OFFICIAL STATEMENT

NEW ISSUE - Book-Entry-Only Dated: August 7, 2008 Ratings: S & P Underlying: “AA+” Moody’s Underlying: “Aa2”

See “OTHER INFORMATION - RATINGS” herein In the opinion of Bond Counsel, interest on the Bonds is excludable from gross income for federal income tax purposes under existing law and the Bonds are not private activity bonds. See “TAX MATTERS–TAX EXEMPTION” herein for a discussion of the opinion of Bond Counsel, including a description of alternative minimum tax consequences for corporations.

$149,780,000 LONE STAR COLLEGE SYSTEM (FORMERLY “NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT”) (HARRIS AND MONTGOMERY COUNTIES, TEXAS) LIMITED TAX GENERAL OBLIGATION BONDS, SERIES 2008
Dated Date: September 1, 2008 Due: August 15, as shown below

PAYMENT TERMS . . . The $149,780,000 Lone Star College System Limited Tax General Obligation Bonds, Series 2008 (the “Bonds”) will be issued as Current Interest Bonds (“CIBs”). Interest on the Bonds will accrue from the dated date as shown above and will be payable February 15 and August 15 of each year, commencing February 15, 2009, and will be calculated on the basis of a 360-day year of twelve 30-day months. The definitive Bonds will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company (“DTC”) pursuant to the Book-Entry-Only System described herein. The Bonds will be issued in principal denominations of $5,000 or any integral multiple thereof. No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of, premium, if any, and interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the beneficial owners of the Bonds (see “THE BONDS–BOOK-ENTRY-ONLY SYSTEM”). The initial Paying Agent/Registrar is Wells Fargo, N.A. (see “THE BONDS–PAYING AGENT/REGISTRAR”). AUTHORITY FOR ISSUANCE . . . The Lone Star College System (the “System”) is authorized to sell the Bonds pursuant to the Constitution and the laws of the State of Texas, including particularly Section 130.122, Texas Education Code as amended, an order (the “Order”) adopted by the Board of Trustees of the System (the “Board”), and an election held on May 10, 2008. The Bonds constitute direct and continuing obligations of the System, payable as to principal and interest from the proceeds of such ad valorem tax levied, within the limits prescribed by law, on all taxable property located within the System, as provided in the Order. See “THE BONDS – SECURITY FOR BONDS” herein. PURPOSE . . . Proceeds from the sale of the Bonds will be used to (i) construct and equip school buildings in the System, including instructional facilities, academic support facilities, administrative support facilities, plant system replacements and technology infrastructure, and the purchase of necessary sites therefore, and (ii) pay costs of issuing the Bonds. See “THE BONDS – USE OF BOND PROCEEDS.” OPTIONAL REDEMPTION . . . The System reserves the right, at its option, to redeem CIBs maturing on August 15, 2019 and thereafter, on or after August 15, 2018 at the price of par plus accrued interest. See “THE BONDS – OPTIONAL REDEMPTION.” DELIVERY . . . The Bonds are offered for delivery when as and if issued and received by the Underwriters and subject to the approving opinions of the Attorney General of the State of Texas and of Vinson & Elkins L.L.P., Bond Counsel, Houston, Texas (see Appendix C –“FORM OF BOND COUNSEL’S OPINION”). Certain matters will be passed on for the Underwriters by Greenberg Traurig, LLP, as counsel to the Underwriters. The Bonds are expected to be available for delivery through the facilities of the Depository Trust Company on or about September 10, 2008.

MORGAN KEEGAN & CO., INC. SOUTHWEST SECURITIES

FIRST SOUTHWEST COMPANY SIEBERT BRANDFORD SHANK & CO.

RICE FINANCIAL PRODUCTS COMPANY

$149,780,000 LONE STAR COLLEGE SYSTEM (HARRIS AND MONTGOMERY COUNTIES, TEXAS) LIMITED TAX GENERAL OBLIGATION BONDS, SERIES 2008
CUSIP Prefix: 542264(c)
Current Interest Bonds
Price or Yield(b) 2.090% 2.300% 3.230% 3.430% 3.610% 3.770% 3.930% 4.060% 4.230% CUSIP Suffix AA4 AB2 AC0 AD8 AE6 AF3 AG1 AH9 AJ5
(c)

$

Amount 10,655,000 2,665,000 2,775,000 2,870,000 2,975,000 3,090,000 3,210,000 3,375,000 3,540,000

Maturity 8/15/2009 8/15/2010 8/15/2013 8/15/2014 8/15/2015 8/15/2016 8/15/2017 8/15/2018 8/15/2019

(a)

Rate 4.000% 4.000% 3.500% 3.750% 3.750% 4.000% 5.000% 5.000% 5.000%

$

Amount 3,720,000 3,905,000 4,100,000 4,305,000 4,530,000 4,770,000 5,020,000 5,285,000

Maturity 8/15/2020 8/15/2021 8/15/2022 8/15/2023 8/15/2024 8/15/2025 8/15/2026 8/15/2027

(a)

Rate 5.000% 5.000% 5.000% 5.250% 5.250% 5.250% 5.250% 5.250%

Price or Yield(b) 4.360% 4.470% 4.550% 4.550% 4.610% 4.660% 4.720% 4.770%

CUSIP Suffix AK2 AL0 AM8 AN6 AP1 AQ9 AR7 AS5

(c)

(Accrued interest from September 1, 2008 to be added) $11,400,000 Term Bonds Maturing August 15, 2029 (a) at 5.00% to yield 5.00%(b) CUSIP 542264AU0 (c) $26,420,000 Term Bonds Maturing August 15, 2033 (a) at 5.00% to yield 5.110%(b) CUSIP 542264AY2 (c) $41,170,000 Term Bonds Maturing August 15, 2038 (a) at 5.00% to yield 5.150%(b) CUSIP 542264BD7 (c)
(Interest to accrue from September 1, 2008)

_______________________ a) The Bonds maturing on August 15, 2019 and thereafter are subject to redemption, at the option of the System, on or after August 15, 2018 at the price of par plus accrued interest. (see “BOND INFORMATION – OPTIONAL REDEMPTION OF BONDS” and “MANDATORY SINKING FUND REDEMPTION OF BONDS”). b) The price or yield represents the initial offering price or yield to the public which has been established by the Underwriters for offers to the public, and which may subsequently be changed by the Underwriters in the sole discretion of the Underwriters. c) CUSIP numbers have been assigned to the Bonds by Standard & Poor’s CUSIP services Bureau, a Division of the McGraw Hill Companies, Inc., and are included solely for the convenience of the owners of the Bonds. Neither the System nor Underwriters are responsible for the selection or correctness of the CUSIP numbers herein. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP services numbers herein.

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TABLE OF CONTENTS

OFFICIAL STATEMENT SUMMARY ..................vi Valuation And Tax-Supported Debt History ..........viii Tax Rate, Levy And Collection History .................viii SYSTEM ADMINISTRATION...............................ix Administration of the System ...................................ix Elected Officials .......................................................ix Appointed Officials ..................................................ix Consultants and Advisors .........................................ix OFFICIAL STATEMENT.........................................1 INTRODUCTION .....................................................1 Description Of The System .......................................1 THE BONDS.............................................................1 Description Of The Bonds .........................................1 Purpose Of The Bonds...............................................2 Authority For Issuance ..............................................2 Security For Bonds ....................................................2 Tax Rate Limitation...................................................2 Optional Redemption.................................................2 Mandatory Sinking Fund Redemption.......................3 Defeasance of Bonds .................................................3 Amendments..............................................................3 Book-Entry-Only System ..........................................3 Paying Agent/Registrar..............................................5 Transfer, Exchange And Registration........................6 Record Date For Interest Payment.............................6 Limitation on Transfer of Bonds ...............................6 Replacement Bonds ...................................................6 Bondholders’ Remedies.............................................7 Use Of Bond Proceeds...............................................7 TAX INFORMATION ..............................................8 Ad Valorem Tax Law ................................................8 Effective Tax Rate and Rollback Tax Rate................9 Property Assessment and Tax Payment...................10 Penalties And Interest..............................................10 FINANCIAL INFORMATION...............................11 Financial Policies.....................................................11 Net Assets................................................................11 Investments..............................................................12 Classification of Revenues ......................................12 Investments..............................................................12 Investment Authority And Investment Practices of the System ...............................................................12 Additional Provisions ..............................................14 Current Investments.................................................14 EMPLOYEES RETIREMENT SYSTEM...............14 TAX MATTERS .....................................................14 Tax Exemption ........................................................14 ADDITIONAL FEDERAL INCOME TAX CONSIDERATIONS...............................................15 Collateral Tax Consequences ..................................15 Tax Accounting Treatment of Original Issue Premium ..................................................................16

Tax Accounting Treatment of Original Issue Discount Bonds .......................................................16 CONTINUING DISCLOSURE OF INFORMATION .................................................................................17 Annual Reports ........................................................17 Material Event Notices ............................................17 Availability Of Information From NRMSIRS And SIDS ........................................................................18 Limitations And Amendments.................................18 Compliance With Prior Undertakings......................18 OTHER INFORMATION .......................................19 Ratings.....................................................................19 Financial Guaranty Industry – Recent Events .........19 Litigation .................................................................19 Registration And Qualification Of Bonds For Sale .19 Legal Investments and Eligibility to Secure Public Funds in Texas.........................................................19 Legal Matters...........................................................20 Validation ................................................................20 Authenticity Of Financial Data And Other Information ..............................................................20 Financial Advisor ....................................................21 Underwriting............................................................21 Forward-Looking Statements Disclaimer ................21 Miscellaneous ..........................................................21
APPENDICES INFORMATION REGARDING THE SYSTEM ........................ A INFORMATION REGARDING THE SYSTEM’S STUDENTS, TUITIONS, & FEES .............................................. B FORM OF BOND COUNSEL’S OPINION ................................ C EXCERPT FROM THE SYSTEM’S ANNUAL REPORT ........ D The cover page hereof, this page, the schedules and the appendices included herein and any addenda, supplement or amendment hereto, are part of the Official Statement.

THIS OFFICIAL STATEMENT, WHICH INCLUDES THE COVER PAGE AND THE APPENDICES AND SCHEDULES HERETO, DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OR SALE. No dealer, broker, salesperson or other person has been authorized to give information or to make any representation other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon. The 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 responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. The information set forth herein has been obtained from the System and other sources believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as the promise or guarantee of the System or the Financial Advisor. This Official Statement contains, in part, estimates and matters of opinion which are not intended as statements of fact, and no representation is made as to the correctness of such estimates and opinions, or that they will be realized. The information and expressions of opinion contained herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the System or other matters described. See “CONTINUING DISCLOSURE OF INFORMATION” for a description of the System’s undertaking to provide certain information on a continuing basis. NEITHER THE SYSTEM, ITS FINANCIAL ADVISOR, OR THE UNDERWRITERS MAKE ANY REPRESENTATION OR WARRANTY WITH RESPECT THE INFORMATION CONTAINED IN THIS OFFICIAL STATEMENT REGARDING THE DEPOSITORY TRUST COMPANY OR ITS BOOKENTRY-ONLY SYSTEM OR REGARDING ITS MUNICIPAL BOND GUARANTEE POLICY IF ANY

THE BONDS HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, INRELIANCE UPON EXEMPTION CONTAINED IN SUCH ACT. THE REGISTRATION OR QUALIFICATION OF THE OBLIGATIONS IN ACCORDANCE WITH APPLICABLE PROVISIONS OF SECURITIES LAW OF THE STATES IN WHICH THE BONDS HAVE BEEN REGISTERED OR QUALIFIED AND THE EXEMPTION FROM REGISTRATION OR QUALIFICATION IN OTHER STATES CANNOT BE REGARDED AS A RECOMMENDATION THEROF THIS OFFICIAL STATEMENT CONTAINS “FORWARD-LOOKING” STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES AND EXCHANGE ACT OF 1934, AS AMENDED. SUCH STATEMENTS MAY INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE AND ACHIEVEMENTS TO BE DIFFERENT FROM THE FUTURE RESULTS, PERFORMANCE AND ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARDLOOKING STATEMENTS. INVESTORS ARE CAUTIONED THAT THE ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS.

-5HOU:2418563.2

OFFICIAL STATEMENT SUMMARY This summary is subject in all respects to the more complete information and definitions contained or incorporated in this Official Statement. The offering of the Bonds to potential investors is made only by means of this entire Official Statement. No person is authorized to detach this summary from this Official Statement or to otherwise use it without the entire Official Statement. THE SYSTEM...................................................... The Lone Star College System (the “System”) (formerly “North Harris Montgomery Community College District”) is a junior college system and political subdivision of the State of Texas. The System is located in the northern portion of Harris County and the southern portion of Montgomery County, Texas. The System encompasses the Aldine, Conroe, Cypress-Fairbanks, Humble, Klein, Magnolia, New Caney, Splendora, Spring, Tomball and Willis Independent School Systems. The System is a comprehensive, public, two-year institution offering academic, general occupational, developmental, and continuing adult education programs through a network of colleges. Presently, the System includes North Harris, Kingwood, Tomball, Montgomery, the Cypress-Fairbanks colleges and the University Center. The System is approximately 1,462 square miles in area (see “Appendix A – Information Regarding the System” and “Appendix B – General Information Regarding Harris County). THE BONDS ....................................................... The $149,780,000 Limited Tax General Obligation Bonds, Series 2008 (the “Bonds”) are issued as Current Interest Bonds (“CIBs”) maturing on August 15 in the years 2009 through 2038 inclusive and paying interest and maturity value at the rates as shown on the inside cover page of this Official Statement. Interest on the CIBs will accrue from the dated date shown on the inside cover page hereof and will be payable February 15 and August 15 of each year, commencing February 15, 2009, and will be calculated on the basis of a 360 day year of twelve 30 day months. See “THE BONDS – DESCRIPTION OF THE BONDS” herein. The Bonds are being issued pursuant to the Constitution and general laws of the State of Texas, including particularly Section 130.122, Texas Education Code, as amended, an order (the “Order”) adopted by the Board of Trustees of the System (the “Board), and an election, held on May 10, 2008. (See “THE BONDS – AUTHORITY FOR ISSUANCE”). The Bonds are direct obligations of the System and are payable from a continuing direct annual ad valorem tax levied by the System, within the limits prescribed by law, on all taxable property located within the System (see “THE BONDS – SECURITY FOR BONDS”).

PAYMENT OF INTEREST .....................................

AUTHORITY FOR ISSUANCE ...............................

SECURITY FOR THE BONDS ...............................

-vi-

OPTIONAL REDEMPTION ....................................

The CIBs maturing on August 15, 2019 and thereafter are subject to redemption at the option of the System, on or after August 15, 2018 at the price of par plus accrued interest. See “THE BONDS – OPTIONAL REDEMPTION” herein. Term Bonds maturing on August 15 in the years 2029, 2033 and 2038 are subject to mandatory sinking fund redemption prior to maturity at a price of par plus accrued interest to the redemption date (see “THE BONDS – MANDATORY SINKING FUND REDEMPTION”). In the opinion of Bond Counsel, interest on the Bonds is excludable from gross income for federal income tax purposes under existing law, and the Bonds are not private activity bonds. See “TAX MATTERS – TAX EXEMPTION” herein. Proceeds from the sale of the Bonds will be used to (i) construct and equip school buildings in the System, including instructional facilities, academic support facilities, administrative support facilities, plant system replacements and technology infrastructure, and the purchase of necessary sites therefore, and (ii) pay costs of issuing the Bonds. See “THE BONDS – USE OF BOND PROCEEDS” herein. The Bonds are rated “Aa2” by Moody’s Investors Service, Inc. (“Moody’s”) and “AA+” by Standard & Poor’s Rating Corporation (“S&P”). The presently outstanding tax supported uninsured debt of the System is rated “Aa2” by Moody’s and “AA+” by S&P. The System also has other issues outstanding which are rated “Aaa” by Moody’s and “AAA” by S&P through insurance by various commercial insurance companies. (see “OTHER INFORMATION – RATINGS”). The System has never defaulted in payment of its general obligation debt.

MANDATORY SINKING FUND REDEMPTION .......

TAX EXEMPTION ...............................................

USE OF THE BONDS ..........................................

RATINGS ............................................................

PAYMENT RECORD ............................................

-vii-

VALUATION AND TAX-SUPPORTED DEBT HISTORY
Ratio of Tax Supported Debt to Taxable Assessed Valuation 0.372% 0.439% 0.352% 0.465% 0.398% 0.362% 0.337% 0.283% 0.251% 0.197% 0.292%

Fiscal Year Taxable Ended Assessed 8/31 Valuation 1998 $ 20,877,459,329 23,655,850,537 1999 29,318,674,811 2000 31,297,100,802 2001 2002 58,509,951,482 2003 63,838,636,037 2004 69,598,292,568 2005 75,289,889,250 2006 75,969,405,661 2007 87,674,701,064 2008 102,375,607,090

Change From Prior Year

Amount
2,778,391,208 5,662,824,274 1,978,425,991 27,212,850,680 5,328,684,555 5,759,656,531 5,691,596,682 679,516,411 11,705,295,403 14,700,906,026

Percent 13.308% 23.938% 6.748% 86.950% 9.107% 9.022% 8.178% 0.903% 15.408% 16.768%

Tax Supported Debt Outstanding at FYE $ 77,583,759 103,806,436 103,198,089 145,613,731 232,747,123 231,339,997 234,403,656 213,294,083 190,336,613 173,001,413 298,820,000

(a)

Estimated System Population 656,111 673,774 844,839 867,582 1,298,518 1,333,474 1,369,371 1,406,234 1,440,000 1,480,000 1,500,000

Per Capita Taxable Assessed Valuation $ 31,820 35,109 34,703 36,074 45,059 47,874 50,825 53,540 52,757 59,240 68,250

Tax Supported Debt Per Capita $ 118 154 122 168 179 173 171 152 132 117 199

Source: The System & Harris County and Montgomery County Appraisal Districts (a) Includes "The Bonds.”

TAX RATE, LEVY AND COLLECTION HISTORY

Fiscal Year Ended 8/31 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Tax Rate $ 0.11980 0.11980 0.11740 0.11000 0.11000 0.10550 0.11450 0.11450 0.12070 0.11670 0.11440

Distribution Local Interest & Maintenance Sinking Fund $ 0.06800 $ 0.05180 0.08070 0.03910 0.07770 0.03970 0.07500 0.03500 0.07600 0.03400 0.07420 0.03130 0.07980 0.03470 0.07980 0.03470 0.08600 0.03470 0.08200 0.03470 0.08090 0.03350

$

Tax Levy 26,544,907 28,539,979 36,343,512 38,098,610 64,360,946 67,349,761 79,690,045 85,862,441 91,695,013 102,316,376 -

(1)(2)

Current Total Collections Collections 97.5% 101.3% 97.3% 101.5% 97.0% 101.1% 96.3% 100.0% 95.6% 100.0% 97.2% 100.0% 97.0% 102.0% 97.0% 100.0% 96.7% 100.0% 96.6% 102.2% In Process of Collection

(1) Excludes Penalty & Interest. (2) Based on taxable value as of January 1.

For additional information regarding the System, please contact:
Cynthia Gilliam, CPA, Vice Chancellor for Business Affairs and Chief Financial Officer Lone Star College System 5000 Research Forest Drive The Woodlands, TX 77381 (832) 813-6500 Phone (832) 813-6618 Fax David Tiffin Clarence Grier RBC Capital Markets 2411 N Haskell Ave Suite 2500 Dallas, TX 75204 (214) 989-1777 Phone (214) 989-1650 Fax

or

-viii-

SYSTEM ADMINISTRATION ADMINISTRATION OF THE SYSTEM Policy making functions are the responsibility of, and are vested in, a nine-member board of trustees who serve sixyear staggered terms with elections being held in May of even-numbered years. The Board delegates administrative responsibilities to the chancellor who is the Chief Executive Officer of the System. Independent consultants and advisors provide various supporting services. ELECTED OFFICIALS
Board of Trustees Randy Bates, J.D., Chair David Holsey, D.D.S., Vice Chair Priscilla Kelly, Secretary Chris Daniel, Assistant Secretary David Vogt, Member Stephanie Marquard, Member Richard Campbell, Ph.D., Member Robert J. Adam, Member Robert Wolfe, Member Length of Service 17 Years 1 1/2 Years 13 Years 1 1/2 Years 11 Years 13 Years 4 Years 3 Months 3 Months Term Expires 2012 2012 2014 2012 2010 2014 2010 2014 2010 Occupation Attorney, Bates & Coleman, P.C. Dentist Counselor, Klein Intermediate School Kellogg Brown & Root President, Vogt Engineering, Inc Owner, Kingwood Air Conditioning & Heating Retired Minister Attorney Attorney, CPA

APPOINTED OFFICIALS
Name Richard Carpenter, Ed.D. Rand W. Key, J.D., M.B.A. Cynthia Gilliam, CPA Ray Laughter, M.B.A. Penny Westerfeld Katherine Persson, Ph.D. Raymond Hawkins, Ph.D. Open Position Diane K. Troyer, Ph.D. Position Chancellor Senior Vice Chancellor & Chief Operating Officer Vice Chancellor for Administration & Finance & Chief Financial Officer Vice Chancellor for External Affairs President, Lone Star College President, Kingwood College President, Tomball College President, Montgomery College President, Cy-Fair College Length of Service at System 1 Year 8 Months 7 1/2 Years 20 1/2 Years Interim 21 1/2 Years 9 1/2 Years 12 Years

CONSULTANTS AND ADVISORS
Bond Counsel ..............................................................................................................................................Vinson & Elkins L.L.P. Houston, Texas Auditors ....................................................................................................................................................McConnell & Jones, LLP Houston, Texas Financial Advisor........................................................................................................................ RBC Capital Markets Corporation Dallas, Texas

-ix-

OFFICIAL STATEMENT RELATING TO $149,780,000 LONE STAR COLLEGE SYSTEM LIMITED TAX GENERAL OBLIGATION BONDS, SERIES 2008 INTRODUCTION This Official Statement provides certain information regarding the issuance by the Lone Star College System (the “System”) of its $149,780,000 Limited Tax General Obligation Bonds, Series 2008 (the “Bonds”). Capitalized terms used in this Official Statement have the same meanings assigned to such terms in the order adopted by the Board of Trustees of the System (the “Board”) which authorizes the issuance of the Bonds (the “Order”), except as otherwise indicated herein. There follows in this Official Statement descriptions of the Bonds and certain information regarding the System 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 System’s Financial Advisor, RBC Capital Markets Corporation, Dallas, Texas. All financial and other information presented in this Official Statement has been provided by the System from its records, except for information expressly attributed to other sources. The presentation of information, including tables of receipts from taxes and other sources, is intended to show recent historic information and is not intended to indicate future or continuing trends in the financial position or other affairs of the System. No representation is made that past experience, as is shown by that financial and other information, will necessarily continue or be repeated in the future (see “FORWARD LOOKING STATEMENTS”). This Official Statement speaks only as of the date and the information contained herein is subject to change. Copies of the Official Statement will be deposited with the Municipal Securities Rulemaking Board, 1900 Duke Street, Suite 600, Alexandria, Virginia 22314. See “CONTINUING DISCLOSURE OF INFORMATION” for a description of the System’s undertaking to provide certain information on a continuing basis.

DESCRIPTION OF THE SYSTEM The System is a junior college system and political subdivision of the State of Texas located in Harris and Montgomery Counties, Texas. The System is governed by a nine-member Board of Trustees who serve staggered six-year terms with elections being held in May of each even-numbered year. Policy-making and supervisory functions are the responsibility of, and are vested in, the Board. The Board delegates administrative responsibilities to the Chancellor who is the chief executive officer of the System (see “SYSTEM ADMINISTRATION”). The System is approximately 1,462 square miles in area. (For more information regarding the System, see “Appendix A – Information Regarding the System” and “Appendix B – General Information Regarding Harris County”). THE BONDS DESCRIPTION OF THE BONDS The Bonds will be issued as Current Interest Bonds (the “CIBs). Interest on the CIBs will accrue from the dated date and will be payable February 15 and August 15 of each year, commencing February 15, 2009, and will be calculated on the basis of a 360 day year of twelve 30-day months. The CIBs will mature on the dates and in the principal amounts set forth on the inside front cover page of this Official Statement. The Bonds will be issued only in fully registered form. The CIBs will be issued in denominations of $5,000 of principal amount or in any integral multiple of $5,000 within a maturity. The Bonds will be initially registered and delivered only to Cede & Co., the nominee of The Depository Trust Company (“DTC”) pursuant to the Book-Entry-Only System described herein.

1

No physical delivery of the Bonds will be made to the beneficial owners thereof. Principal of, premium, if any, maturity value accrued interest on the Bonds will be payable by the Paying Agent/Registrar to Cede & Co., which will make distribution of the amounts so paid to the beneficial owners of the Bonds. See “THE BONDS – BOOKENTRY-ONLY SYSTEM” herein. PURPOSE OF THE BONDS The Bonds are being issued to construct and equip school buildings in the System, including instructional facilities, academic support facilities, administrative support facilities, plant system replacements and technology infrastructure, and the purchase of necessary sites therefore and to pay costs of issuing the Bonds. See “THE BONDS – USE OF BOND PROCEEDS.” AUTHORITY FOR ISSUANCE The Bonds are issued pursuant to the Constitution and the laws of the State of Texas, including particularly Section 130.122, Texas Education Code, as amended, the Order and the Election. SECURITY FOR BONDS The Bonds are direct obligations of the System and are payable from a continuing direct annual ad valorem tax levied by the System, within the limits prescribed by law, on all taxable property located within the System, as provided in the Order. See “–TAX RATE LIMITATION” below. TAX RATE LIMITATION Pursuant to Chapter 130, Texas Education Code, as amended, and an election held within the System, the System is authorized to levy annual ad valorem taxes for maintenance and operations at a rate not to exceed $0.30 per $100 assessed valuation of taxable property in the System and the annual ad valorem taxes for debt service purposes, including payment of principal and interest on the Bonds, may not exceed $0.50 per $100 assessed valuation of taxable property in the System. (Total tax rate is limited to $0.80 per $100.) Currently the System levies maintenance taxes at $0.0809 per $100 valuation and $0.03350 per $100 assessed value for debt service. OPTIONAL REDEMPTION The Bonds maturing on or after August 15, 2019 are subject to optional redemption in whole or in part on August 15, 2018 or any date thereafter, at a price equal to the principal amount thereof, plus accrued interest to the date of redemption. If less than all of the CIBs are to be redeemed, the System shall determine the amounts and maturities thereof to be redeemed. Not less than 30 days prior to a redemption date for the CIBs, the System shall cause a notice of redemption to be sent by United States mail, first class, postage prepaid, to each registered owner of a CIB to be redeemed, in whole or in part, at the address of the registered owner appearing on the registration books of the Paying Agent/Registrar at the close of business on the business day next preceding the date of mailing such notice. ANY NOTICE SO MAILED SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN DULY GIVEN IRRESPECTIVE OF WHETHER RECEIVED BY THE BONDHOLDER, AND, SUBJECT TO PROVISION FOR PAYMENT OF THE REDEMPTION PRICE HAVING BEEN MADE, INTEREST ON THE REDEEMED BONDS SHALL CEASE TO ACCRUE FROM AND AFTER SUCH REDEMPTION DATE NOTHWITHSTANDING THAT A BOND HAS NOT BEEN PRESENTED FOR PAYMENT. If a CIB is subject by its terms to redemption and has been called for redemption and notice of redemption thereof has been duly given, such CIBs (or the principal amount thereof to be redeemed) so called for redemption shall become due and payable, and on the redemption date designated in such notice, interest on said CIBs (or the principal amount thereof to be redeemed) so called for redemption shall become due and payable and on the redemption date designated in such notice, interest on said CIBs (or principal amount thereof to be redeemed) called for redemption shall cease to accrue and such CIBs shall not be deemed to be Outstanding.

-2-

MANDATORY SINKING FUND REDEMPTION The Bonds maturing on August 15 in the years 2029, 2033 and 2038 (the “Term Bonds”) are subject to mandatory redemption in part prior to maturity at a price of par plus accrued interest to the redemption date as follows:
Bonds Maturing August 15, 2029 Redemption Amount Date 8/15/2028 $ 5,560,000 8/15/2029* 5,840,000 Bonds Maturing August 15, 2033 Redemption Amount Date 8/15/2030 $ 6,130,000 8/15/2031 6,435,000 8/15/2032 6,760,000 8/15/2033* 7,095,000 Bonds Maturing August 15, 2038 Redemption Amount Date 8/15/2034 $ 7,450,000 8/15/2035 7,825,000 8/15/2036 8,215,000 8/15/2037 8,625,000 8/15/2038* 9,055,000

*Maturity Date The particular Term Bonds to be redeemed shall be chosen by the Paying Agent/Registrar (or DTC while the Bonds are in Book-Entry-Only form) at random by lot or other customary method; provided, however, that the principal amount of the Term Bonds required to be redeemed pursuant to the operation of the mandatory redemption provisions shall be reduced, at the option of the District, by the principal amount of said Term Bonds which, at least 45 days prior to the mandatory redemption date, (1) shall have been acquired by the District and delivered to the Paying Agent/Registrar for cancellation or (2) shall have been redeemed pursuant to the optional redemption provisions and not theretofore credited against a mandatory redemption requirement.

DEFEASANCE OF BONDS The System reserves the right to defease the Bonds in any manner now or hereafter permitted by law. AMENDMENTS The System may amend the Order without the consent of or notice to any registered owner in any manner not detrimental to the interests of the registered owners, including the curing of any ambiguity, inconsistency, or formal defector omission therein. In addition, the System may with the written consent of the holders of a majority of aggregate principal amount of the Bonds then outstanding affected thereby, amend, add to, or rescind any of the provisions of the Order; except that, without the consent of the registered owners of the Bonds affected, no such amendment, addition or rescission may (1) extend the time or times of payment of the principal of, premium, if any, and interest on the Bonds, reduce the principal amount thereof, the redemption price, or the rate of interest thereon, or in any other way modify the terms of payment of the principal of, premium, if any, or interest on the Bonds, (2) give any preference to any Bond over any other Bond, or (3) reduce the aggregate principal amount of the Bonds required to be held by holders for consent to any such amendment, addition, or rescission. BOOK-ENTRY-ONLY SYSTEM This section describes how ownership of the Bonds is to be transferred and how the principal of, premium, if any, and interest on the Bonds are to be paid to and credited by The Depository Trust Company (“DTC”), New York, New York, while the Bonds are registered in its nominee name. The information in this section concerning DTC and the Book-Entry-Only System has been provided by DTC for use in disclosure documents such as this Official Statement. The System believes the source of such information to be reliable, but takes no responsibility for the accuracy or completeness thereof. The System cannot and does not give any assurance that (1) DTC will distribute payment of debt service on the Bonds, or redemption or other notices to DTC Participants, (2) DTC Participants or others will distribute debt service payments paid to DTC or its nominee (as the registered owner of the Bonds), or redemption or other notices, to the Beneficial Owners, or that they will do so on a timely basis, or (3) DTC will serve and act in the manner described in this Official Statement. The current rules applicable to DTC are on file with the Securities and

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Exchange Commission, and the current procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. DTC will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities 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 certificate will be issued for the Bonds, in the aggregate principal amount of such issue, and will be deposited with DTC. DTC, the world’s largest 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, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC’s participants (“Direct Issues 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, the 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 companies 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 confirmation 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 physical 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 Paying Agent/Registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC’s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

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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 System as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co.’s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, principal, and interest payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC’s practice is to credit Direct Participants’ accounts upon DTC’s receipt of funds and corresponding detail information from the System or the Paying Agent/Registrar, on payable date in accordance with their respective holdings shown on DTC’s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in “street name,” and will be the responsibility of such Participant and not of DTC nor its nominee, the Paying Agent/Registrar, or the System, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, principal, and interest payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the System or the Paying Agent/Registrar. Disbursement of such payments to Direct Participants will be the responsibility of DTC, and reimbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the System or the Paying Agent/Registrar. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. Discontinuance by the District of use of the system of book-entry transfers through DTC may require compliance with DTC operational arrangements. The District may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). Discontinuance of the system of book-entry transfers by the District may require the consent of Participants under DTC’s Operational Arrangements. In that event, Bond certificates will be printed and delivered. The information in this section concerning DTC and DTC’s book-entry system has been obtained from sources that the District believes to be reliable, but neither the District, the Financial Advisor nor the Underwriters take responsibility for the accuracy thereof. 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, notices that are to be given to registered owners under the Order will be given only to DTC. 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 System, the Financial Advisor or the Underwriters. PAYING AGENT/REGISTRAR The initial Paying Agent/Registrar is Wells Fargo, N.A. In the Order, the System retains the right to replace the Paying Agent/Registrar. The System covenants to maintain and provide a Paying Agent/Registrar at all times while the Bonds are outstanding and any successor Paying Agent/Registrar shall be a commercial bank or trust company organized under the laws of the United States or any State duly qualified and legally authorized to serve as and perform the duties and services of Paying Agent/Registrar for the Bonds. Upon any change in the Paying Agent/Registrar for the Bonds, the System agrees to promptly cause a written notice thereof to be sent to each registered owner of the Bonds by United States mail, first class, postage prepaid, which notice shall also give the address of the new Paying Agent/Registrar.

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TRANSFER, EXCHANGE AND REGISTRATION In the event that the Book-Entry-Only System should be discontinued, printed certificates will be issued to the holders, or owners of the Bonds and thereafter, the Bonds may be transferred and exchanged on the registration books of the Paying Agent/Registrar only upon presentation and surrender thereof to the Paying Agent/Registrar and such transfer or exchange shall be without expense or service charge to the registered owner, except for any tax or other governmental charges required to be paid with respect to such registration, exchange and transfer. A Bond may be assigned by the execution of an assignment form on the Bond or by other instrument of transfer and assignment acceptable to the Paying Agent/Registrar. A new Bond or Bonds will be delivered by the Paying Agent/Registrar, in lieu of the Bond being transferred or exchanged, at the principal office of the Paying Agent/Registrar, or sent by United States mail, first class, postage prepaid, to the new registered owner or his designee. To the extent possible, new Bonds issued in an exchange or transfer of Bonds will be delivered to the registered owner or assignee of the registered owner in not more than three business days after the receipt of the Bonds to be canceled, and the written instrument of transfer or request for exchange duly executed by the registered owner or his duly authorized agent, in form satisfactory to the Paying Agent/Registrar. New Bonds registered and delivered in an exchange or transfer shall be in any integral multiple of $5,000 of principal amount for the Bonds for any one maturity and for a like aggregate principal as the Bond or Bonds surrendered for exchange or transfer. See “THE BONDS-BOOK-ENTRY-ONLY SYSTEM” herein for a description of the System to be utilized initially in regard to ownership and transferability of the Bonds. RECORD DATE FOR INTEREST PAYMENT The record date (“Record Date”) for the interest payable on any interest payment date means the close of business on the last business day of the preceding month. In the event of a non-payment of interest on a scheduled payment date, and for 30 days thereafter, a new record date for such interest payment (a “Special Record Date”) will be established by the Paying Agent/Registrar, if and when funds for the payment of such interest have been received by or on behalf of the System. Notice of the Special Record Date and of the scheduled payment date of the past due interest (“Special Payment Date”, which shall be 15 days after the Special Record Date) shall be sent at least five business days prior to the Special Record Date by United States mail, first class postage prepaid, to the address of each holder of a Bond appearing on the registration books of the Paying Agent/Registrar at the close of business on the last business day next preceding the date of mailing of such notice. LIMITATION ON TRANSFER OF BONDS Neither the System nor the Paying Agent/Registrar shall be required to issue, transfer or exchange any Bond during the period beginning at the close of business on any Record Date and ending with the next interest payment date, or with respect to any Bonds or portion thereof called for redemption prior to maturity, within 45 days prior to its redemption date. REPLACEMENT BONDS If any Bond is mutilated, destroyed, stolen or lost, a new Bond in the same principal amount or Maturity Value, as the case may be, as the Bond so mutilated, destroyed, stolen or lost will be issued. In the case of a mutilated Bond, such new Bond will be delivered only upon surrender and cancellation of such mutilated Bond. In the case of any Bond issued in lieu of an substitution for a Bond which has been destroyed, stolen or lost, such new Bond will be delivered only (a) upon filing with the System and the Paying Agent/Registrar a certificate to the effect that such Bond has been destroyed, stolen or lost and proof of the ownership thereof, and (b) upon furnishing the System and the Paying Agent/Registrar with indemnity satisfactory to them. The person requesting the authentication and delivery of a new Bond must pay such expenses as the Paying Agent/Registrar may incur in connection therewith.

