$74,995,000 state of texas veterans bonds, series 2011a · 2011. 3. 7. · the alternative minimum...

AMENDMENT DATED MARCH 7, 2011 TO OFFICIAL STATEMENT DATED MARCH 2, 2011

$74,995,000 STATE OF TEXAS

VETERANS BONDS, SERIES 2011A

The Official Statement dated March 2, 2011 (the “Official Statement”), with respect to the captioned bonds (the “Bonds”) is hereby amended as follows:

· On page 17 of the Official Statement under the subheading “Events of Default,” the following definition is added immediately preceding the definition of “Special Events of Default”:

“Default” means any condition or event that, with the giving of notice or lapse of time or both would, unless cured or waived, become an Event of Default.

· On page 17 of the Official Statement under the subheading “Events of Default,” the definition of “Suspension Event” is amended to read in its entirety as follows:

“Suspension Event” means a Default described in clause (B)(ii) or (B)(iii) below.

Except as revised by this Amendment, the Official Statement shall remain in full force and effect as to the matters covered therein.

CUSIP No. 882722 XC0*

J.P. MORGAN ESTRADA HINOJOSA & COMPANY, INC.

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* CUSIP numbers have been assigned to the Bonds by Standard and Poor’s CUSIP Service Bureau, a Division of The McGraw-Hill Companies, Inc., and are included solely for the convenience of the registered owners of the Bonds. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. Neither the Board nor the Underwriters are responsible for the selection or correctness of the CUSIP numbers set forth herein

OFFICIAL STATEMENT

NEW ISSUE RATINGS: (See “RATINGS” herein.) BOOK-ENTRY ONLY

The delivery of the Bonds is subject to the opinion of Bond Counsel to the effect that, subject to certain conditions described herein, under existing law, interest on the Bonds (other than interest accruing after conversion of the Bonds to Fixed Rate Bonds, for which Bond Counsel expresses no opinion) (i) will be excludable from gross income for federal income tax purposes and (ii) will not be (a) a specific preference item subject to the alternative minimum tax on individuals and corporations or (b) included in a corporation’s adjusted current earnings for purposes of the alternative minimum tax. See “TAX MATTERS” herein for discussion of the opinion of Bond Counsel, including the requirements for an opinion in the event of a conversion of the Bonds to Fixed Rate Bonds.

$74,995,000

STATE OF TEXAS VETERANS BONDS, SERIES 2011A

Interest Accrues From Date of Delivery CUSIP: 882722 XC01 Due: June 1, 2041

The Bonds will initially bear interest for a Weekly Interest Rate Period, as more fully described herein. The Bonds will continue to bear interest for a Weekly Interest Rate Period unless the Bonds are converted to a fixed interest rate, all as described herein. The maximum interest rate the Bonds may bear is currently 15%. Interest on the Bonds in the Weekly Interest Rate Period will accrue from the date of delivery and is payable monthly on the first Business Day of each month, commencing April 1, 2011.

The Bonds will be issued only as fully registered bonds initially in denominations of $100,000 and any integral multiple of $5,000 in excess thereof. The Depository Trust Company, New York, New York (“DTC”) initially will act as securities depository for the Bonds. Beneficial owners of the Bonds will not receive physical delivery of bond certificates except as described herein.

Principal of the Bonds will be payable to the registered owners upon presentation and surrender thereof at the principal office of the Paying Agent therefor, initially the Comptroller of Public Accounts of the State of Texas (the “Comptroller”). Interest on the Bonds will be payable by check, dated as of the interest payment date or redemption date, as applicable, and mailed by the Paying Agent to the registered owners and at the addresses as shown on the records of the Registrar for the Bonds, initially Amegy Bank National Association; however, during any period in which ownership of any of the Bonds is determined only by a book entry at DTC, the Paying Agent will make payments on such Bonds to DTC or DTC’s nominee in accordance with arrangements between the Board and DTC. See “THE BONDS — General Terms.”

The Bonds are subject to optional and mandatory redemption prior to maturity as provided herein. See “THE BONDS — Redemption.” The Bonds are also subject to mandatory tender for purchase as provided herein. See “THE BONDS — Tender Provisions.”

THE BONDS ARE GENERAL OBLIGATIONS, AND ARE SECURED BY THE FULL FAITH AND CREDIT, OF THE STATE OF TEXAS. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS.”

The proceeds of the Bonds will be deposited in the Veterans’ Housing Assistance Fund II, a fund administered by the Veterans’ Land Board of the State of Texas (the “Board”), and made available to make Home Loans (defined herein) to eligible Texas veterans (and certain surviving spouses) in accordance with guidelines established by the Board for the Veterans’ Housing Assistance Program. See “PLAN OF FINANCING.”

The Bonds in the Weekly Interest Rate Period are subject to optional tender for purchase on the demand of the registered owners thereof on any Business Day upon seven days notice. The purchase price of the Bonds tendered for purchase is payable (i) from the proceeds of the remarketing thereof, (ii) from funds that may be made available, subject to the terms and conditions thereof, under the liquidity facility relating to the Bonds, initially a standby bond purchase agreement (the “Liquidity Facility”) between the Board and JPMorgan Chase Bank, National Association (the “Liquidity Provider”), and (iii) from funds of the Board provided in its discretion. The Liquidity Facility, unless extended or earlier terminated, will expire on March 7, 2014. See “THE LIQUIDITY FACILITY.”

J.P. Morgan Securities LLC is the initial remarketing agent for the Bonds.

This Official Statement describes the Bonds in a Weekly Interest Rate Period and is not intended to provide information to prospective owners of the Bonds after conversion to Fixed Rate Bonds.

Price: 100%

The Bonds are offered for delivery when, as and if issued and accepted by the Underwriters, subject to prior sale, withdrawal or modification of the offer without notice and subject to the approving legal opinions of the Attorney General of Texas and of Vinson & Elkins L.L.P., Bond Counsel. Certain legal matters will be passed upon for the Board by its counsel, Lannen & Oliver, P.C., for the Underwriters by their co-counsel, Locke Lord Bissell & Liddell LLP and Mahomes Bolden & Warren PC, and for the Liquidity Provider by its counsel, Nixon Peabody LLP. See “LEGAL MATTERS” herein. It is expected that the Bonds will be available for delivery through the facilities of DTC on or about March 9, 2011.

J.P. MORGAN

ESTRADA HINOJOSA & COMPANY, INC. Dated: March 2, 2011

1 CUSIP numbers have been assigned to the Bonds by Standard and Poor’s CUSIP Service Bureau, a Division of The McGraw-Hill Companies, Inc., and are included solely for

the convenience of the registered owners of the Bonds. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. Neither the Board nor the Underwriters are responsible for the selection or correctness of the CUSIP numbers set forth herein.

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STATE OFFICIALS

Rick Perry Governor

David Dewhurst Lieutenant Governor

Jerry Patterson Commissioner of the General Land Office

Susan Combs Comptroller of Public Accounts

Greg Abbott Attorney General

Todd Staples Commissioner of Agriculture

VETERANS’ LAND BOARD

Jerry Patterson Chairman

Alan Johnson Member

Alan K. Sandersen Member

Paul E. Moore Executive Secretary

BOND COUNSEL

Vinson & Elkins L.L.P. Austin, Dallas, and Houston, Texas

COUNSEL TO THE BOARD

Lannen & Oliver, P.C. Dallas, Texas

FINANCIAL ADVISOR

Raymond James & Associates, Inc. Dallas, Texas

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USE OF INFORMATION IN THIS OFFICIAL STATEMENT

This Official Statement does not constitute an offer to sell the Bonds in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction. No dealer, salesman, or any other person has been authorized by the Board or the Underwriters to give any information or make any representation, other than those contained herein, in connection with the offering and sale of the Bonds, and if given or made, such information or representation must not be relied upon as having been authorized by the Board or the Underwriters.

The information set forth herein has been furnished by the Board and other sources which are believed to be reliable, but is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by, the Underwriters or the Financial Advisor.

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

The information and expressions of opinion herein are subject to change without notice and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Board or the State since the date hereof.

The price and other terms respecting the offering and sale of the Bonds may be changed from time to time by the Underwriters after the Bonds are released for sale, and the Bonds may be offered and sold at prices other than the initial offering price, including sales to dealers who may sell the Bonds into investment accounts. In connection with the offering and sale of the Bonds, the Underwriters may over allot or effect transactions which stabilize or maintain the market price of the Bonds at a level above that which might otherwise prevail in the open market. Such stabilizing, if commenced, may be discontinued at any time.

THE BONDS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ADEQUACY OR ACCURACY OF THIS OFFICIAL STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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TABLE OF CONTENTS

INTRODUCTION.........................................................................................................................................................1 PLAN OF FINANCING................................................................................................................................................2 SOURCES AND USES OF FUNDS.............................................................................................................................3 THE BONDS.................................................................................................................................................................3

General Terms ..........................................................................................................................................................3 Interest Rate Provisions ............................................................................................................................................3 Tender Provisions .....................................................................................................................................................5 Redemption...............................................................................................................................................................7 Selection of Bonds for Redemption ..........................................................................................................................8 Notices of Redemption of Bonds..............................................................................................................................9

SPECIAL CONSIDERATIONS RELATING TO THE BONDS .................................................................................9 The Remarketing Agent is Paid by the Board...........................................................................................................9 The Remarketing Agent Routinely Purchases Bonds for its Own Account..............................................................9 Bonds May be Offered at Different Prices on Any Date Including an Interest Rate Determination Date..............10 The Ability to Sell the Bonds other than through Tender Process May Be Limited...............................................10 Under Certain Circumstances, the Remarketing Agent May Be Removed, Resign or Cease Remarketing

the Bonds, Without a Successor Being Named.................................................................................................10 BOOK-ENTRY ONLY SYSTEM ..............................................................................................................................10

General....................................................................................................................................................................10 Use of Certain Terms in Other Sections of this Official Statement ........................................................................12

SECURITY AND SOURCES OF PAYMENT FOR THE BONDS...........................................................................13 General Obligation Pledge......................................................................................................................................13 Sources of Payment ................................................................................................................................................13 Fund II – Generally.................................................................................................................................................14 Additional Bonds ....................................................................................................................................................15

STRUCTURING ASSUMPTIONS.............................................................................................................................15 THE SWAP AGREEMENT........................................................................................................................................15 THE LIQUIDITY PROVIDER ...................................................................................................................................16 THE LIQUIDITY FACILITY.....................................................................................................................................16

General....................................................................................................................................................................16 Events of Default ....................................................................................................................................................17 Remedies.................................................................................................................................................................18 Alternate Liquidity Facility.....................................................................................................................................19

TAX MATTERS .........................................................................................................................................................20 Tax Exemption........................................................................................................................................................20 Additional Federal Income Tax Considerations .....................................................................................................21

GENERAL INFORMATION REGARDING THE STATE OF TEXAS ...................................................................21 Budget Process and Estimated Revenue for 2012-2013 .........................................................................................21

LEGAL MATTERS ....................................................................................................................................................22 ELIGIBILITY FOR INVESTMENT (TEXAS) ..........................................................................................................22 RATINGS....................................................................................................................................................................23 CONTINUING DISCLOSURE OF INFORMATION................................................................................................23

Continuing Disclosure Undertaking of the Board...................................................................................................23 Continuing Disclosure Undertaking of the Comptroller .........................................................................................24 Agreements of the Board and the Comptroller .......................................................................................................25

UNDERWRITING ......................................................................................................................................................26 FINANCIAL ADVISOR.............................................................................................................................................26 FORWARD LOOKING STATEMENTS ...................................................................................................................26 APPENDIX A THE STATE OF TEXAS APPENDIX B THE VETERANS’ LAND BOARD OF THE STATE OF TEXAS APPENDIX C DEFINITIONS AND SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION APPENDIX D FORM OF BOND COUNSEL’S OPINION

OFFICIAL STATEMENT

$74,995,000 STATE OF TEXAS

VETERANS BONDS, SERIES 2011A

INTRODUCTION

The bonds hereby offered by the Veterans’ Land Board (the “Board”) of the State of Texas (the “State”), acting for the State, are the State’s $74,995,000 State of Texas Veterans Bonds, Series 2011A (the “Bonds”).

The Bonds are issued pursuant to the provisions of the laws of the State, including Article III, Section 49-b (“Section 49-b”) of the State Constitution, Chapter 162, Texas Natural Resources Code, as amended (“Chapter 162”), and Chapter 1371, Texas Government Code, as amended (“Chapter 1371”).

Pursuant to Section 49-b and Chapter 162, the Board has established and currently administers the Veterans’ Housing Assistance Fund II (“Fund II”). Money in Fund II is available to make home mortgage loans (“Home Loans”) to eligible Texas veterans and certain surviving spouses (in either case, “Veterans”) to be used toward the purchase of homes in the State (“Purchase Money Home Loans”) or toward making qualified improvements to homes in the State (“Home Improvement Home Loans”), in accordance with guidelines established by the Board for the Veterans’ Housing Assistance Program (the “Housing Program”), and to pay expenses related to the Housing Program. See “THE VETERANS’ LAND BOARD PROGRAMS – Veterans’ Housing Assistance Program” in Appendix B. The Board has authorized the issuance of the Bonds pursuant to a resolution adopted by the Board on January 27, 2011 (the “Resolution”).

The Board also administers the Veterans’ Housing Assistance Fund (“Fund I”), a separate and distinct fund of the Board but otherwise used by the Board for the same purposes as Fund II. In addition, the Board administers the Veterans’ Land Fund (the “Land Fund”) for the purposes of acquiring land to be resold to Veterans and making land mortgage loans to Veterans. Funding for the Land Fund comes from State general obligation bonds issued by the Board for that purpose. See “THE VETERANS’ LAND BOARD PROGRAMS – Veterans’ Land Program” in Appendix B. The Board is authorized, under certain circumstances, to transfer available money and assets from Fund I, Fund II, or the Land Fund to any other of such funds, or to use such available money or assets for certain other purposes. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS – Fund II – Generally.”

The Board is composed of the Commissioner of the General Land Office, as Chairman, and two citizens of the State who are appointed by the Governor with the advice and consent of the Senate. For additional information regarding the Board and the Housing Program, see Appendix B - THE VETERANS’ LAND BOARD OF THE STATE OF TEXAS.

The Bonds are payable from the assets held in Fund II. IN ADDITION, THE BONDS WILL CONSTITUTE GENERAL OBLIGATIONS OF THE STATE OF TEXAS PURSUANT TO SECTION 49-b AND CHAPTER 162, AND THE FULL FAITH AND CREDIT OF THE STATE ARE PLEDGED FOR THE FAITHFUL PERFORMANCE OF ALL COVENANTS, RECITALS AND STIPULATIONS CONTAINED IN THE BONDS, AND FOR THE FAITHFUL PERFORMANCE IN PROPER TIME AND MANNER OF EACH OFFICIAL OR OTHER ACT REQUIRED OR NECESSARY TO PROVIDE FOR PROMPT PAYMENT OF PRINCIPAL OF, PREMIUM, IF ANY, AND INTEREST ON THE BONDS WHEN DUE. To the extent there is not sufficient money in Fund II to pay the principal of and interest on the Bonds, the State Constitution appropriates, out of the first money coming into the State Treasury in each fiscal year, not otherwise appropriated by the State Constitution, an amount sufficient to make such payment. See “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS – General Obligation Pledge.”

Under certain circumstances as described herein, the owners of the Bonds will have the right or may be required to tender a Bond (or any portion thereof in an authorized denomination) to the Tender Agent, initially Amegy Bank National Association, for purchase from and to the extent of the sources of funds described herein at a purchase price of par plus accrued interest thereon to the date of purchase. The Remarketing Agent, initially

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J.P. Morgan Securities LLC, will remarket Bonds tendered for purchase and will perform certain rate-setting functions in connection with the Bonds pursuant to a Remarketing Agreement (the “Remarketing Agreement”) between the Board and the Remarketing Agent.

The purchase price of the Bonds tendered for purchase by the registered owners thereof as described herein will be payable (i) from the proceeds of the remarketing thereof; (ii) from funds that may be available, subject to the terms and conditions thereof, under the applicable liquidity facility (the “Liquidity Facility”), initially the standby bond purchase agreement between the Board and JPMorgan Chase Bank, National Association (together with the issuer of any Alternate Liquidity Facility, the “Liquidity Provider”); and (iii) from funds of the Board provided in its discretion. For a description of certain provisions of the initial Liquidity Facility, see “THE LIQUIDITY FACILITY.”

This Official Statement describes only the Bonds while bearing interest at a Weekly Interest Rate. It is not intended to provide any information to prospective owners of the Bonds after conversion to bear interest at a Fixed Interest Rate. A Remarketing Memorandum will be issued prior to the conversion of any Bonds to Fixed Rate Bonds.

In connection with the Bonds, the Board has entered into an interest rate swap transaction (the “Swap Agreement”) with Deutsche Bank AG, New York Branch (“DBAG”). Pursuant to the Swap Agreement, DBAG generally will be obligated to pay to the Board an amount equal to interest on a notional amount equal to the scheduled outstanding principal amount of the Bonds at 68% of the three-month USD-LIBOR-BBA (as such term is defined in the 2006 ISDA Definitions), which rate the Board anticipates will approximate the Weekly Interest Rate. In return, the Board will be obligated to pay to DBAG an amount equal to interest at a fixed rate of 2.675% per annum on a notional amount equal to the scheduled outstanding principal amount of the Bonds. See “THE SWAP AGREEMENT.”

This Official Statement contains brief descriptions of the Bonds, the Board, the Housing Program, the Resolution, and certain information about the State and its finances. All descriptions of documents contained herein are only summaries and are qualified in their entirety by reference to each such document. Copies of such documents may be obtained from the Board. Capitalized terms not otherwise defined herein which are defined in the Resolution shall have the meanings assigned to such terms in the Resolution.

PLAN OF FINANCING

The proceeds of the Bonds will be deposited in Fund II and will be available to make Home Loans to certain Veterans within the “Restricted Pool” in accordance with guidelines established by the Board for the Program. See “THE VETERANS’ LAND BOARD PROGRAMS – Veterans’ Housing Assistance Program – Restricted and Unrestricted Pool of Veterans” in Appendix B.

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SOURCES AND USES OF FUNDS

The proceeds of the sale of the Bonds are anticipated to be used as follows:

Sources Principal Amount of the Bonds ................................................... $74,995,000.00

Total ...................................................................................... $74,995,000.00 Uses

Deposit to Fund II to Make Home Loans.................................... $74,414,402.12 Costs of Issuance*....................................................................... 285,597.88 Capitalized Interest 295,000.00

Total....................................................................................... $74,995,000.00

______________________ *Includes Underwriters’ Discount

THE BONDS

General Terms

Interest on the Bonds will accrue from the date of delivery, will bear interest as described herein, and will be payable monthly on the first Business Day of each month, commencing April 1, 2011. The Bonds have a stated maturity of June 1, 2041.

Interest on the Bonds is payable to the registered owner at the address appearing in the Registrar’s books as of the close of business on the Record Date (as defined herein) next preceding such interest payment date, by check sent by the Paying Agent by United States mail, postage prepaid, on such interest payment date; however, during any period in which ownership of the Bonds is determined only by a book entry at The Depository Trust Company, New York, New York (“DTC”), the Paying Agent will make payments on the Bonds to DTC or DTC’s nominee in accordance with arrangements between the Board and DTC. See “BOOK-ENTRY ONLY SYSTEM” herein. In addition, the Paying Agent will pay the principal of and interest on any Bond by wire transfer in immediately available funds to a bank account located in the United States to any registered owner of $1,000,000 or more in aggregate principal amount of Bonds requesting such payment and providing the necessary wire information to the Paying Agent at least 15 days prior to the applicable Record Date. The record date (the “Record Date”) for the interest payable on any interest payment date is the Business Day immediately preceding such interest payment date. The Bonds are issued only as fully registered bonds of the denomination of $100,000 and any integral multiple of $5,000 in excess thereof for Variable Rate Bonds and $5,000 or any integral multiple thereof for Fixed Rate Bonds. Principal of the Bonds will be payable only upon presentation and surrender of the Bonds at the designated office of the Paying Agent at maturity or earlier redemption.

The initial Paying Agent for the Bonds is the Comptroller of Public Accounts of the State of Texas and the initial Registrar for the Bonds is Amegy Bank National Association, Houston, Texas.

Interest Rate Provisions

Payment and Calculation of Interest. Interest on the Bonds shall be paid in arrears. Interest on the Variable Rate Bonds shall be computed on the basis of a 365/366 day year, for the number of days actually elapsed.

Ceiling Rate. The maximum rate of interest on the Bonds is the Ceiling Rate. Ceiling Rate means the lesser of (i) fifteen percent (15%) per annum and (ii) a per annum rate equal to the maximum net effective interest rate permitted to be paid on the Bonds (prescribed by Chapter 1204, Texas Government Code, as amended, or any successor provision), currently fifteen percent (15%).

Determination of Weekly Interest Rate. During each Weekly Interest Rate Period, the Bonds will bear interest at the Weekly Interest Rate, which is required to be determined by the Remarketing Agent by 4:30 p.m.,

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New York City time, on Tuesday of each week during such Weekly Interest Rate Period, or if such day is not a Business Day, then on the next succeeding Business Day. The first Weekly Interest Rate will apply to the period commencing on the delivery date of the Bonds and ending on the next succeeding Tuesday. Thereafter, each Weekly Interest Rate will apply to the period commencing on Wednesday and ending on the next succeeding Tuesday, unless such Weekly Interest Rate Period ends on a day other than Tuesday, in which event the last Weekly Interest Rate for such Weekly Interest Rate Period will apply to the period commencing on the Wednesday preceding the last day of such Weekly Interest Rate Period and ending on the last day of such Weekly Interest Rate Period. The Weekly Interest Rate will be the rate of interest per annum determined by the Remarketing Agent (based on then prevailing market conditions) to be the minimum interest rate which, if borne by the Bonds, would enable the Remarketing Agent to sell the Bonds on such date of determination at a price (without regarding accrued interest) equal to the principal amount thereof. In the event that the Remarketing Agent fails to establish a Weekly Interest Rate for any week, then the Weekly Interest Rate for such week will be the same as the Weekly Interest Rate for the immediately preceding week if the Weekly Interest Rate for such preceding week was determined by the Remarketing Agent. In the event that the Weekly Interest Rate for the immediately preceding week was not determined by the Remarketing Agent, or in the event that the Weekly Interest Rate determined by the Remarketing Agent is held to be invalid or unenforceable by a court of law, then the interest rate for such week will be equal to the most recently available SIFMA Index plus 0.25% per annum, or if such index is no longer available, or no such index was so made available, for the week preceding the date of determination, 75% of the interest rate on 30 day high grade unsecured commercial paper notes sold through dealers by major corporations as reported in The Wall Street Journal on the day the Weekly Interest Rate would otherwise be determined as provided in the Resolution for such Weekly Interest Rate Period.

Determination of Fixed Interest Rate. During a Fixed Interest Rate Period, each Bond will bear interest at the Fixed Interest Rate. The Fixed Interest Rate is required to be determined by the Remarketing Agent on a Business Day not less than 15 days prior to the effective date of the Fixed Interest Rate Period. The Fixed Interest Rate will be the rate of interest per annum determined by the Remarketing Agent (based on then prevailing market conditions) to be the minimum interest rate, if any, at which the Remarketing Agent will agree to purchase the Bonds on such effective date for resale at a price (without regarding accrued interest) equal to the principal amount thereof. If, for any reason, the Fixed Interest Rate is not so determined for the Bonds by the Remarketing Agent at least 15 days prior to the first day of the Fixed Interest Rate Period, then the Bonds will bear interest at the Weekly Interest Rate, and will continue to bear interest at a Weekly Interest Rate until such time as the interest rate on the Bonds has been adjusted to a Fixed Interest Rate, and the Bonds will continue to be subject to purchase upon notice from the Holders. The Liquidity Facility will be terminated as to the Fixed Rate Bonds.

Adjustment to Fixed Interest Rate Period. At any time, the Board, by written direction to the Registrar, the Tender Agent, the Paying Agent, the Liquidity Provider and the Remarketing Agent, may elect, subject to the Board’s providing the Tender Agent and the Remarketing Agent a Favorable Opinion of Bond Counsel, that the Bonds will be subject to a Fixed Interest Rate Period. The direction of the Board is required to specify the effective date of the Fixed Interest Rate Period, which date is required to be (A) a Business Day not earlier than the 30th day following the second Business Day after receipt by the Registrar of such direction, and (B) the day immediately following the last day of a Weekly Interest Rate Period.

If the Board delivers to the Registrar, the Remarketing Agent and the Tender Agent on or prior to the date that the interest rate for the Fixed Interest Rate Period is determined a notice to the effect that the Board elects to rescind its election to have the Bonds become subject to a Fixed Interest Rate Period, then the Bonds will not become subject to a Fixed Interest Rate Period, and the Bonds will bear interest at a Weekly Interest Rate as in effect prior to such event.

Notice of Adjustment to Fixed Interest Rate Period. The Registrar is required to give notice by first class mail of an adjustment to a Fixed Interest Rate Period to the Holders of the Bonds not less than 30 days prior to the effective date of such Fixed Interest Rate Period. Such notice is required to state: (1) that the Interest Rate Period on the Bonds will be adjusted to a Fixed Interest Rate Period unless (x) Bond Counsel fails to deliver to the Board, the Tender Agent and the Remarketing Agent a Favorable Opinion of Bond Counsel as to such adjustment in the Interest Rate Period on the effective date of such adjustment, or (y) the Board elects, on or prior to the date of determination of the Fixed Interest Rate, to rescind its election to cause the adjustment of the Interest Rate Period on the Bonds to the Fixed Interest Rate Period, in which case the Bonds will continue to bear interest at a Weekly

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Interest Rate as in effect immediately prior to such proposed adjustment in the Interest Rate Period, (2) the effective date of the Fixed Interest Rate Period, (3) that the Bonds are subject to mandatory tender for purchase on such effective date and the purchase price applicable thereto, (4) that the Liquidity Facility will be terminated as of the effective date of such Fixed Interest Rate Period, and (5) if ownership of the Bonds is no longer determined only by a book entry at a securities depository for the Bonds, information with respect to the required delivery of bond certificates and payment of purchase price under the Resolution.

Tender Provisions

Optional Tender for Purchase of Variable Rate Bonds. If ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, a Beneficial Owner (through its DTC Participant) may tender his interest in a Variable Rate Bond on any Business Day at a purchase price equal to the principal amount thereof plus accrued interest, if any, from and including the Interest Payment Date immediately preceding the date of purchase through and including the day immediately preceding the date of purchase, unless the date of purchase is an Interest Payment Date, in which case at a purchase price equal to the principal amount thereof, payable in immediately available funds, upon delivery to the Tender Agent at its designated corporate trust office for delivery of notices, with a copy to the Remarketing Agent, of an irrevocable written notice or telephonic notice, promptly confirmed in writing, which states the principal amount of such Variable Rate Bond and the date on which it will be purchased, which date is required to be a Business Day not prior to the seventh day next succeeding the date of the delivery of such notice to the Tender Agent. Any notice delivered to the Tender Agent after 4:00 p.m., New York City time, will be deemed to have been received on the next succeeding Business Day.

The Tender Agent is required to promptly send (but no later than the next Business Day) a copy of any notice delivered to it pursuant to the preceding paragraph by fax to the Remarketing Agent and the Liquidity Provider. On the date for purchase specified in the notice, the Beneficial Owner is required to effect delivery of such Bonds by causing the DTC Participant through which such Beneficial Owner owns such Bonds to transfer its interest in such Bonds equal to such Beneficial Owner’s interest on the records of DTC to the participant account of the Tender Agent with DTC.

If ownership of the Bonds is not determined only by a book entry at a securities depository for the Bonds, a Holder of a Bond may tender the Bond by delivery of the notice described above by the time set forth above and also is required to deliver the Bond to the Tender Agent on the date specified for purchase.

Mandatory Tender for Purchase on First Day of Fixed Interest Rate Period. The Bonds are subject to mandatory tender for purchase on the first day of the Fixed Interest Rate Period, or on the day which would have been the first day of the Fixed Interest Rate Period had the Board not elected to rescind its election to have the Bonds bear interest at a Fixed Interest Rate or had there not been a failure by the Board to provide the Remarketing Agent and the Tender Agent a Favorable Opinion of Bond Counsel which resulted in the interest rate on the Bonds not being adjusted, at a purchase price, payable in immediately available funds, equal to the principal amount of the Bonds, plus accrued interest (if any).

Mandatory Tender for Purchase Upon Termination, Expiration, Suspension, Modification or Replacement of the Liquidity Facility. If at any time the Registrar gives notice in accordance with the Resolution that any Bond or Bonds which, at such time, are subject to purchase under the Liquidity Facility as then in effect, will on the date specified in such notice cease to be subject to purchase from the Liquidity Facility as a result of (A) the termination or expiration of the term of the Liquidity Facility, or (B) the Liquidity Facility being suspended, replaced or modified with the effect that the purchase price of such Bonds is no longer payable from the Liquidity Facility (in each case, whether or not any Alternate Liquidity Facility has been obtained), then on the Business Day the Board specifies to the Registrar that is at least five days and no more than 15 days (or, if no such date is specified, the fifth calendar day (or the immediately preceding Business Day if such day is not a Business Day)) preceding any termination, expiration, suspension, modification or replacement of the Liquidity Facility each such Bond or Bonds will be purchased or deemed purchased as provided in the Resolution. The purchase price for such Bonds will be equal to the principal amount thereof, plus accrued interest (if any).

Mandatory Tender for Purchase Following Event of Default Under Liquidity Facility. All Variable Rate Bonds are subject to mandatory tender for purchase on the tenth day (or the next succeeding Business Day if such day is not a Business Day) following receipt by the Tender Agent of notice from the Liquidity Provider that an

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“Event of Default” has occurred under the Liquidity Facility and directing the mandatory purchase of the Bonds. No later than the third Business Day following receipt of such notice described above, the Tender Agent is required to give notice by first class mail, postage prepaid, to the Holders of the Bonds, the Board and the Remarketing Agent stating that an “Event of Default” has occurred under the Liquidity Facility and that the Bonds are subject to mandatory tender for purchase.

