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DALLAS AREA RAPID TRANSIT

FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED SEPTEMBER 30, 2011 AND 2010

TABLE OF CONTENTS

INDEPENDENT AUDITORS’ REPORT ..................................................................................................................... 1

MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED)...................................................................... 2

BASIC FINANCIAL STATEMENTS: STATEMENTS OF NET ASSETS ............................................................................................................................ 12 STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS .............................................. 13 STATEMENTS OF CASH FLOWS .......................................................................................................................... 14 NOTES TO FINANCIAL STATEMENTS ................................................................................................................ 16

REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED): SCHEDULE OF FUNDING PROGRESS FOR DEFINED BENEFIT PLAN AND OTHER POST EMPLOYMENT BENEFITS ........................................................................................................... 36

DALLAS AREA RAPID TRANSIT MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) FOR THE YEARS ENDED SEPTEMBER 30, 2011 and 2010 (Dollars in Thousands) The management of Dallas Area Rapid Transit (DART) offers the users of DART’s financial statements this narrative overview and analysis of the financial activities for the fiscal years ended September 30, 2011 and 2010. This discussion and analysis is designed to assist the reader to focus on significant financial activities and identify any significant changes in the financial position of DART. It should be read in conjunction with the financial statements that follow this section. All amounts, unless otherwise indicated, are expressed in thousands of dollars.

FINANCIAL HIGHLIGHTS As of September 30, 2011 and 2010, total assets of DART exceeded total liabilities by $2,373,611 and $2,445,494 respectively. The amount of unrestricted net assets as of September 30, 2011 was $795,907 compared to $687,987 in 2010. The net assets of DART decreased by $71,883 during the current fiscal year compared to an increase of $27,030 last year. The decrease during 2011 is predominately due to increases in interest and depreciation expense and decreases in federal capital contributions and grants. The increase during 2010 was due to increases in capital contributions and grants, net of the increases in operating expenses and nonoperating expenses. DART’s total debt increased by $704,723 (23%) during the current fiscal year compared to a decrease of $31,854 (1%) in 2010. The increase in 2011 is due to additional borrowing in the form of revenue bonds. The decrease in 2010 is due to principal payments made on revenue bonds and capital lease/leaseback liabilities. Capital contributions from federal and local governments were $122,314 in 2011 and $151,836 in 2010. Such contributions were used to finance DART’s transit system expansion projects and acquisition of light rail vehicles and equipment. Other federal grants were $47,566 in 2011 compared to $50,913 in 2010. For fiscal year 2011, total expenses exceeded total revenues resulting in a loss before capital contributions and grants of $241,736 compared to $175,719 for 2010. The loss in 2011 is more than that of 2010 primarily because of the increase in interest and depreciation expenses.

BASIC FINANCIAL STATEMENTS Management’s Discussion and Analysis serves as an introduction to DART’s basic financial statements. DART’s basic financial statements are comprised of four components: statements of net assets; statements of revenues, expenses, and changes in net assets; statements of cash flows; and notes to the financial statements. The statements of net assets present information on all of DART’s assets and liabilities with the difference between the two reported as net assets. Over time, increases or decreases in net assets may serve as a useful indicator of whether the financial position of DART is improving or deteriorating. The statements of net assets are shown on page 12 of this report. The statements of revenues, expenses, and changes in net assets present information on revenues, expenses, capital contributions, and how DART’s net assets changed during the two most recent fiscal years. All changes in net assets are reported as soon as the underlying event giving rise to the changes occurs, regardless of the timing of related cash flows. Thus, revenues, expenses, and capital contributions are reported in the statements for some items that result in cash flows only in future fiscal periods. The increase or decrease in net assets may serve as an indicator of the effect of DART’s current year operation on its financial position. The statements of revenues, expenses, and changes in net assets are shown on page 13 of this report. The statements of cash flows summarize all of DART’s cash flows into four categories: cash flows from operating activities; cash flows from non-capital financing activities; cash flows from capital and related financing activities; and cash flows from investing activities. The statements of cash flows, along with related notes and information in other financial statements, can be used to assess the following: DART’s ability to generate positive future cash flows and pay its debt as the debt matures; the reasons for differences between DART’s operating cash flows and operating income (loss); and the effect of cash and non-cash investing, capital, and financing activities on DART’s financial position. The statements of cash flows are shown on pages 14-15 of this report. Notes to the financial statements provide additional information that is essential to fully understand the data provided in the statements of net assets, statements of revenues, expenses, and changes in net assets, and statements of cash flows. The notes to the financial statements are shown on pages 16-35 of this report.

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DALLAS AREA RAPID TRANSIT MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) FOR THE YEARS ENDED SEPTEMBER 30, 2011 and 2010 (Dollars in Thousands)

The activities of DART are accounted for as a proprietary fund and are presented in the financial statements of DART as business type activities. The activities of DART are supported by a 1% sales and use tax within the member jurisdictions, fare collections, federal, state, and local financial assistance, and other receipts such as advertising and rental income. The financial statements of DART include the accounts and operations of a blended component unit, Regional Rail Right-of-Way Corporation.

FINANCIAL ANALYSIS Statements of Net Assets – Total assets of DART exceeded total liabilities by $2,373,611 and $2,445,494 as of September 30, 2011 and 2010, respectively. The largest portion of this excess (66% in 2011 and 71% in 2010) was invested in capital assets, net of related outstanding debt. DART uses these capital assets to provide public transportation services to customers and member jurisdictions; consequently, these assets are not available for future spending. Although DART’s investments in capital assets are reported net of related debt, it should be noted that the resources needed to repay this debt must be obtained from other sources such as sales tax, since the capital assets themselves cannot be used to liquidate these liabilities.

Condensed Summary of Assets, Liabilities, and Net Assets 2011 Current assets Other non-current assets Capital assets (net of accumulated depreciation) Total assets Current liabilities Non-current liabilities Total liabilities Net assets Invested in capital assets, net of related debt Restricted for: Debt service For debt service lease/leaseback liabilities Security for Unrestricted Total net assets $1,053,663 686,533 4,775,830 6,516,026 476,118 3,666,297 4,142,415 1,560,000 7,338 10,766 795,507 $2,373,611 2010 $962,389 446,089 4,520,616 5,929,094 501,043 2,982,557 3,483,600 1,741,742 15,765 687,987 $2,445,494 2009 $670,077 1,309,595 3,934,142 5,913,814 492,159 3,003,191 3,495,350 2,030,937 15,065 372,462 $2,418,464

Other non-current assets increased by $240,444 in 2011 compared to a decrease of $863,506 in 2010. The increase in 2011 is due to bonds that were issued during the year and held for payment of construction and acquisition of capital assets. The decrease in 2010 is due to spending of bond proceeds on capital projects. In 2011, $10,766 of DART’s net assets are restricted to satisfy the requirements of an amended lease/lease back agreement. The unrestricted portion of net assets, $795,507 in 2011 and $687,987 in 2010 represent resources available to meet DART’s ongoing obligations. The DART Board committed $26,123 and $36,633 of the unrestricted net assets for self-insurance and financial reserves in 2011 and 2010, respectively. The increases in unrestricted net assets of $107,520 (16%) in 2011 and $315,525 (85%) in 2010 are due to timing of expenditures and related reimbursements.

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DALLAS AREA RAPID TRANSIT MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) FOR THE YEARS ENDED SEPTEMBER 30, 2011 and 2010 (Dollars in Thousands) Statements of Revenues, Expenses, and Changes in Net Assets – During fiscal year 2011, DART’s activities resulted in a decrease in net assets of $71,883 compared to an increase of $27,030 in 2010. The decrease in 2011 is due to increases in expenses such as depreciation and interest and financing costs and decreases in capital contributions and other federal grants. The increase in net assets during fiscal year 2010 was due to capital contributions and grants, net of the increases in operating expenses and non-operating expenses. The key elements of the changes in net assets for the fiscal years ended September 30 with comparative information for 2009 are shown in the following table. Summary of Revenues, Expenses, and Changes in Net Assets 2011 Operating revenues Passenger revenues Advertising, rent and other Total operating revenues Operating expenses Labor Benefits Services Materials and supplies Purchased transportation Depreciation Utilities Taxes, leases, and other Casualty and liability Total operating expenses Operating loss Non-operating revenues (expenses) Sales tax Investment income Build America Bonds tax credit Other non-operating revenues Interest expense Street improvements for member cities Other non-operating expenses Total net non-operating revenues Loss before capital contributions and grants Capital contributions Other federal and state grants Total capital contributions and grants Increase (decrease) in net assets Net assets, beginning of the year Net assets, end of the year $ 57,329 12,049 69,378 198,290 86,548 33,832 51,096 53,466 179,119 17,047 5,737 3,878 629,013 (559,635) 403,228 28,434 30,250 13,562 (145,514) (1,244) (10,844) 317,872 (241,736) 122,314 47,566 169,880 (71,883) 2,445,494 $2,373,611 $ 2010 52,081 11,149 63,230 193,213 80,714 32,323 57,585 50,452 135,324 13,805 5,288 3,841 572,545 (509,315) 376,295 29,539 17,736 12,039 (93,752) (1,010) (7,251) 333,596 (175,719) 151,836 50,913 202,749 27,030 2,418,464 $2,445,494 2009 $ 46,712 10,640 57,352 180,834 69,157 31,894 51,279 47,291 121,765 12,362 5,685 3,320 523,587 (466,235) 378,421 48,985 4,730 11,997 (78,873) (645) (8,431) 356,184 (110,051) 244,924 57,759 302,683 192,632 2,225,832 $2,418,464

Significant changes in revenues and expenses are shown and explained on the following pages.

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DALLAS AREA RAPID TRANSIT MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) FOR THE YEARS ENDED SEPTEMBER 30, 2011 and 2010 (Dollars in Thousands)

REVENUES The following table summarizes revenues for fiscal year 2011 and 2010 with comparative information for 2009. REVENUES

Revenues Passenger revenues Advertising, rent and other Sales and use tax Other federal and state grants Investment income Capital contributions Build America Bonds tax credit Other revenues Total

2011 $ 57,329 12,049 403,228 47,566 28,434 122,314 30,250 13,562 $714,732

2010 $ 52,081 11,149 376,295 50,913 29,539 151,836 17,736 12,039 $701,588

2009 $ 46,712 10,640 378,421 57,759 48,985 244,924 4,730 11,997 $804,168

Passenger revenues – include farebox receipts, monthly and annual pass revenues, paratransit revenue, and special event fares. Passenger revenues increased by 10% ($5,248) in 2011 compared to an 11% ($5,369) increase in 2010. The increase in 2011 is due to an increase in light rail ridership. The increase in 2010 is due to the fare increase that became effective on October 1, 2009. Advertising, rent and other – Advertising income includes revenues from advertisements at transit stations, on DART buses, and electronic signs on light rail cars. Rental income includes revenue from the rental of land along the rail corridor and other properties. Advertising and rental income increased by 8% ($900) in 2011 compared to an increase of 5% ($509) in 2010. The increase during 2011 is due to rental income from DART’s right-of-way and rail diesel cars leased to the Denton County Transportation Authority. The increase during 2010 is due to an increase in car miles operated on DART’s right-of-way by railroad companies, increase in rate per car mile, CPI increases and revenue from a new right-of-way easement agreement. The increase in rental income is partially offset by a decrease in advertising revenue as a result of a decline in the advertising market. Sales and use tax – Sales and use tax is a dedicated 1% tax imposed on certain items within DART’s member jurisdictions or service area. Sales and use tax increased by 7% ($26,933) in 2011 compared to a decrease of 1% ($2,126) in 2010. The increase in 2011 is due to a relative improvement in the local economy resulting in better than previous year’s retail sales and sales tax receipts. The decrease in 2010 was due to the negative impact of the economic recession on retail sales. Sales and use tax revenue constituted approximately 58% and 54% of DART's total revenues in 2011 and 2010, respectively. Other federal and state grants – Other federal grant revenues decreased by 7% ($3,347) in 2011 compared to a decrease of 12% ($6,846) in 2010. The decrease in 2011 is due to reduced funding for preventive maintenance grants. The decrease in 2010 is due to the use of fixed guideway funding for capital projects. DART received $56 in 2011 and $181 in 2010 from the U S Department of Justice for hiring law enforcement (transit police) officers under the Community Oriented Policing Services (COPS) Universal Hiring Award program. DART also received $1,545 in 2011 and $1,427 in 2010 from the Federal Transit Administration (FTA) for vanpool and ozone programs and $847 in 2011 compared to $370 in 2010 in the form of homeland security grants from the United States Department of Homeland Security. Capital contributions – Capital contributions include federal and local grants and contributions. Capital contributions decreased by 19% ($29,522) in 2011 compared to a decrease of 38% ($93,088) in 2010. The decrease in 2011 was due to delay in project funding from the federal government. The decrease in 2010 compared to 2009 is due to lower funding in the form of the American Recovery and Reinvestment Act (ARRA). City of Irving’s share of the Belt Line Grade separation project cost is $4.2 million in 2011 compared to $1.3 million during 2010. These amounts are recorded as capital contributions. Investment income – Investment income decreased by 4% ($1,105) in 2011 compared to a 40% ($19,446) decrease in 2010. The decrease in 2011 is due to a decrease in interest rates. The decrease in 2010 is due to decreases in interest rates and investment balances.

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DALLAS AREA RAPID TRANSIT MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) FOR THE YEARS ENDED SEPTEMBER 30, 2011 and 2010 (Dollars in Thousands) Build America Bonds tax credit – The Build America Bonds (BABs) tax credit increased by 71% ($12,514) in 2011 compared to a 275% ($13,006) increase in 2010. The increase in 2011 is due to an additional bond issued under the BABs program in October 2010. The increase in 2010 is due to the full year of BABs tax credits in 2010 compared to only four months in 2009. Other revenues – Other revenues increased by13% ($1,523) in 2011 compared to a 0.4% ($42) increase in 2010. Other revenues include revenues from billings to the Fort Worth Transportation Authority (The T) for their share of the Trinity Railway Express (TRE) commuter rail service, toll credits received from the State of Texas as a local match for FTA capital grants, and alternative fuel tax credits. The increase in other revenues in 2011 is due to the alternative fuel tax credit received during 2011 as a result of an act passed by the United State Congress in December 2010 that allowed credits for periods covering fiscal years 2011 and 2010. The following charts summarize revenues for fiscal years 2009 through 2011.

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DALLAS AREA RAPID TRANSIT MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) FOR THE YEARS ENDED SEPTEMBER 30, 2011 and 2010 (Dollars in Thousands)

EXPENSES The following table summarizes expenses for fiscal year 2011 and 2010 with comparative information for 2009 EXPENSES BY OBJECT CLASS Expenses Labor Benefits Services Materials and supplies Purchased transportation Depreciation and amortization Utilities Taxes, leases and other Casualty and liability Street improvements for member cities Interest and financing expenses Other non-operating expense Total 2011 $198,290 86,548 33,832 51,096 53,466 179,119 17,047 5,737 3,878 1,244 145,514 10,844 $ 786,615 2010 $193,213 80,714 32,323 57,585 50,452 135,324 13,805 5,288 3,841 1,010 93,752 7,251 $ 674,558 2009 $180,834 69,157 31,894 51,279 47,291 121,765 12,362 5,685 3,320 645 78,873 8,431 $ 611,536

Labor – Labor costs increased by 3% ($5,077) in 2011 compared to an increase of 7% ($12,379) in 2010. The increase in 2011 is due to early retirement incentives payments and severance pay for terminations as a result of a reduction in force. The increase in 2010 is due to merit increases given to employees, vacant positions filled, and new positions added during 2010 and 2009. The new positions were added in preparation for the Green Line light rail service opening in December 2010. Benefits – Benefits increased by 7% ($5,834) in 2011 compared to a 17% ($11,557) increase in 2010. The increase in 2011 is mainly due to increase in health care claim costs. Other smaller increases include contributions to retirement plans, and payroll taxes. The increase in 2010 is due to increases in health care claim costs, contributions to retirement plans, workers compensation claim costs, payroll taxes and a larger increase in labor costs in 2010 than in 2009. Services – Services include contracted services such as: security, vehicles, equipment and right-of-way maintenance, advertising, marketing, computing, communication, legal, governmental, and environmental services. Services increased by 5% ($1,509) in 2011 compared to an increase of 1% ($429) in 2010. The increase in 2011 is due to the cost of an overhaul of commuter rail vehicles and refurbishment of HOV lane pylons. The increase in 2010 is due to an increase in the maintenance costs of TRE right-of-way and commuter rail cars. Materials and supplies – Materials and supplies include the cost of fuel, parts and supplies used to operate and maintain vehicles, equipment, and facilities. Materials and supplies expenses decreased by 11% ($6,489) in 2011 compared to an increase of 12% ($6,306) in 2010. The decrease in 2011 is due to DART’s diesel fuel hedge program that significantly reduced the net cost of fuel used by DART vehicles. The increase in 2010 is due to an increase in fuel costs and an increased need for parts to maintain the aging fleets of buses and light rail vehicles. Purchased transportation – Purchased transportation represents the costs of contracted transportation services such as commuter rail, paratransit, DART on-call, and shuttle services. Purchased transportation expenses increased by 6% ($3,014) in 2011 compared to a 7% ($3,161) increase in 2010. The increases in both 2011 and 2010 are due to increases in service miles and hours of paratransit service, fuel costs, and fixed monthly costs for paratransit and commuter rail services. Depreciation – Depreciation expenses increased by 32% ($43,795) in 2011 compared to an 11% ($13,559) increase in 2010. The increases in both 2011 and 2010 are due to new assets placed in service during both fiscal years. The increase in 2011 is larger because of the opening of the Green Line light rail service and Northwest Rail Operating Facility in December 2010. Utilities – Utilities represent the cost of electricity, telecommunications, water and sewer, and natural gas. Utilities increased by 23% ($3,242) in 2011 compared to an increase of 12% ($1,443) in 2010. The increase in 2011 is due to electricity usage increase for the light rail service as a result of the Green Line opening. Water usage has also increased because of new passenger and maintenance facilities. The increase in 2010 is due to an increase in the electricity rate and an increase in usage of electricity as well as an increase in communication costs. 7