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BONDHOLDERS’ REMEDIES The Order does not provide for the appointment of a trustee to represent the interests of the Bond holders upon any failure of the System to perform in accordance with the terms of the Order or upon any other condition and, in the event of any such failure to perform, the registered owners would be responsible for the initiation and cost of any legal action to enforce performance of the Order. Furthermore, the Order does not establish specific events of default with respect to the Bonds and, under State law, there is no right to the acceleration of maturity of the Bonds upon the failure of the System to observe any covenant under the Order. A registered owner of Bonds could seek a judgment against the System if a default occurred in the payment of principal of or interest on any such Bonds; however, such judgment could not be satisfied by execution against any property of the System and a suit for monetary damages could be vulnerable to the defense of sovereign immunity. A registered owner’s only practical remedy, if a default occurs, is a mandamus or mandatory injunction proceeding to compel the System to levy, assess and collect an annual ad valorem tax sufficient to pay principal of and interest on the Bonds as it becomes due or perform other material terms and covenants contained in the Order. In general, Texas courts have held that a writ of mandamus may be issued to require a public official to perform legally imposed ministerial duties necessary for the performance of a valid contract, and Texas law provides that, following their approval by the Attorney General and issuance, the Bonds are valid and binding obligations for all purposes according to their terms. However, the enforcement of any such remedy may be difficult and time consuming and a registered owner could be required to enforce such remedy on a periodic basis. The System is also eligible to seek relief from its creditors under Chapter 9 of the U.S. Bankruptcy Code (“Chapter 9”). Although Chapter 9 provides for the recognition of a security interest represented by a specifically pledged source of revenues, the pledge of taxes in support of a general obligation of a bankrupt entity is not specifically recognized as a security interest under Chapter 9. Chapter 9 also includes an automatic stay provision that would prohibit, without Bankruptcy Court approval, the prosecution of any other legal action by creditors or Bond holders of an entity which has sought protection under Chapter 9. Therefore, should the System avail itself of Chapter 9 protection from creditors, the ability to enforce would be subject to the approval of the Bankruptcy Court (which could require that the action be heard in Bankruptcy Court instead of other federal or state court); and the Bankruptcy Code provides for broad discretionary powers of a Bankruptcy Court in administering any proceeding brought before it. The opinion of Bond Counsel will note that all opinions relative to the enforceability of the Order and the Bonds are qualified with respect to the customary rights of debtors relative to their creditors, including rights afforded to creditors under the Bankruptcy Code. USE OF BOND PROCEEDS

Sources Of Funds
Par Amount of Bonds Reoffering Premium Accrued Interest Total Sources 149,780,000.00 181,749.69 1,409,377.55 151,371,127.24

Uses Of Funds
Total Underwriter's Discount Costs of Issuance Deposit to Debt Service Fund Deposit to Project Fund Total Uses 748,849.36 440,000.00 182,277.88 150,000,000.00 151,371,127.24

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TAX INFORMATION AD VALOREM TAX LAW The appraisal of property within the System is the responsibility of the Harris and Montgomery County Appraisal Systems (the “Appraisal Systems”). Excluding agricultural and open-space land, which may be taxed on the basis of productive capacity, the Appraisal System is required under the Property Tax Code to appraise all property within the Appraisal System on the basis of 100% of its market value and is prohibited from applying any assessment ratios. In determining market value of property, different methods of appraisal may be used, including the cost method of appraisal, the income method of appraisal and market data comparison method of appraisal, and the method considered most appropriate by the chief appraiser is to be used. State law further limits the appraised value of a residence homestead for a tax year to an amount not to exceed the lesser of (1) the market value of the property, or (2) 110% of the appraised value of the residence homestead for the preceding tax year plus the market value of all new improvements to the property. The value placed upon property within the Appraisal System is subject to review by an Appraisal Review Board, consisting of three members appointed by the Board of Directors of the Appraisal System. The Appraisal System is required to review the value of property within the Appraisal System at least every three years. The System may require annual review at its own expense, and is entitled to challenge the determination of appraised value of property within the System by petition filed with the Appraisal Review Board. Reference is made to the Property Tax Code, for identification of property subject to taxation; property exempt or which may be exempted from taxation, if claimed; the appraisal of property for ad valorem taxation purposes; and the procedures and limitations applicable to the levy and collection of ad valorem taxes. Article VIII of the State Constitution (“Article VIII”) and State law provide for certain exemptions from property taxes, the valuation of agricultural and open-space lands at productivity value, and the exemption of certain personal property from ad valorem taxation. Under Section 1-b, Article VIII, and State law, the governing body of a political subdivision, at its option, may grant: (1) an exemption of not less than $3,000 of the market value of the residence homestead of persons 65 years of age or older and the disabled from all ad valorem taxes thereafter levied by the political subdivision; and (2) an exemption of up to 20% of the market value of residence homesteads. The minimum exemption under this provision is $5,000. State law and Section 2, Article VIII, mandate an additional property tax exemption for disabled veterans or the surviving spouse or children of a deceased veteran who died while on active duty in the armed forces; the exemption applies to either real or personal property with the amount of assessed valuation exempted ranging from $5,000 to a maximum of $12,000. Effective January 1, 2004, under Article VIII and State law, the governing body of a county, municipality or junior college district, may freeze the total amount of ad valorem taxes levied on the residence homestead of a disabled person or person 65 years of age or older to the amount of taxes imposed in the year such residence qualified for such exemption. Also, upon receipt of a petition signed by five percent of the registered voters of the county, municipality or junior college district, an election must be held to determine by majority vote whether to establish such a limitation on taxes paid on residence homesteads of persons 65 years of age or who are disabled. Upon providing for such exemption, such freeze on ad valorem taxes is transferable to a different residence homestead and to a surviving spouse living in such homestead who is disabled or is at least 55 years of age. If improvements (other than maintenance or repairs) are made to the property, the value of the improvements is taxed at the then current tax rate, and the total amount of taxes imposed is increased to reflect the new improvements with the new amount of taxes then serving as the ceiling on taxes for the following years. Once established, the tax rate limitation may not be repeated or rescinded. Article VIII provides that eligible owners of both agricultural land (Section 1-d) and open-space land (Section 1-d-1), including open-space land devoted to farm or ranch purposes or open-space land devoted to timber production, may elect to have such property appraised for property taxation on the basis of its productive capacity. The same land may not be qualified under both Section 1-d and 1-d-1.

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Nonbusiness personal property, such as automobiles or light trucks, is exempt from ad valorem taxation unless the governing body of a political subdivision elects to tax this property. Boats owned as nonbusiness property are exempt from ad valorem taxation. Article VIII, Section 1-j, provides for “freeport property” to be exempted from ad valorem taxation. Freeport property is defined as goods detained in Texas for 175 days or less for the purpose of assembly, storage, manufacturing, processing or fabrication. Decisions to continue to tax may be reversed in the future; decisions to exempt freeport property are not subject to reversal. Article VIII, section 1-n of the Texas Constitution provides for the exemption from taxation of “goods-in-transit.” “Goods-in-transit” is defined by a provision of the Tax Code, which is effective for tax years 2008 and thereafter, as personal property acquired or imported into Texas and transported to another location in the State or outside of the State within 175 days of the date the property was acquired or imported into Texas. The exemption excludes oil, natural gas, petroleum products, aircraft and special inventory, including motor vehicle, vessel and out-board motor, heavy equipment and manufactured housing inventory. The Tax Code provision permits local governmental entities, on a local option basis, to take official action by January 1 of the year preceding a tax year, after holding a public hearing, to tax goods-in- transit during the following tax year. A taxpayer may receive only one of the freeport exemptions or the goods-in-transit exemptions for items of personal property. The System does not grant the Freeport exemption. A city or county may create a tax increment financing district (“TIF”) within the city or county with defined boundaries and establish a base value of taxable property in the TIF at the time of its creation. Overlapping taxing units, including the System, may agree with the city or county to contribute all or part of future ad valorem taxes levied and collected against the “incremental value” (taxable value in excess of the base value) of taxable real property in the TIF to pay or finance the costs of certain public improvements in the TIF. Depending on the System’s level of participation in a tax increment reinvestment zone, if any, the system’s ability to retain ad valorem taxes collected on the increased assessed valuation of real property in the tax increment reinvestment zone in excess of the tax increment base value established for the zone would be limited by the provisions of its participation in the zone. The System may also enter into tax abatement agreement to encourage economic development. Under the agreements, a property owner agrees to construct certain improvements on its property. The System in tern agrees not to levy a tax on all or pert of the increased value attributable to the improvements until the expiration of the agreement. The abatement agreement could last for a period of up to 10 years.

EFFECTIVE TAX RATE AND ROLLBACK TAX RATE By each September 1 or as soon thereafter as practicable, the Board of Trustees adopts a tax rate per $100 taxable value for the current year. The tax rate consists of two components: (1) a rate for funding of maintenance and operation expenditures, and (2) a rate for debt service. Under the Property Tax Code, the System must annually calculate and publicize its “effective tax rate” and “rollback tax rate”. The Board of Trustees may not adopt a tax rate that exceeds the prior year’s levy until it has held two public hearings on the proposed increase following notice to the taxpayers and otherwise complied with the Property Tax Code. If the adopted tax rate exceeds the rollback tax rate the qualified voters of the System by petition may require that an election be held to determine whether or not to reduce the tax rate adopted for the current year to the rollback tax rate. “Effective tax rate” means the rate that will produce last year’s total tax levy (adjusted) from this year’s total taxable values (adjusted). “Adjusted” means lost values are not included in the calculation of last year’s taxes and new values are not included in this year’s taxable values.

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“Rollback tax rate” means the rate that will produce last year’s maintenance and operation tax levy (adjusted) from this year’s values (adjusted) multiplied by 1.08 plus a rate that will produce this year’s debt service from this year’s values (unadjusted) divided by the anticipated tax collection rate. The Property Tax Code provides that certain cities and counties in the State may submit a proposition to the voters to authorize an additional one-half cent sales tax on retail sales of taxable items. If the additional tax is levied, the effective tax rate and the rollback tax rate calculations are required to be offset by the revenue that will be generated by the sales tax in the current year. Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valorem taxes and the calculation of the various defined tax rates. PROPERTY ASSESSMENT AND TAX PAYMENT Property within the System is generally assessed as of January 1 of each year. Business inventory may, at the option of the taxpayer, be assessed as of September 1. Oil and gas reserves are assessed on the basis of a valuation process which uses an average of the daily price of oil and gas for the prior year. Taxes become due October 1 of the same year, and become delinquent on February 1 of the following year. Taxpayers 65 years old or older are permitted by State law to pay taxes on homesteads in four installments with the first due on February 1 of each year and the final installment due on August 1. PENALTIES AND INTEREST Charges for penalty and interest on the unpaid balance of delinquent taxes are made as follows:
Cumulative Penalty 6% 7% 8% 9% 10% 11% Cumulative Interest 1% 2% 3% 4% 5% 6%

Month February March April May June July

Total 7% 9% 11% 13% 15% 18%

After July, penalty remains at 12%, and interest increases at the rate of 1% each month. In addition, if an account is delinquent in July, a 15% attorney’s collection fee is added to the total tax penalty and interest charge. Taxes levied by the System are a personal obligation of the owner of the property. On January 1 of each year, a tax lien attaches to property to secure the payment of all taxes, penalties and interest ultimately imposed for the year on the property. The lien exists in favor of the State and each taxing unit, including the System, having the power to tax the property. The System’s tax lien is on a parity with tax liens of all other such taxing units. A tax lien on real property has priority over the claim of most creditors and other holders of liens on the property encumbered by the tax lien, whether or not the debt or lien existed before the attachment of the tax lien. Personal property under certain circumstances is subject to seizure and sale for the payment of delinquent taxes, penalty and interest. At any time after taxes on property become delinquent, the System may file suit to foreclose the lien securing payment of the tax, to enforce personal liability for the tax, or both. In filing a suit to foreclose a tax lien on real property, the System must join other taxing units that have claims for delinquent taxes against all or part of the same property. The ability of the System to collect delinquent taxes by foreclosure may be adversely affected by the amount of taxes owed to other taxing units, adverse market conditions, taxpayer redemption rights, or bankruptcy proceedings which restrain the collection of a taxpayer’s debt. Federal bankruptcy law provides that an automatic stay of actions by creditors and other entities, including governmental units, goes into effect with the filing of any petition in bankruptcy. The automatic stay prevents governmental units from foreclosing on property and prevents liens for post-petition taxes from attaching to property and obtaining secured creditor status unless, in either case, an order lifting the stay is obtained from the bankruptcy court. In many cases post petition taxes are paid as an administrative expense of the estate in bankruptcy or by order of the bankruptcy court.

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Reference is made to the Property Tax Code for definitive requirements for the levy and collection of ad valorem taxes. For more particular tax information regarding the System, see “Appendix A –Information Regarding the System.”

FINANCIAL INFORMATION FINANCIAL POLICIES The following description of financial and accounting policies is based on implementation of accounting standards under Governmental Accounting Standards Board (“GASB”) Statement No. 34 and No. 35, and is applicable to financial reports for fiscal year 2002 and thereafter (as reflected in Changes in Net Assets General Fund Consolidated Statement Summary in Appendix E of the System’s 2004 Audit). The significant accounting policies followed by the System in preparing financial statements are in accordance with the Texas Higher Education Coordinating Board’s Annual Financial Reporting Requirements for Texas Public Community and Junior Colleges. These requirements are in substantial conformity with the AICPA Industry Audit Guide, Audits of Colleges and Universities, 1973 and as modified by applicable FASB pronouncements issued through November 1989 and as modified by all applicable GASB pronouncements cited in Codification Section Co5, “Colleges and Universities.” In June 1999, GASB issued Statement No. 34, “Basic Financial Statements - and Management Discussion and Analysis - for State and Local Governments.” This was followed in November 1999 by GASB Statement No. 35, “Basic Financial Statements - and Management’s Discussion and Analysis - for Public Colleges and Universities.” The financial statement presentation required by GASB No. 34 and No. 35 provides a comprehensive, entity-wide perspective of the System’s assets, liabilities, net assets, revenues, expenses, changes in net assets, cash flows, and replaces the fund-group perspective previously required. For financial statement purposes, the System is considered a special-purpose government engaged only in business-type activities. Accordingly, the financial statements of the System are presented using the economic measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned, and expenses are recorded when an obligation has been incurred. All significant intra-agency transactions have been eliminated. Encumbrance accounting, under which purchase order, contracts, and other commitments for expenditures of funds are recorded in order to reserve that portion of the applicable appropriation, is employed as an extension of formal budgetary integration in the financial statements. Under Texas law, appropriations lapse at August 31, and encumbrances outstanding at that time are to be either canceled or appropriately provided for in the subsequent year’s budget. Encumbrances outstanding at year-end that were provided for in the subsequent year’s budget are reported as reservations of net assets since they do not constitute expenditures or liabilities. NET ASSETS The System’s net assets are classified as follows: Investment in Capital Assets, Net of Related Debt. This represents the System’s total investment in capital assets, net of outstanding debt obligations related to those capital assets. To the extent debt has been incurred but not yet expended for capital assets, such amounts are not included as a component of investment in capital assets, net of related debt. Restricted Net Assets - Expendable. Restricted expendable net assets include resources in which the System is legally or contractually obligated to spend resources in accordance with restrictions imposed by external third parties. Restricted Net Assets - Nonexpendable. Nonexpendable restricted net assets consist of endowment and similar type funds in which donors or other outside sources have stipulated, as condition of the gift instrument, that the principal is to be maintained inviolate and in perpetuity, and invested for the purpose of producing present and future income, which may either be expended or added to principal.

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Unrestricted Net Assets. Unrestricted net assets represent resources derived from student tuition and fees, state appropriations, and sales and services of educational departments and auxiliary enterprises. These resources are used for transactions relating to the educational and general operations of the System, and may be used at the discretion of the governing board to meet the current expenses for any purpose. These resources also include auxiliary enterprises, which are substantially self-supporting activities that provide services for students, faculty and staff. INVESTMENTS The System accounts for its investments at fair value in accordance with GASB Statement No. 31, Accounting and Financial Reporting for Certain Investments and for External Investment Pools. Changes in unrealized gain (loss) on the carrying values of investments are reported as a component of investment income in the statements of revenue, expenses, and changes in net assets. CLASSIFICATION OF REVENUES The System has classified its revenues as either operating or non-operating revenues according to the following criteria: Operating Revenues: Operating revenues include activities that have the characteristics of exchange transactions, such as (1) student tuition and fees, net of scholarship discounts and allowances, (2) sales and services of auxiliary enterprises, net of scholarship discounts and allowances, (3) most federal, state and local grants and contracts and federal appropriations, and (4) interest on institutional student loans. Nonoperating Revenues: Nonoperating revenues include activities that have the characteristics of nonexchange transactions, such as gifts and contributions, and other revenue sources that are defined as nonoperating revenues under GASB No. 9, Reporting Cash Flows of Propriety and Nonexpendable Trust Funds and Governmental Entities That Use Proprietary Fund Accounting, and GASB No. 34, such as state appropriations and investment income. Scholarship Discounts and Allowances Student tuition and fee revenues, and certain other revenue from students, are reported net scholarship discounts and allowances in the statements of revenues, expenses, and changes in net assets. Scholarship discounts and allowances are the difference between the stated charge for goods and services provided by the System, and the amount that is paid by students and/or third parties making payments on the students’ behalf. Certain governmental grants, such as Pell grants, and other federal, state or nongovernmental programs, are recorded as either operating or nonoperating revenues in the System’s financial statements. To the extent that revenues from such programs are used to satisfy tuition and fees and other student charges, the System has recorded a scholarship discount and allowance. INVESTMENTS The System invests its investable funds in investments authorized by Texas law in accordance with investment policies approved by the Board of Trustees of the System. Both state law and the System’s investment policies are subject to change. INVESTMENT AUTHORITY AND INVESTMENT PRACTICES OF THE SYSTEM Under Texas law, the System is authorized to invest in (1) obligations of the United States or its agencies and instrumentalities, including letters of credit; (2) direct obligations of the State of Texas or its agencies and instrumentalities; (3) collateralized mortgage obligations directly issued by a federal agency or instrumentality of the United States, the underlying security for which is guaranteed by an agency or instrumentality of the United States; (4) other obligations, the principal and interest of which is guaranteed or insured by or backed by the full faith and credit of, the State of Texas or the United States or their respective agencies and instrumentalities; (5) obligations of states, agencies, counties, cities, and other political subdivisions of any state rated as to investment quality by a nationally recognized investment rating firm not less than A or its equivalent; (6) bonds issued, assumed or guaranteed by the State of Israel; (7) certificates of deposit that are issued by or through an institution that either has its main office or a branch in Texas, and are guaranteed or insured by the Federal Deposit Insurance Corporation or

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the National Credit Union Share Insurance Fund, or are secured as to principal by obligations described in clauses (1) through (6) or in any other manner and amount provided by law for System deposits; (8) fully collateralized repurchase agreements that have a defined termination date, are fully secured by obligations described in clause (1), and are placed through a primary government securities dealer or a financial institution doing business in the State of Texas, (9) securities lending programs if (i) the securities loaned under the program are 100% collateralized, a loan made under the program allows for termination at any time and a loan made under the program is either secured by (a) obligations that are described in clauses (1) through (6) above, (b) irrevocable letters of credit issued by a state or national bank that is continuously rated by a nationally recognized investment rating firm at not less than A or its equivalent or (c) cash invested in obligations described in clauses (1) through (6) above, clauses (11) through (13) below, or an authorized investment pool; (ii) securities held as collateral under a loan are pledged to the System, held in the System's name and deposited at the time the investment is made with the System or a third party designated by the System; (iii) a loan made under the program is placed through either a primary government securities dealer or a financial institution doing business in the State of Texas; and (iv) the agreement to lend securities has a term of one year or less, (10) certain bankers' acceptances with the remaining term of 270 days or less, if the short-term obligations of the accepting bank or its parent are rated at least A-1 or P-1 or the equivalent by at least one nationally recognized credit rating agency, (11) commercial paper with a stated maturity of 270 days or less that is rated at least A-1 or P-1 or the equivalent by either (a) two nationally recognized credit rating agencies or (b) one nationally recognized credit rating agency if the paper is fully secured by an irrevocable letter of credit issued by a U.S. or state bank, (12) no-load money market mutual funds registered with and regulated by the Securities and Exchange Commission that have a dollar weighted average stated maturity of 90 days or less and include in their investment objectives the maintenance of a stable net asset value of $1 for each share, and (13) noload mutual funds registered with the Securities and Exchange Commission that have an average weighted maturity of less than two years, invest exclusively in obligations described in the this paragraph, and are continuously rated as to investment quality by at least one nationally recognized investment rating firm of not less than AAA or its equivalent. In addition, bond proceeds may be invested in guaranteed investment contracts that have a defined termination date and are secured by obligations, including letters of credit, of the United States or its agencies and instrumentalities in an amount at least equal to the amount of bond proceeds invested under such contract, other than the prohibited obligations described in the next succeeding paragraph. The System may invest in such obligations directly or through government investment pools that invest solely in such obligations provided that the pools are rated no lower than AAA or Aaa or an equivalent by at least one nationally recognized rating service. The System may also contract with an investment management firm registered under the Investment Advisers Act of 1940 (15 U.S.C. Section 80b-1 et seq.) or with the State Securities Board to provide for the investment and management of its public funds or other funds under its control for a term up to two years, but the System retains ultimate responsibility as fiduciary of its assets. In order to renew or extend such a contract, the System must do so by order, ordinance, or resolution. The System is specifically prohibited from investing in: (1) obligations whose payment represents the coupon payments on the outstanding principal balance of the underlying mortgage-backed security collateral and pays no principal; (2) obligations whose payment represents the principal stream of cash flow from the underlying mortgage-backed security and bears no interest; (3) collateralized mortgage obligations that have a stated final maturity of greater than 10 years; and (4) collateralized mortgage obligations the interest rate of which is determined by an index that adjusts opposite to the changes in a market index. Under Texas law, the System is required to invest its funds under written investment policies that primarily emphasize safety of principal and liquidity; that address investment diversification, yield, maturity, and the quality and capability of investment management; and that include a list of authorized investments for System funds, the maximum allowable stated maturity of any individual investment and the maximum average dollar-weighted maturity allowed for pooled fund groups. All System funds must be invested consistent with a formally adopted "Investment Strategy Statement" that specifically addresses each fund's investment. Each Investment Strategy Statement will describe its objectives concerning: (1) suitability of investment type, (2) preservation and safety of principal, (3) liquidity, (4) marketability of each investment, (5) diversification of the portfolio, and (6) yield. Under Texas law, the System's investments must be made "with judgment and care, under prevailing circumstances, that a person of prudence, discretion, and intelligence would exercise in the management of the person's own affairs, not for speculation, but for investment considering the probable safety of capital and the probable income to be derived." At least quarterly the System's investment officers must submit an investment report to the Board of

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Trustees detailing: (1) the investment position of the System, (2) that all investment officers jointly prepared and signed the report, (3) the beginning market value, and any additions and changes to market value and the ending value of each pooled fund group, (4) the book value and market value of each separately listed asset at the beginning and end of the reporting period, (5) the maturity date of each separately invested asset, (6) the account or fund or pooled fund group for which each individual investment was acquired, and (7) the compliance of the investment portfolio as it relates to: (a) adopted investment strategies and (b) Texas law. No person may invest System funds without express written authority from the Board of Trustees. ADDITIONAL PROVISIONS Under Texas law, the System is additionally required to: (1) annually review its adopted policies and strategies, (2) require any investment officers with personal business relationships or family relationships with firms seeking to sell securities to the System to disclose the relationship and file a statement with the Texas Ethics Commission and the System, (3) require the registered principal of firms seeking to sell securities to the System to: (a) receive and review the System’s investment policy, (b) acknowledge that reasonable controls and procedures have been implemented to preclude imprudent investment activities, and (c) deliver a written statement attesting to these requirements; (4) in conjunction with its annual financial audit, perform a compliance audit of the management controls on investments and adherence to the System’s investment policy, (5) restrict reverse repurchase agreements to not more than 90 days and restrict the investment of reverse repurchase agreement funds to no greater than the term of the reverse repurchase agreement, (6) restrict the investment in nonmoney market mutual funds in the aggregate to no more than 15% of the System’s monthly average fund balance, excluding bond proceeds and reserves and other funds held for debt service, (7) require local government investment pools to conform to the new disclosure, rating, net asset value, yield calculation, and advisory board requirements and (8) provide specific investment training for the Treasurer, the chief financial officer (if not the Treasurer) and the investment officer. CURRENT INVESTMENTS See “APPENDIX A –Information Regarding the System - Current Investments” for information concerning the composition of the System’s investment portfolio as of the date indicated therein. EMPLOYEES RETIREMENT SYSTEM The System employees are required by State law to participate in either the Teacher Retirement System of Texas or an optional retirement program. In both systems the State of Texas sets contribution levels for employees and the State. The System has no pension fund expenditures or liabilities, however, the System contributes funds on a statutory basis on its employee’s behalf through the State or directly to carriers for matching Optional Retirement Plan contributions. For more information regarding the System’s retirement plan, see the System’s audited financial statements, notes to the financial statements, Note 13. TAX MATTERS TAX EXEMPTION In the opinion of Vinson & Elkins L.L.P., Bond Counsel, (i) interest on Bonds is excludable from gross income for federal income tax purposes under existing law and (ii) the Bonds are not “private activity bonds” under the Internal Revenue Code of 1986, as amended (the “Code”) and interest on the Bonds is not subject to the alternative minimum tax on individuals and corporations, except as described below in the discussion regarding the adjusted current earnings adjustment for corporations. 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 bond proceeds and the source of repayment of bonds, limitations on the investment of bond proceeds prior to expenditure, a requirement that excess arbitrage earned on the investment of bond proceeds be paid

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periodically to the United States and a requirement that the issuer file an information report with the Internal Revenue Service (the “Service”). The System has covenanted in the Order that it will comply with these requirements. Bond Counsel’s opinion will assume continuing compliance with the covenants of the Order 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, will rely on representations by the System, the System’s Financial Advisor and the Underwriters with respect to matters solely within the knowledge of the System, the System’s Financial Advisor and the Underwriters, respectively, which Bond Counsel has not independently verified. If the System should fail to comply with the covenants in the Order or if the foregoing representations or report should be determined to be inaccurate or incomplete, interest on the Bonds could become taxable from the date of delivery of the Bonds, regardless of the date on which the event causing such taxability occurs. The Code also imposes a 20% alternative minimum tax on the “alternative minimum taxable income” of a corporation if the amount of such alternative minimum tax is greater than the amount of the corporation’s regular income tax. Generally, the “alternative minimum taxable income” of a corporation (other than any S corporation, regulated investment company, REIT, REMIC or FASIT), includes 75% of the amount by which its “adjusted current earnings” exceeds its other “alternative minimum taxable income.” Because interest on tax-exempt obligations, such as the Bonds, is included in a corporation’s “adjusted current earnings,” ownership of the Bonds could subject a corporation to alternative minimum tax consequences. 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 acquisition, ownership or disposition of, the Bonds. 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 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 System as the taxpayer and the Owners 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. ADDITIONAL FEDERAL INCOME TAX CONSIDERATIONS COLLATERAL TAX CONSEQUENCES 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, taxpayers owning an interest in a FASIT that holds tax-exempt obligations and individuals otherwise qualifying for the earned income 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.

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TAX ACCOUNTING TREATMENT OF ORIGINAL ISSUE PREMIUM The issue price of all or a portion of the Bonds may exceed the stated redemption price payable at maturity of such Bonds. Such Bonds (the "Premium Bonds") are considered for federal income tax purposes to have "bond premium" equal to the amount of such excess. The basis of a Premium Bond in the hands of an initial owner is reduced by the amount of such excess that is amortized during the period such initial owner holds such Premium Bond in determining gain or loss for federal income tax purposes. This reduction in basis will increase the amount of any gain or decrease the amount of any loss recognized for federal income tax purposes on the sale or other taxable disposition of a Premium Bond by the initial owner. No corresponding deduction is allowed for federal income tax purposes for the reduction in basis resulting from amortizable bond premium. The amount of bond premium on a Premium Bond that is amortizable each year (or shorter period in the event of a sale or disposition of a Premium Bond) is determined using the yield to maturity on the Premium Bond based on the initial offering price of such Bond. The federal income tax consequences of the purchase, ownership and redemption, sale or other disposition of Premium Bonds that are not purchased in the initial offering at the initial offering price may be determined according to rules that differ from those described above. All owners of Premium Bonds should consult their own tax advisors with respect to the determination for federal, state, and local income tax purposes of amortized bond premium upon the redemption, sale or other disposition of a Premium Bond and with respect to the federal, state, local, and foreign tax consequences of the purchase, ownership, and sale, redemption or other disposition of such Premium Bonds. TAX ACCOUNTING TREATMENT OF ORIGINAL ISSUE DISCOUNT BONDS The issue price of all or a portion of the Bonds may be less than the stated redemption price payable at maturity of such Bonds (the "Original Issue Discount Bonds"). In such case, the difference between (i) the amount payable at the maturity of each Original Issue Discount Bond, and (ii) the initial offering price to the public of such Original Issue Discount Bond constitutes original issue discount with respect to such Original Issue Discount Bond in the hands of any owner who has purchased such Original Issue Discount Bond in the initial public offering of the Bonds. Generally, such initial owner is entitled to exclude from gross income (as defined in Section 61 of the Code) an amount of income with respect to such Original Issue Discount Bond equal to that portion of the amount of such original issue discount allocable to the period that such Original Issue Discount Bond continues to be owned by such owner. Because original issue discount is treated as interest for federal income tax purposes, the discussion regarding interest on the Bonds under the caption " Collateral Tax Consequences " generally applies, and should be considered in connection with the discussion in this portion of the Official Statement. In the event of the redemption, sale or other taxable disposition of such Original Issue Discount Bond prior to stated maturity, however, the amount realized by such owner in excess of the basis of such Original Issue Discount Bond in the hands of such owner (adjusted upward by the portion of the original issue discount allocable to the period for which such Original Issue Discount Bond was held by such initial owner) is includable in gross income. The foregoing discussion assumes that (i) the Underwriters have purchased the Bonds for contemporaneous sale to the public and (ii) all of the Original Issue Discount Bonds have been initially offered, and a substantial amount of each maturity thereof has been sold, to the general public in arm's-length transactions for a price (and with no other consideration being included) not more than the initial offering prices thereof stated on the cover page of this Official Statement. Neither the System nor Bond Counsel has made any investigation or offers any comfort that the Original Issue Discount Bonds will be offered and sold in accordance with such assumptions. Under existing law, the original issue discount on each Original Issue Discount Bond accrues daily to the stated maturity thereof (in amounts calculated as described below for each six-month period ending on the date before the semiannual anniversary dates of the date of the Bonds and ratably within each such six-month period) and the accrued amount is added to an initial owner's basis for such Original Issue Discount Bond for purposes of determining the amount of gain or loss recognized by such owner upon the redemption, sale or other disposition thereof. The amount to be added to basis for each accrual period is equal to (i) the sum of the issue price and the amount of original issue discount accrued in prior periods multiplied by the yield to stated maturity (determined on

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the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) less (ii) the amounts payable as current interest during such accrual period on such Bond. The federal income tax consequences of the purchase, ownership, and redemption, sale or other disposition of Original Issue Discount Bonds that are not purchased in the initial offering at the initial offering price may be determined according to rules that differ from those described above. All owners of Original Issue Discount Bonds should consult their own tax advisors with respect to the determination for federal, state, and local income tax purposes of interest accrued upon redemption, sale or other disposition of such Original Issue Discount Bonds and with respect to the federal, state, local and foreign tax consequences of the purchase, ownership, redemption, sale or other disposition of such Original Issue Discount Bonds. CONTINUING DISCLOSURE OF INFORMATION In the Order, the System has made the following agreement for the benefit of the holders and beneficial owners of the Bonds. The System is required to observe the agreement for so long as it remains obligated to advance funds to pay the Bonds. Under the agreement, the System will be obligated to provide certain updated financial information and operating data annually, and timely notice of specified material events, to certain information vendors. This information will be available to securities brokers and others who subscribe to receive the information from the vendors. ANNUAL REPORTS The System will provide certain updated financial information and operating data to certain information vendors annually. The information to be updated includes all quantitative financial information and operating data with respect to the System of the general type included in this Official Statement in Appendix A and in Appendix D. The System will update and provide this information within six months after the end of each fiscal year. The System will provide the updated information to each nationally recognized municipal securities information repository (“NRMSIR”) and to any state information depository (“SID”) that is designated by the State of Texas and approved by the staff of the United States Securities and Exchange Commission (the “SEC”). The System may provide updated information in full text or may incorporate by reference certain other publicly available documents, as permitted by SEC Rule 15c2-12. The updated information will include audited financial statements, if the System commissions an audit and it is completed by the required time. If audited financial statements are not available by the required time, the System will provide unaudited financial statements until the audit becomes available and audited financial statements when and if the audit report becomes available. Any such financial statements will be prepared in accordance with the accounting principles described in Appendix D or such other accounting principles as the System may be required to employ from time to time pursuant to state law or regulation. The System’s current fiscal year end is August 31. Accordingly, it must provide updated information by the last day of February in each year, unless the System changes its fiscal year. If the System changes its fiscal year, it will notify each NRMSIR and any SID of the change. MATERIAL EVENT NOTICES The System will also provide timely notices of certain events to certain information vendors. The System will provide notice of any of the following events with respect to the Bonds, if such event is material to a decision to purchase or sell Bonds: (1) principal and interest payment delinquencies; (2) non-payment related defaults; (3) unscheduled draws on debt service reserves reflecting financial difficulties; (4) unscheduled draws on credit enhancements reflecting financial difficulties; (5) substitution of credit or liquidity providers, or their failure to perform; (6) adverse tax opinions or events affecting the tax-exempt status of the Bonds; (7) modifications to rights of holders of the Bonds; (8) Bond calls; (9) defeasances; (10) release, substitution, or sale of property securing repayment of the Bonds; and (11) rating changes. Neither the Bonds nor the Order make any provision for debt service reserves, or liquidity enhancement. In addition, the System will provide timely notice of any failure by the System to provide information, data, or financial statements in accordance with its agreement described above under

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“Annual Reports.” The System will provide each notice described in this paragraph to any SID and to either each NRMSIR or the Municipal Securities Rulemaking Board (“MSRB”). AVAILABILITY OF INFORMATION FROM NRMSIRS AND SIDS The System has agreed to provide the foregoing information only to NRMSIRs and any SID. The information will be available to holders of Bonds only if the holders comply with the procedures and pay the charges established by such information vendors or obtain the information through securities brokers who do so. The Municipal Advisory Council of Texas has been designated by the State of Texas and approved by the SEC staff as a qualified SID. The address of the Municipal Advisory Council is 600 West 8th Street, P. O. Box 2177, Austin, Texas 78768-2177, and its telephone number is 512/476-6947. A municipal issuer may submit its information filings with the central post office, which then transmits such information to the NRMSIRs and the appropriate SID for filing. This central post office can be accessed and utilized at www.DisclosureUSA.org (“DisclosureUSA”). The System may utilize DisclosureUSA for the filing of information relating to the Bonds. The MAC has also received SEC approval to operate, and has begun to operate as a “Central Post Office” for information filings made by municipal issuers, such as the System. A municipal issuer may submit its information filings with the central post office, which then transmits such information to NRMSIRs and the appropriate SID for filing. This central post office can be accessed and utilized at www.DisclosureUSA.org (“Disclosure USA”). The System may utilize Disclosure USA for the filing of information relating to the Bonds, unless the SEC has withdrawn its interpretive advice stated in its letter to the MAC dated September 7, 2004. LIMITATIONS AND AMENDMENTS The System has agreed to update information and to provide notices of material events only as described above. The System has not agreed to provide other information that may be relevant or material to a complete presentation of its financial results of operations, condition, or prospects or agreed to update any information that is provided, except as described above. The System makes no representation or warranty concerning such information or concerning its usefulness to a decision to invest in or sell Bonds at any future date. The System 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 System to comply with its agreement. The System may amend its continuing disclosure agreement 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 System, if (i) the agreement, as amended, would have permitted an underwriter to purchase or sell Bonds in the initial primary offering in compliance with SEC Rule 15c 2-12, taking into account any amendments or interpretations of SEC Rule 15c 2-12 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 System (such as nationally recognized bond counsel) determines that the amendment will not materially impair the interests of the holders and beneficial owners of the Bonds. If the System 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 For the past five years, the System has complied in all material respects with its previous continuing disclosure agreements made pursuant to SEC Rule 15c2-12.

