$352,095,000 SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT Sales Tax Revenue Bonds, Refunding Series 2005 a MORGAN STANLEY CITIG

NEW ISSUE-BOOK-ENTRY ONLY RATINGS, UNINSURED BONDS" - S&P, AA Moody's: Aa3 Fitch: AA INSURED BONDS - S&P, AAA Moody's: Aaa Fitch: AAA (See "Ratings" herein.) In the opinion of Orrick, Herrinfiton g' Sutcliffe LLP and Lofton g' Jen.ninfis, Co-Bond Counsel, based upon an analysis of existinfi laws, refiulations, rulinfis and court decisions and assuminfi, amonfi other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Series 2005 Ji. Bonds is excluded from fiross income for federal income tax purposes under Section 103 of the InteTnal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the opinion of Co-Bond Counsel, interest on the Series 2005 Ji. Bonds is Mt a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, althoufih Co-Bond Counsel observe that such interest is included in adjusted current eaTninfis in calculatinfi corporate alternative minimum taxable income. Co-Bond Counsel express no opinion refiardinfi any other tax conseque.nces related to the ownership or disposition of, or the accrual or receipt of interest on, the Series 2005 Ji. Bonds. See "TJJ.X MJJ.TTEES" herein

$352,095,000 SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT Sales Tax Revenue Bonds, Refunding Series 2005 A

Dated: Date of Delivery Due: July 1, as shown below The San Francisco Bay Jl.rea Rapid Transit District Sales Tax Revenue Bonds, Eefundinfi Series 2005 Ji. (the "Series 2005 Ji. Bonds") are beinfi issued to refund certain outstandinfi sales tax revenue bonds previously issued by the San Francisco Bay Jl.rea Rapid Transit District (the "District") See "PL!l.N OF FINJJ.NCE" herein. The Series 2005 Ji. Bonds are delivercib"le in fully re[!istered form and, when issued, will be re[!istered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New York ("DTC") Individual purchases of Series 2005 Ji. Bonds will be made in principal amounts of $5,000 and inteffral multip"les thereof and will be in book-entry form only. Purchasers of Series 2005 Ji. Bonds will not receive bonds representinfi their beneficial ownership in the Series 2005 Ji. Bonds but will receive a credit balance on the books of their respective DTC Participants or DTC Indirect Participants. The Series 2005 Ji. Bonds will not be transfercib"le or exchanfieable except for transfer to another nominee of DTC or as otheTWise descriOed herein Interest on the Series 2005 Ji. Bonds, which is pavcib"le on January 1 and July 1 of each year, commencinfi January 1, 2006, and principal on the Series 2005 Ji. Bonds is payable by U.S. Bank National Jl.ssociation, as trustee, to Cede g' Co., and such interest and principal payments are to be disbursed to the beneficial owners of the Series 2005 Ji. Bonds throufih their respective DTC Participants or DTC Indirect Participants The Series 2005 Ji. Bonds are subject to optional and mandatory redemption prior to maturity as descriOed herein The Series 2005 Ji. Bonds are special obli[!ations of the District, payable from and secured by a p"ledfie of Sales Tax Revenues derived from a transaction and use tax "levied by the District in Jl.lameda and Contra Costa Counties and the City and County of San Francisco, as more fully described herein. The Series 2005 Ji. Bonds are issued on a parity with certain other bonds issued by the District and currently outstandinfi. See "SECURITY FOE THE SERIES 2005 Ji. BONDS" herein Payment of principal of and interest on the Series 2005 Ji. Bonds maturinfi on or after July 1, 2008 (the "Insured Series 2005 Ji. Bonds") when due will be insured by a financial fiuaranty insurance policy to be issued by MBIJJ. Insurance Corporation simultaneously with the delivery of the Insured Series 2005 Ji. Bonds See "BOND INSUEJJ.NCE" herein MBIA This cover page contains certain information for reference only. It is not a summary of this issue. Investors must read the entire Official Statement to obtain information essential to the making of an informed investment decision. M.!lTURITY SCHEDULE $26,?,625,000 SERI.!lL BONDS Maturity Maturity Date Principal Interest Price or Date Principal Interest Price or July I Amonnt Ra

The Series 2005 JI. Bonds are offered when, as and if issued and received by the UnderwrUers, subject to the approval of validi;ty by Orrick, Herrimjton g' Sutcliffe LLP and Lofton g' Jennin!js, San Francisco, California, Co-Bond Counsel. Certai;n le!jal matters will be passed upon for the Underwriters by Nixon Peabody LLP, San Francisco, California and for the District by its General Counsel, Sherwood G Wakeman, Esq The Series 2005 JI. Bonds are expected to be delivered throu!jh DTC on or about September 7, 2005 MORGAN STANLEY CITIGROUP Bear, Stearns & Co. Inc. Goldman, Sachs & Co. Merrill Lynch & Co. Backstrom Mc Carley Berry & Co., LLC Jackson Securities Loop Capital Markets, LLC Siebert Brandford Shank & Co., LLC

The date of this Official Statement is Jl.u!just 10, 2005

Priced to the par call date of July 1, 2015 Copyri!jht 2005, Jl.merican Bankers Jl.ssociation CU SIP data provided by Standard g' Poor's CU SIP Service Bureau, a division of The McGraw-Hill Companies, Inc. CU SIP Numbers are provided for convenience of reference only Neither the District nor the Underwriters take any responsibility for the accuracy of such numbers North onco I ~~ -~~i.-'" artin.ez ... ·· · ·· · · An,tioch kspur nco fl ,, Cla . nt Hill

DanviUe itAr Station) n Ramon

...... Ill Ill 1ss1on .. .. 1ss1on To n~ Tracy/ Dublin "' Stockton

Livermore

Pleasanton

Weekdays Only Peak Period 6 am-9aml 4pm-7pm ...... •• . ••••...... •••• •••••••••••·······F· . (approx. times) ...... rie·· m·· ont

BART Richmond- . Daly C · FO/Millbrae BART Fremont-Daly City arm r1n•

BART Pittsbu · ay Point SFOJMillbrae BART DublinlPleasanton Daly City San Joaquin (Amtrak)

ACE (Alta.mont Commuter Express) an Caltrain BART Pa Jose Regional Rail Transfer Point To Gilroy SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT 300 Lakeside Drive, 23rd Floor Oakland, California 94612 (510) 464-6000

BOARD OF DIRECTORS

Joel Keller Carole Ward Allen President Vice President

Thomas M. Blalock Gail Murray James Fang Tom Radulovich Bob Franklin Lynette Sweet ZoydLuce

OFFICERS Thomas E. Margro - General Manager Scott L. Schroeder - Controller/Treasurer Kenneth A. Duron - District Secretary

GENERAL COUNSEL Sherwood G. Wakeman, Esq.

TRUSTEE U.S. Bank National Association San Francisco, California

CO-BOND COUNSEL

Orrick, Herrington & Sutcliffe LLP San Francisco, California

Lofton & Jennings San Francisco, California

CO-FINANCIAL ADVISORS Public Financial Management, Inc. San Francisco, California

Eagle Asset Management San Francisco, California

VERIFICATION AGENT

Causey, Demgen & Moore, Inc. Denver, Colorado IN CONNECTION WITH THE OFFERING OF THE SERIES 2005 A BONDS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2005 A BONDS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. THE UNDERWRITERS MAY OFFER AND SELL THE SERIES 2005 A BONDS TO CERTAIN DEALERS AND DEALER BANKS AND BANKS ACTING AS AGENT AT PRICES LOWER THAN THE PUBLIC OFFERING PRICES STATED ON THE COVER PAGE HEREOF, AND SAID PUBLIC OFFERING PRICES MAY BE CHANGED FROM TIME TO TIME BY THE UNDERWRITERS. This Official Statement does not constitute an offer to sell the Series 2005 A Bonds in any jurisdiction to any person to whom it is unlawful to make such offer in such jurisdiction. No dealer, broker, salesman or other person has been authorized by the San Francisco Bay Area Rapid Transit District (the "District") or the llllderwriters identified on the cover page of this Official Statement (the "Underwriters") to give any information or to make any representation other than that contained herein and, if given or made, such other information or representation must not be relied upon as having been authorized. This Official Statement does not constitute an offer to sell or solicitation of an offer to buy, nor shall there be any offer or solicitation or sale of the Series 2005 A Bonds by any person in any jurisdiction in which it is unlawful for such person to make such offer, solicitation or sale. Neither the delivery of this Official Statement nor the sale of any of the Series 2005 A Bonds implies that the information herein is correct as of any time subsequent to the date hereof. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create the implication that there has been no change in the matters described herein since the date hereof. This Official Statement is not to be construed as a contract with the purchasers of the Series 2005 A Bonds. Statements contained in this Official Statement which involve estimates, forecasts or matters of opinion, whether or not expressly so described herein, are intended solely as such and are not to be construed as representations of facts. All summaries of statutes and documents are made subject to the provisions of such statutes and documents, respectively, and do not purport to be complete statements of any or all of such provisions. The information set forth herein has been obtained from sources that are believed to be reliable, but it is not guaranteed as to accuracy or completeness and is not to be construed as a representation by the Underwriters. The Underwriters have provided the following sentence for inclusion in this Official Statement: The Underwriters have reviewed the information in this Official Statement in accordance with, and as part of, their responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriters do not guarantee the accuracy or completeness of such information. No representation, warranty or guarantee is made by the Co-Financial Advisors as to the accuracy or completeness of any information in this Official Statement, including, without limitation, the information contained in the appendices hereto, and nothing contained in this Official Statement is or shall be relied upon as a promise or representation by the Co-Financial Advisors. This Official Statement contains forecasts, projections and estimates that are based on current expectations or assumptions. \Vhen included in this Official Statement, the words "expects," "forecasts," "projects," "intends," "anticipates," "estimates," "assumes" and analogous expressions are intended to identify forward-looking statements which speak only as of the date of this Official Statement. Any such statements inherently are subject to a variety of risks and uncertainties which could cause actual results to differ materially from those that have been projected. Such risks and uncertainties include, among others, changes in economic conditions, federal, state and local statutory and regulatory initiatives, litigation, seismic events, and various other events, conditions and circumstances, many of which are beyond the control of the District. The inclusion in this Official Statement of such forecasts, projections and estimates should not be regarded as a representation by the District that such forecasts, projections and estimates will occur. Such forecasts, projections and estimates are not intended as representations of fact or guarantees of results. The District disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained herein to reflect any changes in the District's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. THE ACHIEVEMENT OF CERTAIN RESULTS OR OTHER EXPECTATIONS CONTAINED IN SUCH FORWARD LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS DESCRIBED TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE DISTRICT DOES NOT PLAN TO ISSUE ANY UPDATES OR REVISIONS TO THOSE FORWARD-LOOKING STATEMENTS IF OR WHEN ANY OF ITS EXPECTATIONS, OR EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH SUCH STATEMENTS ARE BASED OCCUR, OTHER THAN AS DESCRIBED UNDER "CONTINUING DISCLOSURE" HEREIN. This Official Statement is submitted in connection with the sale of securities referred to herein and may not be reproduced or be used, as a whole or in part, for any other purpose. The Series 2005 A Bonds have not been registered under the Securities Act of 1933, as amended, in reliance upon an exemption contained therein, and have not been registered or qualified under the securities laws of any state. Table of Contents

Page

INTRODUCTION ...... 1 General ...... 1 Authority for Issuance and Purpose and Application of Proceeds ...... 1 Security ...... 1 Bond Insurance ...... 2 References ...... 2 PLAN OF FINANCE ...... 2 DESCRIPTION OF THE SERIES 2005 A BONDS ...... 4 General ...... 4 Optional Redemption ...... 5 Mandatory Redemption ...... 5 Notice ofRedemption ...... 6 Book-Entry-Only Systern ...... 6 Payments Upon Abandomnent of Book-Entry-Only System ...... 6 Transfers and Exchanges Upon Abandomnent of Book-Entry-Only System ...... 6 AMENDMENT OF THE INDENTURE ...... 7 ESTIMATED SOURCES AND USES OF FUNDS ...... 7 DEBT SERVICE REQUIREMENTS ...... 7 SECURITY FOR THE SERIES 2005 A BONDS ...... 8 General ...... 8 Sales Tax Revenues ...... 9 Application of Sales Tax Revenues ...... 11 Bond Reserve Fund ...... 13 Additional Bonds ...... 14 Subordinate Obligations ...... 16 Special Obligations ...... 17 BOND INSURANCE ...... 17 The Series 2005 A Policy ...... 17 The Series 2005 A Bond Insurer...... 18 Regulation ...... 18 Financial Strength Ratings of the Series 2005 A Bond Insurer ...... 19 Table of Contents

Page

The Series 2005 A Bond Insurer Financial Inforrnation ...... 19 Incorporation of Certain Documents by Reference ...... 19 INVESTMENT CONSIDERATIONS ...... 20 Economy of the Three BART Counties and the State ...... 20 Changes in Taxable Items ...... 20 Constitutional Limitations on Appropriations ...... 21 Proposition 218 ...... 21 Further Initiatives ...... 21 No Acceleration Provision ...... 21 Loss of Tax Exemption ...... 21 Sales Tax Litigation in California ...... 21 LEGAL MATTERS ...... 22 TAX MATTERS ...... 23 ABSENCE OF MATERIAL LITIGATION ...... 25 RATINGS ...... 25 CO-FINANCIAL ADVISORS ...... 25 CONTINUING DISCLOSURE ...... 25 UNDERWRITING ...... 26 VERIFICATION OF MATIIEMATICAL ACCURACY ...... 26 FINANCIAL STATEMENTS ...... 26 MISCELLANEOUS ...... 27 APPENDIX A SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT FINANCIAL AND OPERATING INFORMATION ...... A-1

APPENDIX B SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT REPORT ON AUDITS OF FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 ...... B-1

APPENDIX C SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT STATEMENT OF INVESTMENT POLICY ...... C-1

APPENDIX D SUMMARY OF CERTAIN PROVISION OF THE INDENTURE ...... D-1

APPENDIXE TlIE ECONOMY OF TlIE TIIREE BART COUNTIES ...... E-1

APPENDIX F BOOK-ENTRY ONLY SYSTEM ...... F-1

APPENDIX G FORM OF CONTINUING DISCLOSURE AGREEMENT ...... G-1

11 Table of Contents

Page

APPENDIX H PROPOSED FORM OF OPINION OF CO-BOND COUNSEL ...... H-1

APPENDIX I SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY ...... 1-1

111 (Page intentionally left llank.) OFFICIAL STATEMENT

$352, 095, 000 SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT Sales Tax Revenne Bonds, Refnnding Series 2005 A

INTRODUCTION

General

The purpose of this Official Statement, which includes the cover page and appendices hereto, is to set forth certain information in connection with the issuance by the San Francisco Bay Area Rapid Transit District (the "District" or "BART") of $352,095,000 principal amount of San Francisco Bay Area Rapid Transit District Sales Tax Revenue Bonds, Refnnding Series 2005 A (the "Series 2005 A Bonds").

The District was created in 1957 pursuant to the laws of the State of California to provide rapid transit service in the San Francisco Bay area. The District is composed of all of the area in the Counties of Alameda and Contra Costa and the City and County of San Francisco and owns additional property in the County of San Mateo. The District is governed by an elected board of directors consisting of nine members. For additional information concerning the District, see Appendix A - "SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT FINANCIAL AND OPERATING INFORMATION."

Authority for Issuance and Purpose and Application of Proceeds

The Series 2005 A Bonds are to be issued pursuant to the laws of the State of California, including Article 2, Chapter 7, Part 2, Division 10 of the California Public Utilities Code, as amended from time to time, and applicable portions of the Revenue Bond Law of 1941, as amended from time to time (collectively, the "Act") and pursuant to an Indenture, dated as of July 1, 1990, between the District and U.S. Bank National Association, successor by merger to U.S. Bank Trust National Association, formerly known as First Trust of California, National Association, successor to Bank of America National Trust and Savings Association, successor by merger to Security Pacific National Bank, as trustee (the "Trustee"), as supplemented and amended by the First Supplemental Indenture thereto, dated as of August 7, 1990, the Second Supplemental Indenture thereto, dated as of August 29, 1991, the Third Supplemental Indenture thereto, dated as of June 7, 1995, the Fourth Supplemental Indenture thereto, dated as of April 1, 1997, the Fifth Supplemental Indenture thereto, dated as of March 12, 1998, the Sixth Supplemental Indenture thereto, dated as of October 7, 1999, the Seventh Supplemental Indenture thereto, dated as of July 12, 2001 and the Eighth Supplemental Indenture thereto, to be dated the date of issuance of the Series 2005 A Bonds, each between the District and the Trustee. The Indenture, as so supplemented and as further supplemented and amended from time to time, is hereinafter collectively referred to as the "Indenture."

Security

The Series 2005 A Bonds are special obligations of the District, payable from and secured by a pledge of sales tax revenues derived from a seventy-five percent (75%) portion of a transactions and use tax levied by the District in Alameda and Contra Costa Counties and the City and County of San Francisco in an amount equal to one-half of one percent (0.5%) of gross retail receipts, as more fully described herein. See "SECURITY FOR THE SERIES 2005 A BONDS." The Series 2005 A Bonds are issued on a parity with the San Francisco Bay Area Rapid Transit District Sales Tax Revenue Refunding Bonds, Series 1990 (the "Series 1990 Bonds") issued in the principal amount of $158,478,429.95, $28,775,000 of which will be Outstanding following the issuance of the Series 2005 A Bonds, the San Francisco Bay Area Rapid Transit District Sales Tax Revenue Bonds, Series 1998 (the "Series 1998 Bonds") issued in the principal amount of $348,510,000, $171,765,000 of which will be Outstanding following the issuance of the Series 2005 A Bonds, and the San Francisco Bay Area Rapid Transit District Sales Tax Revenue Bonds, Series 200 I (the "Series 200 I Bonds") issued in the principal amount of $168,650,000, $146,325,000 of which will be Outstanding following the issuance of the Series 2005 A Bonds. The Series 1990 Bonds, the Series 1998 Bonds, the Series 200 I Bonds and the Series 2005 A Bonds, together with any future series of parity Bonds, are hereinafter collectively referred to as the "Bonds."

Bond Insurance

Payment of principal of and interest on the Series 2005 A Bonds maturing on or after July I, 2008 (the "Insured Series 2005 A Bonds") when due will be insured by a financial guaranty insurance policy to be issued by MBIA Insurance Corporation (the "Series 2005 A Bond Insurer") simultaneously with the delivery of the Insured Series 2005 A Bonds. See "BOND INSURANCE" herein.

References

This Introduction is not a summary of this Official Statement. It is only a brief description of and guide to the entire contents of this Official Statement, including the cover page and appendices hereto, and the documents summarized or described herein, a full review of which should be made by potential investors. All descriptions and summaries of various documents hereinafter set forth do not purport to be comprehensive or definitive, and reference is made to each document for complete details of all terms and conditions. All statements herein are qualified in their entirety by reference to each document. The offering of the Series 2005 A Bonds is made only by means of this entire Official Statement and is subject in all respects to the information contained herein. All capitalized terms used and not otherwise defined herein shall have the meanings assigned to such terms in "APPENDIX D - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE- Definitions" or, if not defined therein, in the Indenture.

PLAN OF FINANCE

The District intends to apply the proceeds of the Series 2005 A Bonds to refund $349,925,000 aggregate principal amount of the Bonds currently outstanding to achieve cash flow savings and to pay costs of issuance of the Series 2005 A Bonds. The Bonds being refunded are listed on pages 3 and 4. The resolution authorizing the Series 2005 A Bonds authorizes refunding Bonds such that such refunding shall provide present value debt service savings in an amount not less than 3% of the principal amount of the Bonds to be refunded. See "ESTIMATED SOURCES AND USES OF FUNDS" and "VERIFICATION OF MATHEMATICAL ACCURACY."