Notice of Mandatory Tender for Purchase. In connection with any mandatory tender for purchase of Bonds as described under “Mandatory Tender for Purchase on First Day of Fixed Interest Rate Period” and “Mandatory Tender for Purchase Upon Termination, Expiration, Suspension, Modification or Replacement of the Liquidity Facility,” the Registrar is required to give notice of a mandatory tender for purchase. Each notice of mandatory tender for purchase is required to state (A) in the case of a mandatory tender for purchase described under “Mandatory Tender for Purchase Upon Termination, Expiration, Suspension, Modification or Replacement of Liquidity Facility” that the Liquidity Facility will expire, terminate, be suspended, be replaced or be modified and that the purchase price of the Variable Rate Bonds will no longer be payable from the Liquidity Facility then in effect and that any rating applicable thereto may be reduced or withdrawn; (B) in the case of a mandatory tender for purchase described under “Mandatory Tender for Purchase Following Event of Default Under Liquidity Facility”, that an “Event of Default” has occurred under the Liquidity Facility; (C) that the purchase price of any Variable Rate Bond so subject to mandatory purchase will be payable only upon (i) if ownership of the Variable Rate Bonds is not determined only by a book entry at a securities depository for the Variable Rate Bonds, surrender of such Variable Rate Bond to the Tender Agent at its designated corporate trust office for delivery of Variable Rate Bonds, accompanied by an instrument of transfer thereof, in form satisfactory to the Tender Agent, executed in blank by the Holder thereof or his duly authorized attorney, with such signature guaranteed by a bank, trust company or member firm of the New York Stock Exchange or (ii) if ownership of the Variable Rate Bonds is determined only by a book entry at a securities depository for the Variable Rate Bonds, registration of the ownership rights in such Variable Rate Bond to the Tender Agent on the records of DTC; (D) that, provided that moneys sufficient to effect such purchase have been provided through the remarketing of such Variable Rate Bonds by the Remarketing Agent or through the Liquidity Facility, all Variable Rate Bonds so subject to mandatory tender for purchase shall be purchased on the mandatory purchase date, and that if any Holder of a Variable Rate Bond subject to mandatory tender for purchase does not surrender such Variable Rate Bond to the Tender Agent for purchase (or if ownership of the Variable Rate Bonds is determined only by a book entry at a securities depository for the Variable Rate Bonds, effect the transfer of ownership rights to the Tender Agent on the records of DTC) on such mandatory purchase date, and moneys sufficient to pay the purchase price thereof are on deposit with the Tender Agent, then such Variable Rate Bond will be deemed to be an Undelivered Bond, and that no interest will accrue thereon on and after such mandatory purchase date and that the Holder thereof will have no rights under the Resolution other than to receive payment of the purchase price thereof; and (E) in the event that moneys sufficient to pay the purchase price of such Variable Rate Bonds have not been provided to the Tender Agent either through the remarketing of such Variable Rate Bonds or from the Liquidity Facility or otherwise, that such Variable Rate Bonds will not be purchased or deemed purchased and will bear interest at the rate described under “Insufficient Funds for Purchase of Variable Rate Bonds; Adjustment of Interest Rate.” In connection with any mandatory tender for purchase of Variable Rate Bonds as a result of the replacement, termination or expiration of a Liquidity Facility, such notice also is required to contain the information required by the Resolution. The Board is required to provide the Registrar with a form of any such notice.

Delivery of Tendered Variable Rate Bonds. For payment of the purchase price of any Variable Rate Bond required to be purchased pursuant to an optional or mandatory tender for purchase on the date specified, such Variable Rate Bond must be delivered, at or prior to 10:00 a.m., New York City time, on the date specified in such notice, to the Tender Agent at its designated corporate trust office for delivery of Variable Rate Bonds, accompanied by an instrument of transfer thereof, in form satisfactory to the Tender Agent, executed in blank by the Holder thereof or his duly authorized attorney, with such signature guaranteed by a commercial bank, trust company or member firm of the New York Stock Exchange. In the event any such Variable Rate Bond is delivered after 10:00 a.m., New York City time, on such date, payment of the purchase price of such Variable Rate Bond need not be made until the Business Day following the date of delivery of such Variable Rate Bond, but such Variable Rate Bond will nonetheless be deemed to have been purchased on the date specified in such notice and no interest will accrue thereon after such date.

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Irrevocable Notice Deemed to be Tender of Bond; Undelivered Bonds. The giving of notice by an owner of a Variable Rate Bond constitutes the irrevocable tender for purchase of each such Variable Rate Bond with respect to which such notice has been given, regardless of whether such Variable Rate Bond is delivered to the Tender Agent for purchase on the relevant purchase date provided that moneys sufficient to pay the purchase price of such Variable Rate Bonds are on deposit with the Tender Agent for such purpose. The Tender Agent may refuse to accept delivery of any Variable Rate Bonds for which a proper instrument of transfer has not been provided; such refusal, however, will not affect the validity of the purchase of such Variable Rate Bond as described above. If any owner of a Variable Rate Bond who has given notice of tender of purchase, if ownership of the Variable Rate Bonds is not determined only by a book entry at a securities depository for the Variable Rate Bonds, fails to deliver such Variable Rate Bond to the Tender Agent at the place and on the applicable date and at the time specified, or fails to deliver such Variable Rate Bond properly endorsed, or if ownership of the Variable Rate Bonds is determined only by a book entry at a securities depository for the Variable Rate Bonds, fails to cause its beneficial ownership to be transferred to the Tender Agent on the records of DTC, and moneys sufficient to pay the purchase price thereof are on deposit with the Tender Agent for such purpose, such Variable Rate Bond will constitute an Undelivered Bond. If funds in the amount of the purchase price of the Undelivered Bonds are available for payment to the owner thereof on the date and at the time specified, from and after the date and time of that required delivery, (1) each Undelivered Bond will be deemed to be purchased and will no longer be deemed to be outstanding under the Resolution; (2) interest will no longer accrue thereon; and (3) funds in the amount of the purchase price of each such Undelivered Bond will be held by the Tender Agent for the benefit of the owner thereof (provided that the owner has no right to any investment proceeds derived from such funds), to be paid on delivery (and proper endorsement) of such Undelivered Bond to the Tender Agent at its designated office for delivery of Variable Rate Bonds. Any funds held by the Tender Agent as described in clause (3) of the preceding sentence are required to be held uninvested and not commingled.

Insufficient Funds for Purchase of Variable Rate Bonds; Adjustment of Interest Rate. If payment of the purchase price of any Variable Rate Bond is not made to the Holder thereof on any date such Variable Rate Bond has been tendered for purchase pursuant to the Resolution, such Variable Rate Bond will be returned by the Tender Agent to the Holder thereof, and shall continue to bear interest at a Weekly Interest Rate as described under “THE BONDS – Interest Rate Provisions – Determination of Weekly Interest Rate” above.

Redemption

Optional Redemption of Variable Rate Bonds. The Variable Rate Bonds are subject to redemption prior to maturity on the first Business Day of any month, at the option and direction of the Board, in whole or in part, at a redemption price of par plus accrued interest. In the case of any such redemption, the Board will select the amount of Variable Rate Bonds to be redeemed in authorized denominations.

Mandatory Sinking Fund Redemption. The Bonds are subject to scheduled mandatory sinking fund redemption and will be redeemed on the first Business Day of each June and December in the respective principal amounts set forth below, at a redemption price equal to the principal amount thereof, without premium, plus accrued interest to the date fixed for redemption.

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Date Principal

Amount ($) Date Principal

Amount ($) December 2011 800,000 June 2026 1,265,000

June 2012 980,000 December 2026 1,255,000 December 2012 1,205,000 June 2027 1,235,000

June 2013 1,425,000 December 2027 1,225,000 December 2013 1,615,000 June 2028 1,215,000











June 2024 1,320,000 December 2038 990,000 December 2024 1,310,000 June 2039 985,000

June 2025 1,290,000 December 2039 970,000 December 2025 1,280,000 June 2040 970,000

December 2040 955,000

The remaining $875,000 will be paid at maturity on June 1, 2041.

The principal amount of the Bonds to be redeemed on each such redemption date pursuant to mandatory sinking fund redemption will be reduced, at the option of the Board, by the principal amount of any of the Bonds which (A) at least 45 days prior to such mandatory sinking fund redemption date, (1) have been acquired by the Board and delivered to the Registrar for cancellation, or (2) have been acquired and cancelled by the Registrar at the direction of the Board, or (3) have been redeemed pursuant to any optional redemption, and (B) have not been previously credited against a mandatory sinking fund redemption.

Selection of Bonds for Redemption

In the case of any redemption of less than all of the Bonds, the particular Bonds to be redeemed will be selected by the Registrar by lot in such manner as it deems fair and appropriate; provided that during any period in which ownership of the Bonds is determined only by a book entry at a securities depository, if less than the entire principal amount outstanding of all Bonds is to be redeemed, the interests to be redeemed of the beneficial owners of the Bonds will be selected in accordance with the arrangements between the Board and the securities depository. Notwithstanding the foregoing, in the event of any redemption of Variable Rate Bonds, Purchased Bonds are required to be selected first for redemption to the extent there are any Purchased Bonds.

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Notices of Redemption of Bonds

Notice of any redemption of Bonds will be sent by first-class mail, postage prepaid, by the Registrar to the registered owners of Bonds so selected for redemption at their addresses shown on the registration books maintained by the Registrar not less than 30 days prior to the redemption date.

In addition, the Registrar will send notice of redemption by certified or registered mail, return receipt requested, postage prepaid, or by overnight delivery service contemporaneously with such mailing: (1) to any registered owner of $1,000,000 or more in principal amount of the Bonds, (2) to two or more information services of national recognition that disseminate redemption information with respect to municipal bonds; and (3) to any securities depository that is a registered owner of the Bonds. The Registrar is also required to send a notice of redemption to the registered owner of any Bond called for redemption who has not sent such Bond in for redemption within 60 days after the redemption date. Notwithstanding the foregoing, failure to give any notice of redemption as described above or any defect in such notice or the mailing thereof will not affect the validity of any proceedings for the redemption of such Bonds.

If only a portion of any Bond is redeemed, a substitute Bond or Bonds, in any authorized denomination requested in writing by the registered owner thereof, and in an aggregate principal amount equal to the unredeemed portion thereof, will be issued at the expense of the Board to the registered owner upon the surrender thereof for cancellation, all as provided in the Resolution.

By the date fixed for any such redemption, due provision is required to be made by the Board with the Paying Agent for the payment of the required redemption price for the Bonds or the portions thereof which are to be so redeemed. If such written notice of redemption is given, and if due provision for such payment is made, all as provided above, the Bonds, or the portions thereof which are to be so redeemed, thereby automatically will be redeemed prior to their scheduled maturity, and will not bear interest after the date fixed for their redemption. Such Bonds will not be regarded as being outstanding under the Resolution, except for the right of the registered owners thereof to receive the redemption price therefor from the Paying Agent out of the funds provided for such payment.

While the book-entry only system is in effect, notice of redemption and payment of the redemption price shall be made to DTC in accordance with existing arrangements between the Board and DTC.

SPECIAL CONSIDERATIONS RELATING TO THE BONDS

The Remarketing Agent is Paid by the Board

The Remarketing Agent’s responsibilities include determining the interest rate from time to time and remarketing the Bonds that are optionally or mandatorily tendered by the owners thereof (subject, in each case, to the terms of the Remarketing Agreement), all as further described in this Official Statement. The Remarketing Agent is appointed by the Board and is paid by the Board for its services. As a result, the interests of the Remarketing Agent may differ from those of existing holders and potential purchasers of the Bonds.

The Remarketing Agent Routinely Purchases Bonds for its Own Account

The Remarketing Agent acts as remarketing agent for a variety of variable rate demand obligations and, in its sole discretion, routinely purchases such obligations for its own account. The Remarketing Agent is permitted, but not obligated, to purchase tendered Bonds for its own account and, in its sole discretion, routinely acquires such tendered Bonds in order to achieve a successful remarketing of the Bonds (i.e., because there otherwise are not enough buyers to purchase the Bonds) or for other reasons. However, the Remarketing Agent is not obligated to purchase Bonds, and may cease doing so at any time without notice. The Remarketing Agent may also make a market in the Bonds by routinely purchasing and selling Bonds other than in connection with an optional or mandatory tender and remarketing. Such purchases and sales may be at or below par. However, the Remarketing Agent is not required to make a market in the Bonds. The Remarketing Agent may also sell any Bonds it has purchased to one or more affiliated investment vehicles for collective ownership or enter into derivative arrangements with affiliates or others in order to reduce its exposure to the Bonds. The purchase of Bonds by the Remarketing Agent may create the appearance that there is greater third party demand for the Bonds in the market

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than is actually the case. The practices described above also may result in fewer Bonds being tendered in a remarketing.

Bonds May be Offered at Different Prices on Any Date Including an Interest Rate Determination Date

Pursuant to the Remarketing Agreement, the Remarketing Agent is required to determine the applicable rate of interest that, in its judgment, is the lowest rate that would permit the sale of the Bonds bearing interest at the applicable interest rate at par plus accrued interest, if any, on and as of the applicable interest rate determination date. The interest rate will reflect, among other factors, the level of market demand for the Bonds (including whether the Remarketing Agent is willing to purchase Bonds for its own account). There may or may not be Bonds tendered and remarketed on a interest rate determination date, the Remarketing Agent may or may not be able to remarket any Bonds tendered for purchase on such date at par and the Remarketing Agent may sell Bonds at varying prices to different investors on such date or any other date. The Remarketing Agent is not obligated to advise purchasers in a remarketing if it does not have third party buyers for all of the Bonds at the remarketing price. In the event a Remarketing Agent owns any Bonds for its own account, it may, in its sole discretion in a secondary market transaction outside the tender process, offer such Bonds on any date, including the interest rate determination date, at a discount to par to some investors.

The Ability to Sell the Bonds other than through Tender Process May Be Limited

The Remarketing Agent may buy and sell Bonds other than through the tender process. However, it is not obligated to do so and may cease doing so at any time without notice and may require holders that wish to tender their Bonds to do so through the Tender Agent with appropriate notice. Thus, investors who purchase the Bonds, whether in a remarketing or otherwise, should not assume that they will be able to sell their Bonds other than by tendering the Bonds in accordance with the tender process. The Liquidity Facility is not available to purchase Bonds other than those tendered in accordance with the tender process, and as such, would not be drawn to purchase Bonds in connection with a sale of Bonds by the Bondholder to the Remarketing Agent unless and until such Bonds have been properly tendered.

Under Certain Circumstances, the Remarketing Agent May Be Removed, Resign or Cease Remarketing the Bonds, Without a Successor Being Named

Under certain circumstances the Remarketing Agent may be removed or have the ability to resign or cease its remarketing efforts, without a successor having been named, subject to the terms of the Remarketing Agreement and the Resolution.

BOOK-ENTRY ONLY SYSTEM

The information in this section concerning DTC and DTC’s book-entry system has been furnished by DTC for use in disclosure documents such as this Official Statement. The Board and the Underwriters believe such information to be reliable, but neither the Board nor the Underwriters take any responsibility for the accuracy or completeness thereof.

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

General

The Depository Trust Company (“DTC”), New York, NY, will act as securities depository for the Bonds. The Bonds will be issued as fully-registered bonds registered in the name of Cede & Co. (DTC’s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully-registered Bond certificate will be issued for the Bonds, and will be deposited with DTC.

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DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a “banking organization” within the meaning of the New York Banking Law, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934. DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Participants”) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants’ accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (“Indirect Participants”). DTC has Standard & Poor’s highest rating: AAA. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at www.dtcc.com and www.dtc.org.

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

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

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

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

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

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

A Beneficial Owner of Bonds shall give notice to elect to have its Bonds purchased or tendered, through its Participant, to the Tender Agent with a copy to the Remarketing Agent, and shall effect delivery of such Bonds by causing the Direct Participant to transfer the Participant’s interest in the Bonds, on DTC’s records, to the Tender Agent. The requirement for physical delivery of Bonds in connection with an optional tender or a mandatory purchase will be deemed satisfied when the ownership rights in the Bonds are transferred by Direct Participants on DTC’s records and followed by a book-entry credit of tendered Bonds to the Tender Agent’s DTC account.

DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the Board or the Paying Agent. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered.

The Board may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered.

THE REGISTRAR, SO LONG AS THE DTC BOOK-ENTRY SYSTEM IS USED FOR THE BONDS, WILL SEND ANY NOTICE OF REDEMPTION, NOTICE OF PROPOSED AMENDMENT TO THE RESOLUTION, OR OTHER NOTICES WITH RESPECT TO THE BONDS ONLY TO DTC. ANY FAILURE BY DTC TO ADVISE ANY DTC PARTICIPANT, OR OF ANY DIRECT PARTICIPANT OR INDIRECT PARTICIPANT TO NOTIFY THE BENEFICIAL OWNERS, OF ANY NOTICES AND THEIR CONTENTS OR EFFECT WILL NOT AFFECT THE VALIDITY OF THE REDEMPTION OF THE BONDS CALLED FOR REDEMPTION OR OF ANY OTHER ACTION PREMISED ON ANY SUCH NOTICE. REDEMPTION OF PORTIONS OF THE BONDS BY THE BOARD WILL REDUCE THE OUTSTANDING PRINCIPAL AMOUNT OF SUCH BONDS HELD BY DTC. IN SUCH EVENT, DTC MAY IMPLEMENT, THROUGH ITS BOOK-ENTRY SYSTEM, A REDEMPTION OF SUCH BONDS HELD FOR THE ACCOUNT OF DTC PARTICIPANTS IN ACCORDANCE WITH ITS OWN RULES OR OTHER AGREEMENTS WITH DTC PARTICIPANTS AND THEN DIRECT PARTICIPANTS AND INDIRECT PARTICIPANTS MAY IMPLEMENT A REDEMPTION OF SUCH BONDS FROM THE BENEFICIAL OWNERS. ANY SUCH SELECTION OF THE BONDS TO BE REDEEMED WILL NOT BE GOVERNED BY THE RESOLUTION AND WILL NOT BE CONDUCTED BY THE REGISTRAR. NEITHER THE BOARD, THE REGISTRAR, NOR THE PAYING AGENT WILL HAVE ANY RESPONSIBILITY OR OBLIGATION TO DIRECT PARTICIPANTS, INDIRECT PARTICIPANTS, OR THE PERSONS FOR WHOM DTC PARTICIPANTS ACT AS NOMINEES, WITH RESPECT TO THE PAYMENTS ON THE BONDS OR THE PROVIDING OF NOTICE TO DIRECT PARTICIPANTS, INDIRECT PARTICIPANTS, OR BENEFICIAL OWNERS OF THE SELECTION OF PORTIONS OF THE BONDS FOR REDEMPTION. IF LESS THAN ALL OF THE BONDS ARE TO BE REDEEMED, THE CURRENT DTC PRACTICE IS TO DETERMINE BY LOT THE AMOUNT OF INTEREST OF EACH DTC PARTICIPANT TO BE REDEEMED.

Use of Certain Terms in Other Sections of this Official Statement

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

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Information concerning DTC and the Book-Entry-Only System has been obtained from DTC and is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by the Board or the Underwriters.

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

SECURITY AND SOURCES OF PAYMENT FOR THE BONDS

General Obligation Pledge

THE BONDS WILL CONSTITUTE GENERAL OBLIGATIONS OF THE STATE OF TEXAS PURSUANT TO SECTION 49-b AND CHAPTER 162, AND THE FULL FAITH AND CREDIT OF THE STATE ARE PLEDGED FOR THE FAITHFUL PERFORMANCE OF ALL COVENANTS, RECITALS AND STIPULATIONS CONTAINED IN THE BONDS, AND FOR THE FAITHFUL PERFORMANCE IN PROPER TIME AND MANNER OF EACH OFFICIAL OR OTHER ACT REQUIRED OR NECESSARY TO PROVIDE FOR PROMPT PAYMENT OF PRINCIPAL OF, PREMIUM, IF ANY, AND INTEREST ON THE BONDS WHEN DUE. For a discussion of the State, see Appendix A attached hereto.

Section 49-b provides that if there is not enough money in Fund II available to pay the principal of, premium, if any, and interest on the bonds payable from such fund, including money to make payments by the Board under any bond enhancement agreement with respect to principal of or interest on such bonds, there is appropriated out of the first money coming into the State Treasury in each fiscal year, not otherwise appropriated by the State Constitution, an amount that is sufficient to pay such obligations maturing or becoming due during that fiscal year. If the Board determines that there will not be sufficient money in Fund II during the following biennium to pay the principal of or interest on the bonds that are to come due and to be paid from such fund during the following biennium, Chapter 162 directs the Comptroller of Public Accounts of the State to transfer to Fund II the first money coming into the State Treasury not otherwise appropriated by the State Constitution in amounts sufficient to pay such obligations. There has never been a need to appropriate any money from the State Treasury to meet the debt service requirements of any bonds issued by the Board.

Pursuant to Section 49-b, the Bonds are not included within the computation required by Article III, Section 49-j of the Texas Constitution (“Section 49-j”). Under Section 49-j, the Legislature is prohibited from authorizing additional State debt payable from the State’s General Revenue Fund (the “General Revenue Fund”) if the resulting annual debt service exceeds 5% of an amount equal to the average of the amount of General Revenue Fund revenues, excluding revenues constitutionally dedicated for purposes other than payment of State debt, for the three preceding fiscal years. See “STATE DEBT – Recent Developments Affecting State Debt” and “ – Selected Data Concerning State Debt” in the information referred to in Appendix A. For purposes of such limitation, “State debt payable from the General Revenue Fund” does not include bonds issued pursuant to Section 49-b. Notwithstanding this limitation on the ability of the Legislature to authorize additional State debt, the Bonds are general obligations of the State, as described above, and are payable from the sources described in this section.

Sources of Payment

Section 49-b and Chapter 162 provide that “Fund II Veterans’ Housing Assistance Bonds” (which include the Bonds and any additional general obligation bonds payable from Fund II) will be paid out of the money on deposit in Fund II. In accordance with Section 49-b and the Resolution, the Board pledges to use the money in Fund II to pay the principal of, premium, if any, and interest on all outstanding Fund II Veterans’ Housing Assistance Bonds, including payments under any bond enhancement agreement with respect to principal of or interest on such bonds. However, the Board has specifically reserved the right in the Resolution to use such money for any lawful purpose. Pursuant to the Resolution, all Fund II Veterans’ Housing Assistance Bonds are to rank equally, and none of such bonds will be entitled to a priority over any other such bond in the application of money in Fund II, nor in the application of money appropriated by the State Legislature or otherwise made available by law for the payment of the principal of, premium, if any, and interest on such bonds.

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Fund II – Generally

Fund II was established pursuant to the State Constitution as a fund separate and distinct from Fund I. The following are certain characteristics of Fund II.

Pursuant to Section 49-b and Chapter 162, Fund II is comprised of the following:

(1) any interest of the Board in all Home Loans made from money in Fund II pursuant to the Housing Program, including any insurance thereon or on the homes;

(2) the proceeds derived from the sale or other disposition of the Board’s interest in Home Loans made from money in Fund II pursuant to the Housing Program;

(3) the money attributable to any bonds issued and sold by the Board to provide money for Fund II, which will include, but not be limited to, the proceeds from the issuance and sale of such bonds;

(4) income, rents, and any other pecuniary benefit received by the Board as a result of making Home Loans from the money in Fund II;

(5) sums received by way of indemnity or forfeiture for the failure of any bidder for the purchase of any such bonds to comply with his bid and accept and pay for such bonds;

(6) amounts received by the Board under bond enhancement agreements with respect to such bonds;

(7) interest received from investments of any such money; and

(8) any equitable interest of the Board in properties encumbered under the Housing Program and attributable to Fund II.

The Board may deposit other money to the credit of Fund II, including money transferred by the Board from Fund I or from the Land Fund, which are eligible under Section 49-b and applicable laws for such deposit or transfer.

Section 49-b further provides that receipts of all kinds of Fund I, Fund II, or the Land Fund that the Board determines are not required for the payment of principal and interest on general obligation bonds, including payments by the Board under any bond enhancement agreement with respect to principal of or interest on such bonds, authorized by the State Constitution to be issued by the Board to provide money for such fund, may be used by the Board, to the extent not inconsistent with the proceedings authorizing such bonds to (1) make temporary transfers to another of those funds to avoid a temporary cash deficiency in that fund or make a transfer to another of those funds for the purposes of that fund; (2) pay the principal and interest on general obligation bonds issued to provide money for another of those funds or make bond enhancement payments with respect to such bonds; or (3) pay the principal of, premium, if any, and interest on revenue bonds of the Board or make bond enhancement payments with respect to the bonds.

Section 49-b also provides that assets from Fund I, Fund II and the Land Fund that are not required for the purposes of such fund may be (i) transferred by the Board to another of those funds; (ii) used by the Board to secure revenue bonds issued by the Board; (iii) used by the Board to plan and design, operate, maintain, enlarge, or improve veterans cemeteries;1 or (iv) used by the Board to plan and design, construct, acquire, own, operate, maintain, enlarge, improve, furnish, or equip veterans homes.2

For (i) a discussion of Fund I, Fund II and the Land Fund, and (ii) the unaudited financial statements for such funds, see Appendix B attached hereto.

1 Veterans cemeteries are burial grounds operated solely for the burial of Veterans and their eligible relatives. 2 A veterans home is a life care facility, retirement home, retirement village, home for the aging, or other facility that furnishes shelter, food, medical attention,

nursing services, medical services, social activities, or other personal services or attention to Veterans.

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Additional Bonds

Section 49-b authorizes the Board to issue new money general obligation bonds of the State payable from Fund I, Fund II or the Land Fund, provided that the aggregate principal amount of such bonds outstanding does not exceed the aggregate principal amount of such bonds authorized to be issued by prior amendments to the Constitution of the State, which is $4 billion. The Board currently has approximately $1.92 billion in aggregate principal amount of such bonds outstanding. Section 49-b also authorizes the issuance of revenue bonds payable in part from Fund I, Fund II and/or the Land Fund, which revenue bonds may not exceed an aggregate principal amount that the Board determines can be fully retired from the receipts of such funds, assets transferred from such funds, and the other revenues and assets pledged to the retirement of the revenue bonds. While the Board has issued revenue bonds pursuant to such authority, none of such bonds is payable from Fund I, Fund II or the Land Fund.

STRUCTURING ASSUMPTIONS

The mandatory sinking fund schedule of the Bonds has been structured to match the amortization of the Bonds and assuming that the Home Loans funded with the proceeds of the Bonds (the “Series 2011A Loans”) will not be prepaid. The Board anticipates prepayments of some of the Series 2011A Loans, including by reason of default. If a prepayment occurs, including by reason of default, the Board may, at its option, redeem Bonds prior to their scheduled maturity and mandatory sinking fund redemption dates, with the proceeds of such prepayment, without payment of any premium. See “THE BONDS – Redemption – Optional Redemption of Variable Rate Bonds”. The Board may also fund the purchase of additional Home Loans with the proceeds of any such prepayments if market and other conditions make it feasible to do so. However, no assurances can be given that market and other conditions will make it feasible to recycle such prepayments to fund the purchase of additional Home Loans. Nevertheless, if any Bonds are redeemed pursuant to an optional redemption, the Board may, depending upon market conditions, be required to make a termination payment to DBAG pursuant to the Swap Agreement. See “THE SWAP AGREEMENT.”

THE SWAP AGREEMENT

In connection with the issuance of the Bonds, the Board has entered into the Swap Agreement in order to substantially fix the Board’s interest obligation on the Bonds. Under the Swap Agreement, the Board is obligated to make payments to DBAG calculated on a notional amount equal to the scheduled outstanding principal amount of the Bonds at a fixed rate of 2.675% per annum, and DBAG is obligated to make reciprocal floating rate payments calculated on a notional amount equal to the scheduled outstanding principal amount of the Bonds at a variable rate of 68% of the three-month USD-LIBOR-BBA (as such term is defined in the 2006 ISDA Definitions), subject to certain conditions. Payments under the Swap Agreement will be made on a net basis on the first Business Day of each month, commencing on April 1, 2011 and ending on June 1, 2041.

Arrangements made in respect of the Swap Agreement do not alter the Board’s obligation to pay principal and interest on the Bonds. The Swap Agreement does not provide a source of security or other credit for the Bonds. The Board’s obligation under the Swap Agreement to make semi-annual fixed rate payments to DBAG are on a parity with the Board’s obligation to pay principal of and interest on the Bonds.

Under certain circumstances, the Swap Agreement may be terminated prior to the maturity of the Bonds. Accordingly, no assurance can be given that the Swap Agreement will continue to be in existence. If the Swap Agreement is terminated under certain market conditions, the Board may owe a termination payment from Fund II to DBAG or may receive a termination payment from DBAG. Such a termination payment generally would be based upon the market value of the Swap Agreement on the date of termination and could be substantial. In addition, a partial termination of the Swap Agreement could occur to the extent that any Bonds are redeemed pursuant to an optional redemption. If such an optional redemption occurs, a termination payment related to the portion of the Swap Agreement to be terminated will be owed by either the Board or DBAG, depending on market conditions. See “Interest Rate Swap Transactions” in Appendix B for additional information concerning interest rate swap transactions to which the Board is a party.

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THE LIQUIDITY PROVIDER

The following information has been provided by the Liquidity Provider (at times referred to hereinafter as the “Bank”) for use in this Official Statement. The delivery of this Official Statement shall not create any implication that there has been no change in the affairs of the Bank since the date hereof, or that the information contained or referred to under this caption “THE LIQUIDITY PROVIDER” is correct as of any time subsequent to its date. Such information is not guaranteed as to accuracy or completeness by, and is not to be construed as a representation by, the Board or the Underwriters. This information has not been independently verified by the Board or the Underwriters. No representation is made by the Board or the Underwriters as to the accuracy or adequacy of such information or as to the absence of material adverse changes in such information subsequent to the date hereof.

JPMorgan Chase Bank, National Association (the “Bank”) is a wholly owned bank subsidiary of JPMorgan Chase & Co., a Delaware corporation whose principal office is located in New York, New York. The Bank offers a wide range of banking services to its customers, both domestically and internationally. It is chartered and its business is subject to examination and regulation by the Office of the Comptroller of the Currency.

As of December 31st, 2010, JPMorgan Chase Bank, National Association, had total assets of $1,631.6 billion, total net loans of $531.9 billion, total deposits of $1,020.0 billion, and total stockholder’s equity of $123.4 billion. These figures are extracted from the Bank’s unaudited Consolidated Reports of Condition and Income (the “Call Report”) as of December 31st, 2010, prepared in accordance with regulatory instructions that do not in all cases follow U.S. generally accepted accounting principles, which are filed with the Federal Deposit Insurance Corporation. The Call Report, including any update to the above quarterly figures, can be found at www.fdic.gov.

Additional information, including the most recent annual report on Form 10-K for the year ended December 31, 2009, of JPMorgan Chase & Co., the 2009 Annual Report of JPMorgan Chase & Co., and additional annual, quarterly and current reports filed with or furnished to the Securities and Exchange Commission (the “SEC”) by JPMorgan Chase & Co., as they become available, may be obtained without charge by each person to whom this Official Statement is delivered upon the written request of any such person to the Office of the Secretary, JPMorgan Chase & Co., 270 Park Avenue, New York, New York 10017 or at the SEC’s website at www.sec.gov.

THE LIQUIDITY FACILITY

General

The Liquidity Provider will provide a Liquidity Facility for the Bonds on the date that such Bonds are executed and delivered. The Liquidity Facility contains various provisions, covenants and conditions, certain of which are summarized below. Certain words or terms used in the following summary are defined hereinbelow and other words or terms not defined hereinbelow are defined elsewhere in this Official Statement, in the Liquidity Facility or the Resolution, and reference thereto is made for such definitions. The following summary of the Liquidity Facility does not purport to be comprehensive or definitive and is subject to all of the terms and provisions of the Liquidity Facility to which reference is made hereby. Investors are urged to obtain and review a copy of the Liquidity Facility in order to understand all of the terms of that document.

The Liquidity Facility requires the Liquidity Provider to provide funds for the purchase of the Bonds that have been tendered and not remarketed subject to certain conditions described below. The Liquidity Facility does not guarantee the payment of principal of or interest nor redemption premium, if any, on the Bonds in the event of non-payment of such interest, principal or redemption premium, if any, by the Board.