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OTHER INFORMATION RATINGS The Bonds are rated “Aa2” by Moody’s Investors Service, Inc. (“Moody’s”) and “AA+” by Standard & Poor’s Ratings Services (“S&P”). The System also has other issues outstanding, which are rated “Aaa” by Moody’s and “AAA” by S&P through insurance by various commercial insurance companies. An explanation of the significance of such ratings may be obtained from the company furnishing the rating. The ratings reflect only the respective views of such organization and the System makes no representation as to the appropriateness of the ratings. There is no assurance that such ratings will continue for any given period of time or that they will not be revised downward or withdrawn entirely by such rating company, if in the judgment of such company, circumstances so warrant. Any such downward revision or withdrawal of such ratings, or either of them, may have an adverse effect on the market price of the Bonds.

FINANCIAL GUARANTY INDUSTRY – RECENT EVENTS Fitch, Moody’s Investors Service (“Moody’s”), and Standard and Poor’s (collectively referred to herein as the “Rating Agencies”) have each released statements on the health of the financial guaranty industry that cite financial guarantors’ exposure to subprime mortgage risk as an area of stress for the financial guaranty industry. In various releases, the Ratings Agencies have each outlined the processes that they intend to follow in evaluating the effect of this risk on their respective ratings of financial guarantors. For some financial guarantors, the result of such evaluations has been a ratings downgrade. Potential investors are directed to the Rating Agencies for additional information on their respective evaluations of the financial guaranty industry and individual financial guarantors, including the Bond Insurer. LITIGATION The System is not a party to any litigation or other proceeding pending or to its knowledge, threatened, in any court, agency or other administrative body (either state or federal) contesting or attacking the Bonds; restraining or enjoining the issuance, execution or delivery of the Bonds; affecting the provisions made for the payment of or security for the Bonds; in any manner questioning the authority or proceedings for the issuance, execution or delivery of the Bonds; affecting the validity of the Bonds, or which, if decided adversely to the System, would have a material adverse effect on the financial condition or operations of the System. REGISTRATION AND QUALIFICATION OF BONDS FOR SALE The sale of the Bonds has not been registered under the Federal Securities Act of 1933, as amended, in reliance upon the exemption provided thereunder by Section 3(a)(2); and the Bonds have not been qualified under the Securities Act of Texas in reliance upon various exemptions contained therein; nor have the Bonds been qualified under the securities acts of any jurisdiction. The System assumes no responsibility for qualification of the Bonds under the securities laws of any jurisdiction in which the Bonds may be sold, assigned, pledged, hypothecated or otherwise transferred. This disclaimer of responsibility for qualification for sale or other disposition of the Bonds shall not be construed as an interpretation of any kind with regard to the availability of any exemption from securities registration provisions. LEGAL INVESTMENTS AND ELIGIBILITY TO SECURE PUBLIC FUNDS IN TEXAS Section 1201.041 of the Public Security Procedures Act (Chapter 1201, Texas Government Code, as amended) provides that the Bonds are negotiable instruments governed by Chapter 8, Texas Business and Commerce Code, and are legal and authorized investments for insurance companies, fiduciaries, and trustees, and for the sinking funds of municipalities or other political subdivisions or public agencies of the State of Texas. With respect to investment in the Bonds by municipalities or other political subdivisions or public agencies of the State of Texas, the Public Funds Investment Act, Chapter 2256, Texas Government Code, as amended, requires that the Bonds be assigned a rating of “A” or its equivalent as to investment quality by a national rating agency. See "OTHER INFORMATION -

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Ratings" herein. In addition, various provisions of the Texas Finance Code provide that, subject to a prudent investor standard, the Bonds are legal investments for state banks, savings banks, trust companies with capital of one million dollars or more, and savings and loan associations. The Bonds are eligible to secure deposits of any public funds of the State, its agencies, and its political subdivisions, and are legal security for those deposits to the extent of their market value. No review by the System has been made of the laws in other states to determine whether the Bonds are legal investments for various institutions in those states. LEGAL MATTERS The System will furnish a complete transcript of proceedings had incident to the authorization and issuance of the Bonds, including the unqualified approving legal opinion of the Attorney General of Texas approving the initial Bond and to the effect that the Bonds are valid and legally binding obligations of the System, and based upon examination of such transcript of proceedings, the approving opinion of Vinson & Elkins L.L.P., Bond Counsel, to like effect and to the effect that the interest on the Bonds will be excludable from gross income for federal tax purposes under existing law and the Bonds are not private activity bonds, a copy of the proposed form of which is attached hereto as Appendix C. Bond Counsel was not requested to participate, and did not take part, in the preparation of Official Statement, and such firm has not assumed any responsibility with respect hereto or undertaken independently to verify any of the information contained herein. Bond Counsel has reviewed the statements and information contained in the Official Statement under the captions and sub-captions “THE BONDS” (except for the information under the sub-captions “Book-Entry-Only System,” and “Use of Bond Proceeds,” as to which no opinion is expressed) and “CONTINUING DISCLOSURE OF INFORMATION” (except for the information under the sub-caption “Compliance With Prior Undertakings,” as to which no opinion is expressed), and Bond Counsel is of the opinion that the statements and information contained therein fairly and accurately reflect the provisions of the Bond Order; further, Bond Counsel has reviewed the statements and information contained in the Official Statement under the captions and sub-captions “TAX MATTERS,” “ADDITIONAL FEDERAL INCOME TAX CONSIDERATIONS,” “OTHER INFORMATION – Legal Matters,” “OTHER INFORMATION – Registration and Qualification of Bonds for Sale” and “OTHER INFORMATION – Legal Investments and Eligibility to Secure Public Funds in Texas” and Bond Counsel is of the opinion that the statements and information contained therein are correct as to matters of law.

VALIDATION The System filed a bond validation suit on May 28, 2008 under the Public Securities Declaratory Judgment Act, Chapter 1205, Texas Government Code (the “PSDJA”). On June 16, 2008, the District Court of Travis County, Texas found for the System and held that the Bonds and the Bond Election were valid under Texas law. Under the PSDJA, there are no further rights to appeal and the judgment is final. The District filed a bond validation suit on May 28 , 2008 under the Public Securities Declaratory Judgment Act, Chapter 1205, Texas Government Code (the “PSDJA”). On June 16 , 2008, the District Court of Travis County, Texas found for the District and held that the Bonds and the Bond Election were valid under Texas law. Under the PSDJA, the judgment is final and non-appealable. On June 16, 2008, a plaintiff filed suit challenging the bond election. However, on July 22, 2008, the plaintiff filed a nonsuit against the District on all claims against the District. The nonsuit was effective on filing. AUTHENTICITY OF FINANCIAL DATA AND OTHER INFORMATION The financial data and other information contained herein have been obtained from the System’s records, audited financial statements and other sources which are believed to be reliable. There is no guarantee that any of the assumptions or estimates contained herein will be realized. All of the summaries of the statutes, documents, orders and resolutions contained in this Official Statement are made subject to all of the provisions of such statutes, documents, orders and resolutions. These summaries do not purport to be complete statements of such provisions

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and reference is made to such documents for further information. Reference is made to original documents in all respects. FINANCIAL ADVISOR RBC Capital Markets Corporation is employed as Financial Advisor to the System in connection with the issuance of the Bonds. The Financial Advisor’s fee for services rendered with respect to the sale of the Bonds is contingent upon the issuance and delivery of the Bonds. RBC Capital Markets Corporation, in its capacity as Financial Advisor has not verified and does not assume any responsibility for the information, covenants and representations contained in any of the legal documents with respect to the federal income tax status of the Bonds, or the possible impact of any present, pending or future actions taken by any legislative or judicial bodies. UNDERWRITING The Underwriters have agreed, subject to certain conditions, to purchase the Bonds from the System at an underwriting discount of $748,849.36. The Underwriters will be obligated to purchase all of the Bonds if any Bonds are purchased. The Bonds to be offered to the public may be offered and sold to certain dealers (including underwriters and dealers depositing bonds into investment trusts) at prices lower than the public offering prices of such Bonds, and such prices may be changed, from time to time, by the Underwriters. FORWARD-LOOKING STATEMENTS DISCLAIMER The statements contained in this Official Statement, and in any other information provided by the System, that are not purely historical, are forward-looking statements, including statements regarding the System'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 System on the date hereof, and the System assumes no obligation to update any such forward-looking statements. The System's actual results could differ materially from those discussed 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 control of the System. Any of such assumptions could be inaccurate and, therefore, there can be no assurance that the forwardlooking statements included in this Official Statement will prove to be accurate. MISCELLANEOUS The Order authorizing the issuance of the Bonds approved the form and content of this Official Statement, and any addenda, supplement or amendment thereto, and authorizes its further use in the reoffering of the Bonds by the Underwriters. /s/ Randy Bates, J.D. Chair, Board of Trustees Lone Star College System ATTEST: /s/ Priscilla Kelly Secretary, Board of Trustees Lone Star College System

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Lone Star College System

APPENDIX A Information Regarding the System

Page 1 of 24

Lone Star College System

Appendix A Tables
THE PROPERTY TAX CODE AS APPLIED TO THE SYSTEM The Harris County Appraisal District and Montgomery County Appraisal District ("Appraisal District") has the responsibility for appraising property in the District as well as other taxing units in the area. The Appraisal District is governed by a board of directors appointed by voters of the governing bodies of various applicable political subdivisions. The System's taxes are collected by the Harris County and Montgomery County Tax Assessor-Collector. The System grants an exemption of $5,000 or 1% of the market value of residence homesteads, whichever is greater. The System grants an exemption to the residence homestead of persons 65 years of age or older and disabled persons of $75,000. The System grants a residence homestead exemption for disabled veterans of $75,000. The System has not granted an Optional Percentage homestead exemption. Ad valorem taxes are not levied by the System against the exempt value of residence homesteads for the payment of debt. The System does not tax nonbusiness personal property. The System does not permit split payments and discounts are not allowed. The System has not granted the freeport property tax exemption. The System has not granted the goods-in-transit tax exemption The System has not entered into tax abatement agreements.

Page 2 of 24

Lone Star College System

Appendix A Tables
Table A-1 - VALUATION, EXEMPTIONS, AND TAX SUPPORTED DEBT
FY 2008 Total Appraised Value (Excludes Fully Exempt Property) Less Exemptions/Reductions: General Homestead Over 65 or Disabled Veterans Polution Control Deferred Taxes $ 108,313,824,627

$

1,682,535,286 4,109,573,099 40,991,210 97,819,690 7,298,252 $ 5,938,217,537

Total Exemptions FY 2008 Net Taxable Assessed Valuation

$ 102,375,607,090

System Funded Debt Payable from Ad Valorem Taxes as of 8/31/2008 General Obligation Bonds

$

The Bonds

149,040,000 149,780,000 $ 298,820,000 3,336,716 295,483,284

Interest & Sinking Fund Balance as of 8/31/2007 Net Debt

$ $

Ratio Net Funded Debt to Taxable Assessed Valuation 2008 Estimated System Population 2008 Estimated System Population Per TAV 2008 Estimated System Population Per Capita 1,500,000 $68,250 $199
(1)

0.289%

_______________________
(1) Source: The System

Page 3 of 24

Lone Star College System

Appendix A Tables
Table A-2 - TAXABLE ASSESSED VALUATIONS BY CATEGORY FY 2008 Amount $ 69,933,117,103 2,275,722,718 17,429,924,767 189,289,151 1,709,724,305 15,829,281,117 946,765,466 $ 108,313,824,627 5,938,217,537 $ 102,375,607,090 % of Total 64.6% 0.0% 2.1% 0.0% 0.0% 16.1% 0.0% 0.2% 1.6% 14.6% 0.0% 0.0% 0.9% 0.0% 100.0% FY 2007 Amount $ 60,999,270,204 941,252,662 16,908,198,433 205,177,002 1,290,681,790 12,487,021,496 465,019,204 $ 93,296,620,791 5,621,919,727 $ 87,674,701,064 % of Total 65.4% 0.0% 1.0% 0.0% 0.0% 18.1% 0.0% 0.2% 1.4% 13.4% 0.0% 0.0% 0.5% 0.0% 100.0% FY 2006 Amount $ 53,401,597,796 762,325,743 13,855,446,181 103,311,247 191,720,084 12,109,668,837 339,941,318 $ 80,764,011,206 4,794,605,545 $ 75,969,405,661 % of Total 66.1% 0.0% 0.9% 0.0% 0.0% 17.2% 0.0% 0.1% 0.2% 15.0% 0.0% 0.0% 0.4% 0.0% 100.0%

Real, Residential, Single-Family Real, Residential, Multi-Family Real, Vacant Lots/Tracts Real, Acreage (Land Only) Real, Farm and Ranch Improvements Real, Commercial Real, Industrial Real, Oil, Gas and Other Mineral Reserves Real & Tangible Personal, Utilities Tangible Personal, Commercial Tangible Personal, Industrial Other Personal, Real Property, Inventory Special Inventory Total Appraised Value Less: Exemptions/Reductions Net Taxable Assessed Value

FY 2005 Amount 53,170,225,624 1,122,228,843 14,603,443,083 140,423,033 1,265,094,540 11,812,104,762 487,957,830 82,601,477,715 7,311,588,465 75,289,889,250 % of Total 64.4% 0.0% 1.4% 0.0% 0.0% 17.7% 0.0% 0.2% 1.5% 14.3% 0.0% 0.0% 0.6% 0.0% 100.0%

FY 2004 Amount $ 48,174,865,057 1,096,814,090 14,133,148,037 126,774,470 1,151,939,820 10,838,633,373 371,783,750 $ 75,893,958,597 6,295,666,029 $ 69,598,292,568 % of Total 63.5% 0.0% 1.4% 0.0% 0.0% 18.6% 0.0% 0.2% 1.5% 14.3% 0.0% 0.0% 0.5% 0.0% 100.0%

FY 2003 Amount $ 45,247,714,167 122,976,392 10,956,692,561 223,362,730 1,822,058,840 9,227,027,746 302,099,272 $ 67,901,931,708 4,063,295,691 $ 63,838,636,017 % of Total 66.6% 0.0% 0.2% 0.0% 0.0% 16.1% 0.0% 0.3% 2.7% 13.6% 0.0% 0.0% 0.4% 0.0% 100.0%

Real, Residential, Single-Family Real, Residential, Multi-Family Real, Vacant Lots/Tracts Real, Acreage (Land Only) Real, Farm and Ranch Improvements Real, Commercial Real, Industrial Real, Oil, Gas and Other Mineral Reserves Real & Tangible Personal, Utilities Tangible Personal, Commercial Tangible Personal, Industrial Other Personal, Real Property, Inventory Special Inventory Total Appraised Value Less: Exemptions/Reductions Net Taxable Assessed Value

$

$ $

_______________________
Source: County Appraisal District

Page 4 of 24

Lone Star College System

Appendix A Tables
Table A-3 – VALUATION AND FUNDED DEBT HISTORY Tax Supported Debt Outstanding at FYE $ 77,583,759 103,806,436 103,198,089 145,613,731 232,747,123 231,339,997 234,403,656 213,294,083 190,336,613 173,001,413 298,820,000 Ratio of Tax Supported Debt to Taxable Assessed Valuation 0.372% 0.439% 0.352% 0.465% 0.398% 0.362% 0.337% 0.283% 0.251% 0.197% 0.292% Per Capita Taxable Assessed Valuation $ 31,820 35,109 34,703 36,074 45,059 47,874 50,825 53,540 52,757 59,240 68,250 Tax Supported Debt Per Capita $ 118 154 122 168 179 173 171 152 132 117 199

Fiscal Year Taxable Ended Assessed 8/31 Valuation 1998 $ 20,877,459,329 1999 23,655,850,537 2000 29,318,674,811 2001 31,297,100,802 2002 58,509,951,482 2003 63,838,636,037 2004 69,598,292,568 2005 75,289,889,250 2006 75,969,405,661 2007 87,674,701,064 2008 102,375,607,090

Change From Prior Year

Amount
2,778,391,208 5,662,824,274 1,978,425,991 27,212,850,680 5,328,684,555 5,759,656,531 5,691,596,682 679,516,411 11,705,295,403 14,700,906,026

Percent 13.308% 23.938% 6.748% 86.950% 9.107% 9.022% 8.178% 0.903% 15.408% 16.768%

(1)

Estimated System Population 656,111 673,774 844,839 867,582 1,298,518 1,333,474 1,369,371 1,406,234 1,440,000 1,480,000 1,500,000

_______________________ Source: The System & County Appraisal District (1) Includes the Bonds.

Page 5 of 24

Lone Star College System

Appendix A Tables
Table A-4 - TAX RATE, LEVY AND COLLECTION HISTORY Distribution Local Interest & Maintenance Sinking Fund $ 0.06800 $ 0.05180 0.08070 0.03910 0.07770 0.03970 0.07500 0.03500 0.07600 0.03400 0.07420 0.03130 0.07980 0.03470 0.07980 0.03470 0.08600 0.03470 0.08200 0.03470 0.08090 0.03350

Fiscal Year Ended 8/31 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Tax Rate $ 0.11980 0.11980 0.11740 0.11000 0.11000 0.10550 0.11450 0.11450 0.12070 0.11670 0.11440

Tax Levy(1)(2) $ 26,544,907 28,539,979 36,343,512 38,098,610 64,360,946 67,349,761 79,690,045 85,862,441 91,695,013 102,316,376 -

Current Total Collections Collections 97.5% 101.3% 97.3% 101.5% 97.0% 101.1% 96.3% 100.0% 95.6% 100.0% 97.2% 100.0% 97.0% 102.0% 97.0% 100.0% 96.7% 100.0% 96.6% 102.2% In Process of Collection

(1) Excludes Penalty & Interest. (2) Based on taxable value as of January 1.

Page 6 of 24

Lone Star College System

Appendix A Tables
Table A-5 - TEN LARGEST TAXPAYERS FYE 06/07 Taxable Assessed Valuation $ 717,813,000 669,281,000 525,621,000 272,154,000 254,770,000 226,654,000 220,261,000 190,101,000 174,024,000 158,170,000 Percent of Total Taxable Assessed Valuation 0.8% 0.8% 0.6% 0.3% 0.3% 0.3% 0.3% 0.2% 0.2% 0.2% 3.9% $87,674,701,064

Name of Taxpayer Hewlett Packard Centerpoint Energy Inc Houston Pipeline Co LP Walmart Southwestern Bell Hines Interests Ltd Psp Wal-Mart Real Estate Bus. Trust Continental Airlines Inc Exxon Mobil Corp HEB Grocery Co LP

Nature of Property Manufacturing Utility Utility Retail Utility Real Estate Real Estate Airline Oil and Gas Retail Grocery

FYE 06/07 $ 3,408,849,000 FYE 06/07 ____________________________
Source: The System

Page 7 of 24

Lone Star College System

Appendix A Tables
Table A-6 LONE STAR COLLEGE SYSTEM ESTIMATED OVERLAPPING DEBT STMT

Taxing Body Lone Star College System Aldine ISD Barker-Cypress MUD Bilma PUD Charterwood MUD Chimney Hill MUD Clay Road MUD Clovercreek MUD CNP UD Conroe ISD Conroe, City of Cy-Champ PUD Cypress Creek UD Cypress Forest PUD Cypress Hill MUD # 1 Cypress-Fairbanks ISD Cypress-Klein UD Dowdell PUD E. Montgomery Co MUD #3 East Plantation UD El Dorado UD Emerald Forest UD Encanto Real UD Fallbrook UD Far Hills UD Faulkey Gully MUD Forest Hills MUD Fountainhead MUD Grant Road PUD Greens Parkway MUD Harris Co Harris Co Flood Control Harris Co FWSD #61 Harris Co MUD # 1 Harris Co MUD # 5 Harris Co MUD # 11 Harris Co MUD # 16 Harris Co MUD # 18 Harris Co MUD # 24 Harris Co MUD # 26 Harris Co MUD # 33 Harris Co MUD # 43 Harris Co MUD # 44 Harris Co MUD # 46 Harris Co MUD # 49 Harris Co MUD # 58 Harris Co MUD # 70 Harris Co MUD # 82

$

Net Amount 149,040,000 281,090,577 16,041,261 13,821,173 12,245,426 14,674,759 8,273,152 1,542,465 15,305,000 689,596,942 45,466,673 14,805,000 1,290,763 6,330,000 33,544,624 1,354,885,993 3,973,266 15,573,398 5,645,000 3,763,950 3,296,667 11,065,000 3,757,569 3,370,000 2,705,000 15,775,124 3,217,116 5,850,000 7,131,570 4,047,490 2,000,191,354 100,023,775 27,647,333 24,420,706 15,417,638 3,590,000 8,545,000 550,000 16,230,144 27,910,107 1,580,000 4,331,615 2,619,248 5,565,000 9,612,288 1,867,486 10,407,543 24,561,140

* * * *

*

* * *

*

* * *

*

*

Debt As Of 7/9/2008 2/28/2007 4/1/2007 5/31/2007 9/26/2007 9/30/2007 7/31/2007 8/31/2007 4/30/2008 4/30/2008 6/30/2007 4/30/2008 9/30/2006 4/30/2008 8/17/2007 8/31/2007 12/31/2006 9/30/2007 4/30/2008 12/31/2006 9/30/2007 4/30/2008 6/30/2006 4/30/2008 4/30/2008 3/31/2007 2/28/2007 4/30/2008 7/31/2006 4/30/2007 2/28/2007 2/28/2007 5/1/2007 9/30/2007 12/31/2006 4/30/2008 4/30/2008 4/30/2008 12/31/2006 4/30/2007 4/30/2008 12/31/2006 7/31/2007 4/30/2008 6/30/2007 9/30/2006 1/25/2007 2/29/2008

%Ovlpg 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 32.85 32.85 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

Amount Ovlpg $149,040,000 $281,090,577 16,041,261 13,821,173 12,245,426 14,674,759 8,273,152 1,542,465 15,305,000 689,596,942 45,466,673 14,805,000 1,290,763 6,330,000 33,544,624 1,354,885,993 3,973,266 15,573,398 5,645,000 3,763,950 3,296,667 11,065,000 3,757,569 3,370,000 2,705,000 15,775,124 3,217,116 5,850,000 7,131,570 4,047,490 657,062,860 32,857,810 27,647,333 24,420,706 15,417,638 3,590,000 8,545,000 550,000 16,230,144 27,910,107 1,580,000 4,331,615 2,619,248 5,565,000 9,612,288 1,867,486 10,407,543 24,561,140

Page 8 of 24

Lone Star College System

Appendix A Tables
Table A-6 LONE STAR COLLEGE SYSTEM ESTIMATED OVERLAPPING DEBT STMT

Taxing Body Harris Co MUD # 86 Harris Co MUD # 96 Harris Co MUD #102 Harris Co MUD #105 Harris Co MUD #106 Harris Co MUD #109 Harris Co MUD #118 Harris Co MUD #119 Harris Co MUD #127 Harris Co MUD #130 Harris Co MUD #132 Harris Co MUD #136 Harris Co MUD #144 Harris Co MUD #149 Harris Co MUD #150 Harris Co MUD #151 Harris Co MUD #152 Harris Co MUD #153 Harris Co MUD #154 Harris Co MUD #155 Harris Co MUD #157 Harris Co MUD #162 Harris Co MUD #163 Harris Co MUD #165 Harris Co MUD #166 Harris Co MUD #167 Harris Co MUD #168 Harris Co MUD #170 Harris Co MUD #172 Harris Co MUD #173 Harris Co MUD #180 Harris Co MUD #182 Harris Co MUD #183 Harris Co MUD #185 Harris Co MUD #186 Harris Co MUD #188 Harris Co MUD #189 Harris Co MUD #191 Harris Co MUD #196 Harris Co MUD #200 Harris Co MUD #202 Harris Co MUD #205 Harris Co MUD #208 Harris Co MUD #211 Harris Co MUD #215 Harris Co MUD #217 Harris Co MUD #220 Harris Co MUD #221

Net Amount 9,647,517 26,868,217 5,620,000 19,444,323 25,214,251 17,678,347 9,386,920 4,030,945 8,239,449 12,837,513 8,723,628 535,000 4,574,937 3,161,278 16,225,000 16,755,928 15,668,822 20,938,442 17,099,234 6,601,120 37,492,277 3,010,000 100,789 29,247,382 7,334,995 15,560,931 7,175,000 2,800,000 17,625,457 15,347,547 8,182,074 3,300,088 2,391,788 1,685,000 6,030,000 6,995,000 219,959 7,208,564 23,026,177 3,429,146 1,625,000 1,498,669 6,075,391 2,952,450 1,620,000 8,010,942 5,605,435 8,108,132

*

*

*

* *

* *

* * *

*

*

Debt As Of 9/30/2006 10/3/2007 4/30/2008 9/30/2007 9/30/2007 5/31/2007 9/18/2007 12/6/2007 6/6/2007 9/30/2006 5/31/2007 4/30/2008 9/30/2007 4/1/2007 4/30/2008 9/30/2007 9/30/2007 3/31/2007 10/31/2007 8/31/2006 4/24/2007 4/30/2008 4/30/2008 9/30/2007 9/30/2006 10/17/2007 4/30/2008 4/30/2008 11/5/2007 2/28/2007 12/14/2007 12/31/2006 6/30/2007 4/30/2008 4/30/2008 4/30/2008 6/30/2006 9/30/2006 10/17/2007 5/31/2007 4/30/2008 2/28/2007 2/28/2007 9/30/2007 4/30/2008 9/30/2006 2/28/2008 10/10/2006

%Ovlpg 100 100 100 99.99 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

Amount Ovlpg 9,647,517 26,868,217 5,620,000 19,442,379 25,214,251 17,678,347 9,386,920 4,030,945 8,239,449 12,837,513 8,723,628 535,000 4,574,937 3,161,278 16,225,000 16,755,928 15,668,822 20,938,442 17,099,234 6,601,120 37,492,277 3,010,000 100,789 29,247,382 7,334,995 15,560,931 7,175,000 2,800,000 17,625,457 15,347,547 8,182,074 3,300,088 2,391,788 1,685,000 6,030,000 6,995,000 219,959 7,208,564 23,026,177 3,429,146 1,625,000 1,498,669 6,075,391 2,952,450 1,620,000 8,010,942 5,605,435 8,108,132

Page 9 of 24

Lone Star College System

Appendix A Tables
Table A-6 LONE STAR COLLEGE SYSTEM ESTIMATED OVERLAPPING DEBT STMT

Taxing Body Harris Co MUD #222 Harris Co MUD #230 Harris Co MUD #233 Harris Co MUD #239 Harris Co MUD #248 Harris Co MUD #249 Harris Co MUD #250 Harris Co MUD #255 Harris Co MUD #257 Harris Co MUD #261 Harris Co MUD #264 Harris Co MUD #275 Harris Co MUD #276 Harris Co MUD #278 Harris Co MUD #280 Harris Co MUD #281 Harris Co MUD #284 Harris Co MUD #286 Harris Co MUD #290 Harris Co MUD #304 Harris Co MUD #321 Harris Co MUD #322 Harris Co MUD #341 Harris Co MUD #342 Harris Co MUD #354 Harris Co MUD #360 Harris Co MUD #361 Harris Co MUD #364 Harris Co MUD #365 Harris Co MUD #366 Harris Co MUD #368 Harris Co MUD #370 Harris Co MUD #371 Harris Co MUD #374 Harris Co MUD #383 Harris Co MUD #389 Harris Co MUD #391 Harris Co MUD #396 Harris Co MUD #397 Harris Co MUD #399 Harris Co MUD #400 Harris Co MUD # 412 Harris Co Toll Road Harris Co UD # 14 Harris Co UD # 15 Harris Co UD # 16 Harris Co WC&ID # 91 Harris Co WC&ID # 92

Net Amount 8,480,000 11,694,785 6,830,000 14,333,829 16,010,250 18,866,255 2,973,009 3,275,000 5,446,097 2,992,954 4,535,000 3,090,000 16,060,533 28,782,965 11,121,760 14,330,667 15,162,918 1,460,000 21,538,524 11,892,039 7,777,855 10,612,549 8,330,095 10,729,944 28,075,451 13,240,718 12,474,101 20,265,367 15,072,702 1,249,961 43,481,362 24,588,884 12,272,340 12,602,613 15,830,518 4,834,800 19,836,403 6,179,615 13,033,667 2,300,000 21,840,408 6,000,000 0 0 1,870,000 11,606,247 1,315,000 310,000

* *

*

* *

*

* *

* * *

Debt As Of 4/30/2008 6/30/2007 4/30/2008 9/30/2007 7/11/2007 12/31/2006 8/31/2007 4/30/2008 8/31/2006 4/30/2007 4/30/2008 4/30/2008 9/1/2007 2/14/2008 9/30/2006 10/1/2007 9/1/2007 4/30/2008 10/24/2007 2/19/2008 11/6/2006 12/31/2006 8/31/2007 1/31/2007 4/16/2007 6/6/2007 11/9/2007 8/31/2007 9/1/2007 6/30/2007 10/18/2007 8/31/2007 9/1/2007 9/13/2007 9/30/2007 11/30/2006 8/23/2007 6/13/2007 7/17/2007 4/30/2008 9/26/2007 4/30/2008 2/28/2007 3/31/2007 4/30/2008 2/8/2008 4/30/2008 4/30/2008

%Ovlpg 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 32.85 100 100 100 100 100

Amount Ovlpg 8,480,000 11,694,785 6,830,000 14,333,829 16,010,250 18,866,255 2,973,009 3,275,000 5,446,097 2,992,954 4,535,000 3,090,000 16,060,533 28,782,965 11,121,760 14,330,667 15,162,918 1,460,000 21,538,524 11,892,039 7,777,855 10,612,549 8,330,095 10,729,944 28,075,451 13,240,718 12,474,101 20,265,367 15,072,702 1,249,961 43,481,362 24,588,884 12,272,340 12,602,613 15,830,518 4,834,800 19,836,403 6,179,615 13,033,667 2,300,000 21,840,408 6,000,000 0 0 1,870,000 11,606,247 1,315,000 310,000

Page 10 of 24

Lone Star College System

Appendix A Tables
Table A-6 LONE STAR COLLEGE SYSTEM ESTIMATED OVERLAPPING DEBT STMT

Taxing Body Harris Co WC&ID # 96 Harris Co WC&ID #109 Harris Co WC&ID #110 Harris Co WC&ID #119 Harris Co WC&ID #145 Harris Co WC&ID #155 Harris Co WC&ID #157 Heatherloch MUD Horsepen Bayou MUD Houston, City of Humble ISD Humble, City of Hunter's Glen MUD Inverness Forest ID Jackrabbit Road PUD Jersey Village, City of Kings Manor MUD Klein ISD Klein PUD Kleinwood MUD Langham Creek UD Lazy River Improvement Dist Louetta North PUD Louetta Road UD Magnolia ISD Magnolia, City of Malcomson Road UD Meadowhill Reg MUD Mills Road MUD Montgomery Co Montgomery Co DD # 6 Montgomery Co DD # 10 Montgomery Co MUD # 7 Montgomery Co MUD # 15 Montgomery Co MUD # 24 Montgomery Co MUD # 39 Montgomery Co MUD # 40 Montgomery Co MUD # 42 Montgomery Co MUD # 46 Montgomery Co MUD # 47 Montgomery Co MUD # 56 Montgomery Co MUD # 60 Montgomery Co MUD # 67 Montgomery Co MUD # 83 Montgomery Co MUD # 89 Montgomery Co MUD # 94 Montgomery Co MUD # 98 Montgomery WC&ID # 1