DALLAS AREA RAPID TRANSIT MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) FOR THE YEARS ENDED SEPTEMBER 30, 2011 and 2010 (Dollars in Thousands) Taxes, leases, and other – Taxes, leases, and other includes fuel and lube taxes, equipment rentals, leases of operating and passenger facilities, training, travel, business meetings, membership dues, subscriptions, employee programs and an increase in the allowance for uncollectible receivables. Taxes, leases, and other expenses increased by 8% ($449) in 2011 compared to a decrease of 7% ($397) in 2010. The increase in 2011 is due to an increase in equipment rentals, increases in usage and rental rates for document storage facilities and an increase in the wellness screening costs. The decrease in 2010 is due to a decrease in the allowance for uncollectible receivables, recruiting costs and training expenses. Casualty and liability – Casualty and liability expenses increased by 0.1% ($37) in 2011 compared to an increase of 16% ($521) in 2010. The increases in both 2011 and 2010 are due to higher claim losses. Street improvements – Local assistance is provided to eligible member jurisdictions in the form of technical and financial assistance to reduce traffic congestion and complement bus and public transit operations. The street improvement program costs increased by 23% ($234) in 2011 compared to a 57% ($365) increase in 2010. The increases in both 2011 and 2010 are due to increased work on intelligent transportation systems projects that are expected to improve the flow of vehicle traffic. Interest – Interest expense increased by 55% ($51,762) in 2011 compared to an increase of 19% ($14,879) in 2010. In both 2011 and 2010, interest expense increased due to additional borrowings in the form of sales tax revenue bonds. The increase in 2011 is more than that of 2010 because less interest was capitalized as a result of the completion of the Green Line related projects during the first quarter of the fiscal year 2011. Also, additional bonds were issued in October 2011 which caused an added increase in interest in fiscal year 2011. Other non-operating expenses – Other non-operating expenses increased by 50% ($3,593) in 2011 compared to a decrease of 14% ($1,180) in 2010. The increase in 2011 is due to general planning and consulting service costs for a regional commuter rail project and a loss on disposal of capital assets. Expenses incurred for modification to streets adjacent to the new light rail segment caused the increase in 2009. These streets belong to the City of Dallas and Texas Department of Transportation. During 2010 there was no similar expense resulting in the 14% decrease. The following charts summarize expenses for fiscal years 2009 through 2011.

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DALLAS AREA RAPID TRANSIT MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) FOR THE YEARS ENDED SEPTEMBER 30, 2011 and 2010 (Dollars in Thousands) Expenses by function – Transportation – includes expenses that are directly related to the operation of bus, light rail, commuter rail, vanpool, paratransit, high occupancy vehicle (HOV) lanes, DART on-call and shuttle services. These expenses include such items as wages and benefits for operators, transit center service employees, transportation supervisors and managers, DART police, cost of fuel, tires and tubes, propulsion power, purchased transportation, customer service, revenue collection, and other related costs. Maintenance – includes labor costs and benefits for vehicle and facility maintenance, parts and inventory, utilities, and all other costs incurred for maintenance purposes. General and administration – includes administrative personnel costs, benefits, accident, general liability and contract claims; street improvements; and other related costs. Depreciation – includes depreciation expense on all depreciable capital assets. Interest – includes interest expense incurred on debt net of capitalized interest. EXPENSES BY FUNCTION 2011 $ 257,545 125,716 78,721 179,119 145,514 $ 786,615 2010 $ 246,631 123,596 75,255 135,324 93,752 $ 674,558 2009 $ 230,331 110,691 69,876 121,765 78,873 $ 611,536

Transportation Maintenance General and administration Depreciation and amortization Interest Total

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DALLAS AREA RAPID TRANSIT MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) FOR THE YEARS ENDED SEPTEMBER 30, 2011 and 2010 (Dollars in Thousands)

CAPITAL ASSETS AND DEBT ADMINISTRATION Capital assets – Investment in capital assets includes: land and rights-of-way; transitways; buildings and improvements; revenue and nonrevenue vehicles; equipment; and furniture, fixtures, and leasehold improvements. DART’s investment in capital assets as of September 30, 2011, is $4,775,830 compared to $4,520,616 in 2010. The net increase in capital assets during the current year is $255,214 (6%) compared to an increase of $586,474 (15%) in 2010. The following table summarizes capital assets net of depreciation as of September 30 with comparative information for 2009. Capital Assets (Net of Depreciation) 2011 Land and rights-of-way Transitways Buildings and improvements Revenue and non-revenue vehicles and equipment Furniture, fixtures, and leasehold improvements Projects in progress Total $ 548,904 2,185,849 455,135 719,397 6,673 859,872 $4,775,830 2010 $ 397,997 1,123,831 198,617 487,900 7,001 2,305,270 $4,520,616 2009 $ 398,914 1,154,839 209,198 409,131 6,321 1,755,739 $3,934,142

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The increases during 2011 and 2010 are due to the cost of planning, designing and building the Light Rail Transit (LRT) Phase II expansion. The Phase II expansion consists of approximately 46 miles of light rail transit lines. These new lines extend northwest from Downtown Dallas to the cities of Carrollton, Farmers Branch, and Irving and southeast from Downtown Dallas to Buckner Blvd. in South Dallas and northeast from the Downtown Garland Station to the Rowlett Park-and-Ride. The northwest and southeast extensions opened for service during 2011 and the northeast extension is scheduled to open during 2013. Additional information on DART’s capital assets is shown in note 6 on pages 23-25. Outstanding debt – Outstanding debt includes sales tax revenue commercial paper notes, revenue bonds, and capital lease/leaseback liabilities. As of September 30, 2011, DART had total outstanding debt of $3,772,333 compared to $3,067,610 as of September 30, 2010. Outstanding debt increased by 23% ($704,723) in 2011 compared to a 1% ($31,854) decrease in 2010. The following table summarizes DART’s total outstanding debt. Outstanding Debt 2011 $ 150,000 3,298,430 323,903 $3,772,333 2010 $ 150,000 2,595,370 322,240 $3,067,610 2009 $ 150,000 2,613,305 336,159 $3,099,464

Sales tax revenue commercial paper notes Senior lien revenue bonds payable Capital lease/leaseback liabilities Total debt

The sales tax revenue commercial paper notes remained at $150,000 as of September 30, 2011 and 2010. The commercial paper notes were issued as a senior subordinate lien to sales tax revenues and are payable from the 1% sales and use tax receipts. Senior lien revenue bonds outstanding are $3,298,430 as of September 30, 2011 and $2,595,370 as of September 30, 2010. These are senior lien bonds secured by and payable from the 1% sales and use tax receipts and farebox revenues. The increase of $703,060 in 2011 is due to additional borrowing during fiscal year 2011. The decrease of $17,935 in 2010 is due to principal payments made on December 1, 2009. All of DART bonds are issued to finance capital projects. The senior lien revenue bonds are shown net of original issuance premium, discount and refunding gain (loss) of $66,008 and $63,437 as of September 30, 2011 and 2010, respectively, on the statement of net assets. During 2011 DART maintained a AA+ credit rating from Standard & Poors, and a Aa2 from Moody’s for its bonds.

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DALLAS AREA RAPID TRANSIT MANAGEMENT’S DISCUSSION AND ANALYSIS (UNAUDITED) FOR THE YEARS ENDED SEPTEMBER 30, 2011 and 2010 (Dollars in Thousands)

Capital lease/leaseback liabilities are $323,903 and $322,240 as of September 30, 2011 and 2010, respectively. The increase in 2011 is due to accrued interest on outstanding liabilities. The decrease in capital lease/leaseback liabilities in 2010 is due to lease payments. Additional information on DART’s outstanding debt is shown in footnotes 10-14.

ECONOMIC OUTLOOK Sales tax is the largest source of revenue for DART, representing 58% and 54% of total revenues in 2011 and 2010, respectively. Sales tax revenues are affected by changes in the local economy. During fiscal year 2010, DART’s sales tax revenues showed a 1% decline compared to the previous year. Actual sales tax revenues in 2011 are $403.2 million compared to $376.3 million in 2010. The sales tax budget for 2012 is $422.5 million compared to $403.2 million actual for 2011. This represents a 4.8% increase from the 2011 actual sales tax revenues.

REQUESTS FOR INFORMATION This financial report is designed to provide our member jurisdictions, customers, investors, and creditors with a general overview of DART’s finances. If you have questions concerning any of the information provided in this report or need additional financial information, contact the Chief Financial Officer at Dallas Area Rapid Transit, 1401 Pacific Avenue, P.O. Box 660163, Dallas, TX 75266-7220.

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DALLAS AREA RAPID TRANSIT STATEMENTS OF NET ASSETS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands) 2011 ASSETS CURRENT ASSETS Cash and cash equivalents Investments Derivative instrument asset Sales tax receivable Transit revenue receivable, net Due from federal and other governments Materials and supplies inventory, net Prepaid transit expense and other Restricted investments held by trustee for debt service Restricted investments held for advance funding agreements Restricted investments held to pay capital lease/leaseback liabilities TOTAL CURRENT ASSETS NONCURRENT ASSETS Note receivable Investments restricted for system expansion and acquisition Restricted Investments held as security for capital lease/leaseback liabilities Investment in joint venture Capital assets Land and rights-of-way Depreciable capital assets, net of depreciation Projects in progress Restricted investments held to pay capital lease/leaseback liabilities Net pension asset Unamortized bond issue costs and other TOTAL NONCURRENT ASSETS TOTAL ASSETS LIABILITIES CURRENT LIABILITIES Accounts payable and accrued liabilities Commercial paper notes payable Current portion of capital lease/leaseback liabilities Current portion of repayment due to State Comptroller Local Assistance Program payable Retainage payable Unearned revenue and other liabilities Accrued interest payable from restricted assets Current portion of senior lien revenue bonds payable Deferred inflows of resources TOTAL CURRENT LIABILITIES NONCURRENT LIABILITIES Accrued liabilities Repayment due to State Comptroller Senior lien revenue bonds payable Capital lease/leaseback liabilities TOTAL NONCURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS Invested in capital assets, net of related debt Restricted for debt service Restricted as security for capital lease/leaseback liabilities Unrestricted TOTAL NET ASSETS
The accompanying notes are an integral part of these financial statements.

2010

$

116,477 677,801 5,480 68,114 2,563 20,306 27,381 2,483 65,375 11,921 55,762 1,053,663

$ 141,419 609,784 1,660 63,995 2,659 17,092 28,383 3,172 62,379 11,040 20,806 962,389 913 97,464 20,821 397,997 1,817,349 2,305,270 301,434 5,585 19,872 4,966,705 5,929,094

354,274 10,766 24,190 548,904 3,367,054 859,872 268,141 6,485 22,677 5,462,363 6,516,026

93,415 150,000 55,762 824 13,370 55,666 35,194 58,037 8,370 5,480 476,118 30,217 11,871 3,356,068 268,141 3,666,297 4,142,415 1,560,000 7,338 10,766 795,507 $2,373,611

152,195 150,000 20,806 824 13,370 67,531 29,252 46,615 18,790 1,660 501,043 28,411 12,695 2,640,017 301,434 2,982,557 3,483,600 1,741,742 15,765 687,987 $2,445,494

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DALLAS AREA RAPID TRANSIT STATEMENTS OF REVENUES, EXPENSES, AND CHANGES IN NET ASSETS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands) 2011 OPERATING REVENUES Passenger revenues Advertising, rent, and other TOTAL OPERATING REVENUES OPERATING EXPENSES Labor Benefits Services Materials and supplies Purchased transportation Depreciation and amortization Utilities Taxes, leases, and other Casualty and liability TOTAL OPERATING EXPENSES NET OPERATING LOSS NON-OPERATING REVENUES (EXPENSES) Sales tax revenue Investment income Interest income from investments held to pay capital lease/leaseback Interest expense on capital lease/leaseback Street improvements Interest and financing expenses Build America Bonds tax credit Other non-operating revenues Other non-operating expenses NET NON-OPERATING REVENUES LOSS BEFORE CAPITAL CONTRIBUTIONS AND GRANTS CAPITAL CONTRIBUTIONS AND GRANTS Federal capital contributions State capital contributions Local capital contributions Total capital contributions Other federal and state grants TOTAL CAPITAL CONTRIBUTIONS AND GRANTS CHANGE IN NET ASSETS TOTAL NET ASSETS – BEGINNING OF YEAR TOTAL NET ASSETS – END OF YEAR
The accompanying notes are an integral part of these financial statements.

2010 $ 52,081 11,149 63,230

$

57,329 12,049 69,378

198,290 86,548 33,832 51,096 53,466 179,119 17,047 5,737 3,878 629,013 (559,635)

193,213 80,714 32,323 57,585 50,452 135,324 13,805 5,288 3,841 572,545 (509,315)

403,228 5,966 22,468 (22,468) (1,244) (123,046) 30,250 13,562 (10,844) 317,872 (241,736)

376,295 6,842 22,697 (22,697) (1,010) (71,055) 17,736 12,039 (7,251) 333,596 (175,719)

117,217 839 4,258 122,314 47,566 169,880 (71,883) 2,445,494 $2,373,611

147,832 2,712 1,292 151,836 50,913 202,749 27,030 2,418,464 $2,445,494

13

DALLAS AREA RAPID TRANSIT STATEMENTS OF CASH FLOWS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands) 2011 CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers Payments to suppliers of goods and services Payments to purchased transportation service providers Payments to employees Benefit payments on behalf of employees NET CASH USED BY OPERATING ACTIVITIES CASH FLOWS FROM NON-CAPITAL FINANCING ACTIVITIES Sales tax proceeds Other federal grants Other non-operating receipts Build America Bonds tax credit Other non-operating payments Local Assistance Program and street improvements NET CASH PROVIDED BY NON-CAPITAL FINANCING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Interest on investments Proceeds from sales and maturity of investments Purchase of investments Decrease (increase) in restricted assets NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Acquisition and construction of capital assets Proceeds from the issuance of commercial paper notes Payment on commercial paper notes Proceeds from the issuance of sales tax revenue bonds Payments to advance refund existing sales tax revenue bonds Payment of debt issuance costs Principal payment on sales tax revenue bonds Interest and financing expenses Federal capital contributions State capital contributions Local capital contributions Proceeds from the sale of capital assets NET CASH (USED) PROVIDED BY CAPITAL AND RELATED FINANCING ACTIVITIES NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR CASH AND CASH EQUIVALENTS, END OF YEAR $ 75,976 (114,579) (58,436) (197,539) (85,649) (380,227) $ 2010 62,856 (90,684) (48,773) (192,029) (80,012) (348,642)

398,284 48,057 12,462 26,008 (7,341) (649) 476,821

372,614 50,743 12,045 16,554 (7,239) (2,772) 441,945

8,629 1,299,015 (1,368,785) (271,452) (332,593)

10,786 765,278 (980,358) 850,746 646,452

(504,892) 824,800 (824,800) 839,531 (110,410) (4,948) (18,790) (113,884) 118,634 4,849 967 211,057 (24,942) 141,419 $ 116,477

(740,764) 435,000 (435,000)

(17,935) (70,181) 146,237 13,752 992 (667,899) 71,856 69,563 $ 141,419

(Continued)

14

DALLAS AREA RAPID TRANSIT STATEMENTS OF CASH FLOWS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands) 2011 RECONCILIATION OF OPERATING LOSS TO CASH USED BY OPERATING ACTIVITIES CASH FLOWS FROM OPERATING ACTIVITIES Net operating loss ADJUSTMENTS TO RECONCILE NET OPERATING LOSS TO NET CASH USED IN OPERATING ACTIVITIES Depreciation and amortization Changes in assets and liabilities (Increase) decrease in transit receivable Increase (decrease) in materials and supplies inventory (Increase) decrease in prepaid expenses and other current assets Decrease in pension assets Decrease in other post employment benefits assets (Increase) decrease in accounts payable and accrued liabilities Increase in other current liabilities NET CASH USED BY OPERATING ACTIVITIES 2010

$(559,635)

$(509,315)

179,119 (139) 1,002 71 (900) (5,587) 5,842 $(380,227)

135,324 (534) (1,347) (206) (775) 605 20,038 7,568 $(348,642)

NON-CASH OPERATING, INVESTING, AND FINANCING ACTIVITIES Interest income from investments held to pay capital lease/leaseback Interest expense on capital lease/leaseback Decrease in capital lease/leaseback obligations Decrease in investments held to pay capital lease/leaseback Decrease in fair value of investments Amortization of premium, discount and debt issuance costs Loss on disposal of assets

$22,468 (22,468) (1,662) 1,662 (1,454) (2,686) (2,205)

$22,697 (22,697) (13,918) 13,918 (1,930) (2,778) (281)
(Concluded)

The accompanying notes are an integral part of these financial statements.

15

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands)

1.

ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization – Dallas Area Rapid Transit (DART) is a regional transportation authority of the State of Texas, created and confirmed by passage of a referendum on August 13, 1983, pursuant to Article 1118y of the Vernon's Annotated Texas Civil Statutes, as amended, and recodified into Section 452 of the Texas Transportation Code (the Code) effective September 1, 1995. DART is organized to provide public and general transportation services to 13 member jurisdictions in five counties: Dallas, Collin, Ellis, Denton, and Rockwall. The member jurisdictions in which the voters elected to be included in DART consist of the cities of Carrollton, Cockrell Hill, Dallas, Farmers Branch, Garland, Glenn Heights, Irving, Plano, Richardson, Rowlett, University Park, and the towns of Addison and Highland Park. Fifteen Board members represent the 13 member jurisdictions. Board members are appointed according to the ratio of the population of a member jurisdiction to the total population of the service area. One Board member may represent multiple jurisdictions. Amendments to DART’s enabling legislation require approval of the Texas State Legislature, which holds its regular session every two years. Past legislative changes limited the term of debt issued by DART without voter approval, allowed the issuance of lease/leaseback transactions (see note 10), and changed the collection period of sales taxes from quarterly to monthly. Future changes to DART’s enabling legislation could have a material impact on DART’s financial position. The next session of the State Legislature is scheduled to begin in January 2013. On August 12, 2000, the voters of the DART service area passed a referendum that allows DART to issue up to $2.9 billion of bonds or notes that are payable from and secured by the DART sales and use tax, have maturities beyond five years, and are issued pursuant to the authority granted at the election. On August 9, 2001, DART issued $400 million of the authorized $2.9 billion bonds. On September 10, 2002, $98.7 million of the authorized bonds were issued. On March 8, 2007, an additional $770.3 million of the authorized bonds were issued. From the $770.3 million, $317.7 million was issued to refund part of the 2001 and 2002 bonds. The remaining $452.6 million was issued to pay-off commercial paper notes. In April 2008, the Board approved the fourth issuance of Bonds (Series 2008), for $731.4 million as authorized by the Master Debt Resolution. This issuance included $341million to refund commercial paper notes. In May 2009, the Board approved the fifth issuance of Bonds (Series 2009A and Series 2009B), for $1 billion as authorized by the Master Debt Resolution (see notes 12 and 13). These bonds are Senior Lien Sales Tax Revenue Bonds that are secured by, and payable solely from, a senior lien on revenue that DART receives from the 1% sales and use tax. In September 2010, the Board approved the sixth issuance of Bonds (Series 2010A and Series 2010B), for $824.6 million as authorized by the Master Debt Resolution (see notes 12 and 13).These bonds are Senior Lien Bonds that are secured by, and payable solely from, a senior lien on revenues that DART receives from the 1% sales and use tax and farebox revenues. DART received approximately $403,228 in 2011 from a 1% sales tax imposed on certain items within its member jurisdictions compared to $376,295 in 2010. These revenues constituted approximately 58% and 54% of DART's total revenues for fiscal years 2011 and 2010, respectively. In both 2011 and 2010, approximately 50%, 15%, and 11% of these sales tax revenues were collected from sales in the cities of Dallas, Plano, and Irving. Basis of Accounting – The activities of DART are accounted for as proprietary funds of other local governments and therefore are reported as an enterprise fund in accordance with governmental accounting and financial reporting principles issued by the Governmental Accounting Standards Board (GASB). Accordingly, transactions are accounted for using the accrual basis of accounting. Under Alternative 1 of GASB Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, DART applies all standards issued on or before November 30, 1989, by the Financial Accounting Standards Board (FASB), except when they contradict GASB standards, and has elected not to apply FASB standards issued after November 30, 1989. Reporting Entity – DART has a blended component unit, Regional Rail Right-of-Way Corporation (RRRC). RRRC is a legally separate corporation, which was formed to facilitate the acquisition of certain properties and right-of-way for DART. Because RRRC directly benefits DART, GASB Statement No. 14, The Financial Reporting Entity, as amended by GASB Statement No. 39, Determining Whether Certain Organizations Are Component Units—an amendment of GASB Statement No. 14, requires that DART use the blending method to incorporate the financial information of RRRC into DART’s financial statements. The accompanying financial statements include the accounts and operations of RRRC. All significant intercompany balances have been eliminated. Internally prepared financial statements for Regional Rail Right-of-Way Corporation may be obtained by contacting the Chief Financial Officer at Dallas Area Rapid Transit, 1401 Pacific Avenue, P.O. Box 660163, Dallas, TX 75266-7220. New Accounting Pronouncements – During 2011, DART implemented the Governmental Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. This Statement establishes fund balance classifications based primarily on the extent to which a government is bound to observe constraints imposed upon the use of the resources reported in governmental funds, and Statement No. 54 had no financial impact on DART during 2011.

16

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands)

During 2011 the Governmental Accounting Standards Board Statement No. 59, Financial Instruments Omnibus, became effective for DART. The objective of this Statement is to update and improve existing standards regarding financial reporting and disclosure requirements of certain financial instruments and external investment pools. This Statement had no financial impact on DART during 2011. Cash and Cash Equivalents – DART considers investments in unrestricted funds with original maturities of less than 90 days at the date of purchase to be cash equivalents. Cash and cash equivalents were $116,477 and $141,419 as of September 30, 2011 and 2010, respectively. Investments – The investment balances, other than investments held to pay lease/leaseback obligations (see Note 3), at September 30, 2011 and 2010 are stated at fair value. Fair value is the amount at which an investment may be exchanged in a current transaction between willing parties other than in a forced or liquidation sale. DART considers quoted market prices at September 30, 2011 and 2010, as the equivalent of the fair value of investments. When both restricted and unrestricted funds are available, it is DART’s policy to spend restricted funds first on eligible expenditures. Material and Supplies Inventory – An inventory of supplies and parts is maintained at different DART warehouses for use in the operation and is recorded as an expense when consumed or placed in service. Inventory is stated at average cost. Capital Assets – Capital assets are assets with an initial, individual cost of more than five thousand dollars ($5,000) and an estimated useful life in excess of one year. Such assets are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets as indicated in note 6. Major improvements to buildings and equipment are capitalized. Maintenance and repairs are charged to expense as incurred. Improvements and betterments that extend the useful lives of capital assets or add new functionality are capitalized. Transit system development costs for services such as project-related design, construction, construction management, and project management costs are capitalized when incurred. Interest expense incurred during the construction phase of a capital asset is capitalized. In 2011, total interest expense of $172,498 was incurred, and $49,452 of this total was capitalized. In 2010, total interest expense of $139,028 was incurred, and $67,974 of this total was capitalized. Donated assets are capitalized at estimated fair value on the date of donation. Federal, State and Local Capital Contributions, and Grants – Grant funds used for the acquisition of property and equipment are recorded as capital contribution revenues when the related grant eligibility requirements are met and qualified expenditures are incurred. DART received $122,314 in federal, state and local capital contributions during 2011 compared to $151,836 during 2010. Of the total capital contributions amount received during 2011, $105,567 was based on capital expenditures made during the previous years. This amount is included in Federal Capital Contributions on the Statements of Revenues, Expenses and Changes in Net Assets for the fiscal year ended September 30, 2011. In addition to capital contributions, DART also received $47,566 in 2011 compared to $50,913 in 2010 in the form of other federal and state grants. Included in these amounts are grants that are substantially related to capital maintenance grants from the federal government. Paid Time Off, Vacation and Sick Leave – Salaried exempt and non-exempt employees are eligible for a "Paid Time Off" (PTO) benefits program. Accumulated PTO hours have no cash value unless the employee has five or more years of service. Upon termination of employment, a percentage of unused PTO hours will be paid in a lump sum based on number of years or length of continued service with DART. Hourly employees earn vacation and sick leave, which may be taken or accumulated up to certain levels, until paid upon retirement or termination. The liability for PTO, vacation, and sick leave has been calculated in accordance with GASB Statement No. 16, Accounting for Compensated Absences, and is included in the accounts payable and accrued liabilities line item in the accompanying statements of net assets. Operating Revenues and Expenses – Operating revenues are generated from activities related to providing public transportation services such as bus, light rail, commuter rail, paratransit, and vanpool to DART customers. DART’s operating revenues include passenger fare revenues, advertising revenues, and certain rental income. Non-operating revenues are revenues not directly related to the operations of DART's transit service. Sales tax revenues, Build America Bond tax credit, and investment income are classified as non-operating revenues. Operating expenses are incurred for activities directly related to providing public transportation services to DART customers. Such activities include transportation, maintenance, transit police, and general and administrative functions. Non-operating expenses include interest and financing costs, general planning and consulting work not related to current service, and the local assistance provided to eligible member jurisdictions. Revenue Recognition – Operating revenues are recognized when transit service is provided. Monthly tickets and annual passes are sold for revenue service, including bus and rail operations. An estimate of unused tickets and passes is recorded as deferred transit revenue and is included in the unearned revenue and other liabilities line item in the accompanying statements of net assets. 17

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands) Sales Tax Revenues – Sales tax revenues are recognized when the underlying transactions occur. Sales tax revenues are subject to audits by the State Comptroller, which sometimes results in refunds to the State. Self-Insurance Liabilities – DART administers and maintains self-insured reserves for employee medical, operational workers compensation, auto, and general liability (including bus/rail accidents), directors and officers liability, and light rail construction workers compensation and general liability claims. These programs are administered by DART, or in some instances, a third party. DART accrues the estimated cost of self-insurance liabilities based on actuarial review and the estimate is included in the accounts payable and accrued liabilities line item in the accompanying statements of net assets. The estimate includes incurred but not reported (IBNR) claims. Changes in the liabilities in 2011 and 2010 for all of DART's self-insured programs are as follows: Description Beginning balance Current year claims and changes in estimates Payments Ending balance Amounts due in one year 2011 $16,907 6,412 (5,503) $17,816 $5,868 2010 $15,901 7,732 (6,726) $16,907 $5,783

DART purchases liability insurance coverage for all-risk property, commuter rail, leased premises, crime, directors and officers and light rail project-specific professional liability and light rail build-out workers compensation and general liability. Coverage is evaluated annually and adjusted as necessary based upon exposure and claim payments. There was no significant reduction in insurance coverage from the previous year and the settlement amounts did not exceed insurance coverage for each of the past three fiscal years. Premium and Discounts on Revenue Bonds - Premiums and discounts on Senior Lien Revenue Bonds are amortized using the effective interest method. Costs of issuance and gains/losses on refunding are also amortized using the effective interest method over the life of the bonds. 2. SERVICE AGREEMENTS

DART has entered into several long-term agreements with contractors to provide paratransit, commuter rail, HOV lane, DART on-call and shuttle services. Payments to service providers are recorded as purchased transportation in the accompanying statements of revenues, expenses, and changes in net assets. A summary of the major amounts for services rendered in 2011 and 2010 and the current contract terms, including option periods, is as follows: Annual Payments 2011 2010 $17,949 $17,373 30,133 27,795 5,384 $53,466 5,284 $50,452 Contract Terms Began Expires 10/2010 09/2015 01/2007 09/2012 Various Various

Contractor’s Name Herzog Transit Services, Inc. Veolia Transportation Services, Inc. Others Total

Service Type Commuter Rail Paratransit , DART On-call, and Flex Service Various

18

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands)

3.

CASH, CASH EQUIVALENTS, AND INVESTMENTS

Cash and investments, excluding investments held for lease/leaseback liabilities, as of September 30 are classified in the statements of net assets as follows: 9/30/2011 Cash and cash equivalents Investments Restricted investments held by trustee for debt service Restricted investments held for advance funding agreements Investments restricted for system expansion and acquisition Restricted investments held as security for capital lease/leaseback liabilities Total cash and investments Cash and investments as of September 30 consist of the following: 9/30/2011 $570 115,907 1,120,137 $1,236,614 9/30/2010 $732 140,687 780,667 $922,086 $116,477 677,801 65,375 11,921 354,274 10,766 $1,236,614 9/30/2010 $141,419 609,784 62,379 11,040 97,464 $922,086

Cash on hand Cash equivalents Investments Total cash and investments Deposits

State statutes authorize DART's cash to be deposited in demand deposits, time deposits, or certificates of deposit and require that all deposits be fully collateralized or insured. On September 30, 2011, the carrying amount of DART's deposits was $570 compared to $732 at September 30, 2010. Bank balances at September 30, 2011 and 2010 were entirely covered either by Federal Depository Insurance or by collateral held by DART's agent in DART's name. Custodial Credit Risk - Custodial credit risk for deposits is the risk that, in the event of failure of a depository financial institution, DART will not be able to recover its deposits or will not be able to recover collateral securities that are in the possession of an outside party. DART’s policy requires that all deposits with financial institutions must be collateralized to the extent not protected by F.D.I.C. insurance. Securities that can be accepted as collateral are limited to U.S. Government Securities, Federal Agency Securities, and Municipal Securities. Investments In accordance with the Texas Public Funds Investment Act and DART's investment policy, DART invests in, among others, obligations of the United States or its agencies and instrumentalities, and obligations of states, agencies, counties, cities, and other state political subdivisions with ratings from a nationally recognized investment rating firm of not less than "A" or its equivalent and commercial paper with ratings of not less than "A1" or "P1." In addition, State statutes authorize DART to invest funds in other cash equivalents such as money market mutual funds among other things. All DART investments are subject to the Texas Public Funds Investment Act.

19

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands) The following table identifies the investment types that are authorized by DART’s Investment Policy. The table also identifies certain provisions of DART Investment Policy that address interest rate risk, credit risk and concentration of credit risk. Maximum Percentage of Portfolio None None None 50% None None None None Maximum Investment in One Issuer at the time of purchase None 25% 10% 5% None 5% 5% None

Authorized Investment Type U.S. Government Securities Federal Agency Securities Municipal Securities Repurchase Agreements and Reverse Repurchase Agreements Money Market Mutual Funds Commercial Paper Banker’s Acceptance Certificate of Deposit

Maximum Maturity 10 years 10 years 10 years 90 days 10 years 270 days 270 days 10 years

Interest Rate Risk - Interest rate risk is the risk that changes in market interest rates will adversely affect the fair value of an investment. Generally, the longer the maturity of an investment, the greater the sensitivity of its fair value to changes in market interest rates. One of the ways that DART manages exposure to interest rate risk is by purchasing a combination of shorter term and longer term investments and by timing cash flows from maturities so that a portion of it matures evenly over time as necessary to provide the cash flow and liquidity needed for operations. Information about the sensitivity of the fair values of DART investments to market interest rate fluctuations as of September 30 is provided in the tables below, which show the distribution of DART investments by maturity. Remaining Maturity (in months) as of September 30, 2011 12 months 12 to 24 24 to 60 or Less Months Months $54,662 84,685 65,070 21,286 62,038 354,613 126,529 $ 768,883 $ 103,801 70,011 63,568 15,071 $71,494 37,207 40,203 65,806

Investment Type Federal Farm Credit Banks Federal Home Loan Mortgage Corp Federal Home Loan Bank Federal National Mortgage Association Bankers Acceptance Commercial Paper Money Market Funds Total

Total Amount $229,957 191,903 168,841 102,163 62,038 354,613 126,529 $ 1,236,044

$ 252,451

$ 214,710

Investment Type Federal Farm Credit Banks Federal Home Loan Mortgage Corp Federal Home Loan Bank Federal National Mortgage Association Bankers Acceptance Commercial Paper Money Market Funds Total

Total Amount $89,350 125,770 150,866 143,621 47,586 185,337 178,824 $ 921,354

Remaining Maturity (in months) as of September 30, 2010 12 months 12 to 24 24 to 60 or Less Months Months $ 44,419 32,969 36,971 49,218 47,586 185,337 178,824 $ 575,324 $ 29,938 44,044 25,004 41,097 $ 14,993 48,757 88,891 53,306

$ 140,083

$ 205,947

20

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands)

Credit Risk - Credit risk is the risk that an issuer of an investment will not fulfill its obligation to the holder of the investment. This is measured by the assignment of a rating by a nationally recognized rating agency. The following tables show actual ratings as of September 30 for each investment type. Money market funds listed are SEC regulated 2a.7 funds. Rating as of September 30, 2011 AA+/ AAA A1/P1 AAAm $229,957 191,903 168,841 102,163 $ 62,038 354,613 $126,529 $692,864 $416,651 $126,529

Investment Type Federal Farm Credit Banks Federal Home Loan Mortgage Corp Federal Home Loan Bank Federal National Mortgage Association Bankers Acceptance Commercial Paper Money Market Funds Total

Total Amount $229,957 191,903 168,841 102,163 62,038 354,613 126,529 $1,236,044

On August 5, 2011, Standard and Poors, one of three nationally recognized raters of US debt and securities, downgraded the rating of longterm United States sovereign debt from AAA to AA+ for the first time since 1941 with a negative outlook. The two other national raters, Moody’s and Fitch, continue to have the highest ratings, but also have the debt on their watch lists. Included in DART’s investment portfolio as of September 30, 2011 is $692,864 that was downgraded from AAA to AA+ by Standard and Poors. Rating as of September 30, 2010 Investment Type Federal Farm Credit Banks Federal Home Loan Bank Federal Home Loan Mortgage Corp Federal National Mortgage Association Bankers Acceptance Commercial Paper Money Market Funds Total Total Amount $89,350 150,866 125,770 143,621 47,586 185,337 178,824 $921,354 AAA $89,350 150,866 125,770 143,621 A1/P1 AAAm

$ 47,586 185,337 $509,607 $232,923 $178,824 $178,824

Concentration of Credit Risk - Concentration of credit risk is the risk of loss attributed to the magnitude of DART’s investment in a single issuer. The Investment Policy of DART contains limitations on the amount that can be invested in any one issuer as shown in the table on page 20. Investments in any one issuer that represent 5% or more of total investment portfolio of DART as of September 30 are as shown below:

September 30, 2011 Reported Amount $229,957 191,903 168,840 102,163 62,038 69,876 69,839 64,943 59,859 Percentage of total Portfolio 19% 16% 14% 8% 5% 6% 6% 5% 5%

