated in this Private Placement Memorandum. The offering of the Bonds to potential investors is made only by means of this entire Private Placement Memorandum. No person is authorized to detach this summary from this Private Placement Memorandum or to otherwise use it without the entire Private Placement Memorandum. The District Frisco Independent School District (the District) is a political subdivision located primarily in Collin and Denton Counties. The District is governed by a seven-member Board of Trustees (the Board). Policymaking and supervisory functions are the responsibility of, and are vested in, the Board. The Board delegates administrative responsibilities to the Superintendent of Schools who is the chief administrative officer of the District. Support services are supplied by consultants and advisors. The Bonds are being issued as qualified school construction bonds within the meaning of Section 54F of the Internal Revenue Code of 1986, as amended (the Code). See FEDERAL TAX CREDIT and TAX MATTERS. The Bonds do not bear interest. The Bonds are issued pursuant to the Constitution and general laws of the State of Texas, particularly Sections 45.001 and 45.003 (b)(1), Texas Education Code, as amended, an election held in the District on May 13, 2006 and an order (the Bond Order) passed by the Board. In the Bond Order, the District will delegate pricing of the Bonds and certain other matters to an official of the District (the Pricing Officer), who will approve a Pricing Certificate which will complete the sale of the Bonds (the Bond Order and the Pricing Certificate are collectively referred to as the Order). A taxpayer owning a Bond on a tax credit allowance date will be entitled to a credit against such taxpayers federal income tax liability. The credit allowed to a taxpayer shall be equal to the product of 25% of the outstanding principal amount of the Bonds owned by such taxpayer on such date multiplied by 5.36%, with the first and last credits with respect to a Bond prorated accordingly. The amount of the allowable credit is included in the gross income of the recipient thereof as interest income. See THE BONDS, FEDERAL TAX CREDIT and TAX MATTERS. Each March 15, June 15, September 15, and December 15, beginning September 15, 2010 and ending on the earlier of the maturity date or redemption date of the Bonds. See FEDERAL TAX CREDIT. Proceeds from the sale of the Bonds will be used (i) to construct, renovate and equip schools within the District and (ii) to pay costs of issuance of the Bonds. (See The Bonds Authorization and Purpose). The initial Paying Agent/Registrar is the Bank of Texas, N.A. The Bonds will constitute direct and general obligations of the District, payable from ad valorem taxes levied annually against all taxable property located within the District, without limit as to rate or amount. (See THE BONDS Security for Payment herein.) The principal on the Bonds is further secured by the corpus of the Permanent School Fund of Texas. (See THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM herein). The District has received conditional approval from the Texas Education Agency for the payment of the Bonds to be guaranteed under the Permanent School Fund Guarantee Program, which guarantee will automatically become effective when the Attorney General of Texas approves the Bonds. (See THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM). Moodys Investor Service Inc., (Moodys) and Standard and Poors Ratings Services, a Standard & Poors Financial Services LLC business (S&P) have assigned their ratings of "Aaa" and "AAA", respectively to the Bonds based upon the Permanent School Bond Guarantee. Moodys and S&P generally rate all bond issues guaranteed by the Permanent School Fund of the State of Texas Aaa and AAA, respectively. The Districts underlying rating for the Bonds (without consideration of the Permanent School Fund Guarantee or other credit enhancement) is Aa1 by Moodys and AA+ by S&P. An explanation of the significance of any rating may be obtained from the rating agencies. (See RATINGS herein.) The Bonds are subject to special mandatory redemption prior to maturity. (See The Bonds Special Mandatory Redemption). The Bonds are not subject to optional redemption prior to maturity. The District has never defaulted with respect to the payment of its bonds. McCall, Parkhurst & Horton L.L.P., Dallas, Texas, Bond Counsel.

The Bonds

Federal Tax Credit

Tax Credit Allowance Dates Use of Bond Proceeds Paying Agent/Registrar Security

Permanent School Fund Guarantee

Ratings

Redemption

Payment Record Legal Opinion

vii

INTRODUCTORY STATEMENT This Private Placement Memorandum, including Appendices A, B and D, has been prepared by the Frisco Independent School District, in Collin and Denton Counties, Texas (the District), in connection with the offering by the District of its Unlimited Tax Qualified School Construction Bonds, Series 2010 (Tax Credit Bonds) (the Bonds) identified on the cover page hereof. All financial and other information presented in this Private Placement Memorandum 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. PLAN OF FINANCE The Bonds are designated as qualified school construction bonds under Section 54F of the Code. Proceeds from the sale of the Bonds (including investments thereon) will be applied solely to the construction, rehabilitation or repair of a public school facility in the District (including the acquisition of equipment to be used in such portion or portions of the public school facility that is being constructed, rehabilitated or repaired with the proceeds of the Bonds), and to payment of the costs of issuing the Bonds not in excess of 2% of the par amount of the issue taking into account any de minimis amount of premium or discount on the Bonds. The District reasonably expects that all available project proceeds will be spent for such qualified expenditures (as defined in Section 54F of the Code and applicable IRS guidance) within three years of the date of issuance of the Bonds, and that a binding commitment with a third party to spend at least 10 percent of such available project proceeds will be incurred within the six month period beginning on the date of issuance of the Bonds. See THE BONDS Special Mandatory Redemption for information concerning special mandatory redemption of the Bonds in the event that the proceeds of the Bonds are not spent within three years of the Delivery Date of the Bonds. THE BONDS Authorization and Purpose The Bonds are being issued in the aggregate principal amount of $20,195,000 pursuant to the Constitution and general laws of the State of Texas, particularly Sections 45.001 and 45.003 (b)(1), Texas Education Code, as amended, an election held in the District on May 13, 2006 and an order passed by the Board (the Bond Order). In the Bond Order, the District will delegate pricing of the Bonds and certain other matters to an official of the District (the Pricing Officer), who will approve a Pricing Certificate which will complete the sale of the Bonds (the Bond Order and the Pricing Certificate are collectively referred to as the Order).Proceeds from the sale of the Bonds will be used (i) to construct, renovate and equip schools within the District and (ii) to pay costs of issuance of the Bonds. General Description The Bonds mature on the dates and in the amounts described on the inside cover page of this Private Placement Memorandum. Principal on the Bonds will be paid at maturity or upon redemption prior to maturity. The Bonds include a component relating to principal payment (the "Principal Component") and a component relating to a federal income tax credit (the "Tax Credit"), which the registered owner (the "Owner") of the Bonds may claim under the Internal Revenue Code of 1986 (the "Code"), subject to the limitations more fully described herein, on each Tax Credit Allowance Date against federal income tax. No Optional Redemption The Bonds shall not be subject to redemption prior to maturity at the option of the District. Make-Whole/Redemption Premium Any prepayment or early redemption of principal as outlined in the schedule on page ii hereof will be subject to a Prepayment Fee. The Prepayment Fee shall be the Redemption Premium or a Yield Maintenance Fee, whichever is greater. Maintenance Fee is calculated by multiplying a) b) c) any decrease in yield in the Reference Rate between the bond origination date and the prepayment date, by the number of years or partial years remaining in the portion of the bond being pre-paid, by the average balance remaining through maturity of the portion of the bond being pre-paid. The Yield

If the Reference Rate on the date of prepayment is equal to or greater than the Reference Rate on origination date, the prepayment fee will be the Redemption Premium. Interest Rate Swap Rate" is defined as the interest rate swap rate for the term closest in time to the remaining term of the Bonds as such rate has most recently been published by the Federal Reserve Bank on its website under Federal Reserve 1

Statistical Release H.15, as the International Swaps and Derivatives Association ("ISDA") mid-market par swap rate. In the event the Federal Reserve Board fails to publish information from the ISDA concerning the mid-market par swap rate, the parties shall refer to the source of such information (as set forth in footnote 15 of the Federal Reserve Statistical Release H.15 as published on October 2, 2000) in order to determine the Interest Rate Swap Rate. LIBOR Rate is defined as the London Interbank Offered Rate (LIBOR) established by the British Bankers Association for deposits in US dollars for the term closest in time to the remaining term of the Bonds. Reference Rate is defined as a) the LIBOR rate when the remaining term of the Bonds is 12 months or less, or b) the Interest Rate Swap Rate when the remaining term of the bond is greater than 12 months. Special Mandatory Redemption Special Mandatory Redemption Due to Unexpended Proceeds. To the extent that any proceeds of the Bonds are not expended by the close of the three year period beginning on the Delivery Date of the Bonds (or if an extension of such period has been granted by the Secretary of the Treasury, such extended period), then the District shall redeem, an amount of Bonds equal to such unexpended proceeds (rounded up to the next highest $5,000 in principal amount) within 90 days after the end of such period. Additionally, the redemption price shall include the greater of the Redemption Premium or Yield Maintenance Fee. Any partial redemption of Bonds shall be in inverse chronological order of the maturity dates of the Bonds. Special Mandatory Redemption due to loss of Qualified School Construction Bond Status. In addition, upon a Determination of a Loss of Qualified School Construction Bond Status, the Bonds are subject to special mandatory redemption prior to their maturity date, in whole, on the date designated by the District, which date shall be a date on or prior to the February 15 following the next succeeding August 1 after a Determination of Loss of Qualified School Construction Bond Status, at a redemption price equal to the sum of (a) principal amount of the Bonds, together with (b) the greater of the Redemption Premium or the Yield Maintenance Fee, plus (c) interest (calculated at the Tax Credit Rate) from the Tax Credit Allowance Date immediately preceding the redemption date, to the date of redemption. The term Date of Loss of Qualified School Construction Bond Status means the date specified in a Determination of a Loss of Qualified School Construction Bond Status as the date from and after which the Bonds lost their status, or failed to qualify, as Qualified School Construction Bonds as a result of an Accountable Event of Loss of Qualified School Construction Bond Status (defined below), which date could be as early as the date of issuance of the Bonds. The term Determination of a Loss of Qualified School Construction Bond Status means (a) a final determination by the Internal Revenue Service (IRS) (after the District has exhausted all administrative appeal remedies) determining that an Accountable Event of Loss of Qualified School Construction Bond Status has occurred and specifying the Date of Loss of Qualified School Construction Bond Status, or (b) a non-appealable holding by a court of competent jurisdiction holding that an Accountable Event of Loss of Qualified School Construction Bond Status has occurred. The term Accountable Event of Loss of Qualified School Construction Bond Status means any act or any failure to act on the part of the District, which act or failure to act is a breach of a covenant or agreement of the District contained in the Order, the Tax Certificate, or the Bonds and which act or failure to act causes the Bonds to lose their status, or fail to qualify, as Qualified School Construction Bonds. The term Redemption Premium means, as calculated by the Districts Designated Investment Banker and verified by the Purchaser the greater of (x) zero and (y) an amount calculated as (a) the sum of the present values of the remaining scheduled payments of principal and tax credits related to the Bonds called for redemption (exclusive of interest accrued to the date of redemption), discounted to the date of redemption on a semiannual basis (assuming a 360-day year, consisting of 12 months of 30 days each) at a rate per annum equal to the Tax Credit Rate minus (b) the principal amount of the Bonds called for redemption. Selection of Bonds for Mandatory Redemption Redemption of the Bonds will be effected in $5,000 increments. The Paying Agent/Registrar will effect each redemption of the Bonds by redeeming from the Owner, an amount of such Bonds equal to an integral multiple of $5,000. The Paying Agent/Registrar will apply, to the extent possible, any remaining amount of proceeds to redeem such Bonds in authorized denominations of $5,000 increments. Notice of Mandatory Redemption Not less than 30 days prior to a redemption date for a Bond, the District shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to the Owner of such Bond to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing such notice. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN, WHETHER OR NOT THE REGISTERED OWNER RECEIVES SUCH NOTICE. NOTICE HAVING BEEN SO GIVEN, THE BONDS CALLED FOR REDEMPTION SHALL BECOME DUE AND PAYABLE ON THE SPECIFIED REDEMPTION DATE. 2

In the event the District has cured the conditions that caused the Bonds to be subject to special mandatory redemption, the District may rescind any such redemption and notice thereof on any date prior to the date fixed for redemption by causing written notice of the rescission to be given to the Owners of the Bonds so called for redemption. Notice of rescission will be delivered in the same manner in which notice of redemption was originally given. Security The Bonds are direct obligations of the District and are payable from ad valorem taxes to be levied on all taxable property within the District, without legal limitation as to rate or amount. (See STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS). Permanent School Fund Guarantee In connection with the sale of the Bonds, the District has submitted an application to the Texas Education Agency and received conditional approval from the Commissioner of Education for the guarantee of the Bonds under the Permanent School Fund Guarantee Program (Chapter 45, Subchapter C, of the Texas Education Code, as amended). 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. In the event the District defeases any of the Bonds, the payment of such defeased Bonds will cease to be guaranteed by the Permanent School Fund Guarantee. 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., Dallas, Texas, Bond Counsel. The legal opinion will be printed on or attached to the Bonds. (See "LEGAL MATTERS" and Appendix C Form of Legal Opinion of Bond Counsel). Payment Record The District has never defaulted with respect to the payment of its 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 Uses Deposit to Project Fund Cost of Issuance and Underwriters Discount Total Uses of Funds Amendments

$ 20,195,000.00

$ 19,939,227.50 255,772.50 $ 20,195,000.00

The District may, without the consent of the Owner, amend or supplement the Order in order to (i) cure any ambiguity, defect or omission that does not materially adversely affect the interests of the holders, (ii) grant additional rights or security for the benefit of the holders, (iii) add events of default as shall not be inconsistent with the provisions of the Order and that shall not materially adversely affect the interests of the holders, (iv) qualify the Order under the Trust Indenture Act of 1939, as amended, or corresponding provisions of federal laws from time to time in effect, or (v) make such other provisions in regard to matters or questions as shall not be inconsistent with the provisions of the Order and that shall not in the opinion of Bond Counsel materially adversely affect the interests of the holders. In addition, the District may, with the consent of the Owner of the Bonds, amend, add to, or rescind any of the provisions of the Order in order to (1) make any change in the maturity of any of the Bonds; (2) reduce the amount of principal of any Bonds; (3) modify the terms of payment of the principal on Bonds or any of them or impose any condition with respect to such payment; or (4) change the requirement with respect to the Owners consent to such amendment. Defeasance of Bonds The Order provides that the Bonds may be discharged, defeased or refunded in any manner now or hereafter permitted by law, provided that prior thereto the District obtains an opinion of Bond Counsel to the effect that such discharge, defeasance or refunding (i) does not cause the associated Tax Credits to terminate prior to the applicable date of redemption and (ii) does not cause the Bonds to cease being "qualified school construction bonds" within the meaning of Section 54F of the Code. Such restriction does not pertain to the special mandatory redemption of the Bonds with excess proceeds from the sale of the Bonds. 3

REGISTERED OWNERS' REMEDIES The Order defines "Event of Default" as the failure to make payment for the Bonds when the same becomes due and payable or the default in the performance or observance of any other covenant, agreement or obligation of the District under the Order, the failure to perform which materially, adversely affects the rights of the Owners, including, but not limited to, their prospect or ability to be paid principal of the Bonds, or their ability to realize a Tax Credit, and the continuation thereof for a period of 60 days after notice of such default is given by any Owner to the District or if the State fails to honor the Permanent School Fund Guarantee as hereinafter discussed. The Order further provides that upon the occurrence of an Event of Default, the Owners may seek a writ of mandamus to compel the District or District officials to carry out the legally imposed duties with respect to the Bonds if there is no other available remedy at law to compel performance of the Bonds or the Order and the District's obligations are not uncertain or disputed. The issuance of a writ of mandamus is controlled by equitable principles, so rests with the discretion of the court, but may not be arbitrarily refused. There is no acceleration of maturity of the Bonds in the event of default and, consequently, the remedy of mandamus may have to be relied upon from year to year. 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 and accordingly all legal actions to enforce such remedies would have to be undertaken at the initiative of, and be financed by, the registered owners. The Texas Supreme Court ruled in Tooke v. City of Mexia, 197 S.W. 3d 325 (Tex. 2006), that a waiver of sovereign immunity in a contractual dispute must be provided for by statute in clear and unambiguous language. Because it is unclear whether the Texas legislature has effectively waived the Districts sovereign immunity from a suit for money damages, Bondholders may not be able to bring such a suit against the District for breach of the Bonds or Order covenants in the absence of action by the District. Chapter 1371, Texas Government Code (Chapter 1371), which pertains to the issuance of public securities by issuers such as the District, permits the District to waive sovereign immunity in the proceedings authorizing its bonds, but in connection with the issuance of the Bonds, the District has not waived sovereign immunity although it is using the legal authority provided by Chapter 1371. Even if a judgment against the District could be obtained, it could not be enforced by direct levy and execution against the District's property. Further, the registered owners cannot themselves foreclose on property within the District or sell property within the District to enforce the tax lien on taxable property to pay the principal of and interest on the Bonds. 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 ad valorem 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 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 would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state 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 Bonds are qualified with respect to the customary rights of debtors relative to their creditors and by general principles of equity which permit the exercise of judicial discretion. REGISTRATION, TRANSFER AND EXCHANGE Paying Agent/Registrar The initial Paying Agent/Registrar is the Bank of Texas, N.A. Principal of the Bonds will be paid to the Owner at maturity or redemption prior to maturity upon presentation to the Paying Agent/Registrar. (See REGISTRATION, TRANSFER AND EXCHANGE Record Date for Interest Payment). 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. The District covenants to maintain and provide a Paying Agent/Registrar at all times until the Bonds are duly paid, and any successor Paying Agent/Registrar selected by the District shall be a commercial bank, a trust company organized under the laws of the State of Texas or other entity duly qualified and legally authorized to serve and perform the duties of the Paying Agent/Registrar for the Bonds. Transfer, Exchange and Registration The Bonds may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender to the Paying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the Owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. The Bonds 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 will be delivered by the Paying Agent/Registrar, in lieu of the Bond being transferred or exchanged, at the designated office of the Paying Agent/Registrar, or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. To the extent possible, the new Bond issued in an exchange or transfer of the Bond will be delivered to the Owner or assignee of the Owner in not more than three business days after the receipt of the Bonds to be canceled, and the written instrument of transfer or request for exchange duly executed by the 4

Owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. The new Bond registered and delivered in an exchange or transfer shall be for a like aggregate principal amount as the Bond surrendered for exchange or transfer. 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 Property 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. Each Appraisal District (the Appraisal District) within which the District is located is responsible for appraising property within the District, generally, as of January 1 of each year. The appraisal values set by the Appraisal District are subject to review and change by the Appraisal Review Board for each Appraisal District (the Appraisal Review Board), which is appointed by each Appraisal District. Such appraisal rolls, as approved by the Appraisal Review Board, are used by the District in establishing its tax rolls 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; 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 income; solar and wind-powered energy devices; real or personal property that is used wholly or partly as a facility, device or method for the control of air, water or land pollution; most individually owned automobiles; $10,000 exemption to residential homesteads of disabled persons or persons ages 65 or over; up to $12,000 exemption for real or personal property of disabled veterans or the surviving spouse or children of a deceased veteran who died while on active duty in the armed forces; (and, beginning in the 2009 tax year, a disabled veteran who receives 100% disability compensation due to a service-connected disability and a rating of 100% disabled or of individual unemployability is entitled to an exemption from taxation of the total appraised value of the veterans residence homestead), $15,000 in market value for all residential homesteads; 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 who are 65 years of age or older and persons who are disabled above the amount of tax imposed in the year such residence qualified for an exemption based on the age or disability of the owner. The freeze on ad valorem taxes on the homesteads of persons who are 65 years of age or older and persons who are disabled is also transferable to a different residence homestead. Also, a surviving spouse of a taxpayer who is 65 years of age or older and qualifies for the freeze on ad valorem taxes based on such persons age is entitled to the same exemption so long as the property is the homestead of the surviving spouse and the spouse is at least 55 years of age at the time of the death of the individuals spouse. Pursuant to a constitutional amendment approved by the voters on May 12, 2007, legislation was enacted to reduce the school property tax limitation imposed by the freeze on taxes paid on residence homesteads of persons 65 years of age or over or of disabled persons to correspond to reductions in local school district tax rates from the 2005 tax year to the 2006 tax year and from the 2006 tax year to the 2007 tax year (see "CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General" herein). The school property tax limitation provided by the constitutional amendment and enabling legislation apply to the 2007 and subsequent tax years. Article VIII, Section 1-j of the Texas Constitution provides for an exemption from ad valorem taxation for freeport property, which is defined as goods detained in the state for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Taxing units that took action prior to April 1, 1990 may continue to tax freeport property and decisions to continue to tax freeport property may be reversed in the future. However, decisions to exempt freeport property are not subject to reversal. Article VIII, Section 1-n of the Texas Constitution provides for the exemption from taxation of goods-intransit. Goods-in-transit is defined by a provision of the Tax Code, which is effective for tax years 2008 and thereafter, as personal property acquired or imported into Texas and transported to another location in the State or outside of the State within 175 days of the date the property was acquired or imported into Texas. The exemption excludes oil, natural gas, petroleum products, aircraft and special inventory, including motor vehicle, vessel and out-board motor, heavy equipment and manufactured housing inventory. The Tax Code provision permits local governmental entities, on a local option basis, to take official action by January 1 of the year preceding a tax year, after holding a public hearing, to tax goods-in-transit during the 5

following tax year. A taxpayer may only receive either the freeport exemption or the goods-in-transit exemption for items of personal property. A city or county may create a tax increment financing district (TIF) within the city or county with defined boundaries and establish a base value of taxable property in the TIF at the time of its creation. Overlapping taxing units, including school districts, may agree with the city to contribute all or part of future ad valorem taxes levied and collected against the incremental value (taxable value in excess of the base value) of taxable real property in the TIF to pay or finance the costs of certain public improvements in the TIF, and such taxes levied and collected for and on behalf of the TIF are not available for general use by such contributing taxing units. Effective September 1, 2001, school districts may not enter into tax abatement agreements under the general statute that permits cities and counties to initiate tax abatement agreements. In addition, credit will not be given by the Commissioner of Education in determining a districts property value wealth per student for (1) the appraised value, in excess of the frozen value, of property that is located in a TIF 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 TIF of its intention to create the TIF and the TIF was created and had 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 school districts to grant limitations on appraised property values and provide ad valorem tax credits to certain corporations and limited liability companies to encourage economic development within the district. Generally, during the last eight years of the ten-year term of a tax limitation agreement, the school district may only levy and collect ad valorem taxes for maintenance and operation purposes on the agreed-to limited appraised property value. The taxpayer is entitled to a tax credit from the school district for the amount of taxes imposed during the first two years of the tax limitation agreement on the appraised value of the property above the agreed-to limited value. Additional State funding is provided to a school district for each year of such tax limitation in the amount of the tax credit provided to the taxpayer. See THE PROPERTY TAX CODE AS APPLIED TO FRISCO INDEPENDENT SCHOOL DISTRICT and Appendix A Financial Information of the District, Assessed Valuation for a schedule of exemptions allowed by the District. 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. In determining the market value of property, different methods of appraisal may be used, including the cost method of appraisal, the income of appraisal and market data comparison method of appraisal, and the method considered most appropriate by the chief appraiser is to be used. Once an appraisal roll is prepared and finally approved by the Appraisal Review Board, it is used by the District in establishing its tax rolls and tax rate. Assessments under the Property Tax Code are based on one hundred percent (100%) of market value, except as described below, and no assessment ratio can be applied. The Property Tax Code permits 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 Property Tax 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. 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 propertys market value in the most recent tax year in which the market value was determined by the Appraisal District or (2) the sum of (a) 10% of the propertys appraised value for the preceding tax year, (b) the appraised value of the property for the preceding tax year and (c) the market value of all new improvements to the property. The Property 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 a current estimate of appraised values within the District or an estimate of any new property or improvements within the District. While such current estimate 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 its appraisal roll. Residential Homestead Exemption 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 who are 65 years of age or older and for taxpayers who are disabled.