Net Amount 40,802,423 4,749,315 17,753,656 27,865,791 100,000 13,745,955 6,950,000 2,100,000 14,395,000 1,905,320,758 587,294,049 1,067,176 17,679,591 528,746 2,266,615 22,996,846 16,011,055 360,960,870 865,000 15,579,686 14,404,585 1,075,000 10,930,000 1,620,000 178,694,003 2,250,000 18,275,768 21,940,794 11,432,669 285,898,739 1,839,990 6,363,523 9,005,000 3,536,588 375,000 17,589,707 4,630,000 1,750,000 101,266,498 37,905,486 2,468,828 25,901,244 19,198,260 15,147,669 18,975,007 19,708,436 2,803,424 3,750,000

* * * *

*

* * * *

* * * * * *

*

Debt As Of 12/4/2007 12/31/2006 7/31/2007 10/18/2007 4/30/2008 12/31/2006 4/30/2008 4/30/2008 4/30/2008 6/30/2007 9/30/2007 9/30/2006 6/30/2007 12/31/2006 7/31/2007 5/31/2007 12/31/2006 8/31/2007 4/30/2008 8/31/2007 8/31/2007 4/30/2008 4/30/2008 4/30/2008 8/31/2007 4/30/2008 6/1/2007 2/18/2008 11/21/2006 4/30/2008 4/30/2008 12/31/2006 4/30/2008 12/1/2007 4/30/2008 9/30/2007 4/30/2008 4/30/2008 9/30/2007 12/31/2007 9/30/2006 9/30/2007 9/30/2007 7/19/2007 9/1/2007 11/2/2007 2/28/2007 4/30/2008

%Ovlpg 100 100 100 100 100 100 100 100 100 9.35 100 100 100 100 71.97 100 100 100 100 100 100 100 100 100 100 100 100 100 100 88.32 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

Amount Ovlpg 40,802,423 4,749,315 17,753,656 27,865,791 100,000 13,745,955 6,950,000 2,100,000 14,395,000 178,147,491 587,294,049 1,067,176 17,679,591 528,746 1,631,283 22,996,846 16,011,055 360,960,870 865,000 15,579,686 14,404,585 1,075,000 10,930,000 1,620,000 178,694,003 2,250,000 18,275,768 21,940,794 11,432,669 252,505,766 1,839,990 6,363,523 9,005,000 3,536,588 375,000 17,589,707 4,630,000 1,750,000 101,266,498 37,905,486 2,468,828 25,901,244 19,198,260 15,147,669 18,975,007 19,708,436 2,803,424 3,750,000

Page 11 of 24

Lone Star College System

Appendix A Tables
Table A-6 LONE STAR COLLEGE SYSTEM ESTIMATED OVERLAPPING DEBT STMT

Taxing Body Mount Houston Road MUD New Caney ISD New Caney MUD North Belt UD North Park PUD Northampton MUD Northgate Crossing MUD #1 Northgate Crossing MUD #2 Northgate Crossing RUD NorthPointe WC&ID NW Harris Co MUD # 5 NW Harris Co MUD # 6 NW Harris Co MUD # 9 NW Harris Co MUD # 10 NW Harris Co MUD # 12 NW Harris Co MUD # 15 NW Harris Co MUD # 16 NW Harris Co MUD # 19 NW Harris Co MUD # 20 NW Harris Co MUD # 21 NW Harris Co MUD # 22 NW Harris Co MUD # 23 NW Harris Co MUD # 28 NW Harris Co MUD # 29 NW Harris Co MUD # 30 NW Harris Co MUD # 32 NW Harris Co MUD # 36 NW Park MUD Northwood MUD # 1 Oak Ridge N, City of Pine Village PUD Point Aquarius MUD Pt of Houston Auth Porter MUD Post Wood MUD Rankin Road West MUD Rayford Rd MUD Reid Rd MUD # 1 Reid Rd MUD # 2 Remington MUD #1 River Plantation MUD Rolling Creek UD Rolling Fork PUD Roman Forest Cons MUD Roman Forest PUD # 4 Shenandoah, City of Southern Montg Co MUD Spencer Rd PUD

Net Amount 3,481,510 150,151,699 18,537,934 5,223,426 3,015,349 13,881,564 6,030,994 15,376,059 5,689,815 13,988,077 77,091,985 4,843,765 6,345,000 29,095,220 4,671,023 7,054,606 9,293,187 8,325,255 5,932,839 1,004,352 5,057,734 2,763,495 5,303,141 9,855,335 21,239,704 24,661,354 17,386,761 18,234,617 2,255,000 3,586,675 2,107,286 11,131,312 343,965,000 12,714,581 2,445,000 8,475,480 30,081,912 5,030,000 4,745,000 59,679,805 630,966 10,962,517 200,000 2,025,000 765,000 12,565,000 3,688,561 4,252,335

*

*

* *

* *

* * * *

Debt As Of 3/31/2007 8/31/2007 6/1/2007 8/8/2007 9/30/2006 12/31/2006 12/31/2006 3/22/2007 4/12/2006 5/17/2007 12/20/2007 7/9/2007 4/30/2008 4/30/2007 9/30/2006 11/28/2007 6/30/2007 12/12/2007 10/1/2007 5/31/2007 5/31/2007 5/31/2007 12/31/2006 10/31/2006 10/31/2006 8/9/2007 8/31/2007 10/17/2007 4/30/2008 9/30/2007 9/30/2006 9/30/2007 4/30/2008 10/16/2007 4/30/2008 9/30/2006 5/31/2007 4/30/2008 4/30/2008 10/24/2007 9/30/2006 1/2/2008 4/30/2008 4/30/2008 4/30/2008 4/30/2008 9/30/2007 8/16/2007

%Ovlpg 100 100 100 100 100 100 100 100 100 100 100 100 100 100 97.91 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 32.85 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100

Amount Ovlpg 3,481,510 150,151,699 18,537,934 5,223,426 3,015,349 13,881,564 6,030,994 15,376,059 5,689,815 13,988,077 77,091,985 4,843,765 6,345,000 29,095,220 4,573,399 7,054,606 9,293,187 8,325,255 5,932,839 1,004,352 5,057,734 2,763,495 5,303,141 9,855,335 21,239,704 24,661,354 17,386,761 18,234,617 2,255,000 3,586,675 2,107,286 11,131,312 112,992,503 12,714,581 2,445,000 8,475,480 30,081,912 5,030,000 4,745,000 59,679,805 630,966 10,962,517 200,000 2,025,000 765,000 12,565,000 3,688,561 4,252,335

Page 12 of 24

Lone Star College System

Appendix A Tables
Table A-6 LONE STAR COLLEGE SYSTEM ESTIMATED OVERLAPPING DEBT STMT

Taxing Body Splendora ISD Splendora, City of Spring Creek Forest PUD Spring Creek UD Spring ISD Spring West MUD Tattor Rd Municipal Dist Terranova West MUD Texas National MUD The Woodlands Metro Ctr MUD The Woodlands MUD # 2 The Woodlands RUD # 1 Timber Lane UD Timberlake Imp Dist Tomball ISD Tomball, City of Trail of the Lakes MUD W Harris Co MUD # 1 W Harris Co MUD # 9 W Harris Co MUD # 10 W Harris Co MUD # 11 W Harris Co MUD # 14 W Harris Co MUD # 15 W Harris Co MUD # 21 Westador MUD White Oak Bend MUD Willis ISD Windfern Forest UD Woodbranch Village, City of Woodcreek MUD Woodloch, Town of Total Net Overlapping Debt The Bonds
Total Direct and Overlapping Debt

Net Amount 37,875,079 0 5,150,000 16,105,775 609,094,637 5,230,992 4,270,000 1,985,000 260,000 19,860,886 1,755,000 59,097,862 36,606,273 5,979,173 209,205,000 25,065,000 13,077,198 2,185,000 12,806,435 20,798,363 35,487,589 7,973,518 5,080,206 3,490,000 4,015,000 2,505,000 84,279,097 6,225,000 301,000 2,897,235 78,719 :

*

* * * *

* * *

* * * * * * *

Debt As Of 11/30/2007 9/30/2006 4/30/2008 4/30/2007 6/30/2007 5/30/2007 4/30/2008 4/30/2008 4/30/2008 9/30/2007 4/30/2008 10/1/2007 12/13/2007 3/31/2007 4/30/2008 4/30/2008 2/26/2007 4/30/2008 12/31/2007 7/31/2007 6/6/2007 9/30/2006 11/8/2006 4/30/2008 4/30/2008 4/30/2008 4/30/2008 4/30/2008 4/30/2008 5/31/2007 4/30/2008

%Ovlpg 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 1.5 100 100 100 100

Amount Ovlpg 37,875,079 0 5,150,000 16,105,775 609,094,637 5,230,992 4,270,000 1,985,000 260,000 19,860,886 1,755,000 59,097,862 36,606,273 5,979,173 209,205,000 25,065,000 13,077,198 2,185,000 12,806,435 20,798,363 35,487,589 7,973,518 5,080,206 3,490,000 4,015,000 2,505,000 1,264,186 6,225,000 301,000 2,897,235 78,719 ----------$8,725,479,594 149,780,000 $8,875,259,594 8.67% $5,917

Total Direct and Overlapping Debt % of A.V.: Total Direct and Overlapping Debt % of Capita: * Gross Debt

Source: The Municipal Advisory Council of Texas

Page 13 of 24

Lone Star College System

Appendix A Tables
Table A-7 - LIMITED TAX - I&S TAX SUPPORTED DEBT SERVICE REQUIREMENTS Fiscal Year Ending 8/31 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038

Principal 11,865,000 12,270,000 12,760,000 13,375,000 13,805,000 14,170,000 6,055,000 5,020,000 5,350,000 3,885,000 4,160,000 6,620,000 7,165,000 7,360,000 4,955,000 5,415,000 5,600,000 5,820,000 2,760,000 630,000 $ 149,040,000

Outstanding Bonds Interest 6,833,059 6,301,566 5,738,736 5,136,581 4,461,394 3,759,307 3,261,467 2,990,133 2,737,111 2,514,298 2,321,848 2,060,461 1,734,513 1,397,534 1,112,822 866,375 593,288 310,050 97,800 14,963 $ 54,243,305

Total 18,698,059 18,571,566 18,498,736 18,511,581 18,266,394 17,929,307 9,316,467 8,010,133 8,087,111 6,399,298 6,481,848 8,680,461 8,899,513 8,757,534 6,067,822 6,281,375 6,193,288 6,130,050 2,857,800 644,963 $ 203,283,305

Principal 10,655,000 2,665,000 2,775,000 2,870,000 2,975,000 3,090,000 3,210,000 3,375,000 3,540,000 3,720,000 3,905,000 4,100,000 4,305,000 4,530,000 4,770,000 5,020,000 5,285,000 5,560,000 5,840,000 6,130,000 6,435,000 6,760,000 7,095,000 7,450,000 7,825,000 8,215,000 8,625,000 9,055,000 $ 149,780,000

The Bonds Interest 6,946,877 6,843,788 6,737,188 6,737,188 6,737,188 6,640,063 6,532,438 6,420,875 6,297,275 6,136,775 5,968,025 5,791,025 5,605,025 5,409,775 5,204,775 4,978,763 4,740,938 4,490,513 4,226,963 3,949,500 3,671,500 3,379,500 3,073,000 2,751,250 2,413,250 2,058,500 1,686,000 1,294,750 884,000 452,750 $ 138,059,452

Grand Total Requirement Total 17,601,877 9,508,788 6,737,188 6,737,188 9,512,188 9,510,063 9,507,438 9,510,875 9,507,275 9,511,775 9,508,025 9,511,025 9,510,025 9,509,775 9,509,775 9,508,763 9,510,938 9,510,513 9,511,963 9,509,500 9,511,500 9,509,500 9,508,000 9,511,250 9,508,250 9,508,500 9,511,000 9,509,750 9,509,000 9,507,750 $ 287,839,452 36,299,936 28,080,354 25,235,924 25,248,769 27,778,581 27,439,369 18,823,904 17,521,008 17,594,386 15,911,073 15,989,873 18,191,486 18,409,538 18,267,309 15,577,597 15,790,138 15,704,225 15,640,563 12,369,763 10,154,463 9,511,500 9,509,500 9,508,000 9,511,250 9,508,250 9,508,500 9,511,000 9,509,750 9,509,000 9,507,750 $ 491,122,757

Page 14 of 24

Lone Star College System

Appendix A Tables
Table A-8 - INTEREST AND SINKING FUND BUDGET PROJECTION Total 3,336,716 32,660,308 320,000 (32,660,308) 3,656,716

Interest and Sinking Fund Balance, August 31, 2007 Plus: 2006/07 Tax Collections Plus: Interest Earnings and Other Revenues 2006/07 Less: 2006/07 Tax Debt Payments Estimated Balance, August 31, 2008

$

Page 15 of 24

Lone Star College System

Appendix A Tables
Table A-9 - AUTHORIZED BUT UNISSUED UNLIMITED TAX BONDS Amount Previously Issued Amount Being Issued

Amount Authorized

Unissued Balance

$ Total

420,000,000

$

-

$ 150,000,000

(1)

$ 270,000,000 $ 270,000,000

(1) Includes the Bonds.

Page 16 of 24

Lone Star College System

Appendix A Tables
Table A-10 - OTHER OBLIGATIONS The System has the following loans and capital leases outstanding: Fiscal Year Ending 8/31 2008 2009 2010 2011 2012 2013 & thereafter Totals Loans $ $ $ $ Leases 2,025,453 2,024,463 1,407,780 1,270,511 1,102,976 3,900,000 11,731,183 Total 2,025,453 2,024,463 1,407,780 1,270,511 1,102,976 3,900,000 11,731,183

$

$

Page 17 of 24

Lone Star College System

Appendix A Tables
Table A-11 - CURRENT INVESTMENTS 8/31/2007 Weighted Avg Fair Value Maturity (Days) 65,122,957 1,874,941 33,826,969 100,824,867 1 1 160 54

Type of Security External Investment Pools $ Money Market U.S. Agency Notes and Bonds Total Fair Value $ Source: The System

Page 18 of 24

Lone Star College System

Appendix A Tables
Table A-12 - NET ASSETS
2007 ASSETS Current Assets Cash and Cash Equivalents Deposits Held by Others Short-Term Investments Accounts Receivable (net) Deferred Charge Inventories Total Current Assets 2006 Fiscal Year Ended August 31 2005 2004 2003

$

67,041,364 33,826,969 17,052,766 54,967 765,145 118,741,211

$

43,441,318 20,454,027 16,451,842 59,496 325,611 80,732,294

$

14,765,630 30,329,778 15,678,425 52,755 376,883 61,203,471

$

12,058,978 39,103,675 14,160,155 43,856 769,553 66,136,217

$

10,606,742 53,678,151 14,117,162 50,898 419,048 78,872,001

$

$

$

$

$

Noncurrent Assets Restricted Cash and Equivalents $ Endowment Investments Other Long Term Investments Bond Issuance Costs Capital Assets (Net) Total noncurrent assets Total Assets $

328,031,973 328,031,973 446,773,184

$

7,840 333,775,179 333,783,019 414,515,313

$

437,962 337,553,138 337,991,100 399,194,571

$

1,490,817 335,534,016 337,024,833 403,161,050

$

222,048 287,060,167 287,282,215 366,154,216

$

$

$

$

LIABILITIES Current Liabilities Accounts Payable $ Accrued Liabilities Accrued Compensable Absences Payable Deferred Compensation Deferred Revenues Funds held for others Notes Payable-current portion Bonds Payable-current portion Total Current Liabilities $

12,731,495 300,000 22,226,015 1,739,325 28,194,020 65,190,855

$

11,809,776 300,000 20,480,821 1,610,101 16,937,427

$

7,064,444 300,000 18,136,376 1,474,363 15,073,550

$

8,186,812 300,000 16,613,428 1,435,506 14,521,850

$

12,262,008 280,000 16,613,031 1,131,732 13,328,802

$

51,138,125

$

42,048,733

$

41,057,596

$

43,615,573

Noncurrent Liabilities Accrued Compensation Payable $ Deferred Compensation Bond Premium Payable Notes Payable Bonds Payable Other noncurrent liabilities Total Noncurrent Liabilities Total Liabilities NET ASSETS Invested in capital assets, net of related debt Restricted for: Nonexpendable-Student Aid Expendable-Student Aid Expendable-Loans Expendable-Debt Service Unrestricted Total Net Assets $ $

3,420,815 211,520,767 214,941,582 280,132,437

$

3,296,149 213,507,401 216,803,550 267,941,675

$

2,931,533 233,556,601 236,488,134 278,536,867

$

2,582,797 251,050,370 253,633,167 294,690,763

$

2,198,543 220,463,938 222,662,481 266,278,054

$ $

$ $

$ $

$ $

$

119,597,719 485,631 6,051,347 40,506,050

$

105,148,483 485,631 3,336,716 37,602,808

$

88,361,983 485,631 2,324,139 29,485,951

$

79,699,181 485,631 1,760,482 26,524,993

$

75,775,142 365,630 2,542,743 21,282,647

$

166,640,747 446,773,184

$ $

146,573,638 414,515,313

$ $

120,657,704 399,194,571

$ $

108,470,287 403,161,050

$ $

99,966,162 366,244,216

Total Liabilities and Net Asset $

Source: The System's Audit

Page 19 of 24

Lone Star College System

Appendix A Tables
Table A-13 - REVENUES, EXPENSES and CHANGES IN NET ASSETS
Fiscal Year Ended August 31 2007 Operating Revenues Tuition and Fees Federal Grants and Contracts $ 36,814,548 23,859,077 4,702,148 5,671,353 910,264 71,957,390 $ 2006 33,411,958 24,029,031 8,621,571 5,390,095 891,357 72,344,012 $ 2005 30,134,103 24,285,218 4,072,641 4,886,285 1,088,570 64,466,817 $ 2004 28,614,676 21,390,361 3,888,485 5,024,667 429,214 59,347,403 $ 2003 22,310,874 18,368,060 6,458,165 3,681,006 300,167 51,118,272

State Grants and Contracts Non-Governmental Grants and Contracts Sales and Services of Educational Activities Auxiliary Enterprises Other Operating Revenues Total Operating Revenues $

$

$

$

$

Operating Expenses Instruction $ Public Service Academic Support Student Services Institutional Support Operation and Maintenance of P Scholarships and Fellowships Auxiliary Enterprises Depreciation Total Operating Expenses

81,584,567 1,474,702 31,411,111 16,704,792 30,898,395 27,361,558 10,391,971 5,304,332 8,825,363 213,956,791

$

77,225,194 1,475,056 29,009,673 15,550,983 28,571,088 23,665,249 9,340,611 5,132,064 8,702,177 198,672,095

$

69,556,778 1,324,148 25,892,392 13,947,600 28,727,677 20,842,925 10,716,240 4,795,874 8,458,848 184,262,482

$

71,587,224 1,407,690 16,269,680 12,770,442 26,468,437 23,261,792 11,059,887 4,345,050 7,388,883 174,559,085

$

63,502,941 2,145,918 19,318,923 13,100,804 18,687,713 20,704,815 6,795,264 3,325,763 7,995,230 155,577,371

$

$

$

$

$

Operating Income (Loss)

(141,999,401)

(126,328,083)

(119,795,665)

(115,211,682)

(104,459,099)

Non-Operating Revenues (Expenses) State Appropriations $ Taxes for Maintenance & Operations Taxes for General Obligation Bonds Investment Income (Net of Inv. Expenses) Interest on Capital Related Debt Other Non-Operating Revenues (Expenses) Net Non-Operating Revenues $ (Expenses) Increase in Net Assets Net Assets Net Assets - Beginning of Year $

62,749,843 73,755,839 31,367,850 4,477,292 (11,359,249) 1,074,936 162,066,511

$

28,436,732 70,130,332 62,265,831 2,540,321 (12,517,976) 1,388,777

$

26,362,355 60,588,753 54,696,754 1,111,005 (11,431,062) 655,277

$

24,243,159 55,442,037 53,997,443 1,203,523 (11,728,117) 647,761

$

20,016,153 47,337,155 46,501,004 2,098,911 (8,329,984) (1,151,751)

$

152,244,017

$

131,983,082

$

123,805,806

$

106,471,488

20,067,110

$

25,915,934

$

12,187,417

$

8,594,124

$

2,012,389

146,573,637 Net Assets - End of Year Source: The System's Audit $ 166,640,747 $

120,657,703 146,573,637 $

108,470,286 120,657,703 $

99,876,162 108,470,286 $

97,863,773 99,876,162

Page 20 of 24

Lone Star College System

APPENDIX B Information Regarding the System's Students, Tuitions & Fees

Page 21 of 24

Lone Star College System

Appendix B Tables
Table B-1 - PLEDGED REVENUES & COVERAGE ($000s omitted)

Pledged Revenues
Fiscal Year Ended 31-Aug 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
(a) (a) (a) (a) (a) (b) (b) (b) (b) (b)

Debt Service Requirements
Total Pledged Revenue $ 7,280 7,898 8,391 9,673 11,508 15,207 19,786 21,375 22,164 24,553

Tuition Revenue $ 690 743 742 929 1,021 3,796 6,184 6,697 6,160 6,528 $

Technology Fees 1,618 1,684 1,790 1,984 2,841 3,172 4,157 4,465 4,772 5,403

Registration Fees $ 643 650 683 762 877 986 1,061 1,157 1,222 1,269 $

Lab Fees 434 476 468 529 578 619 697 834 882 855

Community Education Fees $ 2,619 2,929 3,156 3,898 4,466 4,903 5,012 5,933 5,964 6,322 $

Interest Income 638 591 580 507 564 570 645 689 1,415 2,304 $

Vending Revenue 141 275 330 350 319 192 241 255 242 293 $

Bookstore Revenue 497 550 642 714 842 969 1,789 1,345 1,507 1,579

Principal $ 770 510 880 115 1,240 1,310 1,938 1,416 1,451 1,346 $

Interest 503 1,054 199 856 730 666 995 1,266 1,222 1,179 $

Total 1,273 1,564 1,079 971 1,970 1,976 2,933 2,682 2,673 2,525

Coverage Ratio 5.7 5.0 7.8 10.0 5.8 7.7 6.7 8.0 8.3 9.7

(a) $15 per student per regular semester. Also, $7.50 per student per summer session. (b) H.B. 1621 permits college districts to pledge up to 25% of tuition collected from each enrolled student for each semester. Source: The System's Audit

Page 22 of 24

Lone Star College System

Appendix B Tables
Table B-2 - Tuition & Fees

Academic Year (Fall) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 $

Registration Fee (per student) 12 12 12 12 12 12 12 12 12 $

Resident Fees per Semester Credit Hour (SCH) Student In-District Out-of-District Technology Activity Tuition Tuition Fee Fee 22 24 24 24 26 28 32 32 36 $ 57 64 64 64 66 68 72 72 76 $ 4 4 4 4 5 5 6 6 6 $ 2 2 2 2 $

Cost For 12 SCH In-District Out-of-District 324 348 348 348 384 432 492 492 540 $ 744 828 828 828 864 912 972 972 1,020

Change From Prior Year In-District Out-of-District 0.0% 7.4% 0.0% 0.0% 10.3% 12.5% 13.9% 0.0% 9.8% 0.0% 11.3% 0.0% 0.0% 4.3% 5.6% 6.6% 0.0% 4.9%

Academic Year (Fall) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 $

General Services Fee 12 12 12 12 12 12 12 12 12 $

Non-Resident Fees per Semester Credit Hour (SCH) Student In-District Out-of-State Technology Activity Tuition Tuition Fee Fee 67 69 69 69 81 83 87 87 91 $ 67 69 69 69 81 83 87 87 91 $ 4 4 4 4 5 5 6 6 6 $ 2 2 2 2

Cost For 12 SCH Out-of-State International $ 864 888 888 888 1,044 1,092 1,152 1,152 1,200 $ 864 888 888 888 1,044 1,092 1,152 1,152 1,200

Change From Prior Year Out-of-State International 0.0% 2.8% 0.0% 0.0% 17.6% 4.6% 5.5% 0.0% 4.2% 0.0% 2.8% 0.0% 0.0% 17.6% 4.6% 5.5% 0.0% 4.2%

Page 23 of 24

Lone Star College System

Appendix B Tables
Table B-3 - Enrollment Details
Fall 2007 Number Percent 28,394 9,013 6,409 64.8% 20.6% 14.6% Fall 2006 Number Percent 23,372 10,107 7,721 56.7% 24.5% 18.7% Fall 2005 Number Percent 24,543 10,002 5,736 60.9% 24.8% 14.2% Fall 2004 Number Percent 22,752 9,080 5,010 61.8% 24.6% 13.6% Fall 2003 Number Percent 22,907 7,690 4,137 65.9% 22.1% 11.9%

Student Classification 0-30 hours 31-61 hours >60 hours

Total

43,816

100.0%

41,200

100.0%

40,281

100.0%

36,842

100.0%

34,734

100.0%

Semester Hour Load <3 hours 3-5 hours 6-8 hours 9-11 hours 12-14 hours 15-17 hours 18 & more hours

Fall 2007 Number Percent 218 10,301 11,110 8,309 11,541 2,161 176 0.5% 23.5% 25.4% 19.0% 26.3% 4.9% 0.4%

Fall 2006 Number Percent 223 9,669 10,254 7,716 11,206 1,955 177 0.5% 23.5% 24.9% 18.7% 27.2% 4.7% 0.4%

Fall 2005 Number Percent 227 9,142 10,308 7,589 10,938 1,921 156 0.6% 22.7% 25.6% 18.8% 27.2% 4.8% 0.4%

Fall 2004 Number Percent 156 8,075 9,394 6,889 10,471 1,687 170 0.4% 21.9% 25.5% 18.7% 28.4% 4.6% 0.5%

Fall 2003 Number Percent 381 7,664 8,230 6,075 10,348 1,862 174 1.1% 22.1% 23.7% 17.5% 29.8% 5.4% 0.5%

Total
Average Course Load

43,816
8.4

100.0%

41,200
8.4

100.0%

40,281
8.5

100.0%

36,842
8.6

100.0%

34,734
8.7

100.0%

Tuition Status TX Resident (In-District) TX Resident (Out-of-District) Non-Resident

Fall 2007 Number Percent 38,948 3,481 1,387 88.9% 7.9% 3.2%

Fall 2006 Number Percent 36,873 3,093 1,234 89.5% 7.5% 3.0%

Fall 2005 Number Percent 36,285 3,002 994 90.1% 7.5% 2.5%

Fall 2004 Number Percent 33,726 2,279 837 91.5% 6.2% 2.3%

Fall 2003 Number Percent 32,002 1,986 746 92.1% 5.7% 2.1%

Total

43,816

100.0%

41,200

100.0%

40,281

100.0%

36,842

100.0%

34,734

100.0%

Does not include non-credit Continuing and Professional Development enrollment. Data Source: LSCS OIRE Data Warehouse as of 07/03/2008

Page 24 of 24

APPENDIX C FORM OF BOND COUNSEL’S OPINION

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DRAFT 08/11/08

September 10, 2008 WE HAVE ACTED as bond counsel for Lone Star College System (the “System”), in connection with an issue of bonds (the “Bonds”) described as follows: LONE STAR COLLEGE SYSTEM LIMITED TAX GENERAL OBLIGATION BONDS, SERIES 2008, dated September 1, 2008, in the aggregate principal amount of $149,780,000. The Bonds mature, bear interest, are subject to redemption prior to maturity, and may be transferred and exchanged as set out in the Bonds and in the order adopted by the Board of Trustees of the System authorizing their issuance (the “Order”). WE HAVE ACTED as bond counsel for the sole purpose of rendering an opinion with respect to the legality and validity of the Bonds under the Constitution and laws of the State of Texas, and with respect to the exclusion of interest on the Bonds from gross income for federal income tax purposes. We 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 System or the disclosure thereof in connection with the sale of the Bonds. Our role in connection with the System’s 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 System and other public officials; and other certified showings relating to the authorization and issuance of the Bonds. We have also examined executed Bond No. I of this issue.

Vinson & Elkins LLP Attorneys at Law Austin Beijing Dallas Dubai Hong Kong Houston London Moscow New York Shanghai Tokyo Washington

First City Tower, 1001 Fannin Street, Suite 2500 Houston, TX 77002-6760 Tel 713.758.2222 Fax 713.758.2346 www.velaw.com

BASED ON SUCH EXAMINATION, IT IS OUR OPINION that: (1) The transcript of certified proceedings evidences complete legal authority for the issuance of the Bonds in full compliance with the Constitution and laws of the State of Texas presently effective and that therefore the Bonds constitute valid and legally binding obligations of the System; and Taxable property in the System is subject to the levy of ad valorem taxes, within the limits prescribed by law, to pay the Bonds and the interest thereon.

(2)

THE RIGHTS OF THE OWNERS of the Bonds are subject to the applicable provisions of the federal bankruptcy laws and any other similar laws affecting the rights of creditors of political subdivisions generally, and may be limited by general principles of equity which permit the exercise of judicial discretion. IT IS OUR FURTHER OPINION that: (1) Interest on the Bonds is excludable from gross income for federal income tax purposes under existing law. The Bonds are not “private activity bonds” within the meaning of the Internal Revenue Code of 1986, as amended (the “Code”), and interest on the Bonds is not subject to the alternative minimum tax on individuals and corporations, except that interest on the Bonds will be included in the “adjusted current earnings” of a corporation (other than any S corporation, regulated investment company, REIT, REMIC or FASIT) for purposes of computing its alternative minimum tax liability.

(2)

In providing such opinions, we have relied on representations of the System, the System’s financial advisor, and the Underwriters (as defined in the Order), with respect to matters solely within the knowledge of the System, the System’s financial advisor, and the Underwriters, respectively, which we have not independently verified, and have assumed continuing compliance with the covenants in the Order pertaining to those sections of the Code which affect the exclusion from gross income of interest on the Bonds for federal income tax purposes. If such representations are determined to be inaccurate or incomplete or the System fails to comply with the foregoing provisions of the Order, interest on the

Bonds could become includable in gross income from the date of original delivery, 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. Owners 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 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 results and are not binding on the Internal Revenue Service (the “Service”); rather, such opinions represent our legal judgment based upon our review of existing law and in reliance upon the representations and covenants referenced above that we deem relevant to such opinions. 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 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 System as the taxpayer. We observe that the System has covenanted in the Order 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.

APPENDIX D EXCERPT FROM THE SYSTEM’S ANNUAL REPORT

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COMPREHENSIVE ANNUAL FINANCIAL REPORT FOR THE FISCAL YEARS ENDED AUGUST 31, 2007 and 2006

Prepared By The Department of Finance & Treasury
5000 Research Forest Drive The Woodlands, TX 77381

NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT Comprehensive Annual Financial Report For the Fiscal Years Ended August 31, 2007 and 2006 TABLE OF CONTENTS
Page INTRODUCTORY SECTION Transmittal Letter ……………………………………………………………………………….. Organizational Chart…………………………………………………………………………….. Organizational Data……………………………………………………………………………... 2006 GFOA Certificate of Achievement for Excellence in Financial Reporting……………….. FINANCIAL SECTION Independent Auditors’ Report ………………………...………………………………………… Management’s Discussion and Analysis………………………………………………………… BASIC FINANCIAL STATEMENTS Exhibit 1 – Statements of Net Assets………………………………………………………… Exhibit 2 – Statements of Revenues, Expenses and Changes in Net Assets…………………. Exhibit 3 – Statements of Cash Flows……………………………………………………….. Notes To The Financial Statements…………………………………………………………... SUPPLEMENTAL SCHEDULES Schedule A – Schedule of Operating Revenues……………………………………………… Schedule B – Schedule of Operating Expenses by Object…………………………………… Schedule C – Schedule of Non-Operating Revenues and Expenses…………………………. Schedule D – Schedule of Net Assets by Source and Availability…………………………… Schedule E – Schedule of Expenditures of Federal Awards…………………………………. Notes to Schedule of Expenditures of Federal Awards……………………………………… Schedule F – Schedule of Expenditures of State Awards…………………………………… Notes to Schedule of Expenditures of State Awards ………………………………… 41 42 43 44 45 48 50 52 21 22 23 25 9 12 1 5 6 7

STATISTICAL SECTION Net Assets by Component……………………………………………………………………….. Revenues by Source……………………………………………………………………………… Program Expenses by Function………………………………………………………………….. Tuition and Fees…………………………………………………………………………………. Assessed Value and Taxable Assessed Value of Property………………………………………. State Appropriation per FTSE and Contact Hour……………………………………………….. Principal Taxpayers……………………………………………………………………………… Property Tax Levies and Collections……………………………………………………………. Ratios of Outstanding Debt……………………………………………………………………… Legal Debt Margin Information…………………………………………………………………. Pledged Revenue Coverage……………………………………………………………………… Demographic and Economic Statistics…………………………………………………………... Principal Employers……………………………………………………………………………... Faculty, Staff and Administrators Statistics……………………………………………………... Enrollment Details……………………………………………………………………………….. Student Profile…………………………………………………………………………………… Transfers to Senior Institutions………………………………………………………………….. Capital Asset Information………………………………………………………………………... 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71

SINGLE AUDIT SECTION Independent Auditors’ Report on Internal Control over Financial Reporting and on Compliance and other matters based on an Audit of Financial Statements performed in Accordance with the Government Auditing Standards……………………………………………………………. Independent Auditors' Report on Compliance with Requirements Applicable to Each Major Program and on Internal Control over Compliance in Accordance with OMB Circular A-133 and State of Texas Single Audit Circular……………………………………………………….. Schedule of Findings and Questioned Costs…………………………………………………….. Summary Schedule of Prior Audit Findings……………………………………………………...