Investment type/Issuer Federal Farm Credit Banks Federal Home Loan Mortgage Corp Federal Home Loan Bank Federal National Mortgage Association Bankers Acceptance: Bank of America Commercial Paper: ABN AMRO Bank, N.A. Citigroup Prudential Abbey National

21

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands)

September 30, 2010 Reported Amount $150,866 143,621 125,770 89,350 47,586 62,379 Percentage of total Portfolio 16% 16% 14% 10% 5% 7%

Investment type/Issuer Federal Home Loan Bank Federal National Mortgage Association Federal Home Loan Mortgage Corp Federal Farm Credit Banks Bankers Acceptance: Bank of America Commercial Paper: Deutsche Bank

Custodial Credit Risk - The custodial credit risk for investments is the risk that, in the event of the failure of the counterparty (e.g., brokerdealer) to a transaction, DART will not be able to recover the value of its investment or collateral securities that are in the possession of another party. All of DART’s investments with the exception of money market mutual funds, which by design provide ownership of shares within the fund, are registered in DART’s name as of September 30, 2011 and 2010 and are not exposed to custodial credit risk. Foreign Currency Risk - Foreign currency risk is the risk that changes in exchange rates will adversely affect the fair value of an investment or deposit. None of DART’s Investment is in foreign currency-denominated investments. Restricted investments held to pay capital lease/leaseback liabilities – Currently, DART has four outstanding lease/leaseback obligations. When DART entered into these transactions it received advance rental payments. A portion of the advance rental payment received by DART was used to purchase contractual undertakings from certain financial institutions. These institutions assumed and agreed to pay the sublease rental payments due through the purchase option date, together with the purchase option price owed if DART were to exercise the purchase option rights. For other leases, DART deposited a portion of the advance rental payment with a trustee, who was to purchase direct obligations of the US government and other securities that would mature on the dates and the amounts required to pay sublease rental payments and the respective purchase option price. These investments are held by the trustee in the name of DART and are invested in U.S. Treasury strips, U.S. government sponsored enterprise obligations, and guaranteed investment contracts. They include a combination of investments with short-term and long-term maturities which minimizes the exposure to interest rate risk. Because these investments are insured by a third party and are held in U.S. Treasuries and government investment contracts they are not recorded at fair value but are recorded at amortized cost in the statement of net assets. Assigned assets – The DART Board has committed certain cash and investment balances to be maintained for self-insurance and financial reserve. These amounts are shown as unrestricted investments in the accompanying financial statements. The assets for self-insurance include amounts committed by the Board to fund future claims and workers' compensation liabilities. The Board established the financial reserve to accumulate sales taxes in years when receipts exceed the budgeted amount. Sales tax receipts were $9,306 more than budget for fiscal year 2011 compared to $12,288 less than budget for fiscal year 2010. In addition, the Board of Directors authorized the establishment of a Capital Reserve Account. Should the Financial Reserve exceed $50 million, excess funds are placed in the Capital Project Reserve Account. An affirmative vote of two-thirds of the Board is required to draw upon the Financial and Capital Project Reserves, and the funds may be used for any purpose approved by the Board. During 2011, the DART Board approved to set aside $10,766 of the financial reserve investments for potential collateral as required by an amendment to one of the lease/leaseback agreements. This amount is shown as restricted investments held as security for capital lease/lease back liabilities in the statements of net assets and is excluded from the financial reserve amount of September 30, 2011 shown below. As of September 30 assets assigned by the DART Board for specific purposes, including investments and accrued interest, consisted of the following: Assigned for Self-Insurance Financial Reserve Total 22 2011 $13,761 12,362 $26,123 2010 $13,778 22,855 $36,633

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands)

4. RESTRICTED ASSETS As security for the Senior Lien Obligations (Bonds) and Senior Subordinate Lien Obligations (Commercial Paper notes), DART is required to maintain a certain amount of money in trust accounts created for this purpose. The money maintained in the trust accounts is reported as Investments held by trustee for debt service in the statements of net assets. The trustee uses all the monies and investments in the account for payment of principal, interest, and administrative expenses for bonds and commercial paper notes. The System Expansion and Acquisition Fund (SEA Fund) includes monies on deposit to be used solely for paying the costs of acquisition and construction of capital assets. The Board may, but is not required to, use money on deposit in the SEA Fund to pay for obligations in the event of a default. Restricted assets shown in the Statements of Net Assets also include bond proceeds which will be used to fund capital expenditures. DART entered into three advance funding agreements with the Texas Department of Transportation and received money for construction of three parking lots. DART also entered into an inter-local agreement with the City of Dallas to plan and design a modern street car system for the City of Dallas and received money for this purpose. The remaining balances of these monies are shown as restricted investments held for advance funding agreements in the Statements of Net Assets as of September 30, 2011. DART also entered into an additional Equity Security Agreement that requires it to set aside certain investments as security for a certain lease/leaseback obligation. As of September 30, 2011, DART has set aside $10,766 for this purpose and this amount is shown as investments restricted as security for lease/lease back liabilities in the statements of net assets.

5.

INVESTMENT IN JOINT VENTURE

DART and the Fort Worth Transportation Authority (―The T‖) jointly provide commuter rail service between downtown Dallas and downtown Fort Worth. The authorities have adopted the assumed name of Trinity Railway Express (―TRE‖) to provide this service. The operation and maintenance of commuter rail service is contracted to Herzog Transit Services, Inc. Cost of operating TRE, net of operating revenues, is shared between DART and the T based on revenue seat miles operated in Dallas County and Tarrant County, respectively. The transit authorities separately contributed the capital for the passenger stations and track storage areas in their respective counties, including fixtures and fare collection equipment at those stations. DART has separately contributed the capital for thirteen rail diesel cars (RDCs) purchased for the initial TRE commuter rail service. DART and the T have jointly contributed the capital for seven rehabilitated locomotives, two new locomotives, ten rehabilitated bi-level coaches, five bi-level coaches, two rehabilitated bi-level cab cars, and five new bi-level cab cars. The book value of DART’s share of these capital assets jointly owned with the T is recorded as Investment in Joint Venture in the statement of net assets in accordance with GASB Statement No. 14, The Financial Reporting Entity, as amended by GASB Statement No.39, Determining Whether Certain Organizations Are Component Units. There are no separate financial statements for the TRE. Each authority includes its share of revenues, operating costs and capital assets in its own financial statements. 6. CAPITAL ASSETS Changes in capital assets for the years ended September 30, 2011 and 2010 are shown in the following tables on the next page.

23

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands)

Beginning Oct. 1, 2010 Non-Depreciable Assets Land and right-of-way Capital projects in progress Total non-depreciable assets Depreciable Assets Transitways Buildings and improvements Revenue and non-revenue vehicles and equipment Furniture, fixtures, and Leasehold improvements Total depreciable assets Less accumulated depreciation Transitways Buildings and improvements Revenue and non-revenue vehicles and equipment Furniture, fixtures, and Leasehold improvements Total accumulated depreciation Depreciable assets, net Total capital assets $397,997 2,305,270 2,703,267 1,631,987 419,849 935,898 38,940 3,026,674 508,156 221,232 447,998 31,939 1,209,325 1,817,349 $4,520,616

Net Transfers/ Adjustments Additions Disposals $( 957) $437,212 437,212 (957) (2,965) (1,618) (15,095) (8) (19,686) 87,205 21,354 65,632 4,638 178,829 (178,829) $258,383 (1,459) (1,619) (14,388) (8) (17,474) (2,212) $(3,169) $ 151,864 (1,882,610) (1,730,746) 1,150,729 277,871 297,836 4,310 1,730,746

Ending Sept. 30, 2011 $548,904 859,872 1,408,776 2,779,751 696,102 1,218,639 43,242 4,737,734 593,902 240,967 499,242 36,569 1,370,680 3,367,054 $4,775,830

1,730,746

Beginning Oct. 1, 2009 Non-Depreciable Assets Land and right-of-way Capital projects in progress Total non-depreciable assets Depreciable Assets Transitways Buildings and improvements Revenue and non-revenue vehicles and equipment Furniture, fixtures, and Leasehold improvements Total depreciable assets Less accumulated depreciation Transitways Buildings and improvements Revenue and non-revenue vehicles and equipment Furniture, fixtures, and Leasehold improvements Total accumulated depreciation Depreciable assets, net Total capital assets $398,914 1,755,739 2,154,653 1,607,364 416,472 804,314

Additions

Disposals $( 917)

Net Transfers/ Adjustments

Ending Sept. 30, 2010 $397,997 2,305,270 2,703,267 1,631,987 419,849 935,898

$722,048 722,048

(917)

$(172,517) (172,517) 24,623 4,188 138,166

(811) (6,582)

38,189 2,866,339 452,524 207,275 395,183 31,868 1,086,850 1,779,489 $3,934,142 55,632 14,658 59,151 4,860 134,301 (134,301) $587,747

(4,789) (12,182)

5,540 172,517

38,940 3,026,674 508,156 221,232 447,998 31,939 1,209,325 1,817,349 $4,520,616

(701) (6,336) (4,789) (11,826) (356) $(1,273)

172,517

24

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands)

Capital assets are depreciated using the straight-line method over the following estimated useful lives. Description Buildings and improvements Buses and equipment Furniture, fixtures, and leasehold improvements Facilities and transitways (LRT System and HOV lanes) Light rail transit vehicles and remanufactured diesel cars Years 20-30 4-12 3-10 20-30 25

7.

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES AND REPAYMENT DUE TO STATE COMPTROLLER

Accounts payable and accrued liabilities at September 30 were as follows: Description Accounts payable and accrued liabilities Payroll Accrued paid time off, vacation and sick leave Self insurance liabilities Other operating liabilities Total operating expense related Non-operating and capital related expenses Total accounts payable and accrued liabilities Non-current Current 2011 2010

$9,364 19,235 17,816 30,278 76,693 46,939 123,632 30,217 $93,415

$7,593 19,650 16,907 38,130 82,280 98,326 180,606 28,411 $152,195

The Texas State Comptroller collects the 1% sales tax from tax payers for DART. Sales tax revenues are subject to audits by the State Comptroller, which sometimes results in repayments to the State. Outstanding repayments and changes in the repayments due to the State Comptroller at September 30 are as follows: Description Beginning balance Payments Ending balance Non-current Current 2011 $13,519 (824) 12,695 11,871 $824 2010 $14,343 (824) 13,519 12,695 $824

8.

ACCRUED PAID TIME OFF (PTO) VACATION AND SICK LEAVE

Changes in accrued PTO, vacation, and sick leave for the years ended September 30 are shown in the following table. Description Beginning balance Additions Payments Ending balance Amounts due in one year 2011 $19,650 1,944 (2,359) $19,235 $965 2010 $17,837 2,665 (852) $19,650 $2,363

Payments during 2011 are higher than that of 2010 because of PTO, sick leave and vacation payments in connection with early retirement and reduction in force that took place during 2011. Accrued PTO, vacation, and sick leave amounts shown above are included in the accounts payable and accrued liabilities line item on the statement of net assets. 25

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands) 9. LOCAL ASSISTANCE PROGRAM

In 1989, DART created a Local Assistance Program (LAP) to provide technical and financial assistance to cities for the implementation of projects to reduce traffic congestion and complement bus and public transit operations. Eligible member jurisdictions are responsible for developing and submitting projects to DART for approval in order to receive distribution of these funds. According to the terms of interlocal agreements, DART allocated a percentage of its annual sales tax collections for the LAP program. Eligible member jurisdictions received 15% of the estimated sales taxes collected within that jurisdiction, except Irving, which received 7.5%. Dallas, University Park, and Highland Park were not eligible. The LAP program ended in 2004. Accrued but unpaid funds were carried over to succeeding years and were recorded as a liability on the accompanying statements of net assets. Changes in Local Assistance Program Payable for the years ended September 30 are as follows: Description Beginning balance Payments Ending balance 10. FINANCE OBLIGATIONS UNDER CAPITAL LEASE/LEASEBACK DART has entered into lease transactions in which certain capital assets are leased to investors (headlease) and simultaneously leased back (sublease). Under these transactions, DART maintains the right to continued use and control of the assets through the end of the lease term and is required to insure and maintain the assets. The headleases and subleases have been recorded as capital lease/leaseback for accounting purposes. The following table summarizes DART capital lease/leaseback transactions as of the respective transaction date. Fair Market Value At Closing Date $57,992 91,000 81,000 46,505 36,828 15,367 Prepayment Received On Head Lease $51,886 91,000 81,000 46,505 36,828 15,367 Amount Invested to Satisfy Sublease Obligation $47,096 84,000 74,700 44,903 35,559 14,838 Repurchase Option Date 01/01/13 01/02/23 01/02/25 01/01/12 01/01/13 01/01/14 Sublease Termination Date 03/01/25 01/02/23 01/02/25 01/01/12 01/01/13 01/01/14 2011 $13,370 $13,370 2010 $14,824 (1,454) $13,370

Lease Date 7/25/97 9/28/00 10/26/00 7/10/02 7/10/02 7/10/02

Property 22 Light rail cars 28 Light rail cars 25 Light rail cars Buses – Lot 1 Buses – Lot 2 Buses – Lot 3

Cash Benefit $4,790 7,000 6,300 1,602 1,269 529

The subleases provide DART with an opportunity, at its sole discretion, to repurchase equipment on specified dates. As these dates approach, DART will complete a financial analysis on each specific lease to determine if it is financially beneficial to repurchase the equipment. At this point in time, DART anticipates that it will exercise the repurchase option on all of its remaining leases at the specified dates and has reflected this option in the amortization. The net present value of the future sublease payments has been recorded as both a short-term and long-term liability in the accompanying statements of net assets. Prepayments received from the head lease were invested to satisfy the sublease obligations. Since the investments have been structured to meet all future obligations under the subleases at all times when due, the investment balances have been recorded to equal the sublease liabilities on the accompanying statements of net assets. The benefits from these transactions, net of transaction costs, were recorded as non-operating revenues in the statements of revenues, expenses, and changes in net assets in the fiscal year each transaction occurred. The capital lease/leaseback liabilities are reported as follows on the statements of net assets: 2011 $55,762 268,141 $323,903 2010 $20,806 301,434 $322,240

Amounts due within one year Amounts due in more than one year Total

26

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands)

Each of the lease/leaseback transactions has specific performance requirements for DART when the financial rating of the Payment Undertaker insurer falls below a specified level. During fiscal year 2010, credit ratings of two of three financial institutions insuring DART’s lease/leaseback transactions were downgraded below certain levels specified in the lease/leaseback agreements. As a result, DART has entered into an amended agreement to reset the acceptable credit rating to be maintained at or above BBB for one of these two transactions. For the other lease/leaseback obligation, DART also entered into an additional Equity Security Agreement that requires it to set aside certain investments as security. As of September 30, 2011, DART has set aside $10,766 for this purpose and this amount is shown as investments restricted as security for lease/lease back liabilities in the statements of net assets. Changes in the capital lease/lease back obligations for the years ended September 30 are shown below: Description Beginning balance Accrued interest Retirements/terminations/adjustments Ending Balance 2011 $322,240 22,468 (20,805) $323,903 2010 $336,159 22,697 (36,616) $322,240

The following schedule shows future minimum sublease payments as of September 30, 2011 for the outstanding lease capital lease/leaseback transactions. Minimum Sublease Payments $55,762 86,884 36,209 14,096 12,210 61,050 267,204 533,415 (209,512) $323,903

Year Ending September 30 2012 2013 2014 2015 2016 2017 – 2021 2022 – 2026 Total minimum sublease payments due under capital lease/leaseback Less: amount representing interest Present value of minimum sublease payments

11. SENIOR SUBORDINATE LIEN SALES TAX REVENUE COMMERCIAL PAPER NOTES PAYABLE In January 2001, the Board approved the issuance of up to $650 million of Senior Subordinate Lien Sales Tax Revenue Commercial Paper Notes under the provisions of the Master Debt Resolution. In 2006, a new Revolving Credit Agreement was executed with four lenders (Westdeutsche Landesbank Girozentrale, Bayerische Landesbank Girozentrale, State Street Bank and Trust Company, and Landesbank Baden-Wurtemberg) to provide a liquidity facility to support the Commercial Paper Program. The Revolving Credit Agreement expired on January 21, 2011. A new agreement was executed with Bank of America with an effective date of January 20, 2011. As part of this new revolving credit agreement, the maximum commercial paper amount that can be issued is limited to a principal amount of $150 million. The Revolving Credit Agreement contains certain covenants as follows: projected gross sales tax revenues must exceed debt service requirements by 150% for each of the three following and consecutive fiscal years, beginning with the first fiscal year in which debt service on the proposed bond obligations will be due and 200% of four consecutive quarters of the last six quarters. DART complied with these covenants for the years ended September 30, 2011 and 2010. The Commercial paper program expires on June 30, 2041. Commercial paper is issued in blocks for terms from 1 to 270 days. The commercial paper notes are recorded as current liabilities on the statements of net assets. The Revolving Credit Agreement is secured by and payable from a pledge (senior subordinate lien) of DART’s sales tax revenue. The average interest rate on outstanding commercial paper at September 30, 2011 was 0.25% compared to 0.37% at September 30, 2010.

27

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands)

Changes in the Commercial Paper Notes for the years ended September 30 are shown below: Description Beginning balance Additions Retirement Ending Balance 2011 $150,000 824,800 (824,800) $150,000 2010 $150,000 435,000 (435,000) $150,000

The maximum principal of outstanding Commercial Paper Notes did not exceed the $150 million limit during either year.