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 the Appraisal District to compel compliance with the Property Tax Code. Public Hearing and Rollback Tax Rate 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 tax rate consists of two components: (1) a rate for funding of maintenance and operation expenditures, and (2) a rate for debt service. For the 2007-08 fiscal year and thereafter, the rollback tax rate for a school district is the lesser of (A) the sum of (1) the product of the district's "state compression percentage" for that year multiplied by $1.50, (2) the rate of $0.04, (3) any rate increase above the rollback tax rate in prior years that were approved by voters, and (4) the district's current debt rate, or (B) the sum of (1) the district's effective maintenance and operations tax rate, (2) the product of the district's state compression percentage for that year multiplied by $0.06; and (3) the district's current debt rate (see "CURRENT PUBLIC SCHOOL FINANCE SYSTEM General" for a description of the "state compression percentage"). The "effective maintenance and operations tax rate" for a school district is the tax rate that, applied to the current tax values, would provide local maintenance and operating funds, when added to State funds to be distributed to the district pursuant to Chapter 42 of the Texas Education Code 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. Section 26.05 of the Property Tax Code provides that the governing body of a taxing unit is required to adopt the annual tax rate for the unit before the later of September 30 or the 60th day after the date the certified appraisal roll is received by the taxing unit, and a failure to adopt a tax rate by such required date will result in the tax rate for the taxing unit for the tax year to be the lower of the effective tax rate calculated for that tax year or the tax rate adopted by the taxing unit for the preceding tax year. Before adopting its annual tax rate, a public meeting must be held for the purpose of adopting a budget for the succeeding year. A notice of public meeting to discuss budget and proposed tax rate must be published in the time, format and manner prescribed in Section 44.004 of the Texas Education Code. Section 44.004(e) of the Texas Education Code provides that a person who owns taxable property in a school district is entitled to an injunction restraining the collection of taxes by the district if the district has not complied with such notice requirements or the language and format requirements of such notice as set forth in Section 44.004(b), and (d) and if such failure to comply was not in good faith. Section 44.004(e) further provides the action to enjoin the collection of taxes must be filed before the date the district delivers substantially all of its tax bills. Levy and Collection of Taxes The District is responsible for the collections of its taxes, unless it elects to transfer such functions to another governmental entity. Before September 1 of each year, or as soon thereafter as practicable, 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 following July 1, an additional penalty of up to twenty percent (20%) may under certain circumstances be imposed by the District. The Property 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 FRISCO INDEPENDENT SCHOOL DISTRICT Each Appraisal District has the responsibility for appraising property in the District located in its respective county as well as other taxing units in that county. Each Appraisal District is governed by a board of directors appointed by voters of the governing bodies of various political subdivisions located in that county. The District does not grant a local option exemption to the market value of the residence homestead of persons who are 65 years of age or older; and, the District does not grant a local option exemption to the market value of the residence homestead of the disabled. The District has not granted any part of the local option, additional exemption of up to 20% of the market value of residence homesteads. Split payments are not permitted. Discounts are not permitted. The District does not tax freeport property. For the 2009/10 fiscal year, property valued at $24,848,302 was eligible for the freeport exemption. See Appendix A Financial Information of the District, Assessed Valuation for a listing of the amounts of the exemptions described above. A resolution was adopted by the District on November 12, 2007 to tax goods-in-transit for the 2010 tax year. The District has not granted any tax abatements. 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 participate in a tax increment reinvestment zone. The City of Frisco, Texas, (the City) pursuant to V.T.C.A., Tax Code, Chapter 311 has designated an area within the City as a reinvestment zone known as Reinvestment Zone Number One, City of Frisco, Texas (the Zone) to promote development within the area. In designating the area as a reinvestment zone, the City has provided for certain improvements to be constructed using tax increment financing, i.e., a tax increment base is established for real property in the area within the reinvestment zone as of the year of its designation and property taxes levied by the city creating the reinvestment zone and other participating overlapping taxing units against the taxable values of such real property in excess of the tax increment base (the Captured Appraised Value) are deposited into a tax increment fund to fund projects within the reinvestment zone in accordance with a Project Plan and Financing Plan approved for the reinvestment zone. The tax increment base value of such TIF for the District is $16,059,872 and Captured Appraised Value in said TIF for the 2009 tax year is $983,778,816. The District has agreed to participate in such TIF by contributing 100% of its taxes collected against the Captured Appraised Value in the TIF and such taxes remitted to the TIF will not be available for operations of the District. The Zone was created by the City in accordance with the requirements of Section 403.302(d) of the Texas Government Code. Accordingly, the Commissioner of Education does not include the Captured Appraised Value of property that is located in the Zone in determining the Districts property value wealth per student. See AD VALOREM TAX PROCEDURES Property Subject to Taxation by the District. The Board has approved a resolution initiating an additional 20% penalty to defray attorney costs in the collection of delinquent taxes over and above the penalty automatically assessed under the Property Tax Code. Charges for penalties and interest on the unpaid balance of delinquent taxes are as follows: Cumulative Penalty 6% 7 8 9 10 32(a) Cumulative Interest(b) 1% 2 3 4 5 6

Month February March April May June July ___________

(a) (b)

Total 7% 9 11 13 15 38

Includes additional penalty of up to 20% assessed after July 1 in order to defray attorney collection expenses. Interest continues to accrue after July 1 at the rate of 1% per month until paid.

FEDERAL TAX CREDIT This section summarizes certain material federal income tax consequences relating to an investment in the Bonds. The summary only addresses such consequences to initial purchasers of the Bonds and is based upon the current provisions of the Code, its applicable legislative history, treasury regulations, administrative pronouncements and judicial decisions, all of which are subject to change, possibly with retroactive effect. This summary does not purport to be a complete discussion of all federal income tax consequences relating to investing in the Bonds. The discussion herein concerning certain tax consequences with respect to

an investment in the Bonds is included for general information only. All prospective purchasers of the Bonds are urged to consult their own tax advisors to determine the specific tax consequences of making an investment in the Bonds, including any state, local or non-U.S. tax consequences. See TAX MATTERS herein. The Bonds are a new security authorized by the American Recovery and Reinvestment Tax Act of 2009 (the Recovery Act). Presently, there is no secondary market for the Bonds. There can be no assurance that a secondary market will develop, or if a secondary market does develop, that it will provide Owners with liquidity or continue to exist for the full term of the Bonds. The Placement Agent is under no obligation to make a secondary market for the Bonds. If a secondary market develops, the Bonds may be subject to greater price volatility than traditional municipal bonds. General A taxpayer who owns a qualified school construction bond may claim, subject to the limitations of the Code, the amount of the Tax Credit as a credit against its federal income tax liability on the applicable tax credit allowance date. The Bonds will be designated by the District as "qualified school construction bonds" under the Code. The District has not provided a mechanism for the Owner of the Bonds to separate the eligibility to receive the Tax Credits from the eligibility to receive the principal payments on the Bonds, nor has the District covenanted to provide such a mechanism in the future. The Owner of the Bonds will be allowed, subject to the limitations of the Code, to claim a credit against the Owner's federal income tax liability, except as otherwise provided herein, on each March 15, June 15, September 15 and December 15 of each year through the maturity date of such Bonds, or such earlier date on which such Bond is redeemed (each, a "Tax Credit Allowance Date"). An issuer of qualified school construction bonds must receive an allocation of the national qualified school construction bond limitation for the calendar year. In accordance with the Recovery Act, the State of Texas received an allocation of $538,585,000 of the national qualified school construction bond limitation from the United States Treasury for the 2009 calendar year, (and $547,674,000 for the 2010 calendar year) and the Texas Education Agency (the "TEA") is responsible for further allocating such funds to issuers within the State. The District submitted an application to the TEA for allocation from the 2009 calendar year and received an allocation in the amount of $20,198,500. Qualified school construction bonds may not exceed a maximum term which would result in the present value of the obligation to repay the principal on the Bonds being equal to 50% of the face amount of the Bonds using as a discount rate the average annual interest rate of tax-exempt obligations having a term of 10 years or more which are issued in the same month in which there is a binding, written contract for the sale or exchange of the Bonds. See FEDERAL TAX CREDIT Amount of Credit herein. Amount of Credit The amount of each Tax Credit is calculated under the Code. The Tax Credit Rate for the Bonds is 5.36%. Except as described in the next sentence, the amount of the Tax Credit is the amount equal to the twenty-five percent (25%) of the product of (i) the Tax Credit Rate and (ii) the outstanding principal amount of each maturity of the Bonds. The Tax Credit for the first and last Tax Credit Allowance Dates will be prorated accordingly. If a Bond is redeemed or matures on a date other than March 15, June 15, September 15 or December 15, the redemption or maturity date will be deemed a Tax Credit Allowance Date and the amount of the associated Tax Credit will also be prorated. Limitation and Carryover of the Credit The Tax Credits are not refundable. If an Owner of a Bond has gross income tax liability for a given year less than the amount of Tax Credits to which it is entitled for that year (the "Allowable Credit"), the Owner would be required to carry forward any excess Tax Credit to subsequent tax years. The Tax Credits to which an Owner of a Bond is entitled on a particular Tax Credit Allowance Date are not transferable after such Tax Credit Allowance Date; investors should be aware that to the extent that the investor is not a potential taxpayer (either now or in the future) and owns a Bond on a Tax Credit Allowance Date, the Tax Credit cannot be utilized. There can be no assurance that an Owner would be able to sell a Bond or a Tax Credit Certificate prior to the related Tax Credit Allowance Date. See "TAX MATTERS" herein. No Separation of Principal Component and Tax Credit Component The District has not provided a mechanism for the ownership of the Principal Component to be separated from the ownership of the Tax Credits, nor has the District covenanted to provide such a mechanism in the future. A transfer or assignment of the Bonds will constitute the transfer or assignment of the eligibility to receive principal payments and future Tax Credits. STATE AND LOCAL FUNDING OF SCHOOL DISTRICTS IN TEXAS Litigation Relating to the Texas Public School Finance System On April 9, 2001, four property wealthy districts filed suit in the 250th District Court of Travis County, Texas (the "District Court") against the Texas Education Agency, the Texas State Board of Education, the Texas Commissioner of Education (the "Commissioner") and the Texas Comptroller of Public Accounts in a case styled West Orange-Cove Consolidated Independent School District, et al. v. Neeley, et al. The plaintiffs alleged that the $1.50 maximum maintenance and operations tax rate had become in effect a state property tax, in violation of Article VIII, Section 1-e of the Texas Constitution, because it precluded them and other school districts from having meaningful discretion to tax at a lower rate. Forty school districts intervened alleging that the Texas public school finance system (the "Finance System") was inefficient, inadequate, and unsuitable, in violation of Article VII, Section 1 of the Texas Constitution, because the State of Texas (the "State") did not provide adequate funding. As described below, this case has twice reached the Texas Supreme Court (the "Supreme Court"), which rendered decisions in the case on May 29, 2003 ("West Orange-Cove I") and November 22, 2005 ("West Orange-Cove II").

After the remand by the Supreme Court back to the District Court in West Orange-Cove I, 285 other school districts were added as plaintiffs or intervenors. The plaintiffs joined the intervenors in their Article VII, Section 1 claims that the Finance System was inadequate and unsuitable, but not in their claims that the Finance System was inefficient. The intervening school district groups contended that funding for school operations and facilities was inefficient in violation of article VII, section 1 of the Texas Constitution, because children in property-poor districts did not have substantially equal access to education revenue. All of the plaintiff and intervenor school districts asserted that the Finance System could not achieve "[a] general diffusion of knowledge" as required by article VII, section 1 of the Texas Constitution, because the system was underfunded. The State, represented by the Texas Attorney General, made a number of arguments opposing the positions of the school districts, as well as asserting that school districts did not have standing to challenge the State in these matters. On November 30, 2004, the final judgment of the District Court was released in connection with its reconsideration of the issues remanded to it by the Supreme Court in West Orange-Cove I. In that case, the District Court rendered judgment for the plaintiffs on all of their claims and for the intervenors on all but one of their claims, finding that (1) the Finance System was unconstitutional in that the Finance System violated Article VIII, Section 1-e of the Texas Constitution because the statutory limit of $1.50 per $100.00 of taxable assessed valuation on property taxes levied by school districts for maintenance and operation purposes had become both a floor and a ceiling, denying school districts meaningful discretion in setting their tax rates; (2) the constitutional mandate of adequacy set forth in Article VII, Section 1, of the Texas Constitution exceeded the maximum amount of funding available under the funding formulas administered by the State; and (3) the Finance System was financially inefficient, inadequate, and unsuitable in that it failed to provide sufficient access to revenue to provide for a general diffusion of knowledge as required by Article VII, Section 1, of the Texas Constitution. As stated above, in West Orange-Cove I the plaintiff school districts asserted that the $1.50 per $100.00 of taxable assessed valuation tax that was generally authorized by State law to be levied for school maintenance and operations purposes (the "M&O Tax"), though imposed locally, had become in effect a State property tax prohibited by Article VIII, Section 1-e of the Texas Constitution. The intervening school district groups contended that funding for school operations and facilities was inefficient in violation of Article VII, Section 1 of the Texas Constitution, because children in property-poor districts did not have substantially equal access to education revenue. All of the plaintiff and intervenor school districts asserted that the Finance System could not achieve "[a] general diffusion of knowledge" as required by Article VII, Section 1 of the Texas Constitution, because the system was underfunded. The State, represented by the Texas Attorney General, made a number of arguments opposing the positions of the school districts, as well as asserting that school districts did not have standing to challenge the State in these matters. In West Orange-Cove II, the Supreme Court's holding was twofold: (1) that the local M&O Tax had become a state property tax in violation of Article VIII, Section 1-e of the Texas Constitution and (2) the deficiencies in the Finance System did not amount to a violation of Article VII, Section 1 of the Texas Constitution. In reaching its first holding, the Supreme Court relied on evidence presented in the District Court to conclude that school districts did not have meaningful discretion in levying the M&O Tax. In reaching its second holding, the Supreme Court, using a test of arbitrariness determined that: the public education system was "adequate," since it is capable of accomplishing a general diffusion of knowledge; the Finance System was not "inefficient," because school districts have substantially equal access to similar revenues per pupil at similar levels of tax effort, and efficiency does not preclude supplementation of revenues with local funds by school districts; and the Finance System does not violate the constitutional requirement of "suitability," since the system was suitable for adequately and efficiently providing a public education. In reversing the District Court's holding that the Finance System was unconstitutional under Article VII, Section 1 of the Texas Constitution, the Supreme Court stated: Although the districts have offered evidence of deficiencies in the public school finance system, we conclude that those deficiencies do not amount to a violation of Article VII, Section 1. We remain convinced, however, as we were sixteen years ago, that defects in the structure of the public school finance system expose the system to constitutional challenge. Pouring more money into the system may forestall those challenges, but only for a time. They will repeat until the system is overhauled. In response to the intervenor districts' contention that the Finance System was constitutionally inefficient, the West Orange-Cove II decision states that the Texas Constitution does not prevent the Finance System from being structured in a manner that results in gaps between the amount of funding per student that is available to the richest districts as compared to the poorest district, but reiterated its statements in Edgewood Independent School District v. Meno, 917 S.W.2d 717 (Tex. 1995) ("Edgewood IV") that such funding variances may not be unreasonable. The Supreme Court further stated that "[t]he standards of Article VII, Section 1 - adequacy, efficiency, and suitability - do not dictate a particular structure that a system of free public schools must have." The Supreme Court also noted that "[e]fficiency requires only substantially equal access to revenue for facilities necessary for an adequate system," and the Supreme Court agreed with arguments put forth by the State that the plaintiffs had failed to present sufficient evidence to prove that there was an inability to provide for a "general diffusion of knowledge" without additional facilities. Funding Changes in Response to West Orange-Cove II In response to the decision in West Orange-Cove II, the Texas Legislature (the "Legislature") enacted House Bill 1 ("HB 1"), which made substantive changes in the way the Finance System is funded, as well as other legislation which, among other things, established a special fund in the Texas state treasury to be used to collect new tax revenues that are dedicated under certain conditions for appropriation by the Legislature to reduce M&O Tax rates, broadened the State business franchise tax, 10

modified the procedures for assessing the State motor vehicle sales and use tax and increased the State tax on tobacco products (HB 1 and other described legislation are collectively referred to herein as the "Reform Legislation"). The Reform Legislation generally became effective at the beginning of the 2006-07 fiscal year of each district. Possible Effects of Litigation and Changes in Law on District Bonds The Reform Legislation did not alter the provisions of Chapter 45, Texas Education Code, that authorizes districts to secure their bonds by pledging the receipts of an unlimited ad valorem debt service tax as security for payment of the Bonds. Reference is made, in particular, to the information under the heading "THE BONDS - Security for Payment" and "THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM" in the Private Placement Memorandum. In the future, the Legislature could enact additional 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 State funding systems. Among other possibilities, a 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 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" (collectively, 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. 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 future legislation or litigation, or how such legislation or future court Order may affect the District's financial condition, revenues or operations. While the disposition of any possible future litigation or the enactment of future legislation to address school funding in Texas could substantially adversely affect the financial condition, revenues or operations of the District, as noted herein, the District does not anticipate that the security for payment of the Bonds, specifically, the District's obligation to levy an unlimited debt service tax and the Permanent School Fund guarantee of the Bonds would be adversely affected by any such litigation or legislation. See "CURRENT PUBLIC SCHOOL FINANCE SYSTEM." CURRENT PUBLIC SCHOOL FINANCE SYSTEM General The following description of the Finance System is a summary of the Reform Legislation and the changes made by the State Legislature to the Reform Legislation since its enactment, including modifications made during the regular session of the 81st Texas Legislature (the "2009 Regular Legislative Session"). For a more complete description of school finance and fiscal management in the State, reference is made to Vernon's Texas Codes Annotated, Education Code, Chapters 41 through 46, as amended. The Reform Legislation, which generally became effective at the beginning of the 2006-07 fiscal year of each district, made substantive changes to the manner in which the Finance System is funded, but did not modify the basic structure of the Finance System. The changes to the manner in which the Finance System is funded were intended to reduce local M&O Tax rates by one third over two years, with M&O Tax levies declining by approximately 11% in fiscal year 2006-07 and approximately another 22% in fiscal year 2007-08, subject to local referenda that may increase local M&O Tax levies, thus offsetting a part of the compression in local M&O Tax levies (see "TAX RATE LIMITATIONS"). Additional State funding needed to offset local tax rate reductions must be generated by the modified State franchise, motor vehicle and tobacco taxes or any other revenue source appropriated by the Legislature. The Legislative Budget Board projected that the Reform Legislation would be underfunded from the Reform Legislation revenue sources by a cumulative amount of $25 billion over fiscal years 2006-07 through 2010-11, however State surpluses have been appropriated to offset the revenue shortfall in fiscal year 2006-07 and for the 2008-09 and 2010-11 State biennia. Under the Finance System, as modified during the 2009 Regular Legislative Session, a school district that imposes an M&O Tax at least equal to the product of the "state compression percentage" (as defined below) multiplied by the district's 2005-06 M&O Tax rate is entitled to at least the amount of State funding necessary to provide the district with the sum of (A) the amount of State and local revenue per weighted average daily attendance ("WADA") to which the school district would be entitled for the 2009-10 school year as calculated under the law as it existed on January 1, 2009, (B) an additional $120 per WADA, (C) an amount to which the district is entitled based on supplemental payments owed to any tax increment fund for a reinvestment zone and (D) any amount due to the district to the extent the district contracts for students residing in the district to be educated in another district (i.e., tuition allotment). If a district adopts an M&O Tax rate in any fiscal year below a rate equal to the state compression percentage for the district in that year multiplied by the M&O Tax rate adopted by the district for the 2005-06 fiscal year, the district's guaranteed amount is reduced in a proportionate amount. If a district would receive more State and local revenue from the Tier One and Tier Two allotments (each as hereinafter defined) and wealth equalization than the guaranteed amount described above, the amount of State funding will be reduced by the amount of such surplus over the guaranteed amount described above.

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In general terms, funds are allocated to districts in a manner that requires districts to "compress" their tax rates in order to receive increased State funding at a level that equalizes local tax wealth at the 88th percentile yield for the 2006-07 fiscal year. The state compression percentage is a basic component of the funding formulas. The state compression percentage was 66.67% for fiscal years 2007-08 and 2008-09. For fiscal year 2009-10 and thereafter, the Commissioner is required to determine the state compression percentage for each fiscal year based on the percentage by which a district is able to reduce its M&O Tax rate for that year, as compared to such district's adopted M&O Tax rate for the 2005-06 fiscal year, as a result of State funds appropriated for distribution for the current fiscal year from the property tax relief fund established under the Reform Legislation, or from any other funding source made available by the Legislature for school district property tax relief. For fiscal year 2009-10, the Commissioner determined the State compression percentage to be 66.67%. State Funding for Local School Districts To limit disparities in school district funding abilities, the Finance System (1) compels districts with taxable property wealth per weighted student higher than the "equalized wealth level" (described under "Wealth Transfer Provisions") to reduce their wealth to the equalized wealth level 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. The Finance System provides for (1) State guaranteed basic funding allotments per student ("Tier One") and (2) State guaranteed revenues per student for each cent of local tax effort that exceeds the compressed tax rate to provide operational funding for an "enriched" educational program ("Tier Two"). In addition, to the extent funded by the Legislature, the Finance System includes, among other funding allotments, an allotment to subsidize existing debt service up to certain limits ("EDA"), the Instructional Facilities Allotment ("IFA"), and an allotment to pay operational expenses associated with the opening of a new instructional facility. Tier One, Tier Two, EDA and IFA are generally referred to as the Foundation School Program. Tier One and Tier Two allotments represent the State funding share of the cost of maintenance and operations of school districts and supplement local ad valorem M&O Taxes levied for that purpose. Tier One and Tier Two allotments and prior year IFA allotments are generally required to be funded each year by the Legislature. EDA and future year IFA allotments supplement local ad valorem taxes levied for debt service on bonds issued by districts to construct, acquire and improve facilities and are generally subject to appropriation by the Legislature. 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. Tier One allotments are intended to provide all districts a basic program of education rated academically acceptable and meeting other applicable legal standards. If needed, the State will subsidize local tax receipts at a tax rate of the state compression percentage multiplied by the lesser of (a) $1.50 or (b) the district's 2005 M&O Tax to ensure that the cost to a district of the basic program is met. Tier Two allotments are intended to guarantee each school district that is not subject to the wealth transfer provisions described below an opportunity 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. The cost of the basic program is based on an allotment per student known as the "Tier One Basic Allotment." The Tier One Basic Allotment is adjusted for all districts by a cost-of-living factor known as the "cost of education index." In addition, a districtsize adjustment further adjusts the Tier One Basic Allotment for districts that (i) have not more than 1,600 students in average daily attendance (with alternative formulas established for such districts that contain at least 300 square miles and those districts that contain less than 300 square miles) or (ii) offer a kindergarten through grade 12 program and have less than 5,000 students in average daily attendance. For fiscal year 2007-08, the Tier One Basic Allotment was $3,135 based upon a guaranteed yield of $36.45 for each cent of tax effort, and for fiscal year 2008-09, the Tier One Basic Allotment was $3,218 based upon a guaranteed yield of $37.42 for each cent of tax effort. For the 2009-10 through 2012-13 school years, the basic allotment is set at the greater of $4,765 or 1.65% of the statewide average property value per student in WADA and, thereafter, at the lesser of $4,765 or that amount multiplied by the quotient of the district's compressed tax rate divided by the State maximum compressed tax rate of $1.00. This increase was due to changes in law effected by the Legislature during the 2009 Regular Legislative Session, which combined certain funding allotments that previously were separate components of Tier Two funding into the Tier One Basic Allotment. An additional change made during the 2009 Regular Legislative Session limits, beginning with 2010-11 school year, the annual increases in a district's M&O Tax revenue per WADA for purposes of State funding to not more than $350, excluding Tier Two funds. For the 2009-10 school year, the revenue increases are limited to the funds that a district would have received under the school finance formulas as they existed on January 1, 2009, plus an additional $350 per WADA, excluding Tier Two funds. Tier Two currently provides two levels of enrichment with different guaranteed yields depending on the district's local tax effort. For fiscal year 2009-10, the first six cents of tax effort that exceeds the compressed tax rate will generate a guaranteed yield equivalent to (a) that of the Austin Independent School District or (b) the amount of tax revenue per WADA received on that tax effort in the previous year, whichever is greater. The second level of Tier Two is generated by tax effort that exceeds the compressed tax rate plus six cents and has a guaranteed yield per penny of local tax effort of $31.95. Before 2009-10, Tier Two consisted of a district's M&O Tax levy above $0.86. For fiscal year 2008-09, State funding to equalize local M&O Tax levies above $0.86, up to a district's compressed rate, was funded at a guaranteed yield of $37.42 per student in WADA for each cent of tax effort; any amount above a district's compressed rate up to $0.04 was funded at a guaranteed yield of $50.98 per WADA for each cent of tax effort; and any tax effort associated with a tax approved by voters at a rollback election was funded at a guaranteed yield of $31.95 per WADA for each cent of tax effort above a district's compressed rate plus $0.04. See "CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General" for a discussion of the state compression percentage. 12

The IFA guarantees each school district a specified amount per student (the "IFA Guaranteed Yield") 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 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. In 2007, the Legislature appropriated funds for outstanding school district bonds that qualified in prior budget cycles for IFA allotments and added funding for qualified debt to be issued for instructional facilities in the State's 2008-09 fiscal biennium; however, the Texas Education Agency has indicated that it intends to reserve all such new appropriation for the second year of the biennium. State financial assistance is provided for certain existing debt issued by school districts (referred to herein as EDA) to produce a guaranteed yield (the "EDA Yield"), which for the 2009-11 State Biennium is $35.00 (subject to adjustment as described below) in State and local revenue per student for each cent of debt service tax levy; however, for bonds that became eligible for EDA funding after August 31, 2001, and prior to August 31, 2005, EDA assistance for such eligible bonds may be less than $35 in revenue per student for each cent of debt service tax, as a result of certain administrative delegations to the Commissioner under State law. Effective September 1, 2003, the portion of the local debt service rate that has qualified for equalization funding by the State has been limited to the first 29 cents of debt service tax or a greater amount for any year provided by appropriation by the Legislature. In general, a district's bonds are eligible for EDA assistance if (i) the district made payments on the bonds during the final school year of the preceding State fiscal biennium or (ii) levied taxes to pay the principal of and interest on the bonds for that school year. Access to EDA funding will be determined by the debt service taxes collected in the final year of the preceding biennium. A district may not receive EDA funding for the principal and interest on a series of otherwise eligible bonds for which the district receives 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 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. 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. The former provision of the Education Code, Section 45.003, that in general limited the M&O Tax rate to $1.50 per $100 of taxable assessed value, was replaced by the Reform Legislation with a formula using the state compression percentage so that the maximum tax rate that may be adopted by a district in any fiscal year is limited based on the amount of State funds to be received by the District in that year. For the 2006-07 and 2007-08 fiscal years, districts were permitted to generate additional local funds by raising their M&O Tax rate by $0.04 above the compressed tax rates (without taking into account changes in taxable valuation) without voter approval, and such amounts generated equalized funding dollars from the State under the Tier Two program. In fiscal year 2008-09 and thereafter, districts may, in general, increase their tax rate by an additional two or more cents and receive State equalization funds for such taxing effort so long as the voters approve such tax rate increase. Many school districts, however, voted their M&O Tax under prior law and may be subject to other limitations on the M&O Tax rate. School districts are also authorized to levy a bond debt service tax that may be unlimited in 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 "AD VALOREM TAX PROCEDURESPublic Hearing and Rollback Tax Rate" herein. Wealth Transfer Provisions Under the Finance System, districts are required, with certain limited exceptions, to effectively adjust taxable property wealth per weighted student ("wealth per student") for each school year to no greater than the "equalized wealth level", determined in accordance with a formula set forth in the Reform Legislation. 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. The wealth level that required wealth reduction measures for fiscal year 2006-07 was $319,500 per student in average daily attendance. For 2007-08 that wealth level was increased to $364,500 per student in average daily attendance with respect to that portion of a district's M&O tax effort that did not exceed its compressed tax rate, and remained at $319,500 with respect to that portion of a district's local tax effort that was beyond its compressed rate plus $.04. For 2008-09 that wealth level was 13

further increased to $374,200 per student in average daily attendance with respect to that portion of a district's M&O Tax effort that did not exceed its compressed tax rate, and remained at $319,500 with respect to that portion of a district's local tax effort that was beyond its compressed rate plus $0.06. For 2009-10 that wealth level has been increased to $476,500 per student in average daily attendance with respect to that portion of a district's M&O Tax effort that does not exceed its compressed tax rate, and remains at $319,500 with respect to that portion of a district's local tax effort that is beyond its compressed rate plus $.06. Property wealthy districts may also be able to levy up to an additional six cents per $100 of assessed valuation of M&O Taxes above their compressed rate to provide revenue that is not subject to recapture. A district has four options to reduce its wealth per student so that it does not exceed the equalized wealth level: (1) 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. (2) Subject to approval by the voters of all affected districts, a district may consolidate by agreement with one or more districts to form a consolidated taxing district solely to levy and distribute either M&O Taxes or both M&O Taxes and debt service taxes. (3) A district may detach property from its territory for annexation by a property-poor district. (4) 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 certain types of property from the district and annexing the property to a property-poor district or, if necessary, consolidate the district with a property-poor district. 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. Possible Effects of Wealth Transfer Provisions on the District's Financial Condition The District's wealth per student for the 2009-10 school year is more than the equalized wealth value. Accordingly, the District has been required to exercise one of the permitted wealth equalization options. As a district with wealth per student in excess of the equalize wealth value, the District has reduced its wealth per student by exercising Options 3 and 4 under Chapter 41, Texas Education Code, for the purpose of achieving property wealth equalization. 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. TAX RATE LIMITATIONS A school district is authorized to levy maintenance and operation taxes ("M&O Tax") subject to approval of a proposition submitted to district voters under Section 45.003(d) of the Texas Education Code, as amended. The maximum M&O Tax rate that may be levied by a district cannot exceed the voted maximum rate or the maximum rate described in the next succeeding paragraph. The maximum voted M&O Tax rate for the District is $1.50 per $100 of assessed valuation as approved by the voters at an election held on October 6, 2001 under Chapter 45, Texas Education Code. The maximum tax rate per $100 of assessed valuation that may be adopted by the District may not exceed the lesser of (A) $1.50 and (B) the sum of (1) the rate of $0.17, and (2) the product of the "state compression percentage" multiplied by $1.50. The state compression percentage was 66.67% for fiscal years 2007-08 and 2008-09. For fiscal year 2009-10 and thereafter, the Commissioner is required to determine the state compression percentage for each fiscal year which is based on the amount of State funds appropriated for distribution to the District for the current fiscal year. For fiscal year 2009-10, the Commissioner has determined to maintain the State compression percentage at 66.67%. For a more detailed description of the state compression percentage, see "CURRENT PUBLIC SCHOOL FINANCE SYSTEM - General." Furthermore, a school district cannot annually increase its 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 "AD VALOREM TAX PROCEDURES - Public Hearing and Rollback Tax Rate."