73

75 77 79

Introductory Section

December 6, 2007 To the Members of the Board of Trustees, Taxpayers of Harris and Montgomery Counties and to the citizens of the North Harris Montgomery Community College District service area: Texas statutes require the Comptroller of Public Accounts and the Texas Higher Education Coordinating Board to jointly prescribe a system for financial accounting and reporting for institutions of higher education. Pursuant to that requirement, we have prepared the comprehensive annual report of the North Harris Montgomery Community College District (the District) for the fiscal years ended August 31, 2007 and 2006. The report consists of management’s representations concerning the finances of the District. Consequently, management assumes full responsibility for the completeness and reliability of the information contained in this report. To provide a reasonable basis for making these representations, management of the District has established a comprehensive internal control framework that is designed both to protect the District’s assets from loss, theft, or misuse and to compile sufficient reliable information for the preparation of the District’s financial statements in conformity with generally accepted accounting principles (GAAP). The District’s system of internal controls is supported by written policies and procedures and is continually reviewed, evaluated, and modified to meet current needs. The system is monitored by an Internal Audit Department whose auditors administer a broad-scope auditing program. Through this program, the adequacy and effectiveness of the District’s internal control system are reviewed and evaluated. The review scope ranges from financial/compliance areas to economy and efficiency in the use of resources. Because the cost of internal controls should not outweigh their benefits, the District’s comprehensive framework of internal controls has been designed to provide reasonable rather than absolute assurance that the financial statements will be free from material misstatement. As management, we assert that, to the best of our knowledge and belief, this financial report is complete and reliable in all material respects. The District’s financial statements have been audited by McConnell and Jones LLP, a firm of licensed certified public accountants. The goal of the independent audit is to provide a reasonable assurance that the financial statements of the District for the year ended August 31, 2007 and 2006 are free from material misstatement. The independent audit involved examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessing the accounting principles used and significant estimates made by management; and, evaluating the overall financial statement presentation. The independent auditor concluded based upon the audit, that there was a reasonable basis for rendering an unqualified opinion that the District’s financial statements for the years ended August 31, 2007 and 2006 are fairly presented in conformity with GAAP. The independent auditor’s report is presented as the first component of the financial section of this report. GAAP requires that management provide a narrative introduction, overview, and analysis to accompany the basic financial statements in the form of management’s discussion and analysis (MD&A). This letter of

1

transmittal is designed to complement the MD&A and should be read in conjunction with it. The District’s MD&A can be found immediately following the report of the independent auditors. District Profile The idea of a college campus in the North Houston region was once only a vision in the minds of community leaders. It began the journey to reality in 1972 when residents in the Aldine, Humble and Spring Independent School Districts elected to create a junior college district, which became known as North Harris County College. We opened our doors in the fall of 1973 and our 16-member staff welcomed 613 students to the first classes held at Aldine High School. To say that we have grown in the past 35 years is an understatement. The original three school districts have been joined by eight others: New Caney in 1981, Tomball in 1982, Conroe in 1991, Willis and Splendora in 1996, Klein in 1998, and Cypress-Fairbanks and Magnolia in 2000. Located in the North Houston metro area of Texas, the District serves 1,400 square miles in Harris and Montgomery Counties. For the academic year just ended the District served over 62,600 credit students and 34,000 continuing education students. Enrollment is 49,000 this semester in credit classes and 14,000 in continuing education. Based on certified contact hours reported by the Texas Higher Education Coordinating Board, the District was the third largest community college district in the state. The District continues to be one of the largest and fastest growing community college districts in Texas, with five distinct colleges: • • • • • North Harris College Kingwood College Tomball College Montgomery College Cy-Fair College

North Harris Montgomery Community College District is a publicly-supported, two-year, comprehensive community college system that involves diverse individuals, businesses, and the community in quality educational opportunities for the successful development of knowledge, skills, and attitudes for a rapidly changing world. Through its colleges and centers, NHMCCD develops learning communities for: • • • • • • • Technical programs, leading to associate degrees or certificates, designed to develop marketable skills and support economic development. Academic courses in the arts and sciences to transfer to senior institutions. Continuing adult education programs for academic, professional, occupational, and cultural enhancement. Developmental education and literacy programs designed to improve the basic skills of students. A program of student support services, including counseling and learning resources, designed to assist individuals in achieving their educational and career goals. Workforce, economic, and community development initiatives designed to meet local and statewide needs. Other purposes as may be directed by the Board of Trustees and/or the laws of the State of Texas.

The District is governed by a nine member Board of Trustees who are elected to serve 6 year terms. The Chief Executive Officer of the District is the Chancellor. The Chancellor, through the Executive Council consisting of the Executive Vice Chancellor, vice chancellors and college presidents, is responsible for management of the daily operations of the District.

2

Economic and Financial Condition The information presented in the financial statements is perhaps best understood when it is considered from the broader perspective of the specific environment within which the District operates. Local Economy Harris and Montgomery Counties, the geographical area in which the District operates, enjoy a very robust economy. Harris County is a southeast Texas county and a major component of the Houston Primary Metropolitan Statistical area. The economy in the county is based on petrochemicals, space exploration, manufacturing and education. The county is ranked as the 6th largest manufacturing county in the country. The Texas Almanac lists cattle, rice and forest products as the principal sources of agricultural income in the county. The county’s population for 2000 was 3,400,578, an increase of 20.6% since 1990. The total 2000 Effective Buying Income was $66.6 billion with 77.8% of the households having incomes in excess of $20,000. The County’s median income per household was $41,887 compared to the state median of $35,942. Retail sales for 2000 totaled $42.4 billion. Mineral production in the county includes oil, gas, cement, salt, lime, gravel, clay and stone. Cash Management Practices Cash was invested in obligations of U.S agencies, treasury bills, commercial paper and local government money market pools. The maturities of the investments range from 1 day to 20 months. The average buy yield of the portfolio at August 31, 2007 was 4.37%. The recent rise in interest is reflected in shorter maturities of investments as the District attempts to maximize earning potential. Investment income includes the increase or decrease in the fair value of investments. The fair value of securities will increase or decrease due to changes in market interest rates during the year. As individual securities come closer to their maturity date, the fair value of the security moves toward its par value. As the price moves toward par value, the unrealized gain or loss is reduced proportionally and is eliminated by the time the security matures. The District generally holds securities to maturity. Debt Management The District has $55,295,957 of limited tax levy debt and $184,418,830 in general obligation debt outstanding at August 31, 2007. Limited tax levy debt are special obligations of the District payable as to principal and interest solely from and secured by a first lien on and a pledge of certain revenues including tuition, fees, investment income and commissions. For the 2007 fiscal year, the pledged revenues provided approximately 9.7 times coverage of the debt service on limited tax levy debt. The District’s limited tax levy debt is currently rated AA- by Standard and Poor’s and Aa3 by Moody’s. The District is authorized to sell bonds and to levy an ad valorem tax in payment of the debt by the Constitution and the laws of the State of Texas. At August 31, 2007 the District had $184,418,830 in general obligation debt outstanding. Ad valorem property taxes to support outstanding debt are limited to a maximum rate of $0.50 tax per hundred dollars of taxable appraised value. Proceeds from general obligation debt may be used to purchase land for sites, construct, improve, renovate and equip District facilities; to refund certain bonds of the District; and to pay the issuance costs of bonds. The District’s general obligation debt is currently rated AA by Standard and Poor’s and Aa2 by Moody’s. Facilities Master Plan During the 2005-2006 fiscal year, the District conducted a comprehensive facilities review and evaluation focused on providing facilities and infrastructure for the District’s five colleges. Led by the Chancellor and Executive Council, the planning process included a college leadership group, community advisory committees, architects, demographers, and the Districts’ financial advisors. The master planning process culminated with a recommendation for a $249.6 million referendum to authorize the issuance of general obligation bonds to provide facilities for growth and to enhance the District’s education mission. On November 7, 2006 the District conducted an unsuccessful referendum. District administration is currently considering alternatives to manage growth and provide adequate facilities. Awards and Acknowledgements The District was awarded, for the third consecutive year, the GFOA Certificate of Achievement in Financial Reporting for its comprehensive annual financial report for the fiscal years ending August 31, 2006, 2005 and 2004. The current year’s comprehensive annual financial report will

3

also be submitted to the program. Management believes that the current year report also meets the criteria of the Certificate of Achievement Program. The preparation of this report could not have been accomplished without the services of the entire staff of Business Affairs. I would like to express my appreciation to all staff that assisted and contributed to the preparation of this report. Credit must also be given to the Chancellor and Board of Trustees for their unfailing support in maintaining the highest standards of professionalism of the District’s finances. Respectfully submitted,

Cynthia F. Gilliam Vice Chancellor of Business Affairs & CFO

4

5

NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT ORGANIZATIONAL DATA For the Fiscal Year 2007

BOARD OF TRUSTEES
W. Randolph Bates, Jr., Chair Stephanie Marquard, Vice Chair John Fox, Secretary Priscilla Kelly, Assistant Secretary Dr. Richard Campbell Chris Daniel Dr. David Holsey Alan Quintero David Vogt

ADMINISTRATION
Dr. Richard Carpenter, Chancellor Open Position, Executive Vice Chancellor Dr. Stephen Head, President, North Harris College Dr. Linda Stegall, President, Kingwood College Dr. Tom Butler, President, Montgomery College Dr. Ray Hawkins, President, Tomball College Dr. Diane Troyer, President, Cy-Fair College Renee Byas Smith, Vice Chancellor & General Counsel Cynthia Gilliam, Vice Chancellor for Business Affairs & Chief Financial Officer Ray Laughter, Vice Chancellor for External Affairs Tom Hill, Vice Chancellor, Information Technology/CIO

North Harris College
2700 W.W. Thorne Drive Houston, TX 77073 281.618.5400

Kingwood College
20000 Kingwood Drive Kingwood, TX 77339 281.312.1600

Montgomery College
3200 College Park Drive Conroe, TX 77384 936-321-5161

Tomball College
30555 Tomball Parkway Tomball, TX 77375 281.351.3300

Cy-Fair College
9191 Barker Cypress Road Cypress, TX 77433-1214 281.290.3200

The University Center
3232 College Park Drive The Woodlands, TX 77384 281.618.7140

District Services and Training Center
5000 Research Forest Drive The Woodlands, TX 77381 832.813.6500

6

The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the North Harris Montgomery Community College District, Texas for its Comprehensive Annual Financial Report for the Fiscal Year Ended August 31, 2006. In order to be awarded a Certificate of Achievement, a governmental unity must publish an easily readable and efficiently organized Comprehensive Annual Financial Report, whose contents conform to program standards. Such reports must satisfy both generally accepted accounting principles and applicable legal requirements. A Certificate of Achievement is valid for a period of one year only. District management believes that this 2007 CAFR conforms to the Certificate of Achievement Program requirements, and we are submitting it to the GFOA for their review.

7

Financial Section

8

INDEPENDENT AUDITORS’ REPORT

9

INDEPENDENT AUDITORS’ REPORT

To the Board of Trustees North Harris Montgomery Community College District

We have audited the accompanying financial statements of the North Harris Montgomery Community College District (the “District”) as of and for the years ended August 31, 2007 and 2006, as listed in the table of contents. These financial statements are the responsibility of the District’s management. Our responsibility is to express opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the District as of August 31, 2007 and 2006, and the changes in financial position and cash flows thereof for the years then ended in conformity with accounting principles generally accepted in the United States of America. In accordance with Government Auditing Standards, we have also issued our report dated November 8, 2007, on our consideration of the District’s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. The management’s discussion and analysis on pages 12 through 19, is not a required part of the basic financial statements but are supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the required supplementary information. However, we did not audit the information and express no opinion on it. Our audits were conducted for the purpose of forming opinion on the District’s financial statements taken as a whole. The introductory section and statistical section are presented for purposes of additional analysis and are not a required part of the basic financial statements. The supplemental schedules on pages 41 through 52 are presented for purposes of additional analysis as required by the Texas Higher Education Coordinating Board, U.S. Office of Budget and Management and Budget Circular A-133, Audits of States Local Governments, and Non-Profit Organizations, and the State of Texas Single Audit Circular and are also not a

10

required part of the basic financial statements of the District. The information in the supplemental schedules and the schedule of expenditures of federal and state awards have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. The introductory and statistical sections have not been subjected to the auditing procedures applied in the audit of the basic financial statements and, accordingly, we express no opinion on them.

Houston, Texas November 8, 2007

11

MANAGEMENT’S DISCUSSION AND ANALYSIS

12

North Harris Montgomery Community College District
The purpose of the annual report is to provide readers with financial information about the activities and financial condition of North Harris Montgomery Community College District (the “District”). The report consists of three basic financial statements that provide information on the District as a whole: the Statement of Net Assets, the Statement of Revenues, Expenses and Changes in Net Assets, and the Statement of Cash Flows. These reports begin on page 21 and should be read in conjunction with the notes to the financial statements. The following summary and management discussion of the results is intended to provide the readers with an overview of the District’s financial activities. For purposes of the summary and discussion, the terms “2007”, “2006”, and “2005” refer to fiscal years ending August 31, 2007, August 31, 2006, and August 31, 2005, respectively.

Accounting Standards
In June 1999, the Governmental Accounting Standard’s Board (GASB) released Statement No. 34, “Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments”, which established a new reporting format for annual financial statements. In November 1999, GASB released Statement No. 35, “Basic Financial Statements and Management’s Discussion and Analysis for Public Colleges and Universities”, which applies the new reporting standards to public colleges and universities.

Financial and Enrollment Highlights - 2007
Net assets increased $20 million, which represents a 14% increase over 2006. Construction in progress balances decreased to approximately $6,000 reflecting the substantial completion of all of the construction projects funded with proceeds from the 2003 general obligation bonds. Revenue bonds of $29.9 million were issued in May 2007 to provide funds for critical infrastructure and repair needs. Factoring in scheduled principal repayments, the net effect was to increase total bonds payable by $9.3 million. Refunding bonds were also issued in August 2007 for $13.4 million. Operating expenses for educational activities increased $15 million, which represents an 8% increase as compared to a 3% increase in headcount, and a 5 % increase in enrollments. The increases were primarily direct expenditures for instruction, academic support and operation and maintenance of plant. Fundable contact hours, the basis on which community colleges in Texas are appropriated State funds, increased 3%.

Financial and Enrollment Highlights - 2006
Net assets increased $25.9 million, which represents a 21.5% increase over 2005. Construction in progress balances remained unchanged at approximately $1 million reflecting substantial completion of construction projects in 2005. The District did not issue any new debt during the year, but did issue refunding bonds in September 2005, for $47.6 million. Repayment of principal decreased total bonds payable by $17.8 million. Deferred revenues increased $2.3 million (a 13% increase), primarily due to a $2 per credit hour tuition increase effective for the Spring 2006 semester. Revenues from grants and contracts increased $4.3 million (15%), as the District continues to search for additional funding sources to accommodate the financial consequences of student growth.

13

Operating expenses for educational activities increased $13.8 million, which represents an 8% increase as compared to a 3% increase in headcount, and a 4% increase in enrollments. The increases were primarily direct expenditures for instruction and academic support, addressing needs that were previously deferred due to limited funding. Fundable contact hours, the basis on which community colleges in Texas are appropriated State funds, increased 2%. The following chart depicts the growth in student headcount and contact hours for the past ten years:

Historical View of Headcount and Contact Hour Growth
120,000 100,000 14,000,000 Headcount 80,000 60,000 8,000,000 40,000 Headcount 20,000 0 97-98 98-99 99-00 00-01 01-02 02-03 03-04 04-05 05-06 06-07 Contact Hours 6,000,000 4,000,000 2,000,000 0 12,000,000 10,000,000 Contact Hours 18,000,000 16,000,000

14

The Statement of Net Assets
The Statement of Net Assets includes all assets and liabilities using the accrual basis of accounting, which is similar to the accounting used by most private-sector institutions. Net assets – the difference between assets and liabilities – are one way to measure the financial health of the District. Net assets increased 14% for 2007 and 21% for 2006.
August 31 2006 $ 63,895,345 16,451,842 385,107 80,732,294 $

2007 Current Assets: Cash and short-term investments Receivables Inventory, prepaid expenses & other Total current assets Non-Current Assets: Restricted cash & cash equivalents Capital assets, net of accumulated depreciation (Note 8) Total assets Current Liabilities: Accounts payable & accrued liabilities Deferred revenues Bonds payable-current portion $ 100,868,333 17,052,766 820,112 118,741,211

2005 45,095,408 15,678,425 429,638 61,203,471

7,840 328,031,973 $ 446,773,184 333,775,179 $ 414,515,313

437,962 337,553,138 $ 399,194,571

$

14,770,820 22,226,015 28,194,020 65,190,855

$

13,719,877 20,480,821 16,937,427 51,138,125

$

8,838,807 18,136,377 15,073,551 42,048,735

Non-Current Liabilities: Accrued compensable absences Bonds payable-noncurrent portion Total liabilities Net Assets: Invested in capital assets Restricted Unrestricted Total net assets

3,420,815 211,520,767 $ 280,132,437

3,296,149 213,507,401 $ 267,941,675

2,931,533 233,556,601 $ 278,536,869

119,597,719 6,536,978 40,506,050 $ 166,640,747

105,148,483 3,822,347 37,602,808 $ 146,573,638

88,361,983 2,809,770 29,485,951 $ 120,657,704

The increase in total current assets for 2007 ($38 million) reflects the District’s investment philosophy of positioning assets for maximum investment return in a rising interest rate environment. Net capital assets declined $5.7 million during 2007 as depreciation expense exceeded purchases of capital assets. The decline is a result of the completion of construction projects financed with proceeds from the 2003 general obligation bond authorization. Total liabilities increased during 2007 by $12 million as a result of the issuance of revenue bonds of $29.9 million. The increases in total net assets of $20 million for 2007 and $25.9 million for 2006 represent a 38% increase in the past two years. Of significance is the mix of reserves and the purposes for which they may be used. The largest increase since 2005 is in the reserves invested in capital assets, $31 million or 35%. As student enrollment trends continue upward, the District’s physical assets have also grown to support student growth. Restricted net assets are assets that cannot be used for current operations because they are subject to restrictions imposed by creditors, grantors or statute. These reserves have grown by $3.7 million (132%) since 2005. Unrestricted net assets (available to fund current operations) have increased by $11 million (37%) since 2005. Unrestricted net assets cover 68 days of operating expenses, or 19%, in 2007.

15

Statement of Revenues, Expenses and Changes in Net Assets
2007 Operating Revenues Student tuition and fees Grants & contracts Auxiliary enterprises Other Total operating revenues Operating Expenses Educational Activities Auxiliary Activities Depreciation Expense Total operating expenses Net Operating Expenses Non-Operating Revenues Ad-valorem taxes State Appropriations Investment income Capital appropriations Other Total non-operating revenues-net Increase in Net Assets Net Assets, Beginning of Year Net Assets, End of Year $ 36,814,548 28,561,225 5,671,353 910,264 71,957,390 $ August 31 2006 33,411,958 32,650,602 5,390,095 891,357 72,344,012 $ 2005 30,134,103 28,357,859 4,886,285 1,088,570 64,466,817

199,827,096 5,304,332 8,825,363 213,956,791 (141,999,401)

184,837,854 5,132,064 8,702,177 198,672,095 (126,328,083)

171,007,760 4,795,874 8,458,848 184,262,482 (119,795,665)

105,123,688 62,749,843 4,477,292 (11,359,249) 1,074,936 162,066,510 20,067,109 146,573,638 $ 166,640,747

98,567,064 62,265,831 2,540,321 (12,517,976) 1,388,777 152,244,017 25,915,934 120,657,704 $ 146,573,638

86,951,108 54,696,754 1,111,005 (11,431,062) 655,277 131,983,082 12,187,417 108,470,287 $ 120,657,704

The Statement of Revenues, Expenses and Changes in Net Assets presents the operating results of the District, as well as the non-operating revenues and expenses. Ad-valorem taxes for maintenance and operations, and state appropriations, while budgeted for operations, are not considered to be exchange transactions and are therefore classified as non-operating revenues according to generally accepted accounting principles. Student tuition and fees increased by $3.4 million for 2007, which directly correlates to the increase in credit tuition rates in the spring of 2006, as well as the 5% increase in credit enrollments for 2007. For 2006, student tuition and fees increased $3.3 million on a 4% increase in credit hours. A $4 per credit hour tuition increase was effective for the spring 2006 semester. The District’s $36 per credit hour tuition rate remains below the Texas average tuition rate for community colleges. State and local grants and contracts revenues decreased by $4 million in 2007 (45.5%) but were relatively the same as in 2005. In 2006, $4.4 million received from Harris County Public Library for the construction of the Tomball library was included in local grants and contracts. Auxiliary enterprise revenues increased 5% for 2007. Food service revenues increased 13%, while bookstore commissions increased 4%. Other auxiliary revenues declined slightly. Expenses for educational activities increased $15 million (8%) in 2007 and $13.8 million (8%) in 2006. Combined increases in the cost of instruction and academic support amounted to $6.7 million (44%) of the

16

increase. Of significance during 2007 is the addition of 25 new full time faculty positions, as the District continues its efforts to maintain or improve the percentage of class sections taught by full-time faculty. Operation and maintenance of plant increased $3.7 million (15%) as the District continues to invest in repair and replacement of facilities to support the effects of increasing enrollment. Tax revenues increased $6.6 million in 2007 ($11.6 million in 2006) as a result of new properties and appraised value increases in existing properties. Investment income increased by 76% from $2.5 million in 2006 to $4.4 million in 2007. The increase was the result of both a rising short-term yield curve and the District’s focus on maintaining a short-term portfolio. State appropriations for 2007 represent the second year of biennium funding, so no significant change in the amounts received as compared to 2006 occurred. State appropriations increased $7.5 million in 2006 for both education and general state support ($4.5 million) and state on-behalf benefits for appropriation eligible employees ($3.0 million). The increases for 2006 (the first year of the state biennium funding cycle) result from increases instituted by the 79th Texas Legislature. Capital appropriations consist of interest and fees on capital asset-related debt. No significant changes occurred during 2007.

Total Revenues
The District has four main sources of revenue: ad valorem taxes, state appropriations, student tuition and fees, and grants and contracts. The total revenues for 2007 and 2006 were $245,383,149 and $237,106,005, respectively. The following chart illustrates the breakdown of total revenues for the District.

45%

43%

42%

40%

2007 2006

35%

30%

26%

26%

25%

20%

15% 14% 14% 12%

15%

10%

5%
5%

4%

0% Ad Valorem Taxes State Appropriations Student Tuition/Fees Grants/Contracts Other

The largest source of revenue for both 2007 and 2006 for the District is ad valorem taxes (43% and 42% for 2007 and 2006, respectively). State appropriations are the second largest revenue source at 26% in both 2007 and 2006. These two sources, along with student tuition and fees, and grants and contracts, provide the majority of funding required for operating expenses. Auxiliary and investment income comprise the majority of Other Revenues.

17

Total Expenses
Expenses for the District can be grouped into four main categories: educational activities, auxiliary activities, depreciation expense, and capital appropriations. The total expenses for 2007 and 2006 were $225,316,040 and $211,190,071, respectively. The following chart illustrates the breakdown of total expenses for the District.
89%
90%

88%

80%

Educational Activities Auxiliary Activities

70%

Depreciation Expense Capital Appropriations

60%

50%

40%

30%

20%

10%

4% 2%

5%

2%

4%

6%

0%

2007

2006

At 89% and 88% of the total expenditures for 2007 and 2006, respectively, educational activities are, by a sizeable margin, the District’s largest expense category. Capital appropriations will continue to occupy a position in the chart, as the District continues to invest in physical facilities to support the effects of burgeoning enrollments. Paralleling this growth in physical facilities, depreciation expense will also continue to hold a position in the chart. Auxiliary activities support and supplement the District’s educational activities, but are a relatively minor portion of total expenses.

Capital Assets and Long-Term Debt Activity
As depicted in Footnote 6 to the financial statements, the cost of capital assets remained relatively the same from 2006 to 2007 at $403 million. The following lists some of the major projects and changes that occurred during 2007 and 2006: 2007 Projects - Most of the projects in 2007 were repair and replacement of existing assets. Furniture for three campuses, additional parking and sidewalk lighting at Cy-Fair College, and water system and cooling improvements at Cy-Fair College were the major projects completed in 2007. 2006 Completed Projects – Expansion of the Student Center at Cy-Fair College and the Irrigation/Water Filtration project at Cy-Fair College were completed.

18

Land Purchases and Sales – A 55 acre tract of land at Montgomery College was purchased during 2007 to provide for future expansion of the campus. A 1.8 acre tract of land was purchased for future expansion at Tomball Colleges’ Willow Chase Center during 2006. Other Assets – Furniture, equipment, library assets, and vehicles decreased by $1.5 million during 2007. A physical inventory of furniture, equipment and vehicles was completed in 2007. The inventory resulted in the write-off of capital assets that were either sold at auction, deemed obsolete, or fell below the current capitalization threshold. Purchases of furniture, equipment, library assets and vehicles increased $3 million during 2006. Capitalized Interest – Interest paid on debt proceeds to finance the construction of new facilities was capitalized in the amount of $2 thousand for 2007, and $41 thousand for 2006. As detailed in Note 7 to the financial statements, financing for the above projects has been achieved through the issuance of long-term bonds.

Economic Factors and Subsequent Events
Several current economic factors and events subsequent to the close of the 2007 fiscal year are worthy of note, as explained next: Enrollments for the fall 2007 semester were 6% greater than the fall 2006 semester. On November 1, 2007, the North Harris Montgomery Community College District Board of Trustees voted to change the name of the District to Lone Star College System. The new name became effective on November 5, 2007.

19

FINANCIAL STATEMENTS

20

EXHIBIT 1 NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT
STATEMENTS OF NET ASSETS AUGUST 31, 2007 AND 2006

ASSETS Current assets: Cash and cash equivalents Short term investments Accounts receivable (See Note 17) Inventories Prepaid items Total current assets Noncurrent assets: Restricted cash and cash equivalents Capital assets, net (See Note 6) Total non-current assets TOTAL ASSETS LIABILITIES Current liabilities: Accounts payable and accrued liabilities (See Note 17) Accrued compensable absences Funds held for others Deferred revenues Bonds payable-current portion Total current liabilities Noncurrent liabilities: Accrued compensable absences Bonds payable-noncurrent portion Total non-current liabilities TOTAL LIABILITIES NET ASSETS Invested in capital assets, net of related debt Restricted: ExpendableLoans Debt service Unrestricted TOTAL NET ASSETS (Schedule D)

2007 $ 67,041,364 33,826,969 17,052,766 54,967 765,145 118,741,211 $

2006 43,441,318 20,454,027 16,451,842 59,496 325,611 80,732,294

328,031,973 328,031,973 $ 446,773,184 $

7,840 333,775,179 333,783,019 414,515,313

$

12,731,495 300,000 1,739,325 22,226,015 28,194,020 65,190,855

$

11,809,776 300,000 1,610,101 20,480,821 16,937,427 51,138,125

3,420,815 211,520,767 214,941,582 280,132,437

3,296,149 213,507,401 216,803,550 267,941,675

119,597,719

105,148,483

485,631 6,051,347 40,506,050 $ 166,640,747 $

485,631 3,336,716 37,602,808 146,573,638

The Notes to the Financial Statements are an integral part of this statement

21

EXHIBIT 2 NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT
STATEMENTS OF REVENUES, EXPENSES AND CHANGES IN NET ASSETS FOR THE YEARS ENDED AUGUST 31, 2007 AND 2006

2007 OPERATING REVENUES Tuition and fees (net of discounts of $10,016,966 in 2007 and $10,161,532 in 2006) Federal grants and contracts State and local grants and contracts Auxiliary enterprises Other operating revenue Total operating revenues (Schedule A) EXPENSES Operating expenses Instruction Public service Academic support Student services Institutional support Operation and maintenance of plant Scholarships and fellowships Auxiliary enterprises Depreciation Total operating expenses (Schedule B) Operating loss NON-OPERATING REVENUE (EXPENSES) Ad-Valorem taxes Maintenance and operations General obligation bonds State Appropriations Gifts Investment income, net Interest and fees on capital asset-related debt (net of capitalized interest costs of $2,819 in 2007 and $41,977 in 2006) Gain (Loss) on disposal of capital assets Other non-operating revenues Total non-operating revenue Increase in net assets NET ASSETS, BEGINNING OF YEAR NET ASSETS, END OF YEAR

2006

$ 36,814,548 23,859,077 4,702,148 5,671,353 910,264 71,957,390

$ 33,411,958 24,029,031 8,621,571 5,390,095 891,357 72,344,012

81,584,567 1,474,702 31,411,111 16,704,792 30,898,395 27,361,558 10,391,971 5,304,332 8,825,363 213,956,791 (141,999,401)

77,225,194 1,475,056 29,009,673 15,550,983 28,571,088 23,665,249 9,340,611 5,132,064 8,702,177 198,672,095 (126,328,083)

73,755,838 31,367,850 62,749,843 17,000 4,477,292 (11,359,249) (245,000) 1,302,936 162,066,510 20,067,109 146,573,638 $ 166,640,747

70,130,332 28,436,732 62,265,831 8,200 2,540,321 (12,517,976) (6,106) 1,386,683 152,244,017 25,915,934 120,657,704 $ 146,573,638

The Notes to the Financial Statements are an integral part of this statement

22

EXHIBIT 3

NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED AUGUST 31, 2007 AND 2006

2007 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from students and other customers Receipts from grants and contracts Payments to suppliers for goods and services Payments to or on behalf of employees Payments for scholarships and fellowships Payments for loans issued to students Receipts from collection of loans to students and employees Other receipts Net cash used by operating activities $ 52,154,798 29,557,243 (50,008,736) (144,330,863) (19,380,147) (10,255,471) 10,338,896 1,039,488 (130,884,792) $

2006 49,458,575 33,214,108 (39,192,031) (135,841,222) (18,618,188) (10,303,676) 10,373,461 891,357 (110,017,616)

CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES Receipts from state appropriations Receipts from ad-valorem taxes Net cash provided by non-capital financing activities

74,701,654 62,749,843 137,451,497

71,206,348 62,265,831 133,472,179

CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Receipts from ad-valorem taxes Proceeds from capital debt Paid for acquisition and construction of capital assets Proceeds from sale of capital assets Principal paid on capital debt and leases Interest paid on capital debt and leases Net cash provided (used) by capital and related financing activities

31,772,153 43,310,000 (3,893,462) 273,895 (34,560,199) (10,824,438) 26,077,949

28,404,141 49,583,248 (5,064,659) 560 (67,768,572) (12,774,316) (7,619,598)

CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales and maturities of investments Interest on investments Purchase of investments and related fees Net cash provided (used) by investing activities Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year

41,450,000 4,212,552 (54,715,000) (9,052,448) 23,592,206 43,449,158 67,041,364

9,888,910 2,534,841 (13,150) 12,410,601 28,245,566 15,203,592 43,449,158

$

$

The Notes to the Financial Statements are an integral part of this statement

23

EXHIBIT 3

NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT
STATEMENTS OF CASH FLOWS (continued) FOR THE YEARS ENDED AUGUST 31, 2007 AND 2006

2007 Reconciliation of Operating Loss to Net Cash Used by Operating Activities Operating loss Adjustments to reconcile operating loss to net cash Used by operating activities Depreciation expense Bad debt expense Changes in assets and liabilities Receivables, net Inventories Prepaid items Accounts payable and accrued liabilities Deferred revenue Funds held for others Accrued compensable absences Total adjustments Net cash used by operating activities $ $ (141,999,401) $

2006 (126,328,083)

8,825,363 500,000 (563,783) 4,528 (439,533) 788,973 1,745,171 129,224 124,666 11,114,609 (130,884,792) $

8,702,177 (331,023) (6,741) 51,271 5,049,987 2,344,442 135,738 364,616 16,310,467 (110,017,616)

The Notes to the Financial Statements are an integral part of this statement

24

NOTES TO FINANCIAL STATEMENTS

25

NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT NOTES TO FINANCIAL STATEMENTS For the Years Ended August 31, 2007 and 2006

1.

REPORTING ENTITY

North Harris Montgomery Community College District (the “District”) was established in 1972 as a Union Junior College District, in accordance with the laws of the State of Texas, to serve the educational needs of the north-central part of Harris County and the southern part of Montgomery County, Texas. The District encompasses the Aldine, Conroe, Cypress-Fairbanks, Humble, Klein, Magnolia, New Caney, Splendora, Spring, Tomball and Willis Independent School Districts. The District is a comprehensive, public, two-year institution offering academic, general, occupational, developmental, and continuing adult education programs through a network of colleges. The colleges of North Harris, Kingwood, Tomball, Montgomery and Cy-Fair comprise the District. The District is considered to be a special purpose, primary government according to the definition in Governmental Accounting Standards Board (GASB) Statement 14, The Financial Reporting Entity. While the District receives funding from local, state, and federal sources, and must comply with the spending, reporting, and record keeping requirements of these entities, it is not a component unit of any other governmental entity. GASB Statement No. 39, Determining Whether Certain Organizations are Component Units, an amendment of GASB Statement No. 14, provides additional guidance in determining whether certain organizations for which the District is not financially accountable should be reported as component units based on the nature and significance of their relationship with the primary government. It requires reporting as a component unit if the organization raises and holds economic resources for the direct benefit of the governmental unit and the component unit is significant compared to the primary government. GASB Statement No. 39 has been applied as required in the preparation of these financial statements and no component unit information is required to be included. The North Harris Montgomery Community College District Foundation (the Foundation) is a legally separate not-for-profit corporation controlled by a separate board of trustees, whose sole purpose is to advance and assist in the development, growth and operation of the District. The District does not appoint any of the Foundation’s board members nor does it fund or is it obligated to pay debt related to the Foundation. The financial position of the Foundation as of August 31, 2007 and 2006 and the cost of services provided by the District to the Foundation during the years then ended are not significant to the District. The Foundation has therefore not been included as a component unit in the financial statements of the District.

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Reporting Guidelines The significant accounting policies followed by the District in preparing these financial statements are in accordance with accounting principles generally accepted in the United States of America as prescribed by the Governmental Accounting Standards Board. The accompanying financial statements of the District have been prepared in accordance with the Texas Higher Education Coordinating Board’s Annual Financial Reporting Requirements for Texas Public Community and Junior Colleges. The accompanying financial statements of the District are presented in accordance with generally accepted accounting principles. The District applies all applicable GASB pronouncements and all applicable Financial Accounting Standard Board (FASB) statements and interpretations issued on or before November 30, 1989, unless they conflict or

26

contradict GASB pronouncements. The District has elected not to apply FASB guidance issued subsequent to November 30, 1989, unless specifically adopted by the GASB. The District is reported as a special-purpose government engaged in business-type activities. Basis of Accounting The financial statements of the District have been prepared on the accrual basis whereby all revenues are recorded when earned and all expenses are recorded when they have been reduced to a legal or contractual obligation to pay. Tuition Discounting Texas Public Education Grants: Certain tuition amounts are required to be set aside for use as scholarships by qualifying students. This set aside, called the Texas Public Education Grant (TPEG), is shown with tuition and fee revenue amounts as a separate set aside amount (Texas Education Code § 56.033). When the award is used by the student for tuition and fees, the amount is recorded as tuition discount. If the amount is disbursed directly to the student, the amount is recorded as a scholarship expense. Title IV, Higher Education Act Program Funds: Certain Title IV HEA Program funds are received by the District to pass through to the student. These funds are initially received by the District and recorded as revenue. When the award is used by the student for tuition and fees, the amount is recorded as tuition discount. If the amount is disbursed directly to the student, the amount is recorded as a scholarship expense. Other Tuition Discounts: The District awards tuition and fee scholarships from institutional funds to students who qualify. When these amounts are used for tuition and fees, the amount is recorded as a tuition discount. If the amount is disbursed directly to the student, the amount is recorded as a scholarship expense. Budgetary Data Each community college in Texas is required by law to prepare an annual operating budget of anticipated revenues and expenditures for the fiscal year beginning September 1. The District’s Board of Trustees adopts the budget, which is prepared on the accrual basis of accounting. A copy of the approved budget must be filed with the Texas Higher Education Coordinating Board, Legislative Budget Board, Legislative Reference Library, and Governor’s Office of Budget and Planning by December 1. Cash and Cash Equivalents The District’s cash and cash equivalents are considered to be cash on hand, demand deposits, and short-term investments with original maturities of three months or less from the date of acquisition. Investments In accordance with GASB 31, Accounting and Financial Reporting for Certain Investments and External Investment Pools, investments are reported at fair value. Fair values are based on published market rates. Short-term investments have an original maturity date greater than three months but less than one year at time of purchase. The District has designated public funds investment pools comprised of $65,122,957 and $29,792,223 at 2007 and 2006, respectively, to be short-term investments. Long-term investments have an original maturity of greater than one year at the time of purchase.