The obligation of the Liquidity Provider pursuant to the Liquidity Facility to provide funds for the purchase of the Bonds that have been tendered and not remarketed will end on the earliest of (1) March 7, 2014 (or such later date as may be agreed to from time to time by the Liquidity Provider and the Board in accordance with the Liquidity Facility), (2) the close of business on the Business Day immediately following the date that the interest on all the Bonds is converted to a Fixed Interest Rate, (3) the date of termination of the Available Commitment in accordance with the Liquidity Facility or following certain events of default under the Liquidity Facility, and (4) the date on which no Bonds are Outstanding; provided, that if such day is not a Business Day, the termination date shall be the immediately preceding Business Day.

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Subject to the terms and conditions of the Liquidity Facility, the Liquidity Provider agrees from time to time during the Purchase Period to purchase, with its own funds, Eligible Bonds that have been tendered for purchase and not remarketed, at the Purchase Price on a purchase date. The Liquidity Provider’s obligation is limited to an amount equal to the aggregate principal amount of the Bonds then outstanding plus an amount equal to 34 days of interest on such outstanding Bonds calculated at 15% per annum based on actual days elapsed in a year of 360 days.

The obligation of the Liquidity Provider to purchase the Bonds on any date is subject to the satisfaction of the following conditions, unless waived in writing by the Liquidity Provider: (i) receipt by the Liquidity Provider of a Notice of Liquidity Provider Purchase as required by Liquidity Facility; (ii) the condition that the Bond to be so purchased is not held by or for the account of the Board or any affiliate thereof and is not bearing interest at a Fixed Interest Rate (each such Bond being an “Eligible Bond”); and (iii) no Special Event of Default or Suspension Event (as each is hereinafter defined) has occurred and is continuing. If a Suspension Event has been cured as set forth under paragraph (iii) or paragraph (iv) under the heading “Remedies” below, the condition described in clause (iii) will be deemed satisfied.

Events of Default

“Special Events of Default” mean the Events of Default listed below under clauses (B)(i), (B)(iv), (B)(v), (C), (E), (F) and (J).

“Suspension Events” mean the Events of Default listed below under clauses (B)(ii) and (B)(iii).

The following occurrences constitute Events of Default under the Liquidity Facility:

A. the Board fails to pay any fees, expenses or other amounts payable by it to the Liquidity Provider; or

B. (i) the Board (A) applies for or consents to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of itself or of all or of a substantial part of its property or assets, (B) admits in writing its inability to pay its debts as they become due or declares a moratorium on the repayment of any of its Parity Debt, (C) makes a general assignment for the benefit of creditors, (D) commences a voluntary case under the United States Bankruptcy Code (as now or hereafter in effect), (E) files a petition seeking to take advantage of any other laws relating to bankruptcy, insolvency, reorganization, liquidation, winding-up or composition or adjustment of debts, or (F) takes any action for the purpose of effecting any of the acts set forth in the preceding clauses (A) through (E); or (ii) an involuntary case or other proceeding shall have been commenced against the Board seeking the liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property and such case or proceeding, including the proceeding regarding any such appointment, shall not be dismissed, vacated, stayed or discharged within sixty (60) days after the filing thereof or any order for relief shall be entered against the Board under the law pursuant to which said case or proceeding, including the proceeding regarding any such appointment, was commenced; (iii) there shall be commenced against the Board, any case, proceeding or other action under any existing or future law of any jurisdiction, domestic or foreign, seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets, which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof; or (iv) any order for relief shall have been entered against the Board under the federal bankruptcy laws as now or hereafter in effect; (v) or a petition shall have been filed by the Board with any Governmental Authority having jurisdiction over it to dissolve it or an order of dissolution of the Board made by any Governmental Authority having jurisdiction; or

C. (i) the State shall have declared or imposed a debt moratorium, debt restructuring or comparable extraordinary restriction on repayment when due and payable of the principal of or interest on the Bonds (including Purchased Bonds) or any other Debt (for purposes of this paragraph (c) only, “Debt” is limited to Parity Debt referred to in clause (b) of the definition of “Debt” set forth in the Liquidity Facility) by the Board, or (ii) any other Governmental Authority having jurisdiction over the Board shall have declared or imposed a debt moratorium, debt

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restructuring or comparable extraordinary restriction on repayment when due and payable of the principal of or interest on the Bonds (including Purchased Bonds); or

D. the Board shall fail to pay when due a money judgment entered by a court or other regulatory body of competent jurisdiction against the Board in an amount in excess of $5,000,000, and enforcement of such judgment continues unstayed and in effect for a period of sixty (60) consecutive days; or

E. the Liquidity Facility in its entirety, or any material provision thereof relating to payment of principal of and interest on the Bonds, including Purchased Bonds (or otherwise affecting the Board’s obligation to pay principal and interest on the Bonds) or the security therefor, ceases to be valid and binding on the Board in accordance with their respective terms, or is declared, pursuant to a final judgment by a court or Governmental Authority having jurisdiction over the Board, to be null and void; or the validity or enforceability of the Liquidity Facility, the Bonds or the Resolution is repudiated, rejected or contested through legal proceedings by the Board, by authorized action, or a proceeding is commenced by the Board, by authorized action, seeking to establish the invalidity or unenforceability thereof; or

F. the State or the Board fails to pay when due and payable (whether at maturity or upon acceleration or otherwise), after giving effect to any applicable grace period, the principal of or interest on any Parity Debt (including without limitation any Bond, whether or not a Purchased Bond) of the State or the Board; or

G. a breach or failure by (i) the Board or the State of certain covenants contained in the Resolution, or (ii) the Board of certain covenants contained in the Liquidity Facility; or

H. a breach or failure by (i) the Tender Agent of certain covenants contained in the Resolution or (ii) the Board of any covenant, condition or agreement of the Board contained in the Liquidity Facility or any Related Document (other than a breach or failure covered by paragraphs (a) through (g) above) that continues for a period of forty–five (45) days after notice thereof from the Liquidity Provider to the Board, which breach or failure the Liquidity Provider reasonably determines may have a material adverse effect on the Liquidity Provider; or

I. any of the Board’s representations or warranties made or deemed made by the Board in the Liquidity Facility or in any other Related Document or in any statement or certificate at any time given pursuant thereto or in connection therewith proves at any time to have been false or misleading in any material respect when made, or any such warranty is breached and may have a material adverse effect on any bondholder; or

J. Moody’s shall have (i) assigned a long-term rating of the Bonds or any Parity Debt below Investment Grade, (ii) withdrawn its rating of the Bonds or any Parity Debt for credit related reasons or (iii) suspended its rating of the Bonds or any Parity Debt for credit related reasons.

The following terms as used in the Liquidity Facility have the following meanings:

“Parity Debt” means any unenhanced, long-term general obligation debt of the State.

“Related Document” means each of the Liquidity Facility, the Remarketing Agreement, the Official Statement and the Resolution.

Remedies

Upon the occurrence of any Event of Default or Default as described in the Liquidity Facility, the Liquidity Provider shall have the following remedies:

(i) Upon the occurrence of a Special Event of Default, the Commitment and the Available Commitment shall automatically, without notice or other action by the Liquidity Provider or any other Person, reduce to zero, in which case, the obligations of the Liquidity Provider under the Liquidity Facility to purchase Eligible Bonds shall immediately terminate and expire.

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(ii) Upon the occurrence and continuance of an Event of Default described in clauses A, D, G, H or I above under “Events of Default,” the Liquidity Provider may deliver to the Board and the Tender Agent a Call Notice, in which case, the Board shall cause the purchase of the Bonds in accordance with the Resolution. Immediately following the Purchase Date relating to the purchase required by the Resolution and provided that the Bank has honored all draw requests made by the Tender Agent on or prior to the close of business on the Purchase Date, the Commitment and the Available Commitment shall automatically be reduced to zero and the obligations of the Liquidity Provider under the Liquidity Facility to purchase Eligible Bonds shall terminate and expire.

(iii) Upon the occurrence of a Default described in clause (B)(ii) under “Events of Default,” the Liquidity Provider’s obligations to purchase Eligible Bonds shall be immediately and automatically suspended and remain suspended until the case or other proceeding referred to therein is either dismissed, vacated, stayed or discharged within sixty (60) days from the commencement of such case or other proceeding or the Termination Date occurs, whichever is first. In the event that said Suspension Event shall have been dismissed, vacated, stayed or discharged within the sixty (60) day period described therein and prior to the Termination Date, then the Available Commitment and the obligation of the Liquidity Provider to purchase Eligible Bonds shall be reinstated and the terms of the Liquidity Facility shall continue in full force and effect as if there had been no such suspension (unless the Purchase Period shall otherwise have been terminated, suspended or expired as provided in the Liquidity Facility). In the event that said Suspension Event shall not have been dismissed, vacated, stayed or discharged by the close of business on such sixtieth (60th) day, then the Available Commitment and the obligation of the Liquidity Provider to purchase Eligible Bonds shall terminate at such time without notice or demand and, thereafter, the Liquidity Provider shall be under no obligation to purchase Eligible Bonds.

(iv) Upon the occurrence of a Default described in clause (B)(iii) under “Events of Default,” the Liquidity Provider’s obligations to purchase Eligible Bonds shall be immediately and automatically suspended and remain suspended until the case, proceeding or other action referred to therein is either vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the commencement of such case, proceeding or other action or the Termination Date occurs, whichever is first. In the event that said Suspension Event shall have been vacated, discharged, or stayed or bonded pending appeal within the sixty (60) day period described therein and prior to the Termination Date, then the Available Commitment and the obligation of the Liquidity Provider to purchase Eligible Bonds shall be reinstated and the terms of the Liquidity Facility shall continue in full force and effect as if there had been no such suspension (unless the Purchase Period shall otherwise have been terminated, suspended or expired as provided in the Liquidity Facility). In the event that said Suspension Event shall not have been vacated, discharged, or stayed or bonded pending appeal by the close of business on such sixtieth (60th) day, then the Available Commitment and the obligation of the Liquidity Provider to purchase Eligible Bonds shall terminate at such time without notice or demand and, thereafter, the Liquidity Provider shall be under no obligation to purchase Eligible Bonds. The Tender Agent shall immediately notify the Board, the Remarketing Agent and the Bondholders of the suspension, reinstatement and/or termination of the Available Commitment and the obligation of the Liquidity Provider to purchase Eligible Bonds described in this paragraph.

(v) In addition to the foregoing, upon the occurrence and continuance of any Event of Default, the Liquidity Provider may pursue any other remedy available to it at law or in equity or otherwise and all obligations under the Liquidity Facility shall bear interest at the Default Rate.

Alternate Liquidity Facility

If at any time there is delivered to the Tender Agent (i) an Alternate Liquidity Facility, (ii) a Favorable Opinion of Bond Counsel, (iii) written evidence from each Rating Agency stating the ratings of the Bonds after substitution of such Alternate Liquidity Facility, or a statement of the Board that no ratings have been obtained, and (iv) an opinion of counsel to the effect that such Alternate Liquidity Facility is a valid and enforceable obligation of the issuer or provider thereof, then the Tender Agent is required to accept such Alternate Liquidity Facility and, if the Liquidity Facility then in effect is a letter of credit, promptly surrender such Liquidity Facility to the Liquidity Provider that issued such Liquidity Facility in accordance with its terms for cancellation. Anything in the Resolution to the contrary notwithstanding, following satisfaction of the requirements set forth in this paragraph and

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the mandatory tender for purchase of the Bonds as described under the caption, “THE BONDS—Tender Provisions—Mandatory Tender for Purchase Upon Termination, Expiration, Suspension, Modification or Replacement of the Liquidity Facility,” in connection with the provision of any Alternate Liquidity Facility, (i) such Alternate Liquidity Facility may at any time thereafter specified by the Board to the Tender Agent become the Liquidity Facility for all purposes of the Resolution, and (ii) the Liquidity Facility replaced by such Alternate Liquidity Facility may be terminated at any time after such replacement.

TAX MATTERS

Tax Exemption

In the opinion of Vinson & Elkins L.L.P., Bond Counsel (“Bond Counsel”), (i) interest on the Bonds will be excludable from gross income for federal income tax purposes under existing law, and (ii) interest on the Bonds will not be (a) a specific preference item subject to the alternative minimum tax on individuals and corporations or (b) included in a corporation’s adjusted current earnings for purposes of the alternative minimum tax.

The Internal Revenue Code of 1986, as amended (the “Code”) imposes a number of requirements that must be satisfied for interest on state or local obligations, such as the Bonds, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of proceeds of the Bonds, limitations on the investment of proceeds of the Bonds prior to expenditure, limitations on the investment of proceeds of the Bonds in Home Loans, a requirement that excess arbitrage earned on the investment of proceeds of the Bonds be paid periodically to the United States, and a requirement that the Board file an information report with the Internal Revenue Service (the “Service”). The Board has covenanted in the Resolution that it will comply with these requirements.

Bond Counsel’s opinions will assume continuing compliance with the covenants of the Resolution pertaining to those sections of the Code that affect the exclusion from gross income of interest on the Bonds for federal income tax purposes and, in addition, relied on representations by the Board, the Underwriters and the Board’s Financial Advisor with respect to matters solely within the knowledge of the Board, the Underwriters and the Board’s Financial Advisor, respectively, which Bond Counsel has not independently verified. If the Board should fail to comply with the covenants in the Resolution or if the foregoing representations should be determined to be inaccurate or incomplete, interest on the Bonds could become includable in gross income from the date of original delivery of the Bonds, regardless of the date on which the event causing such inclusion occurs.

Except as stated above, Bond Counsel will express no opinion as to any federal, state or local tax consequences resulting from the receipt or accrual of interest on, or the acquisition, ownership or disposition of, the Bonds. In addition, Bond Counsel expresses no opinion with respect to its ability to render an opinion that a conversion of the Bonds to Fixed Rate Bonds will not adversely affect the excludability of interest on the Bonds from gross income of the owners thereof for federal income tax purposes, as required by the Resolution.

Bond Counsel’s opinions are based on existing law, which is subject to change. Such opinions are further based on Bond Counsel’s knowledge of facts as of the date thereof. Bond Counsel assumes no duty to update or supplement its opinions to reflect any facts or circumstances that may thereafter come to Bond Counsel’s attention or to reflect any changes in any law that may thereafter occur or become effective. Moreover, Bond Counsel’s opinions are not a guarantee of result and are not binding on the Service; rather, such opinions represent Bond Counsel’s legal judgment based upon its review of existing law and in reliance upon the representations and covenants referenced above that it deems relevant to such opinions. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given regarding whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures, the Service is likely to treat the Board as the taxpayer and the owners of the Bonds may not have a right to participate in such audit. Public awareness of any future audit of the Bonds could adversely affect the value and liquidity of the Bonds regardless of the ultimate outcome of the audit.

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Additional Federal Income Tax Considerations

Prospective purchasers of the Bonds should be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to financial institutions, life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings and profits, individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations and individuals otherwise qualifying for the earned income tax credit. In addition, certain foreign corporations doing business in the United States may be subject to the “branch profits tax” on their effectively connected earnings and profits, including tax-exempt interest such as interest on the Bonds. These categories of prospective purchasers should consult their own tax advisors as to the applicability of these consequences. Prospective purchasers of the Bonds should also be aware that, under the Code, taxpayers are required to report on their returns the amount of tax-exempt interest, such as interest on the Bonds, received or accrued during the year.

GENERAL INFORMATION REGARDING THE STATE OF TEXAS

The Comptroller prepares a quarterly appendix (the “Bond Appendix”) which sets forth certain information regarding the State including its government, finances, economic profile, and other matters for use by State entities when issuing debt. The Bond Appendix is dated February, 2011 and is incorporated herein as described in Appendix A. With respect to evaluating the ability of the State to make timely payment of debt service on the Bonds based on the information contained in the Bond Appendix, no representation is made that such information contains all factors material to such an evaluation or that any specific information should be accorded any particular significance.

The Texas 2010 Comprehensive Annual Financial Report for the year ended August 31, 2010 (the “2010 CAFR”) is currently on file with the Municipal Securities Rulemaking Board. The 2010 CAFR is incorporated by reference and made a part of this Official Statement as if set forth herein. The 2010 CAFR may be found at www.window.state.tx.us/fm/pubs/cafr.

Section 49-j prohibits the Legislature from authorizing additional State debt payable from general revenues, including authorized but unissued bonds and lease purchase contracts in excess of $250,000, if the resulting annual debt service exceeds 5% of an amount equal to the average amount of general revenue for the three immediately preceding years, excluding revenues constitutionally dedicated for purposes other than payment of debt service. See Appendix A and “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS - General Obligation Pledge.”

Budget Process and Estimated Revenue for 2012-2013

Budgeting for the State is handled through the Governor’s Office of Budget, Planning, and Policy (the “GOBPP”) and the State Legislative Budget Board (the “LBB”). By statute, the Governor is the chief budget officer of the State and this function is carried out through the GOBPP. The LBB is the budget agency of the Texas Legislature. The GOBPP and the LBB generally cooperate with respect to matters pertaining to preparation of budgets and prepare uniform instructions and forms for budget requests.

The Texas Constitution requires the Comptroller to submit to the Governor and the State Legislature, at the commencement of each regular session of the State Legislature, a statement that contains, among other things, an itemized estimate of anticipated revenues, based on laws then in effect, that will be received by the State during the succeeding biennium. The Texas Constitution also requires the Comptroller to submit supplementary statements at any special session of the Texas Legislature and at such other times as may be necessary to show probable changes.

On January 10, 2011, in anticipation of the start of the current Texas Legislative session as required by the Texas Constitution, the Comptroller released her revenue estimates for the 2012 – 2013 biennium, which estimates $72.2 billion in funds available for general-purpose spending in that biennium. The Texas Constitution requires that the Texas Legislature pass a balanced budget for each biennium. Accordingly, no assurances can be provided as to how the Texas Legislature will balance the State’s budget for the 2012 – 2013 biennium.

Article III, Section 49-g of the Texas Constitution establishes the Economic Stabilization Fund (“rainy day fund”) which can be used to help balance the State’s budget. If an estimate of anticipated revenues for a succeeding

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biennium prepared by the Comptroller is less than the revenues that are estimated at the same time by the Comptroller to be available for the current biennium, the Texas Legislature may, by a three-fifths vote of the members present in each house, appropriate for the succeeding biennium from the Economic Stabilization Fund an amount not to exceed this difference. In addition to such appropriation authority, the Texas Legislature may, by a two-thirds vote of the members present in each house, appropriate amounts from the Economic Stabilization Fund at any time and for any purpose. Pursuant to the Comptroller’s January 10, 2011 revenue estimate, transfers to the rainy day fund are projected to total $1.2 billion over the three-year fiscal period 2011-13, and after the fiscal 2013 transfer, the balance for the rainy day fund is expected to total $9.4 billion, absent any appropriations during the current 82nd Texas Legislative session. No assurances can be given as to whether the Texas Legislature will appropriate all or any of the Economic Stabilization Fund to help balance the 2012-2013 budget or as to what type of savings plan or other actions the Texas Legislature may take during the 2011 Legislative Session to balance the budget and/or address any revenue shortfalls.

For further discussion of the appropriation and budgeting process for the State, see “APPENDIX A – The State of Texas.”

LEGAL MATTERS

The Board will furnish to the Underwriters a complete transcript of proceedings incident to the authorization and issuance of the Bonds, including the legal opinions of Vinson & Elkins L.L.P. (“Bond Counsel”). Included in the transcript of proceedings will be customary closing documents, including certificates of the Board to the effect that no litigation of any nature has been filed or is then pending which would restrain the authorization and issuance of the Bonds or affect the provisions made for their payment or security or in any manner question the validity of the Bonds. Bond Counsel has not assumed any responsibility with respect to the information contained in this Official Statement and has not undertaken to verify any of the information contained herein, except that, in its capacity as Bond Counsel, such firm has reviewed the statements contained in this Official Statement under the captions “INTRODUCTION”, “PLAN OF FINANCING”, “THE BONDS”, “SECURITY AND SOURCES OF PAYMENT FOR THE BONDS”, “THE LIQUIDITY FACILITY – Alternate Liquidity Facility” and “CONTINUING DISCLOSURE OF INFORMATION – Continuing Disclosure Undertaking of the Board” and “—Limitation and Amendments” (in the case of such latter subcaption, solely as it relates to the Board) and in Appendix C to this Official Statement, except for financial and statistical information contained under any of such captions or appendix, and such firm is of the opinion that the information relating to the Bonds and the Resolution contained under such captions or appendix is a fair and accurate summary of the information purported to be shown therein. In addition, Bond Counsel has reviewed the information under the captions “TAX MATTERS” and “ELIGIBILITY OF INVESTMENT (TEXAS)”, and such firm is of the opinion that such information is correct as to matters of law, and fairly and accurately presents the information therein. Bond Counsel has also reviewed the information relating to the Board and its programs contained in Appendix B to this Official Statement (except for financial and statistical information contained in Appendix B) and will pass upon certain matters with respect thereto. Bond Counsel has not reviewed the statements contained under any other captions in this Official Statement or in Appendix A, and such firm expresses no opinion with respect to the information set forth therein. Certain legal matters will be passed upon for the Board by its counsel, Lannen & Oliver, P.C., for the Underwriters by their co-counsel, Locke Lord Bissell & Liddell LLP, Dallas, Texas and Mahomes Bolden & Warren PC, Dallas, Texas and for the Liquidity Provider by its counsel, Nixon Peabody LLP.

The various legal opinions to be delivered concurrently with the delivery of the Bonds will express the professional judgment of the attorneys rendering the opinions as to the legal issues explicitly addressed therein. In rendering a legal opinion, the attorney does not become an insurer or guarantor of 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.

ELIGIBILITY FOR INVESTMENT (TEXAS)

The Bonds are declared by Chapter 162 to be legal and authorized investments for banks, savings banks, trust companies, building and loan associations, insurance companies, fiduciaries, trustees, guardians and the sinking funds of cities, towns, villages, counties, school districts and other political subdivisions and public agencies of the State, and the Bonds are legal and sufficient security for deposits in the amount of the par value of the Bonds.

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The Texas Public Funds Investment Act, Chapter 2256, Texas Government Code, as amended, provides that a municipality, a county, a public school district, a hospital district, a fresh water supply district, a district or authority created under Article III, Section 52(b)(1) or (2), or Article XVI, Section 59, of the State Constitution, any political subdivision, authority, public corporation, body politic or instrumentality of the State, a State agency or any nonprofit corporation acting on behalf of any of those entities may invest in the Bonds. No investigation has been made of other laws, regulations or investment criteria that might limit the ability of such institutions or entities to invest in the Bonds, or that might limit the suitability of the Bonds to secure the funds of such entities.

No review by the Board has been made of the laws in other states to determine whether the Bonds are legal investments for various institutions or entities in those states.

RATINGS

Moody’s Investors Service, Inc. (“Moody’s”) has assigned the State’s long-term rating of “Aaa” to the Bonds. In addition, Moody’s has assigned a short-term rating of “VMIG 1” to the Bonds on the basis of the Liquidity Provider’s agreement pursuant to the Liquidity Facility to purchase Bonds tendered for purchase by the registered owners thereof.

The ratings reflect only the views of Moody’s. Any explanation of the significance of the ratings assigned to the Bonds may be obtained only from Moody’s. The Board furnished to Moody’s certain information and materials, some of which may not have been included in this Official Statement, relating to the Bonds and the Board. Generally, rating agencies base their ratings upon such information and materials and upon investigation, studies and assumptions by the rating agencies. There can be no assurance that a rating when assigned will continue for any given period of time or that it will not be lowered or withdrawn entirely by Moody’s if in its judgment circumstances so warrant. Any such downward change in or withdrawal of a rating may have an adverse effect on the marketability or market price of the Bonds. The Board will undertake no responsibility to notify the owners of the Bonds of any such revisions or withdrawals of ratings.

The Board expects to furnish to Moody’s information and materials that it may request. However, the Board assumes no obligation to furnish requested information and materials, and may issue bonds for which a rating is not requested. Failure to furnish requested information and materials, or the issuance of bonds for which a rating is not requested, may result in the suspension or withdrawal of Moody’s rating on the Bonds.

CONTINUING DISCLOSURE OF INFORMATION

Continuing Disclosure Undertaking of the Board

General. In the Resolution, the Board has made the following agreement for the benefit of the registered owners of the Bonds. The Board is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the Board will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to the Municipal Securities Rulemaking Board (the “MSRB”).

Annual Reports. The Board will provide certain updated financial information and operating data to the MSRB annually. The information to be updated includes all quantitative financial information and operating data with respect to the Board of the general type included in this Official Statement and in Appendix B. The Board will update and provide this information within six months after the end of each Fiscal Year ending in or after 2011.

The Board may provide updated information in full text or may incorporate by specific reference certain other documents available to the public on the Electronic Municipal Market Access website of the MSRB, with the address as of the date hereof of www.emma.msrb.org (“EMMA”), or filed with the United States Securities and Exchange Commission (the “SEC”), as permitted by SEC Rule 15c2-12. The updated information will include audited financial statements, if the Board commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the Board will provide unaudited financial statements by the required time and audited financial statements when and if such audited financial statements become available. Any such financial statements will be prepared in accordance with generally accepted accounting principles for

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governmental entities or such other accounting principles as the Board may be required to employ from time to time pursuant to State law or regulation.

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

Material Event Notices. The Board shall notify the MSRB, in a timely manner not in excess of ten (10) business days after the occurrence of the event, of any of the following events with respect to the Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults, if material; (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, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notices of Proposed Issue (IRS Form 5701-TEB) or other material notices or determinations with respect to the tax status of the Bonds, or other material events affecting the tax status of the Bonds; (7) modifications to rights of holders of the Bonds, if material; (8) Bond calls, if material, and tender offers; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds, if material; (11) rating changes; (12) bankruptcy, insolvency, receivership or similar event of the Board1; (13) the consummation of a merger, consolidation, or acquisition involving the Board or the sale of all or substantially all of the assets of the Board, other than in the ordinary course of business, the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions, other than pursuant to its terms, if material; and (14) appointment of a successor or additional Paying Agent/Registrar or change in the name of the Paying Agent/Registrar, if material. Neither the Bonds nor the Resolution make any provision for debt service reserves or credit enhancement. In addition, the Board will provide timely notice of any failure by the Board to provide information, data, or financial statements in accordance with its agreement described above under “Annual Reports.” The Board will provide each notice described in this paragraph to the MSRB.

Continuing Disclosure Undertaking of the Comptroller

General. The Comptroller of Public Accounts of the State (the “Comptroller”) currently provides and intends to continue to provide current information concerning the financial condition of State government in compliance with the Rule, and the Comptroller has agreed for the benefit of the holders of the Bonds to provide certain updated information and notices while the Bonds remain outstanding. The Board and the legal and beneficial owners of the Bonds are third-party beneficiaries of the Comptroller’s agreement. The Comptroller is required to observe this agreement for so long as the State remains an “obligated person” within the meaning of SEC Rule 15c2-12. Under the agreement, the Comptroller will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to the MSRB.

In addition, the Comptroller currently prepares an updated disclosure appendix quarterly for use in State agency securities offerings. This disclosure appendix is incorporated herein as described in Appendix A. The Comptroller intends to continue to prepare or supplement such an appendix quarterly and to provide each such update or supplement of the information to the MSRB.

In addition to the Comptroller’s continuing disclosure undertaking, the Comptroller currently publishes a monthly publication, Fiscal Notes, which includes key economic indicators for the State’s economy as well as monthly statements of cash condition, revenues, and expenses for State government funds on a combined basis. Bondholders may subscribe to Fiscal Notes by writing to Fiscal Notes, Comptroller of Public Accounts, P.O. Box 13528, Austin, Texas 78711-3528. Information about State government may also be obtained by contacting the Comptroller’s BBS Window on State Government via the Internet at window.cpa.state.tx.us or via Worldwide Web at www.window.state.tx.us or by calling 1-800-227-8392 (in Texas) or (512) 475-1051.

1 For the purposes of the event identified in (12), the event is considered to occur when any of the following occur: the appointment of a

receiver, fiscal agent, or similar officer for the Board in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court or governmental authority has assumed jurisdiction over substantially all of the assets or business of the Board, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court of a governmental authority, or the entry of an order confirming a plan of reorganization, arrangement, or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of the Board.

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Annual Reports. The Comptroller will provide certain updated financial information and operating data to the MSRB annually. The information to be updated includes all quantitative financial information and operating data with respect to the State of the general type referred to in Appendix A to this Official Statement in Tables A-1 through A-14 and A-31 (however, only actual tax collections and revenues in Table A-10 will be updated) and under the headings “EDUCATION” and “RETIREMENT SYSTEMS”. The Comptroller will update and provide this information within 195 days after the end of each fiscal year.

The Comptroller may provide updated information in full text or may incorporate by reference certain other documents available to the public on the EMMA website of the MSRB or filed with the SEC, as permitted by the Rule. The updated information provided by the Comptroller will be provided on a cash basis and will not be audited, but the Comptroller will provide audited financial statements of the State prepared in accordance with generally accepted accounting principles for governmental entities when the State Auditor completes its statutorily required audit of such financial statements. The accounting principles pursuant to which such financial statements must be prepared may be changed from time to time to comply with State law.

The State’s current fiscal year end is August 31. Accordingly, the Comptroller must provide updated information within 195 days thereof in each year unless the State changes its fiscal year. If the State changes its fiscal year, the Comptroller will notify the MSRB of the change.

Notices of Noncompliance. The Comptroller will also provide timely notice of its failure to provide information, data, or financial statements in accordance with its agreement described above under “– Continuing Disclosure Undertaking of the Comptroller - Annual Reports.” Each notice described in this paragraph will be provided to the MSRB.

Agreements of the Board and the Comptroller

Availability of Information. The Board and the Comptroller have agreed to provide the foregoing financial and operating information only as described above. The Board and the Comptroller will be required to file their respective continuing disclosure information using the MSRB’s EMMA system. Investors will be able to access continuing disclosure information filed with the MSRB free of charge at www.emma.msrb.org.

Effective July 1, 2009 (the “EMMA Effective Date”), the SEC implemented amendments to SEC Rule 15c2-12 which approved the establishment by the MSRB of EMMA, which is now the sole successor to the NRMSIRs with respect to filings made in connection with undertakings made under SEC Rule 15c2-12 after the EMMA Effective Date. Commencing with the EMMA Effective Date, all information and documentation filing required to be made by the Board and the Comptroller in accordance with their undertakings made for the Bonds will be made with the MSRB in electronic format in accordance with MSRB guidelines. Access to such filings will be provided, without charge to the general public, by the MSRB.

Limitations and Amendments. The Board and the Comptroller have agreed to update information and to provide notices of material events only as described above. Neither has agreed to provide other information that may be relevant or material to a complete presentation of the Board’s or the State’s financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. Neither makes any representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. Each 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 Board to comply with its agreement.