The moneys required to refund the Bonds to be refunded will be derived from the net proceeds of the Series 2005 A Bonds. Pursuant to an Escrow Agreement, dated as of September I, 2005, to be entered into between the District and the U.S. Bank National Association, as trustee and escrow agent (the "Escrow Agent"), such moneys will be deposited in an escrow fund (the "Escrow Fund") and applied to purchase direct obligations of the United States of America (the "Goverrunent Securities"). The Goverrunent Securities will be purchased and held by the Trustee and Escrow Agent in an amount sufficient (i) to redeem the San Francisco Bay Area Rapid Transit District Sales Tax Revenue Bonds, Series 1995 (the "Series 1995 Bonds") on October 11, 2005 at a redemption price equal to the principal amount of the Series 1995 Bonds to be refunded plus a redemption premium of I% of such principal amount, plus interest thereon to the redemption date, (ii) to pay the principal and interest with respect to the Series 1998 Bonds to be refunded to and including July I, 2008, ( iii) to redeem the Series 1998 Bonds

2 to be redeemed on July I, 2008 at a redemption price equal to the principal amount of the Series 1998 Bonds to be redeemed plus a redemption premium of I% of such principal amount, (iv) to pay the principal and interest with respect to the San Francisco Bay Area Rapid Transit District Sales Tax Revenue Bonds, Series 1999 (the "Series 1999 Bonds") to be refunded to and including July I, 2009, (v) to redeem the Series 1999 Bonds to be redeemed on July I, 2009 at a redemption price equal to the principal amount of the Series 1999 Bonds to be redeemed plus a redemption premium of I% of such principal amount, (vi) to pay the interest with respect to the Series 200 I Bonds to be refunded to and including July I, 2011, and (vii) to redeem the Series 200 I Bonds to be refunded on July I, 2011 at a redemption price equal to the principal amount of the Series 200 I Bonds to be refunded. See "VERIFICATION OF MATHEMATICAL ACCURACY."

The Bonds that the District intends to refund are set forth below.

San Francisco Bay Area Rapid Transit District Sales Tax Revenue Bonds, Series 1995 Redemption Date: October 11, 2005 Maturity Date Q.tilyJ.l Interest Rate Principal Amount 2006 5.250% $ 2,435,000 2007 5.350 2,555,000 2008 5.450 2,685,000 2009 5.550 2,830,000 2010 5.650 2,980,000 2011 5.700 1,430,000 2015 5.500 6,890,000 2020 5.500 23 470 000 Total (Series 1995) $45,275,000

San Francisco Bay Area Rapid Transit District Sales Tax Revenue Bonds, Series 1998 Red em pt ion Date: July 1, 2008 Maturity Date Q.tilyJ.l Interest Rate Principal Amount 2006 4.125% $ 6,000,000 2007 5.500 9,875,000 2008 4.300 10,510,000 2009 5.500 11,060,000 2010 5.250 2,895,000 2011 5.250 5,930,000 2012 5.250 6,545,000 2013 5.250 3,410,000 2014 5.250 3,585,000 2015 5.250 3,775,000 2016 5.250 6,180,000 2017 5.250 6,500,000 2018 5.250 6,845,000 2028 5.000 72 540 000 Total (Series 1998) $155,650,000

3 San Francisco Bay Area Rapid Transit District Sales Tax Revenne Bonds, Series 1999 Red em pt ion Date: Jnly 1, 2009 Maturity Date Q_tily_J} Interest Rate Princi2al Amount 2006 4.500% $ 2,025,000 2007 4.600 2,115,000 2008 4.700 2,215,000 2009 4.800 2,315,000 2010 4.900 2,425,000 2011 5.000 2,545,000 2012 5.100 2,670,000 2013 5.200 2,810,000 2014 5.250 2,955,000 2015 5.250 3,110,000 2016 5.250 3,275,000 2017 5.250 3,445,000 2018 5.250 3,625,000 2019 5.250 3,815,000 2026 5.500 33,210,000 2029 5.500 18,515,000 2034 5.500 38 290 000 Total (Series 1999) $129,360,000

San Francisco Bay Area Rapid Transit District Sales Tax Revenne Bonds, Series 2001 Redemption Date: Jnly 1, 2011 Maturity Date Q_tily_J} Interest Rate Princi2al Amount 2013 5.250% $ 3,990,000 2014 5.250 4,430,000 2015 5.250 5,700,000 2016 5.250 1,635,000 2017 5.250 2,070,000 2018 5.250 1 815 000 Total (Series 2001): $ 19,640,000

Total (Series 1995, 1998, 1999 and 2001): $349,925,000

DESCRIPTION OF THE SERIES 2005 A BONDS

General

The Series 2005 A Bonds will be dated as of their date of initial delivery and mature at the times and in the principal amounts as set forth on the cover page of the Official Statement. Interest on the Series 2005 A Bonds shall be payable on January 1 and July 1 of each year, commencing January 1, 2006. Interest on the Series 2005 A Bonds shall be computed on the basis of a 360-day year of twelve 30-day months.

The Series 2005 A Bonds will be delivered in fully registered form only and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company, New York, New

4 York ("DTC"). DTC will act as securities depository for the Series 2005 A Bonds. Ownership interests in the Series 2005 A Bonds may be purchased by or through a DTC Participant (as described below) in book-entry form only in denominations of $5,000 or any integral multiple thereof. See "APPENDIX F - BOOK-ENTRY-ONLY SYSTEM." Optional Redemption The Series 2005 A Bonds maturing on or before July I, 2015 are not subject to redemption prior to their stated maturities. The Series 2005 A Bonds maturing on or after July I, 2016 will be subject to redemption prior to their respective stated maturities, at the option of the District, from any source of available funds, as a whole or in part, on any date on or after July I, 2015, at the principal amount of Series 2005 A Bonds called for redemption plus interest accrued thereon to the date fixed for redemption without premium.

Mandatory Redemption The Series 2005 A Bonds which are Term Bonds maturing on July I, 2030, will also be subject to redemption in part, by lot, from Mandatory Sinking Account Payments required by the Indenture on each July I on or after July I, 2027, at the principal amount of the Series 2005 A Bonds to be redeemed plus accrued interest, if any, to the redemption date. Such Mandatory Sinking Account Payments will be sufficient to redeem ( or pay at maturity) the following principal amounts of such Series 2005 A Bonds on the dates set forth below: Sinking Account Payment Date Sinking Account (July 1) Payment

2027 $21,270,000 2028 22,335,000 2029 6,700,000 2030* 5,380,000

'Final Maturity.

The Series 2005 A Bonds maturing on July I, 2034, will also be subject to redemption, in part, by lot, from Mandatory Sinking Account Payments required by the Indenture on each July I on or after July I, 2031, at the principal amount of the Series 2005 A Bonds to be redeemed plus accrued interest, if any, to the redemption date. Such Mandatory Sinking Account Payments will be sufficient to redeem ( or pay at maturity) the following principal amounts of such Series 2005 A Bonds on the dates set forth below:

Sinking Account Payment Date Sinking Account (July 1) Payment

2031 $7,375,000 2032 7,740,000 2033 8,130,000 2034* 8,540,000

'Final Maturity.

5 Pursuant to the Indenture, money in the Sinking Accounts may be used to purchase Series 2005 A Bonds which are Term Bonds maturing on July I, 2030 and on July I, 2034, respectively, in lieu of mandatory redemption.

Notice of Redemption

Notice of any redemption of Series 2005 A Bonds will be mailed by the Trustee by first class mail to the registered owners of any Series 2005 A Bonds designated for redemption at least 30 but not more than 60 days prior to the redemption date (but failure to receive any such notice or any defect therein shall not affect the sufficiency of the redemption proceedings).

Book-Entry-Only System

As noted above, DTC will act as securities depository for the Series 2005 A Bonds. See "APPENDIX F -BOOK-ENTRY ONLY SYSTEM."

Payments of interest on, principal of and premium, if any, on the Series 2005 A Bonds will be made to DTC or its nominee, Cede & Co., as registered owner of the Series 2005 A Bonds. Each such payment to DTC or its nominee will be valid and effective to fully discharge all liability of the District or the Trustee with respect to the principal, redemption price of or interest on the Series 2005 A Bonds to the extent of the sum or sums so paid.

The District and the Trustee cannot and do not give any assurances that DTC Participants or DTC Indirect Participants will distribute to the Beneficial Owners (i) payments of interest and principal with respect to the Series 2005 A Bonds, (ii) confirmation of ownership interests in the Series 2005 A Bonds, or (iii) redemption or other notices sent to DTC or Cede & Co., its nominee, as Owner of the Series 2005 A Bonds, or that they will do so on a timely basis.

Payments Upon Abandonment of Book-Entry-Only System In the event that the book-entry-only system is no longer used with respect to the Series 2005 A Bonds, payment of interest on the Series 2005 A Bonds will be made by check mailed by first class mail on each interest payment date to the Owners thereof as of the close of business on the fifteenth (15th) day of the calendar month immediately preceding such interest payment date; provided, however, that Owners of at least $1,000,000 aggregate principal amount of Series 2005 A Bonds may, at any time prior to the fifteenth day of the calendar month immediately preceding such interest payment date, give the Trustee written instructions for payment of such interest on each succeeding interest payment date by wire transfer. Principal of, and premium, if any, on the Series 2005 A Bonds will be payable at the corporate trust office of the Trustee designated for such purpose. The Series 2005 A Bonds will be in the form of fully registered Bonds and will be issued in denominations of $5 ,000 or any integral multiple thereof. Transfers and Exchanges Upon Abandonment of Book-Entry-Only System The book-entry system for registration of the ownership of the Series 2005 A Bonds in book entry form may be discontinued at any time if: (I) after notice to the District and the Trustee, DTC determines to resign as securities depository for the Series 2005 A Bonds; or (2) after notice to DTC and the Trustee, the District determines that a continuation of the system of book-entry transfers through DTC ( or through a successor securities depository) is not in the best interests of the District. In each of such events ( unless, in the case described in clause (I) above, the District appoints a successor securities depository), the Series 2005 A Bonds shall be delivered in such denominations and registered in the names of such persons as are requested in a certificate of the District, but without any liability on the part of the District or the Trustee for the accuracy of such designation. Whenever DTC requests the District and the Trustee to do so, the District and the Trustee shall cooperate with DTC in taking appropriate

6 action after reasonable notice to arrange for another securities depository to maintain custody of or to print bonds evidencing the Series 2005 A Bonds. Thereafter, all Series 2005 A Bonds are transferable or exchangeable as described in the Indenture. AMENDMENT OF THE INDENTURE

Pursuant to its provisions, the Indenture may be amended with the written consent of the Owners of a majority in aggregate amount of Bond Obligations of the Bonds then Outstanding. Upon their issuance, the Series 2005 A Bonds will constitute a majority in aggregate amount of Bond Obligations of the Bonds then Outstanding. Since the Series 2005 A Bonds constitute a majority in aggregate amount of Bond Obligations of the Bonds then Outstanding, the defmitions of "Interest Rate Swap Agreement" and Maximum Annual Debt Service" will be amended as set forth in the Eighth Supplemental Indenture. See "SECURITY FOR THE SERIES 2005 A BONDS - Additional Bonds" herein and "APPENDIX D - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE - Defmitions" attached hereto. As sole owners of the Series 2005 A Bonds prior to the resale of the Series 2005 A Bonds to the public as contemplated by the Bond Purchase Agreement, the Underwriters will consent to the amendments to the Indenture referred to above. Such amendments will take effect on the date of issuance of the Series 2005 A Bonds.

ESTIMATED SOURCES AND USES OF FUNDS

Set forth below are the estimated sources and uses of funds:

Sources of Funds: $352,095,000.00 Principal Amount of Bonds 17 151199.60 Plus: Net Original Issue Premium

Total Sources: $369,246, 199.60

Uses of Funds: Deposit to Escrow Fund $366,375,263.26 Costs oflssuance

Total Uses: $369,246, 199.60

(1) Includes underwriters' discount, rating agency fees, trustee fees, trustee counsel fees, printing costs, bond insurance premium, Co-Bond Counsel and Co-Financial Advisor fees and expenses and other miscellaneous expenses.

DEBT SERVICE REQUIREMENTS

The debt service requirements for the Series 1990 Bonds, the Series 1998 Bonds and the Series 200 I Bonds, which will remain Outstanding as of the date of issuance of the Series 2005 A Bonds, and the Series 2005 A Bonds are shown in the following table.

7 Debt Service Requirements

Series 2005 A Bonds Total Calendar Outstanding Bond Debt 2 Year Bonds(!), (z) Principal Interest Total(') Service( ) 2006 $ 26,323,445 $ 12,655,000 $ 13,390,501 $ 26,045,501 $ 52,368,946 2007 22,830,601 13,650,000 16,016,881 29,666,881 52,497,483 2008 22,880,901 14,295,000 15,458,281 29,753,281 52,634, 183 2009 22,937,416 14,965,000 14,884,131 29,849,131 52,786,548 2010 31,886,141 6,840,000 14,227,031 21,067,031 52,953, 173 2011 33,599,604 8,225,000 14,004,731 22,229,731 55,829,335 2012 25,528,954 9,010,000 13,593,481 22,603,481 48,132,435 2013 19,605,673 12,630,000 13,241,906 25,871,906 45,477,579 2014 19,388,098 13,445,000 12,650,900 26,095,900 45,483,998 2015 18,352,745 15,130,000 12,005,838 27,135,838 45,488,583 2016 18,281,498 15,920,000 11,298,138 27,218,138 45,499,635 2017 17,939,993 17,020,000 10,543,425 27,563,425 45,503,418 2018 18,309,815 17,455,000 9,744,425 27,199,425 45,509,240 2019 27,421,425 9,215,000 8,871,675 18,086,675 45,508,100 2020 27,434,525 9,675,000 8,410,925 18,085,925 45,520,450 2021 32,930,975 4,650,000 7,946,938 12,596,938 45,527,913 2022 32,938,563 4,875,000 7,714,438 12,589,438 45,528,000 2023 32,948,763 5,120,000 7,470,688 12,590,688 45,539,450 2024 19,823,938 18,510,000 7,214,688 25,724,688 45,548,625 2025 19,826,938 19,430,000 6,289, 188 25,719,188 45,546,125 2026 19,837,688 20,260,000 5,460,750 25,720,750 45,558,438 2027 19,849,188 21,270,000 4,447,750 25,717,750 45,566,938 2028 19,859,688 22,335,000 3,384,250 25,719,250 45,578,938 2029 10,457,438 6,700,000 2,267,500 8,967,500 19,424,938 2030 10,461,188 7,030,000 1,932,500 8,962,500 19,423,688 2031 10,472,188 7,375,000 1,589,250 8,964,250 19,436,438 2032 10,489,188 7,740,000 1,220,500 8,960,500 19,449,688 2033 10,500,731 8,130,000 833,500 8,963,500 19,464,231 2034 10,510,238 8,540,000 427,000 8,967,000 19,477,238 2035 10,526,681 10,526,681 2036 10,533,525 10,533,525 TOTALC2l $634,687,745 $352,095,000 $246,541,207 $598,636,207 $1,233,323,952

(1) Outstanding Bonds as of the date of issuance of the Series 2005 A Bonds will include the Series 1990 Bonds, the Series 1998 Bonds and the Series 2001 Bonds. (') Totals may not add due to rounding.

SECURITY FOR THE SERIES 2005 A BONDS

General

The Series 2005 A Bonds are special obligations of the District payable from and secured by a pledge of sales tax revenues, comprised of seventy-five percent (75%) of the amounts derived from a one half of one percent (0,5%) transactions and use tax (the "Sales Tax" or the "District Sales Tax") imposed within Alameda and Contra Costa Counties and the City and County of San Francisco ( collectively, the "Three BART Counties") pursuant to Section 29140 of the California Public Utilities Code, after deduction by the California State Board of Equalization (the "State Board of Equalization") of its fee for administering the Sales Tax (such sales tax revenues being hereinafter referred to as the "Sales Tax Revenues"), See "Sales Tax Revenues" below,

8 Only Sales Tax Revenues are pledged by the District for the payment of principal of, redemption premiums, if any, and interest on the Series 2005 A Bonds and no other revenues of the District are pledged to repayment of the Bonds, including the Series 2005 A Bonds. The payment of principal of, redemption premiums, if any, and interest on the Series 2005 A Bonds is on a parity with the payment of principal of, redemption premiums, if any, and interest on all Bonds Outstanding under the Indenture and any Additional Bonds hereafter issued by the District.

The District has covenanted in the Indenture not to create any pledge, lien or charge on Sales Tax Revenues having priority over the lien of the Bonds. The District has also covenanted in the Indenture not to create any pledge, lien or charge on Sales Tax Revenues on a parity with the lien of the Bonds except as described under "SECURITY FOR THE SERIES 2005 A BONDS - Additional Bonds."

Sales Tax Revenues

The District is authorized by Section 29140 of the California Public Utilities Code to levy, within the Three BART Counties, the Sales Tax, which is a transactions tax of one-half of one percent (0.5%) of the gross receipts of retailers from the sale of tangible personal property sold at retail in the Three BART Counties and a use tax at the same rate upon the storage, use or other consumption in the Three BART Counties of such property purchased from any retailer for storage, use or other consumption in the Three BART Counties, subject to certain limited exceptions.

Collection of the Sales Tax is administered by the State Board of Equalization, which charges a fee for administration which is based on the costs of administering collection and which, by statute, may not exceed 1.5% of the collections. For the Fiscal Year ended June 30, 2005, the State Board of Equalization fee was $2,023,000.

After deducting its fee, the State Board of Equalization is required by statute to allocate seventy five percent (75%) of the Sales Tax receipts to the District. The remaining twenty-five percent (25%) of the Sales Tax collected by the State Board of Equalization is allocated by the Metropolitan Transportation Commission ("MTC"), on the basis of regional priorities established by MTC, among the District, the City and County of San Francisco for the San Francisco Municipal Railway System, which includes buses, street cars, cable cars and electric trolley buses, and the Alameda-Contra Costa Transit District ("AC Transit") for transit service.

In addition to the Sales Tax and other sales taxes levied at the county level or the city and county level, the State of California (the "State") also imposes a 7.25% sales tax. The breakdown of the State's basic 7.25% rate imposed on a statewide basis effective July I, 2004 is as set forth below.

• 5.00% represents the State general fund tax rate (increased from 4. 75% effective January I, 2002, due to the sales tax trigger described below).

• 1.0% is imposed under the State's uniform local sales and use tax law (decreased from 1.25% before July I, 2004), with 0.75% dedicated to cities and counties and 0.25% dedicated to county transit systems.

• 0.5% is dedicated to local governments for health and welfare program realigrunent.

• 0.5% is dedicated to local governments for public safety employees.

• 0.25% is deposited into the State Fiscal Recovery Fund to repay the State's Economic Recovery Bonds (as described below).

9 Legislation in July 1991 raised the State sales tax rate by 1.25% to its current level. Of this amount, 0.25% was added to the general fund tax rate, and the balance was dedicated to cities and counties. Of the amount dedicated to cities and counties, 0.5% was a permanent addition to counties, but such amount is earmarked for trust funds to pay for the administration of health and welfare programs transferred to counties. Another 0.5% of the State general fund tax rate that was scheduled to terminate after June 30, 1993, was extended until December 31, 1993, and allocated to local agencies for public safety programs. Subsequently, in a special election on November 2, 1993, voters approved a constitutional amendment to permanently extend this 0.5% State sales tax for local public safety programs.

Pursuant to State law, 0.25% of the State general fund tax rate may be suspended upon certification by the State's Director of Finance by November I in any year that: (i) the balance in the budget reserve (excluding revenues derived from the 0.25% sales and use tax rate) is expected to exceed 3% of general fund revenues in that fiscal year; and (ii) actual revenues for the period May I through September 30 equal or exceed the State's May revision to its January proposed budget for that year. The 0.25% rate can be reinstated if the Director of Finance subsequently determines that the reserve will not exceed 4% of general fund revenues. Pursuant to this law, a 0.25% cut in the State sales tax occurred on January I, 200 I but was reinstated as of January I, 2002.

The California Economic Recovery Bond Act ("Proposition 57") was approved by voters at a statewide primary election on March 2, 2004. Proposition 57 authorizes the issuance ofup to $15 billion in economic recovery bonds ("Economic Recovery Bonds") to finance the negative State General Fund reserve balance as of June 30, 2004, and other State General Fund obligations undertaken prior to June 30, 2004. Repayment of the economic recovery bonds is secured by a pledge of revenues from a one quarter cent increase in the State's sales and use tax (through a one-quarter cent reduction in sales and use tax dedicated to cities and counties) starting July I, 2004, as shown above. To date, the State has issued approximately $10.9 billion aggregate principal amount of such bonds.