27

Inventories Inventories consist of food service supplies. Inventories are valued at the lower of cost or market under the “first-in, first-out” method and are charged to expense as consumed. Capital Assets Capital assets are recorded at cost at the date of acquisition, or fair value at the date of donation. For equipment the District’s capitalization policy includes all items with a unit cost of $5,000 or more and an estimated useful life in excess of one year. Renovations to buildings and infrastructure and land improvements that significantly increase the value or extend the useful life of the structure are capitalized. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend the useful life of the asset are charged to operating expense in the year in which the expense is incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 50 years for buildings, 50 years for land improvements, 15 years for library books, 10 years for furniture, machinery, vehicles and other equipment and 5 years for telecommunications and peripheral equipment. Deferred Revenues Tuition and fees of $20,941,384 and $19,685,812 and federal, state, and local grants of $1,284,631 and $795,009 related to the period after August 31, 2007 and 2006, respectively, have been reported as deferred revenues at August 31, 2007 and 2006, respectively. Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Operating and Non-Operating Revenue and Expense Policy The District distinguishes operating revenues and expenses from non-operating items. The District reports as a BTA and as a single, proprietary fund. Operating revenues and expenses generally result from providing services in connection with the District’s principal ongoing operations. The principal operating revenues are tuition and related fees and Federal grants and contracts. The major non-operating revenue sources are State appropriations and property tax collections. Operating expenses include the cost of sales and services, administrative expenses, and depreciation on capital assets. The principal non-operating expense is longterm debt interest and fees. When both restricted and unrestricted resources are available for use, it is the District’s policy to use restricted resources first, then unrestricted resources as they are needed. The operation of the bookstore is performed by a third party contracted by the District. New Accounting Pronouncement In July 2004, the GASB issued Statement No. 45, Accounting and Financial Reporting by Employers for Post-employment Benefit Other Than Pension Plans. Statement No. 45 establishes standards for the measurement, recognition, and display of other post-employment benefits expenses and related liabilities and assets, and other related disclosure requirements. The requirements of Statement No. 45 become effective for fiscal periods beginning after December 15, 2006. The District has not yet determined the effect on the financial statements for implementation of this statement In September 2006, the GASB issued Statement No. 48, Sales and Pledges of Receivable and Future Revenues and Intra-Entity Transfers of Assets and Future Revenues. This statement establishes criteria that governments will use to ascertain whether certain transactions should be regarded as sales or as collateralized

28

borrowings resulting in a liability. The statement also includes disclosure requirements for future revenues that are pledged or sold. The requirements of Statement No. 48 become effective for fiscal periods beginning after December 15, 2006. The District does not expect this statement to have any impacts on the District’s financial statements. In November 2006, the GASB issued Statement No. 49, Accounting and Financial Reporting for Pollution Remediation Obligations. This statement provided guidance on how to calculate and report the costs and obligations associated with pollution and cleanup efforts. The requirements of Statement No. 49 become effective for fiscal periods beginning after December 15, 2007. The District is not expected to participate in pollution remediation activities and, therefore, will not accrue a liability and/or capitalize pollution remediation costs. 3. AUTHORIZED INVESTMENTS

The District is authorized to invest in obligations and instruments as defined in the Public Funds Investment Act (“PFIA”) (Sec. 2256.001 Texas Government Code) and as authorized by local policy. The District’s Board of Trustees has adopted a written investment policy regarding the investment of its funds as defined in the PFIA. Such investments include (1) obligations of the United States or its agencies, (2) Certificates of Deposit issued by a bank domiciled in Texas, or a savings bank domiciled in Texas and that is guaranteed or insured by the Federal Deposit Insurance Corporation or its successor, (3) Fully collateralized repurchase agreements with a defined termination date secured by obligations of the United States government, its agencies or instrumentalities, (4) SEC registered Money Market Mutual Funds rated “AAA”, (5) Constant dollar local government investment pools, and, (6) Commercial paper with a maximum maturity of 120 days rated A1/P1 or equivalent. 4. DEPOSITS AND INVESTMENTS

At August 31, 2007 and 2006, the carrying amount of the District’s demand deposits was $-0- and $-0respectively, and total bank balances equaled $336,736 and $48,883, respectively. Bank balances of $100,000 in each year are covered by federal depository insurance and $336,736 and $-0- were covered by collateral pledged in the District’s name for the years ended August 31, 2007 and 2006, respectively. The collateral was held in the Federal Reserve account of an independent third-party agent. Cash and cash equivalents included on Exhibit 1, Statements of Net Assets, consist of:
2007 Demand Deposits Petty Cash on Hand Short-Term Securities External Investment Pools Total Cash and Cash Equivalents $ 43,466 1,874,941 65,122,957 67,041,364 $ 2006 41,454 13,615,481 29,792,223 43,449,158

$

$

Reconciliation of Deposits and Investments to Statement of Net Assets (Exhibit 1):
Fair Value at August 31, 2007 2006 33,826,969 $ 20,454,027 67,041,364 43,449,158 100,868,333 $ 63,903,185 67,041,364 33,826,969 100,868,333 $ 43,441,318 20,454,027 7,840 63,903,185

U. S. Agency Notes and Bonds Total Cash and Deposits Total Deposits and Investments Cash and Cash Equivalents (Exhibit 1) Short Term Investments (Exhibit 1) Restricted Cash and Cash Equivalents (Exhibit 1) Total Deposits and Investments

$ $ $

$

$

29

As of August 31, 2007 the District had the following investments and maturities:
Weighted Average Maturity (Days) 1 1 160 54

Investment Type External Investment Pools Money Market U. S. Agency Notes and Bonds Total Fair Value $

Fair Value 65,122,957 1,874,941 33,826,969 100,824,867

$

Interest Rate Risk - In accordance with State law and District’s policy, the District does not purchase any investments with maturities greater than three years. The District manages its exposure to declines in fair value by limiting the weighted average maturity of its investment portfolio to approximately one year or less. Credit Risk and Concentration of Credit Risk - In accordance with state law and the District’s investment policy, investments in mutual funds and investment pools must be rated at least “AAA”, commercial paper must be rated at least “A-1” or “P-1”. To reduce market risk the District has established portfolio diversification requirements by issuer and/or type of investment. The Districts portfolio is within the stated parameters at August 31, 2007. The credit quality (ratings) and concentration of the District’s portfolio as of August 31, 2007 is as follows:
Concentration Actual Limit 66% 11% 7% 6% 5% 5% 100% 90% 90% 90% 90% 90%

Security Cash and External Investment Pools FHLB (Federal Home Loan Bank) FNMA (Fede ral National Mortgage Assoc) FHLMC (Federal Home Loan Mortgage Corporation) FMCDN (Federal Home Loa n Mortgage Corporation) FNDN (Federal National Mortgage Assoc Discount Note)

Credit Rating AAA/AAAm AAA AAA AAA AAA AAA

The State Comptroller of Public Accounts exercises oversight responsibility over the Texas Local Government Investment Pool (TexPool). Oversight includes the ability to significantly influence operations, designation of management and accountability for fiscal matters. Additionally, the State Comptroller of Public Accounts has established an advisory board composed of both participants in TexPool and other persons who do not have a business relationship with TexPool. The Advisory Board members review the investment policy and management fee structure. TexPool is rated AAAm by Standard & Poor’s. As a requirement to maintain the rating, weekly portfolio information is submitted to both Standard & Poor’s and the Office of the State Comptroller of Public Accounts for review. TexPool operates in a manner consistent with the Securities and Exchange Commission’s Rule 2a7 of the Investment Company Act of 1940. TexPool uses amortized cost rather than fair value to report net assets to compute share prices. Accordingly, the fair value of the position in TexPool is the same value as the value in TexPool shares. The First Public (Lone Star Investment Pool) is a public funds investment pool established in accordance with the Interlocal Cooperation Act, Chapter 791, Texas Government Code, and the Public Funds Investment Act, Chapter 225, Texas Government Code. Lone Star is governed by trustees comprised of active participants in Lone Star. The board of trustees for Lone Star has the responsibility for adopting and monitoring compliance with the investment policy, of appointing investment officers, of overseeing the selection of an investment advisor, custodian, investment consultant, administrator and other service providers. Lone Star Investment Pool is rated AAA by Standard & Poor’s.

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5.

DERIVATIVES

In September, 2006 the District entered into two constant maturity interest rate swaps in order to assist the District in managing its interest rate risk exposure. Interest rate swaps are agreements between two parties where one stream of future interest payments is exchanged for another. The goal of interest rate swaps is to limit or manage exposure to fluctuations in interest rates or to obtain a marginally lower interest rate than otherwise available. The constant maturity swap is a variation of a regular interest rate swap in which one of the interest revenue streams exchanged is reset periodically according to a fixed maturity market rate of a product with a duration extending beyond the reset period. The contracts are obligations of the District separate and apart from its’ obligation to pay scheduled principal and interest on outstanding debt obligations. The District entered into two contracts for certain of its outstanding general obligation and revenue bonds in the amount of $41,155,000 and $25,155,000, respectively. The contracts were executed independently of each other and neither is dependent upon the other with regards to terms, execution or results. Both transactions were approved by the Attorney General of Texas pursuant to Chapter 1371, Texas Government Code, as amended. General Obligation Bonds On September 12, 2006 the District entered into a constant maturity interest rate swap with Bear Stearns Financial Products, Inc. (BSFP) for certain of its outstanding general obligation bonds in the notional amount of $41,155,000 for the initial calculation period and declining annually thereafter as scheduled repayments of principal occur. The contract was executed on a forward start basis with an effective date of November 15, 2007 and a termination date of February 15, 2028. The District has contractually agreed to a monthly payment and receipt of funds, beginning December 15, 2007, in which the District will pay the counterparty the USD-BMA Municipal Swap Index and receive 67% of the 10 year LIBOR index. No options are embedded in the contract and the District neither received nor paid cash upon execution of the contract. Fair value – As of August 31, 2007, the swap agreement had a positive fair value of $6,783. The positive fair value signifies the amount the District would receive from BSFP upon the termination of the agreement as of that date. The fair value was calculated using a market quotation from BSFP. Credit risk – The swap agreement’s fair value represented the District’s credit exposure to BSFP as of August 31, 2007. Should BSFP fail to perform according to the terms of the swap agreement, the possible loss would be equivalent to the swap agreement’s fair value, if positive. However, should interest rates change and the fair value becomes negative, the District would not be exposed to credit risk. As of August 31, 2007, BSFP’s Standard and Poor’s (S&P) rating was AAA and Moody’s Investors Service (Moody’s) rating was Aaa. Interest rate risk – The swap agreement increases the District’s exposure to interest rate risk. Fluctuations in interest rates will affect the monthly payment and receipt of funds. As the USD-BMA Municipal Swap Index increases or the 10 year LIBOR index decreases, the District’s net payment on the swap agreement increases. Termination risk – The swap agreement is subject to mandatory redemption in the event of default or if ratings assigned to either the District’s or BSFP’s long-term unenhanced debt obligations are withdrawn or reduced to BBB by S&P or Baa2 by Moody’s. The swap agreement is subject to an optional termination by the District at any time during the term of the agreement at the then prevailing market value. Revenue Bonds On September 13, 2006 the District entered into a constant maturity interest rate swap with Citibank, N.A., New York (Citibank) for certain of its outstanding revenue bonds in the notional amount of $25,155,000 for the initial calculation period and declining annually thereafter as scheduled repayments of principal occur. The contract was executed on a forward start basis with an effective date of November 15, 2007 and a

31

termination date of February 15, 2028. The District has contractually agreed to a monthly payment and receipt of funds, beginning December 15, 2007, in which the District will pay the counterparty the USD – BMA Municipal Swap Index and receive 65% of the 10 year LIBOR index. No options are embedded in the contract and the District neither received nor paid cash upon execution of the contract. Fair value – As of August 31, 2007, the swap agreement had a positive fair value of $16,203. The positive fair value signifies the amount the District would receive from Citibank upon the termination of the agreement as of that date. The fair value was calculated using a market quotation from Citibank. Credit risk – The swap agreement’s fair value represented the District’s credit exposure to Citibank as of August 31, 2007. Should CitiBank fail to perform according to the terms of the swap agreement, the possible loss would be equivalent to the swap agreement’s fair value, if positive. However, should interest rates change and the fair value becomes negative, the District would not be exposed to credit risk. As of August 31, 2007, CitiBank’s Standard and Poor’s (S&P) rating was AA and Moody’s Investors Service (Moody’s) rating was Aaa. Interest rate risk – The swap agreement increases the District’s exposure to interest rate risk. Fluctuations in interest rates will affect the monthly payment and receipt of funds. As the USD-BMA Municipal Swap Index increases or the 10 year LIBOR index decreases, the District’s net payment on the swap agreement increases. Termination risk – The swap agreement is subject to mandatory redemption in the event of default or if ratings assigned to either the District’s or Citibank’s long-term unenhanced debt obligations are withdrawn or reduced to BBB by S&P or Baa2 by Moody’s. The swap agreement is subject to an optional termination by the District at any time during the term of the agreement at the then prevailing market value. 6. CAPITAL ASSETS

Capital assets activity for the year ended August 31, 2007 was as follows:
Balance August 31, 2006 Not Depreciated: Land Construction in Progress Subtotal Buildings and Other Capital Assets Buildings and Building Improvements Other Real Estate Improvements Total Buildings & Other Real Estate Impr. Library Books Furniture, Machinery, Vehicles, & Other Total Buildings and Other Capital Assets Accumulated Depreciation Buildings and Building Improvements Other Real Estate Improvements Total Buildings & Other Real Estate Impr. Library Books Furniture, Machinery, & Equipment Total Buildings and Other Capital Assets Net Capital Assets $ 42,997,872 1,167,760 44,165,632 $ Balance August 31, 2007 $ 44,528,662 5,789 44,534,451

Increase 1,646,343 1,917,992 3,564,335 $

Decrease (115,553) (3,079,963) (3,195,516)

320,955,108 5,589,000 326,544,108 11,977,912 20,707,285 359,229,305

686,497 686,497 510,607 1,919,577 3,116,681

(305,664) (3,688,165) (3,993,829)

321,641,605 5,589,000 327,230,605 12,182,855 18,938,697 358,352,157

44,091,251 3,960,985 48,052,236 7,350,938 14,216,584 69,619,758 333,775,179

5,793,585 756,489 6,550,074 609,567 1,665,722 8,825,363 (2,144,347)

(305,664) (3,284,822) (3,590,486) (3,598,859)

49,884,836 4,717,474 54,602,310 7,654,841 12,597,484 74,854,635 328,031,973

$

$

$

$

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Capital assets activity for the year ended August 31, 2006 was as follows:
Balance August 31, 2005 Not Depreciated: Land Construction in Progress Subtotal Buildings and Other Capital Assets Buildings and Building Improvements Other Real Estate Improvements Total Buildings & Other Real Estate Impr. Library Books Furniture, Machinery, Vehicles, & Other Total Buildings and Other Capital Assets Accumulated Depreciation Buildings and Building Improvements Other Real Estate Improvements Total Buildings & Other Real Estate Impr. Library Books Furniture, Machinery, & Equipment Total Buildings and Other Capital Assets Net Capital Assets $ 42,313,684 902,035 43,215,719 $ Balance August 31, 2006 $ 42,997,872 1,167,760 44,165,632

Increase 684,188 1,815,400 2,499,587 $

Decrease (1,549,675) (1,549,675)

320,047,642 5,589,000 325,636,642 11,461,643 18,179,649 355,277,934

907,466 907,466 516,269 2,557,236 3,980,971

(29,600) (29,600)

320,955,108 5,589,000 326,544,108 11,977,912 20,707,285 359,229,305

38,312,046 3,255,492 41,567,538 6,745,489 12,627,488 60,940,515 337,553,138

5,779,205 705,493 6,484,698 605,449 1,612,030 8,702,177 (2,221,618)

(22,934) (22,934) (1,556,341)

44,091,251 3,960,985 48,052,236 7,350,938 14,216,584 69,619,758 333,775,179

$

$

$

$

7.

LONG-TERM LIABILITIES

Long-term liability activity for the year ended August 31, 2007 was as follows:
Balance September 1, 2006 Bonds General obligation bonds Revenue Bonds Subtotal Notes General obligation notes Revenue Bonds Subtotal Leases Accrued compensable absences Total long-term liabilities $ 203,904,611 26,540,217 230,444,828 3,596,149 $ 234,040,977 $ $ Balance August 31, 2007 $ 184,418,830 55,295,957 239,714,787 3,720,815 $ 243,435,602 Current Position $ 26,385,870 1,808,150 28,194,020 300,000 $ 28,494,020

Additions 14,515,307 30,104,336 44,619,643 902,411 45,522,054

Reductions $ (34,001,088) (1,348,596) (35,349,684) (777,745) $ (36,127,429)

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Long-term liability activity for the year ended August 31, 2006 was as follows:
Balance September 1, 2005 Bonds General obligation bonds Revenue Bonds Subtotal Notes General obligation notes Revenue Bonds Subtotal Leases Accrued compensable absences Total long-term liabilities $ 220,638,596 27,991,556 248,630,152 3,231,533 $ 251,861,685 Balance August 31, 2006 $ 203,904,611 26,540,217 230,444,828 3,596,149 $ 234,040,977

Additions $ 49,583,248 49,583,248 997,581 $ 50,580,829

Reductions $ (66,317,233) (1,451,339) (67,768,572) (632,965) $ (68,401,537)

Current Position $ 15,591,088 1,346,339 16,937,427 300,000 $ 17,237,427

8.

BONDS PAYABLES

General information related to bonds payable is summarized below:
Series Revenue Bonds 2000 Rev 2003 Rev 2003A Rev 2007 Rev Purpose Constr/Refunding Construction Construction Construction Maturity Date 2001 - 2025 2004 - 2028 2004 - 2018 2008 - 2038 Interest Rate 5.12% - 6.50% 2.50% - 5.00% 2.00% - 4.25% 4.00% - 5.00% Original Issue Amount $ 11,000,000 10,000,000 10,390,000 29,900,000 Repayment Source Pledged Rev Pledged Rev Pledged Rev Pledged Rev $ Amount Outstanding 8/31/2007 8/31/2006 9,308,271 7,886,974 7,998,634 30,102,078 55,295,957 $ 9,607,616 8,340,000 8,592,601 26,540,217

$ General Obligation Bonds 1997 Var Construction 1999 Construction 2001A Construction 2002A Construction 2002B Refunding 2003 Constr/Refunding 2005 Ref Refunding 2005A Ref Refunding 2007 Ref Refunding 2015 - 2016 2000 - 2025 2002 - 2026 2003 - 2027 2004 - 2009 2004 - 2028 2006 - 2013 2006 - 2026 2008 - 2012 variable 4.45% - 5.25% 3.60% - 5.37% 3.26% - 5.37% 2.22% - 4.50% 2.50% - 5.00% 3.00% - 5.00% 3.00% - 5.00% 3.44% - 4.00% $ 20,000,000 34,300,000 50,000,000 95,040,000 3,649,990 36,464,997 6,915,000 50,244,217 13,410,000 Ad Val Tax Ad Val Tax Ad Val Tax Ad Val Tax Ad Val Tax Ad Val Tax Ad Val Tax Ad Val Tax Ad Val Tax $

$ $

2,530,000 1,225,000 16,453,346 72,897,584 560,343 21,380,025 4,768,647 49,431,999 15,171,886 $ 184,418,830

7,530,000 2,315,000 18,772,951 91,607,698 990,631 27,095,265 5,888,868 49,704,198 $ 203,904,611

The revenue pledged as security for the revenue bond debt service includes a portion of tuition and fees, investment income, and auxiliary revenues. Such pledged revenue amounted to $24,553,000 and $22,164,000, for the years ended August 31, 2007 and 2006, respectively. Debt service requirements at August 31, 2007 were as follows:
For the Year Ended August 31

General Obligation Bonds Principal Interest

Revenue Bonds Principal Interest

Total Bonds Principal Interest

2008 $ 26,385,870 $ 9,425,565 $ 1,808,150 $ 2,843,013 $ 28,194,020 $ 12,268,578 2009 12,618,781 6,994,419 2,248,150 2,394,285 14,866,931 9,388,704 2010 12,859,827 6,445,832 2,243,150 2,308,439 15,102,977 8,754,271 2011 13,180,369 5,878,433 2,288,150 2,218,918 15,468,519 8,097,351 2012 13,777,770 5,265,703 2,353,150 2,120,065 16,130,920 7,385,768 2013-2017 48,518,926 17,323,743 12,025,749 9,092,722 60,544,675 26,416,465 2018-2022 30,647,569 10,164,734 9,569,882 6,598,342 40,217,451 16,763,076 2023-2027 25,759,478 2,980,633 8,271,226 4,403,267 34,030,704 7,383,900 Arb2028-2032 The Tax Reform Act of 1986 instituted certain arbitrage2,790,125ions with respect to the2,805,088e itrage – restrict issuanc 670,240 14,963 5,951,552 6,621,792 1,303,650 7,117,245 1,303,650 of t2033-2037 pt bond proceeds at an interest yield 7,117,245 than the interest yield paid to bondholders. ax exem greater 1,419,553 63,675 1,419,553 63,675 2038 Generally, all interest paid to- bondholders ca-n be retroactively rendered taxable if applicable rebates are not Total $ 184,418,830 $ 64,494,025 $ 55,295,957 $ 36,136,501 $ 239,714,787 $ 100,630,526

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reported and paid to the Internal Revenue Service at least every five years. During the current year, The District performed calculations of excess investment earnings on various bonds and at August 31, 2006 does not expect to incur a liability. 9. VARIABLE RATE BONDS

At August 31, 2007 and 2006 the District had Series 1997 Variable Rate Bonds (the “Bonds”) outstanding in the amount of $2,530,000 and $7,530,000, respectively. The Bonds are repriced to the investor periodically and the interest rate is reset at the same time to the District. The District currently uses a weekly mode for repricing. The interest rates vary weekly based on yield quotations for issues of tax-exempt bonds having similar characteristics. At August 31, 2007 and 2006, the Bonds had a rate of 3.98% and 3.41%, respectively. The Bonds are convertible, at the option of the District, and pursuant to an order by the Board of Trustees, between Variable Rate Periods, Fixed Rate Periods or Flexible Rate Periods in accordance with the Order Authorizing issuance of such Bonds. To accomplish a conversion from one rate method to another, the District must give written notice of the proposed conversion together with an Opinion of Bond Counsel to the Remarketing Agent not less than 45 days before the proposed conversion date. 10. ADVANCE REFUNDING BONDS

On September 14, 2005 the District issued $47,645,000 of Limited Tax Refunding Bonds, Series 2005A. The issue consisted solely of Refunding Bonds with a reoffering premium of $2,574,749. The bonds mature serially through February 15, 2026. Interest on the Bonds ranges from 3.000% to 5.000%. The net refunding proceeds were applied to refund $23,565,000 of outstanding Limited Tax Refunding Bonds, Series 1999 with interest rates ranging from 4.45% to 5.25% and $24,125,000 of outstanding Limited Tax Refunding Bonds, Series 2001 with interest rates ranging from 4.305% to 5.375%. The Series 1999 Bonds are callable on February 15, 2008 and the Series 2001 Bonds are callable on February 15, 2010. The aggregate debt service payments of the refunded bonds ($75,439,094) is $2,659,079 less than the aggregate debt service payments of the refunding bonds ($72,780,015). The net present value savings of the refunding transaction is $1,779,605. The refunding proceeds were deposited into an irrevocable trust with an escrow agent to provide all of the debt service payments. The refunded bonds are considered defeased and the liability for those bonds was removed from the District’s liabilities in fiscal year 2006. On August 1, 2007 the District issued $13,410,000 of Limited Tax Refunding Bonds, Series 2007. The issue consisted solely of Refunding Bonds with a reoffering premium of $1,107,839. The bonds mature serially through February 15, 2012. Interest on the Bonds ranges from 3.443% to 5.000%. The net refunding proceeds were applied to refund $13,410,000 of outstanding Limited Tax General Obligation Bonds, Series 2002 with interest rates of 5.375%. The Series 2002 Bonds are callable on February 15, 2012. The aggregate debt service payments of the refunded bonds ($19,419,787) is $4,595,788 less than the aggregate debt service payments of the refunding bonds ($14,823,999). The net present value savings of the refunding transaction is $449,887. The refunding proceeds were deposited into an irrevocable trust with an escrow agent to provide all of the debt service payments. The refunded bonds are considered defeased and the liability for those bonds was removed from the District’s liabilities in fiscal year 2007. 11. DEFEASED BONDS OUTSTANDING

For the fiscal years ended August 31, 2007 and 2006 the District had the following defeased bonds outstanding.
Series 1999 2001 2002 2007 23,565,000 24,125,000 13,410,000 2006 23,565,000 24,125,000 -

$

$

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12.

OPERATING LEASES

The District leases certain of its educational facilities, offices and other equipment. Future minimum rental payments under non-cancelable operating leases having remaining terms in excess of one year as of August 31, 2007, for each of the next five years and in the aggregate are as follows:

Year Ended 8/31/07 2008 2009 2010 2011 2012 2013-2016 Total minimum lease payments Less: Amount representing interest costs Present value of minimum lease payments

$

$

Total 2,025,453 2,024,463 1,407,780 1,270,511 1,102,976 3,900,000 11,731,182 11,731,182

Rent expense for the years ended August 31, 2007 and 2006 was $2,424,454 and $2,252,462, respectively. 13. EMPLOYEES’ RETIREMENT PLAN

The State of Texas has joint contributory retirement plans for almost all its employees. Within the first 90 days of employment higher education employees make an irrevocable choice to be covered by either the Teacher Retirement System or the Optional Retirement Plan. The total payroll for all District employees was $122,049,525 and $114,467,450 for fiscal years 2007 and 2006, respectively. Teacher Retirement System The District participates in the Teacher Retirement System of Texas (TRS). TRS is a cost-sharing multipleemployer public employee retirement system except that all risks and costs are not shared by the employer but are the liability of the State of Texas. Regulations of the State of Texas assign the authority to establish and amend benefit provisions to the TRS Board of Trustees. Because the TRS bears sole responsibility for retirement commitments beyond contributions fixed by the Legislature, TRS does not separately account for each of its component government agencies. Further information regarding actuarial assumptions and conclusions, as well as audited financial statements, is included in the annual financial report of TRS. That report may be obtained from the TRS website, www.trs.state.tx.us, under the TRS Publications heading. The percentages of participant salaries currently contributed by the State and by each participant are 6.0% and 6.4%, respectively, of annual compensation. The total payroll of employees covered by the Teacher Retirement System for the years 2007 and 2006 was $63,637,285 and $58,945,341, respectively. The retirement expense to the State for District employees was $3,818,237 and $3,536,720 for the fiscal years ended August 31, 2007 and 2006, respectively, and for both years is 100% of required contributions. This amount represents the portion of expended appropriations made by the State Legislature on behalf of the District. These amounts are recorded by the District as on-behalf revenue and expense. Optional Retirement Plan The State has also established an optional retirement program for institutions of higher education. Participation in the optional retirement program is in lieu of participation of the Teacher Retirement System.

36

The optional retirement program provides for the purchase of annuity contracts. The percentages of participant salaries currently contributed by the State and each participant are 6.0% and 6.65%, respectively. The District contributes 2.5% for employees who were participating in the optional retirement program prior to September 1, 1995. Benefits fully vest after one year plus one day of employment. Because these are individual annuity contracts, the State has no additional or unfunded liability for this program. The total payroll of employees covered by the Optional Retirement System was $33,201,651 and $31,657,477 for fiscal years 2007 and 2006, respectively. The retirement expense to the State for the District was $1,992,099 and $1,899,449 for the fiscal years ended August 31, 2007 and 2006, respectively. This amount represents the portion of expended appropriations made by the State Legislature on behalf of the District. These amounts are recorded by the District as on-behalf revenue and expense. 14. DEFERRED COMPENSATION PROGRAM

Certain District employees may elect to defer a portion of their earnings for income tax and investment purposes pursuant to authority granted in Government Code 609.001. The plan is essentially an unfunded promise to pay by the employer to each of the plan participants. As of August 31, 2007, the District has 8 employees participating in the program. There were 4 employees vested at August 31, 2007. At August 31, 2006 there was $215,029 invested in plan assets. There were net contributions in the amount of $120,898 invested in the plan during the fiscal year and vested distributions to employees amounted to $160,967. At August 31, 2007 the total of deferred salaries and accumulated earnings of current employees is $169,423. 15. COMPENSABLE ABSENCES

Full-time non-faculty employees on a twelve month work schedule are eligible for paid annual leave. Eligible employees accrue vacation leave at different rates depending on their length of service and position. Accrual rates range from 8 hours per month to 13.33 hours per month. The District’s policy is to allow employees to carry their accrued leave forward from one fiscal year to another fiscal year with a maximum number of hours accrued equal to twice their annual accrual rate. Eligible employees are entitled to payment for all accumulated annual leave up to the maximum allowed at the time employment with the District is terminated. The District recognizes an accrued liability for the unpaid compensated absences in the amounts of $3,720,815 and $3,596,149 for the fiscal years ended August 31, 2007 and 2006, respectively. Sick leave, which is accumulated to a maximum of 520 hours, is earned at the rate of 8 hours per month. Full time employees eligible to participate in the sick leave plan are those who work a 12 month schedule and who work at least 20 hours per week. It is paid to an employee who misses work due to illness. The District’s policy is to recognize the cost of sick leave when paid. The liability is not shown in the financial statements because the benefit is budgeted annually and employees are not compensated on termination for accrued sick leave balances. 16. COMMITMENTS AND CONTINGENCIES

Contingencies – The District has received federal, state, and other financial assistance in the form of contracts and grants that are subject to review and audit by the grantor agencies. Such audits could result in requests for reimbursement by the grantor agency for expenditures disallowed under terms and conditions specified in the contract and grant agreements. In the opinion of the District’s management, such disallowances, if any, would not be significant in relation to the financial statements of the District. Pending Lawsuits and Claims – On August 31, 2007, various lawsuits and claims involving the District were pending. The ultimate liability with respect to litigation and other claims against the District cannot be reasonably estimated at this time. In the opinion of the District’s management, any liability, to the extent not provided for by insurance or otherwise, will not have a material effect on the District.

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17.

DISAGGREGATION OF RECEIVABLES AND PAYABLES BALANCES

Receivables at August 31, 2007 and 2006 were as follows:
August 31 2007 Student Receivables Taxes Receivable Federal Receivable Accounts Receivable Interest Receivable Other Receivables Subtotal Allowance for Doubtful Accounts TOTAL RECEIVABLES $ 5,097,880 6,188,104 3,333,929 2,905,685 392,146 117,445 18,035,189 (982,423) $ 17,052,766 $ 2006 4,383,324 6,235,292 3,842,020 2,256,743 235,348 482,353 17,435,080 (983,238) $ 16,451,842

Payables at August 31, 2007 and 2006, were as follows:
August 31 2007 Vendors Payable Salaries & Benefits Payable Students Payable Accrued Interest Other Payable TOTAL PAYABLES 10,838,967 1,046,100 345,662 471,453 29,313 $ 12,731,495 2006 9,499,563 796,574 1,032,445 456,796 24,398 $ 11,809,776

18.

CONTRACT AND GRANT AWARDS

Contract and grant awards are accounted for in accordance with the generally accepted accounting principles. Revenues are disclosed on Exhibit 2 and Schedule A. Funds expended, but not collected, are reported as accounts receivable on Exhibit 1. Collections in excess of funds expended are reported as deferred revenues on Exhibit 1. Contract and grant awards that are not yet funded and for which the institution has not yet performed services are not included in the financial statements. 19. RISK MANAGEMENT

The District is exposed to various risks of loss related to torts; theft of, damage to, and destruction of assets; errors and omissions; injuries to employees; and natural disasters. Significant losses for these risks are covered by commercial insurance. There have been no significant reductions in insurance coverage. Settlement amounts have not exceeded insurance coverage for the past three prior years. The District did not maintain or operate a self-insured insurance plan during the years ended August 31, 2007 and 2006. 20. POST-RETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS

In addition to providing pension benefits, the State provides certain health care and life insurance benefits for retired employees. Almost all of the employees may become eligible for those benefits if they reach normal retirement age while working for the state. Those and similar benefits for active employees are provided

38

through an insurance company whose premiums are based on benefits paid during the previous year. The State recognizes the cost of providing these benefits by expending the annual insurance premiums. The state’s contribution per full-time employee was $360.54 per month for the year ended August 31, 2007 ($343.48 per month for 2006) and totaled $7,826,145 for 2007 ($7,150,831 for the year ended 2006). The cost of providing those benefits for 217 retirees in the year ended 2007 was $1,035,217 (retiree benefits for 200 retirees cost $956,311 in 2006). For 1,896 active employees, the cost of providing benefits was $12,258,735 for the year ended 2007 (active employee benefits for 1,907 employees cost $11,543,393 for the year ended 2006). 21. AD VALOREM TAX

The District’s ad valorem property tax is levied each October 1 on the assessed value listed as of the prior January 1 for all real and business personal property located in the District at August 31:

Assessed Valuation of the District Less: Exemption Less: Abatements Net Assessed Valuation of the District

2007 $96,720,583,927 (6,573,726,290) $ 90,146,857,637

2006 $ 87,974,128,240 (6,037,955,445) $ 81,936,172,795

Current Operation Authorized Tax Rate per $100 valuation Assessed Tax Rate per $100 valuation $0.3000 $0.0820

2007 Debt Service

Total

Current Operation

2006 Debt Service

Total

$0.5000 $0.8000 $0.0347 $0.1167

$0.3000 $0.5000 $0.8000 $0.0860 $0.0347 $0.1207

Taxes levied for the year ended August 31, 2007 and 2006 amounted to $105,201,383 and $98,896,961 respectively (which includes any penalty and interest assessed, if applicable). Taxes are due on receipt of the tax bill and are delinquent if not paid before February 1st of the year following the year in which imposed.
Current Operations Current Taxes $ 71,592,439 2007 Debt Service $ 30,467,272 Current Operations $ 67,431,512 2006 Debt Service $ 27,450,839

Total $ 102,059,711

Total $ 94,882,351

Delinquent Taxes

2,160,015

927,486

3,087,501

2,362,703

953,302

3,316,005

Penalties & Interest Total

925,547 $ 74,678,001

373,131 $ 31,767,889

1,298,678 $ 106,445,890

977,390 $ 70,771,605

301,793 $ 28,705,934

1,279,183 $ 99,477,539

Tax collections for the year ended August 31, 2007 and 2006 were 97.01% and 95.94%, respectively of the current tax levy. Taxes assessed are recorded in the District’s financial statements net of the related allowance for uncollectible taxes, based upon the District’s expected collection experience. The use of tax proceeds is restricted for the use of maintenance and general obligation debt service.