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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 a tax unlimited as to rate or amount for the support school district bonded indebtedness (see THE BONDS Security and Source of Payment). 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 reduces 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 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. In addition, taxes levied to pay refunding bonds issued pursuant to Chapter 1207, Texas Government Code, are not subject to the $0.50 tax rate test; however, taxes levied to pay debt service on such bonds are included in the calculation of the $0.50 tax rate test as applied to subsequent issues of "new debt." The Bonds constitute new debt and are subject to the $0.50 threshold tax rate test. Under current law, 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 at a 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. 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 secured by the districts debt service tax from a tax rate of $0.50, and to pay all debt and operating expenses which must be paid from receipts of the districts maintenance and operations tax from a tax not to exceed the maintenance and operations tax limit described under the caption TAX RATE LIMITATIONS. 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 districts calculations showing the compliance with these tests as a condition to the legal approval of the debt. The School Building Bonds constitute new debt and are, therefore, subject to the $0.50 limitation. See also "TAX RATE LIMITATIONS". EMPLOYEES RETIREMENT PLAN AND OTHER POST-EMPLOYMENT BENEFITS The Districts employees participate in a retirement plan with the State of Texas; the Plan is administered by the Teacher Retirement System of Texas (TRS). State contributions are made to cover costs of the TRS retirement plan up to certain statutory limits. The District is obligated for a portion of TRS costs relating to employee salaries that exceed the statutory limit. As a result of its participation in TRS and having no other postemployment retirement benefit plans, the District has no obligations for other postemployment benefits within the meaning of Governmental Accounting Standards Board Statement No. 45. (See Note 5.G. Pension Plan Obligations in the audited financial statements of the District for the year ended June 30, 2009, set forth in Appendix D hereto). 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 Moodys Investor Service Inc., (Moodys) and Standard and Poors Ratings Services, a Standard & Poors Financial Services LLC business (S&P) have assigned their ratings of "Aaa" and "AAA", respectively to the Bonds based upon the Permanent School Bond Guarantee. Moodys and S&P generally rate all bond issues guaranteed by the Permanent School Fund of the State of Texas Aaa and AAA, respectively. The Districts underlying rating for the Bonds (without consideration of the Permanent School Fund Guarantee or other credit enhancement) is Aa1 by Moodys and AA+ by S&P. An explanation of the significance of any rating may be obtained from the rating agencies. (See THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM herein.) An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the respective view of such organization and the District makes no representation as to the appropriateness of the rating. There is no assurance that such rating will continue for any given period of time or that it will not be revised downward or withdrawn entirely by 15

the rating company, if in the judgment of the company, circumstances so warrant. Any such downward revision or withdrawal of such rating, may have an adverse effect on the market price of the Bonds. LEGAL MATTERS The District will furnish a complete transcript of proceedings had incident to the authorization and issuance of the Bonds, including the unqualified approving legal opinions of the Attorney General of the State of Texas as to the Bonds to the effect that the Bonds are valid and legally binding obligations of the District, and based upon examination of such transcript of proceedings, the approving legal opinions of Bond Counsel, with respect to the Bonds issued in compliance with the provisions of the Order. A form of such opinion is attached hereto as Appendix C. 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 said Bonds will also be furnished. In connection with the issuance of the Bonds, Bond Counsel has been engaged by and only represents the District. Bond Counsel was not requested to participate, and did not take part, in the preparation of the Private Placement Memorandum, and such firm has not assumed any responsibility with respect thereto or undertaken independently to verify any of the information contained therein, except that, in its capacity as Bond Counsel, such firm has reviewed the description of the Bonds in the Private Placement Memorandum to verify that such description conforms with the Order. The legal fee to be paid Bond Counsel for services rendered in connection with the issuance of the Bonds is contingent on the sale and delivery of the Bonds. The legal opinion will be attached to or accompany 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 opinion as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of that 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 THE FOLLOWING DISCUSSION, WHICH WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE SALE OF THE BONDS, IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED BY ANY TAXPAYER, TO AVOID PENALTIES THAT MIGHT BE IMPOSED ON THE TAXPAYER IN CONNECTION WITH THE MATTERS DISCUSSED THEREIN. PROSPECTIVE HOLDERS OF THE BONDS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX TREATMENT WHICH MAY BE ANTICIPATED TO RESULT FROM THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE BONDS BEFORE DETERMINING WHETHER TO PURCHASE BONDS. General The following discussion is a summary of certain expected material federal income tax consequences of the purchase, ownership and disposition of the Bonds and is based on the Code, the regulations promulgated thereunder, published rulings and pronouncements of the Secretary or the Internal Revenue Service (IRS) and court decisions currently in effect (Existing Law). There can be no assurance that the IRS will not take a contrary view, and no ruling from the IRS has been, or is expected to be, sought on the issues discussed herein. Any subsequent changes or interpretations may apply retroactively and could affect the opinion and summary of federal income tax consequences discussed herein. The following discussion is not a complete analysis or description of all potential U.S. federal tax considerations that may be relevant to, or of the actual tax effect that any of the matters described herein will have on, particular holders of the Bonds and does not address U.S. federal gift or estate tax or (as otherwise stated herein) the alternative minimum tax, state, local or other tax consequences. Except as otherwise provided herein, this summary does not address special classes of taxpayers (such as partnerships, or other pass-through entities treated as partnerships for U.S. federal income tax purposes, S corporations, mutual funds, insurance companies, financial institutions, small business investment companies, regulated investment companies, real estate investment trusts, grantor trusts, former citizens of the U.S., broker-dealers, traders in securities and tax-exempt organizations, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be subject to or personal holding company provisions of the Code) that are subject to special treatment under U.S. federal income tax laws, or persons that hold Bonds as a hedge against, or that are hedged against, currency risk or that are part of hedge, straddle, conversion or other integrated transactions, or persons whose functional currency is not the U.S. dollar. This summary is further limited to investors who will hold the Bonds as capital assets (generally, property held for investment) within the meaning of Section 1221 of the Code. As used herein, the term U.S. Holder means a beneficial owner of a Bond who or which is: (i) an individual citizen or resident of the United States, (ii) a corporation or partnership created or organized under the laws of the United States or any political subdivision thereof or therein, (iii) an estate, the income of which is subject to U.S. federal income tax regardless of the source; or (iv) a trust, if (a) a court within the U.S. is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) the trust validly elects to be treated as a U.S. person for U.S. federal income tax purposes. As used herein, the term Non-U.S. Holder means a beneficial owner of a Bond that is not a U.S. Holder.

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THIS SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION ONLY AND DOES NOT DISCUSS ALL ASPECTS OF THE U.S. FEDERAL INCOME TAXATION THAT MAY BE RELEVANT TO A PARTICULAR HOLDER OF BONDS IN LIGHT OF THE HOLDERS PARTICULAR CIRCUMSTANCES AND INCOME TAX SITUATION. 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, OR ANY OTHER TAX CONSEQUENCE. FOREIGN INVESTORS SHOULD ALSO CONSULT THEIR OWN TAX ADVISORS REGARDING THE TAX CONSEQUENCES UNIQUE TO NON-U.S. HOLDERS. Opinion On the date of initial delivery of the Bonds, McCall, Parkhurst & Horton L.L.P., Bond Counsel to the District, will render its opinion that, in accordance with Existing Law (i) the Bonds constitute qualified school construction bonds within the meaning of Section 54A of the Code, (ii) holders of the Bonds on one or more tax credit allowance dates, during any taxable year, may claim a federal income tax credit, subject to the limitations of the Code, and (iii) such federal income tax credit will be treated as interest includible in gross income of the holder thereof, in accordance with each holders tax status. Except as stated above, Bond Counsel to the District 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 C - Form of Legal Opinion of Bond Counsel. In rendering its opinion, Bond Counsel to the District will rely upon (a) certain information and representations of the District, including information and representations contained in the District's federal tax certificate related to the Bonds, and (b) 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 therewith. Failure by the District to observe the aforementioned representations or covenants could adversely affect the status of the Bonds as qualified school construction bonds. See THE BONDS Special Mandatory Redemption. 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 the Bonds to be, and to remain, qualified school construction bonds for federal income tax purposes. The opinion of Bond Counsel to the District is conditioned on compliance by the District with such requirements. Bond Counsel to the District has not been retained to monitor compliance with these requirements subsequent to the issuance of the Bonds. See THE BONDS Special Mandatory Redemption. Bond Counsel's opinion regarding the Bonds 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 related to the Bonds is not a guarantee of a result. 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 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. Federal Tax Credit For a general discussion of regarding Tax Credits see "FEDERAL TAX CREDIT" herein. The amount of the Tax Credit that can be taken into account by a taxpayer (the Allowable Credit) cannot exceed the sum of the taxpayers regular tax liability and alternative minimum tax liability of Section 55 of the Code, less, in general, the taxpayers other tax credits (except certain refundable tax credits set forth in the Code). If the federal tax credit with respect to a Bond exceeds such Allowable Credit, any excess thereof may be carried over to the succeeding taxable year, subject to the limitation for such succeeding taxable year. The Allowable Credit is not considered a passive activity credit under section 469(d) of the Code and, therefore, such credit is not subject to the limitations with respect to passive activity credits. Moreover, a taxpayer must, subject to its tax accounting method, include the Tax Credit in gross income, within the meaning of the Code, as interest income (the Deemed Interest Payments), without regard to the limitation described in the preceding paragraph. Allocations of the Tax Credit to shareholders of an S corporation or partners a partnership will be treated as distributions. With respect to tax credit bonds held by regulated investment companies (RICs) and real estate investment trusts (REITs), the Tax Credit is allowed to shareholders and beneficiaries of the RIC or REIT, respectively, and the income from the credit is treated as distributed to such shareholders or beneficiaries under procedures to be prescribed by the IRS. The Code provides that, pursuant to certain procedures prescribed by the IRS, the ownership of a Bond and the tax credit attributable to such bond may be separated and that, in such event, rules pertaining to the stripping of interest coupons under section 1286 of the Code shall apply. NEITHER THE DISTRICT NOR ITS BOND COUNSEL MAKES ANY REPRESENTATION WITH RESPECT TO ANY SUBSEQUENT SEPARATION OF THE FEDERAL TAX CREDIT ATTRIBUTABLE TO THE BONDS. PURCHASERS OF THE BONDS SHOULD CONSULT THEIR TAX ADVISOR WITH RESPECT TO ANY MATTERS PERTAINING THE STRIPPING OF THE TAX CREDIT FROM THE BONDS. Certain United States Federal Income Tax Consequences to U.S. Holders Periodic Interest Payments Other than Tax Credit and Deemed Interest Payments. The Bonds are not obligations described in Section 103(a) of the Code. Accordingly, any stated interest paid with respect to the Bonds would be includable in gross income 17

within the meaning of Section 61 of the Code of each owner thereof and be subject to federal income taxation when received or accrued, depending upon the tax accounting method applicable to such owner. Disposition of Bonds. An owner will recognize gain or loss on the redemption, sale, exchange or other disposition of a Bond equal to the difference between the redemption or sale price (exclusive of any amount paid for accrued interest) and the owner's tax basis in the Bonds. Generally, a U.S. Holder's tax basis in the Bonds will be the owner's initial cost, increased by income reported by such U.S. Holder, including original issue discount and market discount income, and reduced, but not below zero, by any amortized premium. Any gain or loss generally will be a capital gain or loss and either will be long-term or short-term depending on whether the Bonds has been held for more than one year. Information Reporting and Backup Withholding. Subject to certain exceptions, information reports describing interest income, including any original issue discount, with respect to the Bonds will be sent to each registered holder and to the IRS. Payments of interest and principal may be subject to backup withholding under Section 3406 of the Code if a recipient of the payments fails to furnish to the payor such owner's social security number or other taxpayer identification number (TIN), furnishes an incorrect TIN, or otherwise fails to establish an exemption from the backup withholding tax. Any amounts so withheld would be allowed as a credit against the recipients federal income tax. Special rules apply to partnerships, estates and trusts, and in certain circumstances, and in respect of Non-U.S. Holders, certifications as to foreign status and other matters may be required to be provided by partners and beneficiaries thereof. REGISTRATION AND QUALIFICATION OF BONDS FOR SALE The sale of the Bonds has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Bonds have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been qualified under the securities acts of any jurisdiction. The District assumes no responsibility for 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 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 provisions. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section 1201.041 of the Public Security Procedures Act (Chapter 1201, Texas Government Code, as amended) 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 and other political subdivisions and public agencies of the State of Texas. In addition, various provisions of the Texas Finance Code provide that, subject to a prudence 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. In accordance with the Public Funds Investment Act, Chapter 2256, Texas Government Code, as amended, the Bonds must be rated not less than "A" or its equivalent as to investment quality by a national rating agency in order for most municipalities or other political subdivisions or public agencies of the State of Texas to invest in the Bonds, except for purchases for interest and sinking funds of such entities. (See "RATINGS" herein). Moreover, municipalities or other political subdivisions or public agencies of the State of Texas that have adopted investment policies and guidelines in accordance with the Public Funds Investment Act may have other, more stringent requirements for purchasing securities, including the Bonds. 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 AUTHORITY AND PRACTICES OF THE DISTRICT 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. Under Texas law, the District is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (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 and interest of which is 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 of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) certificates of deposit meeting the requirements of the Texas Public Funds Investment Act (Chapter 2256, Texas Government Code) that are issued by or through an institution that either has its main office or a branch in Texas, and 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 (6) or in any other manner and amount provided by law for District deposits; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas, (9) 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 18

time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) 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 (6) above, clauses (11) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the District, held in the District's name and deposited at the time the investment is made with the District or a third party designated by the District; (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, (10) certain 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, (11) commercial paper with a stated maturity of 270 days or less 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, (12) no-load money market mutual funds registered with and regulated by the Securities and Exchange Commission that have a dollar weighted average stated 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, and (13) no-load mutual funds 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 this paragraph, 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. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. The District may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than AAA or AAAm or an equivalent by at least one nationally recognized rating service. The District may also 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 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. Under Texas law, the District is required to invest its funds 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 include a list of authorized investments for District funds, the maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups. All District funds must be invested consistent with a formally adopted "Investment Strategy Statement" that specifically addresses each fund's 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, the District's 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 District's investment officers must submit an investment report to the Board of Trustees detailing: (1) the investment position of the District, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, and 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 strategies and (b) Texas law. No person may invest District funds without express written authority from the Board of Trustees. 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 family relationships with firms seeking to sell securities to the District to disclose the relationship and file a statement with the Texas Ethics Commission and the District, (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) in conjunction with its annual financial audit, perform a compliance audit of the management controls on investments and adherence to the District's investment policy, (5) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement, (6) restrict the investment in non-money market mutual funds in the aggregate to no more than 15% of the District's monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, (7) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements and (8) provide specific investment training for the Treasurer, the chief financial officer (if not the Treasurer) and the investment officer.

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THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM 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). This disclosure statement provides information relating to the program administered by the Texas Education Agency (the TEA) with respect to the Texas Permanent School Fund guarantee of Texas school district bonds, which program is referred to, and defined herein, as the Guarantee Program. 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 1953, the U.S. Congress passed the Submerged Lands Act that relinquished to coastal states all rights of the U.S. navigable waters within state boundaries. If the state, by law, had set a larger boundary prior to or at the time of admission to the Union, or if the boundary had been approved by Congress, then the larger boundary applied. After three years of litigation (1957-1960), the U. S. Supreme Court on May 31, 1960, affirmed Texas' historic three marine leagues (10.35 miles) seaward boundary. Texas proved its submerged lands property rights to three leagues into the Gulf of Mexico by citing historic laws and treaties dating back to 1836. All lands lying within that limit belong to the PSF. 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 Total Return 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. The Total Return Constitutional Amendment provides that interest and dividends produced by Fund investments will be additional revenue to the PSF. The State School Land Board (SLB) maintains the land endowment of the Fund on behalf of the Fund and is authorized to manage the investments of the capital gains, royalties and other investment income relating to the land endowment. The SLB is a three member board, the membership of which consists of the Commissioner of the Texas General Land Office (the Land Commissioner) and two citizen members, one appointed by the Governor and one by the Texas Attorney General (the Attorney General). The Texas Constitution describes the PSF as permanent and perpetual. Prior to the approval by Total Return Constitutional Amendment, only the income produced by the PSF was to be used to complement taxes in financing 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 Total Return 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 Total Return Constitutional Amendment, costs of administering the PSF were allocated to the ASF. With the approval of the Total Return Constitutional Amendment, the administrative costs of the Fund have shifted from the ASF to the PSF. In fiscal year 2009, distributions to the ASF amounted to $163.07 per student and the total amount distributed to the ASF was $716.54 million. Audited financial information for the PSF is provided annually through the PSF Annual Report (the Annual Report), which is filed with the Municipal Securities Rulemaking Board (MSRB). The Annual Report includes the Message of the Executive Administrator of the Fund (the Message) and the Management's Discussion and Analysis (MD&A). Reference is made to the Annual Report for the complete Message and MD&A for the year ended August 31, 2009 and for a description of the financial results of the PSF for the year ended August 31, 2009, the most recent year for which audited financial information regarding the Fund is available. The 2009 Annual Report is incorporated herein and made a part hereof for all purposes, but the 2009 Annual Report speaks only as of its date and the TEA has not obligated itself to update the 2009 Annual Report or any other Annual Report. The TEA posts each Annual Report, which includes statistical data regarding the Fund as of the close of each fiscal year, the most recent disclosure for the Guarantee Program, the Statement of Investment Objectives, Policies and Guidelines of the Texas Permanent School Fund, which is codified at 19 Texas Administrative Code, Chapter 33 (the Investment Policy), monthly updates with respect to the capacity of the Guarantee Program (collectively, the Web Site Materials) on the TEA web site at www.tea.state.tx.us/psf and with the MSRB at www.emma.msrb.org. Such monthly updates regarding the Guarantee Program are also incorporated herein and made a part hereof for all purposes. In addition to the Web Site Materials, the Fund is required to make quarterly filings with the Securities and Exchange Commission (SEC) under Section 13(f) of the Securities Exchange Act of 1934. Such filings, which consist of a list of the Fund's holdings of securities specified in Section 13(f), including exchange-traded (e.g., NYSE, AMEX) or NASDAQ-quoted stocks, equity options and warrants, shares of closed-end investment companies and certain convertible debt securities, is available from the SEC at www.sec.gov/edgar.shtml. A list of the Fund's equity and fixed income holdings as of August 31, 2009 has been 20

posted to the TEA web site and filed with the MSRB. Such list excludes holdings in the Fund's securities lending program. Such list is incorporated herein and made a part hereof for all purposes. The Total Return Constitutional Amendment The Total Return Constitutional Amendment approved a fundamental change in the way that distributions are made to the ASF from the PSF. The Total Return Constitutional Amendment requires that PSF distributions to the ASF be determined using a total-returnbased formula instead of the current-income-based formula, which was used from 1964 to the end of the 2003 fiscal year. The Total Return 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 6% of the average of the market value of the Fund, excluding real property (the Distribution Rate), 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 (the Distribution Measurement Period), in accordance with the rate adopted by: (a) a vote of two-thirds of the total membership of the State Board of Education (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 ten-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 (the Ten Year Total Return). In April 2009, the Attorney General issued a legal opinion, Op. Tex. Att'y Gen. No. GA-0707 (2009) (GA-0707), at the request of the Chairman of the SBOE with regard to certain matters pertaining to the Distribution Rate and the determination of the Ten Year Total Return (see Other Events and Disclosures). In determining the Distribution Rate, the SBOE has adopted the goal of maximizing the amount distributed from the Fund in a manner designed to preserve intergenerational equity. Intergenerational equity is the maintenance of endowment purchasing power to ensure that endowment spending keeps pace with inflation, with the ultimate goal being to ensure that current and future generations are given equal levels of purchasing power. In making this determination, the SBOE takes into account various considerations, and relies particularly upon its external investment consultant, which undertakes a probability analysis for long term projection periods that includes certain assumptions. Among the assumptions used in the analysis are a projected rate of growth of the average daily scholastic attendance State-wide, the projected contributions and expenses of the Fund, projected returns in the capital markets and a projected inflation rate. In September 2006, the SBOE established the Distribution Rate from the Fund to the ASF for fiscal years 2008 and 2009 at 3.5% of the average of the PSF market value during the Distribution Measurement Period. The decision of the SBOE regarding the Distribution Rate for 2008 and 2009 took into account a commitment by the SLB to transfer at least $100 million per year for each year of the biennium commencing September 1, 2007. The SLB has advised the SBOE that it anticipates that it will make similar $100 million releases to the PSF in the 2010 and 2011 fiscal years. In November, 2008, the SBOE set the Distribution Rate for the Fund for fiscal years 2010 and 2011 at 2.5% of the average of the PSF market value during the Distribution Measurement Period that ended in November 2008, and in January 2009, the SBOE reconfirmed the 2.5% Distribution Rate, which was expected to produce transfers of approximately $1.15 billion during the 2010-11 biennium, but also adopted a contingency plan in case the Distribution Rate should temporarily exceed the Ten Year Total Return during the 2010-2011 biennium. In November 2009, in accordance with GA-0707, and due to one of the constitutional measurements that limit transfers from the PSF, the SBOE determined that the authorized transfer amount for fiscal year 2010 would be limited to $60.7 million. Depending on the value of the PSF and market conditions, the 2011 transfer could be sufficient to reach the full $1.15 billion for the biennium, provided that the increase is in accordance with the Total Return Constitutional Amendment and a calculation to be made in 2011 of historic Fund returns. 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. As a result of this prior constitutional framework, the investment of the Fund has historically included a significant amount of fixed income investments and dividend-yielding equity investments, to produce income for transfer to the ASF. With respect to the management of the Fund's investment portfolio, the single most significant change made to date as a result of the Total Return Constitutional Amendment has been new asset allocation policies adopted by the SBOE in February 2004 and in July 2006, which have significantly altered the asset allocations of the Fund. In February 2004, the SBOE adopted a new asset allocation for the Fund, which decreased the fixed income target from 45% to 25% of Fund investment assets and increased the allocation for equities from 55% to 75% of investment assets. In the first quarter of fiscal year 2006, a new investment advisor for the Fund was engaged by the SBOE and tasked with recommending a new asset allocation mix for the Fund. In July 2006, the SBOE adopted a revised asset allocation (the 2006 Asset Allocation Policy), and the Investment Policy was modified in accordance with the 2006 Asset Allocation Policy. The 2006 Asset Allocation Policy included an equity allocation, including both domestic and foreign equity portfolios, of 53%; a fixed income allocation of 19%; and an alternative asset allocation, which includes real estate, real return, absolute return and private equity components, totaling 28% of the Fund's asset target. The Fund's investment policy provides for minimum and maximum ranges among the components of each of the three general asset classifications. In July 2008, the SBOE reapproved the 2006 Asset Allocation Policy (hereinafter, the 2008 Asset Allocation Policy). In August 2009, the SBOE engaged a new investment advisor. The Fund's investment advisor is tasked with advising the SBOE with respect to the implementation of the 2008 Asset Allocation Policy, including the timing and manner of the selection of any external managers and other consultants. For a variety of reasons, including the requirement that the SBOE obtain additional appropriations from the Legislature to pay administrative costs associated with certain types of investments included in the 2008 Asset Allocation Policy, the 2008 Asset Allocation Policy is being implemented in phases. At August 31, 2009, based on unaudited records, the Fund was invested as follows: 67.40% in equity investments; 21.87% in fixed income investments; 10.70% in alternative assets; and 0.03% in cash. In accordance with the Texas Constitution, the SBOE views the PSF as a perpetual institution. Consistent with its perpetual nature, the PSF is managed as an endowment fund with a long-term investment horizon. Under the total-return investment objective, the 21