The Board and the Comptroller may amend their respective continuing disclosure agreements 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 Board or the State, if (i) the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the offering described herein in compliance with the Rule, taking into account any amendments or interpretations of the Rule to the date of such amendment, as well as such changed circumstances, and (ii) either (a) the holders of a majority in aggregate principal amount of the outstanding Bonds consent to the amendment or (b) any person unaffiliated with the Board, the Comptroller and the State (such as nationally recognized bond counsel) determines that the amendment will not materially impair the

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interests of the registered owners of the Bonds. The Board or the Comptroller may also amend or repeal the provisions of this continuing disclosure agreement if the SEC amends or repeals the applicable provisions of the SEC Rule 15c2-12 or a court of final jurisdiction enters judgment that such provisions of the SEC Rule 15c2-12 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 in the primary offering of the Bonds. If the Board or the Comptroller so amends the agreement, it has agreed to include with the next financial information and operating data provided in accordance with its agreement described above under “Annual Reports” an explanation, in narrative form, of the reasons for the amendment and of the impact of any change in the type of financial information and operating data so provided.

Compliance with Prior Undertakings. During the past five years, neither the Board nor the Comptroller has failed to comply in any material respect with any continuing disclosure agreement made by it in accordance with SEC Rule 15c2-12.

UNDERWRITING

The Underwriters have agreed, subject to certain conditions, to purchase the Bonds from the Board at a purchase price of $74,884,402.12, which purchase price represents the original aggregate principal amount of the Bonds, less an underwriting discount of $110,597.88, and no accrued interest on the Bonds. The Underwriters’ obligations are subject to certain conditions precedent, and they will be obligated to purchase all of the Bonds if any Bonds are purchased. The Bonds may be offered and sold to certain dealers and others at prices lower than the public offering price stated on the front cover page hereof, and such public price may be changed, from time to time, by the Underwriters.

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

FINANCIAL ADVISOR

Raymond James & Associates, Inc., Dallas, Texas, has served as financial advisor to the Board in connection with the issuance of the Bonds. The Financial Advisor is not obligated to undertake and has not undertaken to make an independent verification or to assume responsibility for the accuracy, completeness, or fairness of the information contained in the Official Statement. The Financial Advisor did not participate in the underwriting of the Bonds.

FORWARD LOOKING STATEMENTS

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

The forward-looking statements included 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

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control of the Board. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this Official Statement will prove to be accurate.

Pursuant to the Resolution, this Official Statement was approved by the undersigned Authorized Representative of the Board.

* * *

VETERANS’ LAND BOARD OF THE STATE OF TEXAS By: /s/ Jerry E. Patterson Jerry E. Patterson, Chairman

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APPENDIX A

THE STATE OF TEXAS ____________

The Comptroller has filed with the MSRB the Appendix A for the State dated February 2011. The Appendix A is hereby incorporated by reference and made a part of this Official Statement. Such Appendix A can also be obtained via the Worldwide Web through a download at: www.window.state.tx.us/treasops/bondapp.html until the Comptroller posts a later version of such Appendix A.

APPENDIX B

December 2010

THE VETERANS’ LAND BOARD OF THE STATE OF TEXAS

APPENDIX B

December 2010

B-(i)


TABLE OF CONTENTS

THE VETERANS’ LAND BOARD OF THE STATE OF TEXAS .........................................................................B-1

General ........................................................................................................................................................B-1 Members......................................................................................................................................................B-2

THE VETERANS’ LAND BOARD PROGRAMS ..................................................................................................B-2

Veterans’ Housing Assistance Program ......................................................................................................B-2 General..........................................................................................................................................B-2 Fund I Housing Assistance Bonds Outstanding ............................................................................B-3 Fund II Housing Assistance Bonds Outstanding...........................................................................B-5 Terms of Home Loans...................................................................................................................B-7 Restricted and Unrestricted Pool of Veterans ...............................................................................B-8 Origination History .......................................................................................................................B-8 Liens Securing Home Loans .........................................................................................................B-8 Insurance and Guarantees on Home Loans ...................................................................................B-9 Loan Origination and Servicing ..................................................................................................B-10 Housing Program Administration ...............................................................................................B-10 Housing Program Costs ..............................................................................................................B-10 Data Regarding Delinquencies, Foreclosure Recoveries and Prepayments ................................B-10

Veterans’ Land Program ...........................................................................................................................B-12 General........................................................................................................................................B-12 Veterans’ Land Bonds Outstanding ............................................................................................B-13 Terms of Land Loans ..................................................................................................................B-13 Historical Comparison of Forfeited Land Sales ..........................................................................B-15

Housing Fund and Land Fund Investments...............................................................................................B-15 Interest Rate Swap Transactions ...............................................................................................................B-16

Variable to Fixed Rate Swaps .....................................................................................................B-16 Variable to Variable Rate Swaps ................................................................................................B-19 Risks Associated with Interest Rate Swap Transactions.............................................................B-20

Other Veterans’ Land Board Programs .....................................................................................................B-21 Veterans Homes Program ...........................................................................................................B-21 Veterans Cemeteries Program.....................................................................................................B-21

ESTIMATED ANNUAL DEBT SERVICE REQUIREMENTS ............................................................................B-22

B-1

The following information is designed to provide a general description of the Veterans’ Land Board (the “Board”) of the State of Texas (the “State”) and certain programs administered by the Board, and is not intended to be exhaustive. Historical data and trends presented below are not intended to predict future events or continuing trends, and no representation is made that past experience will continue in the future.


General

The Board is an agency of the State established pursuant to Article III, Section 49-b (as amended, “Section 49-b”) of the Constitution (the “State Constitution”) of the State, originally adopted by the voters of the State on November 7, 1946. The Board is composed of the Commissioner of the General Land Office of the State and two citizens of the State who are appointed by the Governor of the State with the advice and consent of the State Senate. One appointed member is required to be well versed in veterans’ affairs, and the other appointed member is required to be well versed in financial matters.

Pursuant to Section 49-b and Chapter 162 (as amended, “Chapter 162”) of the Texas Natural Resources Code, the Board is responsible for the operation of the Veterans’ Housing Assistance Program (the “Housing Program”). In connection with its operation of the Housing Program, the Board administers the Veterans’ Housing Assistance Fund (“Housing Fund I”) and the Veterans’ Housing Assistance Fund II (“Housing Fund II,” and together with Housing Fund I, the “Housing Funds”), which are separate and distinct funds governed by Section 49-b and Chapter 162.

Pursuant to Section 49-b and Chapter 161 (as amended, “Chapter 161”) of the Texas Natural Resources Code, the Board is responsible for the operation of the Veterans’ Land Program (the “Land Program”). In connection with the Land Program, the Board administers the Veterans’ Land Fund (the “Land Fund”), which is governed by Section 49-b and Chapter 161.

The Board may invest money in the Housing Funds and the Land Fund that is not immediately committed for the purposes set forth in Chapters 161 and 162, as applicable, as set forth below under the caption, “THE VETERANS’ LAND BOARD PROGRAMS—Housing Fund and Land Fund Investments.”

Section 49-b provides that receipts of all kinds of Housing Fund I, Housing Fund II and the Land Fund that the Board determines are not required for the payment of principal of and interest on general obligation bonds, including payments by the Board under any bond enhancement agreement with respect to the principal of or interest on such bonds, authorized by the State Constitution to be issued by the Board to provide money for such fund, may be used by the Board, to the extent not inconsistent with the proceedings authorizing such bonds, to: (i) make temporary transfers to another of those funds for the purposes of that fund; (ii) pay the principal of and interest on general obligation bonds issued to provide money for another of those funds or make bond enhancement payments with respect to such bonds; or (iii) pay the principal of, premium, if any, and interest on revenue bonds of the Board or make bond enhancement payments with respect to the bonds.

Section 49-b also provides that assets from Housing Fund I, Housing Fund II and the Land Fund that are not required for the purposes of such fund may be (i) transferred by the Board to another of those funds; (ii) used by the Board to secure revenue bonds issued by the Board; (iii) used by the Board to plan and design, operate, maintain, enlarge, or improve veterans cemeteries, or (iv) used by the Board to plan and design, construct, acquire, own, operate, maintain, enlarge, improve, furnish, or equip veterans homes. Veterans cemeteries are burial grounds operated solely for the burial of Veterans (hereafter defined) and their eligible relatives (“Veterans Cemeteries”), while a veterans home is a life care facility, retirement home, retirement village, home for the aging, or other facility that furnishes shelter, food, medical attention, nursing services, medical services, social activities, or other personal services or attention to Veterans.

B-2

Members

The current members of the Board are as follows:

Jerry E. Patterson, Chairman of the Board (Austin). Mr. Patterson was elected Commissioner of the General Land Office of the State of Texas on November 5, 2002, and re-elected on November 7, 2006, and November 2, 2010, and as such is the Chairman of the Board. Born in Houston, Texas in 1946, Mr. Patterson attended public school in the Houston area and graduated from Texas A&M University Class of 1969 with a Bachelor of Arts degree. He joined the Marine Corps Reserve in 1965, and volunteered for Vietnam in 1972. In 1973, Mr. Patterson was assigned to NAS Pensacola, Florida for flight training as a naval flight officer and received his Naval Flight Officer wings in 1974. In 1991, he was promoted to Lieutenant Colonel in the Marine Corps Reserve. He retired from the Marine Corps Reserve in 1993. In 1992, Mr. Patterson was elected to the Texas State Senate for District 11, including portions of Harris, Galveston and Brazoria counties. While serving in the Texas State Senate, he sponsored several major legislative initiatives, including passage of the concealed handgun law, a constitutional amendment allowing home equity lending, the state coastal management plan and the creation of the Texas State Veterans Homes Program. After serving in the Texas State Senate and prior to his election as the Commissioner of the General Land Office, Mr. Patterson served as the Texas state relations director for the American Red Cross.

Alan E. Johnson, Member (Harlingen). On March 6, 2006, Texas Governor Rick Perry appointed Mr. Johnson as a member of the Board. Mr. Johnson is a retired captain in the U.S. Army, and is the executive vice president of Texas State Bank. He is also a licensed real estate broker and general real estate appraiser in the State of Texas. He serves as chairman of the Harlingen Port Authority, a trustee of the Valley Baptist Medical Center, a member of the Coastal Conservation Association and as co-chairman of the Harlingen Chamber of Commerce Transportation Committee. He also serves as director of the Alliance for I-69 Texas and director of Sunny Glen Children’s Home. He received a bachelor’s degree from Texas A&I University, now Texas A&M University-Kingsville, and is a graduate of the National Commercial Lending School at the University of Oklahoma and the Southwestern Graduate School of Banking at Southern Methodist University.

Alan K. Sandersen, Member (Missouri City). On August 24, 2007, Texas Governor Rick Perry appointed Mr. Sandersen as a member of the Board. Mr. Sanderson served as a Corps of Engineers officer in the Army National Guard, and is a life member of the National Guard Association of Texas. He is a licensed Certified Public Accountant and managing partner of the accounting firm of Sandersen Knox & Belt, LLP. He has served the public in a variety of elected and appointed roles including the Board of Directors of Quail Valley Utility District, the Board of Directors and President of First Colony Municipal Utility District No. 9 in Missouri City, President of the Fort Bend County Housing Finance Corporation, and Fort Bend County representative to the Houston-Galveston Area Council on Aging. He received his bachelor of Business Administration degree in Accounting from Texas A&M University where he was a member of the Corps of Cadets.

THE VETERANS’ LAND BOARD PROGRAMS

Veterans’ Housing Assistance Program

General. The Housing Funds are used in connection with the Housing Program for the purpose of making home mortgage loans (“Home Loans”) to eligible Texas veterans and certain surviving spouses (in either case, “Veterans”), to be used toward the purchase of homes in the State (“Purchase Money Home Loans”) or toward making qualified improvements to homes in the State (“Home Improvement Home Loans”). The State Constitution authorizes the Board from time to time to issue general obligation bonds of the State to augment Housing Fund I (“Fund I Housing Assistance Bonds”), Housing Fund II (“Fund II Housing Assistance Bonds”) or the Land Fund (“Veterans’ Land Bonds”), provided that the aggregate principal amount of such bonds outstanding does not exceed the aggregate principal amount of such bonds authorized to be issued by prior amendments to the Constitution of the State, which is $4 billion. As of December 31, 2010, approximately $2.08 billion in aggregate principal amount of such bonds was outstanding. In addition, the Board has issued revenue bonds in connection with the Housing Program.1

1 As of December 31, 2010, the Board had $589,807 aggregate principal amount outstanding of its Veterans Mortgage Revenue Bonds, Taxable Series 2000A (the “2000A Bonds”). The 2000A Bonds are revenue bonds secured primarily by mortgage pass-through certificates guaranteed as to timely payment of principal and interest by the Government National Mortgage Association, which represent beneficial ownership of pools of Home Loans relating to the 2000A Bonds. The Housing Funds and the Land Fund do not provide security for, and are not pledged for the repayment of, the 2000A Bonds.

B-3

Fund I Housing Assistance Bonds Outstanding. As of December 31, 2010, the Board had outstanding the following series of Fund I Housing Assistance Bonds:

Table 1 Outstanding Fund I Housing

Assistance Bonds

Dated Date Issue

Amount Outstanding

Final Maturity

Date Bond Yield

02/24/94 State of Texas Adjustable Convertible Extendable Securities, Veterans’ Housing Assistance Bonds, Series 1994A-1 $ 6,500,000.00 12/01/23 Floating

04/01/94 State of Texas Veterans’ Housing Assistance Taxable Refunding Bonds, Series 1994A-2 55,000,000.00 12/01/33 Floating

10/01/94 State of Texas Veterans’ Housing Assistance Program, Fund I Series 1994C Refunding Bonds 931,205.20(A) 12/01/15 6.68%

10/31/95 State of Texas Veterans’ Housing Assistance Program, Fund I Series 1995 Refunding Bonds 43,375,000.00 12/01/16 5.52%(B)

11/01/02 State of Texas Veterans’ Housing Assistance Program, Fund I Series 2002B Taxable Refunding Bonds 19,780,000.00 06/01/23 4.91%(B)

11/01/03 State of Texas Veterans’ Housing Assistance Program, Fund I Series 2003 Taxable Refunding Bonds 47,865,000.00 06/01/21 5.19%(B)

05/01/04 State of Texas Veterans’ Housing Assistance Program, Fund I Series 2004 Taxable Refunding Bonds 16,535,000.00 12/01/24 5.45%(B)

11/01/04 State of Texas Veterans’ Housing Assistance Program, Fund I Series 2004C Taxable Refunding Bonds 7,220,000.00 12/01/18 5.35%(B)

11/01/05 State of Texas Veterans’ Housing Assistance Program, Fund I Series 2005C Taxable Refunding Bonds 27,315,000.00 12/01/25 4.88%(C)

Total $224,521,205.20(A)

_________________ (A) Not including interest accretions on the remainder of the Series 1994C Bonds, all of which are capital appreciation “College

Savings Bonds” issued as a portion of the Series 1994C Bonds. (B) Reflects the fixed interest rate to be paid by the Board under an interest rate swap agreement with respect to all of these bonds. (C) Reflects the weighted average fixed interest rate to be paid by the Board under several interest rate swap agreements with

respect to all of these bonds.

The estimated annual debt service requirements relating to the Fund I Housing Assistance Bonds listed above are set forth under “ESTIMATED ANNUAL DEBT SERVICE REQUIREMENTS.”

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B-4

During the fiscal years ending August 31, 2006, 2007, 2008, 2009 and 2010, the Board redeemed (other than pursuant to mandatory sinking fund redemption) the aggregate principal amount of Fund I Housing Assistance Bonds set forth in the following table:

Table 2 Redemptions of Fund I

Housing Assistance Bonds

Fiscal Year Ending August 31, Optional(A)

Excess Moneys(B)

Unexpended Proceeds(C) Prepayments(D)

2006 $41,730,000 -0- -0- -0- 2007 -0- -0- -0- -0- 2008 -0- -0- -0- -0- 2009 -0- -0- -0- -0- 2010 -0- -0- -0- -0-

_________________ (A) Refers to optional redemptions that may be undertaken at any time for any reason following the expiration of a specified “call

protection” period, if any. (B) Refers to optional redemptions relating to amounts (i.e., investment earnings, Home Loan prepayments and amounts in the debt

service reserve fund relating to the Fund I Housing Assistance Bonds in excess of the average annual debt service requirements on such bonds) in excess of those necessary to pay debt service and expenses related to the Housing Program.

(C) Refers to optional redemptions relating to proceeds of Fund I Housing Assistance Bonds that remain in Housing Fund I following the expiration of a specified period.

(D) Refers to mandatory redemptions relating to Home Loan prepayments that must be used to redeem Fund I Housing Assistance Bonds of a specified maturity within the related series.

In addition, during the four months ended December 31, 2010, the Board did not redeem any Fund I Housing Assistance Bonds other than through mandatory sinking fund redemption.


B-5

Fund II Housing Assistance Bonds Outstanding. As of December 31, 2010, the Board had outstanding the following series of Fund II Housing Assistance Bonds:

Table 3 Outstanding Fund II Housing

Assistance Bonds

Dated Date Issue

Amount Outstanding

Final Maturity

Date Bond Yield

11/01/97 State of Texas Veterans’ Housing Assistance Program, Fund II Series 1997B-2 Taxable Bonds $ 25,000,000 12/01/29 Floating

09/01/99 State of Texas Veterans’ Housing Assistance Program, Fund II Series 1999A-1 Taxable Bonds 4,070,000 12/01/29 7.43%

09/01/99 State of Texas Veterans’ Housing Assistance Program, Fund II Series 1999A-2 Taxable Bonds 150,000,000 12/01/29 Floating

03/22/01 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2001A-2 Bonds 20,000,000 12/01/29 4.26%(A)

12/18/01 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2001C-2 Bonds 25,000,000 12/01/33 4.37%(A)

07/10/02 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2002A-2 Bonds 33,490,000 06/01/33 3.87%(A)

03/04/03 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2003A Bonds 35,375,000 06/01/34 3.30%(A)

10/22/03 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2003B Bonds 36,645,000 06/01/34 3.40%(A)

04/07/04 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2004A Bonds 36,430,000 12/01/34 Floating


11/18/04 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2004D Taxable Refunding Bonds 25,085,000 06/01/20 5.35%(A)


08/09/05 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2005B Bonds 39,305,000 06/01/36 Floating

11/16/05 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2005D Taxable Refunding Bonds 11,540,000 06/01/26 5.15%(A)


05/10/06 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2006B Taxable Refunding Bonds 38,570,000 12/01/26 5.83%(A)

05/10/06 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2006C Taxable Refunding Bonds 19,680,000 12/01/27 5.79%(A)

09/20/06 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2006D Bonds 42,990,000 12/01/36 3.69%(A)

11/15/06 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2006E Taxable Refunding Bonds 39,560,000 12/01/26 5.46%(A)



11/14/07 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2007C Taxable Refunding Bonds 39,425,000 06/01/29 4.66%(A)

03/26/08 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2008A Bonds $ 45,690,000 12/01/38 3.19%(A)

B-6

Dated Date Issue

Amount Outstanding

Final Maturity

Date Bond Yield


03/05/09 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2009A Bonds 48,395,000 12/01/23 4.34%

09/03/09 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2009B Bonds 48,990,000 12/01/24 4.95%

11/18/09 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2009C Taxable Refunding Bonds 81,800,000 06/01/31 5.61%(B)

02/25/10 State of Texas Veterans’ Housing Assistance Program, Fund II Series 2010A Bonds 74,345,000 12/01/25 3.25%

05/20/10 State of Texas Veterans Bonds, Taxable Refunding Series 2010B 66,070,000 12/01/31 5.40%(A)

08/20/10 State of Texas Veterans Bonds, Series 2010C 74,995,000 12/01/40 2.31%(A)

11/18/10 State of Texas Veterans Bonds, Taxable Refunding Series 2010E 49,995,000 06/01/32 2.79%(A)

Total $1,367,530,000

_________________ (A) Reflects the fixed interest rate to be paid by the Board under an interest rate swap agreement with respect to all of these bonds. (B) Reflects the weighted average fixed interest rate to be paid by the Board under two interest rate swap agreements with respect to all of these bonds.

The annual debt service requirements relating to the Fund II Housing Assistance Bonds listed above are set forth in “ESTIMATED ANNUAL DEBT SERVICE REQUIREMENTS.”


B-7

During the fiscal years ending August 31, 2006, 2007, 2008, 2009 and 2010, the Board redeemed (other than pursuant to mandatory sinking fund redemption) an aggregate principal amount of Fund II Housing Assistance Bonds as set forth in the following table:

Table 4 Redemptions of Fund II

Housing Assistance Bonds

Fiscal Year Ending August 31, Optional(A)

Excess Moneys(B)

Unexpended Proceeds(C) Prepayments(D)

2006 $ 72,435,000 -0- -0- $16,880,000 2007 39,560,000 -0- -0- 15,370,000 2008 51,615,000 -0- -0- 8,460,000 2009 -0- -0- -0- 4,320,000 2010 149,515,000 -0- -0- 3,390,000

_________________ (A) Refers to optional redemptions that may be undertaken at any time for any reason following the expiration of a specified “call protection” period, if any. (B) Refers to optional redemptions relating to amounts (i.e., investment earnings and Home Loan prepayments) in excess of those necessary to pay debt service and expenses related to the Housing Program. (C) Refers to optional redemptions relating to proceeds of Fund II Housing Assistance Bonds that remain in Housing Fund II following the expiration of a specified period. (D) Refers to mandatory redemptions relating to Home Loan prepayments that must be used to redeem Fund II Housing Assistance Bonds of a specified maturity within the related series.

In addition, during the four months ended December 31, 2010, the Board redeemed the aggregate principal amount of Fund II Housing Assistance Bonds indicated: $49,995,000 “optional,” $-0- “excess moneys,” $-0- “unexpended proceeds” and $820,000 “prepayments.”

Terms of Home Loans. The maximum amount of any Purchase Money Home Loan is $325,000, and the maximum amount of any Home Improvement Home Loan is the maximum amount of any home improvement loan permitted to be insured under the Federal Housing Administration’s Title I home improvement loan program (presently $25,000). Purchase Money Home Loans generally have original terms of 30 years, and Home Improvement Home Loans have original terms of up to 20 years.

Pursuant to the resolutions that authorized the issuance of the Fund I Housing Assistance Bonds, the Board is required to fix interest rates to be charged to Veterans receiving Home Loans from Housing Fund I which will assure that the proceeds from repayments and prepayments of such Home Loans will exceed the amount of payments the Board is required to make from Housing Fund I for the interest on and principal of all outstanding Fund I Housing Assistance Bonds as such come due and mature and the amounts required from time to time to be credited to the debt service reserve fund (the “Fund I Bond Reserve”)2 and the mortgage reserve fund (the “Fund I Mortgage Reserve”)3 relating to the Fund I Housing Assistance Bonds. Pursuant to the resolutions that authorized the issuance of the Fund II Housing Assistance Bonds, the Board is required to fix interest rates to be charged to Veterans receiving Home Loans made from Housing Fund II which will assure that the proceeds from repayments and prepayments of such Home Loans, together with other legally available money, including, without limitation, anticipated transfers from the Land Fund or Housing Fund I, will exceed the amount of payments the Board is required to make from Housing Fund II for the payment of interest on and principal of all outstanding Fund II Housing Assistance Bonds as such come due and mature, including payments by the Board under any bond enhancement agreement with respect to principal of and interest on such bonds, and the Board has covenanted to transfer, to the extent permitted by the State Constitution and laws of the State, such amounts from the Land Fund and Housing Fund I as are necessary to cause available amounts in Housing Fund II to be sufficient for such payment. Subject to these requirements, the rates at which Home Loans are made from Housing Fund I and Housing Fund II, as the case may be, are subject to change at the Board’s discretion, based upon market conditions and other circumstances.

2 The Fund II Housing Assistance Bonds are not benefited by a debt service reserve fund. 3 The Fund II Housing Assistance Bonds are not benefited by a mortgage reserve fund.

B-8

As of December 31, 2010, all new Home Loans bear interest at the rates per annum established pursuant to the Board’s interest rate-setting mechanism.4 As of December 31, 2010, the existing portfolio of Purchase Money Home Loans in Housing Fund I bears interest at fixed interest rates ranging from 3.45% to 10.14% per annum, and the existing portfolio of Home Improvement Home Loans in Housing Fund I bears interest at fixed interest rates ranging from 3.45% to 11.0% per annum. As of December 31, 2010, the existing portfolio of Purchase Money Home Loans in Housing Fund II bears interest at fixed interest rates ranging from 3.05% to 9.0% per annum, and the existing portfolio of Home Improvement Home Loans in Housing Fund II bears interest at fixed interest rates ranging from 3.05% to 9.5% per annum.

The Board currently limits new Home Loans funded with tax-exempt Fund II Housing Assistance Bonds to Veterans in the “Restricted Pool” (hereinafter defined) that are either disabled or serving in a recognized reserve component of any branch of the U.S. armed forces. New Home Loans to other Veterans are funded from other available sources of the Board.

Restricted and Unrestricted Pool of Veterans. Until recently, federal income tax law required that the proceeds of “Qualified Veterans’ Mortgage Bonds” issued by the Veterans’ Land Board, such as the tax-exempt Fund I Housing Assistance Bonds and Fund II Housing Assistance Bonds, be used to make Home Loans to Veterans who (i) served on active duty at some time prior to January 1, 1977, and (ii) applied for financing prior to the date 30 years after such Veteran left active service. Pursuant to the Heroes Earnings Assistance and Relief Tax Act of 2008, this requirement was changed on June 17, 2008 to apply to Veterans who (i) served on active duty, and (ii) applied for financing prior to the date 25 years after such Veteran left active service. The group of Veterans from time to time that qualifies for Home Loans funded with the proceeds of “Qualified Veterans’ Mortgage Bonds” is referred to herein as the “Restricted Pool” of Veterans. Federal income tax law does not, however, restrict the Board’s ability to use the proceeds of taxable bonds to make Home Loans to any Veterans, including those Veterans (the “Unrestricted Pool”) who do not qualify for the Restricted Pool.

Origination History. From the inception of the Housing Program in 1984 through August 31, 2010, 80,105 Purchase Money Home Loans aggregating approximately $7,193,885,000 and 3,773 Home Improvement Home Loans aggregating approximately $58,640,000 have been made to Veterans. As of August 31, 2010, the Board had outstanding (i) 14,660 Purchase Money Home Loans with a remaining principal balance of approximately $1,704,589,000, and (ii) 521 Home Improvement Home Loans with a remaining principal balance of approximately $8,863,000. During the Board’s 2010 fiscal year, which began September 1, 2009, 1,405 Purchase Money Home Loans aggregating approximately $249,180,000 and 166 Home Improvement Home Loans aggregating approximately $3,509,000 were made to Veterans.

Liens Securing Home Loans. Under Section 49-b and Chapter 162, the Board may purchase either first lien or subordinate lien Home Loans. While the Board has purchased subordinate lien Purchase Money Home Loans in the past, the Board’s present policy is to purchase only first lien Purchase Money Home Loans. Home Improvement Home Loans purchased by the Board generally are subordinate lien loans.

4 The Board has adopted an interest rate-setting mechanism to establish the interest rate applicable throughout the term of new Home Loans made. Pursuant to this mechanism, on the first business day of each week the Chairman of the Board will cause the interest rate on Home Loan commitments made during such week to be equal to the FHA/VA rate as of the close of business on the last business day of the immediately preceding week less the amount established by the Board from time to time (0.50% per annum as of December 31, 2010) as the difference between the interest rate on such Home Loans and the applicable FHA/VA rate. The mechanism also allows for certain interest rate adjustments on such new Home Loans during a week in response to extraordinary increases in the FHA/VA rate. The Board reviews this interest rate-setting mechanism at each of its regularly-scheduled meetings, and will make such adjustments, if any, as it considers appropriate.

As of December 31, 2010, the Board offered discounts from the applicable interest rate on Home Loans to certain disabled Veterans. Such Home Loans are discounted 0.50% per annum.

B-9

The following table sets forth lien data as of August 31, 2010, regarding the outstanding Purchase Money Home Loans purchased by the Board for the Housing Funds:

Table 5 Housing Funds

Purchase Money Home Loan Lien Data

Type of Lien Number Outstanding

Principal Balance Percent of Total

Number of Loans

First (A) 14,493 $1,700,901,000 99.78 Second 167 3,688,000 0.22 Totals 14,660 $1,704,589,000 100.00 _________________

(A) All of the Purchase Money Home Loans purchased by the Board for Housing Fund II are first lien Purchase Money Home Loans.

Insurance and Guarantees on Home Loans. The following description of certain mortgage insurance

programs and policies is only a brief outline and does not purport to summarize or describe all the provisions of these programs and policies. For a more complete description thereof, reference is made to the provisions of the terms of particular policies of the various insurers. The Board makes no representations as to the ability of an insurer to make payments under the insurance programs and policies described below.

Substantially all of the Purchase Money Home Loans secured by first liens are insured by the Federal Housing Administration (the “FHA”) or a qualified private mortgage insurer (a “Private Insurer”) or are guaranteed by the Veterans’ Administration (the “VA”). None of the Purchase Money Home Loans secured by subordinate liens are insured or guaranteed.

Substantially all of the unpaid principal, accrued interest and foreclosure expenses associated with a Purchase Money Home Loan insured by the FHA are recoverable from the FHA in the event that such Purchase Money Home Loan goes into default.

If a Purchase Money Home Loan guaranteed by the VA goes into default, the VA has the option of purchasing the related residence or paying on its guarantee. All of the unpaid principal, accrued interest and foreclosure expenses associated with such a Purchase Money Home Loan are recovered from the VA if it elects to purchase the related property. If the VA does not specify a foreclosure bid amount and the property is sold by the Administrator (as herein defined), the VA will pay an amount of the veteran’s entitlement toward the unpaid principal, accrued interest and foreclosure expenses within the VA-approved limits for all VA-guaranteed loans on the property. A veteran’s entitlement is generally limited to a maximum of $36,000. However, an additional amount of up to $68,250 may be available on certain loans with an original principal balance greater than $144,000. Foreclosure sale proceeds and insurance collected minimize the risk of loss on VA-guaranteed Purchase Money Home Loans.

If a Purchase Money Home Loan insured by a Private Insurer goes into default, the Private Insurer generally has the option of purchasing the related residence or paying under its insurance policy. Conventional Purchase Money Home Loans are insured by Private Insurers for 100% of the unpaid principal, accrued interest and foreclosure expenses when title to the property is taken by the Private Insurer. However, when the property is sold by the Administrator, 20% to 25% of the unpaid principal, accrued interest and foreclosure expenses is recovered from the Private Insurer. Foreclosure sale proceeds and insurance collected minimize risk of loss on Purchase Money Home Loans insured by Private Insurers.

B-10

The following table sets forth insurance and guaranty data as of August 31, 2010, regarding the outstanding Purchase Money Home Loans purchased by the Board from the Housing Funds:


Purchase Money Home Loan Insurance and Guaranty Data

Type of Insurance or Guaranty Number

Percent of Total Number of Loans

Private Insurer 3,824 26.09 FHA 776 5.29 VA 9,594 65.44 Other 466 3.18 Totals 14,660 100.00

Presently, the majority of the Home Improvement Home Loans purchased by the Board are insured by the FHA under its Title I home improvement loan program. This insurance covers 90% of the unpaid principal, accrued interest and foreclosure expenses associated with a Home Improvement Home Loan that goes into default.