In addition to the sales tax levied statewide, the Three BART Counties have local transit authorities which each collect a 0.5% sales tax. Currently, the total sales tax levied in each of the Three BART Counties is as follows: City and County of San Francisco, 8.5% (including a 0.50% sales tax for school services); County of Alameda, 8.75% (including a 0.50% essential health care services transactions and use tax); County of Contra Costa, 8.25% (8. 75% for the City of Richmond).

In general, the statewide sales tax applies to the gross receipts of retailers from the sale of tangible personal property and the statewide use tax is imposed on the storage, use or other consumption in the State of property purchased from a retailer for such storage, use or other consumption. The statewide use tax does not apply to cases where the sale of the property is subject to the statewide sales tax, therefore the statewide use tax is generally applied to purchases made outside of the State for use within the State. The District Sales Tax is imposed upon the same transactions and items subject to the statewide sales tax and the statewide use tax (hereinafter collectively referred to as the "State Sales Tax"), with the same exceptions.

Many categories of transactions are exempt from the State Sales Tax and from the District Sales Tax. The most important are: sales of food products for home consumption; prescription medicine; edible livestock and their feed; seed and fertilizer used in raising food for human consumption; and gas, electricity and water when delivered to consumers through mains, lines, and pipes. In addition, "Occasional Sales" (i.e., sales of property not held or used by a seller in the course of activities for which he or she is required to hold a seller's permit) are generally exempt from the State Sales Tax and from the District Sales Tax; however, the "Occasional Sales" exemption does not apply to the sale of an entire business and other sales of machinery and equipment used in a business. Sales of property to be used

10 outside the District which are shipped to a point outside the District, pursuant to the contract of sale, by delivery to such point by the retailer, or by delivery by the retailer to a carrier for shipment to a consignee at such point, are also exempt from the State Sales Tax and from the District Sales Tax.

Action by the State Legislature or by voter initiative could change the transactions and items upon which the State Sales Tax and the District Sales Tax are imposed. Such changes could have either an adverse or beneficial impact on the District Sales Tax Revenues. Senate Bill 671 which was adopted by the State Legislature in 1993 (1993 Reg. Session, Chapter 881), exempts from the State Sales Tax, but not the District Sales Tax, manufacturing equipment purchases of start-up firms.

The following table shows the Sales Tax Revenues received by the District for Fiscal Years ended June 30, 1995 through 2005.

SALES TAX REVENUES

Fiscal Year Percentage Ended June 30 Sales Tax Revenues0 > Change

1995 $ 115,186,000 4.87% 1996 126,077,000 9.46 1997 134,984,000 7.06 1998 144,675,000 7.18 1999 151,806,000 4.93 2000 170,911,000 12.59 2001 191,648,000 12.13 2002 172, 77 4,000 (9.85) 2003 167,441,000 (3.10) 2004 170,566,000 1.90 2 2005 178,392,000( ) 4.60

Source: District. (1) Sales Tax Revenues have been rounded to the nearest thousand. (2) Unaudited.

The District's imposition of the Sales Tax and the allocation of the Sales Tax receipts pursuant to Section 29140 of the California Public Utilities Code are subject to legislative review and amendment. Any repeal or amendment of the Sales Tax provisions of the California Public Utilities Code by the State Legislature would be an Event of Default under the Indenture unless the District determined that such repeal or amendment did not materially and adversely affect the rights of the holders of Bonds. See "APPENDIX D - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE -Events of Default and Remedies."

The District levies the Sales Tax pursuant to District Ordinance No. I, as amended. The District has covenanted in the Indenture that, so long as any Bonds are outstanding, it will not amend, modify or alter such Ordinance in any manner which would reduce the amount of or timing of receipt of Sales Tax Revenues and that it will continue to levy and collect the Sales Tax to the full amount permitted by law.

Application of Sales Tax Revenues

Pursuant to an agreement between the District and the State Board of Equalization, dated August 5, 1982, as amended, the State Board of Equalization remits all Sales Tax Revenues directly to the Trustee on a monthly basis. The Indenture provides that Sales Tax Revenues remitted to the Trustee will be deposited in the Revenue Fund and will be applied by the Trustee to the following funds established by

11 the Indenture in the following order of priority; provided that on a parity with such deposits the Trustee may set aside or transfer amounts with respect to outstanding Parity Debt (which shall be proportionate in the event such amounts are insufficient to provide for all deposits required as of any date to be made with respect to the Bonds and such Parity Debt):

Expense Account. The Trustee shall set aside in the Expense Account amounts payable by the District to the State Board of Equalization for costs and for its services in connection with the collection of the transactions and use taxes (in excess of costs previously deducted by the State Board of Equalization) and all Trustee's and paying agent's fees.

Interest Fund. The Trustee shall set aside in the Interest Fund as soon as practicable in each month an amount equal to one-sixth of the aggregate half-yearly amount of interest becoming due and payable on the Outstanding Current Interest Bonds during the next ensuing six months, until the requisite half-yearly amount of interest on all such Outstanding Current Interest Bonds is on deposit in the Interest Fund; provided that from the date of delivery of the Current Interest Bonds until the first interest payment date with respect to the Current Interest Bonds the amounts so paid shall be sufficient on a monthly pro rata basis to pay the aggregate amount of interest becoming due and payable on said interest payment date. No deposit need be made into the Interest Fund if the amount contained therein is at least equal to the interest to become due and payable on the interest payment dates falling within the next six months upon all the Bonds then Outstanding and on July I of each year any excess amounts in the Interest Fund not needed to pay interest on such date shall be transferred to the District.

Principal Fund; Sinking Accounts. The Trustee shall deposit in the Principal Fund as soon as practicable in each month an amount equal to at least one-twelfth of the aggregate yearly amount of Bond Obligation becoming due and payable on the Outstanding Serial Bonds having annual maturity dates within the next twelve months, plus one-twelfth of the aggregate of the Mandatory Sinking Account Payments to be paid during the next twelve-month period into the respective Sinking Accounts for the Term Bonds of all Series for which a Sinking Account shall have been created and for which annual mandatory redemption is required from such Sinking Account (See "DESCRIPTION OF THE SERIES 2005 A BONDS - Mandatory Redemption"); provided that if the District certifies to the Trustee that any principal payments are expected to be refunded on or prior to their respective due dates or paid from amounts on deposit in the Bond Reserve Fund that would be in excess of the Bond Reserve Requirement upon such payment, no amounts need be set aside towards such principal to be so refunded or paid.

No deposit need be made into the Principal Fund so long as there shall be in such fund (i) moneys sufficient to pay the Bond Obligations of all Serial Bonds then Outstanding and maturing by their terms within the next twelve months plus (ii) the aggregate of all Mandatory Sinking Account Payments required to be made in such twelve-month period, but less any amounts deposited into the Principal Fund during such twelve month period and theretofore paid from the Principal Fund to redeem or purchase Term Bonds during such twelve-month period.

Bond Reserve Fund. The Trustee shall deposit as soon as possible in each month in the Bond Reserve Fund, upon the occurrence of any deficiency therein, the aggregate amount of each unreplenished prior withdrawal from the Bond Reserve Fund and the full amount of any deficiency due to any required valuations of the investments in the Bond Reserve Fund until the balance in the Bond Reserve Fund is at least equal to the Bond Reserve Requirement. In addition, the Trustee shall, on a pro rata basis with such deposits, reimburse to the provider of a letter of credit, insurance policy or surety bond satisfying a portion of the Bond Reserve Requirement the amount of any unreplenished prior withdrawal on such letter of credit, insurance policy or surety bond.

12 In addition to reimbursing the provider of an insurance policy or surety bond ( a "Reserve Policy") or letter of credit satisfying the Bond Reserve Requirement the amount of any unreplenished prior withdrawal on such Reserve Policy or letter of credit, the Trustee shall, on a subordinate basis with such deposits, pay to such provider any reasonable expenses (together with interest thereon), and interest on the amount of any unreplenished prior withdrawal, calculated as specified in the agreement relating to such Reserve Policy or letter of credit. Repayment of such expenses and accrued interest ( collectively, "Policy Costs") shall be made from and to the extent of available Sales Tax Revenues after the replenishment of the Bond Reserve Fund and such withdrawals. Any Sales Tax Revenues remaining in the Revenue Fund after the foregoing transfers shall be transferred on the same Business Day to the District. The District may use and apply the Sales Tax Revenues when received by it for any lawful purpose of the District.

If on any principal payment date, interest payment date or mandatory redemption date the amounts on deposit in the Interest Fund and Principal Fund, including the Sinking Accounts therein, with respect to the payments to be made on such date are insufficient to make such payments, the Trustee shall immediately notify the District, by telephone confirmed in writing, of such deficiency and direct that the District transfer the amount of such deficiency to the Trustee on such payment date. The District shall transfer to the Trustee from any Sales Tax Revenues in its possession the amount of such deficiency on or prior to the principal, interest or mandatory redemption date referenced in such notice.

Bond Reserve Fund

General. Upon issuance of any additional series of Bonds, the Indenture requires the Trustee to deposit into the Bond Reserve Fund such amount as shall be necessary to increase the amount on deposit therein so that such amount will be equal to the Bond Reserve Requirement for the Bonds. The Bond Reserve Requirement is defined in the Indenture to mean as of any date of calculation, an amount equal to the lesser of (i) Maximum Annual Debt Service on all Bonds Outstanding; or (ii) 125% of average Annual Debt Service on all Bonds Outstanding; provided that with respect to a Series of Bonds consisting of Variable Rate Indebtedness, for which an Interest Rate Swap Agreement is not in place, the interest rate thereon for purposes of calculating the Bond Reserve Requirement, shall be assumed to be equal to the highest interest rate published in The Bond Buyer "25 Bond Revenue Bond Index" most recently published preceding the date of sale of such Series of Bonds; and provided further that with respect to the issuance of a Series of Bonds if the Bond Reserve Fund would have to be increased by an amount greater than ten percent ( 10%) of the stated principal amount of such Series of Bonds ( or, if the Series has more than a de minimis amount of original issue discount or premium, of the issue price of such Series of Bonds) then the Bond Reserve Requirement shall be such lesser amount as is determined by a deposit of such ten percent (10%). See "AMENDMENT TO THE INDENTURE" above and "-Additional Bonds" below for a discussion of the amendment to the defmition of Maximum Annual Debt Service under the Indenture.

Reserve Fund Instruments. The Indenture authorizes the District to obtain a letter of credit or a Reserve Policy in place of funding all or a portion of the Bond Reserve Fund. As of the date of issuance of the Series 2005 A Bonds, there will be on deposit in the Bond Reserve Fund a surety bond issued by Ambac Assurance Corporation ("Ambac") in the principal amount of $41,571,225.21 (the "Ambac Reserve Policy") issued in order to satisfy the Bond Reserve Requirement for the Series 1990 Bonds and the Series 1998 Bonds, which is available to pay debt service on any Bonds, and a separate surety bond issued by Financial Guaranty Insurance Company, doing business in California as FGIC Insurance Company ("FGIC") in the principal amount of $8, 789,837.50 (the "FGIC Reserve Policy") issued in order to satisfy the Bond Reserve Requirement for the Series 1999 Bonds, which is available to pay debt service on any Bonds. The Ambac Reserve Policy reduces to $26, 163,250.00 after July I, 2011 and expires on July I, 2028 and the FGIC Reserve Policy expires on July I, 2034. The reimbursement obligations of the

13 District to Ambac with respect to the Ambac Reserve Policy and to FGIC with respect to the FGIC Reserve Policy are subordinate to the District's obligations with respect to the Bonds.

In connection with the issuance of the Series 2001 Bonds, $10,282,603.14 was deposited in the 200 I Reserve Account of the Bond Reserve Fund. Currently, the majority of such amount is invested pursuant to a forward purchase and sale agreement with Bear Steams Capital Markets Inc. The forward purchase and sale agreement provides for the semiannual purchase by the Trustee of U.S. Treasury obligations or obligations of the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Banks, the Farmers Home Administration or the Federal Home Loan Mortgage Corporation for deposit in the Bond Reserve Fund at prices such that the invested funds will earn a fixed interest rate. In addition, approximately $1,582,000 of such deposit is invested in money market securities.

Bond Reserve Requirement. The Bond Reserve Requirement following issuance of the Series 2005 A Bonds will be $49,730,804.51, which is the equal to the lesser of (i) Maximum Annual Debt Service on all Bonds Outstanding or (ii) 125% of average Annual Debt Service on all Bonds Outstanding. No deposit to the Bond Reserve Fund is required in connection with the issuance of the Series 2005 A Bonds.

Additional Bonds

Additional Bonds, including refunding Bonds, may be issued on a parity with the Bonds provided that, among other things: (I) Sales Tax Revenues and Associated Sales Tax Revenues relating to any recently annexed jurisdiction for any period of 12 consecutive months during the immediately preceding 18 months are at least equal to I. 5 times the Maximum Annual Debt Service for all Series of Bonds and Parity Debt then outstanding, including the Bonds to be issued; (2) Sales Tax Revenues estimated by the District for the Fiscal Year in which the additional Bonds are to be issued and for each of the next succeeding four Fiscal Years will equal at least 1.5 times the amount of Annual Debt Service on all Series of Bonds and Parity Debt, including the Bonds to be issued; and (3) Sales Tax Revenues for the Fiscal Year in which the additional Series of Bonds are to be issued under the laws then in existence at the time of the issuance of such additional Series of Bonds shall be at least 1.0 times the amount of the District's obligations with respect to repayment of any withdrawals under a Reserve Policy plus Policy Costs, if any, then due and owing to the Reserve Policy provider providing such Reserve Policy.

The District may, by Supplemental Indenture, establish one or more Series of Bonds and the District may issue, and the Trustee may authenticate and deliver to the purchasers thereof, Bonds of any Series so established, in such principal amount as shall be determined by the District, but only upon compliance by the District with certain provisions of the Indenture and subject to certain specific conditions precedent to the issuance of any series of Bonds set forth in the Indenture. See "APPENDIX D - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE."

As described above under the caption "AMENDMENT OF THE INDENTURE," it is anticipated that the defmition of Maximum Annual Debt Service and the definition of Interest Rate Swap Agreement will be amended as set forth below, such amendments to take effect on the date of issuance of the Series 2005 A Bonds.

"Interest Rate Swap Agreement" means an interest rate swap agreement relating to a Series of Bonds or portion thereof or Parity Debt in which the party with which the District or the Trustee may contract is limited to: (i) entities the debt securities of which are rated in one of the two highest long-term debt Rating Categories by either Moody's or Standard & Poor's and the debt securities of which are rated not lower than the third highest long-term debt Rating Category by the other rating agency; (ii) entities

14 the obligations of which under the interest rate swap agreement are either guaranteed or insured by an entity the debt securities or insurance policies of which are so rated; or (iii) entities the debt securities of which are rated in the third highest long-term debt Rating Categories by Moody's and Standard & Poor's or whose obligations are guaranteed or insured by an entity so rated and, in either case, the obligations of which under the interest rate swap agreement are continuously and fully secured by Investment Securities described in clauses (i) through (iv) of the definition thereof, which shall have a market value determined, by the party designated in such interest rate swap agreement, at least monthly ( exclusive of accrued interest) at least equal to the termination value, if any, that would be payable by the provider of the interest rate swap agreement under such interest rate swap agreement and which shall be deposited with a custodian acceptable to the District."

"Maximum Annual Debt Service" shall mean the greatest amount of principal and interest becoming due and payable on all Bonds and Parity Debt in the Fiscal Year in which the calculation is made or any subsequent Fiscal Year as set forth in a Certificate of the District; provided, however, that for the purposes of computing Maximum Annual Debt Service:

(a) if the Bonds or Parity Debt is Variable Rate Indebtedness for which an Interest Rate Swap Agreement is not in place, the interest rate on such debt shall be calculated at the greater per annum rate (not to exceed 12%) of: (i) the average of the BMA Index for the ten years preceding the date of calculation, and (ii) the highest interest rate listed in The Bond Buyer "25 Bond Revenue Bond Index" published one month preceding the date of sale of such Series of Bonds or Parity Debt.

(b) principal and interest payments on Bonds and Parity Debt shall be excluded to the extent such payments are to be paid from amounts on deposit with the Trustee or other fiduciary in escrow specifically therefor and to the extent that such interest payments are to be paid from the proceeds of Bonds or Parity Debt held by the Trustee or other fiduciary as capitalized interest specifically to pay such interest by the Trustee or other fiduciary;

(c) in determining the principal amount due in each Fiscal Year, payment shall (unless a different subsection of this definition applies for purposes of determining principal maturities or amortization) be assumed to be made in accordance with any amortization schedule established for such debt, including any Mandatory Sinking Account Payments or any scheduled redemption or payment of Bonds on the basis of Accreted Value, and for such purpose, the redemption payment or payment of Accreted Value shall be deemed a principal payment and interest that is compounded and paid as Accreted Value shall be deemed due on the scheduled redemption or payment date of such Capital Appreciation Bond or Combination Bond;

( d) if the Bonds or Parity Debt are debt, the principal of which the District determines ( in a Supplemental Indenture or other document delivered on a date not later than the date of issuance of such Bonds or Parity Debt) that the District intends to pay with moneys which are not Revenues (such as commercial paper, balloon indebtedness or bond anticipation notes), but from future debt obligations of the District, grants received from the State or federal govermnent, or any agency or instrumentality thereof, or any other source of funds of the District, the principal of such Bonds or Parity Debt will be treated as if such principal were due based upon a 30-year level amortization of principal from the date of calculation and the interest on such Bonds or Parity Debt shall be calculated as if such Bonds were Variable Rate Indebtedness;

15 the options or obligations of the Owners of such Bonds to tender the same for purchase or payment prior to their stated maturity or maturities shall be treated as a principal maturity occurring on the first date on which Owners of such Bonds may or are required to tender such Bonds except that any such option or obligation to tender Bonds shall be ignored and not treated as a principal maturity, if (I) such Bonds are rated in one of the two highest long-term Rating Categories by Moody's and by Standard & Poor's or such Bonds are rated in the highest short-term, note or commercial paper Rating Categories by Moody's and by Standard & Poor's and (2) funds for the purchase price of such Bonds have been set aside by the District and pledged to such payment or are to be provided by a letter of credit or standby bond purchase agreement and the obligation of the District with respect to the provider of such letter of credit or standby bond purchase agreement, other than its obligations on such Bonds, shall be subordinated to the obligation of the District on the Bonds or, if not subordinate, shall be incurred ( assuming such immediate tender) under the conditions and meeting the tests for the issuance of Parity Debt set forth in the Indenture, in which latter case, such repayment obligations of the District to the provider of such letter of credit or standby bond purchase agreement shall be included in the computation of the Maximum Annual Debt Service in accordance with the terms of such obligation.

(f) with respect to any Variable Rate Indebtedness for which an Interest Rate Swap Agreement is in place, if (i) the interest rate on such Variable Rate Indebtedness, plus (ii) the payments received and made by the District under an Interest Rate Swap Agreement with respect to such variable interest rate, are expected to produce a synthetic fixed rate to be paid by the District ( e.g., an interest rate swap under which the District pays a fixed rate and receives a variable rate that is expected to equal or approximate the rate of interest on such Variable Rate Indebtedness), the Variable Rate Indebtedness shall be treated as bearing such synthetic fixed rate for the duration of the synthetic fixed rate;

(g) if any Bonds or Parity Debt bear a fixed interest rate or the Bonds or Parity Debt proposed to be issued will bear a fixed interest rate and an Interest Rate Swap Agreement is entered into with respect to such Bonds or Parity Debt, if (i) the interest rate on such fixed rate Bonds or Parity Debt, plus (ii) the payments received and made by the District under an Interest Rate Swap Agreement with respect to such fixed rate Bonds or Parity Debt, are expected to produce a synthetic variable rate to be paid by the District ( e.g., an interest rate swap under which the District pays a variable rate and receives a fixed rate that is expected to equal or approximate the rate of interest on such fixed interest rate debt), the fixed interest rate debt, shall be treated as bearing such synthetic variable rate for the duration of the Interest Rate Swap Agreement calculated as if such Bonds or Parity Debt were Variable Rate Indebtedness.

It is currently anticipated that the District will issue an additional Series of Bonds in the approximate amount of $70 million to finance improvements to the Dublin/Pleasanton station prior to the end of Fiscal Year 2005-06. See "APPENDIX A- SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT FINANCIAL AND OPERATING INFORMATION - System Expansion Program - West Dublin/Pleasanton Infill Station."