12. SENIOR LIEN SALES TAX REVENUE BONDS In August 2000, the voters in DART’s service area approved the issuance of up to $2.9 billion in sales tax revenue bonds to accelerate the completion of extensions to the existing light rail system and other improvements to the public transportation system. The DART Board has approved several issuances in accordance with the Master Debt Resolution. These bonds are Senior Lien Revenue Bonds that are secured by, and payable solely from, a senior lien on revenue that DART receives from the 1% sales and use tax and farebox receipts. Pertinent information related to each bond is shown below. Interest rates (Yields) range Bond Series 2001 2002 2007* 2008 2009A 2009B 2010A 2010B Board Approval Date Jul. 2001 Jul. 2002 Jan. 2007 Apr. 2008 May 2009 May 2009 Sep. 2010 Sep. 2010 Original Issue Amount $400,000 98,735 770,270 731,415 170,385 829,615 95,235 729,390 Date issued 8/09/01 9/10/02 3/08/07 6/23/08 6/25/09 6/25/09 10/7/10 10/7/10 Maturity date range

Optional Redemption Bonds maturing Earliest call after date 12/1/12 12/1/11 12/1/13 12/1/12 12/1/17 12/1/16 12/1/18** 12/1/17 12/1/19 6/1/19 12/1/34 5/31/19 12/1/21 12/1/20 Not applicable

From 2.8% 3.0% 4.0% 4.5% 2.8% 6.0% 2.0% 4.9%

To 5.2% 5.4% 5.3% 5.3% 4.3% 6.3% 5.0% 5.0%

From 12/1/02 12/1/05 12/1/07 12/1/09 12/1/14 12/1/23 12/1/13 12/1/37

To 12/1/31 12/1/32 12/1/36 12/1/48 12/1/22 12/1/44 12/1/23 12/1/48

* The series 2007 bond issuance included $328,235 to partially refund Series 2001 and 2002 bonds. ** The Series 2008 bonds maturing after December 1, 2018 are subject to optional redemption with the exception of those maturing on December 1, 2029 and 2030. In June 2009, DART issued and sold $170,385 in tax exempt Senior Lien Sales Tax Revenue Bonds (Series 2009A Bonds), and $829,615 in taxable Senior Lien Sales Tax Revenue Bonds (Series 2009B Bonds) to finance capital expenditures for DART’s system expansion and acquisition. The Series 2009B bonds are taxable bonds issued under the Build America Bond program of the American Recovery and Reinvestment Act of 2009 (ARRA). In accordance with ARRA, DART receives a tax credit from the United States Treasury in amounts equal to 35% of the interest payable amount on the Series 2009B Bonds. In October 2010, DART issued and sold $95,235 in tax exempt Senior Lien Sales Tax Revenue Bonds (Series 2010A Bonds), and $729,390 in taxable Senior Lien Sales Tax Revenue Bonds (Series 2010B Bonds) to finance capital expenditures for DART’s system expansion and acquisition. The Series 2010B bonds are taxable bonds issued under the Build America Bond program of the American Recovery and Reinvestment Act of 2009 (ARRA). In accordance with ARRA, DART receives a tax credit from the United States Treasury in amounts equal to 35% of the interest payable amount on the Series 2010B Bonds. During 2011, DART recorded tax credits of $30,250 compared to $17,736 for 2010 as Build America Bonds tax credit in the Statements of Revenues, Expenses and Changes in Net Assets. Additional bonds may not be issued unless gross sales tax revenues exceed maximum debt service by at least 200% for 12 of the last 18 months. Changes in revenue bonds (shown at par) for the years ended September 30, 2011 and 2010 are shown on the next page.

28

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands)

Changes in revenue bonds (shown at par) for the years ended September 30, 2011 and 2010. Amounts due in one year

Bond Series 2001 2002 2007 2008 2009A 2009B 2010A 2010B Total

Balance, 9/30/2009 $90,805 29,955 761,130 731,415 170,385 829,615

Retirement $(8,490) (1,545) (4,920) (2,980)

Balance, 9/30/2010 $82,315 28,410 756,210 728,435 170,385 829,615

Addition

Advance Refunding $(73,400) (25,910) (3,465)

Retirement $(8,915) (1,500) (5,240) (3,135)

Balance, 9/30/2011 $ 1,000 750,970 721,835 170,385 829,615 95,235 729,390 $3,298,430

$5,075 3,295

$95,235 729,390 $2,613,305 $(17,935) $2,595,370 $824,625 $(102,775) $(18,790)

$8,370

The revenue bonds shown above are at face value. They are shown on the statement of net assets net of the original issuance premium, discount and refunding gain (loss) of $66,008 and $63,437 as of September 30, 2011 and 2010, respectively. Below is a summary of debt service requirements of the Senior Lien Revenue Bonds as of September 30, 2011.

Year Ended September 30
2012 2013 2014 2015 2016 2017 – 2021 2022 – 2026 2027 – 2031 2032 – 2036 2037 – 2041 2042 – 2046 2047 – 2049 TOTAL

Principal
$8,370 6,740 23,355 43,740 45,870 266,350 335,955 414,105 523,465 616,240 681,925 332,315 $3,298,430

Interest
$173,768 173,395 172,728 171,218 169,090 808,479 732,355 634,543 507,390 352,458 169,517 29,125 $4,094,066

Total Debt Service
$182,138 180,135 196,083 214,958 214,960 1,074,829 1,068,310 1,048,648 1,030,855 968,698 851,442 361,440 $7,392,496

Build America Bonds tax credit
$(30,462) (30,462) (30,462) (30,462) (30,463) (152,311) (149,901) (136,360) (118,567) (90,242) (41,249) (5,609) $(846,550)

Net Debt Service
$151,676 149,673 165,621 184,496 184,497 922,518 918,409 912,288 912,288 878,456 810,193 355,831 $6,545,946

13. PLEDGED REVENUES DART has pledged sales tax and farebox revenues as security for bonds and commercial paper debts. The amount of the pledge is equal to the remaining debt service requirements for these obligations. These obligations were issued to pay for DART’s system expansion and acquisition costs. The pledge continues for the remaining life of these obligations, which is currently through fiscal year 2049. Total principal and interest remaining on the bonds as of September 30, 2011 is $7.4 billion. The annual debt service requirements for these bonds, before Build America Bonds tax credits, range from $214,911 in fiscal year 2018 to $118,162 in fiscal year 2049. For the current fiscal year, debt service on the bonds (including principal and interest) was $180,767. Bonds have a senior lien on the sales tax and farebox revenues. Total principal and interest remaining on commercial paper as of September 30, 2011 is $150,045. Interest payments on commercial paper notes during the current fiscal year totaled $618. Commercial Paper notes have a subordinate senior lien on the sales tax revenues. 14. DEBT REFUNDINGS In prior years, DART issued $770,270 in Senior Lien Sales Tax Revenue Bonds (Series 2007 bonds) to refund the Series 2001 and 2002 Bonds and the Series 2001 Commercial Paper Notes. As a result, the Series 2001 Commercial Paper Notes, and a portion of the Series 2001 and 2002 bonds are considered defeased and the liability for those notes, bonds, and the corresponding assets in the trust account have been 29

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands) removed from DART’s Statements of Net Assets. Also during 2011, DART issued the Series 2010A bonds to refund a portion of Series 2001, 2002 and 2008 bonds. As a result, the Series 2001, 2002 and 2008 bonds in the total amount of $102,775 are considered to be defeased and the liability for those bonds, and the corresponding assets in the trust account have been removed from DART’s Statements of Net Assets. As of September 30, 2011, $431,010 of refunded DART bonds remains outstanding compared to $328,235 as of September 30, 2010. These refunded bonds are solely payable from and secured by the assets in the irrevocable trust accounts. As a result of this refunding, DART recognized a book loss of $7,883, a reduction in debt service of $3,945 and an economic gain of $9,908. 15. PENSION, RETIREMENT, AND DEFERRED COMPENSATION PLANS DART operates several employee benefit plans. The plans include DART Employees’ Defined Benefit Plan (formerly the Dallas Transit System [DTS] pension plan), DART Retirement Plan, and DART Capital Accumulation Plan and Trust. DART is the administrator of these retirement plans and has the authority to establish and amend the plans. Defined Benefit Plan – The DART Employees Defined Benefit Retirement Plan and Trust (the DB Plan) is a single-employer defined benefit pension plan that was designed to provide retirement, death, and disability benefits to certain employees of DART. On October 1, 1995, the DTS Employees Retirement Plan (Plan A) was amended to become the DB Plan. Participants of the DB Plan are those employees who were members of the former plan on September 30, 1995. Those employees who elected to be covered under Plan A have eligibility, vesting, and benefit provisions different from those who elected the DB Plan. DART’s covered payroll for the DB Plan as of October 1, 2010 (actuarial valuation date), was approximately $23.7 million. Contributions to the DB Plan, as stipulated by the "Sale, Purchase, and Transfer Contract Between the City of Dallas and Dallas Area Rapid Transit,‖ are based upon Dallas Area Rapid Transit's agreement to contribute an amount at least equal to the minimum funding standard under Section 412 of the Internal Revenue Code of 1986, as if the Plan were subject to Section 412. Participants who were in the Plan on September 30, 1995 are required to contribute 3% of their base monthly salaries to the Plan. Other participants are not required to contribute to the DB Plan. DART’s contribution amount is actuarially determined on an annual basis. Participants under the provisions of Original Plan A may elect normal retirement at age 60 or at the date at which the sum of their credited service and age equals 90. Participants who elected to remain under the provisions of the original plan receive monthly benefits equal to 2% times the years of credited service multiplied by the participant's final average monthly compensation. Participants in Amended Plan A are entitled to monthly benefits equal to: 2% times the number of years of credited service up to October 1, 1983; plus 1.5% times the number of years of credited service after October 1, 1983; times the participant's final average monthly compensation. A participant may elect early retirement at age 55 with 10 years of service (30 years of service for participants under the Original Plan A). Monthly income under this election will equal normal retirement benefits reduced by 5/12 of 1% for each full month by which the participant's early retirement date precedes the normal retirement date. A net pension asset of $6,485 and $5,585 is shown in the accompanying statements of net assets of DART at September 30, 2011 and 2010, respectively. In accordance with GASB Statement No. 27, Accounting for Pension by State and Local Government Employers, an actuary determines the contribution amount that DART pays to the plan each year. The amount determined is referred to as the "Annual Required Contribution" (ARC). All significant actuarial assumptions used to compute the ARC are the same as those used to compute the actuarial accrued liability. The net pension asset/obligation is the cumulative difference between annual pension cost (including any interest accumulated on the pension asset/obligation, the ARC, and any adjustments to the ARC), and the employer's actual contribution to the plan. Actuarial Assumptions - The net pension assets for fiscal years 2011 and 2010 were computed as part of an actuarial valuation performed and dated as of the first day of the fiscal periods, October 1, 2010 and 2009. The significant actuarial assumptions as of October 1 are as follows: October 1, 2010 and 2009 8% compounded annually, net of expenses 3.5% per annum RP 2000 mortality tables for males and females RP 2000 mortality tables for males and females 55 60 2.5% per annum Projected Unit Credit Cost Method

Investment Return Salary Increases Mortality Disability Mortality Early Retirement Age Normal Retirement Age Cost-of-Living Adjustments Actuarial Cost Method

30

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands)

For plan years 2011, 2010, and 2009, the net pension asset was as follows: 2011 Annual required contribution Interest on net pension asset Adjustment to annual required contribution Annual pension cost Employer contributions Increase in net pension asset Net pension asset, beginning of year Net pension asset, end of year Percentage of annual pension cost contributed $5,317 (447) 496 5,366 6,266 900 5,585 $6,485 117% 2010 $5,395 (385) 427 5,437 6,212 775 4,810 $5,585 114% 2009 $4,559 (350) 388 4,597 5,036 439 4,371 $4,810 110%

The actuarial value of plan net assets is determined using a technique that smoothes the effects of short-term volatility in the market value of investments over a five-year period. The unfunded actuarial accrued liability is being amortized using a level dollar amount on a closed basis with no amortization period exceeding 30 years. Funding Progress - The schedule of funding progress for the DART Employees Defined Benefit Retirement Plan is included in the Required Supplementary Information. The data for the two most recent valuations are as follows: Actuarial Valuation Date 10/1/10 10/1/09 $145,605 $141,696 176,587 173,469 30,982 31,773 82.5% 81.7% 23,727 23,904 130.6% 132.9%

Actuarial value of assets Actuarial accrued liability (AAL) projected unit credit Unfunded AAL (UAAL) Funded ratio Covered payroll UAAL as a % of covered payroll

The recent downturn in market conditions will have a negative impact on the funded ratio. Additional trend information for the DB Plan can be obtained by writing to the DB Plan, Dallas Area Rapid Transit, P.O. Box 660163, Dallas, Texas 75266-7240. DART Retirement Plan – DART has adopted a defined contribution retirement plan for all employees not covered by the pension plans described above. DART contributes an amount equal to 7.7% of each participant's annual compensation to the plan. Participants hired before January 1, 2006 are vested in 25% of DART's contributions after two years of service, graduating to 100% vesting after five years. Participants hired after December 31, 2005 become 100% vested in DART’s contributions to the Plan only after completing five years of service. Total expense to DART to fully fund this plan was approximately $12,710 and $12,419 for the years ended September 30, 2011 and 2010, respectively. DART Capital Accumulation Plan – 401(k) – DART has adopted a deferred compensation plan created in accordance with Internal Revenue Code Section 401(k), which allows employees to contribute up to 50% of their annual compensation to the plan subject to the annual contribution limits of the Internal Revenue Service. DART matches 50% of the employee's contribution up to a maximum of 3% of the employee's annual compensation. Participants hired before January 1, 2006 are vested in 25% of DART's contributions after two years of service, graduating to 100% vesting after five years. Participants hired after December 31, 2005 become 100% vested in DART’s contributions to the Plan only after completing five years of service. Total expense to DART to fully fund this plan was approximately $4,607 and $4,378 for the years ended September 30, 2011 and 2010, respectively. Annual financial statements for each of the three retirement plans discussed above may be obtained by contacting the Chief Financial Officer at Dallas Area Rapid Transit, 1401 Pacific Avenue, P.O. Box 660163, Dallas, TX 75266-7220.

31

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands)

16. POSTEMPLOYEMENT BENEFITS OTHER THAN PENSIONS Plan Description - DART administers a single-employer defined benefit other post employment benefits (OPEB) Plan. The plan provides healthcare and life insurance for eligible retirees and their spouses through DART’s group health plan and group life plan, which covers both active employees and retired members. Eligibility criteria for the post employment health care and life insurance benefits are as follows: Participants of the defined pension plan will be eligible at age 55 with a minimum of ten years of service to DART. Participants of the defined contribution pension plan will be eligible at age 60 with a minimum of ten years of service to DART. Funding Policy - DART’s contribution to the retiree healthcare and life insurance is an annual required contribution (ARC) determined actuarially based on the parameters of GASB Statement 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortization of any unfunded actuarial liabilities (funding excess) over a period not to exceed thirty years. The current ARC is 2.1% of annual covered payroll. Retirees also make monthly contributions to the healthcare plan. Such contributions are determined annually by the plan administrator based on expected annual cost. For the years ended September 30, 2011 and 2010, DART’s annual required contributions to other post employment benefits (OPEB) trust were $4,591 and $3,654. These contribution amounts are the same as annual OPEB costs for both years. The contribution for 2011 was made after fiscal year-end. The annual required contribution amount of $4,591 was recorded as liability and included in the accounts payable and accrued liabilities on DART’s statement of net assets. The OPEB trust was set up during the fiscal year 2008 for the first time and is not included in these financial statements. DART has 298 retirees eligible to receive these benefits in 2011 compared to 310 retirees in 2010. Actuarial Assumptions - Actuarial evaluations were performed for the OPEB Plan as of September 30. The following tables show the actuarial assumptions: Valuation Date Investment Return Future Participation Health Care Trend Mortality – Pre-retirement Mortality – Post-retirement Aging Factor Eligibility for Coverage September 30, 2011 7.00% For future eligible retirees, 56% are assumed to elect medical coverage, while 100% are assumed to elect life coverage Year 1 trend is 8%, and the trend for 12 or more years is 5% (with different rates for the years in between) RP 2000 Employees Pre-Retirement Mortality RP 2000 Healthy Mortality 3% per annum for Pre-65 and 2% for Post-65 For Defined Benefit Pension Plan participants: age 55 and 10 years of service and for Defined Contribution Pension Plan participants: age 60 and 10 years of service For active employees, 40% are assumed to be married at retirement with the spouse electing coverage Females are assumed to be 4 years younger than males Projected Unit Credit

Spouse coverage Age of Dependent Spouse Actuarial Cost Method

Valuation Date Investment Return Future Participation Health Care Trend Mortality – Pre-retirement Mortality – Post-retirement Aging Factor Retirement Age Spouse coverage Age of Dependent Spouse Actuarial Cost Method

September 30, 2010 7.00% For future eligible retirees, 56% are assumed to elect medical coverage, while 100% are assumed to elect life coverage Year 1 trend is 9%, and the trend for 13 or more years is 5% RP 2000 Employees Pre-Retirement Mortality RP 2000 Healthy Mortality 3% per annum for Pre-65 and 2% for Post-65 From 55 to 65 for Defined Benefit Pension Plan participants and from 60 to 70 for Defined Contribution Pension Plan participants 40% of future retirees are assumed to have spouses Females are assumed to be 4 years younger than males Projected Unit Credit

32

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands)