If a Veteran defaults on an installment payment due under the terms of a promissory note and deed of trust securing the Home Loan, the lending institution servicing the loan may initiate a foreclosure action or make claims under applicable insurance policies or guarantees.

Loan Origination and Servicing. Home Loans purchased by the Board with money from the Housing Funds must be originated by independent Board-approved lending institutions throughout the State. The Board determines a Veteran’s eligibility in terms of service in the armed forces and residence in the State. Each lending institution then determines if a Veteran is qualified for a Home Loan based on credit standards similar to those in use for conventional loan applicants. Each originating lending institution may retain, or transfer to another servicer with the permission of the Administrator (defined below), the servicing for the loans originated by it.

Housing Program Administration. CitiMortgage, Inc. (the “Administrator”), a wholly-owned subsidiary of CitiBank (West), FSB, a wholly-owned subsidiary of Citigroup Inc., is the administrator for the Housing Program. The Administrator’s principal offices are located in Dallas, Texas, and the Administrator is engaged in the mortgage banking business primarily in servicing and administering mortgage loans. The Administrator’s duties under the Housing Program include, but are not limited to: (1) preparing guidelines for participation in the Housing Program by lending institutions; (2) preparing loan application forms and information brochures for Veterans; (3) reviewing title and loan papers for each Home Loan; (4) assuring compliance by participating lending institutions with qualification, eligibility, and loan servicing guidelines; (5) reviewing, on at least an annual basis, the performance of participating lending institutions; (6) acting as a clearing house for loan paperwork; (7) overseeing forfeiture, foreclosure, assignment, and collection procedures; and (8) providing data processing services required by the Housing Program.

Housing Program Costs. The expenses of administering the Housing Program and originating and servicing the Home Loans are paid from the receipt of repayments on the Home Loans and other receipts of the Housing Funds.

Data Regarding Delinquencies, Foreclosure Recoveries and Prepayments. As to Purchase Money Home Loans made from the Housing Funds, the following tables describe the Board’s experience with respect to delinquencies (Table 7), collections realized upon defaulted Purchase Money Home Loans (through foreclosure or insurance or guaranty claims) (Table 8), and Purchase Money Home Loans prepayment experience (Table 9), as of the dates or for the periods indicated, as applicable:

B-11


Delinquent and Defaulted Purchase Money Home Loans

Status

Fiscal Year Ended

August 31, 2010

Fiscal Year Ended

August 31, 2009

Fiscal Year Ended

August 31, 2008

Fiscal Year Ended

August 31, 2007

Fiscal Year Ended

August 31, 2006

Loans 31-60 Days Delinquent No. of Loans Percentage of No. of Loans

390

2.70%

403

2.72%

425

2.82%

373

2.44%

414

2.82%


131

0.91%

127

0.88%

112

0.74%

111

0.73%

126

0.86%

Loans 90 + Days Delinquent No. of Loans Percentage of No. of Loans

191

1.32%

187

1.26%

125

0.83%

119

0.78%

117

0.80%

In Foreclosure No. of Loans Percentage of No. of Loans

68

0.47%

87

0.59%

72

0.48%

43

0.28%

59

0.40%

Loans Conveyed to Insurer/Guarantor No. of Loans Percentage of No. of Loans

48 0.33%

40 0.27%

17 0.11%

18 0.12%

27 0.18%

Real Estate Owned No. of Loans Outstanding Principal Balance Percentage of No. of Loans

8

1,019,631 0.06%

3

$424,621 0.02%

4

$97,368 0.03%

3

$389,885 0.02%

9

$595,385 0.06%

Table 8

Housing Funds Purchase Money Home Loans

Foreclosure Recoveries Fiscal Year

Ended August 31, 2010

Fiscal Year Ended

August 31, 2009

Fiscal Year Ended

August 31, 2008

Fiscal Year Ended

August 31, 2007

Fiscal Year Ended

August 31, 2006

No. of Foreclosed Loans Collected Upon

59

48

50

59

104

Dollar Amount of Foreclosed Loans Collected Upon

$7,447,218

$6,930,379

$5,510,116

$5,647,086

$9,235,877

Percentage of No. of Loans 0.41% 0.32% 0.32% 0.38% 0.69%

Table 9

Housing Funds Purchase Money Home Loan

Prepayment Experience Fiscal Year


Fiscal Year Ended

August 31, 2009

Fiscal Year Ended

August 31, 2008

Fiscal Year Ended

August 31, 2007

Fiscal Year Ended

August 31, 2006

Dollar Amount of Prepayments $132,293,086 $122,537,048 $87,177,887 $91,236,103 $97,085,662

Percentage of Principal Balance Prepaid 7.71% 7.11% 5.08% 5.61% 6.68%

As to Home Improvement Home Loans made from the Housing Funds, the following tables describe the Board’s experience with respect to delinquencies (Table 10), and Home Improvement Home Loans prepayment experience (Table 11) as of the date or for the periods indicated, as applicable. The collections realized upon defaulted Home Improvement Home Loans (through insurance or guaranty claims) are not significant.

B-12


Delinquent and Defaulted Home Improvement Home Loans

Status As of

August 31, 2010 As of




August 31, 2006


16

3.07%

12

3.05%

8

2.29%

9

2.46%

13

3.44%


1

0.19%

1

0.25%

-0-

0.00%

-0-

0.00%

3

0.79%

Loans 90 + Days Delinquent No. of Loans Percentage of No. of Loans

10

1.92%

8

2.04%

4

1.14%

7

1.91%

8

2.12%

HUD Assignments No. of Loans Percentage of No. of Loans

7

1.34%

5

1.27%

1

0.29%

2

0.55%

2

0.53%

Table 11

Housing Funds Home Improvement Home Loan

Prepayment Experience Fiscal Year


Fiscal Year Ended

August 31, 2009

Fiscal Year Ended

August 31, 2008

Fiscal Year Ended

August 31, 2007

Fiscal Year Ended

August 31, 2006

Dollar Amount of Prepayments $537,728 $610,261 $517,043 $642,069 $522,259

Percentage of Principal Balance Prepaid 6.95% 10.42% 9.64% 11.83% 9.35%

Veterans’ Land Program

General. The Land Fund is used in connection with the Land Program for the purpose of purchasing land for resale to Veterans and consists of money attributable to Veterans’ Land Bonds, together with any land purchased with such money and the proceeds of the sale or resale of such land or any rights therein. In addition, the Land Fund includes bonuses, income, rents, royalties and any other pecuniary benefit received by the Board from such land and any sums received by way of indemnity or forfeiture for the failure of any bidder for the purchase of any such land to comply with its bid to accept and pay for such land.

Section 49-b, which was originally approved by the voters of the State on November 7, 1946, authorized the issuance of Veterans’ Land Bonds in the principal amount of $25,000,000 to capitalize the Land Fund. Subsequent amendments to the State Constitution have authorized additional Veterans’ Land Bonds. The Board is authorized to issue additional Veterans’ Land Bonds as described under “THE VETERANS’ LAND BOARD PROGRAMS—Veterans’ Housing Assistance Program—General.”


B-13

Veterans’ Land Bonds Outstanding. As of December 31, 2010, the Board had outstanding the following series of Veterans’ Land Bonds:

Table 12 Veterans’ Land Bonds Outstanding

Dated Date Issue

Amount Outstanding

Final Maturity

Date Bond Yield

10/15/91 State of Texas Veterans’ Land Refunding Bonds, Series 1991 $ 574,986.96(A) 12/01/21 6.74%

04/15/94 State of Texas Veterans’ Land Bonds, Series 1994 874,408.32(A) 12/01/24 6.31% 02/01/96 State of Texas Veterans’ Land Bonds, Series 1996 1,541,389.42(A) 12/01/26 5.46% 04/28/99 State of Texas Veterans’ Land Refunding Bonds,

Series 1999A 23,140,000.00 12/01/18 5.11%(B)

07/26/00 State of Texas Veterans’ Land Bonds, Taxable Series 2000A 16,855,000.00 12/01/30 Floating

11/15/00 State of Texas Veterans’ Land Refunding Bonds, Taxable Series 2000 39,655,000.00 12/01/20 6.11%(B)

02/21/02 State of Texas Veterans’ Land Bonds, Series 2002 16,945,000.00 12/01/32 4.14%(B)

02/21/02 State of Texas Veterans’ Land Bonds, Taxable Series 2002A 17,490,000.00 12/01/32 Floating





05/10/06 State of Texas Veterans’ Land Refunding Bonds, Taxable Series 2006A 27,700,000.00 12/01/27 6.54%(B)

05/10/06 State of Texas Veterans’ Land Refunding Bonds, Taxable Series 2006B 21,325,000.00 12/01/26 4.61%(B)

11/15/06 State of Texas Veterans’ Land Refunding Bonds, Taxable Series 2006C 36,000,000.00 12/01/27 6.51%(B)

11/18/10 State of Texas Veterans Bonds, Taxable Refunding Series 2010D 16,480,000.00 12/01/30 6.51%(B

Total $ 311,665,784.70(A)

_________________ (A) Not including interest accretions on $16,597,526.15 original principal amount of capital appreciation “College Savings Bonds”

issued as a portion of Refunding Series 1991, Series 1994 and Series 1996 Veterans’ Land Bonds. Only College Savings Bonds remain outstanding with respect to Refunding Series 1991, Series 1994 and Series 1996.

(B) Reflects the fixed interest rate to be paid by the Board under an interest rate swap agreement with respect to all of these bonds. The annual debt service requirements relating to the Veterans’ Land Bonds listed above are set forth in

“ESTIMATED ANNUAL DEBT SERVICE REQUIREMENTS.”

Terms of Land Loans. Under the Land Program, each land loan must be for a tract of at least one acre and for a maximum maturity of 30 years. Such loans are made after the value of the land to be purchased is determined and is inspected by an appraiser, and the application is reviewed and approved by the Board and its staff. Such loans traditionally have been in the contract for deed form (“contract form”). If a Veteran defaults on a land loan in the contract form, the Board is entitled to declare the related land forfeited by the Veteran, and resell the forfeited land to finance the purchase price of forfeited land tracts by Veterans and non-Veterans.

In addition to the contract form, the Board is also authorized under Chapter 161 to make land loans pursuant to a promissory note secured by a deed of trust (“mortgage form”). Effective December 1, 2007, the Board discontinued making land loans in the contract form and began making all land loans in the mortgage form with a loan limit of $80,000.

From the inception of the Land Program through August 31, 2010, the Board funded approximately 124,640 land loans (total principal amount of approximately $1,914,506,000). The Board funded 1,375 new land loans (total principal amount of approximately $69,277,000) during its 2010 fiscal year, which began on

B-14

September 1, 2009. Each of the existing land loans (other than those funded in the mortgage form or under the program discussed in the next paragraph) has been limited to a maximum of $20,000 and the Veteran has been required to make a down payment equal to 5% of the first $20,000 of land cost and to pay any amount of the land cost in excess of $20,000. Existing land loans with Veterans bear interest at fixed rates ranging from 3.00% to 9.97% per annum. Land loans transferred to non-Veterans (current Board policy permits transfers after three years) bear interest at higher rates, as permitted by law.

Historically, the Board had not been authorized to provide land loans in excess of $20,000 each. In 1991, however, Chapter 161 was amended to permit the Board to provide land loans in the contract form in the maximum amount of $40,000 each. In September 1994, the Board commenced a pilot program using approximately $10,000,000 of surplus Land Fund money to purchase land for resale under land loans in the contract form of up to $40,000 each at an interest rate of 9.25% per annum with a maximum term of 30 years. Veterans participating in the pilot program were required to make a down payment equal to 5% of the first $40,000 of land cost plus the portion of the sale price in excess of $40,000. Based upon the results of the pilot program, the Board decided to begin issuing taxable Veterans’ Land Bonds to expand the available funding for land loans in amounts greater than $20,000 but not more than $40,000 each. Interest rates on land loans funded with proceeds of taxable Veterans’ Land Bonds range from 6.25% to 9.80%. Veterans purchasing land under land loans funded with taxable Veterans’ Land Bond proceeds were required to make a down payment equal to 5% of the first $40,000 of land cost plus the portion of the sales price in excess of $40,000.

From January 1996 until February 2005, the Board made land loans up to $40,000 funded with a combination of 50% proceeds of tax-exempt Veterans’ Land Bonds and 50% proceeds of taxable Veterans’ Land Bonds. In 2003, however, Chapter 161 was amended to permit the Board to provide land loans in the maximum amount of $60,000 each. In December 2003, the Board received a favorable private letter ruling from the Internal Revenue Service that allows the Board to make land loans up to $60,000 funded with a combination of 1/3 proceeds of tax-exempt Veterans’ Land Bonds and 2/3 proceeds of taxable Veterans’ Land Bonds. Effective for all land loan applications received after February 1, 2005, the Board implemented the changes necessary to begin funding land loans on this basis. In 2005, the Board discontinued issuing tax-exempt Veterans’ Land Bonds, and beginning on July 1, 2006, the Board ceased the practice of making land loans blended with tax-exempt and taxable proceeds and began funding land loans with 100% of the proceeds from taxable Veterans’ Land Bonds or available amounts in the Land Fund. The Board currently funds all new land loans with available amounts in the Land Fund.

As of December 31, 2010, the Board had no original proceeds of Veterans’ Land Bonds on deposit in the Land Fund available to fund additional land loans.


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Historical Comparison of Forfeited Land Sales. The following table sets forth the forfeited land sales experience of the Board during the fiscal years ending on August 31, 2006 through 2010:

Table 13 Forfeited Land Sales

Fiscal Year Ending

August 31,

Number of Forfeited

Tracts Sold

Principal Balance Due Under Loans

Total Sale Price(A)

Gain (Loss)(B)

Number of Active Loans

2006 190 $6,592,778 $7,536,541 $ 943,763 23,931 2007 159 3,065,537 7,154,636 4,089,099 21,766 2008 120 3,232,885 5,398,827 2,165,942 19,687 2009 79 1,622,972 2,262,554 639,582 17,681 2010 55 1,965,526 2,552,509 586,983 15,971

_________________ (A) The Board financed the purchase price of most forfeited tracts on terms that varied depending upon whether the purchaser

was an eligible Veteran. (B) The gain or loss from the sale of forfeited tracts is presented in this table on a cash basis and takes into account unpaid

principal owing under forfeited land loans, but does not take into account accrued and unpaid interest owing under such loans. It is the Board’s policy not to sell forfeited tracts for less than the greater of the unpaid principal owing under the forfeited land loan or the appraised market value of the forfeited tract. The Board does not agree or represent that this policy will be continued if the Board determines that this policy is not in the best interests of the Land Program.

Housing Fund and Land Fund Investments

The Board is responsible for investment of money in Housing Fund I, Housing Fund II and the Land Fund. Pursuant to applicable law, money in Housing Fund I, Housing Fund II and the Land Fund may be invested in the following instruments: repurchase agreements; reverse repurchase agreements; direct obligations of or obligations guaranteed by the United States; direct obligations of or obligations guaranteed by Fannie Mae, the Federal Farm Credit System (“FFCS”), the Student Loan Marketing Association (“SLMA”), the Federal Home Loan Mortgage Corporation (“FHLMC”), or any of their successors; certain bankers’ acceptances issued by banks having the highest short-term credit rating; commercial paper having the highest short-term credit rating; option contracts (other than naked-options or uncovered-options); state and local bonds or mutual funds composed of such bonds; deposits insured by the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation, or any of their successors; collateralized mortgage obligations (“CMOs”) issued or guaranteed by the Government National Mortgage Association or by Fannie Mae, FFCS, SLMA, FHLMC, or any of their successors; securities issued by the Farm Credit System Financial Assistance Corporation, the Private Export Funding Corporation or the Export-Import Bank; and any other instrument authorized for investment of State funds by the State Comptroller of Public Accounts (the “Comptroller”).

The Board’s written investment policy permits the Board’s Deputy Commissioner of Funds Management to purchase, sell or trade investments in any of the funds in accordance with applicable legal and policy limitations and imposes upon the Deputy Commissioner of Funds Management a “prudent person” standard. The policy imposes certain portfolio diversification requirements and directs the Deputy Commissioner of Funds Management to invest assets in a manner that maximizes total return, while providing the liquidity and cash flow necessary to fund the programs administered by the Board. The policy requires that certificates of deposit and repurchase agreements must be collateralized by direct obligations of or guaranteed by the United States or by obligations of agencies and instrumentalities of the United States, except that certificates of deposit may also be collateralized by State bonds and certain municipal bonds from within the State which are rated “A” or better. The collateralization level is 102% of market value of principal plus accrued interest and the policy requires the collateral to be marked to market daily to ensure compliance with the 102% requirement. The policy limits permitted investments in state and local bonds (or mutual funds consisting of state and local bonds) to obligations rated “A” or better. Finally, the policy permits investment in bonds issued, assumed or guaranteed by the State of Israel, which are permitted investments for State funds by the Comptroller. The Board does not agree or represent that its investment policy will not be revised from time to time if such revisions are determined by the Board to be in the best interests of its programs.

Money in Housing Fund I, Housing Fund II and the Land Fund that is not invested by the Board is held by the Comptroller within the State Treasury. The Comptroller invests money in the State Treasury in authorized investments consistent with applicable law and the State Comptroller Investment Policy. The Comptroller pools funds for investment purposes and allocates investment earnings on pooled funds proportionately among the various State agencies whose funds are so pooled. The approximate size of the State Treasury pool ranges from $17 billion to $35 billion depending upon seasonal variations in revenues and expenditures. Currently, most pooled funds are

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invested in the following instruments: repurchase agreements; reverse repurchase agreements; obligations of the United States and its agencies and instrumentalities; and fully-collateralized deposits in approved State depositories. All State Treasury investments are marked to market daily using an external financial service.

As of December 31, 2010, the market value of the total portfolio of investments in the Housing Funds and the Land Fund was $517,459,019. The Board reserves the right to sell any portfolio investments and thereby realize a market gain or loss if it determines that such action is in the best interests of its programs. Following is a summary statement showing the market value of the Board’s investment portfolio as of December 31, 2010:

Table 14 Investment Portfolio

Housing Fund I Housing Fund II Land Fund Total

Commercial Paper -0- $ 69,992,500 $ 4,999,750 $ 74,992,250 Money Market Mutual Fund $ 9,571,268 8,094,404 42,921,859 60,587,531 U.S. Treasuries 5,043,165 4,395,900 63,048,713 72,487,778 U.S. Agencies 20,508,353 35,000,000 47,079,022 102,587,375 Taxable Municipals 25,268,228 7,368,649 95,600,804 128,237,681 Miscellaneous -0- -0- 6,009,600 6,009,600 External Investment Pool(A) 14,026,973 46,779,166 11,750,665 72,556,804 Totals $74,417,987(B) $171,630,619 $271,410,413 $517,459,019(B)

_________________ (A) The Board uses the State Treasury primarily as a depository and anticipates that all funds deposited in the State Treasury will be available upon request and will earn interest equal to an allocated share of investment earnings on pooled funds in the State Treasury. (B) Includes market value of $19,690,682 and $12,226,638, respectively, of investments in the Fund I Bond Reserve and the Fund I Mortgage Reserve, respectively, pledged only to support the Fund I Housing Assistance Bonds. So long as the Fund I Bond Reserve contains an amount equal to average annual debt service requirements on the Fund I Housing Assistance Bonds, (i) any excess may be released from the Fund I Bond Reserve but will otherwise be considered as part of Housing Fund I, and (ii) any investment earnings relating to the Fund I Bond Reserve are automatically released from the Fund I Bond Reserve but are otherwise considered as part of Housing Fund I. Investment earnings relating to the Fund I Mortgage Reserve may be used for any lawful purpose permitted for moneys in Housing Fund I generally. Interest Rate Swap Transactions

Variable to Fixed Rate Swaps. As of December 31, 2010, the Board is a party to the interest rate swap transactions set forth in Table 15 below in order to substantially fix the Board’s interest obligations on the related variable rate bonds. In connection with these transactions, the Board is required to make payments to the swap counterparty calculated on a notional amount equal to the scheduled outstanding principal amount of the related bonds and a fixed rate, and the swap counterparty is obligated to make reciprocal floating rate payments to the Board calculated on a notional amount equal to the scheduled outstanding principal amount of the related bonds and a variable rate, subject to certain conditions. The use of synthetic fixed rate debt historically has lowered the Board’s borrowing costs, as compared to the borrowing costs associated with a traditional fixed rate bond issue.

Several of the Board’s interest rate swap transactions contain a “knock out” provision that (i) for two of such transactions gives the counterparty the option to terminate the transaction if the average variable rate exceeds the agreed upon rate for 180 consecutive calendar days, and (ii) for the remainder of such transactions if the variable rate on a reset date exceeds the agreed upon rate, the obligations of both parties to make swap payments are suspended until the next reset date that the variable rate is at or below the agreed upon rate. If any of such transactions is terminated or during any period in which the obligations to make swap payments are suspended, the associated variable rate bonds would no longer have a synthetic fixed rate, and the Board would be subject to interest rate risk to the extent that the variable rate bonds were not hedged with another interest rate swap or other derivative transaction or with variable rate assets in the related fund.

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The table below sets forth the Board’s variable to fixed interest rate swap transactions as of December 31, 2010:

Table 15 Variable to Fixed Interest Rate Swaps

Bond Issue Notional Amount

Effective Date

Fixed Rate

Paid

Variable Rate

Received Knock-out

Barrier

Knock-out

Type Knock-out Period

State of Texas Veterans’ Housing Assistance Program, Fund I Series 1995 Refunding Bonds $43,375,000 11/29/1995 5.5200%

Actual Bond Rate N/A N/A N/A

State of Texas Veterans’ Land Refunding Bonds, Series 1999A 23,140,000 06/01/1999 5.1120%

68% of 6M LIBOR N/A N/A N/A

State of Texas Veterans’ Land Refunding Bonds, Taxable Series 2000 39,655,000 12/01/2000 6.1060%

100% of 6M LIBOR 1M LIBOR>=7.00% Optional Permanent

State of Texas Veterans’ Housing Assistance Program, Fund II Series 2001A-2 Bonds 20,000,000 03/22/2001 4.2590%


State of Texas Veterans’ Housing Assistance Program, Fund II Series 2001C-2 Bonds 25,000,000 12/18/2001 4.3650%


State of Texas Veterans’ Land Bonds, Series 2002 16,945,000 02/21/2002 4.1400%


State of Texas Veterans’ Housing Assistance Program, Fund II Series 2002A-2 Bonds 23,650,000 07/10/2002 3.8725%



100% of 6M LIBOR 6M LIBOR>=7.00% Mandatory Periodic

State of Texas Veterans’ Housing Assistance Program, Fund I Series 2002B Taxable Refunding Bonds 19,780,000 12/01/2002 4.9100%

100% of 6M LIBOR 6M LIBOR>7.00% Mandatory Periodic

State of Texas Veterans’ Housing Assistance Program, Fund II Series 2003A Bonds 35,375,000 03/04/2003 3.3040%


State of Texas Veterans’ Housing Assistance Program, Fund II Series 2003B Bonds 36,645,000 10/22/2003 3.4030% See below(A) N/A N/A N/A State of Texas Veterans’ Land Refunding Bonds, Taxable Series 2003 22,935,000 12/01/2003 5.1230%


State of Texas Veterans’ Housing Assistance Program, Fund I Series 2003 Taxable Refunding Bonds 47,865,000 12/01/2003 5.1900%

100% of 6M LIBOR 6M LIBOR>7.00% Mandatory Periodic



State of Texas Veterans’ Housing Assistance Program, Fund I Series 2004 Taxable Refunding Bonds 16,535,000 06/01/2004 5.4500%


State of Texas Veterans’ Housing Assistance Program, Fund II Series 2004B Bonds 39,615,000 09/15/2004 3.6800%


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Effective Date

Fixed Rate

Paid

Variable Rate

Received Knock-out

Barrier

Knock-out


State of Texas Veterans’ Housing Assistance Program, Fund I Series 2004C Taxable Refunding Bonds and Fund II Series 2004D and Series 2004E Taxable Refunding Bonds $32,305,000 12/01/2004 5.3480%




State of Texas Veterans’ Housing Assistance Program, Fund I Series 2005C and Fund II Series 2005D Taxable Refunding Bonds(B) 23,580,000 12/01/2005 5.1450%(D)


State of Texas Veterans’ Housing Assistance Program, Fund I Series 2005C Taxable Refunding Bonds(B) 15,275,000 12/01/2005 4.9290%(D)






State of Texas Veterans’ Housing Assistance Program, Fund II Series 2006B Taxable Refunding Bonds 38,570,000 06/01/2006 5.8300%


State of Texas Veterans’ Housing Assistance Program, Fund II Series 2006C Taxable Refunding Bonds 19,680,000 06/01/2006 5.7900%


State of Texas Veterans’ Land Refunding Bonds, Taxable Series 2006A 27,700,000 06/01/2006 6.5400%


State of Texas Veterans’ Land Refunding Bonds, Taxable Series 2006B(C) 21,325,000 06/01/2006 4.6100%


State of Texas Veterans’ Land Refunding Bonds, Taxable Series 2006C 36,000,000 12/01/2006 6.5130%


State of Texas Veterans’ Housing Assistance Program, Fund II Series 2006D Bonds 42,990,000 09/20/2006 3.6890%


State of Texas Veterans’ Housing Assistance Program, Fund II Series 2006E Taxable Refunding Bonds 39,560,000 12/01/2006 5.4610%(D)






State of Texas Veterans’ Housing Assistance Program, Fund II Series 2007C Taxable Refunding Bonds 39,425,000 12/01/2007 4.6580%(E)






State of Texas Veterans’ Housing Assistance Program, Fund II Series 2009C Taxable Refunding Bonds(F) 16,950,000 12/01/2009 6.2200%


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Effective Date

Fixed Rate

Paid

Variable Rate

Received Knock-out

Barrier

Knock-out


State of Texas Veterans’ Housing Assistance Program, Fund II Series 2009C Taxable Refunding Bonds(F) $64,850,000 12/01/2009 5.4525%


State of Texas Veterans’ Bonds, Taxable Refunding Series 2010B 66,070,000 06/01/2010 5.4010%(D)


State of Texas Veterans’ Bonds, Series 2010C 74,995,000 08/13/2010 2.3095%


State of Texas Veterans Bonds, Taxable Refunding Series 2010D 16,480,000 12/01/2010 5.2090%


State of Texas Veterans Bonds, Taxable Refunding Series 2010E 49,995,000 12/01/2010 2.7900%


(A) The variable rate received will be 64.5% of 1M LIBOR whenever 1M LIBOR is approximately 5.18% or greater, and increases as 1M LIBOR drops below such level until reaching 100% of 1M LIBOR whenever 1M LIBOR is 1% or less.

(B) Three interest rate swap transactions relate to the Series 2005C Bonds. Each of these transactions was entered into in anticipation of the refunding of a

series of bonds refunded by the Series 2005C Bonds. The aggregate notional amount of these transactions is equal to the principal amount of the Series 2005C Bonds, and the combined amortization of these transactions matches that of the Series 2005C Bonds.

(C) The Board has entered into an additional interest rate swap transaction in connection with these bonds. This interest rate swap transaction has a notional

amount of $24,035,000, a June 1, 2006 effective date, a variable rate paid of 6M LIBOR, a fixed rate received of 4.61%, and a periodic mandatory knock-out if 6M LIBOR >= 8%.

(D) This rate effectively will increase by 1.25% per annum for any semiannual calculation period if on any payment date that is the first day of such

calculation period 6M LIBOR is greater than 4% per annum and the ratio of the daily weighted average of SIFMA during such calculation period to 6M LIBOR on the first day of such calculation period exceeds 74%.

(E) This rate effectively will increase by 1.1% per annum for any semiannual calculation period if on any payment date for such calculation period the ratio

of the daily weighted average of SIFMA during such calculation period to the USD-ISDA-Swap Rate (as defined in the 2000 ISDA Definitions published by the International Swaps and Derivatives Association, Inc.) with a designated maturity of five years on the first day of such calculation period exceeds 71%.

(F) Two interest rate swap transactions relate to the Series 2009C Bonds. Each of these transactions was entered into in anticipation of the refunding of a

series of bonds refunded by the Series 2009C Bonds. The aggregate notional amount of these transactions is equal to the principal amount of the Series 2009C Bonds, and the combined amortization of these transactions matches that of the Series 2009C Bonds.

Variable to Variable Rate Swaps. As of December 31, 2010, the Board is a party to three interest rate swap

transactions associated with four taxable variable rate bond issues in which the Board pays a variable rate based on a percentage of the Securities Industry and Financial Market Association Municipal Swap Index (“SIFMA”) and receives a variable rate based upon the specified maturity of the London Interbank Offered Rate (“LIBOR”). These swaps effectively convert the variable rate on the associated variable rate bond issues from a LIBOR (taxable) based rate to a SIFMA (tax-exempt) based rate. In addition, as of December 31, 2010, the Board is a party to an interest rate swap transaction relating to a tax-exempt bond issue in which the Board pays a variable rate based on SIFMA and receives a variable rate based upon a percentage of LIBOR with a designated maturity of three months. The Board anticipates that these transactions will generate a lower effective borrowing cost to the Board over the term of these transactions.


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The table below sets forth the Board’s variable to variable interest rate swap transactions as of December 31, 2010:

Table 16 Variable to Variable Interest Rate Swaps

Bond Issue Notional

Amount Variable Rate Paid Variable Rate Received

Swap Termination Date

State of Texas Veterans’ Housing Assistance Program, Fund II Series 1999A-2 Taxable Bonds $90,000,000 134.40% of SIFMA 100% of 1M LIBOR 09/01/2011

State of Texas Veterans’ Housing Assistance Program, Fund II Series 1999A-2 Taxable Bonds 60,000,000 134.40% of SIFMA 100% of 1M LIBOR 09/01/2011

State of Texas Veterans’ Land Bonds, Taxable Series 2000A and Taxable Series 2002A 34,345,000 131.25% of SIFMA 100% of 1M LIBOR 12/01/2032

State of Texas Veterans’ Housing Assistance Program, Fund II Series 2009A Bonds 31,630,000 SIFMA 94.35% of 3M LIBOR 12/01/2023

Risks Associated with Interest Rate Swap Transactions. Certain risks associated with the Board’s interest

rate swap transactions are described below.

Counterparty Risk. Counterparty risk is the risk that the counterparty will be unable to perform its obligations pursuant to an interest rate swap transaction. The Board mitigates this risk by only entering into transactions with highly rated counterparties. The credit ratings of the Board’s counterparties range from “AAA” to “A” by Standard & Poor’s (“S&P”) and “Aaa” to “A2” by Moody’s Investors Service (“Moody’s”). The Board also mitigates its counterparty risk by diversifying its swap portfolio among several different counterparties. The Board’s currently outstanding interest rate swap transactions are divided among seven different counterparties. Until recently, no more than approximately 30% of the total notional amount of these transactions was with any single counterparty.5

The documentation relating to the Board’s interest rate swap transactions contains collateralization provisions that require the applicable counterparty to post collateral in the full amount of the fair value of the related transaction if the counterparty’s credit rating is at or below “A+” by S&P or “A1” by Moody’s. Only cash and U.S. government obligations are acceptable forms of collateral. Posted collateral may be held either by the Board itself or by a third party custodian that is rated at least “BBB+” by S&P or “Baa1” by Moody’s.