Subordinate Obligations

No provision of the Indenture limits the ability of the District to issue bonds or other obligations payable from Sales Tax Revenues which are junior and subordinate to the payment of principal, premium, interest and reserve fund requirements of the Bonds and all Parity Debt. See "APPENDIX D - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE - Additional Bonds; Refunding Bonds; Parity Debt; Subordinate Obligations - Subordinate Obligations."

There are currently no outstanding obligations of the District payable from and secured on a subordinate basis with a lien upon Sales Tax Revenues.

16 Special Obligations

The Series 2005 A Bonds are special obligations of the District payable solely from Sales Tax Revenues and no other revenues of the District are pledged to the payment thereof. The Series 2005 A Bonds are not a general obligation of the District, the State or any political subdivision thereof and the District is not obligated to levy any form of taxation, other than the Sales Tax, for the payment of the Series 2005 A Bonds.

BOND INSURANCE

Payment of principal of and interest on the Insured Series 2005 A Bonds when due will be insured by a financial guaranty to be issued by the Series 2005 A Bond Insurer simultaneously with the delivery ofthe Insured Series 2005 A Bonds.

The Series 2005 A Policy

The following information has been furnished by MBIA Insurance Corporation (the "Series 2005 A Bond Insurer") for use in this Official Statement. Reference is made to Appendix I for a specimen of the Series 2005 A Bond Insurer's policy (the "Series 2005 A Policy"). The District makes no representation as to the accuracy or completeness of this information or as to the absence of material adverse changes in this information subsequent to the date hereof.

The Series 2005 A Bond Insurer does not accept any responsibility for the accuracy or completeness of this Official Statement or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of the information regarding the Series 2005 A Policy and the Series 2005 A Bond Insurer set forth under the heading "BOND INSURANCE." Additionally, the Series 2005 A Bond Insurer makes no representation regarding the Insured Series 2005 A Bonds or the advisability of investing in the Insured Series 2005 A Bonds.

The Series 2005 A Policy unconditionally and irrevocably guarantees the full and complete payment required to be made by or on behalf of the District to the Trustee or its successor of an amount equal to (i) the principal of ( either at the stated maturity or by an advancement of maturity pursuant to a mandatory sinking fund payment) and interest on, the Insured Series 2005 A Bonds as such payments shall become due but shall not be so paid ( except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments guaranteed by the Series 2005 A Bond Insurer shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration, unless Series 2005 A Bond Insurer elects in its sole discretion, to pay in whole or in part any principal due by reason of such acceleration); and (ii) the reimbursement of any such payment which is subsequently recovered from any Owner of the Insured Series 2005 A Bonds pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such Owner within the meaning of any applicable bankruptcy law (a "Preference").

The Series 2005 A Policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Insured Series 2005 A Bonds. The Series 2005 A Policy does not, under any circumstance, insure against loss relating to: (i) optional or mandatory redemptions (other than mandatory sinking fund redemptions); (ii) any payments to be made on an accelerated basis; (iii) payments of the purchase price oflnsured Series 2005 A Bonds upon tender by an owner thereof; or (iv) any Preference relating to (i) through (iii) above. The Series 2005 A Policy also does not insure against nonpayment of principal of or interest on the Insured Series 2005 A Bonds resulting from the insolvency,

17 negligence or any other act or omission of the Trustee or any other paying agent for the Insured Series 2005 A Bonds.

Upon receipt of telephonic or telegraphic notice, such notice subsequently confirmed in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by Series 2005 A Bond Insurer from the Trustee or any owner of an Insured Series 2005 A Bond the payment of an insured amount for which is then due, that such required payment has not been made, Series 2005 A Bond Insurer on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in an account with U.S. Bank Trust National Association, in New York, New York, or its successor, sufficient for the payment of any such insured amounts which are then due. Upon presentment and surrender of such Insured Series 2005 A Bonds or presentment of such other proof of ownership of the Insured Series 2005 A Bonds, together with any appropriate instruments of assignment to evidence the assigmnent of the insured amounts due on the Insured Series 2005 A Bonds as are paid by Series 2005 A Bond Insurer, and appropriate instruments to effect the appointment of Series 2005 A Bond Insurer as agent for such owners of the Insured Series 2005 A Bonds in any legal proceeding related to payment of insured amounts on the Insured Series 2005 A Bonds, such instruments being in a form satisfactory to U.S. Bank Trust National Association, U.S. Bank Trust National Association shall disburse to such owners or the Trustee payment of the insured amounts due on such Insured Series 2005 A Bonds, less any amount held by the Trustee for the payment of such insured amounts and legally available therefor.

The Series 2005 A Bond Insurer

The Series 2005 A Bond Insurer is the principal operating subsidiary of MBIA Inc., a New York Stock Exchange listed company (the "Company"). The Company is not obligated to pay the debts of or claims against the Series 2005 A Bond Insurer. The Series 2005 A Bond Insurer is domiciled in the State of New York and licensed to do business in and subject to regulation under the laws of all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United States and the Territory of Guam. The Series 2005 A Bond Insurer has three branches, one in the Republic of France, one in the Republic of Singapore and one in the Kingdom of Spain.

The principal executive offices of the Series 2005 A Bond Insurer are located at 113 King Street, Armonk, New York 10504 and the main telephone number at that address is (914) 273-4545.

Regulation

As a financial guaranty insurance company licensed to do business in the State of New York, the Series 2005 A Bond Insurer is subject to the New York Insurance Law which, among other things, prescribes minimum capital requirements and contingency reserves against liabilities for the Series 2005 A Bond Insurer, limits the classes and concentrations of investments that are made by the Series 2005 A Bond Insurer and requires the approval of policy rates and forms that are employed by the Series 2005 A Bond Insurer. State law also regulates the amount of both the aggregate and individual risks that may be insured by the Series 2005 A Bond Insurer, the payment of dividends by the Series 2005 A Bond Insurer, changes in control with respect to the Series 2005 A Bond Insurer and transactions among the Series 2005 A Bond Insurer and its affiliates.

The Series 2005 A Policy is not covered by the Property/Casualty Insurance Security Fund specified in Article 76 of the New York Insurance Law.

18 Financial Strength Ratings of the Series 2005 A Bond Insnrer

Moody's Investors Service, Inc. rates the financial strength of the Series 2005 A Bond Insurer "Aaa."

Standard & Poor's, a division of The McGraw-Hill Companies, Inc. rates the financial strength of the Series 2005 A Bond Insurer "AAA."

Fitch Ratings rates the financial strength of the Series 2005 A Bond Insurer "AAA."

Each rating of the Series 2005 A Bond Insurer should be evaluated independently. The ratings reflect the respective rating agency's current assessment of the creditworthiness of the Series 2005 A Bond Insurer and its ability to pay claims on its policies of insurance. Any further explanation as to the significance of the above ratings may be obtained only from the applicable rating agency.

The above ratings are not recommendations to buy, sell or hold the Insured Series 2005 A Bonds, and such ratings may be subject to revision or withdrawal at any time by the rating agencies. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of the Insured Series 2005 A Bonds. The Series 2005 A Bond Insurer does not guaranty the market price of the Insured Series 2005 A Bonds nor does it guaranty that the ratings on the Insured Series 2005 A Bonds will not be revised or withdrawn.

The Series 2005 A Bond Insurer Financial Information

As of December 31, 2004, the Series 2005 A Bond Insurer had admitted assets of $10.4 billion (unaudited), total liabilities of $7.0 billion (unaudited), and total capital and surplus of $3.4 billion (unaudited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities. As of March 31, 2005 the Series 2005 A Bond Insurer had admitted assets of $10.6 billion (unaudited), total liabilities of $7.0 billion (unaudited), and total capital and surplus of $3.6 billion (unaudited) determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities.

For further information concerning the Series 2005 A Bond Insurer, see the consolidated financial statements of the Series 2005 A Bond Insurer and its subsidiaries as of December 31, 2004 and December 31, 2003 and for each of the three years in the period ended December 31, 2004, prepared in accordance with generally accepted accounting principles, included in the Annual Report on Form 10-K of the Company for the year ended December 31, 2004 and the consolidated financial statements of the Series 2005 A Bond Insurer and its subsidiaries as of March 31, 2005 and for the three month periods ended March 31, 2005 and March 31, 2004 included in the Quarterly Report on Form 10-Q of the Company for the period ended March 31, 2005, which are hereby incorporated by reference into this Official Statement and shall be deemed to be a part hereof.

Copies of the statutory financial statements filed by the Series 2005 A Bond Insurer with the State of New York Insurance Department are available over the Internet at the Company's web site at http://www.mbia.com and at no cost, upon request to the Series 2005 A Bond Insurer at its principal executive offices.

Incorporation of Certain Documents by Reference

The following documents filed by the Company with the Securities and Exchange Commission (the "SEC") are incorporated by reference into this Official Statement:

19 (1) The Company's Annual Report on Form 10-K for the year ended December 31, 2004; and

(2) The Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.

Any documents, including any fmancial statements of the Series 2005 A Bond Insurer and its subsidiaries that are included therein or attached as exhibits thereto, filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of the Company's most recent Quarterly Report on Form 10-Q or Annual Report on Form 10-K, and prior to the termination of the offering of the Insured Series 2005 A Bonds offered hereby shall be deemed to be incorporated by reference in this Official Statement and to be a part hereof from the respective dates of filing such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein, or contained in this Official Statement, shall be deemed to be modified or superseded for purposes of this Official Statement to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Official Statement.

The Company files annual, quarterly and special reports, information statements and other information with the SEC under File No. 1-9583. Copies of the Company's SEC filings (including (1) the Company's Annual Report on Form 10-K for the year ended December 31, 2004, and (2) the Company's Quarterly Reports on Form 10-Q for the quarter ended March 31, 2005) are available (i) over the Internet at the SEC's web site at http://www.sec.gov; (ii) at the SEC's public reference room in Washington D.C.; (iii) over the Internet at the Company's web site at http://www.mbia.com; and (iv) at no cost, upon request to the Series 2005 A Bond Insurer at its principal executive offices.

In the event the Series 2005 A Bond Insurer were to become insolvent, any claims arising under a policy of fmancial guaranty insurance are excluded from coverage by the California Insurance Guaranty Association, established pursuant to Article 14.2 (commencing with Section 1063) of Chapter 1 of Part 2 of Division 1 of the California Insurance Code.

INVESTMENT CONSIDERATIONS

Economy of the Three BART Counties and the State

The Series 2005 A Bonds are secured by a pledge of Sales Tax Revenues, which consist primarily of the Sales Tax less an administrative fee paid to the State Board of Equalization. The level of Sales Tax Revenues collected at any time is dependent upon the level of retail sales within the Three BART Counties, which level of retail sales is, in tum, dependent upon the level of economic activity in the Three BART Counties and in the State generally. As a result, any substantial deterioration in the level of economic activity within the Three BART Counties or in the State could have a material adverse impact upon the level of Sales Tax Revenues and therefore upon the ability of the District to pay principal of and interest on the Series 2005 A Bonds. For information relating to current economic conditions within the Three BART Counties and the State see "APPENDIX E - THE ECONOMY OF THE THREE BART COUNTIES."

Changes in Taxable Items

With limited exceptions, the Sales Tax is imposed upon the same transactions and items subject to the sales tax levied statewide by the State. The State Legislature or the voters within the State, through the initiative process, could change or limit the transactions and items upon which the State Sales Tax and the Sales Tax are imposed. Any such change or limitation could have an adverse impact on the Sales Tax Revenues collected. For a further description of the Sales Tax, see "SECURITY FOR THE SERIES 2005

20 A BONDS - Sales Tax Revenues." See also "APPENDIX E - THE ECONOMY OF THE THREE BART COUNTIES" for data relating to taxable transactions in the Three BART Counties.

Constitutional Limitations on Appropriations

See Appendix A for a discussion of constitutional limitations on appropriations affecting the District.

Proposition 218

On November 5, 1996, California voters approved an initiative known as the Right to Vote on Taxes Act ("Proposition 218"). Proposition 218 added Articles XIII C and XIII D to the California Constitution. Article XIII C requires majority voter approval for the imposition, extension or increase of general taxes and two-thirds voter approval for the imposition, extension or increase of special taxes by a local government, which is defined to include local or regional governmental agencies such as the District. Article XIII C also removes limitations on the initiative power with regard to reducing or repealing previously authorized local taxes. In the opinion of the District, however, any attempt by the voters to use the initiative provisions under Proposition 218 to rescind or reduce the levy and collection of the Sales Tax in a manner which would prevent the payment of debt service on the Series 2005 A Bonds would violate the Impairment Clause of the United States Constitution and, accordingly, would be precluded. However, it is likely that the interpretation and application of Proposition 218 will ultimately be determined by the courts.

Further Initiatives

Article XIIIB and Proposition 218 were each adopted as measures that qualified for the ballot pursuant to California's initiative process. From time to time other initiative measures could be adopted, which may affect the District's ability to levy and collect the Sales Tax. See also, "INVESTMENT CONSIDERATIONS - Sales Tax Litigation in California."

No Acceleration Provision

The Indenture does not contain a provision allowing for the acceleration of the Series 2005 A Bonds in the event of a default in the payment of principal and interest on the Series 2005 A Bonds when due. In the event of a default by the District, each Series 2005 A Bondholder will have the rights to exercise the remedies, subject to the limitations thereon, set forth in the Indenture. See "APPENDIX D - SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE."

Loss of Tax Exemption

As discussed under "TAX MATTERS," interest on the Series 2005 A Bonds could become includable in federal gross income, possibly from the date of issuance of the Series 2005 A Bonds, as a result of acts or omissions of the District subsequent to the issuance of the Series 2005 A Bonds. Should interest become includable in federal gross income, the Series 2005 A Bonds are not subject to redemption by reason thereof and will remain outstanding until maturity or earlier redemption.

Sales Tax Litigation in California

On December 19, 1991, the California Supreme Court rendered its opinion in Rider v. C aunty of San Diego. The Rider decision invalidated a one-half percent retail transactions and use tax imposed by a special purpose entity controlled by the County of San Diego for justice facility purposes. The Court held that taxes levied by "special districts" require two-thirds voter approval; "special districts" are government

21 entities created to circumvent the liruitations on taxation embodied in Article XIIIA of the California Constitution; and an entity may be deemed a "special district" if it was created after the adoption of XIIIA and it is "essentially controlled" by an entity with the power to levy property taxes.

On September 28, 1995, the California Supreme Court rendered its opinion in Santa Clara County Local Transportation Authority v. Carl Guardino. The Guardino decision held invalid a half-cent sales tax to be levied by the Santa Clara County Local Transportation Authority because it was approved by a majority, but not two-thirds, of the voters in Santa Clara County voting on the tax. The California Supreme Court decided the tax was invalid under Proposition 62, a statutory initiative adopted at the November 4, 1986 election that requires ( among other matters) that any new taxes for general governmental purposes iruposed by local governmental entities be approved by a majority vote of the voters of the governmental entity voting in an election on the tax, and any special tax ( defined as taxes levied for other than general governmental purposes) imposed by a local governmental entity be approved by a two-thirds vote of the voters of the governmental entity voting in an election on the tax.

Following the Guardino decision, several actions were filed challenging taxes iruposed by public agencies after the adoption of Proposition 62. In January 1997, a suit, Coleman v. County ofSanta Clara (Case No. CV763224), was filed challenging the validity of the 1996 Measure B Sales Tax, a County general tax approved by a majority, but not a two-thirds vote. On May 14, 1997, the Superior Court in the County granted the County's Motion for Summary Judgment in the Coleman lawsuit and upheld the validity of the 1996 Measure B Sales Tax. The Court of Appeal also upheld the validity of the 1996 Measure B Sales Tax by unaniruous vote on June 8, 1998 and the California Supreme Court denied plaintiffs' request for review on August 26, 1998.

On June 4, 2001, the California Supreme Court rendered its opinion in Howard Jarvis Taxpayers Association v. City of La Habra, et al., 25 Cal. 4th 809 ("La Habra") holding that an action brought in 1996 challenging the imposition of a 1992 utility users tax iruposed for general purposes, without voter approval, was not barred by a three-year statute of limitations period because the continued iruposition and collection of the tax was an ongoing violation upon which the statute of limitations period began anew with each collection.

On December 17, 200 I, the California Supreme Court rendered its opm1on in Utility Cost Management v. Indian Wells Valley Water District ("Indian Wells"). The Indian Wells decision held that the statute of liruitations applicable to an ordinance, adopted by the Water District imposing certain capital facilities fees, ran from the date of enactment of the ordinance imposing such capital fees and not from the date such fees were actually charged to the customer. In Indian Wells, the California Supreme Court relied upon the express language in the applicable statute of liruitations, which stated that the statute of liruitations runs from the "effective date" of the fee legislation and distinguished such language from the language set forth in the statute applicable in La Habra.

While the Rider, Guardino and Coleman lawsuits will not directly affect the ability of the District to levy and collect the Sales Tax, there can be no guarantee (no matter how unlikely) that future lawsuits challenging the legality of the Sales Tax will not be filed. However, these lawsuits addressed taxes levied after the adoption of Proposition 13 in 1978. The Sales Tax is a tax levied pursuant to the state law prior to the adoption of Proposition 13 and is distinguishable from the local taxes disputed in the litigation described above.

LEGAL MATTERS

The validity of the Series 2005 A Bonds and certain other legal matters are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, San Francisco, California and Lofton &

22 Jennings, San Francisco, California, Co-Bond Counsel. A complete copy of the proposed form of the opinion to be delivered by Co-Bond Counsel is attached hereto as Appendix H. Co-Bond Counsel take no responsibility for the accuracy, completeness or fairness of this Official Statement. Approval of certain other legal matters will be passed upon for the District by Sherwood G. Wakeman, Esquire, General Counsel to the District and for the Underwriters by Nixon Peabody LLP, San Francisco, California, which also undertakes no responsibility for the accuracy, completeness or fairness of this Official Statement.

TAX MATTERS

In the opm10n of Orrick, Herrington & Sutcliffe LLP and Lofton & Jennings ("Co-Bond Counsel"), based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Series 2005 A Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 (the "Code") and is exempt from State of California personal income taxes. Co-Bond Counsel are of the further opinion that interest on the Series 2005 A Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Co-Bond Counsel observe that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. A complete copy of the proposed form of opinion of Co-Bond Counsel is set forth in Appendix H hereto.

To the extent the issue price of any maturity of the Series 2005 A Bonds is less than the amount to be paid at maturity of such Series 2005 A Bonds ( excluding amounts stated to be interest and payable at least annually over the term of such Series 2005 A Bonds), the difference constitutes "original issue discount," the accrual of which, to the extent properly allocable to each owner thereof, is treated as interest on the Series 2005 A Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Series 2005 A Bonds is the first price at which a substantial amount of such maturity of the Series 2005 A Bonds is sold to the public ( excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Series 2005 A Bonds accrues daily over the term to maturity of such Series 2005 A Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Series 2005 A Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Series 2005 A Bonds. Owners of the Series 2005 A Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Series 2005 A Bonds with original issue discount, including the treatment of purchasers who do not purchase such Series 2005 A Bonds in the original offering to the public at the first price at which a substantial amount of such Series 2005 A Bonds is sold to the public.

Series 2005 A Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity ( or, in some cases, at their earlier call date) ("Premium Bonds") will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a purchaser's basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such purchaser. Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances.

23 The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Series 2005 A Bonds. The District has made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Series 2005 A Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Series 2005 A Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Series 2005 A Bonds. The opinion of Co-Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Co-Bond Counsel have not undertaken to determine ( or to inform any person) whether any actions taken ( or not taken), or events occurring ( or not occurring), or any other matters coming to Co Bond Counsel's attention after the date of issuance of the Series 2005 A Bonds may adversely affect the value of, or the tax status of interest on, the Series 2005 A Bonds.

Certain requirements and procedures contained or referred to in the Indenture, the Tax Certificate, and other relevant documents may be changed and certain actions (including, without limitation, defeasance of the Series 2005 A Bonds) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. Co-Bond Counsel express no opinion as to any Series 2005 A Bond or the interest thereon if any such change occurs or action is taken or omitted upon the advice or approval of bond counsel other than Orrick, Herrington & Sutcliffe LLP and Lofton & Jennings.