Annual OPEB Cost and Net OPEB Asset For plan years 2011 and 2010, annual OPEB cost and the net OPEB asset were as follows: 2011 Annual required contribution Annual OPEB cost Total employer contributions* Increase in net OPEB obligation (decrease in net OPEB asset) Net OPEB asset (obligation), beginning of year Net OPEB asset (obligation), end of year Percentage of annual OPEB cost contributed* $4,951 4,951 4,951 (4,951) 0% 2010 $3,654 3,654 3,049 (605) 605 83%

*For 2011, employer contribution was made after fiscal year-end. For 2010, employer actual contribution is lower than annual required contribution by $605 since DART applied the net OPEB asset towards the contribution requirement for 2010. Funding Progress - The schedule of funding progress for the DART Other Postemployment Benefits (OPEB) is included in the Required Supplementary Information. The data for the two most recent valuations are as follows: Actuarial Valuation Date 9/30/11 9/30/10 Actuarial value of assets Actuarial accrued liability (AAL) Unit Credit Unfunded AAL (UAAL) Funded ratio Covered payroll UAAL as a % of covered payroll 17. CLAIMS AND LITIGATION In the ordinary course of business, a number of claims and lawsuits arise from individuals seeking compensation for personal injury, death, and/or property damage resulting from accidents occurring in the operation of the system. In addition, DART has been named as a defendant in a number of lawsuits relating to personnel and contractual matters. Management does not believe that the outcome of these claims will have a material adverse effect on DART's financial position. 18. COMMITMENTS AND CONTINGENCIES The Board has approved a Transit System Plan, which includes the design and construction of a 47-mile light rail transit (LRT) extension from Downtown Dallas to Buckner Blvd. (the Southeast Corridor) and from Downtown Dallas to Farmers Branch, Carrollton, and Irving (the Northwest Corridor) and from downtown Garland to Rowlett (Rowlett extension). The timing and completion of the Transit System Plan is based on economic assumptions made in DART’s 20-year financial plan and is subject to change based on changing economic conditions. The Transit System Plan is forecasted at $3.6 billion as of September 30, 2011. DART has entered into contract commitments for the LRT build out and other capital developments in the amount of $3.1 billion and spent approximately $2.8 billion of the committed amount as of September 30, 2011 on these projects. DART participates in several federal and state grant programs that are governed by various rules and regulations of the grantor agencies. Costs charged to the respective grant programs are subject to audit and adjustment by the grantor agencies. In the opinion of management, no significant contingent liabilities exist relating to compliance with the rules and regulations governing the respective grants; therefore, no provision has been recorded in the accompanying financial statements for such contingencies. $14,103 $43,323 $29,220 32.6% $175,685 16.6% $10,554 $34,598 $24,044 30.5% $171,371 14.0%

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DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands)

DART has entered into certain operating lease agreements. Operating lease expenses are approximately $1,302 and $980 in 2011 and 2010, respectively. Future minimum lease payments for all non-cancelable operating leases are as follows: Fiscal Year Minimum Lease Payments 2012 $1,080 2013 $866 2014 $849 2015 $737 2016 $141

DART owns and operates a number of facilities. It also acquires new properties for light rail expansion projects. In some of these properties DART has discovered contamination that may require pollution remediation activity. DART is working with relevant state and federal agencies on pollution remediation plans. Management does not believe that the outcome of these remediation activities will have a material adverse effect on DART’s financial position. Management has accrued an estimate which is included in the accounts payable and accrued liabilities line item in the accompanying statements of net assets.

19. DERIVATIVE INSTRUMENTS - DIESEL FUEL HEDGE As part of its normal business of providing public transportation services, DART operates a large fleet of buses, commuter rail cars, and paratransit and innovative service vans, that are currently operated with diesel fuel. DART has diesel fuel delivery contracts with suppliers; however, the price DART pays for the fuel fluctuates depending on market prices. This exposes DART to significant risk related to fluctuations in the amounts it pays for fuel. It also creates uncertainty in budgeting for fuel costs. In order to minimize the impact of fluctuating fuel market prices on its cash flow, DART has entered into diesel fuel hedge contracts. Summary information of each hedge contract is shown below.

Fiscal Year Covered 2011 2012 2013

Type Commodity forward contract Commodity forward contract Commodity forward contract Total

Notional Amount (U.S. Gallons) 8,413,200 8,413,200 7,218,765

Effective Date 10/1/10 10/1/11 10/1/12

Termination Date 9/30/11 9/30/12 9/30/13

Fair Value, 9/30/10 $656 581 423 $1,660

Fair Value, 9/30/11 $0 3,565 1,915 $5,480

Change in Fair Value $(656) 2,984 1,492 $3,820

The fair values of $5,480 and $1,660 as of 9/30/2011 and 9/30/2010 are shown in the statements of net assets and statements of changes in net assets on pages 12 and 13. Objective and terms of the fuel hedge contracts The objective of each of the derivative instruments (diesel fuel hedge contracts) is to hedge changes in cash flows due to market price fluctuations related to expected purchases of diesel fuel for DART buses, commuter rail cars, and paratransit vans. The terms of the agreement include DART paying monthly fixed prices and receiving floating prices based on an average of daily mean of Platts US Gulf Coast ultra low sulphur diesel (ULSD) for each month. Risks Credit risk – The derivative instrument for fiscal years 2012 and 2013 are held by the same counterparty. On September 30, 2011, DART’s position in the derivative instruments is a potential inflow of resources. DART can potentially be exposed to credit risk if the counter party to the transaction becomes insolvent. The following table shows credit ratings for the counterparty. Fiscal Year Covered 2012 2013 Credit Rating A+/Aa3 A+/Aa3 34

DALLAS AREA RAPID TRANSIT NOTES TO FINANCIAL STATEMENTS For the Years Ended September 30, 2011 and 2010 (Dollars in Thousands) Termination risk – DART or its counterparties may terminate a derivative instrument if the other party fails to perform under the terms of the contract. The effect of termination risk on DART is that it will pay market prices for diesel fuel it buys for use in its operations. No termination event has occurred during fiscal years 2011 and 2010. Contingencies All of DART’s derivative instruments include provisions that require it to post collateral in the event its credit rating falls below A- or A3 as issued by Standard & Poors or Moody’s and if the exposure exceeds threshold amounts specified in the derivative instruments (contracts). DART’s credit rating as of September 30, 2011 is AA+ as issued by Standards & Poors or Aa2 as issued by Moody’s. 20. NEW ACCOUNTING PRONOUNCEMENTS In December 2009, the GASB issued Statement No. 57, OPEB Measurements by Agent Employers and Agent Multiple Employer Plans. This Statement address issues related to the use of the alternative measurement method and the frequency and timing of measurements by employers that participate in agent multiple-employer other postemployment benefit (OPEB) plans and clarifies when actuarially determined OPEB measures are reported by an agent multiple-employer OPEB plan and its participating employers. This Statement is effective for DART in fiscal year 2012. In December 2010 GASB issued Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements, to improve financial reporting by addressing issues related to service concession arrangements (SCAs), which are a type of public-private or publicpublic partnership. The standard addresses SCAs in which there is an arrangement between a transferor (a government) and an operator (governmental or nongovernmental entity) in which (1) the transferor conveys to an operator the right and related obligation to provide services through the use of infrastructure or another public asset (a ―facility‖) in exchange for significant consideration and (2) the operator collects and is compensated by fees from third parties. The statement also includes required disclosures about the SCAs. This Statement is effective for DART in fiscal year 2013. In November 2010 GASB issued Statement No. 61, The Financial Reporting Entity: Omnibus—an amendment of GASB Statements No. 14 and No. 34, to improve financial reporting for a governmental reporting entity. The standard modifies certain requirements for inclusion of component units, amends criteria for blending, and clarifies the reporting of equity interests in legally separate entities. This Statement is effective for DART in fiscal year 2013. In December 2010 GASB issued Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in PreNovember 30, 1989 FASB and AICPA Pronouncements, which incorporates into the GASB’s authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements: Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board Opinions, and Accounting Research Bulletins of the American Institute of Certified Public Accountants’ (AICPA) Committee on Accounting Procedure. This Statement also supersedes Statement No. 20, Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting, thereby eliminating the election provided in paragraph 7 of that Statement for enterprise funds and business-type activities to apply post-November 30, 1989 FASB Statements and Interpretations that do not conflict with or contradict GASB pronouncements. However, those entities can continue to apply, as other accounting literature, post-November 30, 1989 FASB pronouncements that do not conflict with or contradict GASB pronouncements, including this Statement. This standard becomes effective for DART in fiscal year 2013. In June 2011 GASB issued Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position. This Statement provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. GASB defines deferred outflows of resources as a consumption of net assets by the government that is applicable to a future reporting period and deferred inflows of resources as an acquisition of net assets by the government that is applicable to a future reporting period. This standard becomes effective for DART in fiscal year 2013. In June 2011 GASB issued Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provisions—an amendment of GASB Statement No. 53. The objective of this Statement is to clarify whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty’s credit support provider. It also provides guidance as to when the effective hedging relationship continues and hedge accounting should continue to be applied. This standard becomes effective for DART in fiscal year 2012. Management has not yet determined the impact of these statements on the basic financial statements.

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DALLAS AREA RAPID TRANSIT REQUIRED SUPPLEMENTARY INFORMATION (UNAUDITED) DEFINED BENEFIT PENSION PLAN AND OTHER POST EMPLOYMENT BENEFITS SCHEDULE OF FUNDING PROGRESS September 30, 2011 (Dollars in Thousands)

The schedule of funding progress for the DART defined benefit Pension Plan calculated by the actuaries as follows: Actuarial Valuation Date 10/1/10 10/1/09 10/1/08 Actuarial Value of Assets Actuarial Accrued Liability (AAL) Projected Unit Credit Unfunded AAL (UAAL) Funded Ratio Covered Payroll UAAL as a % of Covered Payroll $145,605 176,587 30,982 82.5% 23,727 130.6% $141,696 173,469 31,773 81.7% 23,904 132.9% $145,269 166,876 21,607 87.1% 24,721 87.4%

Annual financial statements for the DART defined benefit Pension Plan may be obtained by contacting the Chief Financial Officer at Dallas Area Rapid Transit, 1401 Pacific Avenue, P.O. Box 660163, Dallas, TX 75266-7220.

The schedule of funding progress for the DART Other Postemployment Benefits (OPEB) calculated by the actuaries is as follows: Actuarial Valuation Date 9/30/11 9/30/10 9/30/09 Actuarial Value of Assets Actuarial Accrued Liability (AAL) Unit Credit Unfunded AAL (UAAL) Funded Ratio Covered Payroll UAAL as a % of Covered Payroll $14,103 $43,323 $29,220 32.6% $175,685 16.6% $10,554 34,598 24,044 30.5% 171,371 14.0% $7,362 34,151 26,789 21.6% 150,406 17.8%

********

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Preliminary Draft - For Discussion Purposes Only To be returned to Deloitte & Touche LLP and not to be reproduced in any form without their permission.

January 24, 2012 Board of Directors Dallas Area Rapid Transit 1401 Pacific Avenue Dallas, TX 75202 Dear Members of DART’s Board of Directors: We have performed an audit of the financial statements of Dallas Area Rapid Transit (“DART”) as of and for the year ended September 30, 2011, in accordance with auditing standards generally accepted in the United States of America and have issued our report thereon dated January 24, 2012. We have prepared the following comments to assist you in fulfilling your obligation to oversee the financial reporting and disclosure process for which the management of DART is responsible. OUR RESPONSIBILITY UNDER GENERALLY ACCEPTED AUDITING STANDARDS Our responsibility under auditing standards generally accepted in the United States of America has been described in our engagement letter dated May 17, 2011. As described in that letter, the objective of a financial statement audit conducted in accordance with auditing standards generally accepted in the United States of America is to express an opinion on the fairness of the presentation of DART’s financial statements for the year ended September 30, 2011 in conformity with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”), in all material respects. Our responsibilities under generally accepted auditing standards include forming and expressing an opinion about whether the financial statements that have been prepared by management with the oversight of the Board of Directors are presented fairly, in all material respects, in conformity with generally accepted accounting principles. The audit of the financial statements does not relieve management or the Board of Directors of their responsibilities. We considered DART’s internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of DART’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of DART’s internal control over financial reporting. Our consideration of internal control over financial reporting was not designed to identify all deficiencies in internal control over financial reporting that might be significant deficiencies or material weaknesses. ACCOUNTING ESTIMATES Accounting estimates are an integral part of the financial statements prepared by management and are based on management’s current judgments. Those judgments are ordinarily based on knowledge and experience about past and current events and on assumptions about future events. Significant accounting estimates reflected in DART’s 2011 financial statements include liabilities for insurance claims, accumulated depreciation, and the annual required contributions to benefit plans and other postemployment benefits. During the year ended September 30, 2011, there were no significant changes in accounting estimates or in management’s judgments relating to such estimates.

Preliminary Draft - For Discussion Purposes Only To be returned to Deloitte & Touche LLP and not to be reproduced in any form without their permission.

UNCORRECTED MISSTATEMENTS AND DISCLOSURE ITEMS PASSED Our audit of the financial statements was designed to obtain reasonable, rather than absolute, assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. There were no uncorrected misstatements aggregated by us during the current engagement and pertaining to the latest period presented. MATERIAL CORRECTED MISSTATEMENTS There were no material misstatements that were brought to the attention of management as a result of our audit procedures. SIGNIFICANT ACCOUNTING POLICIES DART’s significant accounting policies are set forth in Note 1 to DART’s 2011 financial statements. There were no significant changes in previously adopted accounting policies or their application. OTHER INFORMATION IN OTHER REPORTS When audited financial statements are included in documents containing other information such as DART’s Annual Report and Comprehensive Annual Financial Report, we read such other information and consider whether it, or the manner of its presentation, is materially inconsistent with the information, or the manner of its presentation, in the financial statements audited by us. We will read the other information in DART’s Annual Report as of and for the years ended September 30, 2011 and 2010 and will inquire as to the methods of measurement and presentation of such information. If we note any material inconsistencies or obtain knowledge of a material misstatement of fact, we will bring it to the attention of DART management and the Board of Directors as appropriate. DISAGREEMENTS WITH MANAGEMENT We have not had any disagreements with management related to matters that are material to DART’s 2011 Financial Statements. CONSULTATION WITH OTHER ACCOUNTANTS We are not aware of any consultations that management may have had with other accountants about auditing and accounting matters during 2011.

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Preliminary Draft - For Discussion Purposes Only To be returned to Deloitte & Touche LLP and not to be reproduced in any form without their permission.

SIGNIFICANT ISSUES DISCUSSED, OR SUBJECT OF CORRESPONDENCE, WITH MANAGEMENT PRIOR TO OUR ENGAGEMENT OR RETENTION Throughout the year, routine discussions were held, or were the subject of correspondence, with management regarding the application of accounting principles or auditing standards in connection with transactions that have occurred, transactions that are contemplated, or reassessment of current circumstances. In our judgment, such discussions or correspondence were not held in connection with our retention as auditors. OTHER SIGNIFICANT ISSUES DISCUSSED, OR SUBJECT OF CORRESPONDENCE, WITH MANAGEMENT Throughout the year, routine discussions were held, or were the subject of correspondence, with management. In our judgment, such discussions or correspondence did not involve significant issues requiring communication to Board of Directors. SIGNIFICANT DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT In our judgment, we received the full cooperation of DART’s management and staff and had unrestricted access to DART’s senior management in the performance of our audit. MANAGEMENT’S REPRESENTATIONS We have made specific inquiries of DART’s management about the representations embodied in the financial statements. Additionally, we have requested that management provide to us the written representations DART is required to provide to its independent auditors under generally accepted auditing standards. We have attached to this letter, as Appendix A, a copy of the representation letter we obtained from management.

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Preliminary Draft - For Discussion Purposes Only To be returned to Deloitte & Touche LLP and not to be reproduced in any form without their permission.

CONTROL-RELATED MATTERS We have issued a separate report to you, also dated January 24, 2012, containing certain matters involving DART’s internal control over financial reporting that we consider to be control deficiencies under standards established by the American Institute of Certified Public Accountants. This report is intended solely for the information and use of management, Board of Directors, and others within the organization and is not intended to be and should not be used by anyone other than these specified parties. Yours truly,

cc: The Management of Dallas Area Rapid Transit

******

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Preliminary Draft - For Discussion Purposes Only To be returned to Deloitte & Touche LLP and not to be reproduced in any form without their permission.

APPENDIX A

MANAGEMENT REPRESENTATION LETTER

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Preliminary draft – for discussion purposes only

To be printed on DART letterhead

January 24, 2012 Deloitte & Touche LLP 2200 Ross Avenue, Suite 1600 Dallas, Texas 75201-6778 We are providing this letter in connection with your audits of the financial statements of Dallas Area Rapid Transit (“DART”), as of and for the years ended September 30, 2011 and 2010 for the purpose of expressing an opinion as to whether the basic financial statements present fairly, in all material respects, the financial position, results of operations, and cash flows of DART in conformity with accounting principles generally accepted in the United States of America. We confirm that we are responsible for the following: a. The fair presentation in the basic financial statements of financial position, results of operation and cash flows in conformity with accounting principles generally accepted in the United States of America The design, implementation, and maintenance of programs and controls to prevent and detect fraud, including fraud related to federal awards Establishing and maintaining effective internal control over financial reporting.

b. c.

Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement. We confirm, to the best of our knowledge and belief, the following representations made to you during your audits. 1. The basic financial statements referred to above are fairly presented in conformity with accounting principles generally accepted in the United States of America. In addition: a. The financial statements include all component units as well as joint ventures with an equity interest, and properly disclose all other joint ventures and other related organizations. The financial statements properly classify all funds and activities, including special and extraordinary items. Net asset components (invested in capital assets, net of related debt; restricted; and unrestricted) are properly classified and, if applicable, approved. Deposits and investment securities are properly classified in the category of custodial credit risk.

b. c. d.

e. f. g. h. 2. 3.