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22.

INCOME TAXES

The District is exempt from income taxes under Internal Revenue Code Section 115, “Income of States, Municipalities, Etc.”, although unrelated business income may be subject o income taxes under Internal Revenue Code Section 511(a)(2)(B), “Imposition of Tax on Unrelated Business Income of Charitable, Etc. Organizations”. The District had no unrelated business income tax liability for the year ended August 31, 2007 and 2006. 23. RELATED PARTIES

The North Harris Montgomery Community College District Foundation (the “Foundation”) is a nonprofit organization with the purpose of supporting the educational and other activities of the District. The District does not appoint board members; does not fund; nor is the District obligated to pay debt related to the Foundation. However, the District does have the ability to significantly influence the policies of the Foundation. The Foundation solicits donations and acts as coordinator of gifts made by other parties. It remitted restricted gifts of $739,920 and $697,513 to the District during the years ended August 31, 2007 and 2006, respectively. The District furnished certain services, such as office space, utilities and some staff assistance, to the Foundation which totaled $246,696 and $225,816 for 2007 and 2006, respectively. There were no related receivables as of August 31, 2007 and 2006. 24. SUBSEQUENT EVENT

On November 1, 2007, the North Harris Montgomery Community College District Board of Trustees voted to change the name of the District to Lone Star College System. The new name became effective on November 5, 2007.

40

SCHEDULE A

NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT
SCHEDULE OF OPERATING REVENUES YEAR ENDED AUGUST 31, 2007 (With Memorandum Totals for the Year Ended August 31, 2006)

Unrestricted Tuition State funded courses In-district resident tuition Out-of-district resident tuition Non-resident tuition TPEG -credit (set aside)* State-funded continuing education TPEG -non-credit (set aside)* Non-state funded continuing education Total tuition Fees General fee Student service fee Laboratory fee Other fees Total fees Scholarship allowances and discounts Scholarship Allowances Remissions and Exemptions TPEG Allowances State Grants to Students Federal Grants to Students Other Total scholarship allow and disc Total net tuition and fees Additional operating revenues Federal grants and contracts State grants and contracts Local grants and contracts Other operating revenues Total additional operating revenues Auxiliary enterprises Food Service Bookstore Child Care Fees Special Events Other Total net auxiliary enterprises Total Operating Revenues

Restricted

Educational Activities

Auxiliary Enterprises

Total

2006 Totals

$ 26,111,730 4,740,009 2,615,623 (1,904,211) 4,522,764 (199,082) 1,799,690 37,686,523 1,269,538 1,617,835 854,667 5,402,951 9,144,991 (2,616,801) (1,028,790) (572,539) (601,556) (5,197,280) (10,016,966) 36,814,548 1,560,592 910,264 2,470,856 $ 39,285,404

$

23,859,077 826,569 2,314,987 27,000,633

$ 26,111,730 4,740,009 2,615,623 (1,904,211) 4,522,764 (199,082) 1,799,690 37,686,523 1,269,538 1,617,835 854,667 5,402,951 9,144,991 (2,616,801) (1,028,790) (572,539) (601,556) (5,197,280) (10,016,966) 36,814,548 23,859,077 826,569 3,875,579 910,264 29,471,489 $ 66,286,037

$

-

$ 26,111,730 4,740,009 2,615,623 (1,904,211) 4,522,764 (199,082) 1,799,690 37,686,523 1,269,538 1,617,835 854,667 5,402,951 9,144,991 (2,616,801) (1,028,790) (572,539) (601,556) (5,197,280) (10,016,966) 36,814,548 23,859,077 826,569 3,875,579 910,264 29,471,489 2,146,409 1,579,040 721,414 659,601 564,889 5,671,353 $ 71,957,390
(Exhibit 2)

$ 24,638,645 4,216,666 2,111,057 (1,691,502) 4,313,776 (97,745) 1,650,480 35,141,377 1,222,140 1,556,029 881,734 4,772,210 8,432,113 (2,319,480) (878,692) (666,542) (477,125) (5,819,693) (10,161,532) 33,411,958 24,029,031 523,595 8,097,976 891,357 33,541,959 1,897,054 1,507,082 725,821 688,911 571,227 5,390,095 $ 72,344,012
(Exhibit 2)

$ 27,000,633

2,146,409 1,579,040 721,414 659,601 564,889 5,671,353 $ 5,671,353

*In accordance with the Education code 56.033, $2,103,293 and $1,789,247 was set aside for Texas Public Education Grants in 2007 and 2006, respectively.

41

SCHEDULE B

NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT
SCHEDULE OF OPERATING EXPENSES BY OBJECT YEAR ENDED AUGUST 31, 2007 (with Memorandum Totals for the Year Ended August 31, 2006)

Operating Expenses Salaries and Wages Unrestricted Educational Activities Instruction Public service Academic support Student services Institutional support Operation and maintenance of plant Scholarships and fellowships Total unrestricted educational activities Restricted Educational Activities Instruction Public service Academic support Student services Institutional support Operation and maintenance of plant Scholarships and fellowships Total restricted educational activities Total educational activities Auxiliary enterprises Depreciation expense - buildings Depreciation expense - equip & furn Total Operating Expenses $ 2,116,653 259,494 146,678 825,581 102,350 198,562 3,649,318 119,239,518 1,949,807 121,189,325 $ $ 5,773,939 72,302 3,188,283 1,442,203 3,159,754 13,636,481 13,636,481 13,636,481 $ 301,029 48,931 7,828 100,321 17,772 58,852 534,733 9,565,276 395,316 9,960,592 $ 1,181,897 336,803 211,795 1,036,465 238,525 94,136 10,391,971 13,491,592 57,385,821 2,959,209 6,550,074 2,275,289 69,170,393 $ 9,373,518 717,530 3,554,584 3,404,570 3,518,401 351,550 10,391,971 31,312,124 199,827,096 5,304,332 6,550,074 2,275,289 213,956,791 (Exhibit 2) $ 10,515,290 648,258 2,935,768 3,390,875 3,126,523 1,093,359 9,340,611 31,050,684 184,837,854 5,132,064 6,484,698 2,217,479 198,672,095 (Exhibit 2) $ 61,484,394 549,911 21,472,790 10,022,940 14,690,738 7,369,427 115,590,200 $ $ 3,171,368 45,748 1,284,565 598,310 2,037,030 1,893,522 9,030,543 $ 7,555,287 161,513 5,099,172 2,678,972 10,652,226 17,747,059 43,894,229 $ 72,211,049 757,172 27,856,527 13,300,222 27,379,994 27,010,008 168,514,972 $ 66,709,904 826,798 26,073,905 12,160,108 25,444,565 22,571,890 153,787,170 State Benefits Local Other Expenses 2007 Total 2006 Total

42

SCHEDULE C

NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT
SCHEDULE OF NON-OPERATING REVENUES AND EXPENSES YEAR ENDED AUGUST 31, 2007 (With Memorandum Totals for the Year Ended August 31, 2006)

Unrestricted NON-OPERATING REVENUES: State appropriations: Education and general state support State group insurance State retirement matching Developmental education Total state appropriations Maintenance ad valorem taxes General obligation ad valorem taxes Gifts Investment income Gain on sale of investment Gain on disposal of capital asset Other non-operating revenue Total non-operating revenues NON-OPERATING EXPENSES: Interest on capital related debt Loss on disposal of capital assets Other non-operating expense Total non-operating expenses Net non-operating revenues $ 128,289,039

Restricted

Auxiliary Enterprises

August 31, 2007 2006

$ 49,113,362 49,113,362 73,755,838 17,000 4,477,292 925,547 128,289,039

$

7,826,145 5,810,336 13,636,481 31,367,850 377,389 45,381,720

$

-

$ 49,113,362 7,826,145 5,810,336 62,749,843 73,755,838 31,367,850 17,000 4,477,292 1,302,936 173,670,759

$ 49,113,362 7,490,673 5,661,796 62,265,831 70,130,332 28,436,732 8,200 2,540,321 1,386,683 164,768,099

11,359,249 245,000 11,604,249 $ 33,777,471 $

-

11,359,249 245,000 11,604,249 $ 162,066,510
(Exhibit 2)

12,517,976 6,106 12,524,082 $ 152,244,017
(Exhibit 2)

43

SCHEUDLE D

NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT
SCHEDULE OF NET ASSETS BY SOURCE AND AVAILABILITY YEAR ENDED AUGUST 31, 2007 (with Memorandum Totals for the Year Ended August 31, 2006)

Unrestricted
Current: Unrestricted Board designated Restricted Auxiliary enterprises Loan Endowment: Quasi: Unrestricted Restricted Endowment True Term Life income contracts Annuities Plant: Unexpended Renewals Debt service Investment in Plant Total Net Assets, August 31, 2007 Total Net Assets, August 31, 2006 Net Increase in Net Assets $ 40,506,050 37,602,808 2,903,242 $ 38,799,592 1,706,458 -

Detail by Source Restricted Capital NonAssets Expendable Expendable (Net)

Available for Current Operations Total Yes No

$

485,631

$

-

$

-

$

38,799,592 1,706,458 485,631

$

38,799,592 1,706,458 -

$

485,631

6,051,347 6,536,978 3,822,347 $ 2,714,631 $

$

119,597,719 119,597,719 105,148,483 14,449,236 $

6,051,347 119,597,719 166,640,747 146,573,638 20,067,109 $

40,506,050 37,602,808 2,903,242 $

6,051,347 119,597,719 126,134,697 108,970,830 17,163,867

44

SCHEDULE E

NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT
SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS
YEAR ENDED AUGUST 31, 2007

Federal Grantor/Pass Through Grantor/ Program Title U.S. DEPARTMENT OF EDUCATION Direct Programs: Federal Supplemental Educational Opportunity Grants-FSEOG (06-07) Institutional Development & Undergraduate Education Service Higher Education - Institutional Aid-Title V (06-07) Federal Work-Study Program (06-07) Federal Work-Study Program (07-08) Total Federal Work-Study Program TRIO - Student Support Services (06-07) TRIO - Talent Search (06-07) NHC's Student Support Services Initiative TRIO - Upward Bound (06-07) TRIO - Upward Bound (06-07) Total TRIO - Upward Bound Federal Pell Grant program (02-03) Federal Pell Grant program (03-04) Federal Pell Grant program (04-05) Federal Pell Grant program (05-06) Federal Pell Grant Program (06-07) Total Federal Pell Grant Program Academic Competitiveness (06-07) Pass-Through From: Texas Education Agency Adult Education - State Grant Program (05-06) Adult Education - State Grant Program (06-07) Adult Education - State Grant Program (05-06) Adult Education - State Grant Program (06-07) Adult Education - State Grant Program (05-06) Adult Education - State Grant Program (06-07) Total Adult Basic Education - State Grant Program Career and Technology Education (06-07) ATC Professional Development Pass-Through From: Texas Higher Education Coordinating Board Vocational Education - Basic Grants to States (05-06) Vocational Education - Basic Grants to States (06-07) Vocational Education - Basic Grants to States (06-07) Vocational Education - Basic Grants to States (06-07) Vocational Education - Basic Grants to States (06-07) Vocational Education - Basic Grants to States (06-07) Vocational Education - Basic Grants to States (06-07) Vocational Education - Basic Grants to States (06-07) Vocational Education - Basic Grants to States (05-06) Vocational Education - Basic Grants to States (06-07) Total Vocational Education - Basic Grants

Federal CFDA Number

Pass-Through Grantor's Number

Pass Through Disbursements and Expenditures

84.007

P007A034084

$

534,401

84.031S 84.033 84.033

P031S040052-06 P933A044084 P933A044084

404,374 251,782 36,137 287,919 253,587

84.042A

P042A050846

84.044A 84.047A 84.047A 84.063 84.063 84.063 84.063 84.063 84.375

P044A020444-6 P047A031128-06 P047A030935-06 P063P033422 P063P033422 P063P033422 P063P033422 P063P033422 n/a

283,076 385,803 245,007 630,810 98 2,025 (6) (33,750) 17,150,055 17,118,422 15,175

84.002A 84.002A 84.002A 84.002A 84.002A 84.002A

6410008711053 74100017110153 54100087110053 74100087110163 410005711060004 74100037110023

128,117 759,882 7,404 80,519 92,109 330,570 1,398,601 134,889

84.048

1670

84.048 84.048 84.048 84.048 84.048 84.048 84.048 84.048 84.048 84.048

61404 74233 71409 71502 71104 71103 71407 71501 61301 71404

2,450 951,384 51,058 77,320 29,442 23,931 93,268 30,457 (440) 84,472 1,343,342

The Notes to the Schedule of Expenditures of Federal Awards are an integral part of this statement

45

SCHEDULE E

NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT
SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (continued)
YEAR ENDED AUGUST 31, 2007

Federal Grantor/Pass Through Grantor/ Program Title Texas Higher Education Coordinating Board Southwest Texas Junior College Career Foundation Core Advanced Manufacturing Grant (06-07) Texas Higher Education Coordinating Board Alamo Community College District Technical Degree Program Course Redesign (Math) (06-07) Texas Higher Education Coordinating Board Austin Community College District Bridge to Careers Project (06-07) Texas Higher Education Coordinating Board Leveraging Educational Assistance Partnership (06-07) Texas Higher Education Coordinating Board Special Leveraging Educational Assistance Partnership (06-07) Texas Higher Education Coordinating Board Robert C. Byrd Honors Scholarship (06-07) Texas Higher Education Coordinating Board Tech Prep Education (06-07) Fund for the Improvement of Postsecondary Education Stephen F. Austin Articulated Internet Teacher Education Program for Multilingual Classrooms (06-07) Landmark College Demonstrations Projects to Ensure Students with Disabilities Receive a Higher Education (06-07) Total U.S. Department of Education THE DEPARTMENT OF AGRICULTURE Pass -Through from: Texas Health and Human Services Commission Child and Adult Care Food Program (06-07) DEPARTMENT OF JUSTICE Direct Program: Bullet Proof Vest Program (06-07) DEPARTMENT OF LABOR Pass-Through from: Houston-Galveston Area Council WIA Pilots, Demonstrations, and Research Projects NATIONAL SCIENCE FOUNDATION Direct Program: Education and Human Resources (06-07) Pass-Through from: Texas Engineering Experiment Station (TEES) Education and Human Resources Total National Science Foundation

Federal CFDA Number

Pass-Through Grantor's Number

Pass Through Disbursements and Expenditures

84.048

71405

4,999

84.048

74401

14,244

84.048 84.069A 84.069B 84.185A 84.243

74402 n/a n/a n/a 71713

27,159 25,792 43,355 3,000 927,277

84.116

P116B060283

3,566

84.333A

P333A050035-06

17,732 23,471,720

10.558

75L4003

29,221

16.607

15-0404-01-754

495

17.261

229-06

2,462

47.076 47.076

401988 ESI-0353377

12,863 122,040 134,903

The Notes to the Schedule of Expenditures of Federal Awards are an integral part of this statement

46

SCHEDULE E

NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT
SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS (continued)
YEAR ENDED AUGUST 31, 2007

Federal Grantor/Pass Through Grantor/ Program Title SMALL BUSINESS ADMINISTRATION Pass-Through from: University of Houston Small Business Development Center (06-07)) Small Business Development Center (06-07)) Total Small Business Administration HEALTH AND HUMAN SERVICES COMMISSION Pass-Through from: Texas Education Agency Temporary Assistance for Needy Families (05-06) Temporary Assistance for Needy Families (06-07) Total Health and Human Service Commission CORPORATION FOR NATIONAL AND COMMUNITY SERVICE Pass-Through from: Maricopa Community College ASSETS Accent on Student Success Engaged Together in Service Learn & Serve: Higher Ed: HE-Consortia (06-07) Direct Program: AACC Community College Broadening Horizon through Learn and Serve America - Higher Education (06-07) Total Corporation for National and Community Service TOTAL FEDERAL FINANCIAL ASSISTANCE

Federal CFDA Number

Pass-Through Grantor's Number

Pass Through Disbursements and Expenditures

59.037 59.037

R070104 R040213

5,033 128,801 133,834

93.558 93.558

63625017110124 73625017110124

3,344 72,451 75,795

94.005

06LHHAZ001

9,291

94.005

03LHHDC001

1,356 10,647 $ 23,859,077

The Notes to the Schedule of Expenditures of Federal Awards are an integral part of this statement.

47

NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED AUGUST 31, 2007

1

Basis of Presentation

The schedule of expenditures of federal awards presents the federal grant activity of North Harris Montgomery Community College District (the "District") for the year ended August 31, 2007. The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Government, and Non-Profit Organizations and includes awards received directly from federal agencies as well as federal awards passed through other government agencies.
2 Basis of Accounting

The accompanying schedule of expenditures of federal awards is presented using the accrual basis of accounting. Revenue is recognized when earned and expenditures are recognized when incurred. Revenues are reported only to the extent of expenditures for the current year. Federal receivables represent amounts expended in excess of that received.
3 Student Loans Processed and Administrative Costs Recovered

Federal Grantor CFDA Number /Program Name U.S. Department of Education Federal Family Education Loan Program 84.032

New Loans Processed

Administrative Cost Recovered

Total Loans Processed & Admin Cost Recovered

$

9,893,571

$

-

$

9,893,571

4

Federal Assistance Reconciliation Federal Grants and Contracts Revenue per Exhibit 2 Reconciling Items Total Federal revenues per Schedule of Expenditures of Federal Awards $ 23,859,077 23,859,077

$

48

NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS FOR THE YEAR ENDED AUGUST 31, 2007

5

Subrecipients The following amounts were passed-through to the listed subrecipients by the college. These amounts were from the Tech Prep (06-07) program CFDA 84.243A from U S Department of Education through the Texas Higher Education Coordinating Board. ISD Name Aldine ISD Alief ISD Alvin ISD Bellville ISD Channelview ISD Clear Creek ISD Columbus ISD Cypress-Fairbanks ISD Deer Park ISD El Campo ISD Fort Bend ISD Friendswood ISD Galena Park ISD Goose Creek ISD Hitchcock ISD Houston ISD Huffman ISD Huntsville ISD Katy ISD Klein ISD LaMarque ISD Lamar CISD Liberty ISD New Caney ISD Pearland ISD Santa Fe ISD Sealy ISD Spring ISD Spring Branch Sweeny ISD Tidehaven ISD Van Vleck ISD Waller ISD Willis ISD Colleges Alvin CC Brazosport College College of the Mainland Galveston College Houston Community College System Lee College North Harris Montgomery Comm. College District San Jacinto College District TOTAL $ $ 11,917 4,878 4,647 4,824 2,811 10,957 2,020 11,435 21,143 1,419 30,145 6,383 4,659 865 1,141 5,936 1,110 1,526 14,868 11,080 1,042 2,826 1,250 2,464 6,299 2,056 6,576 13,888 36,050 160 424 988 553 1,428 1,775 3,700 95,345 1,608 35,435 27,723 57,835 1,105 454,294

49

SCHEDULE F NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT SCHEDULE OF EXPENDITURES OF STATE AWARDS FOR THE YEAR ENDED AUGUST 31, 2007

State Grantor/Pass Through Grantor

State/Federal CFDA Number

Pass-Through Grantor's Number

Expenditures

TEXAS HIGHER EDUCATION COORDINATING BOARD: Direct Programs: 7800 College Work - Study Program (06-07) 7800 College Work - Study Program (07-08) Total College Work - Study Program
7801 Texas Grant Program (05-06) 7801 Texas Grant Program (06-07)

N/A N/A

N/A N/A

$

33,571 3,313 36,884 (3,175) 168,988 165,813 93,090 2,364 48,078 50,442 2,141 783

N/A N/A

N/A N/A

Total Texas Grant Program
7804 Texas Grant Renewal Program (06-07) 7805 Texas II Grant Renewal Program (06-07) 7803 Texas II Grant Program (06-07)

N/A N/A N/A

N/A N/A N/A

Total Texas II Grant Program 7831 Professional Nursing (06-07) 7833 Vocational Nursing (06-07) Pass -Through from: University of Texas Medical Branch 7518 NIGP-RPD Category (06-07) Pass -Through from: University of Texas 7503 WF Increases Nurses & Nursing Faculty (06-07) Total Texas Higher Education Coordinating Board
N/A N/A

N/A

N/A

N/A

N/A

6,908

N/A

N/A

13,423 369,484

See Accompanying Notes to Schedule of Expenditures of State Awards

50

SCHEDULE F NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT SCHEDULE OF EXPENDITURES OF STATE AWARDS (continued) FOR THE YEAR ENDED AUGUST 31, 2007

State Grantor/Pass Through Grantor TEXAS WORKFORCE COMMISSION: Direct Programs: 7514 TWC Skills Development (06-07)

State/Federal CFDA Number

Pass-Through Grantor's Number

Expenditures

N/A

2807SDF001

285,105

TEXAS EDUCATION AGENCY: Direct Programs: 7508 Temporary Assist. for Needy Families (06-07) 7509 Adult Basic Education (06-07) Pass -Through from: TEA Aldine ISD 7517 Victory Early College High School (06-07) Total Texas Education Agency

N/A N/A

70110017110124 70100017110135

38,938 130,090

N/A

71045297110001

1,833 170,861

TEXAS COMPTROLLER OF PUBLIC ACCOUNTS: Direct Programs: 7500 LEOSE/Law Enforcement Officer Standards and Education (06-07) TOTAL STATE FINANCIAL ASSISTANCE

N/A

N/A 1,119 $ 826,569

See Accompanying Notes to Schedule of Expenditures of State Awards

51

NORTH HARRIS MONTGOMERY COMMUNITY COLLEGE DISTRICT NOTES TO SCHEDULE OF EXPENDITURES OF STATE AWARDS FOR THE YEAR ENDED AUGUST 31, 2007

1

Significant Accounting Policies used in Preparing the Schedule

The expenditures included in the schedule are reported for the District's fiscal year. Expenditure reports to funding agencies are prepared on the award period basis. The expenditures reported above represent funds which have been expended by the college district for the purposes of the award. The expenditures reported above may not have been reimbursed by the funding agencies as of the end of the fiscal year. Some amounts reported in the schedule may differ from amounts used in the preparation of the basic financial statements. Separate accounts are maintained for the different awards to aid in the observance of limitations and restrictions imposed by the funding agencies. The District has followed all applicable guidelines issued by various entities in the preparation of the schedule.

2

State Assistance Reconciliation Total State Revenues Reconciling item: Interest Income Total expenditures per Schedule of State Awards $ 826,569 $ 826,569

52

STATISTICAL SECTION

This part of the North Harris Montgomery Community College District’s comprehensive annual financial report presents detailed information as a context for understanding what the information in the financial statements, note disclosures, and required supplementary information says about the government’s overall financial health. Contents Page

Financial Trends These schedules contain trend information to help the reader understand how 54 the District’s financial performance and well-being have changed over time. Revenue Capacity These schedules contain information to help the reader assess the District’s most significant local revenue sources - tuition and fees, state appropriations and ad valorem taxes. Debt Capacity These schedules present information to help the reader assess the affordability of the District current levels of outstanding debt and the District’s ability to issue additional debt in the future. Demographic and Economic Information These schedules offer demographic and economic indicators to help the reader understand the environment within which the District’s financial activities take place. Operating Information These schedules contain service and infrastructure data to help the reader understand how the information in the District’s financial report relates to the services the District provides and the activities it performs.

57

62

65

67

Sources: Unless otherwise noted, the information in these schedules is derived from the comprehensive annual financial reports for the relevant year.

53

North Harris Montgomery Community College District Net Assets by Component Fiscal Years 2002 to 2007 (unaudited)

For the Fiscal Year Ended August 31,
(amounts expressed in thousands)

2007 Invested in capital assets, net of related debt Restricted - expendable Restricted - nonexpendable Unrestricted Total net assets $119,598 6,537 40,506 $ 166,641

2006 $105,149 3,822 37,603 $ 146,574

2005 $88,362 2,810 29,486 $ 120,658

2004 $79,699 2,246 26,525 $ 108,470

2003 $81,262 2,818 21,283 $ 105,363

2002 $79,681 4,537 19,133 $ 103,351

Net increase in net assets

$

20,067

$

25,916

$

12,188

$

3,107

$

2,012

Note: Due to reporting format and definition changes prescribed by GASB Statement 34, only fiscal years 2002-2007 are available.

54

North Harris Montgomery Community College District Revenues by Source Fiscal Years 2002 to 2007 (unaudited) For the Year Ended August 31, (amounts expressed in thousands) 2007 Tuition and Fees (Net of Discounts) Governmental Grants and Contracts Federal Grants and Contracts State Grants and Contracts Local Grants and Contracts Non-Governmental Grants and Contracts Sales and services of educational activities Auxiliary enterprises Other Operating Revenues Total Operating Revenues Ad Valorem Taxes: Maintenance and Operations General Obligation Bonds State Appropriations Gifts Investment income Other non-operating revenues Total Non-Operating Revenues Total Revenues $ 36,815 23,859 826 3,876 5,671 910 71,957 $ 2006 33,412 24,029 524 8,098 5,390 891 72,344 $ 2005 30,134 24,285 901 3,172 4,886 1,089 64,467 $ 2004 28,615 21,390 910 2,978 5,025 429 59,347 $ 2003 22,311 18,368 1,680 4,778 3,681 300 51,118 2002 $ 19,423 18,547 1,416 2,624 3,765 131 $ 45,906

$

$

$

$

$

$

73,756 31,368 62,750 17 4,477 1,303 173,671 245,628

$

70,130 28,437 62,266 8 2,540 1,387 164,768 237,112

$

60,589 26,362 54,697 32 1,111 623 143,414 207,881

$

55,442 24,243 53,998 1,204 618 135,505 194,852

$

47,337 20,016 46,501 2,099 539 116,492 167,610

45,720 20,517 48,744 2,538 2,284 119,803 $ 165,709

For the Year Ended August 31, 2007 Tuition and Fees (Net of Discounts) Governmental Grants and Contracts Federal Grants and Contracts State Grants and Contracts Local Grants and Contracts Non-Governmental Grants and Contracts Sales and services of educational activities Auxiliary enterprises Other Operating Revenues Total Operating Revenues Ad Valorem Taxes: Maintenance and Operations General Obligation Bonds State Appropriations Gifts Investment income Other non-operating revenues Total Non-Operating Revenues Total Revenues 14.99% 9.71% 0.34% 1.58% 2.31% 0.37% 29.30% 2006 14.09% 10.13% 0.22% 3.42% 2.27% 0.38% 30.51% 2005 14.50% 11.68% 0.43% 1.53% 2.35% 0.52% 31.01% 2004 14.69% 10.98% 0.47% 1.53% 2.58% 0.22% 30.46% 2003 13.31% 10.96% 1.00% 2.85% 2.20% 0.18% 30.50% 2002 11.72% 11.19% 0.85% 1.58% 2.27% 0.08% 27.70%

30.03% 12.77% 25.55% 0.01% 1.82% 0.52% 70.70% 100.00%

29.58% 11.99% 26.26% 1.07% 0.58% 69.49% 100.00%

29.15% 12.68% 26.31% 0.02% 0.53% 0.30% 68.99% 100.00%

28.45% 12.44% 27.71% 0.62% 0.32% 69.54% 100.00%

28.24% 11.94% 27.74% 1.25% 0.32% 69.50% 100.00%

27.59% 12.38% 29.42% 1.53% 1.38% 72.30% 100.00%

Note: Due to reporting format and definition changes prescribed by GASB Statement 34, only fiscal years 2002-2007 are available.

55

North Harris Montgomery Community College District Program Expenses by Function g format and definition changes prescribed by GASB Statement 34, only fiscal years 2002-2007 are available. Note: Due to reportin Fiscal Years 2002 to 2007 (unaudited) For the Year Ended August 31,
(amounts expressed in thousands)

2007 Instruction Research Public service Academic support Student services Institutional support Operation and maintenance of plant Scholarships and fellowships Auxiliary enterprises Depreciation Total Operating Expenses Interest on capital related debt Loss on disposal of fixed assets Total Non-Operating Expenses Total Expenses $ 81,585 1,475 31,411 16,705 30,898 27,362 10,392 5,304 8,825 213,957 11,359 245 11,604 225,561 $

2006 77,225 1,475 29,010 15,551 28,571 23,665 9,341 5,132 8,702 198,672 12,518 6 12,524 211,196 $

2005 69,557 1,324 25,892 13,947 28,728 20,843 10,716 4,796 8,459 184,262 11,431 11,431 195,693 $

2004 71,587 1,408 16,270 12,770 26,468 23,262 11,060 4,345 7,389 174,559 11,728 11,728 186,287 $

2003 63,503 2,146 19,319 13,101 18,687 20,705 6,795 3,326 7,995 155,577 8,330 1,691 10,021 165,598

2002 $ 54,145 2,455 15,096 11,557 19,831 8,481 8,526 3,726 4,613 $ 128,430 9,151 9,151 $ 137,581

$

$

$

$

$

$

$

$

$

$

For the Year Ended August 31, 2007 Instruction Research Public service Academic support Student services Institutional support Operation and maintenance of plant Scholarships and fellowships Auxiliary enterprises Depreciation Total Operating Expenses Interest on capital related debt Loss on disposal of fixed assets Total Non-Operating Expenses Total Expenses 36.16% 0.00% 0.65% 13.93% 7.41% 13.70% 12.13% 4.61% 2.35% 3.91% 94.85% 5.04% 0.11% 5.15% 100.00% 2006 36.57% 0.70% 13.74% 7.36% 13.53% 11.21% 4.42% 2.43% 4.12% 94.07% 5.93% 5.93% 100.00% 2005 35.54% 0.68% 13.23% 7.13% 14.68% 10.65% 5.48% 2.45% 4.32% 94.16% 5.84% 5.84% 100.00% 2004 38.43% 0.76% 8.73% 6.86% 14.21% 12.49% 5.94% 2.33% 3.97% 93.70% 6.30% 6.30% 100.00% 2003 38.35% 1.30% 11.67% 7.91% 11.28% 12.50% 4.10% 2.01% 4.83% 93.95% 5.03% 1.02% 6.05% 100.00% 2002 39.35% 1.78% 10.97% 8.40% 14.41% 6.16% 6.20% 2.71% 3.35% 93.35% 6.65% 6.65% 100.00%

Note: Due to reporting format and definition changes prescribed by GASB Statement 34, only fiscal years 2002-2007 are available.

56

North Harris Montgomery Community College District Tuition and Fees Last Ten Academic Years (unaudited)

Academic Year (Fall) 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997

Registration Fee (per student) $ 12 12 12 12 12 12 12 12 12 12 $

In-District Tuition 36 32 32 28 26 24 24 24 22 22

Resident Fees per Semester Credit Hour (SCH) Student Cost for Out-of-District Technology Activity 12 SCH Tuition Fees Fees In-District $ 76 72 72 68 66 64 64 64 57 57 $ 6 6 6 5 5 4 4 4 4 4 $ 2 2 2 2 $ 540 492 492 432 384 348 348 348 324 324

Cost for 12 SCH Out-of-District $ 1,020 972 972 912 864 828 828 828 744 744

Increase from Increase from Prior Year Prior Year In-District Out-of-District 9.76% 0.00% 13.89% 12.50% 10.34% 0.00% 0.00% 7.41% 0.00% 0.00% 4.94% 0.00% 6.58% 5.56% 4.35% 0.00% 0.00% 11.29% 0.00% 0.00%

Academic Year (Fall) 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997

Registration Fee (per student) $ 12 12 12 12 12 12 12 12 12 12 $

In-District Tuition 91 87 87 83 81 69 69 69 67 67

Non-Resident Fees per Semester Credit Hour (SCH) Student Cost for Out-of-District Technology Activity 12 SCH Tuition Fees Fees Out of State $ 91 87 87 83 81 69 69 69 67 67 $ 6 6 6 5 5 4 4 4 4 4 $ 2 2 2 2 $ 1,200 1,152 1,152 1,092 1,044 888 888 888 864 864 $

Cost for 12 SCH International 1,200 1,152 1,152 1,092 1,044 888 888 888 864 864

Increase from Increase from Prior Year Prior Year In-District Out-of-District 4.17% 0.00% 5.49% 4.60% 17.57% 0.00% 0.00% 2.78% 0.00% 0.00% 4.17% 0.00% 5.49% 4.60% 17.57% 0.00% 0.00% 2.78% 0.00% 0.00%

Note: Includes basic enrollment tuition and fees but excludes course based fees such as laboratory fees, testing fees and certification fees.

57

North Harris Montgomery Community College District Assessed Value and Taxable Assessed Value of Property Last Ten Fiscal Years (unaudited)

(amounts expressed in thousands) Taxable Assessed Value (TAV) $ 90,146,858 81,936,173 75,289,890 69,598,293 63,838,636 58,509,952 31,297,101 29,318,675 23,655,851 20,877,459 Ratio of Taxable Assessed Value to Assessed Value 93.20% 93.14% 91.15% 91.70% 94.02% 93.65% 91.57% 91.75% 91.90% 89.98% Maintenance & Operations (a) $ 0.0820 0.0860 0.0798 0.0798 0.0742 0.0760 0.0750 0.0777 0.0807 0.0680

Direct Rate

Fiscal Year 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 1999-00 1998-99 1997-98

Assessed Valuation of Property $ 96,720,584 87,974,128 82,601,478 75,893,959 67,901,932 62,474,553 34,178,258 31,955,285 25,739,511 23,202,740

Less: Exemptions $ (6,573,726) (6,037,955) (7,311,588) (6,295,666) (4,063,296) (3,964,601) (2,881,157) (2,636,610) (2,083,660) (2,325,281)

Debt Service $

(a) $

Total (a) 0.1167 0.1207 0.1145 0.1145 0.1055 0.1100 0.1100 0.1174 0.1198 0.1198

0.0347 0.0347 0.0347 0.0347 0.0313 0.0340 0.0350 0.0397 0.0391 0.0518

Source: Local Appraisal District Notes: Property is assessed at full market value. (a) per $100 Taxable Assessed Valuation

58

North Harris Montgomery Community College District State Appropriation per FTSE and Contact Hour Last Ten Fiscal Years (unaudited)

Appropriation per FTSE

Appropriation per Contact Hour (hours expressed in thousands)

Fiscal Year 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 1999-00 1998-99 1997-98

State Appropriation (expressed in thousands) $ 62,750 62,266 54,697 53,997 46,501 48,744 40,281 38,613 33,279 32,183

FTSE (a)

State Appropriation per FTSE 2,443 2,464 2,343 2,442 2,263 2,606 2,467 2,607 2,408 2,581

Academic Contact Hours (b) 6,229 6,160 5,750 5,649 5,097 4,599 4,069 3,879 3,667 3,587

Voc/Tech Contact Hours (c) 182 236 154 193 210 223 198 168 144 142

Total Contact Hours

State Appropriation per Contact 9.79 9.74 9.26 9.24 8.76 10.11 9.44 9.54 8.73 8.63

25,688 $ 25,269 23,348 22,114 20,552 18,706 16,326 14,810 13,823 12,471

6,411 $ 6,396 5,904 5,842 5,307 4,822 4,267 4,047 3,811 3,729

Source (a) CBM001 Fall Semester (b) CBM004 Fall Semester (c) CBM00C 1st Quarter

Note: FTSE is defined as the number of full time students plus total hours taken by part-time students divided by 12.