Investment Policy provides that the PSF shall be managed consistently with respect to the following: generating income for the benefit of the public free schools of Texas, the real growth of the corpus of the PSF, protecting capital, and balancing the needs of present and future generations of Texas school children. As described above, the Total Return 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. State law provides that each transfer of funds from the PSF to the ASF is made monthly, with each transfer to be in the amount of one-twelfth of the annual distribution. The heavier weighting of equity securities relative to fixed income investments has resulted in greater volatility of the value of the Fund. Given the greater weighting in the overall portfolio of passively managed investments, it is expected 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 the 2008 Asset Allocation Policy includes an allotment for 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 prior 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 Total Return 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. 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 section 33.1. The Total Return Constitutional Amendment provides that expenses of managing the PSF are to be paid by appropriation from the PSF. In January 2005, at the request of the SBOE, the Attorney General issued a legal opinion, Op. Tex. Att'y Gen. No. GA-0293 (2005) (GA-0293), that the Total Return Constitutional Amendment requires that SBOE expenditures for managing or administering PSF investments, including payments to external investment managers, be paid from appropriations made by the Legislature, but that the Total Return Constitutional Amendment does not require the SBOE to pay from such appropriated PSF funds the indirect management costs deducted from the assets of a mutual fund or other investment company in which PSF funds have been invested. Texas law assigns control of the Fund's land and mineral rights to the three-member SLB, which consists of the elected Commissioner of the General Land Office (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. In 2007, the Legislature established the real estate special fund account of the PSF (the Real Estate Account) consisting of the land, mineral or royalty interest, real estate investment, or other interest, including revenue received from those sources, that is set apart to the PSF under the Texas Constitution and laws, together with the mineral estate in riverbeds, channels, and the tidelands, including islands. The investment of the Real Estate Account is subject to the sole and exclusive management and control of the SLB and the Land Commissioner, who is also the head of the GLO. The 2007 legislation that established the Real Estate Account, House Bill 3699 (HB 3699) presented constitutional questions regarding the respective roles of the SBOE and the SLB relating to the disposition of proceeds of real estate transactions to the ASF, among other questions. On April 9, 2008, the Attorney General issued a legal opinion, Op. Tex. Att'y Gen. No. GA-0617 (2008), at the request of the Chair of the SBOE advising, among other matters, that any proceeds from the sale of real estate that are not reinvested by the SLB in other real estate assets must be invested under the direction of the SBOE, and that the provisions of H.B. 3699 that permit the SLB to directly transfer real estate investment proceeds to the ASF (in lieu of transfer to the investment portfolio of the PSF under the management of the SBOE), would likely be determined by a court to be in violation of the State constitution. Amounts in the investment portfolio of the PSF are taken into account by the SBOE for purposes of determining the Distribution Rate. 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 established the Committee of Investment Advisors, which consists of independent investment experts each appointed by a member of the SBOE to closely advise the respective SBOE member on investment issues. 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 22

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. The SBOE has also engaged outside counsel to advise it as to its duties over the Fund, including specific actions regarding the investment of the PSF to ensure compliance with the fiduciary standards, and to provide transactional advice in connection with the investment of Fund assets in non-traditional investments. 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. The portion of the Fund that is managed by external managers declined from 39% at August 31, 2002 to 26.46% at August 31, 2008, in large part due to legislative appropriations riders that reduced the appropriation for the administrative costs of managing the Fund during that period, including, in particular, the payment of fees of external managers. As the TEA has implemented the 2008 Asset Allocation in a manner outlined in GA-0293, the portion of the Fund that is administered by external managers has begun to increase, in large part due to changes in the fair market value of the various asset classes, and at August 31, 2009 29.87% of the Fund was managed by external managers. The Guarantee The Guarantee Program for School District Bonds (the Guarantee Program) was authorized by an amendment to the Texas Constitution in 1983 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 guaranteed bonds are paid or defeased, by a refunding or otherwise. In the event of default, holders of guarantee bonds will receive all payments due from the corpus of the PSF. Following a determination that a district will be or is unable to pay maturing or matured principal or interest on any guaranteed 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 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 Comptroller). The Commissioner will instruct the Comptroller 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. Effective September 1, 2009, the Act permits the Commissioner to order a school district to set a tax rate sufficient to reimburse the Fund for any payments made with respect to guaranteed bonds, and also sufficient to pay future payments on guaranteed bonds, and provides certain enforcement mechanisms to the Commissioner, including the appointment of a board of managers or annexation of a defaulting district to another district. If a 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 redemption of bonds, except upon mandatory sinking fund redemption, and does not apply to the obligation, if any, of a school district to pay a redemption premium on bonds. In the event that two or more payments are made from the PSF on behalf of a district, the Commissioner shall 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 guaranteed bonds. Capacity Limits for the Guarantee Program 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 regulations and a notice issued by the Internal Revenue Service (the IRS and the IRS Limit, respectively). 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. During the 78th Regular Session of the Legislature in 2003, legislation was enacted that increased 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 eliminated the real estate exclusion from the calculation. Prior to the issuance of the IRS Notice (defined below), the capacity of the program under the IRS Limit was 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 excluded additions to the Fund made since May 14, 1989. During the 2007 Texas Legislature, Senate Bill 389 (SB 389) was enacted providing for additional increases in the capacity of the Guarantee Program, and specifically providing that the SBOE may by rule increase the capacity of the Guarantee Program from two and onehalf times the cost value of the PSF to an amount not to exceed five times the cost value of the PSF, provided that the increased limit does not violate federal law and regulations and does not prevent bonds guaranteed by the Guarantee Program from receiving the highest available credit rating, as determined by the SBOE. SB 389 further provides that the SBOE shall at least annually consider whether to change the capacity of the Guarantee Program. Since 2005, the Guarantee Program has twice reached capacity under the IRS Limit, and in each instance the Guarantee Program was closed to new bond guarantee applications until relief was obtained from the IRS. The most recent closure of the Guarantee Program commenced in March 2009 and the Guarantee Program reopened in February 2010 on the basis of receipt of the IRS Notice. On December 16, 2009, the IRS published Notice 2010-5 (the IRS Notice) stating that the IRS will issue proposed regulations amending the existing regulations to raise the IRS limit to 500% of the total cost of the assets held by the PSF as of December 16, 23

2009. In accordance with the IRS Notice, the amount of any new bonds to be guaranteed by the PSF, together with the then outstanding amount of bonds previously guaranteed by the PSF, must not exceed the IRS limit on the sale date of the new bonds to be guaranteed. The IRS Notice further provides that the IRS Notice may be relied upon for bonds sold on or after December 16, 2009, and before the effective date of future regulations or other public administrative guidance affecting funds like the PSF. The IRS Notice establishes a static capacity for the Guarantee Program based upon the cost value of Fund assets on December 16, 2009 multiplied by five. On December 16, 2009, the cost value of the Guarantee Program was $23,463,749,653 (estimated and unaudited), thereby producing an IRS Limit of approximately $117.3 billion. The State Capacity Limit is determined on the basis of the cost value of the Fund from time to time multiplied by the capacity multiplier determined annually by the SBOE, but not to exceed a multiplier of five. The capacity of the Guarantee Program will be limited to the lower of the State Capacity Limit and the IRS Limit. On May 21, 2010, the SBOE modified the regulations that govern the Guarantee Program (the Guarantee Program Rules), and increased the State Law Capacity to an amount equal to three times the cost value of the PSF, which regulations will be effective 21 days following publication in the Texas Register. The estimated effective date of the new capacity rule is on or about July 4, 2010. The Guarantee Program Rules provide that the Commissioner may reduce the multiplier to maintain the AAA credit rating of the Guarantee Program, but provide that any changes to the multiplier made by the Commissioner are to be ratified or rejected by the SBOE at the next meeting following the change. See Valuation of the PSF and Guaranteed Bonds, below. Since July 1991, when the SBOE amended the Guarantee Program Rules to broaden the range of bonds that are eligible for guarantee 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 issued by school districts in the State. See the table Permanent School Fund Guaranteed Bonds below. The SBOE has modified the Guarantee Program Rules in recent years, most recently in May 2010. Generally, the Guarantee Program Rules limit guarantees to certain types of notes and bonds, including, with respect to refunding bonds, a requirement that the bonds produce debt service savings, and that bonds issued for capital facilities must have been voted as unlimited tax debt of the issuing district. The Guarantee Program regulations include certain accreditation criteria for districts applying for a guarantee of their bonds, and limit guarantees to districts that have less than the amount of annual debt service per average daily attendance that represents the 90th percentile of annual debt service per average daily attendance for all districts, but such limitation will not apply to school districts that have enrollment growth of at least 25% over the previous five school years. Effective September 1, 2009, the Act provides that the SBOE may annually establish a percentage of the cost value of the Fund to be reserved from use in guaranteeing bonds. The capacity of the Guarantee Program in excess of any reserved portion is referred to herein as the Capacity Reserve. The Guarantee Program Rules provide for a minimum Capacity Reserve of no less than 5%, and provide that the amount of the Capacity Reserve may be increased by a majority vote of the SBOE. The Commissioner is authorized to change the Capacity Reserve, which decision must be ratified or rejected by the SBOE at its next meeting following any change made by the Commissioner. The Guarantee Program Rules are codified in the Texas Administrative Code at 19 TAC sections 33.65 et seq., and are available on the TEA web site at www.tea.state.tx.us/rules/tac/chapter033/index.html. The current Capacity Reserve is noted in the monthly updates with respect to the capacity of the Guarantee Program on the TEA web site at www.tea.state.tx.us/psf, which are also filed with the MSRB. 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. It is anticipated that the issuance of the IRS Notice will substantially increase the amount of bonds guaranteed under the Guarantee Program. The Act requires that the Commissioner prepare, and the SBOE approve, an annual report on the status of the Guarantee Program (the Annual Report). 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 the audited annual report of the PSF for the year ended August 31, 2009 with the MSRB. The 2009 Annual Report has also been filed with the Municipal Advisory Council of Texas and posted to the PSF web site. Such report speaks only as of the date thereof. Ratings of Bonds Guaranteed Under the Guarantee Program Moody's Investors Service, Standard & Poor's Rating Service, a Standard & Poors Financial Service LLC business, 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.

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24

Valuation of the PSF and Guaranteed Bonds Permanent School Fund Valuations Fiscal Year Ended 8/31 2005 2006 2007 2008 2009
(1)

Book Value(1) $18,497,507,739 19,359,570,146 21,234,323,093 22,926,299,922 23,117,052,793(2)

Market Value(1) $25,994,480,027 26,537,687,968 29,251,882,931 29,336,248,611 25,443,104,623(2)

SLB managed assets are included in the market value and book value of the Fund. In determining the market value of the PSF from time to time during a fiscal year, the TEA uses current, unaudited values for TEA managed investment portfolios and cash held by the SLB. Market values of land and mineral interests, and investments in externally managed real estate funds managed by the SLB are based upon information reported to the PSF by the SLB. Beginning in fiscal year 2009, the SLB reported that information to the PSF on a quarterly basis. The valuation of such assets at any point in time is dependent upon a variety of factors, including economic conditions in the State and nation in general, and the values of these assets, and, in particular, the valuation of mineral holdings administered by the SLB, can be volatile and subject to material changes from period to period. At August 31, 2009, land, external real estate investments and mineral assets managed by the SLB had book values of approximately $471.4 million, $979.9 million, and $13.4 million, respectively, and market values of approximately $817.3 million, $622.8 million, and $2.628 billion, respectively.
(2)

At April 30, 2010, the PSF had a book value of $23,118,090,410 and a market value of $28,525,881,675 (in each case, based on unaudited data). At 8/31 2005 2006 2007 2008 2009(2) Permanent School Fund Guaranteed Bonds Principal Amount(1) $35,230,425,201 37,793,429,328 44,856,621,419 49,860,572,025 50,032,724,439

(1)

_________ Represents original principal amount; does not reflect any subsequent accretions in value for compound interest bonds (zero coupon securities). The amount shown 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.

At April 30, 2010, there were $49,171,472,797 of bonds guaranteed under the Guarantee Program and the capacity of the Guarantee Program was $57,795,226,025 based on the then applicable two and one half times cost value multiplier (in each case based on unaudited data). At April 30, 2010, the capacity of the Guarantee Program would have been $69,354,271,230, based on the three times cost value multiplier approved by the SBOE on May 21, 2010 (based on unaudited data). Such capacity figures include the Reserve Capacity. Discussion and Analysis Pertaining to Fiscal Year Ended August 31, 2009 The following discussion is derived from the Annual Report for the year ended August 31, 2009, including the Message of the Executive Administrator of the Fund and the Management's Discussion and Analysis contained therein. Reference is made to the Annual Report for the complete Message and MD&A. Investment assets managed by the fifteen member SBOE are referred to throughout this MD&A as the PSF(SBOE) assets. As of August 31, 2009, the Fund's land, mineral rights and certain real assets are managed by the three-member SLB and these assets are referred to throughout as the PSF(SLB) assets. The 2008 Asset Allocation Policy includes an allocation for real estate investments, and as such investments are made, and become a part of the PSF investment portfolio, those investments will be managed by the SBOE and not the SLB. At the end of fiscal 2009, the total Fund balance was $22.6 billion and includes a restatement of beginning Fund balance by $197 million, resulting from the implementation of GASB Statement 52, Land and Other Real Estate Held as Investments by Endowments. Including the result of the restatement, Fund balance decreased $2.6 billion from the prior year. During the year, the SBOE continued implementing its revised long term strategic asset allocation to diversify and strengthen the PSF(SBOE) investment assets of the Fund. The revised allocation is projected to increase returns over the long run while reducing risk and return volatility of the portfolio. The one year, three year, five year and ten year annualized total returns for the PSF(SBOE) assets were -8.47%, -0.63%, 4.35% and 3.67% respectively (total return takes into consideration the change in the market value of the Fund during the year as well as the interest and dividend income generated by the Fund's investments). In addition, the SLB continued its shift into externally managed real asset investment funds and the one year, three year, and five year annualized total returns for the PSF(SLB) real assets, including cash, are -17.63%, -0.24%, and 4.00% respectively.

(2)

25

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 factors affecting investment performance are the asset allocation decisions made by the SBOE and SLB. The current SBOE long term asset allocation policy allows for diversification of the PSF(SBOE) portfolio into alternative asset classes whose returns are not as correlated to traditional asset classes. The implementation of the long term asset allocation will occur over several fiscal years and is expected to provide incremental total return at reduced risk. As of August 31, 2009, the PSF(SBOE) portion of the Fund had diversified into emerging market international equities and absolute return funds. Searches for real estate and private equity advisors are underway and other asset classes such as real return will be strategically added commensurate with the economic environment and the goals and objectives of the SBOE. The PSF(SLB) portfolio is generally characterized by three broad categories: (1) discretionary real assets investments, (2) sovereign and other lands, and (3) mineral interests. Discretionary real assets investments consist of externally managed real estate, infrastructure, and energy/minerals investment funds, internally managed direct real estate investments, and cash. Sovereign and other lands consist primarily of the lands set aside to the PSF when it was created. Mineral interests consist of the minerals that are associated with PSF lands. The investment focus of PSF(SLB) discretionary real assets investments has shifted from internally managed direct real estate investments to externally managed real assets investment funds. During fiscal year 2009, the SLB made capital commitments to four externally managed real assets investment funds in a total amount of $200 million. At August 31, 2009, the SLB had approved total capital commitments of $1.9 billion to thirty-three funds, of which $920 million remains unfunded. The PSF(SBOE)'s investment in equity securities experienced a return of -16.68% during the fiscal year ended August 31, 2009. The PSF(SBOE)'s investment in fixed income securities produced a return of 10.20% during the fiscal year and absolute return investments yielded a return of -4.86%. Combined, all PSF(SBOE) asset classes produced an investment return of -8.47% for the fiscal year ended August 31, 2009, outperforming the target index by approximately 17 basis points. All PSF(SLB) real assets (including cash) returned -17.63% for the fiscal year ending August 31, 2009. For fiscal year 2009, total revenues, inclusive of unrealized gains and losses and net of security lending rebates and fees, continued to decline, totaling negative $1.98 billion by the end of the year. This decline is primarily attributable to the fact that domestic and international securities markets were lower in all sectors in fiscal year 2009 and the fair market valuations of the Fund's assets experienced declines commensurate with market conditions. In fiscal year 2009, revenues earned by the Fund included lease payments, bonuses and royalty income received from oil, gas and mineral leases; lease payments from commercial real estate; surface lease and easement revenues; revenues from the resale of natural and liquid gas supplies; dividends, interest, and securities lending revenues; the net change in the fair value of the investment portfolio; and, other miscellaneous fees and income. Expenditures are paid from the Fund before distributions are made under the total return formula. Such expenditures include the costs incurred by the SLB to manage the land endowment, as well as operational costs of the Fund, including external management fees. Total operating expenditures, net of security lending rebates and fees, decreased 29.3% for the fiscal year ending August 31, 2009. This decrease is primarily attributable to the decrease in the expenditures for gas supplies purchased for resale within the State Energy Management Program. The Fund supports the public school system in the State by distributing a predetermined percentage of its asset value to the ASF. For fiscal years 2008 and 2009, this distribution to the ASF totaled $716.54 million and $716.5 million, respectively. At the end of the 2009 fiscal year, PSF assets guaranteed $50.03 billion in bonds issued by 781 local school districts. Since its inception in 1983, the Fund has guaranteed 4,050 school district bond issues totaling $85.9 billion in principal amount. During the 2009 fiscal year, the number of outstanding issues guaranteed under the Guarantee Program decreased by 65, or -2.5%. The dollar amount of guaranteed school bond issues outstanding increased by $172.1 million or 0.3%. The guarantee capacity of the Fund increased by $445.7 million, or 0.8%, during fiscal year 2009. Other Events and Disclosures The State Investment Ethics Code governs the ethics and disclosure requirements for financial advisors and other service providers who advise certain State governmental entities, including the PSF. In accordance with the provisions of the State Investment Ethics Code, the SBOE periodically modifies its code of ethics, which occurred most recently in May 2010. The SBOE code of ethics 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. For the 2008-2009 biennium, the SBOE requested an additional appropriation of approximately $18 million to be used for the implementation of the 2008 Asset Allocation Policy. Such amount was requested in addition to a general operating appropriation for 2008-2009 of $14 million. The 2007 Legislature appropriated $9 million of the requested 2008-2009 additional appropriation for external management services, and a $14 million operating appropriation. For the 2010-2011 biennium, the SBOE made an exceptional item request of approximately $12.5 million to fund costs of implementing the 2008 Asset Allocation Policy, but the exceptional item was not funded. The Legislature provided a total appropriation of $23.2 million for the general administration of the Fund for the 2010-2011 biennium. While funds were not appropriated in the 2009 Legislature to implement the 2008 Asset Allocation Policy, Fund management is of the view that there are sufficient resources available to continue the phased 26

implementation of new alternative asset allocations during the 2010-2011 biennium. In accordance with HB 3699, the SLB approved a resolution on August 7, 2007 to begin depositing revenues previously deposited with the PSF into the Real Estate Account, commencing September 1, 2007. Also on August 7, 2007, July 23, 2008 and August 6, 2009, the SLB adopted resolutions to make four quarterly payments of $25,000,000 during fiscal years 2008, 2009 and 2010, respectively, from the Real Estate Account to the SBOE for investment, which action was taken to honor a SLB commitment to the Fund that was made prior to the enactment of HB 3699. As of August 31, 2009, 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 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 the MSRB. The MSRB has established the Electronic Municipal Market Access (EMMA) system, and the TEA is required to file its continuing disclosure information using the EMMA system. Investors may access continuing disclosure information filed with the MSRB at www.emma.msrb.org. Annual Reports The TEA will annually provide certain updated financial information and operating data to the MSRB. 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 Private Placement Memorandum 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 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 the MSRB of the change. Material Event Notices The TEA will also provide timely notices of certain events to the MSRB. 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 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.

27

Availability of Information The TEA has agreed to provide the foregoing information only to the MSRB and to transmit such information electronically to the MSRB in such format and accompanied by such identifying information as prescribed by the MSRB. The information is available from the MSRB to the public without charge at www.emma.msrb.org. 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 Guarantee Program. The District may make 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, if any, is included elsewhere in the Private Placement Memorandum relating to the Bonds. 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 guaranteed bonds in the primary offering of such 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 its 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. 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 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 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 no more than $10 million of outstanding municipal securities. FINANCIAL ADVISOR Southwest Securities is employed as Financial Advisor (the 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 Private Placement Memorandum. 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 Private Placement Memorandum. Because of its 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 also 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. PLACEMENT AGENT BOSC, Inc., a subsidiary of BOK Financial Corp., is acting as Placement Agent in connection with the issuance of the Bonds. The Placement Agents fee for services rendered with respect to the issuance of the Bonds is contingent upon the issuance and delivery of the Bonds.

28

BOSC, Inc., in its capacity as Placement Agent, has not verified and does not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Bonds, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. AUTHENTICITY OF FINANCIAL INFORMATION The financial data and other information contained herein have been obtained from the District's records, audited financial statements and other sources which are believed to be reliable. All of the summaries of the statutes, documents and resolutions contained in this Private Placement Memorandum are made subject to all of the provisions of such statutes, documents and resolutions. These summaries do not purport to be complete statements of such provisions and reference is made to such documents for further information. Reference is made to original documents in all respects. LITIGATION The District is not a party to any litigation or other proceeding 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. CONTINUING DISCLOSURE OF INFORMATION The sale of the Bonds is exempt from Securities and Exchange Commission Rule 15c2-12 (the "Rule") by virtue of the private placement exemption set forth in the Rule. The District is not, therefore, obligated pursuant to the Rule to provide any ongoing disclosure relating to the District or the Bonds. Notwithstanding the forgoing, in consideration for the purchase of the Bonds by the Initial Purchaser, the Issuer has agreed to provide the Initial Purchaser with its audited annual financial statements within one hundred eighty (180) days after each fiscal year end. See THE PERMANENT SCHOOL FUND GUARANTEE PROGRAM for a description of the continuing disclosure undertaking to provide certain updated financial information and operating date 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 the MSRB. FORWARD LOOKING STATEMENTS The statements contained in this Private Placement Memorandum, and in any other information provided by the District, that are not purely historical, are forward-looking statements, including statements regarding the Districts 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 Private Placement Memorandum 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 Districts 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 assurances that the forward-looking statements included in this Private Placement Memorandum would prove to be accurate. CONCLUDING STATEMENT 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 Private Placement Memorandum 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 original documents in all respects. The Order has approved the form and content of this Private Placement Memorandum, and any addenda, supplement or amendment thereto, and authorized its use in the reoffering of the Bonds by the Placement Agent. Frisco Independent School District Dan Mossakowski President, Board of Trustees ATTEST: Brenda Polk Secretary, Board of Trustees 29

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APPENDIX A
FINANCIAL INFORMATION OF THE DISTRICT

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FRISCO INDEPENDENT SCHOOL DISTRICT FINANCIAL INFORMATION OF THE DISTRICT (As of April 1, 2010)
ASSESSED VALUATION 2009 Actual Total Valuation Exemption/Deductions Residential Homestead Freeport Over-65/Disabled Disabled/Deceased Vet Homestead Cap Adjustment Productivity/Cap Loss HB 366/Other Total (13.31% of actual value) 2009 Certified Net Taxable Valuation $ 19,603,843,991

509,953,653 24,848,302 32,731,390 3,812,435 17,307,041 1,645,421,930 2,197,753 2,236,272,504 $ 17,367,571,487

VOTED GENERAL OBLIGATION DEBT PRINCIPAL Unlimited Tax Bonds Outstanding Less: Bonds to be Refunded Plus: The Refunding Bonds Qualified School Construction Bonds (1) Total General Obligation Debt (Stated Principal Amount) Ratio of Net GO Debt Principal to 2009 Net Taxable Valuation 2010 Population Estimate 2009/10 Enrollment 6.90% 165,000 34,273 Per Capita Actual 2009 Valuation Per Capita Net 2009 Valuation Per Capita Net G.O. Debt Principal $ 1,178,615,745.40 (26,855,000.00) 26,855,000.00 20,195,000.00 $ 1,198,810,745.40 $ $ $ 118,811 105,258 7,266

(1)

Excludes interest accreted on outstanding capital appreciation bonds.

PROPERTY TAX RATES AND COLLECTIONS Net Taxable Valuation $ 3,430,012,041 4,855,789,194 6,115,556,513 7,247,491,385 8,565,309,234 10,151,128,417 12,291,132,177 14,927,611,286 16,554,603,478 17,367,571,487 % Collections Total (1) Current 99.02% 99.62% 97.94% 98.96% 98.47% 103.20% 99.03% 100.02% 99.04% 100.03% 98.71% 99.56% 98.57% 99.57% 98.18% 99.35% 98.90% 100.90% (In process of collection)

Tax Year 2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008 2008/2009 2009/2010

Tax Rate $1.4200 $1.4400 $1.4975 $1.5175 $1.5575 $1.6300 $1.5800 $1.3500 $1.3700 $1.3900

F/Y Ended 8/31/01 8/31/02 8/31/03 8/31/04 8/31/05 8/31/06 8/31/07 6/30/08 * 6/30/09

Source
(2) (2) (2) (2) (2) (2) (2) (2) (2)

(1) (2)

Excludes penalties and interest. District Tax Office and Audit Reports.

*Beginning September 1, 2007, the district changed its fiscal year end to June 30th.

A-1

DEBT SERVICE FUND COMPARATIVE STATEMENTS OF REVENUE AND EXPENDITURES Fiscal Year Fiscal Years Ending June 30* 2009 2008 46,270,566 $ 4,965,217 Ending August 31* 2007 $ 779,182

Beginning Fund Balance Revenues: Local, Intermediate, and Out-of-State State Program Revenues Federal Program Revenues Total Revenues Expenditures Total Expenditures Excess (Deficiency) Revenues over Expenditure Other Uses Other Resources Fund Balance - End of Year

58,613,963

63,926,276

52,797,676

58,613,963

$ 63,926,276

52,797,676

64,656,557

$ 22,676,979

48,916,249

(6,042,594)

$ 41,249,297

3,881,427

$ 40,227,972
(1)

56,052 $ 46,270,566
(1)(2)

304,608 $ 4,965,217

*Beginning September 1, 2007, the District changed its fiscal year end to June 30th. Includes funds disbursed to pay debt service on the Districts outstanding bonds due on August 15 of next fiscal year. As a result of the change to a June 30 fiscal year end, the District's annual tax levy includes an amount sufficient to pay debt service coming due in August of the fiscal year following the fiscal year in which the tax is levied. See "AD VALOREM TAX PROCEDURES."
(2) (1)

Represents results for ten-month period ending June 30, 2008.

TAX RATE DISTRIBUTION Fiscal Years Ending June 30* 2010 2009 1.0000 $ 1.0000 0.3900 0.3700 1.3900 $ 1.3700

2008 $ $ 0.9600 0.3900 1.3500

Maintenance & Operation Interest & Sinking Fund Total

$ $

*Beginning September 1, 2007, the district changed its fiscal year end to June 30th.