Although Co-Bond Counsel are of the opinion that interest on the Series 2005 A Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or disposition of, or the accrual or receipt of interest on, the Series 2005 A Bonds may otherwise affect a beneficial owner's federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the beneficial owner or the beneficial owner's other items of income or deduction. Co-Bond Counsel express no opinion regarding any such other tax consequences.

Future legislation, if enacted into law, or clarification of the Code may cause interest on the Series 2005 A Bonds to be subject, directly or indirectly, to federal income taxation, or otherwise prevent beneficial owners from realizing the full current benefit of the tax status of such interest. The introduction or enactment of any such future legislation or clarification of the Code may also affect the market price for, or marketability of, the Series 2005 A Bonds. Prospective purchasers of the Series 2005 A Bonds should consult their own tax advisers regarding any pending or proposed federal tax legislation, as to which Co-Bond Counsel express no opinion.

The opinion of Co-Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Co-Bond Counsels' judgment as to the proper treatment of the Series 2005 A Bonds for federal income tax purposes. It is not binding on the Internal Revenue Service ("IRS") or the courts. Furthermore, Co-Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the District, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The District has covenanted, however, to comply with the requirements of the Code.

Co-Bond Counsels' engagement with respect to the Series 2005 A Bonds ends with the issuance of the Series 2005 A Bonds, and, unless separately engaged, Co-Bond Counsel are not obligated to defend the District or the beneficial owners regarding the tax-exempt status of the Series 2005 A Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the District and their appointed counsel, including the beneficial owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit

24 examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the District legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the Series 2005 A Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the Series 2005 A Bonds, and may cause the District or the beneficial owners to incur significant expense.

ABSENCE OF MATERIAL LITIGATION

At the time of delivery of and payment for the Series 2005 A Bonds, the District will certify that, except as disclosed herein, there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, regulatory agency, public board or body, pending or, to the knowledge of the District, threatened against the District in any way affecting the existence of the District or the titles of its officers to their respective offices or seeking to restrain or to enjoin the issuance, sale or delivery of the Series 2005 A Bonds, the application of the proceeds thereof in accordance with the Indenture, or the levy or collection of the Sales Tax or application of the Sales Tax Revenues or other moneys to be pledged to pay the principal of and interest on the Series 2005 A Bonds, or the pledge thereof, or in any way contesting or affecting the validity or enforceability of the Series 2005 A Bonds or the Indenture or in any way contesting the completeness or accuracy of this Official Statement with respect to the Series 2005 A Bonds.

RATINGS

Standard & Poor's Ratings Group, a division of The McGraw Hill Company ("S&P"), Moody's Investors Service Inc. ("Moody's") and Fitch Ratings ("Fitch") are expected to assign ratings of "AA-," "Aa3," and "AA," respectively, to the Series 2005 A Bonds. In addition, S&P, Moody's and Fitch are expected to assign ratings "AAA," "Aaa," and "AAA," respectively, to the Insured Series 2005 A Bonds based on the understanding that the Series 2005 A Policy will be issued by the Series 2005 A Bond Insurer simultaneously with the delivery of the Series 2005 A Bonds. There is no assurance that any credit ratings given to the Series 2005 A Bonds will be maintained for any period of time or that the ratings may not be lowered or withdrawn entirely by such rating agencies, if, in their judgment, circumstances so warrant. The District undertakes no responsibility to oppose any such revision or withdrawal. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Series 2005 A Bonds. Such ratings reflect only the views of such organizations and an explanation of the significance of such ratings may be obtained from such rating agencies.

CO-FINANCIAL ADVISORS

Public Financial Management, Inc., San Francisco, California, and Eagle Asset Management, San Francisco, California, serve as Co-Financial Advisors to the District with respect to the sale of the Series 2005 A Bonds. The Co-Financial Advisors have not conducted a detailed investigation of the affairs of the District to determine the completeness or accuracy of this Official Statement. Because of their limited participation, the Co-Financial Advisors have not independently verified any of the data contained herein and have no responsibility for the accuracy or completeness thereof.

The compensation of the Co-Financial Advisors is contingent upon the issuance of the Series 2005 A Bonds.

CONTINUING DISCLOSURE

The District has covenanted for the benefit of the Bondholders and Beneficial Owners of the Series 2005 A Bonds to provide certain fmancial information and operating data relating to the District by not later than eight months following the end of the District's fiscal year (presently June 30), commencing

25 with the report for the 2004-2005 Fiscal Year (the "Annual Report"), and to provide notices of the occurrence of certain enumerated events, if material. When provided by the District, the Annual Report will be filed by the Trustee on behalf of the District with each Nationally Recognized Municipal Securities Information Repository ( and with the State Repository, if any) ( collectively the "Repositories"). When directed to do so by the District, the notices of material events will be filed by the Trustee on behalf of the District with the Municipal Securities Rulemaking Board or the Repositories. The specific nature of the information to be contained in the Annual Report or the notices of material events is described in "APPENDIX G - FORM OF CONTINUING DISCLOSURE AGREEMENT." These covenants have been made in order to assist the Underwriters of the Series 2005 A Bonds in complying with Securities and Exchange Commission Rule 15c2-12(b)(5). The District has never failed to comply with any undertaking under said Rule.

UNDERWRITING

The Series 2005 A Bonds are being purchased from the District by Morgan Stanley & Co. Incorporated, as representative of the Underwriters listed on the cover hereof (the "Underwriters") pursuant to a bond purchase agreement, dated the date of sale of the Series 2005 A Bonds (the "Bond Purchase Agreement"), between the District and the Underwriters. The Underwriters expect to purchase the Series 2005 A Bonds from the District at a purchase price of $368,088, 779.25 (representing the principal amount of the Series 2005 A Bonds, plus a net original issue premium of $17,151,199.60 and less an underwriters' discount of $1, 157,420.35). The initial public offering prices of the Series 2005 A Bonds may be changed from time to time by the Underwriters. The Bond Purchase Agreement provides that the Underwriters will purchase all the Series 2005 A Bonds if any are purchased and that the obligations to make such purchases are subject to certain terms and conditions set forth in the Bond Purchase Agreement including, among others, the approval of certain legal matters by their counsel.

VERIFICATION OF MATHEMATICAL ACCURACY

Upon delivery of the Series 2005 A Bonds, the arithmetical accuracy of certain computations included in the schedules provided by the Underwriters on behalf of the District relating to the: (i) adequacy of forecasted receipts of principal and interest on the escrow securities and cash held in the escrow fund relating to the Bonds to be refunded; (ii) the scheduled payments of principal and interest with respect to the Bonds to be refunded on and prior to their projected maturity and/or redemption dates; and (iii) yields on the securities to be deposited pursuant to the escrow fund relating to the Bonds to be refunded upon delivery of the Series 2005 A Bonds, will be verified by Causey, Demgen & Moore, Inc., independent certified public accountants (the "Verification Agent"). Such verification shall be based solely upon information and assumptions supplied the Verification Agent by the Underwriters. The Verification Agent has not made a study or evaluation of the information and assumptions on which such computations are based and, accordingly, has not expressed an opinion on the data used, the reasonableness of the assumptions or the achievability of the forecasted outcome.

FINANCIAL STATEMENTS

The financial statements of the District included in Appendix B to this Official Statement have been examined by PricewaterhouseCoopers, whose report thereon appears in such Appendix. PricewaterhouseCoopers was not requested to consent to the inclusion of its report in Appendix B, nor has PricewaterhouseCoopers undertaken to update its report or to take any action intended or likely to elicit information concerning the accuracy, completeness or fairness of the statements made in this Official Statement, and no opinion is expressed by PricewaterhouseCoopers with respect to any event subsequent to the date of its report.

26 MISCELLANEOUS

This Official Statement is not to be construed as a contract or agreement between the District and the purchasers, holders or beneficial owners of any of the Series 2005 A Bonds. All of the preceding summaries of the Series 2005 A Bonds, the Indenture, applicable legislation and other agreements and documents are made subject to the provisions of the Series 2005 A Bonds and such documents, respectively, and do not purport to be complete statements of any or all of such provisions. Reference is hereby made to such documents on file with the District for further information in connection therewith.

Any statements made in this Official Statement involving matters of opinion or of estimates, whether or not expressly stated, are set forth as such and not as representations of fact, and no representation is made that any of the estimates will be realized.

The execution and delivery of this Official Statement by the Controller/Treasurer of the District has been duly authorized by the District. Concurrently with the delivery of the Series 2005 A Bonds, the District will furnish to the Underwriters a certificate of the District to the effect that this Official Statement, as of the date of this Official Statement and as of the date of delivery of the Series 2005 A Bonds, does not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements herein, in the light of the circumstances under which they were made, not misleading.

SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT

By:~~~~~/=s~/=S=co~tt~L~·=S=chr~o=e=d=er~~~~~~ Controller/Treasurer

27 (Page intentionally left llank.) APPENDIX A

SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT FINANCIAL AND OPERATING INFORMATION (Page intentionally left llank.) SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT

General Description of the District

The San Francisco Bay Area Rapid Transit District (the "District" or "BART") was created in 1957 by Chapter 1056 of the Statutes of 1957 of the State of California, constituting Sections 28500 to 29757, inclusive, of the California Public Utilities Code, as amended (the "BART Legislation"). The District is presently composed of all the area in the Counties of Alameda and Contra Costa and the City and County of San Francisco (the "Three BART Counties"). In addition, the District owns property within the County of San Mateo on which BART facilities are located and the District acquired the right to use additional right of way and station locations in connection with the extension of its rapid transit system (the "BART System") to the San Francisco International Airport located in the County of San Mateo. Under certain conditions, other counties may be annexed to and become a part of the District.

All capitalized terms used and not otherwise defmed in this Appendix A shall have the meanings assigned to such terms in Appendix D - Summary of Certain Provisions of the Indenture, or, if not defined in Appendix D, in the Indenture, as such term is defmed in the front portion of the Official Statement to which this Appendix A is attached.

Powers of the District

The BART Legislation grants the District the following powers, among others:

Financing and Taxation. The District may issue general obligation bonds up to the amount authorized by a two-thirds vote of the electorate voting on the ballot measure proposing such general obligation bonds. Upon issuance of general obligation bonds authorized by the electorate, the District is obligated to levy and collect an ad valorem tax on property in the Three BART Counties at a rate sufficient to pay the annual debt service on such outstanding general obligation bonds when due and payable. Such tax may be offset to the extent that other moneys are legally made available for such purpose.

In addition to general obligation bonds, the District may issue: (1) sales tax revenue bonds; (2) revenue bonds payable solely from revenues of any facility or enterprise to be acquired or constructed by the District; (3) equipment trust certificates payable from revenues derived from the operation of the BART System; (4) special assessment bonds; (5) grant anticipation notes, bond anticipation notes and tax and revenue anticipation notes; and (6) such other obligations as are authorized by the law of the State of California.

Eminent Domain. The District has the right, with certain limitations, of eminent domain for the condemnation of private property for public use.

Administration

Governance of the District is vested in a Board of Directors (the "Board" or the "Board of Directors") composed of nine members, each representing an election district within the District. The boundaries of the election districts have been set on the basis of, as nearly as practicable, equal population and, among other things, community of interest of the population within the election district. The boundaries of the District election districts do not conform to the boundaries of the Three BART Counties. Directors are elected to four-year terms. Each term commences at the meeting of the Board of Directors held in December in the year of a November general election and ends at the meeting of the Board of Directors held in December four years later.

The District Directors are:

Director City of Residence Occupation Term Expiration (December)

Joel Keller, Antioch Assistant 2006 President Superintendent of Juvenile Hall

Carole Ward Allen, Oakland Educator 2006 Vice President !Businessperson

Thomas M. Blalock Fremont Civil Engineer 2006

James Fang San Francisco Businessman 2006

Bob Franklin Berkeley BART Director 2008

ZoydLuce Dublin Enviromnental 2008 Engineer

Gail Murray Walnut Creek Transportation 2008 Executive

Tom Radulovich San Francisco Enviromnental 2008 Designer

Lynette Sweet San Francisco Executive Director, 2008 African American Interest Free Loan Association

The executive management staff of the District consists of statutory officers appointed by the Board and operating managers appointed by the General Manager.

The four statutory officers are:

Thomas E. Margro, General Manager

Mr. Margro was appointed general manager of the District by the Board of Directors in September 1996. Prior to becoming general manager, Mr. Margro held the position of Director of Maintenance and Engineering Services/Chief Engineer for the New Jersey Turnpike Authority. Mr. Margro previously worked for the District for over 5 years as Assistant General Manager of Transit System Development. During such time, he was responsible for implementation of the program to expand the BART System beyond its original 71 mile zone, including implementation of the BART Extensions Program, which resulted in the opening of the first five additional BART stations, commencing with the opening of the North Concord/Martinez station in 1995. See "The BART System."

A-2 Before coming to the District, Mr. Margro was employed by the Southeastern Pennsylvania Transportation Authority for 18 years. Mr. Margro attended Syracuse University and graduated with a B.S. in Electrical Engineering. He also obtained a Masters Degree from the University of Pennsylvania in Systems Engineering and Operations Research.

Scott L. Schroeder, Controller/Treasurer

Mr. Schroeder joined the District in November 1988 as an Investment Analyst in the Finance Department. He served as Assistant Treasurer of the District from January 1996 until June 1997. In June 1997, the Board of Directors appointed Mr. Schroeder Controller/Treasurer. Prior to joining the District, Mr. Schroeder worked as a portfolio manager and govermnent bond trader. Mr. Schroeder holds a Bachelor degree in Business Administration from California State University, Chico and became a Chartered Financial Analyst (CFA) in 1992.

Sherwood G. Wakeman, General Counsel

Mr. Wakeman joined the District in March 1973 as an attorney in the Office of the General Counsel. In April 1986 he was promoted to Associate General Counsel and in 1987 he was appointed as General Counsel. Mr. Wakeman received a Bachelor of Arts degree in Anthropology from the University of California at Berkeley and his J.D. from the University of California at Berkeley, Boalt School of Law.

Kenneth A. Duron, District Secretary

Mr. Duron joined the District in 1991 as a Senior Capital Program Planner in the Government and Community Relations Department. He served as Executive Assistant to the General Manager from 1995 to 200 I and was appointed District Secretary in February 200 I. Prior to joining the District, Mr. Duron worked for Xerox Corporation. His public transit experience includes 5 years as a member of professional staff with the Southern California Rapid Transit District. Mr. Duron holds a Bachelor of Science degree in Public Administration from the University of Southern California, Center for Public Affairs.

Principal executive management staff appointed by the General Manager include:

Dorothy W. Dugger, Deputy General Manager

Ms. Dugger joined the District in September 1992 as Executive Manager of External Affairs. In April of 1994, she was appointed Deputy General Manager. Prior to coming to the District, Ms. Dugger had over 19 years of public policy experience, including 10 years with the Port Authority of New York and New Jersey (the "Port Authority") where she served as the Port Authority's Director of Government, Community and Public Affairs. Before joining the Port Authority, she was the Assistant to the Governor, State of New Jersey, in the Governor's Washington, D.C. office, where she represented the Governor before Congress and federal agencies. Ms. Dugger also served as Assistant to the Deputy Commissioner, New Jersey Department of Environmental Protection and as Legislative Director of the Civil Liberties Union of New Jersey. She holds a Bachelor of Arts degree in History and Sociology from Rutgers University.

Paul Oversier, Assistant General Manager, Operations

Mr. Oversier joined the District in 1990 as Chief Transportation Officer. In June 1999, Mr. Oversier was appointed as the Assistant General Manager, Operations. Prior to joining the District, Mr. Oversier was the Chief Transportation Officer of the New York City Transit Authority for 4 years after serving as the Director of Operations Support for over 2 years. He was also the General Manager of the

A-3 Centre Area Transportation Authority in State College, Pennsylvania for 3 years. Mr. Oversier holds a Master of Science Degree in Transportation from Northwestern University and a Bachelors Degree in Economics from the University of California at Davis.

Employees and Labor Relations

As of the date of this Official Statement, the typical BART employee earns $72,692. As of mid-2004 (which is the most current data available), the typical BART employee has been with the District 12.8 years. Seventy-four percent are male, and 26% female. The youngest employee is 21 years old, the oldest is 77, and the overall average age is 47.7 years. Minority representation on the workforce is high, and representative of the San Francisco Bay area population, with 40. 7% white, 22.3% black, 22.9% Asian or Pacific Islander, 13.2% Hispanic, and 0.9% American Indian.' As of September 2004, the District currently had approximately 1,400 retirees.

As of June 30, 2005, the District had 3,053 employees, of which 2,956 are full-time and 97 are part-time. Most District employees are represented by recognized employee organizations. Some supervisors are represented by the American Federation of State, County and Municipal Employees (AFSCME), Local 3993. Station agents, train operators and some clerical employees supportive of the train operators and station agents are represented by the Amalgamated Transit Union (ATU), Local 1555. Maintenance and clerical staff are represented by the Service Employees International Union (SEIU), Local 790. In addition, BART police officers and police managers are represented by the BART Police Officers Association and the BART Police Managers Association.

Negotiations have resulted in a settlement without a strike with the A TU, SEIU and AFSCME. Agreements reached with the ATU and SEIU have been approved by the membership and are currently scheduled to be approved by the Board of Directors on September 8, 2005. Agreement reached with AFSCME has also been approved by the membership and will be scheduled for approval by the Board of Directors at a later date. The agreements do not provide for any wage increase for the Fiscal Year ending June 30, 2006. Wage increases of 2%, 2% and 3% are provided for each of the following three Fiscal Years. In addition, an agreement on increased health benefit co-payments by employees will assist the District with the cost of employee health benefits. No settlement has been reached with either the BART Police Officers Association or the BART Police Managers Association. Negotiations are continuing with each of these labor organizations and settlement without a strike is expected. All agreements will expire on June 30, 2009. The previous agreements were negotiated in 200 I following a request for a fact finding and a cooling off period approved by the Governor of the State of California. Subsequent to such period, the various labor organizations reached agreements with the District without a strike. In 1997, negotiations with the labor organizations failed to produce a settlement. A request for a fact finding and cooling off period was made and approved by the Governor of the State of California. Subsequently, in September 1997, A TU and SEIU employees went on strike over wages and benefits. The strike was resolved in a one week period.

FINANCING THE BART SYSTEM

The District has received and may from time to time continue to receive grants from the federal government, from the State of California (the "State of California" or the "State") and from regional bridge tolls for capital renovation and expansion of the BART System. In addition to grants and bridge toll revenues, capital renovation and expansion of the BART System is funded with BART revenues, including allocations from the operating budget and the proceeds of BART financing

*These are the racial categories and category names utilized by the Federal Transit Administration.

A-4 mechanisms, as further described below. See "Strategic Plans, Short Range Transit Plans and Capital Improvement Programs."

General Obligation Bonds. Pursuant to voter approval in the Three BART Counties in 1962, the District issued a total of $792 million aggregate principal amount of general obligation bonds in twelve series during the years 1963 through 1969. Such general obligation bonds were payable from ad valorem taxes required to be levied on all properties subject to taxation by the District. General obligation bond proceeds were used to pay a portion of the cost of planning, acquisition and construction of the original 71-mile BART System, excluding the San Francisco-Oakland rapid transit tube and its approaches (the "Trans bay Tube"). All such general obligation bonds have been paid.

Pursuant to voter approval in the Three BART Counties secured in the November 2, 2004 election, the District is authorized to issue general obligation bonds (the "General Obligation Bonds"), in one or more series, in an amount not to exceed $980 million in order to make earthquake safety improvements to the BART System. As of the date of this Official Statement, $100,000,000 aggregate principal amount of such General Obligation Bonds have been issued and are outstanding. See "Strategic Plans, Short Range Transit Plans and Capital Improvement Programs - Earthquake Safety Program" in this Appendix A.

Sales Tax Revenue Bonds. Commencing in 1970, the District has issued bonds from time to time (the "Sales Tax Revenue Bonds") secured by a pledge of sales tax revenues, comprised of seventy-five percent (75%) of the amounts derived from a one-half of one percent (0.5%) transactions and use tax imposed by the District within the Three BART Counties pursuant to Section 29140 of the California Public Utilities Code, in order to finance or refmance the costs of constructing, improving and equipping the BART System. Upon issuance of the Series 2005 Bonds described in the front portion of this Official Statement, $698,960,000 aggregate principal amount of Sales Tax Revenue Bonds will be Outstanding. See "Plan of Finance" in the front portion of this Official Statement.