59

North Harris Montgomery Community College District Principal Taxpayers Last Ten Tax Years (unaudited) Taxable Assessed Value (TAV) by Tax Year (amounts expressed in thousands) 2004 2003 2002 2001 2000 1999 328,867 665,897 231,324 243,006 190,395 218,060 248,881 185,355 143,586 136,277 $ 2,591,648 $75,289,890 259,341 604,808 245,454 214,578 197,419 248,881 143,585 202,282 178,640 160,887 $ 2,455,875 $69,598,293 302,183 126,266 141,063 538,611 156,242 168,148 532,028 131,219 186,453 101,913 $ 2,384,126 $63,838,636 365,921 206,790 212,018 137,282 250,185 139,439 859,405 569,840 222,394 109,772 $ 3,073,046 $58,509,952 291,608 136,729 166,180 355,425 106,272 680,923 232,752 182,134 121,144 86,708 $ 2,359,875 $31,297,101 126,550 197,990 165,299 201,501 126,133 753,487 195,534 113,300 96,209 86,345 $ 2,062,348 $29,318,675

Taxpayer

Type of Business

2006

2005 612,508 627,004 368,197 194,673 260,074 211,493 218,579 127,130 136,543 136,277 $ 2,892,478 $81,936,173

1998 116,094 131,687 130,941 122,489 322,710 103,603 669,608 201,055 122,501 108,650 $ 2,029,338 $23,655,851

1997

Hewlett Packard Manufacturing 717,813 Centerpoint Energy Inc Utility 669,281 Houston Pipeline Co LP Utility 525,621 Walmart Retail 272,154 Southwestern Bell Utility 254,770 Hines Interests Ltd Psp Real Estate 226,654 Wal-Mart Real Estate Bus Trs Real Estate 220,261 Continental Airlines Inc Airline 190,101 Exxon Mobil Corp Oil and Gas 174,024 HEB Grocery Co LP Retail grocer 158,170 Texas Cable Partners LP Utiulity Wachovia Development Corp Real Estate Woodlands Land Dev LP Real Estate AEP Energy Services, Inc Utility Gulf States Utilities Utility First Security Bank, Trustee Other Compaq Manufacturing Haliburton Energy Oil and Gas BAM Lease Company Property Managemen Houston Lighting & Power Utility Enron Corporation Conglomerate Weingarten Realty Real Estate Greenspoint Plaza Ltd Property Managemen Huntsman Inc. Petrochemical Hydril Co. Oil and Gas Sarsaparillali GGHP Deerbrook Shopping Mall Avis Car Rental Colombia Regional Medical Hospital Totals $ 3,408,849 Total Taxable Assessed Value $90,146,858

94,462 167,000 110,000

78,820

884,000

194,000 97,983 46,802

47,074 46,910 $ 1,767,051 $20,877,459

Taxpayer

Type of Business

2006 0.80% 0.74% 0.58% 0.30% 0.28% 0.25% 0.24% 0.21% 0.19% 0.18% 3.78%

2005 0.75% 0.77% 0.45% 0.24% 0.32% 0.26% 0.27% 0.16% 0.17% 0.17% 3.53%

2004

% of Taxable Assessed Value (TAV) by Tax Year 2003 2002 2001 2000 0.37% 0.87% 0.35% 0.31% 0.28% 0.36% 0.21% 0.29% 0.26% 0.23% 3.53% 0.47% 0.20% 0.22% 0.84% 0.24% 0.26% 0.83% 0.21% 0.29% 3.73% 0.63% 0.35% 0.36% 0.23% 0.43% 0.24% 1.47% 0.97% 0.38% 0.19% 0.00% 0.00% 0.00% 5.25% 0.93% 0.44% 0.53% 1.14% 0.34% 2.18% 0.74% 0.58% 0.39% 0.28% 7.54%

1999 0.43% 0.68% 0.56% 0.69% 0.43% 2.57% 0.67% 0.39% 0.33% 0.29% 7.03%

1998 0.49% 0.56% 0.55% 0.52% 1.36% 0.44% 2.83% 0.85% 0.52% 0.46% 8.58%

1997 0.40% 0 0.47% 0.00% 0.33% 0.00% 0.00% 3.74% 0.82% 0 0 0.00% 0 0.00% 8.46%

Hewlett Packard Manufacturing Centerpoint Energy Inc Utility Houston Pipeline Co LP Utility Walmart Retail Southwestern Bell Utility Hines Interests Ltd Psp Real Estate Wal-Mart Real Estate Bus Trs Real Estate Continental Airlines Inc Airline Exxon Mobil Corp Oil and Gas HEB Grocery Co LP Retail grocer Texas Cable Partners LP Utiulity Wachovia Development Corp Real Estate Woodlands Land Dev LP Real Estate AEP Energy Services, Inc Utility Gulf States Utilities Utility First Security Bank, Trustee Other Compaq Manufacturing Haliburton Energy Oil and Gas BAM Lease Company Property Managemen Houston Lighting & Power Utility Enron Corporation Conglomerate Weingarten Realty Greenspoint Plaza Ltd Huntsman Inc. Hydril Co. Sarsaparillali GGHP Deerbrook Avis Shopping Mall Car Rental Real Estate Property Managemen Petrochemical Oil and Gas

0.88% 0.31% 0.32% 0.25% 0.29% 0.33% 0.25% 0.19% 0.18% 3.44%

Colombia Regional Medical Hospital

Source: Harris County and Montgomery County Appraisal Districts

60

North Harris Montgomery Community College District Property Tax Levies and Collections Last Ten Tax Years
(unaudited) (amounts expressed in thousands)

Fiscal Year Ended August 31 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 $

Levy (a) 91,528 91,695 78,300 74,477 67,075 60,906 34,427 34,420 28,339 25,011

Cumulative Levy Adjustments $ 13,673 $ 5,876 7,830 5,173 1,025 3,905 3,652 1,895 489 1,517

Adjusted Tax Levy (b)

Collections Year of Levy (c) 102,060 94,882 83,765 77,593 64,734 62,478 37,025 35,456 27,832 25,941

Percentage 97.01% 97.24% 97.25% 97.42% 95.06% 96.40% 97.23% 97.63% 96.55% 97.79%

Prior Collections of Current Prior Levies Collections of (d) Prior Levies (e) $ - $ 1,387 1,407 2,864 1,935 848 677 869 469

Total Collections 102,060 96,651 85,533 79,189 67,719 64,513 37,901 36,152 28,710 26,419

Cumulative Collections of Adjusted Levy 97.01% 99.06% 99.31% 99.42% 99.44% 99.54% 99.53% 99.55% 99.59% 99.59%

105,201 $ 97,571 86,130 79,650 68,100 64,811 38,079 36,315 28,828 26,528

- $ 1,769 381 189 121 100 28 19 9 9

Source: Local Tax Assessor/Collector and District records. (a) per original certified tax levy. (b) As of August 31st of the current reporting year. (c) Property tax only - does not include penalties and interest (d) Represents cumulative collections of prior years not collected in the current year or the year of the tax levy. (e) Represents current year collections of prior years levies.

61

North Harris Montgomery Community College District Ratios of Outstanding Debt Last Ten Fiscal Years

(unaudited)

For the Year Ended August 31 (amounts expressed in thousands) 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998

General Bonded Debt $ $ 184,419 $ 203,905 $ 220,639 $ 236,164 $ 212,193 $ 222,729 $ 132,323 $ 184,419 $ 203,905 $ 220,639 $ 236,164 $ 212,193 $ 222,729 $ 132,323 $ 89,163 89,163 $ $ 95,657 95,657 $ $ 68,705 68,705

General obligation bonds

Notes

Less: Funds restricted for debt service

Net general bonded debt

Other Debt $ $ 239,715 $ 230,445 $ 248,631 $ 265,572 $ 233,793 $ 235,564 $ 55,296 $ 26,540 $ 27,992 $ 29,408 $ 21,600 $ 12,835 $ 14,075 146,398 $ $ 14,189 103,352 $ $ 8,230 103,887 $ $ 10,280 78,985

Revenue bonds

Notes

Capital lease obligations

Total Outstanding Debt

62
$ 7,179 0.20% 0.25% 0.29% 0.34% 8,069 9,450 10,679 124.61 $ 137.77 $ 149.08 $ 159.57 $ 143.37 10,325 0.33% $ $ 9,332 0.29% 0.28% 0.33% 9,120 10,649 161.97 $ 155.71 $ 167.99 $ 179.44 12,009 0.38% $ 157.97 11,376 0.37% $

General Bonded Debt Ratios 150.49 11,907 0.38% $ 89.41 8,105 0.42% $ 60.25 6,020 0.30% $ 64.63 6,920 0.40% $ 46.42 5,509 0.33%

Per Capita

Per FTSE

As a percentage of Taxable Assessed Value

Total Outstanding Debt Ratios 159.16 12,593 0.40% $ 98.92 8,967 0.47% $ 69.83 6,979 0.35% $ 70.19 7,516 0.44% $ 53.37 6,333 0.38%

Per Capita

Per FTSE

As a percentage of Taxable Assessed Value

Notes: Ratios calculated using population and TAV from current year. Debt per student calculated using full-time-equivalent enrollment.

North Harris Montgomery Community College District

Legal Debt Margin Information

Last Ten Fiscal Years

(unaudited)

.
For the Year Ended August 31 (amounts expressed in thousands) 2007 $ 90,146,858 $ 81,936,173 $ 75,289,890 $ 69,598,293 $ 63,838,636 $ 58,509,952 $ 31,297,101 $ 2006 2005 2004 2003 2002 2001 2000 29,318,675 $ 1999 23,655,851 $ 1998 20,877,459

Taxable Assessed Value

General Obligation Bonds 450,734 (6,051) 444,683 30,107 $ 414,576 $ 377,535 $ 347,271 $ 323,451 $ 295,604 $ 28,809 26,854 22,780 21,136 406,344 374,125 346,231 316,740 289,733 21,010 268,723 $ (3,337) (2,324) (1,760) (2,453) (2,817) 409,681 376,449 347,991 319,193 292,550 156,486 (938) 155,548 12,614 142,934 $ 146,593 (154) 146,439 14,147 132,292 $ 118,279 (80) 118,199 14,134 104,065 $ 104,387 (2,560) 101,827 14,308 87,519

Statutory Tax Levy Limit for Debt Service

Less: Funds Restricted for Repayment of General Obligation Bonds

Total Net General Obligation Debt

Current Year Debt Service Requirements

Excess of Statutory Limit for Debt Service over Current Requirements

Net Current Requirements as a % of Statutory Limit

5.34%

6.22%

6.52%

6.04%

5.85%

6.22%

7.46%

9.55%

11.88%

11.25%

Note: Texas Education Code Section 130.122 limits the debt service tax levy of community colleges to $0.50 per hundred dollars taxable assessed valuation.

63

North Harris Montgomery Community College District

Pledged Revenue Coverage

Last Ten Fiscal Years

(unaudited)

Revenue Bonds Pledged Revenues (amounts expressed in thousands)
Community Education Fees $ 5,964 5,933 5,012 241 192 319 350 330 275 141 969 842 714 642 550 497 1,789 4,903 4,466 3,898 3,156 2,929 2,619 638 591 580 507 564 645 570 689 255 1,415 242 1,507 1,345 22,164 21,375 19,786 15,207 11,508 9,673 8,391 7,898 7,280 6,322 $ 2,304 Income Commission Commission Total 1,579 $ 24,553 $ 293 $ Interest Vending Bookstore
Principal

Debt Service Requirements (amounts expressed in thousands)
Coverage Interest $ 1,346 1,451 1,416 1,938 1,310 1,240 115 880 510 770 $ 1,179 1,222 1,266 995 666 730 856 199 1,054 503 Total $ 2,525 2,673 2,682 2,933 1,976 1,970 971 1,079 1,564 1,273 Ratio 9.72 8.29 7.97 6.75 7.70 5.84 9.96 7.78 5.05 5.72

Fiscal Year
Fees $ 882 834 697 619 578 529 468 476 434 855 Fee 5,403 $ 1,222 1,157 1,061 986 877 762 683 650 643 4,772 4,465 4,157 3,172 2,841 1,984 1,790 1,684 1,618 Fees 1,269

Technology Registration Laboratory

Ended August 31

Tuition

2007

$ 6,528

$

2006

6,160

2005 2004

6,697

6,184

2003

3,796

64

2002

1,021

2001

929

2000

742

1999 1998

743

690

North Harris Montgomery Community College District Demographic and Economic Statistics Fiscal Years 1998 to 2007 (unaudited) District Personal Income Fiscal District (thousands Year Population (a) of dollars) 2007 1,480,000 66,959,640 $ 2006 1,440,000 62,549,280 2005 1,406,264 58,645,428 2004 1,369,371 53,490,370 2003 1,333,474 49,531,892 2002 1,298,518 47,058,292 2001 867,582 32,408,526 2000 844,839 30,081,337 1999 673,774 21,987,267 1998 656,111 20,656,999

District Personal Income Per Capita (b) 45,243 43,437 41,703 39,062 37,145 36,240 37,355 35,606 32,633 31,484

(c) (c)

District Unemployment Rate (d) 4.1% 5.0% 5.3% 6.2% 7.2% 5.9% 4.7% 4.3% 4.8% 4.4%

Sources: (a) District estimate. 2002 includes annexation of CypressFairbanks ISD and Magnolia ISD. (b) U.S. Department of Commerce Bureau of Economic Analysis, Local Area BEARFACTS by SMSA/FIPS Code for Harris County, Texas (c) Estimated using average increase in per capita income 1998-2005 (d) U.S. Bureau of Labor Statistics, Metropolitan Area Employment and Unemployment

65

North Harris Montgomery Community College District Principal Employers (a) Fiscal Year 2007 (b) (unaudited)

Principal Employment Sectors (a) Local Government Retail Trade Construction Health Care and Social Assistance Professional and Technical Services Manufacturing Administrative and Waste Services Accommodation and Food Services Other Services, except public administration Wholesale Trade Total

2005 (b) Percentage Number of of Total Employees Employment 402,961 11.27% 364,111 10.18% 278,914 7.80% 275,259 7.70% 271,786 7.60% 267,052 7.47% 245,929 6.88% 227,514 6.36% 209,730 5.87% 153,485 4.29% 2,696,741 75.42%

2001 (b) Percentage Number of of Total Employees Employment 376,255 11.17% 356,622 10.59% 271,022 8.05% 237,563 7.05% 244,541 7.26% 289,970 8.61% 215,071 6.39% 203,885 6.05% 193,435 5.74% 143,967 4.27% 2,532,331 75.19%

Total Employment

3,575,609

3,367,964

Source: U.S. Department of Commerce Bureau of Economic Analysis, Regional Economic System Information, Houston Economic Area (Houston-Baytown-Huntsville)

Notes: (a) Principal employer data was not available for the District. (b) Data is normally presented with the current year compared to nine years prior. Latest data available for employment sectors is 2005 year and the earliest year available that is comparable is the 2001 year.

66

North Harris Montgomery Community College District Faculty, Staff, and Administrators Statistics Last Ten Fiscal Years (unaudited)

2007

2006

2005

2004

Fiscal Year 2003 2002 2001 2000

1999

1998

Faculty Full-Time Part-Time Total 704 1,910 2,614 661 1,799 2,460 646 1,636 2,282 605 1,557 2,162 532 1,272 1,804 471 1,130 1,601 441 998 1,439

416 936 1,352

392 866 1,258

373 869 1,242

Percent Full-Time Part-Time 26.9% 73.1% 26.9% 73.1% 28.3% 71.7% 28.0% 72.0% 29.5% 70.5% 29.4% 70.6%

30.6% 69.4%

30.8% 69.2%

31.2% 68.8%

30.0% 70.0%

67
49.1% 50.9% 52.4% 47.6% 51.8% 48.2% 55.0% 45.0% 51.2% 48.8% 36.49 21.16 $ 61,426 $ 58,424 $ 58,090 $ 38.23 21.29 36.14 20.44 36.55 20.27 56,738 $ 38.63 21.86 57,252

Staff and Administrators Full-Time Part-Time Total 1,214 1,260 2,474 1,187 1,078 2,265 1,142 1,064 2,206 1,091 894 1,985 940 895 1,835

852 778 1,630

807 745 1,552

744 689 1,433

673 647 1,320

629 617 1,246

Percent Full-Time Part-Time

52.3% 47.7%

52.0% 48.0%

51.9% 48.1%

51.0% 49.0%

50.5% 49.5%

FTSE per Full-time Faculty FTSE per Full-Time Staff Member

39.72 21.96 $ 56,877 $

37.02 20.23 55,827 $

35.60 19.91 55,832 $

35.26 20.54 54,809 $

33.43 19.83 53,925

Average Annual Faculty Salary

North Harris Montgomery Community College District Enrollment Details Last Ten Fiscal Years (unaudited)

Fall 2006 Number 24,543 10,002 Not available 5736 40,281 100.00% 36,842 100.00% 34,734 100.00% 31,958 100.00% 28,003 100.00% 24,769 100.00% 14.24% 5010 13.60% 4137 11.91% 3586 11.22% 3221 11.50% 2930 11.83% 24.83% 9,080 24.65% 7,690 22.14% 6,993 21.88% 6,172 22.04% 5,484 22.14% 60.93% 22,752 61.76% 22,907 65.95% 21,379 66.90% 18,610 66.46% 16,355 66.03% Not available Percent Number Percent Number Percent Number Percent Number Percent Number Percent Number Percent Number

Fall 2005

Fall 2004

Fall 2003 Fall 2001 Fall 2000 Fall 1999

Fall 2002

Fall 1998 Percent

Fall 1997 Number Percent Not available

Student Classification

Number

Percent

00-30 hours

23,372

56.73%

31-60 hours

10,107

24.53%

> 60 hours

7,721

18.74%

Total

41,200

100.00%

Fall 2006 Number 227 9,142 10,308 7,589 10,938 1,921 156 40,281 8.6 8.8 9.2 8.7 8.8 100.00% 36,842 100.00% 34,734 100.00% 31,958 100.00% 28,003 100.00% 0.39% 170 0.46% 174 0.50% 206 0.64% 216 0.77% 4.77% 1,687 4.58% 1,862 5.36% 1,716 5.37% 1,578 5.64% 27.15% 10,471 28.42% 10,348 29.79% 9,189 28.75% 8,302 29.65% 7,495 1,389 158 24,769 8.9 18.84% 6,889 18.70% 6,075 17.49% 5,305 16.60% 4,486 16.02% 3,926 25.59% 9,394 25.50% 8,230 23.69% 7,483 23.42% 6,680 23.85% 5,757 22.70% 8,075 21.92% 7,664 22.06% 7,730 24.19% 6,448 23.03% 5,705 23.03% 23.24% 15.85% 30.26% 5.61% 0.64% 100.00% 0.56% 156 0.42% 381 1.10% 329 1.03% 293 1.05% 339 1.37% Percent Number Percent Number Percent Number Percent Number Percent Number Percent

Fall 2005

Fall 2004

Fall 2003

Fall 2002 Fall 2001 Fall 2000

Fall 1999 Number Percent

Fall 1998 Number Percent

Fall 1997 Number Percent

Semester Hour Load

Number

Percent

Less than 3

223

0.54%

3-5 semester hours

9,669

23.47%

6-8 Semester hours

10,254

24.89%

9-11 semester hours

7,716

18.73%

Not available

Not available

Not available

12-14 semester hours

11,206

27.20%

15-17 semester hours

1,955

4.75%

18 & over

177

0.43%

Total

41,200

100.00%

68
Fall 2005 Number 36,285 3,002 994 40,281 100.00% 36,842 100.00% 34,734 100.00% 31,958 2.47% 837 2.27% 746 2.15% 696 7.45% 2,279 6.19% 1,986 5.72% 1,673 90.08% 33,726 91.54% 32,002 92.13% 29,589 Percent Number Percent Number Percent Number Percent 92.59% 5.23% 2.18% 100.00% Fall 2004 Fall 2003 Fall 2002 Fall 2001 Number 25,846 1,490 667 28,003 Percent 92.30% 5.32% 2.38% 100.00%

Average course load

8.8

8.6

8.0

Not available

Fall 2006

Fall 2000 Number 22,730 1,430 609 24,769 Percent 91.77% 5.77% 2.46% 100.00%

Fall 1999 Number 18,578 3,671 451 22,700 Percent 81.84% 16.17% 1.99% 100.00%

Fall 1998 Number 17,193 3,516 328 21,037 Percent 81.73% 16.71% 1.56% 100.00%

Fall 1997 Number 17,129 3,587 325 21,041 Percent 81.41% 17.05% 1.54% 100.00%

Tuition Status

Number

Percent

Texas Resident (in-District)

36,873

89.50%

Texas Resident (out-of-District)

3,093

7.51%

Non-Resident Tuition

1,234

3.00%

Total

41,200

100.00%

Source: NHMCCD OIE Credit Student Demographics by District by Term

North Harris Montgomery Community College District Student Profile Last Ten Fiscal Years (unaudited)

Fall 2006 Percent 60.12% 39.88% 100.00% 14,353 36,842 38.96% 100.00% 13,632 34,734 39.25% 100.00% 12,635 31,958 39.54% 100.00% 11,243 28,003 40.15% 100.00% 10,065 24,769 40.64% 100.00% 9,176 22,700 40.42% 100.00% 8,368 21,037 22,489 61.04% 21,102 60.75% 19,323 60.46% 16,760 59.85% 14,704 59.36% 13,524 59.58% 12,669 Number Percent Number Percent Number Percent Number Percent Number Percent Number Percent Number Percent 24,218 16,063 40,281

Fall 2005

Fall 2004

Fall 2003

Fall 2002

Fall 2001

Fall 2000

Fall 1999

Fall 1998 60.22% 39.78% 100.00%

Fall 1997 Number 12,732 8,247 20,979 Percent 60.69% 39.31% 100.00%

Gender

Number

Percent

Number

Female

24,791

60.17%

Male Total

16,409 41,200

39.83% 100.00%

Fall 2006 Percent 55.28% 20.13% 11.35% 6.01% 2.04% 0.37% 4.82% 100.00% 1,547 36,842 4.20% 100.00% 1,171 34,734 3.37% 100.00% 932 31,958 2.92% 100.00% 674 28,003 2.41% 100.00% 673 24,769 158 0.43% 145 0.42% 131 0.41% 126 0.45% 94 0.38% 2.72% 100.00% 733 1.99% 671 1.93% 645 2.02% 383 1.37% 298 1.20% 2,058 5.59% 1,900 5.47% 1,906 5.96% 1,528 5.46% 1,223 4.94% 4,185 11.36% 3,843 11.06% 3,373 10.55% 2,945 10.52% 2,565 10.36% 7,033 19.09% 6,188 17.82% 5,329 16.68% 4,439 15.85% 3,626 14.64% 3,085 2,323 1,149 287 111 294 22,700 21,128 57.35% 20,816 59.93% 19,642 61.46% 17,908 63.95% 16,290 65.77% 15,451 Number Percent Number Percent Number Percent Number Percent Number Percent Number 22,268 8,109 4,572 2,422 820 148 1,942 40,281

Fall 2005

Fall 2004

Fall 2003

Fall 2002

Fall 2001

Fall 2000

Fall 1999 Percent 68.07% 13.59% 10.23% 5.06% 1.26% 0.49% 1.30% 100.00%

Fall 1998 Number 14,825 2,726 1,919 1,069 169 92 237 21,037 Percent 70.47% 12.96% 9.12% 5.08% 0.80% 0.44% 1.13% 100.00%

Fall 1997 Number 14,729 2,625 1,937 1,053 88 91 456 20,979 Percent 70.21% 12.51% 9.23% 5.02% 0.42% 0.43% 2.17% 100.00%

Ethnic Origin

Number

Percent

Number

White

21,496

52.17%

Hispanic

9,103

22.09%

African American

4,626

11.23%

Asian

2,558

6.21%

Foreign

847

2.06%

Native American

136

0.33%

Other Total

2,434 41,200

5.91% 100.00%

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Fall 2005 Percent 36.24% 32.46% 11.53% 11.43% 6.13% 2.21% 100.00% 24.6 24.9 24.7 809 36,842 2.20% 100.00% 923 34,734 2.66% 100.00% 842 31,958 2.63% 100.00% 2,384 6.47% 2,477 7.13% 2,233 6.99% 4,415 11.98% 4,213 12.13% 3,693 11.56% 3,357 2,084 706 28,003 24.9 4,238 11.50% 3,916 11.27% 3,459 10.82% 2,967 11,979 32.51% 10,979 31.61% 9,731 30.45% 8,579 13,017 35.33% 12,226 35.20% 12,000 37.55% 10,310 Number Percent Number Percent Number Percent Number Percent 36.82% 30.64% 10.60% 11.99% 7.44% 2.52% 100.00% 14,598 13,075 4,643 4,604 2,469 892 40,281 24.5 Fall 2004 Fall 2003 Fall 2002 Fall 2001

Fall 2006

Fall 2000 Number 9,080 7,466 2,640 3,026 1,891 666 24,769 25.0 Percent 36.66% 30.14% 10.66% 12.22% 7.63% 2.69% 100.00%

Fall 1999 Number 5,453 8,717 2,876 3,052 1,961 641 22,700 24.5 Percent 24.02% 38.40% 12.67% 13.44% 8.64% 2.82% 100.00%

Fall 1998 Number 2,092 9,699 3,207 3,188 2,087 764 21,037 25.7 Percent 9.94% 46.10% 15.24% 15.15% 9.92% 3.63% 100.00%

Fall 1997 Number 2,092 9,641 3,207 3,188 2,087 764 20,979 26.2 Percent 9.97% 45.96% 15.29% 15.20% 9.95% 3.64% 100.00%

Age

Number

Percent

Number

Under 20

15,499

37.62%

20-24

13,231

32.11%

25-29

4,596

11.16%

30-39

4,665

11.32%

40-49

2,353

5.71%

50 & over Total

856 41,200

2.08% 100.00%

Average Age

24.1

Source: NHMCCD OIE Credit Student Demographics by District by Term

North Harris Montgomery Community College District Transfers to Senior Institutions 2004 Fall Students as of Fall 2005 (Includes only public senior colleges in Texas) (unaudited) Transfer Student Count Academic 2,248 2,258 1,714 1,072 933 534 362 285 253 180 179 162 110 89 72 58 52 54 53 38 26 26 25 23 15 19 14 12 12 8 6 6 4 2 3 3 2 2 1 0 0 10,915 Transfer Student Count Technical 82 77 43 21 49 19 8 11 22 9 3 5 3 2 6 5 2 1 0 1 5 4 1 0 7 1 3 2 1 0 0 0 1 3 0 0 0 0 0 0 0 397 Transfer Student Count Tech-Prep 111 75 23 17 70 12 8 14 32 10 3 2 16 3 11 1 3 1 2 3 1 1 4 2 1 1 0 0 1 0 0 0 1 0 0 0 0 0 0 0 0 429 Total of all NHMCCD Transfer Students 2,441 2,410 1,780 1,110 1,052 565 378 310 307 199 185 169 129 94 89 64 57 56 55 42 32 31 30 25 23 21 17 14 14 8 6 6 6 5 3 3 2 2 1 0 0 11,741 % of all NHMCCD Transfer Students 20.79% 20.53% 15.16% 9.45% 8.96% 4.81% 3.22% 2.64% 2.61% 1.69% 1.58% 1.44% 1.10% 0.80% 0.76% 0.55% 0.49% 0.48% 0.47% 0.36% 0.27% 0.26% 0.26% 0.21% 0.20% 0.18% 0.14% 0.12% 0.12% 0.07% 0.05% 0.05% 0.05% 0.04% 0.03% 0.03% 0.02% 0.02% 0.01% 0.00% 0.00% 100.00%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41

University of Houston Sam Houston State University Texas A&M University The University of Texas at Austin University of Houston - Downtown Texas State University Texas Tech University Stephen F. Austin State University Prairie View A&M University Texas Southern University The University of Texas at San Antonio University of North Texas Texas Woman's University Lamar University The University of Texas Health Science Center at Houston The University of Texas at Dallas The University of Texas at Arlington Texas A&M University at Galveston The University of Texas at Tyler The University of Texas Medical Branch at Galveston University of Houston at Clear Lake University of Houston at Victoria Texas A&M University at Corpus Christi Texas Tech University Health Sciences Center Midwestern State University Tarleton State University The University of Texas - Pan American West Texas A&M University The University of Texas Health Science Center at San Antonio Texas A&M University at Kingsville Texas A&M University at Commerce Sul Ross State University Angelo State University The University of Texas M.D. Anderson Cancer Center The University of Texas at El Paso The Texas A&M University System Health Science Center Texas A&M University at Texarkana The University of Texas Southwestern Medical Center at Dallas Texas A&M International University The University of Texas at Brownsville The University of Texas of the Permian Basin Totals

Source: Texas Higher Education Coordinating Board

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North Harris Montgomery Community College District Capital Asset Information Fiscal Years 2002 to 2007 (unaudited)

2007 Academic buildings Square footage (in thousands) Libraries Square footage (in thousands) Number of Volumes (in thousands) Administrative and support buildings Square footage (in thousands) Dormitories Square footage (in thousands) Number of Beds Apartments Square footage (in thousands) Number of beds Dining Facilities Square footage (in thousands) Average daily customers Athletic Facilities Square footage (in thousands) Stadiums Gymnasiums Fitness Centers Tennis Court Plant facilities Square footage (in thousands) Transportation Cars Light Trucks/Vans Buses 30 1,575 7 299 662,298 22 507 55,116 3,907 38 112 6 32 6 33 16 17 -

2006 30 1,575 7 299 862,764 22 505 55,116 n/a 38 112 6 32 6 33 16 17 -

Fiscal Year 2005 30 1,575 7 299 686,172 21 503 55,116 n/a 38 112 6 32 6 33 16 15 -

2004 29 1,524 7 299 928,639 20 500 55,116 n/a 38 112 6 32 6 33 16 14 -

2003 25 1,334 6 232 812,876 19 456 55,116 n/a 36 87 4 32 6 30 15 12 -

2002 20 1,034 2 81 1,020,276 14 276 40,881 n/a 29 78 3 26 5 24 14 9 -

n/a - not available

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SINGLE AUDIT SECTION

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REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS

To the Board of Trustees North Harris Montgomery Community College District We have audited the financial statements of the North Harris Montgomery Community College District (the “District”) as of and for the year ended August 31, 2007 and have issued our report thereon dated November 8, 2007. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States.

Internal Control Over Financial Reporting
In planning and performing our audit, we considered the District’s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the District’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the District’s internal control over financial reporting. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the District’s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the District’s financial statements that is more than inconsequential will not be prevented or detected by the District’s internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the District’s internal control. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above.

Compliance and Other Matters
As part of obtaining reasonable assurance about whether District’s financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those

73

provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. This report is intended solely for the information and use of the Board of Trustees, audit committee, management, and federal and state of Texas awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties.

Houston, Texas November 8, 2007

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REPORT ON COMPLIANCE WITH REQUIREMENTS APPLICABLE TO EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133 AND STATE OF TEXAS SINGLE AUDIT CIRCULAR

To the Board of Trustees North Harris Montgomery Community College District

Compliance
We have audited the compliance of North Harris Montgomery Community College District (the “District”) with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement and State of Texas Single Audit Circular that are applicable to each of its major federal and state programs for the year ended August 31, 2007. The District’s major federal and state programs are identified in the summary of auditors’ results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts, and grants applicable to each of its major federal and state programs is the responsibility of the District’s management. Our responsibility is to express an opinion on the District’s compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations and the State of Texas Single Audit Circular. Those standards, OMB Circular A-133, and the State of Texas Single Audit Circular require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal and state program occurred. An audit includes examining, on a test basis, evidence about the District’s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of District’s compliance with those requirements. In our opinion, the District complied, in all material respects, with the requirements referred to above that are applicable to each of its major federal and programs for the year ended August 31, 2007.

Internal Control Over Compliance
The management of the District is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts, and grants applicable to federal and state programs. In planning and performing our audit, we considered the District's internal control over compliance with the requirements that could have a direct and material effect on a major federal or state program in order to determine our auditing procedures for the purpose of expressing our opinion on compliance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the District's internal control over compliance.

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A control deficiency in an entity's internal control over compliance exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect noncompliance with a type of compliance requirement of a federal or state program on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity's ability to administer a federal or state program such that there is more than a remote likelihood that non-compliance with a type of compliance requirement of a federal or state program that is more than inconsequential will not be prevented or detected by the entity's internal control. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that material noncompliance with a type of compliance requirement of a federal or state program will not be prevented or detected by the entity's internal control. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses, as defined above. This report is intended solely for the information and use of the Board of Trustees, audit committee, management, and federal and state of Texas awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties.

Houston, Texas November 8, 2007

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SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED AUGUST 31, 2007
SECTION I: SUMMARY OF AUDITORS' RESULTS
Financial Statements: 1. 2. Type of auditors' report issued: Internal control over financial reporting: a) Material weakness identified? b) Reportable conditions identified that are not considered to be material weaknesses? c) Noncompliance material to financial statements noted? Unqualified

No None Reported No

Federal and State Awards: 1. Internal control over major programs: a) Material weakness identified? b) Reportable condition identified that are not considered to be material weakness? 2. 3. Type of auditors' report issued on compliance for major programs. Any audit findings disclosed that are required to be reported in accordance with section 510(a) of Circular A-133? Identification of major programs: Federal - CFDA Number Name of Federal Program or Cluster 84.007 84.032 84.033 84.063 84.375 84.002A Federal Supplemental Educational Opportunity Grants Federal Family Education Loan Program Federal Work Study Program Federal Pell Grant Program Academic Competitiveness Adult Education- State Grant Program Program Title No No Unqualified

No

4.

State – Contract Number N/A N/A

Texas Grant TWC Skill Development

Dollar threshold used to distinguish between type A and type B programs:
Federal: State: $649,477 $300,000

Auditee qualified as low-risk auditee under OMB Circular A-133, Section 530 and the State of Texas Single Audit Circular?
Federal State Yes Yes

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SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED AUGUST 31, 2007
SECTION 2: FINDINGS-FINANCIAL STATEMENT AUDIT
None reported.

SECTION 3: FINDINGS AND QUESTIONED COSTS-MAJOR FEDERAL AND STATE OF TEXAS AWARD PROGRAMS
None reported.

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SCHEDULE OF FINDINGS AND QUESTIONED COSTS FOR THE YEAR ENDED AUGUST 31, 2007
Prior Year Findings:
There were no audit findings included in the August 31, 2006 Schedule of Findings and Questioned Costs relative to Federal and State of Texas Awards.

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