Basis Risk. Basis risk is the risk that the payments received under an interest rate swap transaction do not match the hedged obligation. The Board mitigates this risk with respect to its hedged variable rate bonds by: (i) matching the notional amount and amortization schedule of each transaction to the notional amount and amortization schedule of each related variable rate bond issue, and (ii) selecting an index for the variable rate component of each interest rate swap transaction that is reasonably expected to closely match the interest rate resets on the related variable rate bonds over the life of each bond issue. If the actual variable rate on hedged variable rate bonds is higher than the variable rate payments determined pursuant to the related interest rate swap transaction, the Board will be obligated to pay the difference between the variable rate received under such transaction and the actual variable rate borne by such bonds.

Termination Risk. Termination risk is the risk that an interest rate swap transaction is terminated prior to its scheduled termination date. Either party may terminate an interest rate swap transaction if the other party fails to

5 Prior to the merger of Bear Stearns Financial Products Inc. (“BSFP”) into JPMorgan Chase Bank, N.A.,

approximately 24% of the total notional amount of the Board’s interest rate swap transactions were with BSFP, and approximately 28% were with JPMorgan Chase Bank, N.A. As of December 31, 2010, approximately 48% of the total notional amount of the Board’s interest rate swap transactions is with JPMorgan Chase Bank, N.A.

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perform its payment obligations or violates certain other provisions. In addition, the Board has the right to terminate any of its interest rate swap transactions at any time without cause, and as described above under “THE VETERANS’ LAND BOARD PROGRAMS—Interest Rate Swap Transactions—Variable to Fixed Rate Swaps,” two of the Board’s interest rate swap transactions with “knock out” provisions may be terminated at the option of the counterparty under certain circumstances. If any variable to fixed interest rate swap transaction is terminated, the associated variable rate bonds would no longer have a synthetic fixed rate, and the Board would be subject to interest rate risk to the extent that the variable rate bonds were not hedged with another interest rate swap or other derivative transaction or with variable rate assets in the related fund. In addition, if at the time of termination (other than as the result of the exercise of a counterparty’s “knock out” termination option) the interest rate swap transaction has a fair value to the counterparty, the Board would owe the applicable counterparty a termination payment equal to such fair value, which could be substantial.

Other Veterans’ Land Board Programs

Veterans Homes Program. Pursuant to Chapter 164 of the Texas Natural Resources Code, as amended (“Chapter 164”), the Board has established a program (the “Veterans Homes Program”) to provide veterans homes. A veterans home (“Veterans Home”) is a life care facility, retirement home, retirement village, home for the aging, or other facility that furnishes shelter, food, medical attention, nursing services, medical services, social activities, or other personal services or attention to Veterans.

The Board has authority under Chapter 164 to issue revenue bonds to finance Veterans Homes, and it has issued such bonds (“Veterans Homes Revenue Bonds”) to finance four Veterans Homes, located in Bonham, Big Spring, Floresville and Temple, Texas. The Veterans Homes Revenue Bonds ($22,620,000 in aggregate principal amount of which were outstanding as of December 31, 2010) are payable from and secured by revenues received by the Board from or in connection with these Veterans Homes, money in certain funds and accounts established by the Board, and additional collateral that may be provided by the Board from time to time in the future. Among the funds and accounts established for the Veterans Homes Revenue Bonds is a “Collateral Account” within the Land Fund (which account was funded with $21,000,000 determined by the Board not to be required for purposes of the Land Fund) and which is available to pay principal of and interest on the Veterans Homes Revenue Bonds. On each February 1 and August 1, the Board is required to consider whether additional amounts should be deposited to the credit of the Collateral Account and, if so, whether amounts for such purpose are available in the Land Fund, Housing Fund I, or Housing Fund II. No additional amounts have been found to be necessary, and the Board does not anticipate that additional amounts will be required to be deposited. The Board does not anticipate that amounts in the Collateral Account, or any other amounts from the Land Fund or the Housing Funds, will be required to be used for the purpose of paying principal of or interest on the Veterans Homes Revenue Bonds.

The Board has no current intentions of financing any additional Veterans Homes with bonds, and intends to develop such Veterans Homes as follows. The Board anticipates that the land for any future Veterans Home will be donated, and it intends to fund any such Veterans Home with “excess” assets from the Land Fund or other available sources and with a grant from the United States Department of Veterans’ Affairs (the “VA”). Each grant from the VA is expected to pay for approximately 65% of the construction costs of the related Veterans Home up to the amount of the grant. The Board has constructed Veterans Homes in Amarillo, El Paso and McAllen, Texas that were financed in this manner. The Board currently is constructing another Veterans Home in Tyler, Texas, and will from time to time consider future Veterans Homes in response to the demand for such facilities.

Veterans Cemeteries Program. Pursuant to Chapter 164, the Board has established a program to provide Veterans Cemeteries (the “Veterans Cemeteries Program”). The Board anticipates that the land for any Veterans Cemetery will be donated, and intends to fund the Veterans Cemeteries Program with transfers from the Land Fund and with grants from the VA. The Board does not anticipate that the amount of such transfers from the Land Fund will be material.

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ESTIMATED ANNUAL DEBT SERVICE REQUIREMENTS The following table sets forth for each six-month period indicated the amount required as of August 31, 2010, for the payment of

principal of and interest on the Fund I Housing Assistance Bonds, the Fund II Housing Assistance Bonds, and the Veterans’ Land Bonds, respectively, whether at stated maturity or by mandatory sinking fund redemption.

Fund I Fund II Housing Assistance Bonds Housing Assistance Bonds Veterans' Land Bonds

Six Month Period Ending Principal Interest(A) Principal Interest(A) Principal Interest(A)

6/1/2011 $ 258,719 $6,705,950 $18,530,000 $30,944,394 $ 2,507,703 $ 9,329,600

12/1/2011 6,885,000 6,204,669 24,360,000 30,582,925 10,387,732 10,909,133 6/1/2012 530,403 6,537,236 19,055,000 30,095,395 2,535,620 8,832,369

12/1/2012 7,720,000 6,010,179 24,670,000 29,738,804 12,065,669 8,923,666 6/1/2013 3,478,159 6,337,900 20,460,000 29,255,775 2,697,250 8,455,642

12/1/2013 11,420,000 5,717,599 24,975,000 28,880,420 12,864,586 8,536,494 6/1/2014 3,693,924 5,963,611 19,405,000 28,381,431 2,866,990 8,052,750

12/1/2014 12,280,000 5,323,181 24,690,000 28,019,241 13,711,409 8,118,070 6/1/2015 6,470,000 4,994,976 22,920,000 27,531,434 3,045,498 7,617,319

12/1/2015 15,235,000 4,826,061 26,925,000 27,066,341 14,815,000 7,105,781 6/1/2016 4,750,000 4,418,048 23,040,000 26,504,011 3,633,330 7,141,507

12/1/2016 16,725,000 4,295,378 27,995,000 26,031,684 15,830,000 6,590,934 6/1/2017 4,935,000 3,847,663 27,375,000 25,434,291 4,345,000 6,149,426

12/1/2017 8,190,000 3,720,311 30,100,000 24,843,594 16,925,000 6,024,512 6/1/2018 5,285,000 3,508,761 27,125,000 24,189,398 4,645,000 5,552,269

12/1/2018 7,895,000 3,372,369 29,840,000 23,599,786 18,120,000 5,418,523 6/1/2019 4,795,000 3,168,985 27,640,000 22,931,538 4,980,000 4,912,671

12/1/2019 8,435,000 3,046,026 30,405,000 22,319,109 15,405,000 4,769,158 6/1/2020 5,125,000 2,828,916 22,075,000 21,647,761 5,325,000 4,329,387

12/1/2020 8,975,000 2,697,491 26,700,000 21,176,478 16,440,000 4,175,781 6/1/2021 2,080,000 2,466,417 21,510,000 20,585,281 5,700,000 3,706,123

12/1/2021 5,430,000 2,414,115 28,345,000 20,127,711 17,570,000 3,541,507 6/1/2022 1,690,000 2,275,002 22,635,000 19,482,303 6,095,000 3,072,871

12/1/2022 5,960,000 2,232,925 28,255,000 18,969,772 9,545,000 2,896,641 6/1/2023 1,810,000 2,080,372 23,115,000 18,309,188 6,530,000 2,623,359

12/1/2023 4,895,000 2,035,308 59,110,000 17,778,221 10,185,000 2,434,347 6/1/2024 570,000 1,908,509 22,400,000 16,326,884 5,665,000 2,142,408

12/1/2024 2,765,000 1,893,846 56,615,000 15,825,715 9,490,000 1,973,786 6/1/2025 610,000 1,819,399 25,260,000 14,464,674 4,725,000 1,697,198

12/1/2025 630,000 1,803,707 62,345,000 13,893,473 8,715,000 1,552,954 6/1/2026 -0- 1,787,500 26,260,000 12,386,667 5,070,000 1,295,983

12/1/2026 -0- 1,787,500 26,200,000 11,787,679 9,315,000 1,141,015 6/1/2027 -0- 1,787,500 21,640,000 11,188,844 3,060,000 865,936

12/1/2027 -0- 1,787,500 22,895,000 10,719,189 7,460,000 766,111 6/1/2028 -0- 1,787,500 22,170,000 10,213,688 -0- 541,750

12/1/2028 -0- 1,787,500 22,405,000 9,729,568 4,535,000 541,750 6/1/2029 -0- 1,787,500 21,410,000 9,239,375 -0- 413,791

12/1/2029 -0- 1,787,500 171,160,000 8,771,650 4,805,000 413,791 6/1/2030 -0- 1,787,500 19,705,000 3,433,971 -0- 278,071

12/1/2030 -0- 1,787,500 20,400,000 3,030,611 5,080,000 278,071 6/1/2031 -0- 1,787,500 21,070,000 2,609,069 -0- 134,430

12/1/2031 -0- 1,787,500 17,790,000 2,169,907 2,425,000 134,430 6/1/2032 -0- 1,787,500 14,360,000 1,820,953 -0- 68,951

12/1/2032 -0- 1,787,500 12,460,000 1,565,384 2,550,000 68,951 6/1/2033 -0- 1,787,500 12,495,000 1,336,212 -0- -0-

12/1/2033 55,000,000 1,787,500 11,025,000 1,106,320 -0- -0- 6/1/2034 -0- -0- 8,640,000 904,425 -0- -0-

12/1/2034 -0- -0- 7,535,000 753,209 -0- -0- 6/1/2035 -0- -0- 6,830,000 623,466 -0- -0-

12/1/2035 -0- -0- 6,090,000 506,882 -0- -0- 6/1/2036 -0- -0- 5,575,000 404,565 -0- -0-

12/1/2036 -0- -0- 4,980,000 313,683 -0- -0- 6/1/2037 -0- -0- 4,020,000 233,308 -0- -0-

12/1/2037 -0- -0- 3,340,000 170,585 -0- -0- 6/1/2038 -0- -0- 3,075,000 120,303 -0- -0-

12/1/2038 -0- -0- 1,940,000 74,672 -0- -0- 6/1/2039 -0- -0- 1,065,000 48,326 -0- -0-

12/1/2039 -0- -0- 1,055,000 36,028 -0- -0- 6/1/2040 -0- -0- 1,040,000 23,846 -0- -0-

12/1/2040 -0- -0- 1,025,000 11,836 -0- -0- _________________________

(A) Interest, remarketing fees and liquidity facility fees on the bonds (collectively, the “Tax-Exempt Variable Rate Bonds”) that are listed with a “floating” bond yield in Tables 1 and 3 and that do not include “Taxable” in the name of the bonds are assumed to accrue at the rate of 5.0% per annum. Interest, remarketing fees and liquidity facility fees on the other bonds (together with the Tax-Exempt Variable Rate Bonds, the “Variable Rate Bonds”) that are listed with a “floating” bond yield in Tables 1, 3 or 12 are assumed to accrue at the rate of 6.5% per annum. Interest on the Variable Rate Bonds is subject to a 15% per annum limitation. Bonds that are identified in Tables 1, 3 or 12 with interest rates that represent the Board’s fixed rate obligation under an interest rate swap agreement are assumed to accrue interest at such rates, which do not include any remarketing fees or liquidity facility fees.

B-23

SELECTED UNAUDITED FINANCIAL INFORMATION

The following financial statements relating to the Veterans’ Housing Assistance Fund, the Veterans’ Housing Assistance Fund II and the Veterans’ Land Fund are unaudited and have been prepared in accordance with generally accepted accounting principles for governmental units as prescribed by the Governmental Accounting Standards Board. These financial statements are as of, or for the fiscal year ending, August 31, 2010, as applicable. Comparative figures as of, or for the fiscal year ending, August 31, 2009, as applicable, are also included.

As indicated therein, these financial statements (i) are a recapitulation of data in the Board’s Unaudited Annual Financial Report, and (ii) are derived from financial statements that have been reviewed by the State auditors as part of the reviews done in compiling the Texas Comprehensive Annual Financial Report (CAFR), Audited GAAP Edition. The scope of agency reviews do not constitute overall agency audits, and accordingly, the information is considered unaudited at the agency level.

In the opinion of the Board, there have been no material adverse changes in the financial condition of Housing Fund I, Housing Fund II or the Land Fund since August 31, 2010.

B-24

TEXAS GENERAL LA ND OFFICE U NAUDITED (1)

AND VETERA NS' LAN D BOARD

STATEMENT OF NET ASSETSALL HO USING FUND I SERIESAugust 31, 2010(With comparative memorandum totals for August 31, 2009)

TOTALS2010 2009

ASSE TS $ $

Current Assets: Cash and Ca sh Equivalents: Cash in State Treasury 19,977,457.91 22,836,194.97 Cash Equiva lents 106,477,335.57 73,790,203.38 Securities Lending Collateral 303,000.00 15,515,785.00 Investments - Securities at Market Value 0.00 7,583,077.70 Loans R ec eiva ble: Housing Mortgages 10,072,022.72 10,491,221.49 Home Improvement Loans 325,207.90 305,097.97 Interest and Dividends Receivable: Investment Interest 192,529.94 292,497.69 Interest on Housing Mortgages 1,514,163.01 2,923,650.42 Interest on Home Improvement Loans 34,824.85 63,154.84 Accounts Receivable (Net of Allowance for Uncollectables) 18,283.48 21,369.83 Due from Other Funds 13,707,956.44 14,212,558.07Total Current Assets 152,622,781.82 148,034,811.36

Non-Current Assets: Investments - Securities at Market Value 49,729,991.60 44,827,207.92 Deferred Outflow of Resources 36,528,907.00 0.00 Loans R ec eiva ble: Housing Mortgages 300,960,086.62 338,318,790.97 Home Improvement Loans 3,875,552.01 3,552,994.66 Property Acquired Through Foreclosure - Housing Mortgages 449,403.14 21,308.25Total Non-Current Assets 391,543,940.37 386,720,301.80

TOTAL ASSETS 544,166,722.19 534,755,113.16

LIAB ILITIES

Current Liabilities: Vouchers and Accounts Payable 365,571.48 407,610.79 Debt Service Interest Pa yable 391,822.60 708,896.95 Due to Other Funds 13,710,097.62 14,268,166.69 Bonds Payable (Net of Unamortized Discounts and Premiums): General Obligation 21,748,719.20 23,998,175.20 Ac cretion 501,280.80 481,824.80 Obligations Under Securities Lending 303,000.00 15,515,785.00Total Current Lia bilities 37,020,491.70 55,380,459.43

Non-Current Liabilities: Bonds Payable (Net of Unamortized Discounts and Premiums): General Obligation 224,262,486.00 246,011,205.20 Ac cretion 1,196,740.05 1,495,432.42 Hedging Derivative Instrument 36,528,907.00 0.00Total Non-Current Liabilities 261,988,133.05 247,506,637.62

TOTAL LIABILITIES 299,008,624.75 302,887,097.05

B-25

TEX A S GE N ER A L LA N D OF F I C E U N A U D IT ED ( 1)

A N D V ET ER A N S' LA N D B O A R D

ST AT E M EN T O F N E T ASSE T S (con clud ed)AL L HO U SIN G F U N D I SE RI ESA ug us t 31 , 20 10(W it h com p ara t iv e m em oran d um to ta l s fo r A ug us t 31 , 2 0 09 )

T OT ALS2 01 0 2 00 9

N E T A S SE T S $ $

In ves ted i n C api tal As s et s , N et o f R el ated D ebtR es tri ct ed fo r t he Vetera ns ' Lan d B oard 2 45 ,1 58 ,0 97 .4 4 2 31 ,8 68 ,0 16 .1 1

T OT A L NE T A SS E TS 2 45 ,1 58 ,0 97 .4 4 2 31 ,8 68 ,0 16 .1 1

(1 )T he fi nan ci al da ta is a recap i tu la t io n o f d a t a in t he Ag ency 's Un aud i ted F inan ci al repo rt. T he fi nan c ia l dat a is d eriv ed fro m finan ci al st at em en t s th a th av e b een reviewed b y th e S t at e A ud itors a s part o f th e rev iews do ne in com p il in g th e Texa s C om p rehen si ve An n ual F i nan c ia l R epo rt (C AF R ),A ud i ted GA AP E di ti o n. Th e s cop e of th e agen cy rev iew s d o no t c on st itut e o vera l l ag ency aud i ts an d therefo re th e i nfo rm ation i s co ns id eredu n aud it ed at th e ag ency lev e l.

B-26

TEXAS GENERAL LAND OFFICE UNAUDITED (1)

AND VETERANS' LAND BOARD

STATEMENT OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS ALL HOUSING FUND I SERIESFor the Year Ended August 31, 2010(With comparative memorandum totals for the year ended August 31, 2009)

TOTALS2010 2009

OPERATING REVENUES $ $

Interest on Housing Mortgages 15,841,048.75 18,395,664.88Interest on Home Improvement Loans 181,589.87 210,470.74Gain (Loss) on Mortgage and Home Improvement Loans 2,431,727.77 (536,312.91)Other Revenues 87.39 0.00

TOTAL OPERATING REVENUES 18,454,453.78 18,069,822.71

OPERATING EXPENSES

Professional Fees and Services 319,715.72 325,059.66Debt Service Interest 10,464,073.81 15,061,923.73Other Operating Expenses 923,492.98 417,218.41

TOTAL OPERATING EXPENSES 11,707,282.51 15,804,201.80

OPERATING INCOME (LOSS) 6,747,171.27 2,265,620.91

NONOPERATING REVENUES (EXPENSES)

Investment Income 1,450,365.65 2,106,316.65Net Increase (Decrease) Fair Value 4,091,868.31 1,958,681.60Borrower Rebate/Agent Fees - Securities Lending (16,910.90) (71,139.06)

TOTAL NONOPERATING REVENUE (EXPENSES) 5,525,323.06 3,993,859.19

INCOME (LOSS) BEFORE OTHER REVENUES,(EXPENSES), GAINS/(LOSSES), AND TRANSFERS 12,272,494.33 6,259,480.10

OTHER REVENUES, (EXPENSES), GAINS/(LOSSES), AND TRANSFERS

Transfers In 10,805,499.92 29,079,748.20Transfers Out (9,787,912.92) (31,614,024.44)

TOTAL OTHER REVENUES, (EXPENSES), GAINS/(LOSSES), AND TRANSFERS 1,017,587.00 (2,534,276.24)

CHANGE IN NET ASSETS 13,290,081.33 3,725,203.86

NET ASSETS - August 31, 2009 231,868,016.11 228,142,812.25

NET ASSETS - August 31, 2010 245,158,097.44 231,868,016.11

(1 )

The financial data is a recapitulation of data in the Agency's Unaudited Financial report. The financial data is derived from financial statements thathave been reviewed by the State Auditors a s part of the reviews done in compiling the Texas Comprehensive Annual Financial Report (CAFR),Audited GAAP Edition. The scope of the agency reviews do not constitute overall agency audits and therefore the information is consideredunaudited at the agency level.

B-27



STATEMENT OF CASH FLOWSALL HOUSING FUND I SERIESFor the Year Ended August 31, 2010(With comparative memorandum totals for the year ended August 31, 2009)

TOTALS2010 2009

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ $

OPERATING ACTIVITIES

Receipts from Loan Payments 141,575,143.69 359,124,233.90Fundings for Mortgage and Home Improvement Loans (84,790,483.33) (264,320,465.44)Payments to Suppliers of Goods and Services (1,220,877.33) (779,475.86)

NET CASH PROVIDED BY OPERATING ACTIVITIES 55,563,783.03 94,024,292.60

NONCAPITAL FINANCING ACTIVITIES Payments for Debt Service - Principal (24,480,000.00) (9,005,000.00)Payments for Debt Service - Interest (10,578,559.73) (15,272,643.56)Transfers from Other Funds 11,289,761.05 28,301,578.51Transfers to Other Funds (10,272,174.05) (30,834,763.31)

NET CASH PROVIDED BY NONCAPITAL FINANCING ACTIVITIES (34,040,972.73) (26,810,828.36)

INVESTING ACTIVITIES

Proceeds from Interest and Investment Income 1,814,079.18 2,791,704.71Proceeds from the Sale of Investments 30,479,304.28 22,761,932.50Payments to Acquire Investments (23,987,798.63) (17,348,546.27)

NET CASH PROVIDED BY INVESTING ACTIVITIES 8,305,584.83 8,205,090.94

INCREASE (DECREASE) IN CASH 29,828,395.13 75,418,555.18

CASH AND CASH EQUIVALENTS - August 31, 2009 96,626,398.35 21,207,843.17

CASH AND CASH EQUIVALENTS - August 31, 2010 126,454,793.48 96,626,398.35-to next page

B-28



ST AT E M EN T O F C ASH FL O W S (co nc lu ded )AL L HO U SIN G F U N D I SE RI ESFo r th e Y ear E nd ed Au gu st 3 1, 2 01 0(W it h com p ara t iv e m em oran d um to ta l s fo r t he year en ded A ug us t 31 , 2 0 09 )

T OT ALS2 01 0 2 00 9

R E C ON C IL IA T IO N OF OP E R A T IN G I NC O M E T O $ $ N E T C A S H P R OV I DE D B Y O PE R A T IN G A C TI V IT IE S

O PE R A TI NG I NC O M E (L OS S) 6 ,7 47 ,1 71 .2 7 2 ,2 65 ,6 20 .9 1

A D JU ST M E NT S T O R E C ON C IL E O PE R A TI NG I NC O M E T O NE T C A SH PR O V ID E D B Y O PE R A TI NG A C T IV I TI E S

C l ass i fi cat io n Di fferences 10 ,4 64 ,0 73 .8 1 15 ,0 61 ,9 23 .7 3(In crease) D ecrease in R ecei vab les 1 ,4 40 ,9 03 .7 5 53 ,0 77 ,8 41 .7 4(In crease) D ecrease in Lo ans an d C on t rac ts 37 ,4 35 ,2 35 .8 4 23 ,4 08 ,1 18 .2 5(In crease) D ecrease in O th er As se t s (4 07 ,7 54 .3 9 ) 2 79 ,2 28 .8 7In crease (D ecrease) in Paya bl es (42 ,0 39 .3 1 ) (52 ,8 43 .9 0 )In crease (D ecrease) in O th er Li abi li t ies (73 ,8 07 .9 4 ) (15 ,5 97 .0 0 )

T OT A L A DJ U S TM E N TS 48 ,8 16 ,6 11 .7 6 91 ,7 58 ,6 71 .6 9

N E T C A S H P R OV I DE D B Y O PE R A T I NG A C T IV IT IE S 55 ,5 63 ,7 83 .0 3 94 ,0 24 ,2 92 .6 0

N ON -C A SH T R A N SA C TI ON S

C ap i ta l Ap p rec ia t io n B on d In teres t Accre t io n (2 02 ,5 88 .4 3 ) (2 36 ,9 51 .4 3 )C h an ge in F air Val ue o f In vest m en ts (8 48 ,9 23 .2 5 ) 1 ,6 94 ,4 89 .1 4

T OT A L NO N-C A SH TR A NSA C T IO NS (1 ,0 51 ,5 11 .6 8 ) 1 ,4 57 ,5 37 .7 1

(1 )T he fi nan ci al da ta is a recap i tu la t io n o f d a t a in t he Ag ency 's Un aud i ted Finan ci al repo rt. T he fi nan cia l dat a is d eriv ed fro m finan ci al st at em en t s th a th av e b een reviewed b y th e St at e A ud itors a s part o f th e rev iews do ne in com p il in g th e Texa s C om p rehen si ve An n ual F i nan cia l R epo rt (C AF R ),A ud i ted GA AP E di ti o n. Th e s cop e of th e agen cy rev iew s d o no t c on st itute o vera l l ag ency aud i ts an d therefo re th e i nfo rm ation i s co ns id eredu n aud it ed at th e ag ency lev e l.

B-29

TEX AS GE NER AL LA ND OFFICE U NAUDIT ED ( 1)

AND VET ERA NS' LAN D BOARD

STATE MENT OF NE T ASSE TSALL HO USING FUND II SER IESA ugust 31, 2010(W ith comparative memorandum totals for A ugust 31, 2009)

TOTALS2010 2009

ASSE TS $ $

Current A ssets: Cash and Ca sh Equ ivalents : Cash in State Treasury 43 ,863,552.37 47,012 ,037.60 Cash Equiva len ts 94 ,228,012.92 6,287 ,486.69 Securit ies L end ing Collateral 5 ,225,000.00 0.00 D erivative Instruments 8,395.67 0.00 Loans R ec eiva ble: H ousing Mortgages 37 ,606,379.80 35,907 ,005.18 H ome Improvement Loans 227,325.35 141 ,018.69 In terest and Dividends Receivable: Investment In terest 97,147.64 81 ,913.49 Interest on Housing Mortgages 6 ,912,298.06 6,670 ,023.56 Interest on Home Improvement Loans 26,533.56 14 ,142.65 A ccounts Receivable (N et of A llowance fo r Uncollectables) 0 .00 37 ,693.27 D ue from O ther Funds 7,435.03 429 ,549.70Total Current Assets 188 ,202,080.40 96,580 ,870.83

N on-Curren t Assets: Investments - Securit ies at Market Value 12 ,610,154.75 6,040 ,371.95 D erivative Instruments 342,119.76 0.00 D eferred O utflow of Resources 206 ,531,226.00 0.00 Loans R ec eiva ble: H ousing Mortgages 1,359 ,631,426.98 1,344,336 ,977.63 H ome Improvement Loans 4 ,659,502.58 2,697 ,448.64 Property A cquired Through Foreclosure - Housing Mortgages 806,256.03 424 ,620.91Total Non-Current A ssets 1 ,584 ,580,686.10 1,353,499 ,419.13

TOTAL ASSETS 1,772 ,782,766.50 1,450,080 ,289.96

LIAB ILITIES

Current L iabilit ies: V ouchers and Accounts Payable 2 ,160,995.92 2,236 ,651.09 D ebt Service In terest Pa yab le 3 ,759,474.91 5,020 ,235.42 D ue to Other Funds 5,286.00 373 ,756.06 Bonds Payable (Net of Unamortized D iscounts and Premiums): General Obligation 54 ,972,625.12 52,678 ,852.24 O bligations Under Securi ties Lending 5 ,225,000.00 0.00Total Current Lia bili ties 66 ,123,381.95 60,309 ,494.81

N on-Curren t Liabilit ies : Bonds Payable (Net of Unamortized D iscounts and Premiums): General Obligation 1,364 ,453,352.95 1,209,984 ,792.61 Acc retion H edging Derivative Ins trument 206 ,531,226.00 0.00Total Non-Current Liabil it ies 1,570 ,984,578.95 1,209,984 ,792.61

TOTAL LIABILITIES 1,637 ,107,960.90 1,270,294 ,287.42

B-30



ST AT E M EN T O F N E T ASSE T S (con clud ed)AL L HO U SIN G F U N D II SER IESA ug us t 31 , 20 10(W it h com p ara t iv e m em oran d um to ta l s fo r A ug us t 31 , 2 0 09 )

T OT ALS2 01 0 2 00 9

N E T A S SE T S $ $

In ves ted i n C api tal As s et s , N et o f R el ated D ebtR es tri ct ed fo r t he Vetera ns ' Lan d B oard 1 35 ,6 74 ,8 05 .6 0 1 79 ,7 86 ,0 02 .5 4

T OT A L NE T A SS E TS 1 35 ,6 74 ,8 05 .6 0 1 79 ,7 86 ,0 02 .5 4

(1 )

T he fi nan ci al da ta is a recap i tu la t io n o f d a t a in t he Ag ency 's Un aud i ted F inan ci al repo rt. T he fi nan c ia l dat a is d eriv ed fro m finan ci al st at em en t s th a th av e b een reviewed b y th e S t at e A ud itors a s part o f th e rev iews do ne in com p il in g th e Texa s C om p rehen si ve An n ual F i nan c ia l R epo rt (C AF R ),A ud i ted GA AP E di ti o n. Th e s cop e of th e agen cy rev iew s d o no t c on st itut e o vera l l ag ency aud i ts an d therefo re th e i nfo rm ation i s co ns id eredu n aud it ed at th e ag ency lev e l.