Bridge Toll Note Financing. On September I, 1999, the San Francisco Bay Area Transit Financing Authority (the "Transit Financing Authority"), a public instrumentality of the State of California created pursuant to a joint exercise of powers agreement between the District and the Metropolitan Transportation Commission ("MTC"), issued $65,860,000 aggregate principal amount of San Francisco Bay Area Transit Financing Authority Bridge Toll Notes, Series 1999 (the "Bridge Toll Notes") in order to assist in financing a portion of the costs of the extension of the BART System to the vicinity of the San Francisco International Airport (the "SFO Extension"). As of the date of this Official Statement, $26,090,000 aggregate principal amount of Bridge Toll Notes are outstanding. The Bridge Toll Notes are secured by certain bridge tolls pledged by the District from allocations committed to the District by MTC for such purpose. The Bridge Toll Notes are not payable from nor secured by a pledge of the ad valorem taxes securing the General Obligation Bonds issued or to be issued by the District nor by a pledge of Sales Tax Revenues nor by a pledge of any revenues of the District other than the allocation of bridge tolls pledged to the payment of the Bridge Toll Notes.

Full Funding Grant Agreement Financings. On March 22, 200 I, the Association of Bay Area Governments, a public instrumentality of the State of California created pursuant to a joint exercise of powers agreement among various cities and counties in the San Francisco Bay area ("ABAG"), issued $485,350,000 aggregate principal amount of Association of Bay Area Governments BART SFO Extension Bonds (FTA Capital Grant), 2001 Series A (the "Series 2001 FTA Capital Grant Bonds") for the benefit of the District. As of the date of this Official Statement, $131,250,000 aggregate principal amount of Series 200 I FT A Capital Grant Bonds are outstanding. The Series 200 I FT A Capital Grant Bonds were issued to assist in financing a portion of the SFO Extension and to provide for the refunding and defeasance of $300,000,000 aggregate principal amount of San Francisco Bay Area Transit Financing Authority Commercial Paper Notes, Series A, B, C, D, E and F issued by the Transit Financing Authority

A-5 to assist in financing a portion of the SFO Extension. The Series 2001 FT A Capital Grant Bonds are payable from funds to be received by the District pursuant to a full funding grant agreement labeled "CA- 03-0394-06 San Francisco Airport Extension Project" (the "Grant Agreement") between the United States of America, acting through the Department of Transportation, Federal Transit Administration, and the District.

On June 14, 2004, ABAG issued $66,000,000 aggregate principal amount of Association of Bay Area Govermuents BART SFO Extension Refunding Bonds (FTA Capital Grant), 2004 Series A (the "Series 2004 FTA Capital Grant Bonds") for the benefit of the District, all of which remain outstanding. The Series 2004 FTA Capital Grant Bonds were issued to provide for the refunding and defeasance of $58,495,000 aggregate principal amount of the Series 2001 FTA Capital Grant Bonds issued by ABAG to assist in financing a portion of the SFO Extension. The Series 2004 FT A Capital Grant Bonds are payable from funds to be received by the District pursuant to the Grant Agreement.

The Series 2001 FT A Capital Grant Bonds and the Series 2004 FTA Capital Grant Bonds (hereinafter collectively referred to as the "FTA Capital Grant Bonds") are not payable from nor secured by a pledge of the ad valorem taxes securing the General Obligation Bonds issued or to be issued by the District nor by a pledge of Sales Tax Revenues nor by a pledge of any revenues of the District other than the federal grants pledged to the payment of the FTA Capital Grant Bonds.

Premium Fare Financing. On October 31, 2002, ABAG issued $56,715,000 aggregate principal amount of Association of Bay Area Govermuents BART SFO Extension Bonds (Airport Premium Fare), 2002 Series A (the "Premium Fare Bonds") for the benefit of the District, all of which remain outstanding. The Premium Fare Bonds were issued to assist in financing a portion of the SFO Extension. The Premium Fare Bonds are payable from the premium fare imposed and collected by the District from passengers who board or depart the BART System at the San Francisco International Airport station. The Premium Fare Bonds are not payable from nor secured by a pledge of the ad valorem taxes securing the General Obligation Bonds issued or to be issued by the District nor by a pledge of Sales Tax Revenues nor by a pledge of any federal grants nor by a pledge of any revenues of the District other than the premium fare pledged to the payment of the Premium Fare Bonds.

THE BART SYSTEM

General Description

The BART System is an electrically powered rapid transit commuter rail system serving the residents of the San Francisco Bay area. The BART System is currently comprised of 104 miles of double track (including some areas of multiple tracks) and 43-stations, 38 of which are located in the Three BART Counties and 5 of which, constructed in connection with the extension of BART to the San Francisco International Airport, are located in San Mateo County on the San Francisco Peninsula. BART is powered by an electric third rail at 1,000 volts DC. The rail right-of-way is fully protected and has no grade crossings. Automatic fare collection equipment is located in each station to vend and process passenger tickets. As of July 1, 2005, the District owned 669 vehicles. Trains are from 3 to 10 cars in length and contain one control equipped vehicle (an A-car or C-car) at each end with mid-train vehicles (B-cars or C-cars) making up the remainder of each train. Control equipped C-cars can be used as lead, mid-train, or trail vehicles. All station platforms are constructed to accommodate trains ofup to 10 cars. Trains are operated from the lead A-car or C-car. Computers located along the right-of-way automatically control train movements. BART System train supervision is provided by the BART train control computer located at the BART Operations Control Center at the Lake Merritt station. Should the need arise, train operators aboard each train may override the automatic system. The District's 669-car operating fleet currently consists of 59 A-Cars, 380 B-cars and 230 C-cars.

A-6 BART service lines run through the urban and suburban areas of the Three BART Counties and San Mateo County. Service patterns are largely dictated by the topography of the region. Lines run along the east and west sides of the San Francisco Bay, under San Francisco Bay and then traverse the hills and valleys of inland areas. The BART system radiates from the Oakland Wye, which is located under downtown Oakland. Lines running west from the Wye travel under San Francisco Bay, through downtown San Francisco and terminate at Daly City, Millbrae or the San Francisco International Airport. Other lines radiate out from the Oakland Wye and terminate in Richmond, Pittsburgffiay Point, Dublin or Fremont. A second wye is located on the San Francisco Peninsula between San Bruno station, Millbrae station and the San Francisco International Airport station. In addition to the two wyes, merges and diverges also occur at two other locations in Alameda County. For more detailed information regarding BART System routes, see the BART System map in the front portion of this Official Statement. Approximately one-third of the BART System is underground, one-third is aerial and one-third is at grade.

BART stations are spaced approximately one-half mile apart in downtown San Francisco and Oakland and approximately two to four miles apart in suburban areas. A number of BART stations located in downtown San Francisco provide intermodal transfers to the San Francisco Municipal Railway ("Muni") light rail, cable cars and buses. The Millbrae station provides cross-platform transfers to the Ca!Train commuter rail service, which provides commuter service along the San Francisco Peninsula and south to Gilroy, and the Richmond station provides intermodal transfers to the Capitol Corridor intercity rail service to Sacramento. The San Francisco International Airport station is located in the San Francisco International Airport. The Coliseum station in Oakland provides access to the Oakland-Alameda County Coliseum Complex where the Oakland Raiders, a professional football team, the Oakland Athletics, a professional baseball team, and the Golden State Warriors, a professional basketball team, play their home games.

The BART Operations Control Center (the "OCC") controls and monitors all mainline acbv1bes and equipment, including safety critical and emergency equipment, such as emergency telephones and fire alarm systems, responds to emergencies, manages delays, and controls the electrification grid. Operational functions performed in the OCC include the generation of daily train schedules, dispatching of trains from the ends of line and yards, keeping trains on schedule by adjusting the speeds between stations and/ or dwell times at stations, control and monitoring of ventilation fans, dampers, sump pumps, traction power equipment, train location and other wayside systems equipment.

Revenue Hours

BART revenue hours run from 4:00 a.m. to midnight Monday through Friday, 6:00 a.m. to midnight on Saturdays, and 8:00 a.m. to midnight on Sundays. The last trains depart each end of the line around midnight, so passengers can get anywhere in the BART system if they arrive at any station by midnight. Depending upon demand, holiday rail service is provided on a full or modified weekday schedule, a Saturday schedule or a Sunday schedule.

Passenger Fares

On May 26, 2005, the Board of Directors approved a series of increases and changes in passenger fare policies designed to enhance revenues. Such increases and changes are scheduled to take effect January 1, 2006. Data presented below includes information concerning such increases and changes.

BART rail fares are computed using a distance-based formula. Distance-based fares are then adjusted based on the scheduled travel time versus travel time based on a systemwide average speed. In addition, surcharges apply to transbay trips and trips originating from or destined to stations located in

A-7 San Mateo County, and a premium applies to trips to and from the San Francisco International Airport station. As of the date of this Official Statement, the transbay surcharge, applied to transbay trips, is equal to $0. 76; the Daly City surcharge, applied to trips between the Daly City station and San Francisco stations, is equal to $0.88; and the San Mateo County surcharge, applied to trips beginning and ending at San Mateo County stations ( except trips between San Mateo County stations and the San Francisco International Airport station) and trips between San Mateo County stations ( except Daly City ) and San Francisco stations, is equal to $1.00. In addition, a premium of $1.50 is applied to trips to or from the San Francisco International Airport station. Effective January I, 2006, the trans bay surcharge will increase to $0. 79; the Daly City surcharge will increase to $0.91; and the San Mateo County surcharge will increase to $1.14 and will also be applied to trips between the San Francisco International Airport station and the Daly City, Cohna, South San Francisco and San Bruno stations. In addition, a capital surcharge equal to $0.10 will be applied to all trips within the Three BART Counties, including Daly City, effective January I, 2006. Revenues resulting from such capital surcharge will be applied to fund capital programs previously funded from the operating budget.

The current minimum one-way fare is $1.25. The current maximum one-way fare is $7.45. Effective January I, 2006, the current minimum one-way fare will increase to $1.40 and the current maximum one-way fare will increase to $7.65. Fare increases during BART's history include a 21% average fare increase in November 1975, a 35% average fare increase in July 1980, an 18% average fare increase in September 1982, a 30% average fare increase in January, 1986, a 15% fare increase effective April 1, 1995, a 13% fare increase effective April 1, 1996 an 11.4% fare increase effective April I, 1997, a 5% fare increase effective January I, 2003, and a 10% fare increase effective January I, 2004. In May 2003, the Board of Directors approved a series of productivity-adjusted Consumer-Price Index based fare increases to take effect in January of each even-numbered year from 2006 through 2012. The first of such productivity-adjusted Consumer-Price Index-based fare increases, a fare increase of 3.7%, will also be implemented on January I, 2006.

The District currently offers fare discounts ranging from 6.25% to 75%. Effective January I, 2006, such fare discounts will range from 6.25% to 62.5%. A discount of 6.25% is available in connection with purchases of three ticket denominations, $32.00, $48.00, and $64.00. A discount of75%, which will be reduced to 62.5% effective January I, 2006, is provided to persons with disabilities, children ages 5 through 12 and senior citizens age 65 and over. Certain restrictions apply to the use of discounted tickets available to the disabled and proof of age is required in connection with use of discounted tickets available to senior citizens. In addition, the District offers discounts to middle and secondary school students. Such tickets may only be sold by a participating school to students of such school and may only be used for school-related weekday trips.

The rates and charges of BART are by law free from the jurisdiction and control of any regulatory agency other than BART, including the California Public Utilities Commission. Surcharges imposed in San Mateo County ( other than at the Daly City station) are, however, subject to agreement between BART and the San Mateo County Transit District. As provided in the California Public Utilities Code, passenger fares for BART are established by a two-thirds vote of the Board of Directors and are required to be reasonable. Any Board of Supervisors of a county or city and county, or the city council of a municipality having territory located within the District, may file a request for a hearing before the Board of Directors regarding the reasonableness of any fares. The hearing must be held between 15 and 60 days from the date of the request and a decision by the Board of Directors must be rendered in writing within 30 days after the hearing. Thereafter, the decision may be reviewed by the courts through a writ of mandate.

As a condition to receiving assistance from the federal government, acting through the Federal Transit Administration, public hearings are held before any increase in fares or any substantial reduction in service is made. Such change is made only after proper consideration has been given to the

A-8 views and comments expressed in such hearings and after consideration has been given to the effects on energy conservation and the economic, enviromnental and social impact of such change.

Ridership

Average weekday passenger trips for the Fiscal Years ended June 30, 1996 through June 30, 2005 are set forth below.

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

East Bay... 62,499 65,525 68,193 69,239 74,575 78,683 77,215 74,484 74,942 75,390 West Bay .. 64,144 67,066 68,663 75,938 83,657 87,939 83,423 77,119 85,637 87,800 Transbay .. 122,026 127,952 128,467 133,506 152,036 164,964 150,087 143,555 145,991 147,526 Average Total Weekday Trips .. 248,669 260,543 265,324 278,683 310,268 331,586 310,725 295,158 306,570 310,717 Percentage Annual Change(11 .. 0.2% 4.8% 1.8% 5.0% 11.3% 6.9% (6.3%) (5.0%) 3.9% 1.4%

Source: The District.

(1) Percentage Annual Change for Average Total Weekday Trips.

On October 17, 1989, the San Francisco Bay area experienced the effects of an earthquake that registered 7.1 on the Richter Scale. The epicenter of the earthquake, referred to as the Loma Prieta earthquake, was located in the Santa Cruz mountains about 60 miles south of San Francisco. No structural damage affecting BART operations was found and service was restored within hours of the Loma Prieta earthquake. Among other things, the Loma Prieta earthquake damaged a portion of the San Francisco-Oakland Bay Bridge and a portion of the Cypress Freeway in Oakland. After the Loma Prieta earthquake, the BART System became the primary transportation link between the East Bay and San Francisco. Every available rail car was put into service and, for the first time, BART offered 24-hour service. As a result of the effect of the Loma Prieta earthquake, the BART System experienced an increase in ridership which peaked at 357,000 on November 16, 1989, the day prior to the reopening of the San Francisco-Oakland Bay Bridge. BART System ridership stabilized at an average of 239,000 weekday passengers (between December 1989 and April 1990), a 9% increase compared with the average weekday ridership of219,000 prior to the Loma Prieta earthquake.

Starting in Fiscal Year 1998, ridership increased significantly: by 5% in Fiscal Year 1999, by an additional ll.3% in Fiscal Year 2000, and an additional 6.9% in Fiscal Year 2001. Average weekday trips increased to approximately 295,000 during the summer of 1999, 340,000 during the fall of 2000 and 337,000 during the spring of 200 I. Ridership growth, which peaked in Fiscal Year 200 I, occurred in all areas of the BART System, primarily as a result of growth in the economy of the San Francisco Bay area. During this period, weekday trips peaked at 374,889 on October 4, 2000, resulting from major league professional baseball games played in both Oakland and San Francisco.

During Fiscal Year 2002, BART ridership decreased substantially, with average weekday trips averaging approximately 311,000 or 6% below Fiscal Year 200 I trips. Much of this ridership decrease was attributable to a downturn in the economy of the San Francisco Bay area, stemming from a loss of technology jobs and the impact of the terrorist attacks of September 11, 200 I. The San Francisco Bay area experienced a large number of employee layoffs, thereby decreasing the size of the work travel market. The decrease in employment also alleviated some freeway congestion, making BART less competitive with the automobile on some previously very congested corridors. Additionally, weekend

A-9 ridership decreased, with Saturday and Sunday trips averaging approximately 137,000 and 96,000 respectively, or 5% and 8% below Saturday and Sunday Fiscal Year 2001 trips. Decline in BART ridership continued during Fiscal Year 2003. During Fiscal Year 2004, the opening of the SFO Extension and the leveling off of the economic decline in the San Francisco Bay area resulted in an increase in BART ridership of approximately 3.9%. Ridership continued to increase during Fiscal Year 2005. As of the date of this Official Statement, BART ridership for the twelve (12) month period commencing July 1, 2004 and ending June 30, 2005 increased approximately 1.4% over the twelve (12) month period commencing July 1, 2003 and ending June 30, 2004.

Parking Programs

The District provides a variety of options for passengers who drive to BART stations. As of the date of this Official Statement, parking is provided at 32 stations and the total number of parking spaces provided system-wide is approximately 46,400. Parking is provided in surface lots and in parking garages. Most parking is provided free of charge. A $2.00 daily parking fee is charged at the Daly City station and a $1.00 daily parking fee is charged at the Cohna station. The District also offers a paid monthly reserved parking program at many of its stations which provide parking and a paid long term parking program at most of its stations located on the east side of San Francisco Bay (the "East Bay stations"). The monthly reserved parking program allows passengers to purchase guaranteed parking near the entrance to a station. The long term parking program allows passengers traveling to either San Francisco International Airport or Oakland Airport to purchase permits to park their vehicles at BART stations for periods of time greater than 24 hours. Monthly parking fees vary from station to station within a range of $42 to $84 based on demand. As of the date of this Official Statement, the actual number of spaces set aside at a particular station for the monthly reserved parking program is also determined based on demand. However, the number of spaces set aside under current authorization cannot exceed 25% at East Bay stations and 40% at stations located on the west side of San Francisco Bay (the "West Bay stations"). Pursuant to the long term parking program, permits are sold for use at most East Bay stations, excluding the West Oakland and Lake Merritt stations, based on daily commuter parking utilization. Passengers wishing to purchase a long term parking permit go the BART website parking page, indicate the desired East Bay station and the proposed dates of usage. A computerized reservation program determines whether long term parking permits are available at the desired station for the dates requested. If space is available, the passenger prints out a permit from the passenger's printer. The daily cost for a long term parking permit is $5.00 per day. In addition to the monthly reserved parking program and the long term parking program, a number of spaces are set aside in many BART parking facilities for carpoolers and spaces are set aside for passengers who arrive at stations after 10 a.m. In order to increase the availability of parking for BART passengers at high volume BART station parking lots, a parking validation program is in place. Validation of parking requires parking passengers to use a BART ticket that has been activated through fare gate entry.

On May 26, 2005, the Board of Directors approved several new parking programs, which are also designed to enhance revenues and are scheduled to be implemented no later than January 1, 2006. Such programs include daily weekday parking fees at selected stations and a Single Day Reserved Program for East Bay Stations.

Daily weekday parking fees applicable between the hours of 4:00 a.m. and 3:00 p.m. will initially be implemented at the ten East Bay stations that meet the criteria adopted by the Board of Director on May 26, 2005. Daily weekday parking fees will be implemented at an East Bay station if (i) parking at such station fills three or more days a week and at least 15% of the parking spaces at such station are sold as monthly reserved parking or (ii) the local government jurisdiction requests that the District implement a daily fee. East Bay stations which currently meet one these criteria include West Oakland, MacArthur, Lake Merritt, Rockridge, Orinda, Lafayette, Walnut Creek, Dublin/Pleasanton,

A-10 North Berkeley, and Ashby. A daily weekday fee of $1.00 will be imposed at each of these stations except West Oakland. A daily weekday fee of $5.00 will be imposed at West Oakland.

A Single Day Reserved Parking Permit Program will be available at all East Bay stations with parking. This program will operate similarly to the long term parking program described above. Passengers wishing to purchase a Single Day Reserved Program parking permit go to the BART website parking page, indicate the desired East Bay station and the proposed date of usage. A computerized reservation program determines whether single day parking permits are available at the desired station for the date requested. If space is available, the passenger prints out a permit from the passenger's printer. The cost for the Single Day Reserved Program parking permit will be between $3.00 and $5.00 and will vary from station to station.