Capital assets, including infrastructure assets, are properly capitalized, reported, and, if applicable, depreciated. Required supplementary information is measured and presented within prescribed guidelines. Applicable laws and regulations are followed in adopting, approving, and amending budgets. Federal awards expenditures have been charged in accordance with applicable cost principles.

DART has provided to you all relevant information and access as agreed in the terms of the audit engagement letter. DART has provided you: a. b. Financial records and related data. Minutes of the meetings of directors and committees of directors or summaries of actions of recent meetings for which minutes have not yet been prepared.

4.

There has been no: a. b. Action taken by DART management that contravenes the provisions of federal laws and Texas laws and regulations, or of contracts and grants applicable to DART Communication from other regulatory agencies concerning noncompliance with or deficiencies in financial reporting practices or other matters that could have a material effect on the financial statements.

5.

DART has provided to you the results of management's risk assessment, including the assessment of the risk that the financial statements may be materially misstated as a result of fraud. We have no knowledge of any fraud or suspected fraud affecting DART involving: a. Management. b. c. Employees who have significant roles in internal control over financial reporting. Others if the fraud could have a material effect on the financial statements.

6.

7.

We have no knowledge of any allegations of fraud or suspected fraud affecting DART received in communications from employees, former employees, analysts, regulators, or others. There are no unasserted claims or assessments that legal counsel has advised us are probable of assertion and must be disclosed in accordance Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 450, Contingencies. Significant assumptions used by us in making accounting estimates are reasonable.

8.

9.

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10. The Schedule of Expenditures of Federal and State Awards was prepared in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations and the State of Texas Uniform Grant Management Standard (UGMS). We have identified in that schedule all awards provided by federal and state agencies in the form of grants, contracts, loans, loan guarantees, property, cooperative agreements, interest subsidies, insurance, or direct appropriations. We have also properly identified subrecipient expenditures. In addition, we have accurately completed the appropriate sections of the data collection form. 11. We are responsible for compliance with local, state, and federal laws, rules, and regulations, including compliance with the requirements of OMB Circular A-133 and UGMS, and provisions of grants and contracts relating to DART’s operations. We are responsible for establishing and maintaining the components of internal control relating to our activities in order to achieve the objectives of providing reliable financial reports, effective and efficient operations, and compliance with laws and regulations. DART is responsible for maintaining accounting and administrative control over revenues, obligations, expenditures, assets, and liabilities. 12. We are responsible for establishing and maintaining, and have established and maintained, effective internal control over compliance for federal and state programs that provides reasonable assurance that we are managing federal and state awards in compliance with laws, regulations, and provisions of contracts or grant agreements that could have a material effect on its federal and state programs. 13. We have disclosed to you all deficiencies in the design or operation of internal control over financial reporting identified as part of our evaluation, including separately disclosing to you all such deficiencies that are significant deficiencies or material weaknesses in internal control over financial reporting. 14. We have: a. Identified the requirements of laws, regulations, and the provisions of contracts and grant agreements that are considered to have a direct and material effect on each federal and state program as identified in Part 3 of the March 2011 Compliance Supplement b. Complied, in all material respects, with the requirements identified above in connection with federal and state awards c. Identified and disclosed interpretations of any compliance requirements that have varying interpretations d. Made available all information related to federal and state financial reports and claims for advances and reimbursements. Federal and state financial reports and claims for advances and reimbursements are supported by the books and records from which the financial statements have been prepared and are prepared on a basis consistent with that presented in the Schedule of Expenditures of Federal and State Awards. The copies of federal and state program financial reports provided are true copies of the reports submitted, or electronically transmitted, to the federal and state agency or passthrough DART, as applicable e. Monitored subrecipients to determine that they have expended pass-through assistance
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in accordance with applicable laws and regulations and have met the requirements of Circular A-133 and UGMS f. Taken appropriate corrective action on a timely basis after receipt of a subrecipient’s auditor’s report that identifies noncompliance with laws, regulations, or the provisions of contracts or grant agreements

g. Considered the results of the subrecipient’s audits and made any necessary adjustments to the auditee’s own books and records h. Identified and disclosed all amounts questioned and any known noncompliance with the requirements of federal and state awards, including the results of other audits or program reviews related to the objectives of the audit i. Identified previous financial audits, attestation engagements, performance audits, or other studies related to the objectives of the audit and the corrective actions taken to address significant findings and recommendations, including the status of follow-up on prior audit findings (and information about all management decisions) by federal and state awarding agencies and pass-through entities Provided to you our views on the reported findings, conclusions, and recommendations for your report.

j.

15. We are responsible for follow-up on all prior-year findings. We have prepared a summary schedule of prior-year findings reporting the status of our efforts in implementation of the prior-year’s corrective action plan. 16. Management has identified and disclosed to you all laws and regulations that have a direct and material effect on the determination of financial statement amounts. 17. We have adopted the provisions of GASB Statement No. 39, Determining Whether Certain Organizations Are Component Units, an amendment of Statement No. 14, The Financial Reporting Entity. We believe that we have properly identified and reported as a component unit of DART each organization that meets the criteria established in GASB Statement No. 39. Except where otherwise stated below, matters less than $4,000,000 collectively are not considered to be exceptions that require disclosure for the purpose of the following representations. This amount is not necessarily indicative of amounts that would require adjustment to, or disclosure in, the financial statements. 18. There are no transactions that have not been properly recorded in the accounting records underlying the financial statements. 19. DART has no plans or intentions that may affect the carrying value or classification of assets and liabilities. 20. The following, to the extent applicable, have been appropriately identified, properly recorded, and disclosed in the financial statements: a. Related-party transactions and associated amounts receivable or payable, including sales, purchases, loans, transfers, leasing arrangements, and guarantees (written or
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oral) b. Guarantees, whether written or oral, under which DART is contingently liable. 21. In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management uses estimates. All estimates have been disclosed in the financial statements for which known information available prior to the issuance of the financial statements indicates that both of the following criteria are met: a. It is at least reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that existed at the date of the financial statements will change in the near term due to one or more future confirming events b. The effect of the change would be material to the financial statements. 22. Risks associated with concentrations, based on information known to management, that meet all of the following criteria have been disclosed in the financial statements: a. The concentration exists at the date of the financial statements b. The concentration makes the enterprise vulnerable to the risk of a near-term severe impact c. It is at least reasonably possible that the events that could cause the severe impact will occur in the near term. 23. There are no: a. Violations or possible violations of laws or regulations whose effects should be considered for disclosure in the financial statements or as a basis for recording a loss contingency b. Other liabilities or gain or loss contingencies that are required to be accrued or disclosed by FASB Statement No. 5, Contingencies except as accrued as a portion of accounts payable and accrued liabilities and disclosed to you by DART’s in-house counsel. 24. DART has satisfactory title to all owned assets, and there are no liens or encumbrances on such assets nor has any asset been pledged as collateral except for leased assets acquired under lease-leaseback transactions as disclosed in the financial statements. 25. DART has complied with all aspects of contractual agreements that may have an effect on the financial statements in the event of noncompliance. 26. No department or agency of DART has reported a material instance of noncompliance to us. 27. DART has identified all derivative instruments as defined by GASB Statement No. 53, Accounting and Financial Reporting for Derivative Instruments, and appropriately recorded and disclosed such derivatives in accordance with GASB Statement No. 53.
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28. Other than those described in the notes to the financial statements, no events have occurred after September 30, 2011, but before January 24, 2012, the date the financial statements were issued that require consideration as adjustments to or disclosures in the financial statements. 29. Management has disclosed whether, subsequent to September 30, 2011, any changes in internal control or other factors that might significantly affect internal control, including any corrective action taken by management with regard to significant deficiencies and material weaknesses, have occurred. 30. With regard to the fair value measurements and disclosures of certain assets, liabilities, and specific components of equity, such as investment, we believe that: a. b. The measurement methods, including the related assumptions, used in determining fair value were appropriate and were consistently applied The completeness and adequacy of the disclosures related to fair values are in conformity with accounting principles generally accepted in the United States of America No events have occurred subsequent to September 30, 2011 that require adjustment to the fair value measurements and disclosures included in the financial statements.

c.

31. DART has determined whether a capital asset has been impaired in accordance with GASB Statement No. 42, Accounting and Financial Reporting for Impairment of Capital Assets and for Insurance Recoveries. In making this determination, DART considered the following factors: a. The magnitude of the decline in service utility is significant b. The decline in service utility is unexpected. 32. We believe that the actuarial assumptions and methods used to measure pension and other postemployment benefit costs for financial accounting purposes are appropriate in the circumstances. 33. We have disclosed to you all additions or changes to the existing pension, 401(k), and other postretirement benefit plans.

34. DART has not completed the process of evaluating the impact that will result from
adopting Governmental Accounting Standards Board (GASB) Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements, GASB Statement No. 61, The Financial Reporting Entity: Omnibus an amendment of GASB Statements No. 14 and No. 34, GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, and GASB Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provisions – an amendment of GASB Statement No. 53 as discussed in Note 1 to the basic financial statement. DART is therefore unable to disclose the impact that adopting these statements will have on its financial position and results of operations when such statements are adopted.
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35. Receivables recorded in the financial statements represent valid claims against debtors for sales or other charges arising on or before the balance-sheet date and have been appropriately reduced to their estimated net realizable value. 36. Provision has been made to reduce excess or obsolete inventories to their estimated net realizable value. All inventories are the property of DART and do not include any items consigned to it or any items billed to customers. 37. We believe that all expenditures that have been deferred to future periods are recoverable. 38. We agree with the findings of the specialists in evaluating the claims liabilities related to medical, general liability, and workers’ compensation and have adequately considered the qualifications of the specialist in determining amounts and disclosures used in the financial statements and underlying accounting records. We did not give any instructions, nor cause any instructions to be given, to the specialists with respect to values or amounts derived in an attempt to bias their work, and we are not aware of any matters that have affected the independence or objectivity of the specialists. 39. We have no intention of terminating any of our pension, 401(k), or postemployment benefit plans or taking any other action that could result in an effective termination or reportable event for any of the plans. We are not aware of any occurrences that could result in the termination of any of our plans to which we contribute. 40. DART participates in several federal and state grant programs that are governed by various rules and regulations of the grantor agencies. Costs charged to the respective grant programs are subject to audit and adjustment by the grantor agencies. In the opinion of management, no significant contingent liabilities exist relating to the compliance with the rules and regulations governing the respective grants; therefore, no provision has been recorded in the financial statements for such contingencies. 41. DART owns and operates a number of facilities. It also acquires new properties for light rail expansion projects. In some of these properties, DART has discovered contamination that may require pollution remediation activity. DART is working with relevant state and federal agencies on pollution remediation plans. Management does not believe that the outcome of these remediation activities will have a material adverse effect on DART’s financial position. Management has accrued an estimate of pollution remediation costs which is included in the accounts payable and accrued liabilities line item in the statement of net assets. 42. As disclosed in the notes to the financial statements, DART has been named as a defendant in a number of lawsuits relating to personnel and contractual matters. Management does not believe that the outcome of these claims will have a material adverse effect on DART’s financial position. 43. With respect to the senior subordinate lien sales tax revenue bonds and commercial notes payable discussed in the notes to the financial statements, DART is in compliance with all of its debt covenants for the years ended September 30, 2011 and 2010. 44. Tax exempt bonds have retained their tax exempt status. 45. We have and will not cause any actions that would violate the requirements under section 5 of the Tax Indemnity Agreement and therefore cause equity investors to be required to
7

include any additional income as taxable other than what is stipulated in section 2 of the agreement related to lease and lease-back transactions. We do not believe that any potential liability related to the excise tax on such transactions described in the Tax Increase Prevention and Reconciliation Act of 2005 to be either probable or estimable at this time. Therefore, no liability has been recorded for the years ended September 30, 2011 or 2010. 46. Management intends to, and DART has the ability to, exercise the purchase option on the remaining lease/leaseback agreements at the earliest option date. The lease investments and related long-term liabilities have been recorded at a value that includes this option and the amortization schedules reflect the purchase option payments and date. 47. The subleases of the lease/leaseback agreements provide DART with an opportunity, at its sole discretion, to repurchase equipment on specified dates. As these dates approach, DART will complete a financial analysis on each specific lease to determine if it is financially beneficial to repurchase the equipment. At this point in time, DART anticipates that it will exercise the repurchase option on all of its remaining leases at the specified dates and has reflected this option in the amortization. 48. Each of the lease/leaseback transactions has specific performance requirements for DART when the financial rating of the Payment Undertaker insurer falls below a specified level. Credit ratings of two of three financial institutions insuring DART’s lease/leaseback transactions were downgraded below certain levels specified in the lease/leaseback agreements. As a result, DART has entered into an amended agreement to reset the trigger to BBB for one of these two transactions. For the other lease/leaseback obligation, DART has entered into an equity security agreement that requires it to set aside certain investments for security. As of September 30, 2011, DART has set aside $10.766 million for this purpose and this amount is shown as investments restricted as security for lease/leaseback liabilities in the statement of net assets. 49. DART is responsible for determining and maintaining the adequacy of the allowance for doubtful notes, loans, and accounts receivable, as well as estimates used to determine such amounts. Management believes the allowances are adequate to absorb currently estimated bad debts in the account balances. 50. Regarding required supplementary information: a. We confirm that we are responsible for the required supplementary information b. The required supplementary information is measured and presented in accordance with accounting principles generally accepted in the United States of America. c. The methods of measurement and presentation of the supplementary information have not changed from those used in the prior period 51. Regarding supplementary information: a. We are responsible for the fair presentation of the supplementary information in accordance with accounting standards generally accepted in the United States of America

8

b. We believe the supplementary information, including its form and content, is fairly presented in accordance with accounting standards generally accepted in the United States of America c. The methods of measurement and presentation of the supplementary information have not changed from those used in the prior period d. The significant assumptions underlying the measurement and presentation of the supplementary information relate to actuarial assumptions and are disclosed in the notes to the financial statements.

David Leininger, Chief Financial Officer

Sharon Leary, Vice President, Finance

Gary C. Thomas, President/Executive Director

9

Dallas Area Rapid Transit
Report to Management Year Ended September 30, 2011

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January 24, 2012 The Board of Directors, and Management Dallas Area Rapid Transit 1401 Pacific Avenue Dallas, TX 75202 Dear Members of the Board of Directors and Management: In planning and performing our audit of the financial statements of Dallas Area Rapid Transit (“DART”) as of and for the year ended September 30, 2011 (on which we have issued our report dated January 24, 2012), in accordance with auditing standards generally accepted in the United States of America, we considered DART’s internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of DART’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of DART’s internal control over financial reporting. Our consideration of internal control over financial reporting was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over financial reporting. However, in connection with our audit, we identified, and included in the attached Appendix, a deficiency related to DART’s internal control over financial reporting as of September 30, 2011, that we wish to bring to your attention. The definitions of a deficiency and a material weakness are also set forth in the attached Appendix. Although we have included management’s written response to our comments in the attached Appendix, such responses have not been subjected to the auditing procedures applied in our audit and, accordingly, we do not express an opinion or provide any form of assurance on the appropriateness of the responses or the effectiveness of any corrective actions described therein. A description of the responsibility of management for establishing and maintaining internal control over financial reporting and of the objectives of and inherent limitations of internal control over financial reporting is set forth in Section IV of Appendix I and should be read in conjunction with this report. The recommendations presented in the attached exhibits resulted from our observations made in connection with our audit of DART’s financial statements for the year ended September 30, 2011. The recommendations included in this report concern financial, administrative, and operating matters that resulted from our observations during our audit and are not based on a special study. This report is intended solely for the information and use of management, the Board of Directors, federal and state awarding agencies and pass through entities, and others within the organization and is not intended to be, and should not be, used by anyone other than these specified parties. Yours truly,

2

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APPENDIX
SECTION I — DEFICIENCIES We identified, and have included below, a control deficiency involving DART’s internal control over financial reporting as of September 30, 2011, that we wish to bring to your attention:

Access and Monitoring Controls
Criteria – System access should be restricted by appropriate means to protect the organization from data loss and misuse of information. Condition Found (including cause and perspective) – During our tests of general information technology controls, we noted that certain access reviews were not performed or completed, and the access for one terminated user was not removed. Specifically: · The data center access review was in process at the time our audit procedures were being performed. During our audit procedures we noted that 7 terminated users and 3 users who do not have day to day data center responsibility exist with access to data center. Although the 7 terminated user badges were returned, their access was still enabled in the physical security badge system. Periodic access reviews across all IT layers (Lawson, Oracle, UNIX, and Novell) are not performed to check whether user’s access privileges to financial data are appropriate. One terminated user with privileged access to Oracle database supporting Lawson application was not removed; however, this user’s network access was disabled.

· ·

Effect – A lack of sufficient access and/or monitoring controls over information systems access could lead to unauthorized transactions being executed, potentially causing lack of integrity and reliability of information produced by the systems. Recommendation – Consider implementing the following review and monitoring control procedures: · Complete periodic reviews to monitor appropriateness of access assigned to users on the application, database, operating system and network. · Incorporate a process in data center access reviews to validate that users with access are still employed, removed timely from the physical security badge system and their access is commensurate with job responsibilities. Validate terminated users accounts against application, operating system, database and application. Access for terminated employees should be removed from each layer.