B-31



ST AT E M EN T O F R EV EN U E S, EX PE N SE S, AN D C HA N G E S IN N E T A SSE T S AL L HO U SIN G F U N D II SER IESFo r th e Y ear E nd ed Au gu st 3 1, 2 01 0(W ith com p arat iv e m em oran d um to tal s fo r t he year en ded A ug us t 31 , 2 0 09 )

T OT ALS2 01 0 2 00 9

O PER ATI NG REVE N UES $ $

In teres t o n Ho us in g M ortga ges 61 ,8 15 ,8 86 .5 8 63 ,4 66 ,7 41 .7 6In teres t o n Ho m e Im pro vem en t Loan s 1 44 ,8 29 .8 1 97 ,1 14 .1 0G ain (Lo ss ) o n M ortgag e an d Ho m e Im pro vem en t L oan s 56 ,0 39 .0 6 (2 ,1 15 ,5 00 .5 8 )

T OT AL OP ERAT IN G R EVENU ES 62 ,0 16 ,7 55 .4 5 61 ,4 48 ,3 55 .2 8

O PER ATI NG EXP E NSES

Pro fess io nal Fees and Serv ices 2 ,2 17 ,3 22 .1 7 1 ,4 27 ,6 15 .7 3Print i ng an d Repro du ctio n 4 ,1 38 .3 0 1 ,2 20 .9 3D ebt Serv ice In teres t 47 ,9 65 ,6 72 .8 5 64 ,2 79 ,4 53 .3 4O th er O perat in g Ex pen ses 5 ,3 68 ,3 41 .8 0 2 ,1 61 ,8 30 .7 9

T OT AL OP ERAT IN G E XPEN SES 55 ,5 55 ,4 75 .1 2 67 ,8 70 ,1 20 .7 9

O PER ATI NG I NCO M E (L OSS) 6 ,4 61 ,2 80 .3 3 (6 ,4 21 ,7 65 .5 1 )

N ON OP ER AT IN G REV ENU ES (EXP ENSES)

In ves tm en t In com e 8 75 ,8 33 .3 4 6 70 ,4 98 .3 7N et In crease (Decreas e) Fair Value 1 ,5 09 ,7 63 .2 2 1 76 ,5 86 .5 9Bo rrow er Reba te/Agen t Fees - Securi ti es Len ding (5 ,5 95 .3 3 ) (30 ,4 26 .7 9 )

T OT AL NO NO PER ATI NG REVEN UE (EXPE N SES) 2 ,3 80 ,0 01 .2 3 8 16 ,6 58 .1 7

I NCO M E (L OSS) BEFO RE O TH ER REVENU E S,(EX P EN SES), G AIN S/(L O SSES), AN D TR AN SFER S 8 ,8 41 ,2 81 .5 6 (5 ,6 05 ,1 07 .3 4 )

O TH ER REVE NU ES, (EXPE NSES), GAI NS/(LO SSES), AND T RA NSFER S

T rans fers In 38 ,2 92 ,8 14 .0 0 70 ,8 86 ,6 00 .0 0T rans fers Ou t (92 ,2 07 ,6 52 .5 0 ) (1 03 ,2 32 ,3 91 .7 5 )

T OT AL OT H ER R EVE NU ES, (EXP EN SES), G AIN S/(L OSSE S), AN D TRAN SF ERS (53 ,9 14 ,8 38 .5 0 ) (32 ,3 45 ,7 91 .7 5 )

CH A NG E IN N ET ASSETS (45 ,0 73 ,5 56 .9 4 ) (37 ,9 50 ,8 99 .0 9 )

N ET ASSET S - Aug ust 3 1, 2 00 9 1 79 ,7 86 ,0 02 .5 4 2 17 ,7 36 ,9 01 .6 3

Res tatem en ts 9 62 ,3 60 .0 0

N ET ASSET S - Aug ust 3 1, 2 00 9, a s R estat ed 1 80 ,7 48 ,3 62 .5 4 2 17 ,7 36 ,9 01 .6 3

N ET ASSET S - Aug ust 3 1, 2 01 0 1 35 ,6 74 ,8 05 .6 0 1 79 ,7 86 ,0 02 .5 4

(1 )T he finan cial dat a is a recap i tu lat io n o f d at a in the Ag ency 's Un aud i ted Finan cial repo rt. T he finan ci al dat a is d eriv ed fro m finan cial st at em en t s th ath av e b een revi ewed b y th e St at e A ud itors a s part o f th e rev iews do ne in com p il in g th e Texa s Com p rehen sive An n ual Finan ci al Repo rt (CAFR),A ud i ted GA AP E di tio n. Th e s cop e of th e agen cy rev iew s d o no t c on st it ut e o veral l ag ency aud i ts an d therefo re th e info rm ation i s co ns id eredu n aud it ed at th e ag ency lev el.

B-32



STATEMENT OF CASH FLOWSALL HOUSING FUND II SERIESFor the Year Ended August 31, 2010(With comparative memorandum totals for the year ended August 31, 2009)

TOTALS2010 2009

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ $


Receipts from Loan Payments 214,480,724.72 265,437,118.40Fundings for Mortgage and Home Improvement Loans (172,569,943.76) (208,116,309.40)Payments to Suppliers of Goods and Services (7,181,472.42) (3,572,849.27)

NET CASH PROVIDED BY OPERATING ACTIVITIES 34,729,308.54 53,747,959.73

NONCAPITAL FINANCING ACTIVITIES Proceeds from Debt Issuance 362,436,317.00 102,930,861.50Payments for Debt Service - Principal (204,885,000.00) (39,745,000.00)Payments for Debt Service - Interest (49,955,574.89) (64,946,188.22)Transfers from Other Funds 38,292,814.00 70,886,600.00Transfers to Other Funds (92,207,652.50) (103,232,391.75)

NET CASH PROVIDED BY NONCAPITAL FINANCING ACTIVITIES 53,680,903.61 (34,106,118.47)


Proceeds from Interest and Investment Income 920,499.63 974,619.38Proceeds from the Sale of Investments 75,990,000.00 14,120,513.94Payments to Acquire Investments (80,528,670.78) (12,695,775.00)

NET CASH PROVIDED BY INVESTING ACTIVITIES (3,618,171.15) 2,399,358.32

INCREASE (DECREASE) IN CASH 84,792,041.00 22,041,199.58



-to next page

B-33



ST AT E M EN T O F C ASH FL O W S (co nc lu ded )AL L HO U SIN G F U N D II SER IESFo r th e Y ear E nd ed Au gu st 3 1, 2 01 0(W it h com p ara t iv e m em oran d um to ta l s fo r t he year en ded A ug us t 31 , 2 0 09 )

T OT ALS2 01 0 2 00 9

R E C ON C IL IA T IO N OF OP E R A T IN G I NC O M E T O $ $ N E T C A S H P R OV I DE D B Y O PE R A T IN G A C TI V IT IE S

O PE R A TI NG I NC O M E (L OS S) 6 ,4 61 ,2 80 .3 3 (6 ,4 21 ,7 65 .5 1 )

A D JU ST M E NT S T O R E C ON C IL E O PE R A TI NG I NC O M E T O NE T C A SH PR O V ID E D B Y O PE R A TI NG A C T IV I TI E S

C l ass i fi cat io n Di fferences 47 ,9 65 ,6 72 .8 5 64 ,2 79 ,4 53 .3 4(In crease) D ecrease in R ecei vab les (2 51 ,8 14 .3 9 ) 6 33 ,3 42 .1 4(In crease) D ecrease in Lo ans an d C on t rac ts (19 ,0 42 ,1 84 .5 7 ) (4 ,3 28 ,9 85 .1 9 )(In crease) D ecrease in O th er As se t s 40 ,4 79 .5 5 (5 91 ,5 74 .8 5 )In crease (D ecrease) in Paya bl es (75 ,6 55 .1 7 ) 1 41 ,7 59 .6 6In crease (D ecrease) in O th er Li abi li t ies (3 68 ,4 70 .0 6 ) 35 ,7 30 .1 4


N E T C A S H P R OV I DE D B Y O PE R A T I NG A C T IV IT IE S 34 ,7 29 ,3 08 .5 4 53 ,7 47 ,9 59 .7 3

N ON -C A SH T R A N SA C TI ON S

C h an ge in F air Val ue o f In vest m en ts 1 ,5 09 ,7 63 .2 2 1 76 ,5 86 .5 9

T OT A L NO N-C A SH TR A NSA C T IO NS 1 ,5 09 ,7 63 .2 2 1 76 ,5 86 .5 9

(1 )T he fi nan ci al da ta is a recap i tu la t io n o f d at a in t he Ag ency 's Un aud i ted Finan ci al repo rt. T he fi nan cia l dat a is d eriv ed fro m finan ci al st at em en t s th a th av e b een reviewed b y th e St at e A ud itors a s part o f th e rev iews do ne in com p il in g th e Texa s C om p rehen si ve An n ual F i nan cia l R epo rt (C AF R ),A ud i ted GA AP E di ti o n. Th e s cop e of th e agen cy rev iew s d o no t c on st itute o vera l l ag ency aud i ts an d therefo re th e i nfo rm ation i s co ns id eredu n aud it ed at th e ag ency lev el.

B-34

TEX AS GE NER AL LA ND OFFI CE UN AUDIT ED ( 1)

AND VET ERA NS' LAN D B O ARD

STATE M ENT OF NE T ASSE TSALL LAND PRO GRA M F UNDSA ug ust 31 , 20 10(W ith comp arat ive to ta ls for Aug u st 3 1, 20 0 9)

TO TA LS20 10 20 0 9

ASSE TS $ $

Cu rrent A ssets : Cash and Ca sh Eq u iv alen ts : Cash in State Treasury 1 8, 37 8, 413 .52 3, 68 0, 58 4 .84 Cash Eq uiva len ts 7 3, 46 4, 938 .03 3 3, 24 8, 43 2 .64 Securit ies L en din g Col lateral 2 2, 54 7, 375 .12 8 4, 49 8, 41 2 .50 In vestmen ts - Secu rit ies at Mark et Value 4, 99 2, 687 .50 4 9, 74 6, 23 5 .68 Lo an s R ec eiva bles: Lan d Co ntracts 1 3, 56 0, 889 .81 1 3, 95 9, 85 9 .13 Lan d Mo rtg ages 1, 03 1, 923 .32 38 9, 19 2 .79 In terest an d Divid end s Receiv able: Inv estment In teres t 76 0, 767 .80 79 8, 79 0 .58 Lan d Co ntracts 3, 05 4, 163 .61 2, 75 1, 30 1 .41 Lan d Mo rtg ages 28 5, 412 .33 15 2, 10 0 .01 A ccou nts Receiv able (N et o f A llo wan ce fo r Un co llectab les ) 75 6, 687 .99 44 4, 86 9 .52 D ue fro m O th er Fu nd s 1 2, 88 0, 052 .85 8, 08 5, 69 3 .01T otal Curren t Assets 1 5 1, 71 3, 311 .88 19 7, 75 5, 47 2 .11

N on curren t Assets: In vestmen ts - Secu rit ies at Mark et Value 1 9 3, 60 1, 265 .27 16 3, 37 5, 48 8 .42 D eriv ative In st ru ments (2, 01 3, 576 .88 ) 0 .00 D eferred O utflow of Resou rces 7 5, 11 7, 582 .00 0 .00 Lo an s R ec eiva bles: Lan d Co ntracts 2 3 9, 81 2, 309 .24 27 3, 78 6, 21 0 .51 Lan d Mo rtg ages 6 3, 86 9, 255 .86 3 7, 44 9, 34 6 .66 Pro perty A cqu ired T hro ug h Foreclosure Lan d Co ntracts 97 3, 646 .46 1, 83 7, 44 9 .17 D epreciable Capital Assets: Furni tu re an d Eq uip ment 0 .00 16 2, 57 8 .15 Less A ccumula ted Dep recia tion 0 .00 (5 7, 74 7 .23 ) N on-Dep reciab le Capi tal A ssets : Amort izab le In tang ib le Assets: Compu ter Software 16 2, 578 .15 0 .00 Less Accu mulated A mort izat io n (9 0, 262 .43 ) 0 .00T otal No ncu rrent A ssets 5 7 1, 43 2, 797 .67 47 6, 55 3, 32 5 .68

T OT AL ASSET S 7 2 3, 14 6, 109 .55 67 4, 30 8, 79 7 .79

L IAB IL IT IES

Cu rrent L iab il it ies: A ccou nts Payab le 4, 74 6, 773 .63 68 3, 52 3 .13 D ebt Service In teres t Pa yab le 64 1, 065 .81 67 8, 65 3 .10 D ue to Oth er Fun ds 1 1, 51 8, 952 .23 8, 01 5, 52 0 .98 D eferred Rev enu es 15 2, 680 .17 11 4, 73 8 .23 Bo nd s Payab le (Net of Un amort ized D iscou nts an d Premiu ms): Gen eral Ob ligat io n 1 0, 58 3, 337 .48 1 7, 52 6, 56 7 .37 Acc ret ion 4, 54 0, 662 .52 5, 90 6, 43 2 .63 O blig ation s Un der Securi t ies Len ding 2 2, 54 7, 375 .12 8 4, 49 8, 41 2 .50T otal Curren t Lia bi li ties 5 4, 73 0, 846 .96 11 7, 42 3, 84 7 .94

-to n ext p age

B-35



ST AT E M EN T O F N E T ASSE T SAL L L AN D P RO G RA M F U N D SA ug us t 31 , 20 10(W it h com p arat iv e to ta ls for Aug u st 3 1, 20 0 9)

TO TA LS20 10 20 0 9

L IA B IL IT IE S (con t in u e d) $ $N on cu rren t Li abi li t ies : B o nd s P ayab le (Net of Un am ort ized D is cou nt s an d P rem i u m s): Gen eral Ob li gat io n 3 0 9, 15 8, 08 2 .06 31 9, 74 1, 41 9 .54 Acc ret i on 4, 41 1, 99 4 .18 7, 95 5, 86 6 .03 H edg in g Deri vat iv e Ins tru m en ts 7 5, 11 7, 58 2 .00 0 .00T ot al No ncu rrent Li ab il it ies 3 8 8, 68 7, 65 8 .24 32 7, 69 7, 28 5 .57

T OT A L LI A B I LI TI E S 4 4 3, 41 8, 50 5 .20 44 5, 12 1, 13 3 .51

N E T A S S E T S

In ves ted i n C api tal As s et s , N et o f R el a ted D ebt 7 2, 31 5 .72 16 2, 57 8 .15R es tri c t ed fo r t he Vet era ns ' Lan d B oard 2 7 9, 65 5, 28 8 .63 22 9, 02 5, 08 6 .13

T OT A L NE T A S SE TS 2 7 9, 72 7, 60 4 .35 22 9, 18 7, 66 4 .28

(1 )T he fi n anci a l dat a is a recap it ul a t io n o f dat a i n t he Agen cy's U na ud it ed Fi n anci a l rep ort . Th e fin anci a l dat a is d eriv ed fro m fin an cia l st a tem en tst h at hav e b een revi ewed by t he S ta t e A ud i to rs a s part o f t he rev i ew s do ne in co m p il in g th e T exas C om preh ens iv e An n ual F i nan cia l R ep ort (C A F R ),A ud i ted G AA P E d it io n. Th e s cop e of t he agen cy rev iews do n o t con s ti tu te ov erall agen cy aud i ts an d t h erefo re th e i nfo rm at io n i s con si d eredu n aud it ed a t th e ag ency lev el.

B-36



ST AT E M EN T O F R EV EN U E S, EX PE N S E S, AN D C HA N G E S IN N E T A SSE T S AL L L AN D P RO G RA M F U N D SFo r th e Y ear E nd ed Au gu st 3 1, 2 01 0(W it h com p ara t iv e to ta ls for th e year en d ed A ug u st 3 1, 20 0 9)

T OT ALS2 01 0 2 00 9

O PE R A TI NG R E V E N UE S $ $

In te res t o n Lan d C on trac t s 23 ,1 98 ,4 08 .5 5 23 ,9 66 ,2 67 .5 8G ain (Lo ss ) o n Lan d C on trac t s 5 86 ,9 83 .2 8 6 39 ,5 82 .3 4M is ce llan eou s Inco m e 44 ,8 83 .3 4 61 ,5 43 .6 7

T OT A L OP E R A T IN G R E V E NU E S 23 ,8 30 ,2 75 .1 7 24 ,6 67 ,3 93 .5 9

O PE R A TI NG E X P E NSE S

Pro fess io nal Fees and Serv ices 1 ,2 05 ,4 07 .0 7 1 ,2 43 ,3 55 .6 2T ravel 2 67 .2 8 5 22 .6 0M at eri a ls an d Su p pl ies 5 82 .2 4 0 .0 0R ep ai rs an d M ai nt enan ce 22 ,0 05 .0 0 0 .0 0R en ta l o f Fu rni sh in gs an d Eq u ip m ent 2 ,7 66 .2 0 0 .0 0Print i ng an d R epro du c tio n 2 90 ,9 35 .9 4 0 .0 0D epreci at io n a nd Am o rti za t io n 32 ,5 15 .2 0 32 ,4 13 .0 8D ebt Serv ice In teres t 16 ,0 52 ,7 09 .0 2 24 ,3 40 ,6 52 .1 1O th er O pera t in g Ex pen ses 1 ,6 02 ,7 95 .2 9 1 ,4 55 ,8 92 .1 2

T OT A L OP E R A T IN G E X PE N S E S 19 ,2 09 ,9 83 .2 4 27 ,0 72 ,8 35 .5 3


N ON OP E R A T IN G R E V E NU E S (E X P E NSE S )

In ves tm en t In com e 4 ,2 11 ,0 65 .4 5 5 ,6 00 ,8 43 .0 5N et In crease (Decreas e) in Fa i r V alu e of In ves tm en t s 9 ,7 06 ,2 78 .4 1 4 ,4 93 ,8 55 .3 4B o rrow er R eba te /Agen t Fees - Securi ti es Len di ng (92 ,1 95 .4 7 ) (4 57 ,5 39 .6 8 )

T OT A L NO NO PE R A TI NG R E V E N UE (E X PE N S E S) 13 ,8 25 ,1 48 .3 9 9 ,6 37 ,1 58 .7 1

I NC O M E (L OSS) B E F O R E O TH E R R E V E NU E S ,(E X P E N S E S), G A IN S / (L O S SE S), A N D TR A N S F E R S 18 ,4 45 ,4 40 .3 2 7 ,2 31 ,7 16 .7 7

O TH E R R E V E NU E S, (E X PE NSE S ), GA I NS/ (LO SS E S), A ND T R A NSF E R S

T rans fers In 88 ,0 54 ,2 61 .8 5 1 26 ,0 83 ,4 41 .3 3T rans fers Ou t (54 ,7 89 ,2 93 .1 0 ) (1 12 ,2 55 ,9 02 .7 4 )

T OT A L OT H E R R E VE NU E S , (E X P E N SE S ), G A IN S/(L OSSE S ), A N D TR A N SF E R S 33 ,2 64 ,9 68 .7 5 13 ,8 27 ,5 38 .5 9

C H A NG E IN N E T A S SE TS 51 ,7 10 ,4 09 .0 7 21 ,0 59 ,2 55 .3 6

N E T A S SE T S , A U GU ST 31 , 2 0 09 2 29 ,1 87 ,6 64 .2 8 2 08 ,1 28 ,4 08 .9 2

R es tat em en ts (1 ,1 70 ,4 69 .0 0 ) 0 .0 0

N E T A S SE T S , A u g ust 3 1, 2 00 9, a s R est at ed 2 28 ,0 17 ,1 95 .2 8 2 08 ,1 28 ,4 08 .9 2

N E T A S SE T S , A u g ust 3 1, 2 01 0 2 79 ,7 27 ,6 04 .3 5 2 29 ,1 87 ,6 64 .2 8

(1 ) T he fi nan ci al da ta is a recap i tu la t io n o f d a t a in t he Ag ency 's Un aud i ted F inan ci al repo rt. T he fi nan c ia l dat a is d eriv ed fro m finan ci al st at em en t s th a th av e b een reviewed b y th e S t at e A ud itors a s part o f th e rev iews do ne in com p il in g th e Texa s C om p rehen si ve An n ual F i nan c ia l R epo rt (C AF R ),A ud i ted GA AP E di ti o n. Th e s cop e of th e agen cy rev iew s d o no t c on st itut e o vera l l ag ency aud i ts an d therefo re th e i nfo rm ation i s co ns id eredu n aud it ed at th e ag ency lev e l.

B-37



STATEMENT OF CASH FLOWSALL LAND PROGRAM FUNDSFor the Year Ended August 31, 2010(With comparative totals for the year ended August 31, 2009)

TOTALS2010 2009

INCREASE (DECREASE) IN $ $CASH AND CASH EQUIVALENTS


Receipts from Loan Payments 31,668,755.77 40,029,612.45Fundings for Land Loans (395,986.49) (520,005.87)Payments to Suppliers of Goods and Services (3,368,678.22) (2,362,083.81)Payments for Other Expenses (5,646.85) (522.60)

NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 27,898,444.21 37,147,000.17

NONCAPITAL FINANCING ACTIVITIES

Payments for Debt Service - Principal 1055, 1065 (23,433,000.00) (22,795,000.00)Payments for Debt Service - Interest 7814 (15,093,505.64) (22,682,862.66)Transfers from Other Funds 85,013,946.77 121,803,760.19Transfers to Other Funds (51,331,630.88) (102,431,496.48)

NET CASH PROVIDED (USED) BY NONCAPITAL FINANCING ACTIVITIES (4,844,189.75) (26,105,598.95)

CAPITAL AND RELATED FINANCING ACTIVITIES

Payments for Additional Capital Assets (741,522.57) (23,045.00)

NET CASH PROVIDED (USED) BY CAPITAL AND RELATED FINANCING ACTIVITIES (741,522.57) (23,045.00)


Proceeds from Interest and Investment Income 4,278,318.87 7,884,071.25Proceeds from the Sale of Investments 165,856,800.08 119,245,308.29Payments to Acquire Investments (137,511,068.57) (162,144,728.38)

NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 32,624,050.38 (35,015,348.84)

INCREASE (DECREASE) IN CASH 54,936,782.27 (23,996,992.62)

CASH AND CASH EQUIVALENTS, August 31, 2009 36,906,569.28 60,926,010.10

CASH AND CASH EQUIVALENTS, August 31, 2010 91,843,351.55 36,929,017.48-to next page

B-38



ST AT E M EN T O F C ASH FL O W S (co nc lu ded )AL L L AN D P RO G RA M F U N D SFo r th e Y ear E nd ed Au gu st 3 1, 2 01 0(W it h com p ara t iv e to ta ls for th e year en d ed A ug u st 3 1, 20 0 9)

T OT ALS2 01 0 2 00 9

R E C ON C IL IA T IO N OF OP E R A T IN G I NC O M E T O $ $N E T C A S H P R OV I DE D (U SE D) B Y O P E R A TI NG A C T IV I TI E S


A D JU ST M E NT S T O R E C ON C IL E O PE R A TI NG I NC O M ET O NE T C A SH PR O V ID E D (USE D ) B Y OP E R A T IN G A C TI V IT IE S

D epreci at io n a nd Am o rti za t io n 32 ,5 15 .2 0 32 ,4 13 .0 8C l ass i fi cat io n Di fferences 16 ,0 52 ,7 09 .0 2 24 ,3 40 ,6 52 .1 1(In crease) D ecrease in R ecei vab les (7 15 ,2 91 .8 2 ) (81 ,5 16 .7 6 )(In crease) D ecrease in Lo ans an d C on t rac ts 7 ,3 10 ,2 30 .8 6 14 ,5 60 ,6 86 .4 3(In crease) D ecrease in O th er As se t s 8 31 ,8 27 .9 0 4 25 ,1 09 .0 2In crease (D ecrease) in Paya bl es (3 17 ,7 47 .1 6 ) 3 43 ,3 21 .9 4In crease (D ecrease) in O th er Li abi li t ies 83 ,9 08 .2 8 (68 ,2 23 .7 1 )


N E T C A S H P R OV I DE D (U SE D) B Y O P E R A TI NG A C T IV I TI E S 27 ,8 98 ,4 44 .2 1 37 ,1 47 ,0 00 .1 7

N ON C A SH T R A N S A C TI ON S

C ap i ta l Ap p rec ia t io n B on d In te res t Accre t io n (9 96 ,7 90 .9 3 ) (1 ,4 80 ,2 96 .6 0 )C h an ge in F air Val ue o f In vest m en ts 1 11 ,6 15 .5 6 2 ,9 46 ,8 86 .7 9

T OT A L NO NC A S H TR A NS A C T IO NS (8 85 ,1 75 .3 7 ) 1 ,4 66 ,5 90 .1 9

(1 ) T he fi nan ci al da ta is a recap i tu la t io n o f d a t a in t he Ag ency 's Un aud i ted F inan ci al repo rt. T he fi nan c ia l dat a is d eriv ed fro m finan ci al st at em en t s th a th av e b een reviewed b y th e S t at e A ud itors a s part o f th e rev iews do ne in com p il in g th e Texa s C om p rehen si ve An n ual F i nan c ia l R epo rt (C AF R ),A ud i ted GA AP E di ti o n. Th e s cop e of th e agen cy rev iew s d o no t c on st itut e o vera l l ag ency aud i ts an d therefo re th e i nfo rm ation i s co ns id eredu n aud it ed at th e ag ency lev e l.

APPENDIX C

DEFINITIONS AND SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION ____________

APPENDIX C

TABLE OF CONTENTS

Page

DEFINITION OF CERTAIN TERMS......................................................................................................................C-1 SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION .....................................................................C-3

Successor Paying Agent and Registrar........................................................................................................C-3 Registration .................................................................................................................................................C-4 Limitation on Transfers and Exchanges ......................................................................................................C-4 Enforcement ................................................................................................................................................C-4 Amendment of Resolution...........................................................................................................................C-4 Interest Rates and Payment .........................................................................................................................C-5 Weekly Interest Rate ...................................................................................................................................C-5

Notices ........................................................................................................................................C-5 Binding Effect ...............................................................................................................................C-5

Fixed Interest Rate Period ...........................................................................................................................C-5 Amendments to Liquidity Facility...............................................................................................................C-6 Notice of Termination or Other Change in Liquidity Facility.....................................................................C-6 Remarketing Agent .....................................................................................................................................C-6 Tender Agent...............................................................................................................................................C-6 Qualifications of Remarketing Agent and Tender Agent; Resignation; Removal.......................................C-7 Notice of Variable Rate Bonds Delivered for Purchase; Purchase of Variable Rate Bonds .......................C-8 Remarketing of Bonds; Notice of Interest Rates .........................................................................................C-9 Delivery of Bonds .......................................................................................................................................C-9 Delivery of Proceeds of Sale .....................................................................................................................C-10 Draws on Liquidity Facility to Pay Purchase Price of Variable Rate Bonds.............................................C-10

C-1

DEFINITION OF CERTAIN TERMS

In addition to terms defined in this Official Statement, the following terms have the meanings assigned to them below whenever they are used:

“Alternate Liquidity Facility” means a letter of credit, standby bond purchase agreement or any other agreement or agreements used to provide liquidity support for the Bonds, satisfactory to the Board and the Remarketing Agent and containing administrative provisions reasonably satisfactory to the Tender Agent, issued and delivered to the Tender Agent in accordance with the Resolution.

“Board” means the Veterans’ Land Board of the State.

“Bond” or “Bonds” means the State of Texas Veterans Bonds, Series 2011A, authorized by the Resolution.

“Bond Counsel” means Vinson & Elkins L.L.P. or any other attorney or firm of attorneys nationally recognized as experienced in the field of bonds of governmental issuers and appointed by the Board.

“Bond Purchase Fund” means the fund so designated that is established with the Tender Agent as described in paragraph (ii) under the caption, “Tender Agent” herein.

“Business Day” means any day other than (i) a Saturday, a Sunday or any other day on which banks located in the cities in which the Tender Agent, the Remarketing Agent, the Paying Agent, the Registrar, the Board or the Liquidity Provider are located, or in which the office of the Liquidity Provider from which payments are made pursuant to the Liquidity Facility is located, are authorized or required to remain closed or (ii) a day on which the New York Stock Exchange is closed.

“Ceiling Rate” means the lesser of (i) fifteen percent (15%) per annum and (ii) a per annum rate equal to the maximum net effective interest rate permitted to be paid on the Bonds (prescribed by Chapter 1204, Texas Government Code, as amended, or any successor provision), currently fifteen percent (15%).

“DTC” means The Depository Trust Company, New York, New York, and its successors and assigns, or any successor securities depository for the Bonds.

“DTC Participant” means the securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations on whose behalf DTC was created to hold securities to facilitate the clearance and settlement of securities transactions among DTC Participants.

“Favorable Opinion of Bond Counsel” means an opinion of Bond Counsel, addressed to the Board, the Remarketing Agent and the Tender Agent to the effect that the action proposed to be taken is authorized or permitted by the laws of the State and the Resolution and will not adversely affect any exclusion from gross income for federal income tax purposes of interest on the Bonds.

“Fixed Interest Rate” means, with respect to a Bond, the non-variable interest rate established as described under the caption, “THE BONDS—Interest Rate Provisions—Determination of Fixed Interest Rate” in the forepart of this Official Statement.

C-2

“Fixed Interest Rate Period” means the period of time during which the Bonds bear interest at a Fixed Interest Rate.

“Fixed Rate Bond” or “Fixed Rate Bonds” means the Bonds after the Fixed Rate Conversion Date.

“Fixed Rate Conversion Date” means the date on which the interest rate on each of the Bonds converts to a Fixed Interest Rate.

“Holder” means a Person in whose name a Bond is registered in the bond register maintained by the Registrar.

“Interest Accrual Period” means the period from and including each Interest Payment Date to and excluding the next Interest Payment Date; the initial Interest Accrual Period will begin on (and include) the delivery date of the Bonds and the final Interest Accrual Period will end on the day next preceding the maturity date of the Bonds.

“Interest Payment Date” means (i) with respect to any Weekly Interest Rate Period, (A) the first Business Day of each month, commencing on April 1, 2011, (B) the Fixed Rate Conversion Date, if any, and (C) the maturity date of the Bonds; and (ii) with respect to any Fixed Interest Rate Period, each June 1 and December 1, commencing the June 1 or December 1 immediately following the Fixed Rate Conversion Date by at least 30 days.

“Interest Rate Period” means any Weekly Interest Rate Period or Fixed Interest Rate Period.

“Liquidity Agreement” means the Standby Bond Purchase Agreement dated as of March 1, 2011, between the Board and the initial Liquidity Provider, as the same may be amended or supplemented.

“Liquidity Facility” means initially the Liquidity Agreement, and, upon the effectiveness of an Alternate Liquidity Facility, means such Alternate Liquidity Facility.

“Liquidity Provider” means initially JPMorgan Chase Bank, National Association, and, upon the effectiveness of an Alternate Liquidity Facility, means the bank or banks or other financial institution or financial institutions or other entity that is then a party to the Liquidity Facility. In the case of any Alternate Liquidity Facility to which more than one bank, financial institution or other entity is a party, notices required by the Resolution to be given to the Liquidity Provider may be given to the bank or financial institution under such Liquidity Facility appointed to act as agent for all such banks or financial institutions.

“Outstanding” means, when used with reference to a Bond or Bonds and as of a particular date, such Bond or Bonds not canceled except a Bond or Bonds for the payment or redemption of which provision has been made.

“Paying Agent” means the entity appointed by the Board pursuant to the Resolution to perform the paying agent duties thereunder, initially the Comptroller of Public Accounts of the State.

“Person” means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, limited liability company, unincorporated organization or government or any agency or political subdivision thereof.

“Purchase Account” means the account so designated and established as described in paragraph (ii) under the caption, “Tender Agent” herein.

C-3

“Purchased Bond” or “Purchased Bonds” has the meaning ascribed to such term in the Liquidity Facility.

“Rating Agency” means Moody’s Investors Service, or, if such entity ceases to assign a rating to the Bonds, any substitute statistical rating organization so designated by the Board, which at the time has a credit rating assigned to the Bonds at the request of the Board.

“Registrar” means initially Amegy Bank National Association, or any successor entity appointed by the Board as described under the caption, “Successor Paying Agent and Registrar” herein to perform the duties of registrar and transfer agent under the Resolution.

“Remarketing Account” means the account so designated and established as described in paragraph (ii) under the caption, “Tender Agent” herein.

“Remarketing Agent” means J.P. Morgan Securities LLC, or any successor appointed as described in the first paragraph under the caption, “Qualifications of Remarketing Agent and Tender Agent; Resignation; Removal” herein.

“Remarketing Agreement” means the Remarketing Agreement dated as of March 9, 2011, between the Board and the Remarketing Agent, as the same may be amended or supplemented from time to time, or any remarketing agreement entered into with a successor Remarketing Agent.

“Resolution” means the resolution of the Board authorizing the issuance of the Bonds.

“SIFMA Index” means the index based upon the weekly interest rate resets of tax-exempt variable rate issues included in a database maintained by Municipal Market Data which meet specific criteria established by the Securities Industry and Financial Market Association, formerly The Bond Market Association.

“State” means the State of Texas.