STRATEGIC PLANS, SHORT RANGE TRANSIT PLANS AND CAPITAL IMPROVEMENT PROGRAMS

From time to time, the Board of Directors adopts a strategic plan ( each, a "Strategic Plan") to support the mission of BART. The current Strategic Plan was adopted by the Board of Directors in 1999 and updated in 2003. To support and supplement the Strategic Plan, the District periodically prepares short range transit plans ( each a "Short Range Transit Plan" or "SRTP") and capital improvement programs ( each, a "Capital Improvement Program" or "CIP") which detail the District's efforts to provide safe, reliable and efficient transit service to the San Francisco Bay area and frame the District's challenges for the upcoming decade by focusing on BART's strategic vision, operational requirements, capital requirements and underlying fmancial plans. The SRTP and the CIP are prepared on a 2-year cycle, with minor updates prepared in alternating years. The current update of the Short Range Transit Plan (hereinafter referred to as the "FY05 SRTP"") and Capital Improvement Program (hereinafter referred to as the "FY05 CIP"") were adopted by the Board of Directors on September 9, 2004 and relate to Fiscal Year 2005 through Fiscal Year 2014. A minor update to the FY05 SRTP and the FY05 CIP is in process and is currently scheduled for consideration by the Board of Directors in October 2005.

Major program areas of the FY05 CIP include System Reinvestment, Earthquake Safety, Service and Capacity Enhancement and System Expansion. The System Reinvestment Program consists of numerous infrastructure rehabilitation and replacement projects designed to improve the reliability of the District's rail cars and other BART System elements. The Earthquake Safety Program is intended to address the earthquake risk from several major fault lines in the immediate vicinity of the BART rail lines. The Service Capacity and Enhancement Program includes a variety of elements, including accessibility improvements to better accommodate disabled riders, general access to stations through a variety of modes, station area development to attract and accommodate increased ridership, and projects to increase the passenger-carrying capacity of the BART System, including station and line-haul capacity. The System Expansion Program consists of various extension projects being studied, designed and/or constructed within the BART System.

System Reinvestment Program

First Generation Reinvestment Program. In 1995, the District initiated a comprehensive program of essential renovation requiring $1.508 billion to complete. This program (herein referred to as the "First Generation Reinvestment Program"), was funded from a variety of funding sources, including various federal, state, and local funding sources, and as of the date of this Official Statement is essentially complete. Major elements of the First Generation Reinvestment Program are described below.

A- and B-Car Renovation Program. The largest single component of the 1995 Reinvestment Program was the rebuilding of the entire original fleet of 59 control-equipped A-cars and

A-11 380 non-control equipped B-cars to extend their useful lifetimes. The rebuilding program, completed in September 2002, consisted of disassembly and complete repair, upgrading and rebuilding of each car and restoring each car to like-new condition.

Automatic Fare Collection Modernization/ Translink Implementation. The Automatic Fare Collection Modernization Program (the "AFC Modernization Program") provided for the complete renovation and replacement of fare collection equipment throughout the BART System, including ticket vendors, addfare machines, and faregates. The AFC Modernization Program also provided new bill-to bill change machines for installation in each station, upgrades to the central Data Acquisition System and station infrastructure upgrades. The new fare collection equipment is compatible with MTC's Translink Program, designed to enable a transit rider to utilize one ticket to access multiple transit systems within the San Francisco Bay area. Translink implementation for faregates, targeted in the FY05 CIP for revenue service in late 2005, is currently experiencing contractual delays. Options regarding implementation are currently being explored by MTC, the District and other transit operators within the San Francisco Bay area.

Escalator and Elevator Renovation and Replacement. This program, completed in 2004, encompassed the full renovation or replacement of escalators at the 34 oldest stations of the original 71 mile core system. Twenty-three escalators were completely replaced and one hundred twenty escalators were renovated.

Advanced Automatic Train Control. This program involves the installation of new train control technology from the Bay Fair station to the Daly City station and is designed to enhance service by reducing run times and the headway time between trains in the most congested part of the BART System. Upon completion of a demonstration phase, issues involving the new technology's integration with the existing train control system were identified. Negotiation to resolve these issues are underway between the technology's suppliers and the District. The District currently estimates that approximately $5 million will be required to complete this program.

Future Plans. As of the date of this Official Statement, the District has begun developing and refining its next generation reinvestment program, which is expected to include structural, mechanical, and power-related renovation projects. In addition, discussion is underway concerning whether to renovate or replace the C-1 cars which will be nearing the end of their expected useful life after approximately 2011. Concurrently with this needs assessment, the District is beginning discussions with potential funding partners to develop a financing strategy for further BART System renovation.

Earthquake Safety Program

The original components of the BART System, constructed in the 1960s, were designed to withstand much greater seismic stress than required by construction standards of the time. The 1989 Loma Prieta earthquake provided a significant test of that design. BART was back in service just hours after the event, while many roads, bridges, freeways, and other structures in the San Francisco Bay area suffered major damage. With the San Francisco-Oakland Bay Bridge out of service, BART served as a vital link between San Francisco and the East Bay following the Loma Prieta earthquake. However, the epicenter of the Loma Prieta earthquake was located approximately 60 miles from most of the BART System. BART faces earthquake risk from several major fault lines in the immediate vicinity of BART rail lines.

In Fiscal Year 2001, BART embarked on a comprehensive study (the "Seismic Vulnerability Study") to assess the vulnerability of, and evaluate the risk to, BART's physical plant and systems, from a major earthquake in the San Francisco Bay area located on a nearby fault. The Seismic Vulnerability Study, developed by BART after more than a year of engineering analysis and presented to

A-12 the Board of Directors on June 6, 2002, identified retrofit strategies to strengthen the BART System. In order to implement a retrofit strategy based on the Seismic Vulnerability Study, the Board of Directors adopted a resolution on July 25, 2002, placing a measure on the November 5, 2002 ballot seeking authorization to issue general obligation bonds, in one or more series, in an amount not to exceed $1.05 billion. The November 5, 2002 ballot measure failed to receive approval by at least a two-thirds vote in the Three BART Counties, receiving approval from 64.2% of the voters voting on the ballot measure.

Subsequently, on June 10, 2004, the Board of Directors adopted a General Obligation Bond Program Report, which defined a $1.307 billion earthquake safety program (the "Measure AA Earthquake Safety Program") based on the Seismic Vulnerability Study. The Measure AA Earthquake Safety Program is designed (i) to protect aerial trackway structures, underground trackway structures, including the Trans bay Tube, and at-grade trackway structures, stations, and administrative, maintenance, and operations facilities and (ii) to provide additional retrofits to facilitate a rapid return to service in the core of the BART System, spanning from the west portal of the Berkeley Hills Tunnel to the Daly City Yard.

In order to fund a portion of the Measure AA Earthquake Safety Program, the Board of Directors adopted a resolution on June 10, 2004, placing a measure ("Measure AA") on the November 2, 2004 ballot seeking authorization to issue general obligation bonds, in one or more series, in an amount not to exceed $980 million. Measure AA received approval by at least a two-thirds vote in the Three BART Counties, receiving approval from 68.8% of the voters voting on Measure AA.

Funds provided by the issuance of the General Obligation Bonds, together with approximately $143 million from funds authorized pursuant to California State Senate Bill 916, enacted in 2003 and approved in March 2004 by San Francisco Bay area voters as Regional Measure 2 ("Regional Measure 2"), $134 million of Local Seismic Safety Retrofit Program funds expected to be provided by the California State Department of Transportation ("Caltrans"), and $50 million from BART Revenues are expected to fully fund the Measure AA Earthquake Safety Program.

In addition to the retrofit strategy described in the Vulnerability Study and incorporated in the Measure AA Earthquake Safety Program, the Vulnerability Study included additional retrofit strategies (such additional retrofit strategies, together with the Measure AA Earthquake Safety Program, being hereinafter referred to as the "Earthquake Safety Program"), which would retrofit the entire 71 mile original system to facilitate a rapid return to full service systemwide following a major earthquake, at an additional cost estimated at $300 million. To date, funds have not been secured for this additional portion of the Earthquake Safety Program. However, the Earthquake Safety Program is among the transportation projects identified as a Tier 2 project in the Alameda County Transportation Improvement Authority ("ACTIA") transportation expenditure plan (the "Alameda County Measure B Expenditure Plan") approved in connection with the approval of a ballot measure which provides for the collection of a one half of one percent sales tax (the "Alameda County Measure B Sales Tax") in Alameda County for transportation purposes. As a Tier 2 project, the Earthquake Safety Program will receive receipts of the Alameda County Measure B Sales Tax only in the event that more funds than anticipated become available from the Alameda County Measure B Sales Tax. In the event that more funds than anticipated become available from the Alameda County Measure B Sales Tax, the Alameda County Measure B Expenditure Plan allocates $109 million to fund a portion of the costs of the Earthquake Safety Program. In addition, the District continues to pursue other funding alternatives and is working with the District's federal representatives to advocate for inclusion of funding for the costs of the Earthquake Safety Program in federal transportation fmancing legislation.

A-13 Security Euhaucemeut Program

Prior to the terrorist attacks of September 11, 2001, the District had an active security program in place under the auspices of the BART Police Department. The security program also included full involvement by the various District operating departments. Subsequent to the terrorist attacks of September 11, 2001, this security program continued, with the BART Police Department currently numbering 215 sworn police officers. However, subsequent to the terrorist attacks of September 11, 2001, the District has made significant investments in security training for all employees, customer outreach, physical hardening of BART facilities, and the development/installation of electronic security enhancements. In addition, concerted efforts to enhance the security of certain components of the BART System are ongoing and involve cooperation with, among others, outside law enforcement agencies and the U.S. Department of Homeland Security. However, unlike an airport system, the BART System remains fundamentally open, and open and easy access to transit service and public facilities 1s fundamental to the success of any public, mass transit system, including BART. The District 1s continuing its efforts to make its facilities and riders as secure as possible under such circumstances.

Service aud Capacity Euhaucemeut Program

Major elements of this program include station enhancements and upgrades, capacity projects, station access improvements and transit oriented development projects.

Statiou Euhaucemeuts aud Upgrades. Station enhancement and upgrade projects include capacity expansion and upgrade projects within the paid and unpaid areas of stations. Such projects may be either systemwide projects or individual station projects, which are developed through a comprehensive planning process. Once projects are identified, grant funding is sought from a variety of sources to allow for project implementation. When grant funding is secured and identified for a particular project, such project is implemented. Projects identified, funded and implemented to date include the reconstruction of the station entrance plaza at the 16th/Mission Street station, streetscape improvements at Concord station, and access and accessibility improvements at both Glen Park and Balboa Park stations.

Capacity Projects. Capacity projects may be either systemwide projects or station specific projects. Once projects are identified, grant funding is sought from a variety of sources to allow for project implementation. When grant funding is secured and identified for a particular project, such project is implemented. Station capacity projects identified, funded and implemented to date include the phase one expansion at the Balboa Park station, consisting of a new escalator, stairs, faregates and emergency exit improvements.

Statiou Access Im provemeuts. During the Fiscal Year ended June 30, 2000, the Board of Directors adopted the Access Management and Improvement Policy Framework (the "Access Improvement Policy"). The Access Improvement Policy called for the development of access goals, new partnerships with transit agencies, local communities and private entities, parking resource management and development of access improvements consistent with station area planning strategies. Pursuant to the Access Improvement Policy, station access improvement efforts continue.

Through the Fiscal Year ended June 30, 2004, District staff completed access plans for seventeen stations. Each access plan is intended to guide investment decisions at the station for which it was developed. In addition, District staff developed the BART Station Access Guidelines, which map out how the District can optimize access to stations by all modes.

Ongoing access program projects are divided into six categories: Bicycle, Auto, Signage, System Accessibility and Americans with Disability Act ("ADA") Improvements, Transit Connectivity, and Pedestrian. A systemwide Bicycle Plan was developed and distributed to the Board of Directors in

A-14 September 2002. Bicycle related projects are implemented as grant funding is obtained. Auto-oriented access projects include, among other projects, the parking management programs described above under the caption "The BART System - Parking Programs," a partnership with the San Francisco based non profit City Car Share organization to provide affordable hourly car rentals, and the SMART Parking Pilot Program, a program developed as a result of cooperation among the District, Caltrans and The University of California, Berkeley, to provide potential BART passengers using California State Highway 24 with real-time parking availability at the Rockridge stations. Signage projects involve programs designed to enhance informational signage at and around stations to make access to the stations and to activities surrounding the stations more accessible to BART passengers. System accessibility and ADA projects are designed to improve system accessibility for users with disabilities by incorporating ADA guidelines and regulations within the BART System. Such projects include parking and path improvements, ADA compatible signage and ADA-related elevator projects. Transit connectivity projects are designed to improve coordination with other transit agencies and include such projects as adjustment of service schedules and construction of intermodal facilities. Pedestrian access projects include pedestrian friendly amenities, including crosswalks, sidewalks, curb cuts and signage.

Implementation of System Access Improvements projects is dependent upon securing funding. When grant funding is secured and identified for a particular project, such project is implemented.

Transit-Oriented Development. During 2004, a policy review panel, comprised of representatives of the Board of Directors, ABAG, MTC, the Bay Area Quality Management District and the Center for Transit-Oriented Development, a national organization formed to address transit-oriented development issues, conducted a comprehensive review of BART development activity in order to revise existing BART policies regarding real estate development. On July 14, 2005, the Board of Directors adopted the revised policy (the "Transit-Oriented Development Policy"), which resulted from this review. The Transit-Oriented Development Policy is intended to guide development on BART land, to provide for interface with private development adjacent to BART stations, and to assure that access to BART stations will be accommodated by all development around BART stations.

To date, BART has completed a residential project at Castro Valley. In addition, projects are in process at the Fruitvale, Hayward and Richmond stations. Other projects in various stages of development are slated for the Ashby, Coliseum, Dublin/Pleasanton, MacArthur, Pleasant Hill, Richmond (second phase), Walnut Creek and West Oakland stations. The District is working closely with a variety of local jurisdictions, community groups and private development partners to advance such projects and to support their efforts to develop public and private funding plans for these projects. Participation in the planning and development process does not commit the District to funding any project.

System Expansion Program

Proposed extensions of the BART System include:

West Dublin/Pleasanton Infill Station. This planned project will build the third station originally planned for the Castro Valley-Dublin/Pleasanton Extension in Alameda County. The District is working with a developer on the development of a mixed-use project, which will surround the station on either side of the Interstate 580 freeway and is expected to include residential, hotel and office use as well as parking. The District currently anticipates issuing approximately $70 million of Sales Tax Revenue Bonds prior to June 30, 2006 to finance the new station and two parking garages.

Oakland Airport Connector. This planned project, identified as a $254.3 million project in the Transportation 2030 Plan for the San Francisco Bay area, prepared by the MTC, would extend in a 3.2 mile long aerial alignment from the existing Coliseum/Oakland Airport station to the

A-15 Oakland International Airport in Alameda County. This project is also identified as a Tier I project in the Alameda County Measure B Expenditure Plan and $76.3 million (in 1998 dollars) is expected to be provided by ACTIA from the Alameda County Measure B Sales Tax to fund a portion of this project. In addition to the funds expected to be provided by ACTIA from the Alameda County Measure B Sales Tax, $30 million in bridge toll funds has been secured from Regional Measure 2 bridge toll funds and $33 million has been programmed by the State Transportation Improvement Program ("STIP"). This project is also expected to receive an additional $44 million in STIP programming, $31 million in bridge toll funds authorized pursuant to California State Senate Bill 45, enacted in 1988 and later approved by San Francisco Bay area voters as Regional Measure I ("Regional Measure I"), and $25 million of funding from the Port of Oakland. The District is working to secure the additional funds necessary to complete this project.

Warm Springs Extension. This planned $678 million extension (in 2004 dollars) would extend south from the current end of the line at the Fremont station to a station at Warm Springs in southern Alameda County. This project is partially funded in the amount of $111 million based on approved funding agreements with Caltrans. In addition, this project is among the transportation projects identified as Tier I projects (projects expected to be funded from receipts of the Alameda County Measure B Sales Tax, based on current assumptions for sales tax revenue growth and construction escalation) in the Alameda County Measure B Expenditure Plan. Pursuant to the Alameda County Measure B Expenditure Plan, $195 million (in 2004 dollars) is expected to be provided by ACTIA to fund a portion of this project. Other regional funds are being pursued to provide the balance necessary to complete this project, including $58 million in regionally programmed STIP funds, $84 million in Regional Measure I bridge toll funds, $85 million in Regional Measure 2 bridge toll funds, and $145 million from the San Mateo County Transit District.

Silicon Valley Rapid Transit Project. This potential extension would extend the BART System 16.3 miles from the future Warm Springs station in Fremont to Milpitas, San Jose and Santa Clara in Santa Clara County. BART expects that this extension will be financed and constructed by VT A. On November 19, 200 I, BART and VTA cosigned a comprehensive agreement, which outlined the responsibilities of each concerning the construction, management, financing, operation and ongoing maintenance of this extension, and which requires the District and VTA to continue to work together to design and construct this extension. The downturn in the economy which occurred in 200 I and which was particularly severe in VT A's service area will most likely result in a delay in the development of this extension. The cost of this extension is currently estimated to be $4.193 billion (in 2003 dollars), of which $2. 71 billion is expected to come from a ballot measure, approved by the voters of Santa Clara County in the November 7, 2000 election, authorizing a one-half of one percent sales tax to fund transit projects and programs, and State and local sources to be determined, $649 million is expected to come from State Traffic Congestion Relief Program funds and the remainder is expected to come from the federal Section 5309 New Starts Program.

eBART/East Contra Costa Rail Extension. This proposed extension, designed to improve transit service in the congested California State Highway Route 4 ("State Route 4") corridor, consists of a 23-mile extension eastward from the Pittsburg, Bay Point station. Rail service in the form of diesel powered commuter trains would be provided for the Contra Costa County communities of Antioch, Oakley, Brentwood, and Byron. The alignment would be located in the median of State Route 4 from the Pittsburg, Bay Point station eastward to Loveridge Road, and then shift out of the median and travel east toward Byron. Estimated cost is $390 million in 2004 dollars. Funding sources secured to date include $150 million from a ballot measure approved by the voters of Contra Costa County in the November 2, 2004 election authorizing the extension of a one-half of one percent sales tax currently in effect in Contra Costa County to fund transportation projects, and $96 million in bridge toll funds authorized by Regional Measure 2. Additional funding sources are being sought. Environmental review was initiated in July 2005. In addition, preliminary engineering and early right of way activities are underway.

A-16 Tri-Valley Rail Extension. This proposed extension, currently the subject of a study being directed by the Alameda County Congestion Management Agency, is designed to provide an alternative to traffic congestion on Interstate 580 and to improve transit connectivity in the Tri-Valley area. No funding has been identified for this proposed extension.

The SFO Extension, the most recently completed extension of the BART System, is described below.

SFO Extension. In June 2003, the District commenced revenue service on the SFO Extension. The projected final cost of the SFO Extension exceeds the amount budgeted by approximately $114 million. Approximately $43 million of proceeds of the Premium Fare Bonds were applied to fund a portion of such projected additional costs. In addition, the District is pursuing several other strategies for payment of such projected additional costs. Such strategies include discussions with MTC relating to $60 million in funding previously made available to the District for the SFO Extension by MTC from certain reserve funds held by MTC to fund rail extension projects in the East Bay. Such funding was considered a loan to the District, to be repaid by the District upon receipt of the final payments from the Federal Transit Administration under the Grant Agreement. (See "Financing the BART System - Full Funding Grant Agreement Financings"). At this time, the District anticipates that it will not have identified funds to repay such loan at the time of receipt of the final payments under the Grant Agreement. The District and MTC are currently in negotiations to identify a mutually satisfactory course of action acceptable to both parties relating to such previously provided funding.

In connection with the SFO Extension, which is located in San Mateo County outside of the boundaries of the District, the District entered into an agreement ( as amended, the "Comprehensive Agreement"), with the San Mateo County Transit District ("Sam Trans"). Pursuant to the terms of the Comprehensive Agreement, the District and SamTrans share any operating surpluses generated by the SFO Extension and SamTrans is responsible for any operating deficits generated by the SFO Extension. To date, ridership has been lower than expected resulting in lower than expected revenue generation. As a result, the District and SamTrans agreed to modify SFO Extension services in May 2004. Recently, SamTrans proposed additional changes which, as required pursuant to the Comprehensive Agreement, were approved by the governing body of Sam Trans and the Board of Directors. Such changes include SFO Extension routing changes, increasing the time between SFO Extension trains during commute hours and, effective January 1, 2006, application of the $1.14 San Mateo County surcharge to trips between the San Francisco International Airport station and the Daly City, Cohna, South San Francisco and San Bruno stations.