·

View of Responsible Officials – · Periodic reviews to monitor access – In the discussion it was stated that this observation pertains to administration rights access to Lawson, Unix, Oracle and Novell. There are very few people with such rights and they are the only ones who can grant them. There are (2) people with Lawson admin rights, (4) with Unix admin rights, (2) with Oracle admin rights and (5) with

3

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Novell admin rights. Because of necessary multiple responsibilities, these represent 10 people, are all in the IT department and work closely every day with IT management a formal periodic review seems unnecessary. Every access to any system by an administrator is logged and the logs are reviewed monthly at a minimum. End user access to Lawson is managed by user departments using role based security. IT will initiate issuing a semi-annual report to department heads to remind and help them review access rights in their departments. · Data Center Access – We do have a periodic process to review data center access, which is the one that was in progress at the time of the audit review, as referenced above. That process had identified the ten individuals and we were in the process of validating, or not, their employment status and/or access rights. The seven terminated employees could not have accessed the data center without their forfeited badges. Our process does remove terminated employees’ access from all system. Not removing the privileged Oracle access cited above was an oversight. That user was an AVP who retired after 43 years with DART and he could not have accessed the Oracle databases because his network access credentials had been removed.

·

4

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SECTION II — OTHER MATTERS Our observations concerning other matters that we wish to bring to your attention are as follows: RECENTLY ISSUED STATEMENTS OF THE GOVERNMENT ACCOUNTING STANDARDS BOARD (“GASB”) GASB 57: OPEB Measurements by Agent Employers and Agent Multiple Employer Plans Observation – GASB Statement No. 57, OPEB Measurements by Agent Employers and Agent Multiple Employer Plans, clarifies that when actuarially determined OPEB measures are reported by an agent multiple-employer OPEB plan and its participating employers, those measures should be determined as of a common date and at a minimum frequency to satisfy the agent multiple-employer OPEB plan’s financial reporting requirements. This Statement becomes effective for DART in fiscal year 2012. GASB 60: Accounting and Financial Reporting for Service Concession Arrangements Observation — GASB Statement No. 60, Accounting and Financial Reporting for Service Concession Arrangements, was issued in December 2010 to improve financial reporting by addressing issues related to service concession arrangements (SCAs), which are a type of public-private or public-public partnership. The standard addresses SCAs in which there is an arrangement between a transferor (a government) and an operator (governmental or nongovernmental entity) in which (1) the transferor conveys to an operator the right and related obligation to provide services through the use of infrastructure or another public asset (a “facility”) in exchange for significant consideration and (2) the operator collects and is compensated by fees from third parties. The statement also includes required disclosures about the SCAs. This standard becomes effective for DART in fiscal year 2013. GASB 61: The Financial Reporting Entity: Omnibus—an amendment of GASB Statements No. 14 and No. 34 Observation — GASB Statement No. 61, The Financial Reporting Entity: Omnibus—an amendment of GASB Statements No. 14 and No. 34, was issued in November 2010 to improve financial reporting for a governmental reporting entity. The standard modifies certain requirements for inclusion of component units, amends criteria for blending, and clarifies the reporting of equity interests in legally separate entities. This standard becomes effective for DART in fiscal year 2013. GASB 62: Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements Observation – GASB 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989 FASB and AICPA Pronouncements, was issued in December 2010 to incorporate into the GASB’s authoritative literature certain accounting and financial reporting guidance that is included in the following pronouncements issued on or before November 30, 1989, which does not conflict with or contradict GASB pronouncements: 1. Financial Accounting Standards Board (FASB) Statements and Interpretations 2. Accounting Principles Board Opinions

5

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3. Accounting Research Bulletins of the American Institute of Certified Public Accountants’ (AICPA) Committee on Accounting Procedure. This standard becomes effective for DART in fiscal year 2013. GASB 63: Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position Observation – GASB Statement No. 63, Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position, was issued in June 2011 to improve financial reporting for a governmental reporting entity. The standard provides financial reporting guidance for deferred outflows of resources and deferred inflows of resources. This standard becomes effective for DART in fiscal year 2013. GASB 64: Derivative Instruments: Application of Hedge Accounting Termination Provisions—an amendment of GASB Statement No. 53 Observation – GASB Statement No. 64, Derivative Instruments: Application of Hedge Accounting Termination Provisions—an amendment of GASB Statement No. 53, was issued in June 2011 to improve financial reporting for a governmental reporting entity. The standard clarifies whether an effective hedging relationship continues after the replacement of a swap counterparty or a swap counterparty’s credit support provider. This statement sets forth criteria that establish when the effective hedging relationship continues and hedge accounting should continue to be applied. This standard becomes effective for DART in fiscal year 2012. Recommendation – Review all GASB Statements listed above and their implications to determine the potential impact on DART’s financial statements. View of Responsible Officials – Management is aware of the new GASB requirements and will implement these when prescribed by GASB.

6

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SECTION III — DEFINITIONS Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The definitions of a deficiency, a material weakness, and a significant deficiency that are established in AU 325, Communicating Internal Control Related Matters Identified in an Audit, are as follows: A deficiency in internal control over financial reporting 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 and correct misstatements on a timely basis. A deficiency in design exists when (a) a control necessary to meet the control objective is missing or (b) an existing control is not properly designed so that, even if the control operates as designed, the control objective would not be met. A deficiency in operation exists when (a) a properly designed control does not operate as designed, or (b) the person performing the control does not possess the necessary authority or competence to perform the control effectively. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.

7

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SECTION IV — MANAGEMENT’S RESPONSIBILITY FOR AND THE OBJECTIVES AND LIMITATIONS OF INTERNAL CONTROL The following comments concerning management’s responsibility for internal control over financial reporting and the objectives and inherent limitations of internal control over financial reporting are adapted from auditing standards generally accepted in the United States of America. Management’s Responsibility DART’s management is responsible for the overall accuracy of the financial statements and their conformity with generally accepted accounting principles. In this regard, management is also responsible for establishing and maintaining effective internal control over financial reporting. Objectives of Internal Control over Financial Reporting Internal control over financial reporting is a process affected by those charged with governance, management, and other personnel and designed to provide reasonable assurance about the achievement of the entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. Internal control over the safeguarding of assets against unauthorized acquisition, use, or disposition may include controls related to financial reporting and operations objectives. Generally, controls that are relevant to an audit of financial statements are those that pertain to the entity’s objective of reliable financial reporting (i.e., the preparation of reliable financial statements that are fairly presented in conformity with generally accepted accounting principles). Inherent Limitations of Internal Control over Financial Reporting Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

* * * * *

8

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Dallas Area Rapid Transit
Single Audit Reports Year Ended September 30, 2011

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DALLAS AREA RAPID TRANSIT
TABLE OF CONTENTS

Page Auditor-Prepared 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 Government Auditing Standards Independent Auditors’ Report on Compliance With Requirements That Could Have a Direct and Material Effect on Each Major Program and Internal Control Over Compliance in Accordance with OMB Circular A-133 and the State of Texas Uniform Grant Management Standards Schedule of Findings and Questioned Costs Auditee-Prepared Schedule of Expenditures of Federal and State Awards Notes to Schedule of Expenditures of Federal and State Awards Corrective Action Plan Status of Prior Year Findings 7-8 9 10 11

1-2

3-4 5-6

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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 GOVERNMENT AUDITING STANDARDS Members of the Board of Directors Dallas Area Rapid Transit We have audited the financial statements of Dallas Area Rapid Transit (“DART”) as of and for the year ended September 30, 2011, and have issued our report thereon dated January 24, 2012. 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 Management of DART is responsible for establishing and maintaining effective internal control over financial reporting. In planning and performing our audit, we considered DART’s internal control over financial reporting as a basis for designing our auditing procedures for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of DART’s internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of DART’s internal control over financial reporting. A deficiency in internal control 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 and correct misstatements on a timely basis. A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis. Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, 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 DART’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 provisions was not an objective of our audit and, accordingly, we do not express such an opinion. The

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results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditing Standards. We noted certain other matters that we reported to management of DART in a separate letter dated January 24, 2012. This report is intended solely for the information and use of the Board of Directors, management, and appropriate federal and state awarding agencies, and pass-through entities and is not intended to be, and should not be, used by anyone other than these specified parties.

January 24, 2012

2

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INDEPENDENT AUDITORS’ REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A133 AND THE STATE OF TEXAS UNIFORM GRANT MANAGEMENT STANDARDS
Members of the Board of Directors Dallas Area Rapid Transit Dallas, Texas Compliance We have audited the Dallas Area Rapid Transit’s (“DART”) compliance with the types of compliance requirements described in the U.S. Office of Management and Budget (“OMB”) Circular A-133 Compliance Supplement and the State of Texas Uniform Grant Management Standards (“UGMS”) that could have a direct and material effect on each of its major federal and state programs, respectively, for the year ended September 30, 2011. DART’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 DART’s management. Our responsibility is to express an opinion on DART’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; OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations; and UGMS. Those standards and OMB Circular A-133 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 or state program occurred. An audit includes examining, on a test basis, evidence about DART’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 DART’s compliance with those requirements. In our opinion, DART complied, in all material respects, with the requirements referred to above that could have a direct and material effect on each of its major federal and state programs for the year ended September 30, 2011.

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Internal Control Over Compliance Management of DART 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 DART’s internal control over compliance with the requirements that could have a direct and material effect on a major federal or state program to determine the auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133 and UGMS, 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 DART’s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal or state program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be deficiencies, 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. Schedule of Expenditures of Federal and State Awards We have audited the financial statements of DART as of and for the year ended September 30, 2011, and have issued our report thereon dated January 24, 2012. Our audit was performed for the purpose of forming an opinion on the financial statements that collectively comprise DART’s basic financial statements. The accompanying schedule of expenditures of federal and state awards is presented for purposes of additional analysis as required by OMB Circular A-133 and UGMS, respectively, and is not a required part of the financial statements. Such information has been subjected to the auditing procedures applied in the audit of the financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the financial statements taken as a whole. This report is intended solely for the information and use of the Board of Directors, management, appropriate federal and state awarding agencies, and pass-through entities and is not intended to be, and should not be, used by anyone other than these specified parties.

January 24, 2012

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DALLAS AREA RAPID TRANSIT
SCHEDULE OF FINDINGS AND QUESTIONED COSTS YEAR ENDED SEPTEMBER 30, 2011

I.

Summary of Auditors’ Results Financial Statements Type of auditors' report issued: Internal control over financial reporting: Material weakness(es) identified? Significant deficiency(ies) identified not considered to be material weaknesses? Noncompliance material to financial statements noted? Federal and State Awards Internal control over major programs: Material weakness(es) identified? Significant deficiency(ies) identified not considered to be material weakness(es)? Type of auditors' report issued on compliance for major programs: Any audit findings disclosed that are required to be reported in accordance with OMB Circular A-133 (section .510(a)) or UGMS? Identification of major programs: FEDERAL Federal Transit Capital Improvement Grant (Federal Transit Cluster) 20.500 and 20.507; 20.500-ARRA and 20.507-ARRA STATE SH-121 Toll Projects (Frankford Station Additional Parking and Northwest Plano Park and Ride Facility) TRE Head-End-Power Overhaul of Vehicles Grant No No Unqualified

None reported

No

None reported

Unqualified

No

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Dollar threshold used to distinguish between Type A and Type B programs: Auditee qualified as low-risk auditee? II. Findings Related to the Financial Statements N/A

Federal: $3,000,000; State: $300,000 Yes – Federal; No – State

III. Findings and Questioned Costs Related to the Federal and State Awards N/A

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DALLAS AREA RAPID TRANSIT
SCHEDULE OF EXPENDITURES OF FEDERAL AND STATE AWARDS YEAR ENDED SEPTEMBER 30, 2011 Federal CFDA Number Passed Through to Subrecipients

Agency/Grant Name Federal Grants U.S. Department of Transportation: Federal Transit Administration (FTA) Direct Programs: Federal Transit Capital Improvement Grant Federal Transit Capital Improvement Grant - ARRA Federal Transit Capital and Operating Assistance Formula Grant Federal Transit Capital Improvement Grant Federal Transit Capital Improvement Grant - ARRA Federal Transit Cluster Job Access - Reverse Commute Transit Services Program Total Federal Transit Administration Federal Highway Administration: Integrated Corridor Management Passed through the North Texas Council of Governments: Highway Planning and Construction

Total Expenditures

20.500 20.500 - ARRA 20.507 20.507 20.507 - ARRA

$

112,475,857 44,542,841 4,430,857 72,479 161,522,034 195,051 119,691 161,836,776

$

120,258

283,575 403,833

20.516 20.521

403,833

20.200

224,037

-

20.205

1,578,878

-

Total U.S. Department of Transportation U.S. Department of Homeland Security: Direct Program: National Explosives Detection Canine Team Program Urban Areas Security Initiative Urban Areas Security Initiative Urban Areas Security Initiative Urban Areas Security Initiative - ARRA Total Department of Homeland Security U.S. Department of Justice: Direct Program: Office of Community Oriented Policing Services Total Expenditures of Federal Awards

163,639,691

403,833

97.072 97.075 97.008 97.118 97.118- ARRA

157,387 191,838 241,084 404,349 494,433 1,489,091

-

-

16.710 $

55,928 165,184,710 $

403,833 (continued)

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DALLAS AREA RAPID TRANSIT
SCHEDULE OF EXPENDITURES OF FEDERAL AND STATE AWARDS YEAR ENDED SEPTEMBER 30, 2011 Federal CFDA/PassThrough Number Passed Through to Subrecipients

Agency/Grant Name

Total Expenditures

State Grants Texas Department of Transportation Toll Credits Contract Passed through the North Texas Council of Governments: United We Ride SH-121 Toll Projects: Frankford Station Additional Parking Northwest Plano Park and Ride Facility Total SH-121 Toll Projects Total Texas Department of Transportation Texas Commission on Environmental Quality Passed through the North Texas Council of Governments: TRE HEP Vehicle Overhaul Total Expenditures of State Awards Total Expenditures of Federal and State Awards See notes to schedule of expenditures of federal and state awards. (Concluded) $

NA

$

247,320

$

-

NA 0918-46-232 0918-24-170

1,529 81,506 447,641 529,147 777,996

-

NA

309,612 1,087,608 166,272,318 $

403,833

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DALLAS AREA RAPID TRANSIT
NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AND STATE AWARDS YEAR ENDED SEPTEMBER 30, 2011

1.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Schedule of Expenditures of Federal and State Awards was prepared on the accrual basis of accounting. Amounts reported as expenditures in the accompanying schedule of expenditures of federal and state awards may not agree with the amounts reported in the related federal and state financial reports filed with the grantor agencies because of accruals that would be included in the next report filed with the agency. DART received $112,475,857 in federal transit capital improvement grants (CFDA 20.500), $48,973,698 (CFDA 20.507) and $72,479 (CFDA 20.507-ARRA) during the year ended September 30, 2011. Of the $112,475,857, $105,567,117 was based on capital expenditures made in a prior year and of the $48,973,698, $5,376,744 was from the prior year. These amounts are included in the Federal Transit Capital Improvement Grant on the Schedule of Expenditures of Federal and State Awards for the year ended September 30, 2011, as the related funding was not approved until fiscal year 2011.

2.

COMMITMENTS AND CONTINGENCIES DART participates in several federal and state grant programs, which are governed by various rules and regulations of the grantor agencies. Costs charged to the respective grant programs are subject to audit and adjustment by the grantor agencies. Therefore, to the extent that DART has not complied with the rules and regulations governing the grants, refunds of any money received may be required, and the collectability of any related receivable at September 30, 2011 may be impaired. In the opinion of management, there are no significant contingent liabilities relating to compliance with the rules and regulations governing the respective grants.

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Preliminary Draft - For Discussion Purposes Only To be returned to Deloitte & Touche LLP and not to be reproduced in any form without their permission.

DALLAS AREA RAPID TRANSIT
CORRECTIVE ACTION PLAN YEAR ENDED SEPTEMBER 30, 2011

N/A

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Preliminary Draft - For Discussion Purposes Only To be returned to Deloitte & Touche LLP and not to be reproduced in any form without their permission.

DALLAS AREA RAPID TRANSIT
STATUS OF PRIOR YEAR FINDINGS YEAR ENDED SEPTEMBER 30, 2011

2010-01 Texas Department of Transportation President George Bush Park and Ride Facility – Reporting Material Weakness, Material Noncompliance Criteria – The grant agreement specifies a report be completed and submitted monthly and be supported by expenditures that agree to DART’s records. Condition – Two of three monthly reports from the period from February through April 2010 (project completion date) were not submitted to the grantor. However, a report with cumulative figures was submitted in September 2010. Additionally, the report submitted did not include all of the expenditures eligible for payment. In our judgment, the fact that a majority of the reports were not filed appropriately results in a material noncompliance and material weakness related to reporting for this grant in accordance with the Texas Uniform Grant Management Standards. However, this does not reflect a material weakness in financial reporting for the financial statements as a whole nor in the other compliance requirements related to this grant. The threshold for this determination must be made at each of the applicable 14 compliance requirements for each grant considered to be a major program. Status – Corrected and removed.

2010-02 Texas Department of Transportation North Carrollton Light Rail Train Station Parking Lot – Reporting Material Weakness, Material Noncompliance Criteria – The grant agreement specifies a report be completed and submitted monthly. Condition – Seven of eight monthly reports from the period from November 2009 through August 2010 were not submitted to the grantor. However, a report with cumulative figures was submitted in September 2010. In our judgment, the fact that a majority of the reports were not filed appropriately results in a material noncompliance and material weakness related to reporting for this grant in accordance with the Texas Uniform Grant Management Standards. However, this does not reflect a material weakness in financial reporting for the financial statements as a whole nor in the other compliance requirements related to this grant. The threshold for this determination must be made at each of the applicable 14 compliance requirements for each grant considered to be a major program. Status – Corrected and removed.

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