FUND BALANCES (unaudited as of March 31, 2010) General Fund Interest & Sinking Fund Capital Projects or Improvement Fund $ 156,799,623 44,126,762 38,320,677

A-2

Name of Taxpayer Rodman LLC (2) Tollway/121 Partners LTD Capital One National Association Tenet Frisco LTD McKinney (TX) - 7951 Collin McKinney Inland Wester/Weber JV Frisco Pkwy GP Park II LLC Virtu Investments LLC Granite Park I LLC OTR
(1)

Principal Line of Business Real Estate Development Real Estate Development Finance Medical Real Estate Development Real Estate Development Real Estate Development Real Estate Development Real Estate Development Real Estate Development Total

Total Taxable Value $ 100,058,043 87,922,529 85,842,007 81,920,170 50,020,126 44,000,722 44,000,000 43,600,000 42,500,000 41,129,338 $ 620,992,935

% A.V. 0.58% 0.51% 0.49% 0.47% 0.29% 0.25% 0.25% 0.25% 0.24% 0.47% 3.58%

Source: The District's Tax Office. (2) As of February 1, 2010, Rodman LLC is delinquent in their 2009/10 property taxes.

CLASSIFICATION OF ASSESSED VALUATION Total Tax Roll for Fiscal Years 2008-2009 2007-2008

Property Use Category Real Property Single-Family Residential Multi-Family Residential Vacant Lots/Tracts Acreage (Land Only) Farm and Ranch Improvements Commercial and Industrial Real & Tangible Personal Utilities Tangible Personal Commercial & Industrial Other Total Assessed Valuation Less Exemptions: Residential Homestead Freeport Disabled/Deceased Veterans Over-65 and/or Disabled Homestead Cap Adjustment Productivity/Loss HB 366/Other Total Exemptions Taxable Assessed Valuation

2009-2010

$ 11,309,788,459 959,404,823 364,731,048 1,954,149,099 20,428,120 3,449,231,702 130,731,808 800,897,895 614,481,037 $ 19,603,843,991

$ 10,932,540,985 818,695,375 380,018,808 2,282,033,533 23,276,723 3,178,652,666 127,215,788 734,025,615 496,331,198 $ 18,972,790,691

$ 9,798,010,024 697,691,492 266,328,691 2,258,395,104 21,299,008 2,640,463,134 112,861,870 635,539,523 788,876,767 $ 17,219,465,613

509,953,653 24,848,302 3,812,435 32,731,390 17,307,041 1,645,421,930 2,197,753 $ 2,236,272,504 $ 17,367,571,487

482,785,387 18,643,424 3,352,000 28,722,784 29,595,965 1,844,393,517 10,694,136 $ 2,418,187,213 $ 16,554,603,478

433,613,492 19,787,432 2,701,000 22,880,000 42,943,418 1,768,076,750 1,852,235 $ 2,291,854,327 $ 14,927,611,286

Note: The Taxable Assessed Valuation includes the Captured Appraised Value of property that is located in the City of Frisco Reinvestment Zone Number One. See "AD VALOREM TAX PROCEDURES - The Property Tax Code as Applied to the Frisco Independent School District." The Zone was created by the City in accordance with the requirements of Section 403.302(d) of the Texas Government Code. Accordingly, the Commissioner of Education does not include the Captured Appraised Value of property that is located in the Zone in determining the District's property value wealth per student.

A-3

COMPARATIVE STATEMENT OF GENERAL FUND REVENUES AND EXPENDITURES Fiscal Year Ending Fiscal Years Ending June 30* 2009 2008 Beginning Fund Balance Revenues: Local and Intermediate Sources State Sources Federal or Other Resources Total Revenues Expenditures: Instruction & Instructional Related Resources Instructional and School Leadership Support Services - Student (Pupil) Administrative Support Services Support Services - Nonstudent Based Ancillary Services Capital Outlay Debt Services Intergovernmental Charges Total Expenditures Excess (deficiency) of revenues over (under) expenditures Other Resources (Uses): Other Resources Other Uses Adjustment Total Other Resources (Uses) Excess (Deficiency) of Revenues and Other Sources over Expenditures and Other Uses Ending Fund Balance - August 31 $ 43,473,686 $ 26,675,356 $ August 31* 2007 11,446,048

177,165,313 77,793,663 27,945 254,986,921

154,610,346 59,931,616 214,541,962

162,908,672 33,903,946 18,373 196,830,991

151,883,750 20,193,250 22,226,197 6,838,930 23,212,771 3,745,788 25,800,818 253,901,504

121,864,979 13,071,610 17,538,410 5,470,242 17,784,247 2,548,485 19,465,659 197,743,632

103,914,648 12,539,975 15,160,580 4,811,057 16,710,483 2,573,597 1,175 25,770,469 181,481,984

1,085,417

16,798,330

15,349,007

1,085,417

16,798,330

(119,699) (119,699)

$ $

1,085,417 44,559,103

$ $

16,798,330 43,473,686
(1)

$ $

15,229,308 26,675,356

*Beginning September 1, 2007, the District changed its fiscal year end to June 30th.
(1)

The Districts financial statements for the period ending June 30, 2008 cover only ten months of expenditures due to the Districts change in its fiscal year end. The increase in general fund balance is due, in part, to the ensuing conservation of revenues that otherwise would have been utilized to pay expenditures realized in the months of July and August, prior to the change in the Districts fiscal year. A substantial portion of such revenues are comprised of collections of local ad valorem tax receipts, which were received prior to June 30.

A-4

DEBT SERVICE REQUIREMENTS Less: Year Ending 8/31* 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 $ $ Outstanding Debt Service 77,418,328.00 79,373,166.34 82,508,878.84 82,509,941.34 82,506,766.32 82,505,741.32 82,509,866.34 82,505,916.34 82,509,120.08 82,508,616.32 82,509,735.06 82,509,917.54 82,509,385.04 82,509,122.54 82,510,486.30 82,506,431.30 82,505,725.04 82,509,350.04 82,508,737.54 82,506,300.04 82,507,662.52 82,505,950.02 82,506,262.52 82,508,775.02 82,505,656.28 76,936,850.02 66,936,768.76 56,939,043.76 46,936,087.50 36,938,518.76 20,720,250.00 10,718,800.00 2,370,602,156.84 $ $ Refunded Debt Service** 1,600,900.00 2,260,900.00 5,249,700.00 5,237,950.00 5,230,625.00 3,354,775.00 3,340,312.50 3,322,312.50 1,300,212.50 1,284,550.00 1,272,050.00 1,257,450.00 1,250,750.00 1,231,425.00 37,193,912.50 $ 3,845,000.00 3,580,000.00 4,435,000.00 2,730,000.00 2,830,000.00 2,920,000.00 1,015,000.00 1,040,000.00 1,070,000.00 1,095,000.00 1,135,000.00 1,160,000.00 26,855,000.00 $ $ Principal $ Plus: Series 2010 Refunding Bonds** Interest 1,050,554.31 936,137.50 936,137.50 1,642,337.50 782,337.50 604,937.50 495,737.50 382,537.50 265,737.50 222,600.00 178,400.00 135,600.00 91,800.00 46,400.00 7,771,254.31 $ $ Total 1,050,554.31 936,137.50 4,781,137.50 5,222,337.50 5,217,337.50 3,334,937.50 3,325,737.50 3,302,537.50 1,280,737.50 1,262,600.00 1,248,400.00 1,230,600.00 1,226,800.00 1,206,400.00 34,626,254.31 $ $ Principal 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,350,000.00 1,350,000.00 1,350,000.00 1,350,000.00 20,195,000.00 $ $ Plus: Series 2010 Qualified School Construction Bonds** Interest*** $ $ Total 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,350,000.00 1,350,000.00 1,350,000.00 1,350,000.00 20,195,000.00 $ $ Combined Fiscal Total 77,418,328.00 78,822,820.65 81,184,116.34 83,386,378.84 83,836,153.82 83,837,453.82 83,835,028.84 83,836,341.34 83,834,345.08 83,834,141.32 83,832,785.06 83,831,267.54 83,827,535.04 83,830,172.54 83,835,461.30 83,856,431.30 83,855,725.04 83,859,350.04 82,508,737.54 82,506,300.04 82,507,662.52 82,505,950.02 82,506,262.52 82,508,775.02 82,505,656.28 76,936,850.02 66,936,768.76 56,939,043.76 46,936,087.50 36,938,518.76 20,720,250.00 10,718,800.00 2,388,229,498.65

*Represents debt service payments from September 1 through August 31. The District changed its fiscal year end from August 31 to June 30, effective with the fiscal period that began September 1, 2007 and ended June 30, 2008. However, due to timing of tax collection receipts, the District budgets for its August debt service payments in the previous fiscal year. See AD VALOREM TAX PROCEDURES. **Concurrently with the delivery of the Bonds, the District will deliver its $26,855,000 Unlimited Tax Refunding Bonds, Series 2010 which will refund certain bonds of the District's Unlimited Tax School Building Bonds, Series 2000A, Series 2001, and Series 2002. *** The Bonds do not bear interest.

TAX ADEQUACY WITH RESPECT TO THE DISTRICT'S OUTSTANDING BONDS Maximum Principal and Interest Requirements, Year Ending 8/31/2027 (1) Less indicated combined State Funds available Net Estimated Maximum Requirements A $0.48330 Interest and Sinking Fund Tax Rate @ 100% Collections based on 2009/10 Net AV produces: $83,859,350 0 $83,859,350 $83,937,473

(1)

The District does not currently receive assistance from the State for the payment of debt service. The amount of State aid for debt service, if any, may vary substantially from year to year, depending on a number of factors, including amounts, if any, appropriated for that purpose by the Texas Legislature and a school district's wealth per student. See "CURRENT PUBLIC SCHOOL FINANCE SYSTEM State Funding for Local School Districts" and DEBT LIMITATIONS.

A-5

PRINCIPAL REPAYMENT SCHEDULE Less: Year Ending 8/31* 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 2039 2040 2041 Outstanding Bonds 20,672,773.40 18,376,133.80 22,709,605.10 25,940,000.00 27,045,000.00 28,235,000.00 29,530,000.00 32,750,000.00 34,310,000.00 36,770,000.00 35,974,472.30 37,652,422.40 39,435,469.35 38,246,447.95 37,889,353.20 39,732,677.75 38,149,730.30 39,971,872.70 41,910,319.20 43,934,030.05 54,416,443.70 47,877,801.00 51,023,770.00 39,664,731.20 41,392,692.00 63,470,000.00 56,665,000.00 49,520,000.00 41,995,000.00 33 940 000 00 33,940,000.00 19,255,000.00 10,160,000.00 1,178,615,745.40 Refunded Bonds** $ 660,000.00 3,695,000.00 3,925,000.00 4,160,000.00 2,535,000.00 2,675,000.00 2,820,000.00 965,000.00 1,000,000.00 1,040,000.00 1,080,000.00 1,130,000.00 1,170,000.00 $ 26,855,000.00 Plus: Series 2010 Refunding Bonds** $ 3,845,000.00 3,580,000.00 4,435,000.00 2,730,000.00 2,830,000.00 2,920,000.00 1,015,000.00 1,040,000.00 1,070,000.00 1,095,000.00 1,135,000.00 1,160,000.00 $ 26,855,000.00 Plus: Series 2010 Qualified School Construction Bonds** $ $ 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,345,000.00 1,350,000.00 1,350,000.00 1,350,000.00 1,350,000.00 $ 20,195,000.00 $ Bonds Unpaid At Year End 1,178,137,972.00 1,159,761,838.20 1,137,712,233.10 1,110,277,233.10 1,082,232,233.10 1,052,377,233.10 1,021,307,233.10 987,057,233.10 951,302,233.10 913,137,233.10 875,777,760.80 836,750,338.40 795,954,869.05 756,358,421.10 717,129,067.90 676,046,390.15 636,546,659.85 595,224,787.15 553,314,467.95 509,380,437.90 454,963,994.20 407,086,193.20 356,062,423.20 316,397,692.00 275,005,000.00 211,535,000.00 154,870,000.00 105,350,000.00 63,355,000.00 29 415 000 00 29,415,000.00 10,160,000.00 0.00 Percent of Principal Retired 1.72% 3.26% 5.10% 7.39% 9.72% 12.21% 14.81% 17.66% 20.65% 23.83% 26.95% 30.20% 33.60% 36.91% 40.18% 43.61% 46.90% 50.35% 53.84% 57.51% 62.05% 66.04% 70.30% 73.61% 77.06% 82.35% 87.08% 91.21% 94.72% 97 55% 97.55% 99.15% 100.00%

Total 20,672,773.40 18,376,133.80 22,049,605.10 27,435,000.00 28,045,000.00 29,855,000.00 31,070,000.00 34,250,000.00 35,755,000.00 38,165,000.00 37,359,472.30 39,027,422.40 40,795,469.35 39,596,447.95 39,229,353.20 41,082,677.75 39,499,730.30 41,321,872.70 41,910,319.20 43,934,030.05 54,416,443.70 47,877,801.00 51,023,770.00 39,664,731.20 41,392,692.00 63,470,000.00 56,665,000.00 49,520,000.00 41,995,000.00 33 940 000 00 33,940,000.00 19,255,000.00 10,160,000.00 1,198,810,745.40

*Beginning September 1, 2007, the District changed its fiscal year end to June 30th. Represents debt service payments from September 1 through August 21. The District changed its fiscal year end from August 31 to June 30, effective with the fiscal period that began September 30, 2007 and ended June 30, 2008. However, due to timing of tax collections receipts, the District budgets for its August debt service payments in the previous fiscal year. See "AD VALOREM TAX PROCEDURES." ** Concurrently with the delivery of the Bonds, the District will deliver its $26,855,000 Unlimited Tax Refunding Bonds, Series 2010 which will refund certain bonds of the District's Unlimited Tax School Building Bonds, Series 2000A, Series 2001, and Series 2002.

AUTHORIZED BUT UNISSUED BONDS

Following the issuance of the Bonds, the District will have $468,306,286.20 of authorized but unissued Bonds. The District has preliminary plans to issue additional authorized unlimited tax school building bonds within the next 12 months. In addition to unlimited tax bonds, the District may incur other financial obligations payable from its collection of taxes and other sources of revenue, including maintenance tax notes payable from its collection of maintenance taxes, public property finance contractual obligations, delinquent tax notes, and leases for various purposes payable from State appropriations and surplus maintenance taxes.

A-6

APPENDIX B
GENERAL INFORMATION REGARDING FRISCO INDEPENDENT SCHOOL DISTRICT, THE CITY OF FRISCO COLLIN COUNTY, TEXAS

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GENERAL INFORMATION REGARDING FRISCO INDEPENDENT SCHOOL DISTRICT, THE CITY OF FRISCO AND COLLIN COUNTY, TEXAS GENERAL AND ECONOMIC INFORMATION The District is a residential, commercial, and agricultural area, which covers approximately 72 total square miles in the western portion of Collin County extending into the eastern section of neighboring Denton County. The District includes the City of Frisco, which is the primary commercial and population center of the District. The 2010 population estimate for the District is 165,000 compared to the 2000 population estimate of 34,000. The District's economic base is primarily comprised of commercial and governmental concerns which provide a variety of goods and services. The following table illustrates the leading employers located within the City of Frisco. 2010 Approximate Number of Employees 4,784 2,500 780 550 500 455 400 340 250 250

Employer Frisco Independent School District T-Mobile Rodman Companies IntegraSys Mario Sinacola & Sons City of Frisco IKEA Tenet Texas RBO Option One Mortgage Co. Aastra Telecom

*Sources: The District, Oncor Economic Development Department 2010 Community Profile, Frisco Economic Development Corp., and Frisco ISD. SCHOLASTIC INFORMATION The District is a Texas Education Agency Recognized District with thirty-two campuses receiving exemplary status, seven campuses receiving a recognized rating, and one campus receiving academically acceptable status. The District offers a fully accredited and comprehensive educational program. Presently five high schools, nine middle schools, twenty-eight elementary schools, and four special program centers serve the District. The Frisco ISD Board of Trustees was selected as the Outstanding Board in the State of Texas for 2008 by the Texas Association of School Administrators and Texas Association of School Boards. The District is accredited by the Southern Association of Colleges and Secondary Schools and by the Accreditation Division of the Texas Education Agency on a K-12 basis. The Districts personnel totals 4,784. Approximately 27.81 percent of the teachers and 59.49 percent of administration hold masters degrees. Currently, the District reflects a pupil-teacher ratio of 10.5:1 for high school, 12.4:1 for middle school and 16.1:1 for elementary. Computer labs are in every school and the District has a ratio of four students to every computer. Through a technology outreach program, older computers that are no longer suitable for the school setting have been refurbished and loaded with appropriate software to be placed in homes of students in need of a computer. In addition to the core curriculum, the District offers a wide variety of classes and training for students including:

Physical Education, Music and Art for elementary students After-school programming and Spanish Language classes are offered at elementary schools through partnerships with the YMCA and other educational entities. Duke University Talent Search, Math/Science Competition, pre Advanced Placement courses, Mock Trial, Band, Choir, Art, Theatre Arts, Robotics, Video production and may other opportunities are available at the middle school level. Advance Placement and Honors courses are being offered in the high schools including Language, Literature, Composition, Computer Science, US History, Government, Macroeconomics, Chemistry, Biology, Physics, Calculus, Art, Statistics. Dual credit classes are offered in conjunction with community colleges for English IV, Government and Economics. Additionally, Tech Prep courses are available. The Independent Study Mentorship Program is offered for qualifying, committed juniors and seniors, enabling them to explore a career through a community mentor. Comprehensive special education programs for students with special learning needs, including Gifted Instruction, Special Education, ESL/Bilingual, Dyslexia, Head Start, Early Literacy, Career and Technology Education, Credit Recovery and GED. Clubs and activities include band, color guard, chorale music, drill team, cheerleading, National Honor Society, Student Council, Academic Decathlon, National Junior Statesman, Theatre, Agriculture, Key Club, Spanish Club, Yearbook, Fellowship of Christian Athletes, Science Club, French Club, Future Homemakers of America and Art Club. UIL competition is at the 4A level which includes football, basketball, baseball, soccer, softball, volleyball, track and cross-country, swimming, golf, power lifting and wrestling.

B-1

PRESENT SCHOOL PLANTS

Current Enrollment 626 652 778 629 746 662 521 632 702 793 687 706 719 687 745 737 564 803 669 791 672 439 631 809 699 638 471 561 777 980 972 1,020 906 713 673 602 782 1,593 1,444 634 1,637 2,013 0 733 0 25 34,273

A description of the present school facilities is as follows: Grades School Capacity Provided Allen Elementary (new) 760 K-5 Anderson Elementary 760 K-5 Ashley Elementary 760 K-5 Bledsoe Elementary 760 K-5 Boals Elementary 760 K-5 Borchardt Elementary 760 K-5 Bright Elementary 760 K-5 Carroll Elementary 760 K-5 Christie Elementary 760 K-5 Corbell Elementary 760 K-5 Claude Curtsinger Elementary 760 K-5 Elliott Elementary 760 K-5 Fisher Elementary 760 K-5 Gunstream Elementary 760 K-5 Isbell Elementary 760 K-5 Mooneyham Elementary 760 K-5 Ogle Elementary 760 K-5 Pink Elementary 760 K-5 Riddle Elementary 760 K-5 Robertson Elementary 760 K-5 I.S. Rogers Elementary 760 K-5 Isabel Pierce Sem Elementary 760 K-5 Shawnee Trail Elementary 760 K-5 Noel A. Smith Elementary 760 K-5 Sparks Elementary 760 K-5 Spears Elementary 760 K-5 Tadlock Elementary 760 K-5 Taylor Elementary 760 K-5
Clark Middle School Fowler Middle School Griffin Middle School Pioneer Heritage Middle School Roach Middle School Scoggins Middle School Stafford Middle School Benton A. Staley Middle School Wester Middle School Centennial High School Frisco High School Heritage High School (new) Liberty High School Wakeland High School Career and Technology Center Early Childhood School (new) Student Opportunity Center Z.T. Acker Special Program Ctr. Total 950 950 950 950 950 950 950 950 950 1,800 1,800 1,800 1,800 1,800 925 400 150 400 40,705 6-8 6-8 6-8 6-8 6-8 6-8 6-8 6-8 6-8 9-12 9-12 9-12 9-12 9-12 9-12 1-12 EC-1

Teachers 33 39 48 40 45 41 36 42 46 45 46 43 43 44 45 46 42 45 38 45 43 32 38 46 41 42 32 40 64 74 74 80 71 57 49 57 71 156 146 77 145 175 25 40 15 33 2,573

Others (a) 3 3 2 3 4 3 2 3 3 3 3 3 3 3 3 3 3 2 3 3 3 3 3 3 2 3 3 2 3 4 4 3 5 4 4 3 4 7 8 4 7 9 1 3 1 1 150

Aides 11 8 13 10 11 13 74 17 18 14 10 9 8 9 11 9 17 8 7 8 10 13 12 7 9 10 11 17 11 15 12 13 14 13 11 11 15 23 23 13 22 33 4 46 5 40 696

Admin. 1 2 2 2 2 2 2 2 2 1 2 2 2 1 2 2 2 1 1 2 2 2 2 2 2 2 2 2 2 3 3 3 3 2 3 3 2 5 6 4 6 7 2 2 2 5 111

(a) (b)

Includes counselors, librarians, nurses, diagnosticians, and psychologist. Acker Special Programs Center has additional students who attend K-8 Disciplinary Alternative Education Program or (DAEP). These students are counted on their assigned home campus. (c) The Career and Technical Education Center (CATE) does not have students assigned as a home campus. All students who attend classes here are counted as enrolled at another high school campus. (d) The Student Opportunity Center (SOC) does not have students assigned as a home campus. This is the districts discipline center.

B-2

STUDENT ENROLLMENT BY GRADES

Grade E.C. PRE-K K 1 2 3 4 5 6 7 8 9 10 11 12 Total

2009/2010 491 286 3,335 3,294 3,177 3,204 2,901 2,839 2,641 2,456 2,328 2,215 1,959 1,685 1,462 34,273

2008/2009 390 283 3,095 3,023 3,024 2,772 2,698 2,467 2,361 2,243 2,087 1,996 1,719 1,444 1,330 30,932

2007/2008 300 272 2,801 2,436 2,512 2,542 2,416 2,339 2,143 2,028 1,782 1,585 1,532 1,480 1,251 27,419

2006/2007 230 250 2,613 2,390 2,301 2,112 2,089 1,914 1,763 1,653 1,530 1,461 1,290 1,224 978 23,798

AVERAGE DAILY ATTENDANCE INCREASES/(DECREASES)

School Year 2009-2010 2008-2009 2007-2008 2006-2007 2005-2006 2004-2005 2003-2004 2002-2003 2001-2002 2000-2001
SCHOLASTIC ENROLLMENT INCREASE/(DECREASES)

Attendance 32,745.00 (estimate) 29,403.66 26,194.40 22,786.45 18,978.00 16,060.00 12,806.00 10,633.30 8,903.49 7,040.01

School Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Enrollment 1,706 1,907 2,204 2,679 3,111 3,759 4,622 5,565 7,161 9,292 11,412 13,672 16,677 20,215 23,798 27,419 30,932 34,273

Amount 171 201 297 475 432 648 863 943 1,596 2,131 2,120 2,260 3,005 3,538 3,583 3,771 3,513 3,341

Percent (%) 11.14 11.78 15.57 21.55 16.13 20.83 22.96 20.40 28.68 29.76 22.82 19.80 21.98 21.22 17.72 15.21 12.81 10.80

B-3

STUDENT ENROLLMENT PROJECTIONS

Grade EE-PK K 1 2 3 4 5 6 7 8 9 10 11 12 Total 2010/2011 659 3,536 3,463 3,383 3,267 3,302 3,035 2,952 2,734 2,567 2,525 2,242 1,927 1,688 37,280 2011/2012 705 3,811 3,712 3,572 3,479 3,401 3,424 3,159 3,036 2,838 2,745 2,512 2,157 1,869 40,420 2012/2013 762 4,101 3,979 3,798 3,644 3,592 3,498 3,535 3,222 3,125 3,010 2,709 2,397 2,075 43,447

GENERAL INFORMATION REGARDING THE CITY OF FRISCO AND COLLIN COUNTY, TEXAS The City of Frisco, Texas (the City) is located approximately 20 miles north of Dallas off State Highway 289. The northern extension of the Dallas North Tollway service road to Main Street (FM 720) and north to U.S. 380 provides direct access to downtown Dallas. The Citys estimated population reached 108,462 in 2010, which is a 221% increase over the 2000 census of 33,714. The Citys population is estimated to reach 280,000 by the year 2025. The City was rated as one of the Top Ten Places to Relocate in 2009 by Forbes.com. Additionally, the City was rated as one of the Top 100 Best Places to Live in 2008 by Money Magazine. The City is home to three sports teams: the Frisco Rough Riders professional baseball, Texas Tornado amateur hockey, and FC Dallas - major league soccer. The City of Frisco, Frisco Independent School District, Collin County and Hunt Sports Group teamed up to build the $65 million soccer facility named Pizza Hut Park, the first large scale soccer facility of its type in the United States. The stadium features a 20,000 seat stadium; 17 soccer fields serving the amateur players which include a 600 seat stadium and turf field dedicated for the high school football and soccer teams. POPULATION TRENDS City of Frisco 108,462 33,714 6,141 3,420 1,845 1,184 Collin County 791,631 491,675 264,036 144,490 66,920 41,247

2010 Estimate 2000 Census 1990 Census 1980 Census 1970 Census 1960 Census

Sources: U.S. Census Bureau Frisco Economic Development Corporation, and Oncor Economic Development Corporation. EMPLOYMENT STATISTICS The Texas Work Force Commission reports the following employment statistics for the City of Frisco, Collin County and the State of Texas. March 2010 City of Frisco Collin County State of Texas Civilian Labor Force Total Employed Total Unemployed 52,594 48,734 3,860 City of Frisco Civilian Labor Force Total Employed Total Unemployed
Source: Texas Employment Commission, Austin, Texas

415,928 384,532 31,396 March 2009 Collin County 402,906 375,759 27,147

12,123,100 11,127,900 995,200 State of Texas 11,775,200 10,994,400 780,800

48,907 45,504 3,403

B-4

UNEMPLOYMENT RATES March 2010 7.3% 7.5 8.2 10.2 March 2009 7.0% 6.7 6.7 9.0 March 2008 3.9% 4.0 4.2 5.2

City of Frisco Collin County State of Texas United States of America

Source: Texas Work Force Commission, Austin, Texas

OVERLAPPING DEBT DATA AND INFORMATION Estimated Direct and Overlapping Ad Valorem Tax Supported Gross Debt Statement (As of April 2010)

Taxing Body Collin County Denton County Collin County Community College District Frisco, City of Hackberry, City of Little Elm, City of McKinney, City of Denton County FWSD # 8-C Plano, City of Total Net Overlapping Debt Frisco ISD Total Direct and Overlapping Debt Direct and Overlapping Debt to 2009 Net Taxable Valuation Direct and Overlapping Debt to Actual Total Valuation Per Capita Direct and Overlapping Debt

Amount 409,395,000 375,770,733 48,345,000 144,960,480 175,000 37,265,538 213,195,000 10,910,000 362,207,942

(1)

(1)

(1) (1)

% Overlap 16.61 8.50 16.61 95.37 100.00 26.74 13.69 100.00 8.67 100.00

$ 1,198,810,745

(2)

Amount Overlap $ 68,000,510 31,940,512 8,030,105 138,248,810 175,000 9,964,805 29,186,396 10,910,000 31,403,429 $ 327,859,567 1,198,810,745 $ 1,526,670,312 8.79% 7.79% 9,253

__________ Excludes self-supporting debt. (2) Includes The Bonds and the District's Unlimited Tax Qualified School Construction Bonds, Series 2010 (Tax Credit Bonds), which are being privately placed concurrently with the offering of the Bonds.
(1)

Source: Texas Municipal Advisory Council Reports

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APPENDIX C
FORM OF LEGAL OPINION OF BOND COUNSEL

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Proposed Form of Opinion of Bond Counsel An opinion in substantially the following form will be delivered by McCall, Parkhurst & Horton L.L.P., Bond Counsel, upon the delivery of the Bonds, assuming no material changes in facts or law.