“Tender Agent” means any entity acting as Tender Agent pursuant to the terms of the Resolution, initially Amegy Bank National Association.

“Variable Rate Bond” or “Variable Rate Bonds” means Bonds subject to a Weekly Interest Rate Period.

“Weekly Interest Rate” means a variable interest rate on the Bonds established as described under the caption, “THE BONDS—Interest Rate Provisions—Determination of Weekly Interest Rate” in the forepart of this Official Statement.

“Weekly Interest Rate Period” means each period during which a Weekly Interest Rate is in effect.

SUMMARY OF CERTAIN PROVISIONS OF THE RESOLUTION

The following is a summary of certain provisions of the Resolution. This summary is qualified in its entirety by reference to the Resolution for a full and complete statement of the provisions thereof.

Successor Paying Agent and Registrar

Provision is made in the Resolution for replacement of the Paying Agent and the Registrar by the Board. If a Paying Agent or Registrar is replaced by the Board, a new Paying Agent or Registrar, as applicable, will accept the records of the previous entity and act in the same capacity as the previous entity. Any successor Paying Agent or

C-4

Registrar selected by the Board may be either a national or state banking institution which is a corporation organized and doing business under the laws of the United States of America or of any state, authorized under such laws to exercise trust powers and subject to supervision or examination by federal or state authority, and, if the previous Paying Agent or Registrar was a banking institution, whose qualifications substantially are similar to the previous Paying Agent or Registrar. The Board is not required to select the same institution to serve as Paying Agent and as Registrar for the Bonds, as long as such Bonds are registered only by means of a book entry at a securities depository.

Registration

Except as provided under the caption, “BOOK-ENTRY ONLY SYSTEM” in the forepart of this Official Statement, the Bonds may be transferred, exchanged, registered, and assigned only on the registration books of the Registrar. The Board is required to pay the Registrar’s reasonable and standard or customary fees and charges for making transfers of Bonds, but the Holder of any Bond requesting such transfer is required to pay any taxes or other governmental charges required to be paid with respect thereto. The Holder of any Bond requesting any conversion and exchange is required to pay the Registrar’s reasonable and standard or customary fees and charges for converting and exchanging such Bond or portion thereof, together with any taxes or governmental charges required to be paid with respect thereto, all as a condition precedent to the exercise of such privilege of conversion and exchange; except, however, that in the case of the conversion and exchange of an assigned and transferred Bond or any portion or portions thereof in any Authorized Denomination, and in the case of the conversion and exchange of a portion of the unredeemed portion of a Bond that has been redeemed in part prior to maturity, as provided in the Resolution, such fees and charges are required to be paid by the Board.

Limitation on Transfers and Exchanges

Except in the case of tenders of Variable Rate Bonds or of the remarketing of Purchased Bonds, neither the Board nor the Registrar will be required (1) to issue, transfer, replace or exchange any Bond subject to redemption in whole or in part during a period beginning at the opening of business 30 days before the day of the first mailing of a notice of redemption of the Bonds and ending at the close of business on the day of such mailing or (2) to replace, transfer, or exchange any Bond so selected for redemption, in whole or in part, when such redemption is scheduled to occur within 30 calendar days; except that at the option of the Holder of at least $1,000,000 in principal amount of Bonds, the Registrar will be required to transfer or exchange any Bond of such Holder which has been selected, in whole or in part, for redemption upon surrender thereof. The Registrar may make such arrangements as it deems appropriate for notation on each new Bond issued in exchange for or upon the transfer of the Bond so selected for redemption of an appropriate legend to the effect that such new Bond has been so selected for redemption.

Enforcement

All rights available to the Holders of the Bonds under the Constitution and statutes of the State, by suit for mandamus or otherwise, to compel the performance of their official duties by the Board, its officers and employees, and by other officers of the State to the end that the principal of and interest on the Bonds may be paid promptly, are recognized and reserved by the Resolution to and for the Holders of the Bonds.

Amendment of Resolution

The Board reserves the right to amend the terms of the Resolution upon receiving written approval of the Holders of Bonds aggregating in principal amount at least 51% of the aggregate principal amount of the Bonds outstanding under the Resolution, in the manner provided in the Resolution; provided, however, no such amendment may make any change in the maturity of Bonds, reduce the rate of interest borne by any Bonds, reduce the amount of the principal payable on any of the Bonds, modify the terms of payment of principal of or interest on any of the Bonds, or impose any conditions with respect to such payment, change the minimum percentage of the principal amount of Bonds necessary for consent to such amendment, or affect the rights of the owners of less than all of the Bonds then outstanding under the Resolution without the written approval of all of the Holders of the Bonds in the manner provided in the Resolution.

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In addition, the Board reserves the right to amend the terms of the Resolution without the consent of the Holders to (i) impose conditions or restrictions additional to, but not in diminution of, those contained in the Resolution, respecting the issuance of Bonds, (ii) undertake covenants additional to but not inconsistent with those contained in the Resolution; (iii) correct any ambiguity or correct or supplement any inconsistent or defective provision contained in the Resolution or any amendatory resolution; (iv) adopt amendments to the Resolution that become effective following a mandatory tender of all of the Bonds then Outstanding; or (v) adopt amendments to the Resolution that, in the opinion of Bond Counsel, do not adversely affect the Holders.

Interest Rates and Payment

Each Outstanding Variable Rate Bond will bear interest at the Weekly Interest Rate (except as described under the caption, “THE BONDS—Tender Provisions—Insufficient Funds for Purchase of Variable Rate Bonds; Adjustment of Interest Rate” in the forepart of this Official Statement), and each Fixed Rate Bond will bear interest at the Fixed Interest Rate; provided, however, that in no event may the interest rate on any Bond exceed the Ceiling Rate. The Bonds will bear interest from their date, and interest on each Bond for each Interest Accrual Period is payable on each Interest Payment Date applicable to such Bond; provided, however, that the Holder (other than a Liquidity Provider) of a Variable Rate Bond will be paid interest thereon for an Interest Accrual Period only in the amount that would have accrued thereon at the Weekly Interest Rate, regardless of whether such Variable Rate Bond was a Purchased Bond during any portion of such Interest Accrual Period, and the amount, if any, accrued as interest on such Variable Rate Bond at the Purchased Bond Rate in excess of the amount required to be paid to such Holder will be paid by the Board to the Liquidity Provider in accordance with the Liquidity Facility.

Weekly Interest Rate

Notices. On each date on which the Remarketing Agent determines the interest rate on any Variable Rate Bond, the Remarketing Agent is required to give the Tender Agent, the Paying Agent, the Liquidity Provider and the Board notice by facsimile or e-mail transmission of the interest rate determined by the Remarketing Agent on such date. Upon telephonic request, the Remarketing Agent will give any Holder of Variable Rate Bonds notice of the interest rate on the Variable Rate Bonds owned by such Holder.

Binding Effect. Each determination of the interest rate for the Variable Rate Bonds, as provided in the Resolution, will be conclusive and binding upon the owners of the Variable Rate Bonds, the Board, the Remarketing Agent, the Tender Agent, the Liquidity Provider and the Paying Agent. Upon telephonic request to the Remarketing Agent from the Board, the Paying Agent, the Liquidity Provider or any Holder of any Variable Rate Bond, the Remarketing Agent is required to inform such Person of the interest rate then in effect on the Variable Rate Bonds. Failure of the Remarketing Agent to give any of notices described in this paragraph, or any defect therein, will not affect the interest rate to be borne by any of the Variable Rate Bonds nor in any way change the rights of the Holders of the Variable Rate Bonds to tender their Variable Rate Bonds for purchase in accordance with the Resolution.

Fixed Interest Rate Period

If the Board elects to convert the Bonds to Fixed Rate Bonds, then the written direction furnished by the Board to the Liquidity Provider, the Registrar, the Tender Agent and the Remarketing Agent is required to be made by registered or certified mail, or by e-mail or fax, confirmed by registered or certified mail. Any such direction of the Board is required to be accompanied by a copy of the notice required to be given by the Registrar as described under the caption, “THE BONDS—Interest Rate Provisions—Notice of Adjustment to Fixed Interest Rate Period” in the forepart of this Official Statement.

Notwithstanding anything in the Resolution to the contrary, in connection with any conversion of the Bonds to Fixed Rate Bonds, the Board is required to cause to be provided to the Tender Agent and the Remarketing Agent a Favorable Opinion of Bond Counsel on the effective date of such conversion. In the event that Bond Counsel fails to deliver a Favorable Opinion of Bond Counsel on any such date, then the Interest Rate Period on the Bonds will not be adjusted, and the Bonds will continue to be Variable Rate Bonds. In any event, if notice of such adjustment has been mailed to the Holders of the Bonds and Bond Counsel fails to deliver a Favorable Opinion of Bond Counsel on the effective date as described in the Resolution, the Bonds will continue to be subject to

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mandatory purchase on the date which would have been the effective date of such adjustment as provided in the Resolution.

Amendments to Liquidity Facility

Except with the consent of all the Holders of the Variable Rate Bonds, neither the Board nor the Tender Agent may permit any amendment, supplement, modification or waiver to the Liquidity Facility that would result in the rating assigned to the Variable Rate Bonds by the Rating Agency being withdrawn or reduced below that in effect prior to such amendment, supplement, modification or waiver.

Notice of Termination or Other Change in Liquidity Facility

The Registrar is required to give notice by mail to the Holders of the Variable Rate Bonds on or before the 15th day preceding (i) the expiration of any Liquidity Facility in accordance with its terms, or (ii) any termination, replacement or modification of the terms of the Liquidity Facility, which notice is required, to the extent applicable, to (1) state the date of such replacement, termination, expiration or modification and the date of the proposed substitution of the Alternate Liquidity Facility (if any), (2) specify the ratings, if any, to be applicable to the Variable Rate Bonds after such replacement, termination, expiration or modification of the Liquidity Facility or state that no ratings have been obtained with respect to the Variable Rate Bonds for the period subsequent to such replacement, termination, expiration, or modification of the Liquidity Facility, and (3) state the date that the Variable Rate Bonds will be purchased as described under the caption, “THE BONDS—Tender Provisions—Mandatory Tender for Purchase Upon Termination, Expiration, Suspension, Modification or Replacement of the Liquidity Facility,” in the forepart of this Official Statement as a result of such replacement, termination, expiration or modification. The Board is required to provide the Registrar with written notice of any information required to enable the Registrar to give the foregoing notice and is required to provide the Registrar with the form of such notice at least five days before such notice is required to be given.

Remarketing Agent

In accordance with and subject to the Remarketing Agreement, J.P. Morgan Securities LLC will be appointed as the initial Remarketing Agent. The Board may appoint any successor Remarketing Agent subject to the conditions set forth in the first paragraph under the caption, “Qualifications of Remarketing Agent and Tender Agent; Resignation; Removal” herein. Each Remarketing Agent is required to designate its designated office and signify its acceptance of the duties and obligations imposed upon it under the Resolution by a written instrument of acceptance delivered to the Board and the Liquidity Provider under which such Remarketing Agent will agree, particularly, to keep such books and records with respect to its duties as Remarketing Agent as are consistent with prudent industry practice and to make such books and records available for inspection by the Board and the Liquidity Provider at all reasonable times.

Tender Agent

The initial Tender Agent is Amegy Bank National Association. The Board may appoint any successor Tender Agent, subject to the conditions set forth in the second paragraph under the caption, “Qualifications of Remarketing Agent and Tender Agent; Resignation; Removal” herein. Each Tender Agent is required to designate its designated office(s) for delivery of notices and delivery of Variable Rate Bonds and signify its acceptance of the duties and obligations imposed upon it under the Resolution by a written instrument of acceptance delivered to the Registrar, the Board, the Liquidity Provider and the Remarketing Agent. By acceptance of its appointment under the Resolution, the Tender Agent agrees:

(i) to hold all Variable Rate Bonds delivered to it pursuant to a mandatory or optional tender as agent and bailee of, and in escrow for the benefit of, the respective owners which have so delivered such Variable Rate Bonds until moneys representing the purchase price of such Variable Rate Bonds have been delivered to or for the account of or to the order of such owners;

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(ii) to establish and maintain a separate segregated trust fund designated as the “State of Texas Veterans Bonds, Series 2011A Bond Purchase Fund” (the “Bond Purchase Fund”), and to establish and maintain therein a remarketing account (the “Remarketing Account”) and a liquidity facility account (the “Purchase Account”), until such time as it has been discharged from its duties as Tender Agent under the Resolution;

(iii) to hold all moneys (without investment thereof) delivered to it under the Resolution in the Bond Purchase Fund for the purchase of Variable Rate Bonds as agent and bailee of, and in escrow for the benefit of, the Person that so delivered such moneys until the Variable Rate Bonds purchased with such moneys have been delivered to or for the account of such Person;

(iv) to hold all moneys delivered to it by the Board for the purchase of Variable Rate Bonds as agent and bailee of, and in escrow for the benefit of, the owners or former owners who deliver Variable Rate Bonds to it for purchase until the Variable Rate Bonds purchased with such moneys have been canceled;

(v) to hold all Variable Rate Bonds registered in the name of the new owners thereof which have been delivered to it by the Registrar for delivery to the Remarketing Agent in accordance with the provisions of the Resolution; and

(vi) to keep such books and records as are consistent with prudent industry practice and to make such books and records available for inspection by the Board, the Liquidity Provider and the Remarketing Agent at all reasonable times.

Qualifications of Remarketing Agent and Tender Agent; Resignation; Removal

The Remarketing Agent is required to be a member of the National Association of Securities Dealers, having a combined capital stock, surplus and undivided profits of at least $15,000,000 and authorized by law to perform all the duties imposed upon it by the Resolution. Any successor Remarketing Agent is required to have, or be a subsidiary of another corporation or a partnership which includes as a general partner an entity which has, senior unsecured long-term debt which is rated, so long as the Variable Rate Bonds are rated by the Rating Agency, at least Baa3/P-3 (or its equivalent) or otherwise qualified by the Rating Agency. The Remarketing Agent may at any time resign and be discharged of its duties and obligations upon providing the Board, the Tender Agent, the Liquidity Provider, the Paying Agent and the Registrar with at least 30 days’ prior written notice. The Remarketing Agent may be removed at any time, at the direction of the Board with the written consent of the Liquidity Provider, by an instrument signed by the Board and filed with the Tender Agent, the Registrar, the Liquidity Provider and the Remarketing Agent at least 30 days prior to the effective date of such removal. In the event that the Remarketing Agent has resigned or been removed and no successor Remarketing Agent has been appointed by the Board, the Tender Agent will perform, or engage a Person to perform, the duties of the Remarketing Agent until a successor Remarketing Agent has been appointed.

The Tender Agent is required to be a bank with trust powers or a trust company duly organized under the laws of the United States of America or any state or territory thereof, and authorized by law to exercise corporate trust powers and otherwise perform all the duties imposed upon it by the Resolution. The Tender Agent may at any time resign and be discharged of the duties and obligations created by the Resolution by giving at least 60 days’ written notice to the Registrar, the Board, the Liquidity Provider and the Remarketing Agent. The Tender Agent may be removed at any time by an instrument signed by the Board, filed with the Tender Agent, the Registrar, the Liquidity Provider and the Remarketing Agent. Such resignation or removal will take effect on the day a successor Tender Agent has been appointed by the Board and the successor Tender Agent has accepted such appointment.

Upon the effective date of resignation or removal of the Tender Agent, the Tender Agent is required to deliver any Variable Rate Bonds and moneys held by it in such capacity to its successor.

So long as any Variable Rate Bonds are Outstanding, the same entity is required to be the Tender Agent and the Registrar.

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Notice of Variable Rate Bonds Delivered for Purchase; Purchase of Variable Rate Bonds

The Tender Agent will determine timely and proper delivery of Variable Rate Bonds pursuant to the Resolution and the proper endorsement of such Variable Rate Bonds. Such determination will be binding on the owners of such Variable Rate Bonds, the Board, the Remarketing Agent and the Liquidity Provider, absent manifest error. The Tender Agent is required to give notice by telephone, e-mail or fax, promptly confirmed by a written notice if given by telephone, to the Registrar, the Remarketing Agent, the Liquidity Provider and the Board specifying the principal amount of Variable Rate Bonds, if any, as to which it has received notice of tender for purchase as described under the caption, “THE BONDS—Tender Provisions—Optional Tender for Purchase of Variable Rate Bonds” in the forepart of this Official Statement.

Variable Rate Bonds required to be purchased in accordance with the Resolution will be purchased from the owners thereof, on the date and at the purchase price at which such Variable Rate Bonds are required to be purchased. Funds for the payment of such purchase price will be derived from the following sources in the order of priority indicated:

(i) proceeds of the sale of such Variable Rate Bonds remarketed to any Person as described under the caption, “Remarketing of Bonds; Notice of Interest Rates” herein and furnished to the Tender Agent by the purchasers or by the Remarketing Agent for deposit into the Remarketing Account of the Bond Purchase Fund;

(ii) moneys furnished to the Tender Agent for deposit into the Purchase Account of the Bond Purchase Fund representing moneys received from draws on the Liquidity Facility; and

(iii) moneys furnished to the Tender Agent for deposit into the Bond Purchase Fund representing moneys provided by the Board in its discretion.

The Tender Agent may establish separate accounts or sub-accounts within the Bond Purchase Fund for such purposes as the Tender Agent may deem appropriate.

If ownership of the Bonds is no longer determined only by a book entry at a securities depository for the Bonds, the Registrar is required to authenticate a new Bond or Bonds in an aggregate principal amount equal to the principal amount of Bonds purchased as described in the immediately preceding paragraph, whether or not the Variable Rate Bonds so purchased are presented by the owners thereof, bearing a number or numbers not contemporaneously outstanding. Every Bond authenticated and delivered as provided in this heading will be entitled to all the benefits of the Resolution equally and proportionately with any and all other Bonds duly issued thereunder. The Registrar is required to maintain a record of the Variable Rate Bonds purchased as described in this heading, together with the names and addresses of the former owners thereof. If ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, on any date on which beneficial ownership in the Variable Rate Bonds is tendered at the option of the owner of such beneficial interest (acting through its DTC Participant) as described under the caption, “THE BONDS—Tender Provisions—Optional Tender for Purchase of Variable Rate Bonds” in the forepart of this Official Statement (including transfer of the beneficial ownership interest of the tendering owner to the account of the Tender Agent at DTC), the Tender Agent is required to transfer ownership of such beneficial ownership on the records of DTC as described under the caption, “Delivery of Bonds” herein. If ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, on any date on which beneficial ownership interest in the Variable Rate Bonds is subject to mandatory tender in accordance with the Resolution, the Tender Agent is required to transfer beneficial ownership of the Bonds on the records of DTC as described under the caption, “Delivery of Bonds” herein, regardless of whether the owners of the beneficial interests subject to mandatory tender transfer their beneficial ownership of the Variable Rate Bonds to the Tender Agent on the records of DTC, and moneys for the purchase of the beneficial interests subject to mandatory tender will be transferred by the Tender Agent to DTC for transfer to the owners of such beneficial interests subject to mandatory purchase.

If ownership of the Bonds is no longer determined only by a book entry at a securities depository for the Bonds, in the event any Variable Rate Bonds purchased as described in this heading are not presented to the Tender Agent, the Tender Agent is required to segregate and hold the moneys for the purchase price of such Variable Rate

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Bonds in trust for the benefit of the former owners of such Variable Rate Bonds, who will, except as provided in the following sentence, thereafter be restricted exclusively to such moneys for the satisfaction of any claim for the purchase price of such Variable Rate Bonds. Any moneys which the Tender Agent segregates and holds in trust for the payment of the purchase price of any Variable Rate Bond and remaining unclaimed for three years after the date of purchase will, subject to the unclaimed property laws of the State and upon the Board’s written request to the Tender Agent, be paid to the Board. After the payment of such unclaimed moneys to the Board, the former owner of such Variable Rate Bond may look only to the Board for the payment thereof, and the Board will not be liable for any interest thereon and will not be regarded as a trustee of such moneys. If ownership of the Bonds is determined only by a book entry at a securities depository for the Bonds, if the Variable Rate Bonds are subject to mandatory tender in accordance with the terms of the Resolution, then the Tender Agent is required to transfer beneficial ownership of the Bonds on the records of DTC as provided under the caption, “Delivery of Bonds” herein, regardless of whether the owners of the beneficial interests subject to mandatory tender transfer their beneficial ownership of the Variable Rate Bonds to the Tender Agent on the records of DTC, and moneys for the purchase of the beneficial interests subject to mandatory tender will be transferred by the Tender Agent to DTC for transfer to the owners of such beneficial interests subject to mandatory purchase.

Remarketing of Bonds; Notice of Interest Rates

Upon notice of the tender for purchase of Variable Rate Bonds, the Remarketing Agent is required to offer for sale and use its best efforts to sell such Variable Rate Bonds, any such sale to be made on the date of such purchase in accordance with the Resolution at the price determined in accordance therewith. The Remarketing Agent agrees that while a Liquidity Facility is in effect it will not sell any Bonds tendered for purchase pursuant to the Resolution to the Board, or to any Person who controls, is controlled by, or is under common control with, the Board. In addition, the Remarketing Agent will offer for sale and use its best efforts to sell any Variable Rate Bonds that are Purchased Bonds.

The Remarketing Agent is required to determine the rate of interest to be borne by the Bonds during each Interest Rate Period and is required to furnish to the Board and the Registrar on the Business Day of determination each rate of interest so determined by e-mail, telephone or fax, promptly confirmed in writing if given by telephone, or will make such information available to the Board and the Registrar by other readily accessible electronic means.

The Remarketing Agent is required to advise the Tender Agent and the Liquidity Provider in writing or by telephone (promptly confirmed by e-mail or fax if given by telephone) not later than the Business Day preceding the Business Day on which the Variable Rate Bonds are to be purchased pursuant to an optional or mandatory tender for purchase, of the aggregate principal amount of Variable Rate Bonds subject to purchase that have not been remarketed, provided that the Remarketing Agent may continue to remarket such Variable Rate Bonds thereafter. The Remarketing Agent is required to give e-mail or telephonic notice, promptly confirmed by a written notice if given by telephone, to the Board, the Registrar and the Tender Agent on each date on which Variable Rate Bonds have been purchased pursuant to the Resolution, specifying the principal amount of Bonds, if any, sold by it as described in the first paragraph of this heading along with, to the extent permitted by applicable law, a list of such purchasers showing the names and denominations in which such Bonds will be registered, and the addresses and social security or taxpayer identification numbers of such purchasers. The Remarketing Agent is required to transfer the proceeds received from the purchasers named in such notice to the Tender Agent by 11:30 a.m., New York City time, on the Business Day on which such Variable Rate Bonds are purchased.

Delivery of Bonds

Variable Rate Bonds purchased with moneys derived from a remarketing are required to be made available by the Tender Agent to the Remarketing Agent for delivery to the purchasers thereof against payment therefor.

Except as otherwise provided in a Liquidity Facility, Variable Rate Bonds purchased with moneys derived from a Liquidity Facility will be held by the Tender Agent on behalf of the Liquidity Provider as Purchased Bonds, and shall not be released unless the Tender Agent has received written confirmation from the Liquidity Provider that the Liquidity Facility has been reinstated with respect to such Bonds.

Variable Rate Bonds purchased with moneys provided by the Board are required to be canceled.

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Bonds delivered as described in this heading will be registered in the manner directed by the recipient thereof.

Delivery of Proceeds of Sale

The proceeds of the sale by the Remarketing Agent of any Variable Rate Bonds delivered to it by any Holder are required to be turned over to the Tender Agent.

Draws on Liquidity Facility to Pay Purchase Price of Variable Rate Bonds

The Tender Agent, on each day on which Variable Rate Bonds are required to be purchased pursuant to the Resolution, is directed to make drawings under the Liquidity Facility by such times and in such manner as are required to receive in immediately available funds on such date amounts sufficient (based upon the amount on deposit in the Remarketing Account of the bond Purchase Fund by 10:30 a.m., New York City time, on such day) to pay the purchase price plus accrued interest, if any, of Variable Rate Bonds tendered for purchase or required to be purchased pursuant to the provisions of the Resolution and that have not been remarketed by the Remarketing Agent, and to deposit the proceeds of such drawings or cause such proceeds to be deposited in the Purchase Account of the Bond Purchase Fund pending application of such moneys to the payment of the purchase price of such Variable Rate Bonds. In determining the amount of any such purchase price then due, the Tender Agent may not take into consideration any purchase price due on Variable Rate Bonds held by the Board or any affiliate thereof, and no drawings under the Liquidity Facility may be made or be used to pay the purchase price of any Purchased Bonds or Variable Rate Bonds held by the Board or any affiliate thereof.

APPENDIX D

FORM OF BOND COUNSEL’S OPINION ____________

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APPENDIX D

FORM OF BOND COUNSEL’S OPINION

March 9, 2011

WE HAVE REPRESENTED THE VETERANS’ LAND BOARD (the “Board”) OF THE STATE OF TEXAS as its Bond Counsel in connection with the issue of bonds described as follows:

STATE OF TEXAS VETERANS BONDS, SERIES 2011A in the total authorized aggregate principal amount of $74,995,000, and maturing on December 1, 2040 (the “Bonds”). The Bonds bear interest, are subject to redemption prior to maturity, and may be transferred and exchanged as set out in the Bonds and in the resolution adopted by the Board authorizing their issuance (the “Resolution”). The Bonds initially will be issued as Variable Rate Bonds subject to a Weekly Interest Rate Period. Subject to certain conditions set forth in the Resolution, the Bonds may be converted to Fixed Rate Bonds.

WE HAVE ACTED AS BOND COUNSEL to the Board 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 (the “State”), and with respect to the exclusion from gross income of interest on the Bonds. We have not been requested to investigate or verify and have not investigated or verified original proceedings, records, data, or other material, but have relied solely upon the transcript of certified proceedings described in the following paragraph. We have not assumed any responsibility with respect to the financial condition or capabilities of the State or the disclosure thereof in connection with the sale of the Bonds. Our role in connection with the Board’s Official Statement (the “Official Statement”) prepared for use in connection with the sale of the Bonds has been limited as described therein.

IN OUR CAPACITY AS BOND COUNSEL, we have participated in the preparation of and have examined a transcript of certified proceedings pertaining to the Bonds, on which we have relied in giving our opinion. The transcript contains certified copies of certain proceedings of the Board; customary certificates of officers, agents and representatives of the Board and other public officials; and other certified showings relating to the authorization and issuance of the Bonds. We have also examined applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), court decisions, Treasury Regulations and published rulings of the Internal Revenue Service (the “Service”) as we have deemed relevant. In addition, we have examined executed Bond No. VR-1. Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Resolution.

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BASED ON SAID EXAMINATION, IT IS OUR OPINION THAT:

(a) The Board is a duly created and existing agency of the State, and has full power and authority to issue the Bonds and to adopt the Resolution and perform its obligations thereunder.

(b) The Board has duly adopted the Resolution, which Resolution duly authorizes the issuance, sale, execution and delivery of the Bonds. Authorized representatives of the Board have duly executed the Bonds, and the Bonds have been duly registered and delivered to the Underwriters. The Bonds constitute legal, valid and binding general obligations of the State.

(c) The Bonds have been authorized and issued in accordance with the Constitution and laws of the State, having been issued pursuant to Article III, Section 49-b (“Section 49-b”) of the Constitution of the State, as implemented by Chapter 162, Texas Natural Resources Code, as amended. The Bonds are payable primarily from the Veterans’ Housing Assistance Fund II created by the Constitution of the State, and as provided in Section 49-b, to the extent there is not enough money in the Veterans’ Housing Assistance Fund II available for the payment of principal of and interest on the general obligation bonds benefiting the Veterans’ Housing Assistance Fund II, including money to make payments by the Board under a bond enhancement agreement with respect to principal of or interest on such general obligation bonds, there shall be appropriated out of the first money coming into the State Treasury in each fiscal year, not otherwise appropriated by the Constitution of the State, an amount that is sufficient to pay the principal of and interest on such general obligation bonds that mature or become due during that fiscal year or to make bond enhancement payments with respect to those bonds.

IT IS FURTHER OUR OPINION THAT:

(1) Interest on the Bonds (other than interest accruing after conversion to Fixed Rate Bonds, for which we express no opinion) is excludable from gross income for federal income tax purposes under existing law.

(2) Interest on the Bonds is not (i) a specific preference item subject to the alternative minimum tax on individuals and corporations or (ii) included in a corporation’s “adjusted current earnings” for purposes of the alternative minimum tax.

In providing the opinions set forth in paragraphs (1) and (2) above, we have relied on representations of the Board, the Underwriters and the Board’s Financial Advisor, with respect to matters solely within the knowledge of the Board, the Underwriters and the Board’s Financial Advisor that we have not independently verified, and have assumed continuing compliance with the covenants set forth in the Resolution and other documents relating to the requirements of the Code. In the event that such representations are determined to be inaccurate or incomplete or the Board fails to comply with such covenants, interest on the Bonds could become includible in gross income from the date of original delivery of the Bonds, regardless of the date on which the event causing such inclusion occurs.

Except as stated above, we express no opinion as to any federal, state or local tax consequences resulting from the receipt or accrual of interest on, or acquisition, ownership or disposition of, the Bonds. In addition, we express no opinion with respect to our ability to render an opinion that a conversion to Fixed Rate Bonds will not adversely affect the excludability of interest on the Bonds from gross income of the owners thereof for federal income tax purposes as required by Section 9.3 of the Resolution.

Owners of the Bonds should also be aware that the ownership of tax-exempt obligations may result in collateral federal income tax consequences to financial institutions, life insurance and property and casualty insurance companies, certain S corporations with Subchapter C earnings or profits,

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individual recipients of Social Security or Railroad Retirement benefits, taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry tax-exempt obligations and individuals otherwise qualifying for the earned income tax credit. In addition, certain foreign corporations doing business in the United States may be subject to the “branch profits” tax on their effectively-connected earnings and profits, including tax-exempt interest such as interest on the Bonds.

The opinions set forth above 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 these opinions to reflect any facts or circumstances that may hereafter come to our attention or to reflect any changes in any law that may hereafter occur or become effective. Moreover, our opinions are not a guarantee of result and are not binding on 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. The Service has an ongoing audit program to determine compliance with rules that relate to whether interest on state or local obligations is includable in gross income for federal income tax purposes. No assurance can be given regarding whether or not the Service will commence an audit of the Bonds. If an audit is commenced, in accordance with its current published procedures, the Service is likely to treat the Board as the taxpayer. We observe that the Board has covenanted in the Resolution not to take any action, or omit to take any action within its control, that if taken or omitted, respectively, may result in the treatment of interest on the Bonds as includable in gross income for federal income tax purposes.

It is to be understood that the rights of the owners of the Bonds and the enforceability of the Bonds and the Resolution may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors’ rights heretofore or hereafter enacted to the extent constitutionally applicable and that their enforcement may also be limited by general principles of equity that permit the exercise of judicial discretion in appropriate cases, whether considered at law or in equity.

This opinion speaks only as of its date and only in connection with the Bonds and may not be applied to any other transaction. We do not undertake to advise you of matters which may come to our attention subsequent to the date hereof that may affect our legal opinion and conclusions expressed herein. Further, this opinion is specifically limited to the laws of the State of Texas and, to the extent applicable, the laws of the United States of America.

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