July __, 2010

Frisco Independent School District 6942 Maple Street Frisco, Texas 75034 Bank of Texas, N.A. 1401 McKinney, Suite 1650 Houston, Texas 77010 Re: Frisco Independent School District Unlimited Tax Qualified School Construction Bonds, Series 2010A (Tax Credit Bonds) in the Aggregate Principal Amount of $20,195,000

We have acted as bond counsel in connection with the issuance by the Frisco Independent School District (the "Issuer") of the above-referenced bonds (the "Bonds"). We have examined into the legality and validity of the Bonds, maturing in the years stated, unless redeemed prior to maturity, all in accordance with the terms and conditions stated in the text of the Bonds. We have examined the applicable and pertinent provisions of the Constitution and laws of the State of Texas, and a transcript of certified proceedings of the Issuer, and other pertinent instruments authorizing and relating to the issuance of the Bonds, including one of the executed Bonds (Bond Number R-1). Based on said examination, it is our opinion the Bonds have been authorized and issued and the Bonds delivered concurrently with this opinion have been duly delivered and that, assuming due authentication, Bonds issued in exchange therefore will have been duly delivered, in accordance with law, and that the Bonds, except as may be limited by laws applicable to the Issuer relating to bankruptcy, reorganization and other similar matters affecting creditors' rights generally, and by general principles of equity which permit the exercise of judicial discretion, constitute valid and legally binding obligations of the Issuer, and ad valorem taxes sufficient to provide for the payment of the interest on and principal of the Bonds have been levied and pledged for such purpose, without limit as to rate or amount. In expressing the opinion, we have considered the effect of the November 22, 2005 decision by the Texas Supreme Court in West Orange-Cove Consolidated Independent School District, et al. v. Neeley, et al., upholding, in part, a lower court judgment concluding that the local ad valorem maintenance and operation tax authorized under the school finance system then in effect had become

a State property tax in violation of article VIII, section 1-e of the Texas Constitution, in that school districts did not have meaningful discretion in levying the tax. The Court's opinion further noted that the court "...remain[s] convinced...that defects in the structure of the public school finance system expose the system to constitutional challenge. . . . [Such challenges] will repeat until the system is overhauled." Subsequent to such decision, legislation was enacted by the Texas Legislature to address the constitutional issues raised in the court's ruling. It is further our opinion, except as discussed below, that: (i) the Bonds constitute "qualified school construction bonds" within the meaning of Section 54F of the Internal Revenue Code of 1986 (the "Code"); (ii) holders of the Bonds may claim a credit against the tax imposed by Chapter 1 of the Code with respect to the Bonds on one or more "credit allowance dates" (as defined in the Section 54A of the Code), during each calendar year while the Bonds are outstanding or unpaid, subject to the limitations of the Code; and (iii) such federal income tax credit will be treated as interest includable in gross income of the holder thereof, in accordance with each holder's tax status. In expressing the aforementioned opinions, we have relied on, and assume compliance by the Issuer with, certain representations and covenants relating to certain matters, including arbitrage and the use of the proceeds of the Bonds and the property financed therewith. We call your attention to the fact that failure by the Issuer to observe the aforementioned representations or covenants could adversely affect the status of the Bonds as "qualified school construction bonds." Except as stated above, we express no opinion as to any other federal, state or local tax consequences of acquiring, carrying, owning or disposing of the Bonds. Our opinions are based on Existing Law, which is subject to change. Such opinions are further based on our knowledge of facts as of the date hereof. We assume no duty to update or supplement our opinions to reflect any facts or circumstances that may thereafter come to 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 Revenue Service (the "Service"); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. Our sole engagement in connection with the issuance of the Bonds is as Bond Counsel for the Issuer, and, in that capacity, we have been engaged by the Issuer for the sole purpose of rendering an opinion with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and with respect to the status of the Bonds as "qualified school construction bonds" for federal income tax purposes, and for no other reason or purpose. The foregoing opinions represent our legal judgment based upon a review of existing legal authorities that we deem relevant to render such opinions and are not a guarantee of a result. We have not been requested to

investigate or verify, and have not independently investigated or verified any records, data, or other material relating to the financial condition or capabilities of the Issuer, or the disclosure thereof in connection with the sale of the Bonds, and have not assumed any responsibility with respect thereto. We express no opinion and make no comment with respect to the marketability of the Bonds and have relied solely on certificates executed by officials of the Issuer as to the current outstanding indebtedness of, and assessed valuation of taxable property within the Issuer. Our role in connection with the Private Placement Memorandum prepared for use in connection with the sale of the Bonds has been limited as described therein. IRS CIRCULAR 230 DISCLOSURE: YOU ARE ADVISED TO OBTAIN CONTINUING INDEPENDENT TAX ADVICE REGARDING THE BONDS BASED ON THE PARTICULAR CIRCUMSTANCES. THE TAX DISCUSSION ABOVE RELATING TO THE BONDS WAS NOT INTENDED OR WRITTEN TO BE USED AND CANNOT BE USED, FOR THE PURPOSE OF AVOIDING FEDERAL TAXPAYER PENALTIES. THIS OPINION WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE BONDS. THE NOTICE SET FORTH IN THIS PARAGRAPH IS INTENDED TO COMPLY WITH UNITED STATES TREASURY PUBLICATION CIRCULAR 230. Respectfully,

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APPENDIX D
The information contained in this Appendix has been reproduced from the Frisco Independent School District Annual Financial Report (the "Report") for the fiscal year ended June 30, 2009 as prepared by Pingleton, Howard & Company, P.C., Certified Public Accountants, Frisco, Texas THE INFORMATION PRESENTED REPRESENTS ONLY A PART OF THE REPORT AND DOES NOT PURPORT TO BE A COMPLETE STATEMENT OF THE DISTRICT'S FINANCIAL CONDITION. REFERENCE IS MADE TO THE COMPLETE REPORT FOR ADDITIONAL INFORMATION.

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FRISCO INDEPENDENT SCHOOL DISTRICT

Financial Report For the Year Ended June 30, 2009

FRISCO INDEPENDENT SCHOOL DISTRICT Financial Report For the Year Ended June 30, 2009

TABLE OF CONTENTS Page Exhibit CERTIFICATE OF BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii FINANCIAL SECTION Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Managements Discussion and Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Basic Financial Statements: Government-Wide Financial Statements: Statement of Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statement of Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fund Financial Statements: Balance Sheet - Governmental Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statement of Revenues, Expenditures, and Changes in Fund Balance Governmental Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balance to the Statement of Activities . . . . . Statement of Net Assets - Proprietary Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . Statement of Revenues, Expenses, and Changes in Net Assets Proprietary Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Statement of Cash Flows - Proprietary Funds . . . . . . . . . . . . . . . . . . . . . . . . . . Statement of Net Assets - Fiduciary Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12 13 14 17 18 21 22 23 24 25 26

A-1 B-1 C-1 C-2 C-3 C-4 D-1 D-2 D-3 E-1

Required Supplementary Information: Budgetary Comparison Schedule - General Fund . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Combining Statements: Combining Balance Sheet - Nonmajor Governmental Funds . . . . . . . . . . . . . . . . . 50 Combining Statement of Revenues, Expenditures, and Changes in Fund Balance Nonmajor Governmental Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Required T.E.A. Schedules: Schedule of Delinquent Taxes Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fund Balance and Cash Flow Calculation Worksheet - General Fund . . . . . . . . . Budgetary Comparison Schedule - Child Nutrition Fund . . . . . . . . . . . . . . . . . . . Budgetary Comparison Schedule - Debt Service Fund . . . . . . . . . . . . . . . . . . . . . . 60 62 63 64

F-1 G-1 G-2 H-1 H-2 H-3 H-4

FRISCO INDEPENDENT SCHOOL DISTRICT Financial Report For the Year Ended June 30, 2009 -continued-

TABLE OF CONTENTS Page Exhibit FEDERAL AWARDS SECTION Report on Internal Control Over Financial Reporting and on Compliance Based on an Audit of Basic Financial Statements Performed in Accordance with Government Auditing Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Report on Compliance with Requirements Applicable to Each Major Program and Internal Control Over Compliance in Accordance with OMB Circular A-133 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Schedule of Findings and Questioned Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Schedule of Status of Prior Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Corrective Action Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Schedule of Expenditures of Federal Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 I-1

ii

CERTIFICATE OF BOARD Frisco Independent School District Name of School District Collin County 043-905 Co.- Dist. Number

We, the undersigned, certify that the attached financial reports of the above-named school district were reviewed and (X) approved ( ) disapproved for the year ended June 30, 2009, at a meeting of the Board of School Trustees of such school district on the 9th day of November, 2009.

/s/ Brenda Polk Signature of Board Secretary

/s/ Dan Mossakowski Signature of Board President

If the auditor's report was disapproved, the reason(s) therefore is/are (attach list if necessary):

iii

FINANCIAL SECTION

[This page is intentionally left blank.]

PINGLETON, HOWARD & COMPANY, P. C.

CERTIFIED PUBLIC ACCOUNTANTS P. O. BOX 148 FRISCO, TEXAS 75034 972-335-9754/FAX 972-335-9758
TOM W. PINGLETON, CPA RANDY HOWARD, CPA R. WAYNE NABORS, CPA ROBIN J. TURNBULL, CPA WHITNEY YOUNTS, CPA MEMBERS AMERICAN INSTITUTE of CPAs AICPA DIVISION for CPA FIRMS TEXAS SOCIETY of CPAs

UNQUALIFIED OPINION ON BASIC FINANCIAL STATEMENTS ACCOMPANIED BY REQUIRED SUPPLEMENTAL INFORMATION AND OTHER SUPPLEMENTARY INFORMATION AND THE SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Independent Auditors Report Board of School Trustees Frisco Independent School District 6942 Maple Frisco, Texas 75034

Members of the Board: We have audited the accompanying financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of Frisco Independent School District, Frisco Texas (the District) as of and for the year ended June 30, 2009, which collectively comprise the Districts basic financial statements as listed in the table of contents. These financial statements are the responsibility of the District's administrators. Our responsibility is to express an opinion on them based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America, and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the respective financial position of governmental activities, each major fund, and the aggregate remaining fund information of Frisco Independent School District as of June 30, 2009, and the respective changes in financial position for the year then ended in conformity with accounting principles generally accepted in the United States of America. Managements discussion and analysis on pages 3 through 9 and the budgetary comparison information on page 48 are not a required part of the basic financial statements but are supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it.

Board of Trustees Page Two

In accordance with Government Auditing Standards, we have also issued our report dated October 14, 2009 on our consideration of the Districts internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grants. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Governmental Auditing Standards and should be read in conjunction with this report in considering the results of our audit.

Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Districts basic financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is not a required part of the basic financial statements. The combining and individual nonmajor fund financial statements and the T.E.A. required schedules listed in the table of contents are presented for additional analysis and are not a required part of the basic financial statements. The schedule of expenditures of federal awards, combining and individual nonmajor fund financial statements and the T.E.A. required schedules (except for Exhibit G-3, the Fund Balance and Cash Flow Calculation Worksheet, which is marked UNAUDITED and on which we express no opinion) have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole.
/s/ Pingleton, Howard & Company, P.C.

October 14, 2009

Managements Discussion and Analysis

This section of the Frisco Independent School District annual financial report presents the discussion and analysis of the Districts financial performance during the year ended June 30, 2009. The following report and analysis will be an extension to the Districts financial statements. Overview of the Financial Statements This annual report consists of a series of financial statements. The government-wide financial statements include the Statement of Net Assets (Exhibit A-1) and the Statement of Activities (Exhibit B-1). These reports provide information about the activities of the District as a whole, long-term view of the Districts property, debt obligations, and other financial matters. They reflect the flow of total economic resources in a manner similar to the financial reports of a business enterprise. Fund financial statements (starting with Exhibit C-1) report the Districts operations in more detail than the government-wide statements by providing information about the Districts most significant funds. For government activities, these statements tell how services were financed in the short term as well as what resources remain for future spending. They also reflect the flow of current financial resources, and supply the basis for tax levies and the appropriations budget. The remaining statements provide financial information about activities for which the District acts solely as a trustee or agent for the benefits of those outside of the District. The notes to the financial statements (following Exhibit E-1) provide narrative explanations or additional data needed for full disclosure in the government-wide statements or the fund financial statements. The combining statements for non-major funds contain even more information about the Districts individual funds. These are not required by TEA and are contained in Exhibits G-1 and G-2. The sections labeled TEA Required Schedules and Federal Awards Section contain data used by monitoring or regulatory agencies for assurance that the District is using funds supplied in compliance with the terms of the grants. Reporting the District Financial Performance as a Whole Government-wide Statements: The Statement of Net Assets and the Statement of Activities The government-wide statements report information about the District as a whole using accounting methods similar to those used by private-sector companies. The Statement of Net Assets, Exhibit A-1, includes all of the governments assets and liabilities. The Statement of Activities, Exhibit B-1, accounts for all of the current periods revenue and expenses. The two government-wide statements report the Districts net assets and how they have changed. Net assets, the difference between Districts assets and liabilities, is one way to measure the Districts financial health or position. Within the government-wide financial statements of the District, most of the Districts basic services are included, such as instructions, extracurricular activities, curriculum and staff development, health services, and general administration. Property taxes, grants, and state revenues finance most of the activities.

Reporting the Districts Most Significant Funds Fund Financial Statements The fund financial statements provide detailed information about the Districts most significant funds, not the District as a whole. Funds are accounting devices that the District uses to keep track of specific sources of funding and spending for a particular purpose. Some funds are required to State law and bond covenants Other funds are established to control and manage money for particular purposes or to show that it is properly using certain taxes and grants.

This District has three kinds of funds: Governmental funds - Most of the Districts basic services are reported in governmental funds. These use modified accrual accounting (a method that measures the receipt and disbursement of cash and all other financial assets that can be readily converted to cash) and report balances at the end of the fiscal period. The governmental funds statements provide a detailed, shortterm view of the Districts general operations and the basic services it provides. The difference between the governmental activities (reported in the Statement of Net Assets and Statement of Activities) and governmental funds are described in reconciliation narratives following each of the fund financial statements. (Exhibits C-2 and C-4) Proprietary funds - Services for which the District charges customers a fee are generally reported in proprietary funds. Proprietary funds, like the government-wide statements, provide both long and short-term financial information. Internal Service Funds are used to report activities that provide supplies and services for the Districts other programs and activities, such as the Districts Self-Insurance Fund. Fiduciary funds - The District is the trustee, or fiduciary, for money raised by student activities and alumnae scholarship programs. All of the Districts fiduciary activities are reported in separate Statements of Fiduciary Net Assets (Exhibit E-1). We exclude these resources from the Districts other financial statements because the District cannot use these assets to finance its operations. The District is only responsible for ensuring that the assets reported in these funds are used for their intended purpose.

Financial Analysis of the District The District implemented GASB Statement #34 for the 2001-2002 fiscal year. As of 2008-2009 fiscal year, the analysis will present both current and prior year data and discuss significant changes in the accounts. Our analysis focuses on the net assets (Table A1) and changes in net assets (Table A2) of the Districts governmental and business-type activities. Net Assets - The Districts combined net assets were $(82,899,936) on June 30, 2009. The prior years net assets were $(40,383,010) (See Table A1).

Statement of Net Assets (Exhibit A-1)

Table A-1 Districts Net Assets 2008-2009 Governmental $ 275,650,178 996,890,365 1,272,540,543 134,216,506 1,221,223,973 1,355,440,479 2007-2008 Governmental 240,957,702 844,426,024 1,085,383,726 93,858,773 1,031,907,963 1,125,766,736 Percentage Change 14.4% 18.1% 17.2% 43.0% 18.3% 20.4%

Current and other assets Capital and non-current assets Total assets Current liabilities Long term liabilities Total liabilities Net assets: Invested in capital assets (net of related debt) Restricted Unrestricted Total net assets

(171,154,403) 66,321,195 21,933,272 $ (82,899,936)

(122,276,884) 51,515,881 30,377,993 (40,383,010)

-40.0% 28.7% -27.8% -105.3%

Statement of Activities (Exhibit B-1) Table A2 Changes in Net Assets

REVENUES Program revenues Charges for services Operating grants and contributions Total program revenues General revenues Property taxes State aid-formula Investment earnings Grants and contributions Other revenue Total general revenues Total Revenues EXPENSES Instructional and instructional related Instructional leadership and administration Guidance, social work, health and transportation Food services Extracurricular activities General administration Plant maintenance and security Data processing services Community services Debt Contracted instructional services Total expenses Increase/(decrease) in net assets Beginning net assets Ending net assets

2008-2009 Governmental $ 12,358,105 18,596,276 30,954,381 226,525,817 68,601,051 2,509,504 27,945 21,090,145 318,754,462 349,708,843 190,484,088 17,478,440 19,130,993 12,921,293 12,113,595 9,650,382 28,584,878 4,766,862 1,424,151 67,009,800 28,661,287 392,225,769 (42,516,926) (40,383,010) $ (82,899,936)

2007-2008 Governmental 10,334,116 16,447,353 26,781,469 188,769,030 52,027,127 6,400,879 28,255,988 275,453,024 302,234,493 140,764,900 13,389,118 15,527,620 10,181,062 9,456,889 5,800,055 20,348,847 1,785,957 850,082 39,696,630 19,614,719 277,415,879 24,818,614 (65,201,624) (40,383,010)

Percentage Change 19.6% 13.1% 15.6% 20.0% 31.9% -60.8% -25.4% 15.7% 15.7% 35.3% 30.5% 23.2% 26.9% 28.1% 66.4% 40.5% 166.9% 67.5% 68.8% 46.1% 41.4% -171.3% -38.1% -105.3%

The increase in expenses for the 2008 - 2009 school year is a result of the Districts decision to change the year end from August 31 to June 30 beginning with the 2007 - 2008 school year. The impact of opening of one (1) elementary school, one (1) high school, and an Early Childhood School contributed to the increase of expenses.

Budgetary Highlights: (Information from Exhibit F-1) General Fund At the end of the 2008 fiscal period, the ending fund balance of $43,473,686 represented 18.5% of the 2008 - 2009 operating budget. For the 2009 fiscal period, the ending fund balance of $44,962,721 represents 17.7% of the 2009 - 2010 operating budget. Total revenues increased from $214,541,962 in 2007 - 2008 to $254,986,921 for 2008 - 2009 or an 18.9% increase. Total local revenue continues to increase due to the increase in the Districts property values of 5.6% in 2008 - 2009 from the previous year. The District received an increase of $17,862,047 from the State compared to the previous year. Regarding expenditures, in Function 11 the District had a variance in instructional costs of approximately $0.9M mainly due to the personnel benefits for TRS on Behalf being $0.5M less than expected. The majority of the Districts approximately 4,900 employees are included in Function 11. The $0.6M favorable variance in Function 34 is due to a change in procedures for billing the cost of student field trips to the campuses. In Function 51, the budget for utilities was $9.1M and the actual was $8.5M thus contributing to the $1.0M favorable variance. The $0.8M unfavorable variance in Function 97 is linked directly to the revenue received in the Tax Increment Refunding Zone. The revenue and expenses relating to this zone were more than originally anticipated.

Capital Assets and Debt Administration At the end of 2009, the District had invested $1,091,382,355 in various capital assets, including land, equipment, buildings, and construction in progress. The following table (A3) represents the Districts total Capital Assets:

Table A3 Capital Assets Description Land Buildings and improvements Furniture and equipment Construction in progress Total cost (historical) Total accumulated depreciation Net capital assets $ Total Costs 2008-2009 $ 119,199,396 738,380,083 26,818,342 206,984,534 1,091,382,355 (99,956,098) 991,426,257 Total Costs 2007-2008 114,467,329 622,386,344 18,829,150 165,009,891 920,692,714 (78,874,174) 841,818,540 Percentage Change 4.1% 18.6% 42.4% 25.4% 18.5% 26.7% 17.8%

The Districts fiscal year 2010 capital budget will include expenditures for the completion of five (5) additional campuses. The five campuses consist of two (2) elementary schools and three (3) middle schools. Additional information on capital assets is contained in Note 4, Section E of the Notes to the Financial Statements. At the end of the 2009 fiscal year, the District had $1,239,824,093 in bonds outstanding as compared to $1,045,163,317 the previous fiscal year 2008.

Table A4 Long Term Debt Analysis Description Bonds payable Total bonds payable Total 2008-2009 $ 1,239,824,093 $ 1,239,824,093 Total 2007-2008 1,045,163,317 1,045,163,317 Percentage Change 18.6% 18.6%

More detailed information is available about the Districts debt in Note 4, Section G of the Notes to the Financial Statements.

Economic Factors and Next Years Budget and Rates Appraised values used for the 2010 budget preparation has increased to approximately $16,276,550,271 which represents an increase of 9.0% from the prior year appraised values. The assessed property values for the 2009 - 2010 budget year is approximately $17,164,437,205 or a 5.5% increase. The District continues to have an excellent tax collection rate of 99.13% compared to 98.62% in 2008. The Districts 2009 - 2010 student enrollment is expected to be approximately 34,000 which represents an 11.9% increase over the enrollment in 2008 - 2009. The Districts debt obligations will continue to have a financial impact as long as the District continues to add additional building and campuses. Frisco ISD has received a rating of Superior Achievement under Texas new financial accountability rating system. The Superior Achievement rating is the states highest, demonstrating the quality of the Districts financial management and reporting system. This is the seventh year of Schools FIRST (Financial Integrity Rating System of Texas), a financial accountability system for school districts developed by the Texas Education Agency. The primary goal of FIRST is to achieve quality performance in the management of the Districts financial resources. Frisco ISD has received a superior rating for all seven years of the program.

Contacting the Districts Financial Management This financial report is designed to provide our citizens, taxpayers, customers, investors and creditors with a general overview of the Districts finances and to demonstrate the Districts accountability for the money it receives. If you have any questions about this report or need additional financial information, contact the Districts Financial Services Office.

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10

BASIC FINANCIAL STATEMENTS

11

EXHIBIT A-1 FRISCO INDEPENDENT SCHOOL DISTRICT STATEMENT OF NET ASSETS JUNE 30, 2009
Primary Government Data Control Codes

Governmental Activities

ASSETS Cash and Cash Equivalents Property Taxes Receivable (Delinquent) Allowance for Uncollectible Taxes Due from Other Governments Other Receivables, net Capitalized Bond and Other Debt Issuance Costs Capital Assets: 1510 Land 1520 Buildings, Net 1530 Furniture and Equipment, Net 1580 Construction in Progress
1110 1220 1230 1240 1290 1420

261,148,008 4,572,210 (450,134) 10,187,643 192,451 5,464,108 119,199,396 650,197,797 15,044,530 206,984,534 1,272,540,543

1000

Total Assets

LIABILITIES Accounts Payable Interest Payable Payroll Deductions & Withholdings Accrued Wages Payable Accrued Expenses Deferred Revenues Noncurrent Liabilities 2501 Due Within One Year 2502 Due in More Than One Year 2600 Deferred Gain on Refunding Bonds
2110 2140 2150 2160 2200 2300

34,561,640 22,911,253 1,565,461 25,928,630 10,113,677 19,280,008 19,855,837 1,219,968,256 1,255,717 1,355,440,479 (171,154,403) 3,121,981 59,011,864 4,187,350 21,933,272 $ (82,899,936)

2000

Total Liabilities

3200 3820 3850 3860 3900

NET ASSETS Invested in Capital Assets, Net of Related Debt Restricted for Federal and State Programs Restricted for Debt Service Restricted for Capital Projects Unrestricted Net Assets Total Net Assets

3000

The notes to the financial statements are an integral part of this statement. 12

FRISCO INDEPENDENT SCHOOL DISTRICT STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2009
Program Revenues
1 3 4

EXHIBIT B-1
Net (Expense) Revenue and Changes in Net Assets
6

Data Control Codes Expenses Charges for Services

Operating Grants and Contributions

Primary Gov. Governmental Activities

Primary Government:
GOVERNMENTAL ACTIVITIES:
11 12 13 21 23 31 32 33 34 35 36 41 51 52 53 61 72 73 81 91 93 95 97 Instruction Instructional Resources and Media Services Curriculum and Instructional Staff Development Instructional Leadership School Leadership Guidance, Counseling and Evaluation Services Social Work Services Health Services Student (Pupil) Transportation Food Services Extracurricular Activities General Administration Plant Maintenance and Operations Security and Monitoring Services Data Processing Services Community Services Debt Service - Interest on Long Term Debt Debt Service - Bond Issuance Cost and Fees Facilities Acquisition and Construction Contracted Instructional Services Between Schools Payments to Fiscal Agent/Member Districts of SSA Payments to Juvenile Justice Alternative Ed. Prg. Payments to Tax Increment Fund $ 179,255,336 $ 7,527,217 3,701,535 3,707,131 13,771,309 8,615,821 233,822 2,875,656 7,405,694 12,921,293 12,113,595 9,650,382 27,055,506 1,529,372 4,766,862 1,424,151 66,796,474 213,326 12,904,887 127,022 112,838 15,516,540 392,225,769 $ 315,818 $ 10,534,707 746,020 761,560 12,358,105 $ 11,237,196 206,056 535,019 249,111 494,258 2,274,122 3,964 109,529 297,115 2,078,938 162,122 161,807 447,317 16,217 89,248 54,128 53,105 127,022 18,596,276 $ (167,702,322) (7,321,161) (3,166,516) (3,458,020) (13,277,051) (6,341,699) (229,858) (2,766,127) (7,108,579) (307,648) (11,205,453) (9,488,575) (25,846,629) (1,513,155) (4,677,614) (1,370,023) (66,796,474) (213,326) 53,105 (12,904,887) (112,838) (15,516,540) (361,271,388)

[TP] TOTAL PRIMARY GOVERNMENT:

Data Control Codes MT DT SF GC IE MI TR CN NB NE

General Revenues: Taxes: Property Taxes, Levied for General Purposes Property Taxes, Levied for Debt Service State Aid - Formula Grants Grants and Contributions not Restricted Investment Earnings Miscellaneous Local and Intermediate Revenue Total General Revenues Change in Net Assets Net Assets--Beginning Net Assets--Ending $ 168,875,322 57,650,495 68,601,051 27,945 2,509,504 21,090,145 318,754,462 (42,516,926) (40,383,010) (82,899,936)

The notes to the financial statements are an integral part of this statement. 13

FRISCO INDEPENDENT SCHOOL DISTRICT BALANCE SHEET GOVERNMENTAL FUNDS JUNE 30, 2009
Data Control Codes 10 General Fund 50 Debt Service Fund 60 Capital Projects

1110 1220 1230 1240 1260 1290 1000

ASSETS Cash and Cash Equivalents Property Taxes - Delinquent Allowance for Uncollectible Taxes (Credit) Due from Other Governments Due from Other Funds Other Receivables Total Assets LIABILITIES AND FUND BALANCES Liabilities: Accounts Payable Interest Payable - Current Payroll Deductions and Withholdings Payable Accrued Wages Payable Due to Other Funds Accrued Expenditures Deferred Revenues Total Liabilities Fund Balances: Reserved For: Retirement of Long Term Debt Food Service Unreserved Designated For: Construction Other Purposes Unreserved and Undesignated: Reported in the General Fund Reported in Special Revenue Funds Total Fund Balances

92,492,051 $ 3,371,035 (350,696) 9,513,883 175,856 32,846 105,234,975 $

59,914,245 $ 1,201,175 (99,438) 61,015,982 $

100,915,842 159,605 101,075,447

2110 2140 2150 2160 2170 2200 2300 2000

10,997,357 $ 1,565,461 24,645,597 999,884 22,063,955 60,272,254

500 $ 901,881 1,101,737 2,004,118

22,020,257 111,600 175,856 9,113,793 31,421,506

3420 3450 3510 3590 3600 3610 3000

23,000,000 21,962,721 44,962,721

59,011,864 59,011,864

69,653,941 69,653,941

4000 Total Liabilities and Fund Balances

105,234,975 $

61,015,982 $

101,075,447

The notes to the financial statements are an integral part of this statement. 14

EXHIBIT C-1

Other Funds

Total Governmental Funds

5,412,121 $ 673,760 6,085,881 $

258,734,259 4,572,210 (450,134) 10,187,643 175,856 192,451 273,412,285

56,860 $ 1,171,433 236,392 1,464,685

33,074,974 901,881 1,565,461 25,928,630 175,856 10,113,677 23,402,084 95,162,563

3,121,981 1,499,215 4,621,196

59,011,864 3,121,981 69,653,941 23,000,000 21,962,721 1,499,215 178,249,722

6,085,881 $

273,412,285

15

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16

EXHIBIT C-2 FRISCO INDEPENDENT SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS JUNE 30, 2009

Total Fund Balances - Governmental Funds

1 The District uses internal service funds to charge the costs of certain activities, such as

178,249,722 927,083

self-insurance and printing, to appropriate functions in other funds. The assets and liabilities of the internal service funds are included in governmental activities in the statement of net assets. The net effect of this consolidation is to increase net assets.
2 Capital assets used in governmental activities are not financial resources and therefore

are not reported in governmental funds. At the beginning of the year, the cost of these assets was $920,692,714 and the accumulated depreciation was $78,874,174. In addition, long-term liabilities, including bonds payable of $992,862,979, are not due and payable in the current period, and, therefore are not reported as liabilities in the funds. The net effect of including the beginning balances for capital assets (net of depreciation) and long-term debt in the governmental activities is to decrease net assets.
3 Current period capital outlays of $170,851,510, current period disposals of $(4,650), and

(151,044,439)

current period long-term debt principal payments of $14,393,638 are expenditures in the fund financial statements ,but they should be shown as increases in capital assets in the government-wide financial statements. The net effect of including the current period capital outlays is to increase net assets.
4 Accrued interest payable on long-term debt is not shown on the fund financial

185,240,498

statements, but is shown on the government-wide financial statements. The effect of including accrued interest payable is to decrease net assets.
5 Accreted interest on capital appreciation bonds on not included on the fund financial

(22,009,372)

statements, but is included on the government-wide financial statements. The effect of including accreted interest is to decrease net assets.
6 The current period depreciation expense increases accumulated depreciation. The net

(64,577,910)

effect of the current year's depreciation is to decrease net assets.

7 Various other reclassifications and eliminations are necessary to convert from the

(21,239,143)

modified accrual basis of accounting to accrual basis of accounting. These include recognizing deferred revenue as revenue, eliminating interfund transactions, reclassifying the proceeds of bond sales as an increase in bonds payable, and recognizing the liabilities associated with maturing long-term debt and interest. The net effect of these reclassifications and recognitions is to decrease net assets.
19 Net Assets of Governmental Activities

(188,446,375)

(82,899,936)

The notes to the financial statements are an integral part of this statement. 17

FRISCO INDEPENDENT SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE GOVERNMENTAL FUNDS FOR THE YEAR ENDED JUNE 30, 2009
Data Control Codes 10 General Fund 50 Debt Service Fund $ 58,613,963 58,613,963 $ 60 Capital Projects 13,851,023 53,105 13,904,128

REVENUES:
5700 5800 5900 5020 Total Local and Intermediate Sources State Program Revenues Federal Program Revenues $ 177,165,313 77,793,663 27,945 254,986,921

Total Revenues EXPENDITURES:

Current:
0011 0012 0013 0021 0023 0031 0032 0033 0034 0035 0036 0041 0051 0052 0053 0061 0071 0072 0073 0081 0091 0093 0095 0097 6030 1100 Instruction Instructional Resources and Media Services Curriculum and Instructional Staff Development Instructional Leadership School Leadership Guidance, Counseling and Evaluation Services Social Work Services Health Services Student (Pupil) Transportation Food Services Extracurricular Activities General Administration Facilities Maintenance and Operations Security and Monitoring Services Data Processing Services Community Services 146,262,459 5,621,291 3,259,066 3,556,453 13,377,731 6,601,100 233,822 2,781,160 5,877,442 6,732,672 6,838,930 23,212,771 1,237,700 1,770,527 737,561 12,904,887 112,838 12,783,093 253,901,503 1,085,418 17,096 401,521 (15,000) 403,617 1,489,035 43,473,686 $ 44,962,721 $ 14,393,638 47,192,970 3,069,950 64,656,558 (6,042,595) 14,170,000 10,074,910 8,865,586 (14,326,603) 18,783,893 12,741,298 46,270,566 59,011,864 $ 197,245,977 2,733,447 199,979,424 (186,075,296) 185,000,000 (10,074,910) 174,925,090 (11,150,206) 80,804,147 69,653,941

Debt Service:
Debt Service - Principal on Long Term Debt Debt Service - Interest on Long Term Debt Debt Service - Bond Issuance Cost and Fees

Capital Outlay:
Facilities Acquisition and Construction

Intergovernmental:
Contracted Instructional Services Between Schools Payments to Fiscal Agent/Member Districts of SSA Payments to Juvenile Justice Alternative Ed. Prg. Payments to Tax Increment Fund

Total Expenditures
Excess (Deficiency) of Revenues Over (Under) Expenditures

OTHER FINANCING SOURCES (USES):

7911 7912 7915 7916 8911 8949 7080 1200 0100 3000 Capital Related Debt Issued (Regular Bonds) Sale of Real and Personal Property Transfers In Premium or Discount on Issuance of Bonds Transfers Out (Use) Other (Uses)

Total Other Financing Sources (Uses) Net Change in Fund Balances Fund Balance - July 1 (Beginning) Fund Balance - June 30 (Ending)

The notes to the financial statements are an integral part of this statement.

18

EXHIBIT C-3

Other Funds $

Total Governmental Funds

12,894,304 $ 2,937,482 6,413,077 22,244,863

262,524,603 80,784,250 6,441,022 349,749,875

4,536,591 443,044 149,486 2,016,990 1,475 11,615,911 1,398,617 114,057 1,475 674,557 127,022 21,079,225 1,165,638 15,000 (401,521) (386,521) 779,117 3,842,079 $ 4,621,196 $

150,799,050 5,621,291 3,702,110 3,705,939 13,377,731 8,618,090 233,822 2,781,160 5,878,917 11,615,911 8,131,289 6,952,987 23,214,246 1,237,700 1,770,527 1,412,118 14,393,638 47,192,970 3,069,950 197,245,977 12,904,887 127,022 112,838 15,516,540 539,616,710 (189,866,835) 199,170,000 17,096 10,491,431 8,865,586 (10,491,431) (14,326,603) 193,726,079 3,859,244 174,390,478 178,249,722

19

This page left blank intentionally.

20

EXHIBIT C-4 FRISCO INDEPENDENT SCHOOL DISTRICT RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES FOR THE YEAR ENDED JUNE 30, 2009

Total Net Change in Fund Balances - Governmental Funds The District uses internal service funds to charge the costs of certain activities, such as self-insurance and printing, to appropriate functions in other funds. The net income (loss) of internal service funds are reported with governmental activities. The net effect of this consolidation is to increase net assets. Current period capital outlays of $170,851,510, current period disposals of $(4,650), and current period long-term debt principal payments of $14,393,638 are expenditures in the fund financial statements, but they should be shown as increases in capital assets in the government-wide financial statements. The net effect of removing the current period capital outlays is to increase net assets. Accrued interest payable on long-term debt is not shown on the fund financial statements, but is shown on the government-wide financial statements. The net effect of showing accrued interest payable is to decrease net assets. Accreted interest on capital appreciation bonds is not included on the fund financial statements, but is included on the government-wide financial statements. The effect of including accreted interest is to decrease net assets. Depreciation is not recognized as an expense in governmental funds since it does not require the use of current financial resources. The net effect of the current period's depreciation is to decrease net assets. Various other reclassifications and eliminations are necessary to convert from the modified accrual basis of accounting to accrual basis of accounting. These include recognizing deferred revenue as revenue, adjusting current year revenue to show the revenue earned from the current year's tax levy, eliminating interfund transactions, reclassifying the proceeds of bond sales, and recognizing the liabilities associated with maturing long-term debt and interest. The net effect of these reclassifications and recognitions is to decrease net assets. Change in Net Assets of Governmental Activities

3,859,244 149,541

185,240,498

(4,572,002)

(15,624,665)

(21,239,143)

(190,330,399)

(42,516,926)

The notes to the financial statements are an integral part of this statement. 21

EXHIBIT D-1 FRISCO INDEPENDENT SCHOOL DISTRICT STATEMENT OF NET ASSETS PROPRIETARY FUNDS JUNE 30, 2009
Governmental Activities -

Internal Service Fund

ASSETS Current Assets: Cash and Cash Equivalents Total Assets LIABILITIES Current Liabilities: Accounts Payable Total Liabilities NET ASSETS Unrestricted Net Assets Total Net Assets

2,413,749 2,413,749

1,486,666 1,486,666 927,083 $ 927,083

The notes to the financial statements are an integral part of this statement. 22

EXHIBIT D-2 FRISCO INDEPENDENT SCHOOL DISTRICT STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE 30, 2009
Governmental Activities -

Internal Service Fund

OPERATING REVENUES: Local and Intermediate Sources Total Operating Revenues OPERATING EXPENSES: Other Operating Costs Total Operating Expenses Operating Income NONOPERATING REVENUES (EXPENSES): Earnings from Temporary Deposits & Investments Total Nonoperating Revenues (Expenses) Change in Net Assets Total Net Assets - July 1 (Beginning) Total Net Assets - June 30 (Ending) $ 17,725 17,725 149,541 777,542 927,083 14,615,919 14,615,919 131,816 $ 14,747,735 14,747,735

The notes to the financial statements are an integral part of this statement. 23

EXHIBIT D-3 FRISCO INDEPENDENT SCHOOL DISTRICT STATEMENT OF CASH FLOWS PROPRIETARY FUNDS FOR THE YEAR ENDED JUNE 30, 2009
Governmental Activities -

Internal Service Fund

Cash Flows from Operating Activities: Cash Received from User Charges Cash Payments for Other Operating Expenses Net Cash Provided by Operating Activities Cash Flows from Investing Activities: Interest and Dividends on Investments Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents at Beginning of the Year: Cash and Cash Equivalents at the End of the Year: Reconciliation of Operating Income to Net Cash Provided by Operating Activities: Operating Income: Effect of Increases and Decreases in Current Assets and Liabilities: Decrease (increase) in Receivables Increase (decrease) in Accounts Payable Net Cash Provided by Operating Activities

14,831,780 (14,441,119) 390,661

17,725 408,386 2,005,363 $ 2,413,749

131,816

84,045 174,800 $ 390,661

The notes to the financial statements are an integral part of this statement. 24

EXHIBIT E-1 FRISCO INDEPENDENT SCHOOL DISTRICT STATEMENT OF NET ASSETS FIDUCIARY FUNDS JUNE 30, 2009

Agency Fund

ASSETS Cash and Cash Equivalents Total Assets LIABILITIES Accounts Payable Due to Student Groups Total Liabilities $ 618,070 618,070

5,449 612,621 618,070

The notes to the financial statements are an integral part of this statement. 25

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Frisco Independent School District (the "District") is a public educational agency operating under the applicable laws and regulations of the State of Texas. It is governed by a seven member Board of Trustees (the Board) elected by registered voters of the District. The District prepares its basic financial statements in conformity with accounting principles generally accepted in the United States of America promulgated by the Governmental Accounting Standards Board and other authoritative sources identified in Statement on Auditing Standards No. 69 of the American Institute of Certified Public Accountants; and it complies with the requirements of the appropriate version of Texas Education Agencys Financial Accountability System Resource Guide (the Resource Guide) and the requirements of contracts and grants of agencies from which it receives funds. A. Reporting Entity The Board is elected by the public and it has the authority to make decisions, appoint administrators and managers, and significantly influence operations. It also has the primary accountability for fiscal matters. Therefore, the District is a financial reporting entity as defined by the Governmental Accounting Standards Board (GASB) in its Statement No. 14, The Financial Reporting Entity. There are no component units included within the reporting entity. B. Government-wide and Fund Financial Statements The government-wide financial statements (i.e., the Statement of Net Assets and the Statement of Activities) report information on all of the non-fiduciary activities of the District. For the most part, the effect of interfund activity has been removed from these statements. Governmental activities, which normally are supported by taxes and intergovernmental revenues, are reported separately from business-type activities, which rely to a significant extent on fees and charges for support. The Statement of Activities demonstrates the degree to which the direct expenses of a given function or segment are offset by program revenues. Direct expenses are those that are clearly identifiable with a specific function or segment. Program revenues include 1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function or segment and 2) grants and contributions that are restricted to meeting the operational or capital requirements of a particular function or segment. Taxes and other items not properly included among program revenues are reported instead as general revenues. Separate financial statements are provided for governmental funds, proprietary funds, and fiduciary funds, even though the latter are excluded from the government-wide financial statements. Major individual governmental funds are reported as separate columns in the fund financial statements. C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation The government-wide financial statements are reported using the economic resources measurement focus and the accrual basis of accounting, as are the proprietary fund and -continued26

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continuedNOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) C. Measurement Focus, Basis of Accounting, and Financial Statement Presentation (continued) fiduciary fund financial statements. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. With this measurement focus, only current assets, current liabilities and fund balances are included on the balance sheet. Operating statements of these funds present net increases and decreases in current assets (i.e., revenues and other financing sources and expenditures and other financing uses). The modified accrual basis of accounting recognizes revenues in the accounting period in which they become both measurable and available, and it recognizes expenditures in the accounting period in which the fund liability is incurred, if measurable, except for unmatured interest and principal on long-term debt, which is recognized when due. The expenditures related to certain compensated absences and claims and judgements are recognized when the obligations are expected to be liquidated with expendable available financial resources. The District considers all revenues available if they are collectible within 60 days after year end. Revenues from local sources consist primarily of property taxes. Property tax revenues and revenues received from the State are recognized under the susceptible to accrual concept, that is, when they are both measurable and available. The District considers them available if they will be collected within 60 days of the end of the fiscal year. Miscellaneous revenues are recorded as revenue when received in cash because they are generally not measurable until actually received. Investment earnings are recorded as earned, since they are both measurable and available. Grant funds are considered to be earned to the extent of expenditures made under the provisions of the grant. Accordingly, when such funds are received, they are recorded as deferred revenues until related and authorized expenditures have been made. If balances have not been expended by the end of the project period, grantors sometimes require the District to refund all or part of the unused amount. The Proprietary Fund Types and Fiduciary Funds are accounted for on a flow of economic resources measurement focus and utilize the accrual basis of accounting. This basis of accounting recognizes revenues in the accounting period in which they are earned and become measurable and expenses in the accounting period in which they are incurred and become measurable. The District applies all GASB pronouncements as well as the Financial Accounting Standards Board pronouncements issued on or before November 30, 1989, unless these pronouncements conflict or contradict GASB pronouncements. With this measurement focus, all assets and all liabilities associated with the operation of these funds are included on the fund Statement of Net Assets. The fund equity is segregated into invested in capital assets net of related debt, restricted net assets, and unrestricted net assets. -continued27

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) D. Fund Accounting The District reports the following major governmental funds: 1. 2. General Fund - The general fund is the Districts primary operating fund. It accounts for all financial resources except those required to be accounted for in another fund. Debt Service Fund - The District accounts for resources accumulated and payments made for principal and interest on long-term general obligation debt of governmental funds in a debt service fund. Capital Projects Fund - The proceeds from long-term debt financing and revenues and expenditures related to authorized construction and other capital asset acquisitions are accounted for in a capital projects fund.

3.

Additionally, the District reports the following fund types(s): Governmental Funds: 1. Special Revenue Funds - The District accounts for resources restricted to, or designated for, specific purposes by the District or a grantor in a special revenue fund. Most Federal and some State financial assistance is accounted for in a Special Revenue Fund, and sometimes unused balances must be returned to the grantor at the close of specified project periods.

Proprietary Funds: 2. Internal Service Fund - Revenues and expenses related to services provided to organizations inside the District on a cost reimbursement basis are accounted for in an internal service fund. The Districts Internal Service Fund is a self-funded health insurance fund.

Fiduciary Funds: 3. E. Agency Funds - The District accounts for resources held for others in a custodial capacity in agency funds. The Districts Agency Fund is for student groups.

Assets, Liabilities, and Net Assets or Equity 1. Deposits and Investments The Districts cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments with original maturities of three months or less from the date of acquisition.

-continued28

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) E. Assets, Liabilities, and Net Assets or Equity (continued) 2. Due From (To) Other Funds Interfund receivables and payables arise from interfund transactions and are recorded in all affected funds in the period in which transactions are executed in the normal course of operations. 3. Capital Assets Capital assets, which include property, plant, and equipment, are reported in the applicable governmental activities columns in the government-wide financial statements. Capital assets are defined by the government as assets with an initial, individual cost of more than $5,000 and an estimated useful life in excess of two years. Such assets are recorded at historical cost or estimated historical cost if purchased or constructed. Donated capital assets are recorded at estimated fair market value at the date of donation. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend assets lives are not capitalized. Major outlays for capital assets and improvements are capitalized as projects are constructed. Property, plant, and equipment of the district is depreciated using the straight line method over the following estimated useful lives: Assets Buildings Building improvements Vehicles Office equipment Computer equipment 4. Vacation and Sick Leave Vacations are to be taken within the same year they are earned, and any unused days at the end of the year are forfeited. Therefore, no liability has been accrued in the accompanying basic financial statements. Employees of the District are entitled to sick leave based on category/class of employment. Sick leave is allowed to be accumulated but does not vest. Therefore, a liability for unused sick leave has not been recorded in the accompanying basic financial statements. Years 40 20 10 7 5

-continued29

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) E. Assets, Liabilities, and Net Assets or Equity (continued) 5. Long-term Obligations In the government-wide financial statements, and proprietary fund types in the fund financial statements, long-term debt and other long-term obligations are reported as liabilities in the applicable governmental activities, business-type activities, or proprietary fund type statement of net assets. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds using the effective interest method. Bonds payable are reported net of the applicable bond premium or discount. Bond issuance costs are reported as deferred charges and amortized over the term of the related debt. In the fund financial statements, governmental fund types recognize bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from the actual debt proceeds received, are reported as debt service expenditures. 6. Fund Equity In the fund financial statements, governmental funds report reservations of fund balance for amounts that are not available for appropriation or are legally restricted by outside parties for use for a specific purpose. Designations of fund balance represent tentative management plans that are subject to change. Debt Service Fund reserves total $59,011,864 for retirement of funded indebtedness as of June 30, 2009. A total of $69,653,941 has been designated for authorized construction programs in the Capital Projects Fund. The Special Revenue Fund reserves total $3,121,981 for Food Service. Unreserved Designated Fund balances for other purposes included $23,000,000 in the General Fund. 7. When the District incurs an expense for which it may use either restricted or unrestricted assets, it uses the restricted assets first whenever they will have to be returned if they are not used. Data Control Codes The Data Control Codes refer to the account code structure prescribed by T.E.A. in the Financial Accountability System Resources Guide. Texas Education Agency requires school districts to display these codes in the financial statements filed with the Agency in order to insure accuracy in building a Statewide data base for policy development and funding plans.

8.

-continued30

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continuedNOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) E. Assets, Liabilities, and Net Assets or Equity (continued) 9. School Districts are required to report all expenses by function, except certain indirect expenses. General administration and data processing service functions (data control codes 41 and 53, respectively) include expenses that are indirect expenses of other functions. These indirect expenses are not allocated to other functions.

NOTE 2 RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS A. Explanation of Certain Differences Between the Governmental Fund Balance Sheet and the Government-Wide Statement of Net Assets Exhibit C-2 provides a reconciliation between fund balance - total governmental funds and net assets - governmental activities as reported in the government-wide statement of net assets. One element of that reconciliation explains that various other reclassifications and eliminations are necessary to convert from the modified accrual basis of accounting to the full accrual basis of accounting. The details of this $(188,446,375) adjustment are as follows: Long-term debt: Issuance of bonds payable Premium and discount on bonds Deferred gain on refunding bonds Issuance costs on bonds Deferred revenue: To remove the current year uncollected tax levy from deferred revenue To remove prior year collectible delinquent tax levy receivable from deferred revenue Net adjustment to reduce fund balance - total governmental funds to arrive at net assets - governmental activities B. $ (185,000,000) (11,776,842) (1,255,717) 5,464,108 (192,568,451)

3,551,476 570,600 4,122,076 $ (188,446,375)

Explanation of Certain Differences Between the Governmental Fund Statement of Revenues, Expenditures, and Changes in Fund Balances and the Government-Wide Statement of Activities Exhibit C-4 provides a reconciliation between net changes in fund balances - total governmental funds and changes in net assets of governmental activities as reported in the governmentwide statement of activities. One element of that reconciliation explains that various other reclassifications are necessary to convert from the modified accrual basis of accounting to the full accrual basis of accounting. The details of this $(190,330,399) adjustment are as follows:

-continued31

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 2 RECONCILIATION OF GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS (continued) B. Explanation of Certain Differences Between the Governmental Fund Statement of Revenues, Expenditures, and Changes in Fund Balances and the Government-Wide Statement of Activities (continued) Long-term debt: Issuance of bonds payable Current period amortization Current period premium and discount on bonds Current period issuance costs on bonds Taxes: To move the current year uncollected tax levy to revenue To remove the prior year tax collection from current year revenue Net adjustment to decrease net changes in fund balance - total governmental funds to arrive at changes in net assets of governmental activities NOTE 3 STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY A. Budgetary Data The Board of Trustees adopts an appropriated budget for the General Fund, Debt Service Fund and the Food Service Fund which is included in the Special Revenue Funds. The District is required to present the adopted and final amended budgeted revenues and expenditures for each of these funds. The District compares the final amended budget to actual revenues and expenditures. The General Fund Budget report appears in Exhibit F-1 and the other two reports are in Exhibit H-3 and H-4. The following procedures are followed in establishing the budgetary data reflected in the basic financial statements: 1. Prior to June 19, the District prepares a budget for the next succeeding fiscal year beginning July 1. The operating budget includes proposed expenditures and the means of financing them. A meeting of the Board is then called for the purpose of adopting the proposed budget. At least ten days public notice of the meeting must be given. 3,551,476 (3,622,679) (71,203) $ (185,000,000) 548,438 (8,865,586) 3,057,952 (190,259,196)

$ (190,330,399)

2.

-continued32

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 3 STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY (continued) A. Budgetary Data (continued) 3. Prior to July 1, the budget is legally enacted through passage of a resolution by the Board. Once a budget is approved, it can only be amended at the function and fund level by approval of a majority of the members of the Board. Amendments are presented to the Board at its regular meetings. Each amendment must have Board approval. As required by law, such amendments are made before the fact, are reflected in the official minutes of the Board and are not made after fiscal year end. The budget was properly amended throughout the year by the Board of Trustees. Each budget is controlled by the budget coordinator at the revenue and expenditure function/object level. Budgeted amounts are as amended by the Board. All budget appropriations lapse at year end. A reconciliation of fund balances for both appropriated budget and nonappropriated budget special revenue funds is as follows: June 30, 2009 Fund Balance Appropriated budget funds - Food Service Special Revenue Fund Nonappropriated budget funds All Special Revenue Funds B. Encumbrance Accounting The District employs encumbrance accounting, whereby encumbrances for goods or purchased services are documented by purchase orders and contracts. An encumbrance represents a commitment or Board appropriation related to unperformed contracts for goods and services. The issuance of a purchase order or the signing of a contract creates an encumbrance but does not represent an expenditure for the period, only a commitment to expend resources. Appropriations lapse at June 30 and encumbrances outstanding at that time are either canceled or appropriately provided for in the subsequent year's budget. There were no outstanding encumbrances at year end. NOTE 4 DETAILED NOTES ON ALL FUNDS A. Deposits and Investments The funds of the District must be deposited and invested under the terms of a contract, contents of which are set out in the Depository Contract Law. The depository bank places approved pledged securities for safekeeping and trust with the Districts agent bank in an amount sufficient to protect District funds on a day-to-day basis during the period of the contract. The pledge of approved securities is waived only to the extent of the depository banks dollar amount of Federal Deposit Insurance Corporation (FDIC) insurance. $ 3,121,981 1,499,215 $ 4,621,196

4.

-continued33

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continuedNOTE 4 DETAILED NOTES ON ALL FUNDS (continued) A. Deposits and Investments (continued) At June 30, 2009, the carrying amount of the District's cash, savings, and time deposits was $7,578,802. The bank balance was $8,856,375. The District's combined deposits at June 30, 2009, and during the year ended June 30, 2009 were fully insured by federal depository insurance or collateralized with securities pledged to the District and held by the District's agent. In addition the following is disclosed regarding coverage of combined balances on the date of highest deposit: a. b. c. d. Name of bank JPMorgan Chase Bank, Frisco, Texas. The market value of securities pledged as of the date of the highest combined balance on deposit was $ 54,406,326. The highest combined balances of cash, savings, and time deposit accounts amounted to $ 37,017,596 and occurred during the month of January. Total amount of FDIC coverage at the time of highest combined balance was $ 250,000.

The Public Funds Investment Act (Government Code Chapter 2256) contains specific provisions in the areas of investment practices, management reports and establishment of appropriate policies. Among other things, it requires the District to adopt, implement, and publicize an investment policy. That policy must address the following areas: (1) safety of principal and liquidity, (2) portfolio diversification, (3) allowable investments, (4) acceptable risk levels, (5) expected rates of return, (6) maximum allowable stated maturity of portfolio investments, (7) maximum average dollar-weighted maturity allowed based on the stated maturity date for the portfolio, (8) investment staff quality and capabilities, and (9) bid solicitation preferences for certificates of deposit. Statutes authorize the District to invest in (1) obligations of the U.S. Treasury, certain U.S. agencies, and the State of Texas; (2) certificates of deposit; (3) certain municipal securities; (4) money market savings account; (5) repurchase agreements, (6) bankers acceptances, (7) Mutual Fund; (8) Investment pools; (9) guaranteed investment contracts; and (10) common trust funds. The Act also requires the District to have independent auditors perform test procedures related to investment practices as provided by the Act. The District is in substantial compliance with the requirements of the Act and with local policies. In compliance with the Public Funds Investment Act, the District has adopted a deposit and investment policy. That policy addresses the following risks: a. Custodial Credit Risk - Deposits: In the case of deposits this is the risk that, in the event of a bank failure, the Districts deposits may not be returned to it. The Districts policy regarding types of deposits allowed and collateral requirements is: the Depository may be a state bank authorized and regulated under Texas law; a national bank, savings and loan association, or savings bank authorized and regulated by federal law; or a savings and loan association or savings bank organized under Texas law; but shall not be any bank the deposits of which are not insured by the Federal Deposit Insurance Corporation (FDIC). The District is not exposed to custodial credit risk for its deposits, as all are covered by depository insurance and pledged securities. -continued34

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 4 DETAILED NOTES ON ALL FUNDS (continued) A. Deposits and Investments (continued) b. Custodial Credit Risk - Investments: For an investment, this is the risk that, in the event of the failure of the counterparty, the District will not be able to recover the value of its investments or collateral securities that are in the possession of an outside party. The District investments are with the Lone Star Investment Pool (LoneStar). The pool is a public funds investment pool created to provide a safe environment for the placement of local government funds in authorized short-term investments. Local investment pools operate in a manner consistent with the Security and Exchange Commissions Rule 2a7 of the Investment Company Act of 1940. Administration of LoneStar is performed by a Board of Directors, which is an administrative agency created under the Interlocal Act. The District is not exposed to custodial credit risk for its investments. Credit Risk - This is the risk that an issuer of an investment will be unable to fulfill its obligations. The rating of securities by nationally recognized rating agencies is designed to give an indication of credit risk. The credit quality rating for LoneStar at year end was Aaa by Moodys Investor Service. Interest Rate Risk - This is the risk that changes in interest rates will adversely affect the fair value of an investment. The District manages its exposure to declines in fair values by limiting the weighted average maturity of its investment portfolio to less than one year from the time of purchase. The weighted average maturity for the Districts investment in external investment pools is less than 60 days. Foreign Currency Risk - This is the risk that exchange rates will adversely affect the fair value of an investment. The District is not exposed to foreign currency risk. Concentration of Credit Risk - This is the risk of loss attributed to the magnitude of the Districts investment in a single issuer (i.e., lack of diversification). Concentration risk is defined as positions of 5 percent or more in the securities of a single issuer. Investments issued by the U. S. Government and investments in investment pools are excluded from the 5 percent disclosure requirement. The District is not exposed to concentration of credit risk.

c.

d.

e. f.

The District's temporary investments at June 30, 2009, were as follows: Investment type: Lone Star investment pool B. Property Taxes Property taxes are considered available when collected within the current period or expected to be collected soon enough thereafter to be used to pay liabilities of the current period. The District levies its taxes on October 1 in conformity with Subtitle E, Texas Property Tax Code. Taxes are due upon receipt of the tax bill and are past due and subject to interest if not paid -continued35

Fair Value $ 254,186,010

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 4 DETAILED NOTES ON ALL FUNDS (continued) B. Property Taxes (continued) by February 1 of the period following the October 1 levy date. The assessed value of the property tax roll on August 1, 2008, upon which the levy for the 2008-09 fiscal year was based, was $16,276,550,271. The roll was subsequently increased to a period end assessed value of $16,641,378,797. Taxes are delinquent if not paid by January 31. Delinquent taxes are subject to both penalty and interest charges plus 15% delinquent collection fees for attorney costs after June 30. The tax rates assessed for the year ended June 30, 2009, to finance General Fund operations and the payment of principal and interest on general obligation long-term debt were $1.00 and $0.37 per $100 valuation, respectively, for the total of $1.37 per $100 valuation. Total tax collections for the year ended June 30, 2009 were 99.9% of the period end adjusted tax levy. Delinquent taxes are prorated between maintenance and debt service based on rates adopted for the year of the levy. Allowances for uncollectible taxes within the General and Debt Service Funds are based on historical experience in collecting taxes. Uncollectible personal property taxes are periodically reviewed and written off, but the District is prohibited from writing off real property taxes without specific statutory authority from the Texas Legislature. As of June 30, 2009, property taxes receivable, net of estimated uncollectible taxes, totaled $3,020,339 and $1,101,737 for the General and Debt Service Funds, respectively. C. Due From Other Governments The District participates in a variety of federal and state programs from which it receives grants to partially or fully finance certain activities. In addition, the District receives entitlements from the State through the School Foundation and Per Capita Programs. Amounts due from federal and state governments as of June 30, 2009, are summarized below. All federal grants shown below are passed through the TEA and are reported on the combined financial statements as Due from Other Governments. Fund General Special revenue Total State Entitlements $ 9,513,883 19,461 $ 9,533,344 654,299 654,299 Federal Grants Total 9,513,883 673,760 10,187,643

-continued36

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 4 DETAILED NOTES ON ALL FUNDS (continued) D. Interfund Receivables and Payables Interfund balances at June 30, 2009, consisted of the following individual fund receivables and payables: Fund General Fund: Capital Projects Fund Capital Projects Fund: General Fund Total E. Capital Assets Capital asset activity for the period ended June 30, 2009, was as follows: Primary Government Beginning Balance Government activities: Land Buildings and improvements Furniture and equipment Construction in progress Totals at historical cost Less accumulated depreciation for: Buildings and improvements Furniture and equipment Total accumulated depreciation Governmental activities capital assets, net Additions Retirements Ending Balance 119,199,396 738,380,083 26,818,342 206,984,534 $ 175,856 Receivable $ 175,856 175,856 175,856 Payable

$ 114,467,329 4,732,067 622,386,344 115,993,739 18,829,150 8,151,061 (161,869) 165,009,891 159,536,799 (117,562,156)

920,692,714 288,413,666 (117,724,025) 1,091,382,355 (69,946,804) (18,235,482) (8,927,370) (3,003,661) (78,874,174) (21,239,143) (88,182,286) (11,773,812) (99,956,098) 991,426,257

157,219 157,219

$ 841,818,540 267,174,523 (117,566,806)

-continued37

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 4 DETAILED NOTES ON ALL FUNDS (continued) E. Capital Assets (continued) Depreciation expense was charged to governmental functions as follows: Instruction Instructional resources and media School leadership Student transportation Food services Extracurricular activities General administration Plant maintenance and operations Security monitoring Data processing services Community services Total depreciation expense F. Construction Commitments At June 30, 2009, the District had several projects under construction. A summary of the status of these projects and the related binding contracts with contractors is as follows: Scheduled Completion Date 08/09 08/09 09/09 08/09 08/09 09/09 08/09 08/09 08/10 08/09 08/10 08/10 08/10 Costs Incurred Through Amount 06/30/09 Retained 62,441,788 2,908,664 65,092,268 3,280,277 46,524 78,282 1,774 19,553 304 73,412 15,316,828 353,647 10,812 11,391 1,477,901 68,540 1,930,564 94,146 631,637 10,079,121 449,950 18,619,564 440,787 5,405,466 234,301 10,793,367 494,960 12,206,776 570,815 $ 13,791,894 375,712 225,566 1,532,050 1,173,360 1,727,859 377,537 954,749 172,695 895,688 12,033 $ 21,239,143

Project Name Heritage HS Lone Star HS Lawler ES Ag Facility Memorial turf East Side stadium Allen ES Running Trails Grayhawk ES Service Ctr. Phase IV Various projects West Side Stadium Hunt MS Early Child Ctr. Sonntag ES Maus MS Cobb MS

Contract Amount 64,411,851 65,325,441 840,000 621,002 15,487,253 176,942 1,548,948 4,110,828 24,520,000 19,293,538 12,372,000 24,936,000 26,263,000

-continued38

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 4 DETAILED NOTES ON ALL FUNDS (continued) F. Construction Commitments (continued) Scheduled Completion Date 08/10 Costs Incurred Through 06/30/09 1,655,985 207,995 885,300

Project Name Purefoy ES Shaddock MS Central Admin. G. Bonds Payable

Contract Amount 13,237,000

Amount Retained 40,204

Bonds payable activity for the year ended June 30, 2009, was as follows:
Interest Rate Payable
7.75% 7.25% 6.50% 5.75% 7.00% 7.00% 6.50% 7.25% 5.77% 2.60% 7.00% 5.25% 5.50% 5.50% 5.00% 4.58% 4.86% 4.41% 4.83% 5.00% 5.91% 5.23% 3.76%

Governmental Activities
Bonded Indebtedness: 1997 School Building 1998 School Building 1998A School Building 1999 Refunding & School Building 2000 School Building 2000A School Building 2001 School Building 2002 School Building 2002A Refunding & School Building 2003A School Building 2003B School Building 2004 Refunding & School Building 2005A School Building 2005B School Building 2005C Refunding & School Building 2006 School Building 2006A School Building 2007 Refunding & School Building 2007A School Building 2008 School Building 2008A School Building 2009 School Building 2009 Refunding Subtotal Bond Premium Accreted interest

Amounts Original Issue

8,300,000 17,700,000 25,000,000 40,033,092 45,000,000 28,000,000 60,000,000 75,000,000 38,019,141 1,900,000 38,100,000 60,661,071 40,000,000 25,000,000 104,595,831 85,000,000 80,000,000 95,186,595 100,000,000 90,000,000 100,000,000 85,000,000 14,170,000

Beginning Balance
220,000 14,655,000 22,180,000 33,808,092 14,565,000 26,640,000 56,995,000 72,135,000 37,834,141 500,000 38,100,000 58,139,395 39,505,000 24,560,000 102,839,756 85,000,000 80,000,000 95,186,595 100,000,000 90,000,000

Additions

Reductions
(220,000) (14,655,000) (575,000) (1,490,000) (820,000) (515,000) (1,115,000) (1,085,000) (1,705,000) (500,000)

Ending Balance

Due Within One Year

21,605,000 32,318,092 13,745,000 26,125,000 55,880,000 71,050,000 36,129,141 38,100,000

605,000 1,585,000 870,000 550,000 1,175,000 1,165,000 1,785,000 520,000 1,313,596 555,000 485,000 2,315,000 1,190,000 1,050,000 1,840,000 1,480,000

(1,378,882) (520,000) (465,000) (1,869,756) (650,000) (1,000,000)

56,760,513 38,985,000 24,095,000 100,970,000 84,350,000 79,000,000 95,186,595 100,000,000 90,000,000

100,000,000 85,000,000 14,170,000 992,862,979 3,347,093 48,953,245 8,865,586 16,056,027 (435,837) (431,362)

100,000,000 85,000,000 14,170,000 11,776,842 64,577,910 670,000 19,153,596 435,837 266,404 19,855,837

199,170,000 (28,563,638) 1,163,469,341

Total bonded indebtedness

1,045,163,317

224,091,613 (29,430,837) 1,239,824,093

-continued39

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 4 DETAILED NOTES ON ALL FUNDS (continued) G. Bonds Payable (continued) General obligation bonds consist of 1998 through 2009 School Building Bonds bearing interest at 2.0 - 7.25% per annum and 1999, 2002, 2004, 2005, 2007, and 2009 Refunding Bonds bearing interest at 2.0 - 5.75% per annum. Interest expense for the year on all bonded indebtedness was $47,192,970. Debt service requirements for the general obligation bonds are as follows: Year Ending June 30, 2010 2011 2012 2013 2014 2015-2019 2020-2024 2025-2029 2030-2034 2035-2039 2040-2042 Total Principal Interest $ 19,153,596 57,423,202 20,817,773 56,083,398 20,631,134 59,600,172 21,959,605 58,199,044 25,250,000 54,819,509 149,325,000 250,480,479 186,463,812 212,576,540 195,918,953 202,847,609 234,966,776 162,898,449 231,552,692 66,381,496 57,430,000 3,377,684 $ 1,163,469,341 1,184,687,582 Total Requirements 76,576,798 76,901,171 80,231,306 80,158,649 80,069,509 399,805,479 399,040,352 398,766,562 397,865,225 297,934,188 60,807,684 2,348,156,923

There are a number of limitations and restrictions contained in the various general obligation bonds indentures. The District is in compliance with all significant limitations and restrictions at June 30, 2009. H. Defeasance of Debt On April 28, 2009, the District issued general obligation bonds (refunding bonds) of $14,170,000 (par value) with an effective interest rate of 3.76 percent to advance refund the Unlimited Tax School Building Bonds, Series 1998 (refunded bonds), with an effective interest rate of 4.97 percent and par value of $14,170,000. The refunding bonds were issued at par and, after paying issuance costs of $225,580, and receiving a premium of $382,183, the net proceeds were $14,326,603. The net proceeds were used to purchase U.S. Government securities and those securities were deposited in an irrevocable trust with an escrow agent to provide debt service payments until the refunded portion is paid. The advance refunding met the requirements of an in-substance debt defeasance and the refunded bonds were removed from the Districts Long-Term Debt Payable. As a result of the advance refunding, the Districts total debt service requirements decreased by $636,455, which resulted in an economic gain (difference between the present value of the debt service payments on the old and new debt) of $592,621. The District issued the refunding bonds in order to restructure the bond debt and to enable the District to issue additional bonds for the purpose of capital improvements with an approximate annual level debt service. -continued40

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 4 H.

DETAILED NOTES ON ALL FUNDS (continued) Defeasance of Debt (continued) In prior years, the District defeased previously issued and outstanding bonds by placing the proceeds of new bonds in an irrevocable trust to provide for all future debt service payments on the old bonds. Accordingly, the trust account assets and the liability for the defeased bonds are not included in the Districts financial statements. On June 30, 2009, $26,470,000 of the bonds outstanding (including those defeased in 2009) are considered defeased.

NOTE 5 A.

OTHER INFORMATION Risk Management The District is exposed to various risks of loss related to torts; theft of, damage to and destruction of assets; errors and omissions; injuries to employees; and natural disasters. During fiscal 2009, the District purchased commercial insurance to cover general liabilities. There were no significant reductions in coverage in the past fiscal year, and there were no settlements exceeding insurance coverage for each of the past three fiscal years.

B.

Litigation and Contingencies The District is a party to various legal actions none of which is believed by administration to have a material effect on the financial condition of the District. Accordingly, no provision for losses has been recorded in the accompanying combined financial statements for such contingencies. The District participates in numerous state and federal grant programs which are governed by various rules and regulations of the grantor agencies. Costs charged to the respective grant programs are subject to audit and adjustment by the grantor agencies; therefore, to the extent that the District has not complied with the rules and regulations governing the grants, if any, refunds of any money received may be required and the collectability of any related receivable at June 30, 2009, may be impaired. In the opinion of the District, there are no significant contingent liabilities relating to compliance with the rules and regulations governing the respective grants; therefore, no provision has been recorded in the accompanying combined financial statements for such contingencies.

-continued41

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 5 OTHER INFORMATION (continued) C. Revenues from Local and Intermediate Sources During the current period, revenues from local and intermediate sources consisted of the following:
Special General Fund Property taxes Food sales Investment income Penalties, interest and other tax related income Co-curricular student activities Other Total 4,730,864 746,020 14,840,840 2,321,944 58,613,963 12,783,093 13,851,023 14,747,735 14,765,460 $ 177,165,313 12,894,304 514,625 5,245,489 746,020 44,693,612 277,290,063 1,004,163 $ 155,843,426 10,534,707 37,653 382,033 1,067,930 17,725 Revenue Fund Debt Service Fund 57,717,305 Capital Projects Fund Internal Service Fund Total 213,560,731 10,534,707 2,509,504

D.

Deferred Revenue Governmental funds report deferred revenue in connection with receivables for revenues that are not considered to be available to liquidate liabilities of the current period. Governmental funds also defer revenue recognition in connection with resources that have been received, but not yet earned. At the end of the current fiscal year, the various components of deferred revenue reported in the governmental funds were as follows: General Fund $ 3,020,339 19,043,616 $ 22,063,955 180,475 5,923 236,392 1,101,737 Special Revenue Fund 49,994 Debt Service Fund 1,101,737

Net tax revenue Advanced placement incentives Foundation Technology allotment IDEA - Part B, Preschool Total E. Health Care Coverage

Total 4,122,076 49,994 19,043,616 180,475 5,923 23,402,084

The District sponsors a health self-insurance plan (the plan). The District contributes $275 per month per employee to the plan and the employees, at their option authorized payroll withholdings to pay premiums for dependents health insurance coverage. A third party administrator acting on behalf of the District processes health claim payments. Claims incurred after October 1, 2008 are subject to an individual stop-loss of $185,000 per participant annually. Individual employee health claims are self insured by the District up to $185,000 annually and H.C.C. Benefits provides stop-loss benefits above $185,000 up to an aggregate district wide attachment point of $16,735,683. At June 30, 2009, the District -continued42

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 5 E.

OTHER INFORMATION (continued) Health Care Coverage (continued) has recorded current health claim short term liabilities of $1,486,666 in the Internal Service Fund representing claims reported but not paid and incurred but not reported. These liabilities are based on requirements of Governmental Accounting Standards Board Statement No. 10, which requires that a liability for claims be reported if information prior to the issuance of the financial statements indicates that it is probable that a liability has been incurred as of the date of the financial statements and the amount of loss can be reasonably estimated. The latest financial statements available for H.C.C. Benefits are filed with the Texas State Board of Insurance, Austin, Texas, and are public records. The District does not provide any post-retirement health benefits to its employees. Changes in the medical claims liability amounts for the two previous years are as follows: Year Ended June 30, 2008 $ 1,236,037 8,111,937 (8,036,108) $ 1,311,866 Year Ended June 30, 2009 1,311,866 12,270,267 (12,095,467) 1,486,666

Unpaid claims, beginning of period Incurred claims (including IBNRs) Claim payments Unpaid claims, end of fiscal period F. Pension Plan Obligations

Plan Description - The District contributes to the Teacher Retirement System of Texas (TRS), a cost-sharing multiple employer defined benefit pension plan. TRS administers retirement and disability annuities, and death and survivor benefits to employees and beneficiaries of employees of the public school systems of Texas. It operates primarily under the provisions of the Texas Constitution, Article XVI, Sec. 67, and Texas Government Code, Title 8, Subtitle C. TRS also administers proportional retirement benefits and service credit transfer under Texas Government Code, Title 8, Chapters 803 and 805, respectively. The Texas state legislature has the authority to establish and amend benefit provisions of the pension plan and may, under certain circumstances, grant special authority to the TRS Board of Trustees. TRS issues a publicly available financial report that includes financial statements and required supplementary information for the defined benefit pension plan. That report may be obtained by writing to the TRS Communications Department, 1000 Red River Street, Austin, Texas 78701, by calling the TRS Communications Department at 1-800223-8778, or by downloading the report from the TRS Internet website, www.trs.state.tx.us, under the TRS Publications heading.

-continued43

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 5 F.

OTHER INFORMATION (continued) Pension Plan Obligations (continued) Funding Policy - Contribution requirements are not actuarially determined but are established and amended by the Texas state legislature. The state funding policy is as follows: (1) The state constitution requires the legislature to establish a member contribution rate of not less than 6.0% of the members annual compensation and a state contribution rate of not less than 6.0% and not more than 10% of the aggregate annual compensation of all members of the system; (2) A state statute prohibits benefit improvements or contribution reductions if, as a result of the particular action, the time required to amortize TRS unfunded actuarial liabilities would be increased to a period that exceeds 31 years, or, if the amortization period already exceeds 31 years, the period would be increased by such action. State law provides for a member contribution rate of 6.4% for fiscal period 2007, 2008 and 2009 and a state contribution rate of 6.0% for fiscal year 2007 and 6.58% for the fiscal periods 2008 and 2009. In certain instances the reporting district is required to make all or a portion of the states 6.00% contribution for fiscal year 2007 and 6.58% for periods 2008 and 2009. State contributions to TRS made on behalf of the Districts employees for the year ended August 31, 2007, the ten months ended June 30, 2008 and the year ended June 30, 2009 were $6,304,763, $7,904,489, and $8,891,470, respectively. The District paid additional state contributions for the year ended August 31, 2007, the ten months ended June 30, 2008 and the year ended June 30, 2009 in the amount of $1,447,237, $1,424,850, and $2,003,172, respectively, on the portion of the employees salaries that exceeded the statutory minimum.

G.

Retiree Health Plan Plan Description - The District contributes to the Texas Public School Retired Employees Group Insurance Program (TRS-Care), a cost-sharing multiple-employer defined benefit postemployment health care plan administered by the Teacher Retirement System of Texas. TRS-Care Retired Plan provides health care coverage for certain persons (and their dependents) who retired under the Teacher Retirement System of Texas. The statutory authority for the program is Texas Insurance Code, Chapter 1575. Section 1575.052 grants the TRS Board of Trustees the authority to establish and amend basic and optional group insurance coverage for participants. The TRS issues a publicly available financial report that includes financial statements and required supplementary information for TRS-Care. That report may be obtained by visiting the TRS Web site at www.trs.state.tx.us, by writing to the Communications Department of the Teacher Retirement System of Texas at 1000 Red River Street, Austin, Texas 78701, or by calling 1-800-223-8778. Funding Policy - Contribution requirements are not actuarially determined but are legally established each biennium by the Texas Legislature. Texas Insurance Code, Sections 1575.202, 203, and 204 establish state, active employee, and public school contributions, respectively. The State of Texas and active public school employee contribution rates were 1.0% and 0.65% of public school payroll, respectively, with school districts contributing a percentage of payroll set at 0.55% for fiscal years 2007, 2008, and 2009. Per Texas Insurance Code, Chapter 1575, the public school contribution may not be less than 0.25% or greater than 0.75% of the salary of each active employee of the public school. For the year ended August 31, 2007, the ten months ended June 30, 2008, and year ended June 30, 2009, the -continued44

FRISCO INDEPENDENT SCHOOL DISTRICT Notes to the Financial Statements at and for the Year Ended June 30, 2009 -continued-

NOTE 5 G.

OTHER INFORMATION (continued) Retiree Health Plan (continued) States contributions to TRS-Care were $1,220,259, $1,217,470, and $1,714,330, respectively, the active member contributions were $793,173, $790,341, and $1,114,465, respectively, and the school districts contributions were $671,147, $669,601, and $943,009, respectively, which equaled the required contributions each year. In addition to the pension plan and TRS-Care on behalf, the District is allocated a portion of the Medicare Part D retiree drug subsidy the TRS-Care receives. The amount allocated on behalf for the year ended June 30, 2009 is estimated by TRS at $392,095.

H.

Workers Compensation Insurance For its workers' compensation insurance, the District is a participant in the East Texas Educational Insurance Association (ETEIA), a public entity risk pool. The District pays premiums to ETEIA for its workers' compensation insurance. The ETEIA has obtained reinsurance from Safety National Casualty Corporation for claims exceeding $225,000. At June 30, 2009, the District's unpaid claims total $999,884 including incurred but not reported (IBNR) claims of $599,930, estimated. The District has reported the unpaid claims as a liability in the General Fund. Changes in the balances of claims liability amounts in fiscal years 2008 and 2009 are as follows: Unpaid claims, beginning of year Incurred claims (including IBNR) Claim payments Unpaid claims, end of year 2008 917,541 898,608 (163,859) $ 1,652,290 $ 2009 1,652,290 (44,886) (607,520) 999,884

NOTE 6

ARBITRAGE COMPLIANCE The District is monitoring its compliance with Federal arbitrage regulations. As of June 30, 2009, the District is in compliance with Federal regulations and the District has no liability for arbitrage rebates.

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