DISTRICT FINANCIAL INFORMATION

Financial Statements

A copy of the most recent audited fmancial statements of the District prepared by PricewaterhouseCoopers LLP ("PricewaterhouseCoopers"), San Francisco, California, are included as Appendix B to this Official Statement. See Appendix B - "San Francisco Bay Area Rapid Transit District Report on Audits of Financial Statements for the Years Ended June 30, 2004 and 2003." The financial statements of the District included in Appendix B to this Official Statement have been examined by PricewaterhouseCoopers, whose report thereon appears in such Appendix. PricewaterhouseCoopers was not requested to consent to the inclusion of its report in Appendix B, nor has PricewaterhouseCoopers undertaken to update its report or to take any action intended or likely to elicit information concerning the accuracy, completeness or fairness of the statements made in this Official Statement, and no opinion is expressed by PricewaterhouseCoopers with respect to any event subsequent to the date of its report.

A-17 Historical Financial Resnlts

The table on the following page sunnnarizes BART's income statements for the Fiscal Years ending June 30, 2000 through June 30, 2004. The summary income statements for the Fiscal Years ending June 30, 2000 through June 30, 2004 are derived from BART audited fmancial statements for the Fiscal Years indicated therein ( excluding certain non-cash items and after certain other adjustments) and are qualified in their entirety by reference to such statements, including the notes thereto.

(Remainder of Page Intentionally Left Blank)

A-18 HISTORICAL FINANCIAL RESULTS (in thonsands) (Fiscal Year Ending Jnne 30)

2000 2001 2002 2003 2004 Armual Passengers 91,092 97,281 90,797 87,381 91,042

Operating Revenues Passenger Revenues $194,291 $213,260 $193,701 $191,386 $220,391 Investment Income 9,330 10,697 7,002 5,575 1,324 Other 9,476 13,377 13,907 13,698 14,155

Total Operating Revenues $213,098 $237,333 $214,610 $210,659(l) $235,870(l)

Financial Assistance: Sales Tax Revenues $170,911 $191,648 $172,774 $167,441 $170,566 Property Tax Revenues 15,479 17,011 18,713 20,252 21,372 Other 723 529 1,253 2,440 19,875

Total Financial Assistance $187,113 $209, 188 $192,741 $190,133 $211,813

Total Revenues $400,211 $446,521 $407,351 $400,792 $447,683

Operating Expenses: Labor $226,943 $239,581 $244,326 $247,561 $275,126 Electrical Power 18,026 17,366 18,323 19,912 24,078 Express Feeder Bus 1,573 2,677 17(2) 2,391 2,411 Other Non-Labor 68,256 74,460 73,221 69,403 80,321

Total Operating Expenses $314,799 $334,084 $335,887 $339,267 $381,936

Net Operating Revenues $85,412 $112,438 $ 71,464 $ 61,525 $ 65,747

Annual Sales Tax Revenue Bond Debt Servicecsi $ 46,211 $ 48,108 $ 52,554 $ 54,663 $ 54,840

Remaining Revenues $ 39,201 $ 64,330 $ 18,910 $ 6,862 $ 10,907

Operating RatioC4l 68% 71% 64% 62% 62% Farebox Ratiocsi 62% 64% 58% 56% 58%

Source: The District. (1) Excludes one-time revenues related to the demutualization of Principal Mutual Holding Company in Fiscal Year 2002. See Note 2 to the audited financial statements of the San Francisco Bay Area Rapid Transit District included as Appendix B to this Official Statement. (2) One time decrease in Express Bus Feeder expenses due to increase in State Transportation Assistance and Transportation Development Act funding. (3) For a complete discussion of BART's long term debt, see Note 7 to the audited financial statements of the San Francisco Bay Area Rapid Transit District included as Appendix B to this Official Statement. (4) Operating Ratio is defined as the total operating revenues divided by the total operating expenses. (5) Farebox Ratio is defined as total passenger revenue divided by total operating expenses.

A-19 Management's Discnssion of Historical Financial Resnlts

Total ridership peaked in the Fiscal Year ended June 30, 2001 at approximately 97,281,000. Subsequently, total ridership decreased to approximately 91,042,000 trips in the Fiscal Year ended June 30, 2004. This decrease resulted from the recessionary enviromnent in the San Francisco Bay area economy, particularly for the technology and tourism segments. In addition, fewer jobs in the San Francisco Bay area resulted in a reduction of freeway congestion which reduced BART's attractiveness as an alternative to the automobile. Total ridership increased to approximately 92,756,000 trips in the Fiscal Year ended June 30, 2005. As of the date of this Official Statement, total BART ridership for the twelve ( 12) month period commencing July 1, 2004 and ending June 30, 2005 increased approximately 1.9% over the twelve (12) month period commencing July 1, 2003 and ending June 30, 2004. See also "The BART System - Ridership."

Sales Tax Revenues peaked during the Fiscal Year ended June 30, 2001 at approximately $191,648,000. Subsequently, Sales Tax revenues decreased to approximately $167,441,000 for the Fiscal Year ended June 30, 2003. This decrease also resulted from the recessionary environment in the San Francisco Bay area economy. Commencing in the Fiscal Year ended June 30, 2004, Sales Tax Revenues began to increase. Sales Tax Revenues for the Fiscal Year ended June 30, 2005 were approximately $178,392,000 (unaudited), an increase of approximately 4.6% over the Fiscal Year ended June 30, 2004. See "Security for the Series 2005 A Bonds - Sales Tax Revenues" in the front portion of this Official Statement.

Management has established a goal of maintaining an operating ratio (percentage of operating revenue to operating expense) of approximately 50%, a level that exceeds that of most urban rail systems. The operating ratio was 62% for the Fiscal Year ended June 30, 2003, June 30, 2004 and June 30, 2005.

See also "Management's Discussion and Analysis" set forth in Appendix B - "San Francisco Bay Area Rapid Transit District Report on Audits of Financial Statements for the Years Ended June 30, 2004 and 2003."

Prior to the Fiscal Year ending June 30, 1979, BART levied a limited property tax for operating purposes which the District is no longer permitted to levy pursuant to legislation implementing Article XIII A, a constitutional provision that limits ad valorem tax on real property to one percent (1 %) of the full cash value of such property, subject to certain exceptions. Enabling legislation adopted by the State Legislature subsequent to the adoption of Article XIII A allocates a portion of the one percent ( 1%) ad valorem property tax levied in the Three BART Counties to the District. Between the Fiscal Year ended June 30, 2000 and the Fiscal Year ended June 30, 2005, the District's allocated share of such ad valorem property tax increased from approximately $15,479,000 to approximately $22,411,762. This increase is related to the increase in property values and new residential and commercial development within the Three BART Counties.

In connection with the adoption of the 2004 Budget Act by the State Legislature, the State Legislature enacted Proposition lA, which was approved by the voters of the State in the November 2004 general election. Pursuant to Proposition lA, 3 % of the receipts of the ad valor em property tax described in the preceding paragraph, or approximately $700,000 per Fiscal Year, will be allocated to the State for its use in resolving the deficit in the State's General Fund in Fiscal Year 2005 and Fiscal Year 2006. Commencing in Fiscal Year 2009, the State may shift up to 8% of the receipts of the ad valorem property tax described in the preceding paragraph, provided, however, that: ( i) the Governor of the State shall have declared that a "severe State fiscal hardship" requires such reduction; (ii) such shifted funds shall be paid back within three (3) Fiscal Years; and (iii) such shifts may not occur in more than two (2) Fiscal Years during any period often (10) consecutive Fiscal Years.

A-20 Financial Forecast

The FY05 SRTP included a ten-year operating financial forecast (the "Financial Forecast") which details a ten-year outlook for the existing BART System, based upon the budget adopted for the Fiscal Year ending June 30, 2005. The Financial Forecast indicated that the District projected a cumulative deficit of approximately $350 million through the Fiscal Year ending June 30, 2014 without additional or increased revenue sources or cost contaimnent reductions. As in the past, the District pursued and will continue to pursue and implement a number of strategies to avoid projected shortfalls, including a combination operating expense reductions and strategies to generate revenues. Operating expense reductions are expected to include implementing technology and productivity advancements to reduce or avoid increasing operational costs, exploring greater service efficiency and effectiveness and working to increase and optimize ridership. In addition, careful consideration of wages and benefits will continue to be required.

In order to address the projected deficit in the Fiscal Year 2006 operating budget, management implemented expense reductions and developed a number of revenue enhancement proposals, which included proposed surcharges tied to specific capital needs, proposed changes to the parking program and proposed fare changes, including examination of certain discount programs. On April 28, 2005, the Board of Directors held a public hearing on the proposed revenue enhancement proposals. On May 26, 2005, the Board of Directors adopted a program of revenue enhancements which included a small surcharge, fare changes and parking program changes. See "The BART System - Passenger Fares" and "Parking Programs" above. Such expense reductions and revenue enhancements, together with the settlements reached with the District's largest labor organizations and the settlements expected to be reached with the remaining labor organizations, are expected to result in the elimination of the deficits previously projected for the Fiscal Years ending June 30, 2006 through June 30, 2009. See "San Francisco Bay Area Rapid Transit District - Employees and Labor Relations."

Investment Policy

The investment of funds of BART are made in accordance with BART's investment policy, developed by BART's Treasurer and approved by the Board of Directors on October 23, 2003 (the "Investment Policy") and Section 53600 et seq. of the California Government Code. The Investment Policy is subject to revision by the Controller/Treasurer, subject to approval by the Board of Directors, at any time and is reviewed periodically to ensure compliance with the stated objectives of safety, liquidity, yield and current laws and fmancial trends.

All funds of BART and investment activities are governed by the Investment Policy, which sets forth the following primary objectives, in order of priority:

1. Preservation of capital.

2. Liquidity - funds shall be invested only until date of anticipated need or for a lesser period.

3. Yield - generation of a favorable return on investment without compromise of the first two objectives.

See Appendix C - "San Francisco Bay Area Rapid Transit District Statement of Investment Policy."

Set forth in the table on the following page are the market values and types of investment securities in BART's General Fund as of June 30, 2005.

A-21 INVESTMENT DISTRIBUTION as of Juue 30, 2005

FHLMC Discount Notes $ 35,000,000 FNMA Discount Notes 75,000,000 FHLB Discount Notes 20,000,000 FHLMC Debenture 5,000,000 Treasury Notes 15,000,000 Miscellaneous Federal Agency Securities 20,000,000 Certificates of Deposit 800,000 Mutual Fund 49 598 684

Total $ 220,398,684

As of June 30, 2005 the average duration of the District's investments ( average days to maturity) was 71 days.

All amounts deposited in the Project Fund established in connection with the General Obligation Bonds authorized by the voters in the Three BART Counties in the election held on November 2, 2004 will be invested at the direction of the District in Investment Securities as such term is defmed in the Paying Agent Agreement entered into by the District in connection with the General Obligation Bonds. Investment Securities include guaranteed investment contracts.

All amounts held by the respective trustees for the Sales Tax Revenue Bonds, the Bridge Toll Notes, the FTA Capital Grant Bonds and the Premium Fare Bonds in the funds and accounts established under the indentures pursuant to which such obligations were issued are invested at the direction of the District, subject to certain limitations contained in the applicable indenture. Amounts held on deposit by the applicable trustee for the Bridge Toll Notes and the Series 2001 FTA Capital Grant Bonds are invested in guaranteed investment agreements. In addition, certain amounts held on deposit by the applicable trustee for the Series 2004 FTA Capital Grant Bonds are invested in a guaranteed investment agreement.

Employee Retirement Benefits

The information concerning the California Public Employees' Retirement System ("CalPERS'') set forth below is excerpted from publicly available sources which the District believes to be accurate. CalPERS should be contacted directly at CalPERS, Lincoln Plaza, 400 P Street, Sacramento, California 95814, Telephone: (888) 225-7377for other information, including information relating to its financial position and investments.

Plan Description. All eligible employees may part1c1pate in the Public Employees' Retirement Fund (the "Fund") of CalPERS under the Miscellaneous Plan and the Safety Plan of the San Francisco Bay Area Rapid Transit District. The Fund is an agent multiple-employer public sector employee defined-benefit retirement plan that acts as a common investment and administrative agent for 2,560 local public agencies and school districts within the State of California. The Fund provides retirement, disability and death benefits based on the employee's years of service, age and compensation. Employees vest after five years of service and may receive retirement benefits at age 50. These benefit provisions and all other requirements are established by State statute and District contractual agreements.

Funding Policy. The funding policy for the Miscellaneous Plan and the Safety Plan (hereinafter sometimes referred to as the "CalPERS Plans") provides for periodic District contributions of actuarially-determined amounts sufficient to accumulate the necessary assets to pay benefits when due as specified by contractual agreements. The individual entry age normal method is used to determine the

A-22 normal cost, and beginning on July I, 1997, the unfunded actuarial accrued surplus or liability (past service liability) is amortized as a level percentage of future covered payroll over 13 years for the Miscellaneous Plan and the Safety Plan. District contributions for the fiscal year ended June 30, 2004 (which is the most current fiscal year for which information is available) to cover normal cost and to amortize the unfunded actuarial accrued surplus approximated 7.201% (7.051% in 2003) and 15.029% (15.050% in 2003) of covered payroll for the Miscellaneous Plan and the Safety Plan, respectively.

The staff actuaries at Ca!PERS prepare annually an actuarial valuation which covers a Fiscal Year ending approximately fifteen ( 15) months before the actuarial valuation is prepared (thus, the actuarial valuation delivered to the District in October 2004 covered the Fiscal Year ended June 30, 2003). The actuarial valuation expresses the District's required contribution rates in percentages of payroll, which percentages the District contributes in the Fiscal Year immediately following the Fiscal Year in which the actuarial valuation is prepared (thus, the District's contribution rates derived from the actuarial valuation as of June 30, 2003, which was prepared in October 2004, will be effective during the District's Fiscal Year ending June 30, 2006). Ca!PERS rules require that the District implement the actuary's recommended rates.

In calculating the annual actuarially required contribution rates, the Ca!PERS actuary calculates, on the basis of certain assumptions, the actuarial present value of benefits that Ca!PERS will fund under the Ca!PERS Plans, which includes two components, the normal cost and the unfunded actuarial accrued liability (the "UAAL"). The normal cost represents the actuarial present value of benefits that Ca!PERS will fund under the Ca!PERS Plans that are attributed to the current year, and the U AAL represents the actuarial present value of benefits that Ca!PERS will fund that are attributed to past years. The UAAL represents an estimate of the actuarial shortfall between assets on deposit at Ca!PERS and the present value of the benefits that Ca!PERS will pay under the Ca!PERS Plans to retirees and active employees upon their retirement. The UAAL is based on several assumptions including, the rate of investment return, average life expectancy, average age of retirement, inflation, salary increases and occurrences of disabilities. In addition, calculation of the UAAL involves certain actuarial adjustments, including the actuarial practice of smoothing losses and gains over multiple years (which is described in more detail below). As a result, prospective investors are encouraged to consider the UAAL as an estimate of the unfunded actuarial present value of the benefits that Ca!PERS will fund under the Ca!PERS Plans to retirees and active employees upon their retirement, and not as a fixed or hard expression of the liability the District owes to Ca!PERS under the Ca!PERS Plans.

In calculating the U AAL in an actuarial valuation, the Ca!PERS actuary smoothes gains and losses over multiple years using a smoothing technique that generally only recognizes one third of the gain or loss realized in a given Fiscal Year. In each actuarial valuation, the Ca!PERS actuary calculates what was the expected actuarial value of the assets (the "Expected Value") of the Ca!PERS Plans at the end of the Fiscal Year (which assumes, among other things, that the real rate of return during that Fiscal Year equaled the assumed rate of return of 8.25%). However, Ca!PERS does not allow the Expected Value to be less than 90% or more than 110% of market value.

Ca!PERS recently approved changes in its actuarial policies to help reduce volatility in employer contribution rates. Changes include amortizing gains and losses over a rolling 30-year period, moving from a three-year to a 15-year smoothing methodology, revising the Expected Value corridor to not less than 80% or more than 120% of market value, and the creation of a stabilization fund.

On April 21, 2004, the Ca!PERS Board of Administration approved a change in the inflation assumption used in the actuarial valuations that set employer contribution rates. The inflation assumption was changed from 3.5% to 3%. The change impacted the inflation component of the annual investment return assumption, the long-term payroll growth assumption and the individual salary increase assumptions as follows:

A-23 • The annual assumed investment return has decreased from 8.25% to 7. 75%.

• The long-term salary increase assumption has decreased from 3.75% to 3.25%.

• The inflation component of individual salary scales has decreased from 3. 75% to 3.25%.

The change to the inflation assumption also impacted the cost of living adjustments and purchasing power protection allowances assumed in the actuarial valuations. These changes are reflected in the June 30, 2003 Ca!PERS actuarial report which was delivered in 2004 and affects District contribution rates starting in Fiscal Year 2005-06. For complete updated inflation and actuarial assumptions, please contact Ca!PERS at the above-referenced address.

The District's contribution for annual pension cost for fiscal year 2004, which is the most recent fiscal year for which data is available, was $15,356,000 and $2,102,000 for Miscellaneous Plan employees and Safety Plan employees, respectively. The required contribution was determined as part of an actuarial valuation performed as of June 30, 2003, the latest available for the Fund. The significant actuarial assumptions used in the 2003 valuation to compute the pension benefit obligation were an assumed rate of return on investment assets of 7. 75%, annual payroll increases of 3.00% attributable to inflation, 3.25% attributable to real salary increases, and merit increases that vary by length of service, and no postretirement benefit increases.

The funding status applicable to the District's employee group at June 30, 2003 (the most current available for the Fund) is summarized as follows:

Funded Status ofthe Miscellaneous Plan (in thousands ofdollars)

Entry Age Unfunded Normal Actuarial Liability Annual UAAL asa Valuation Accrued Value (Excess Fonded Covered Percentage Date Liability of Assets Assets) Status Payroll of Payroll

6/30/01 $722,298 $991,464 $(269,166) 137.3% $184,513 (149.970)% 6/30/02 $801,662 $944,685 $(143,023) 117.8% $196,260 (72.900)% 6/30/03 $939,072 $950,571 $ (11,499) 101.2% $202,170 (5.700)%

Funded Status ofthe Safety Plan (in thousands ofdollars)

Entry Age Unfunded Normal Actuarial Liability Annual UAAL asa Valuation Accrued Value (Excess Fonded Covered Percentage Date Liability of Assets Assets) Status Payroll of Payroll

6/30/01 $ 70,958 $83,306 $(12,348) 117.4% $12,385 (99.700)% 6/30/02 $ 78,154 $80,207 $ (2,053) 102.6% $12,753 (16.100)% 6/30/03 $100,960 $82,329 $ 18,631 81.5% $14,277 130.500%

Source: District Audited Financial Statements.

For fiscal year 2004, the District was not required to make contributions to the Fund for Miscellaneous Plan employees due to a surplus of the District's portion of the Fund's net assets over the District's pension benefit obligation caused by a change in 1988 in the actuarial valuation method and an actual rate of return on investment assets that exceeded the assumed rate. Commencing July 1, 2004 after

A-24 the surplus was used, the District was required to make contributions for Miscellaneous Plan employees at the rate of2.6150% ofregular earnings.

The District's covered payroll for employees participating in the Fund for the years ended June 30, 2005 and 2004 was $234, 793,000 and $222,678,000, respectively. The District's 2005 and 2004 payroll for all employees was $261,269,000 and $245,589,000, respectively. In accordance with agreements with the labor organizations representing District employees, the District also reimburses the employees for their contributions, which are 9% for Safety Plan personnel and 7% for Miscellaneous Plan employees. Effective October I, 200 I through June 30, 2004, due to the agreements reached with the labor organizations in 200 I and the overfunded status of the Fund, Miscellaneous Plan employees were not required to make contributions to the Fund. Effective July I, 2004, the District resumed making the 7% contribution for Miscellaneous Plan employees.

Postretirement Health Care Benefits

Postretirement Health Care Costs. In addition to the retirement benefits described above, as specified in the District's contractual agreements, the District provides postretirement health care benefits assistance to employees. Most employees who retire directly from the District or their surviving spouses are eligible if the employee retires at or after age 50 with a minimum of 5 years of service with the District, elects to take an annuity from Ca!PERS and makes a timely election of retiree medical. As of June 30, 2004, which is the most recent year for which data is available, 915 retirees and surviving spouses (818 in 2003) are provided this benefit. The District paid up to $508,000 and $405,000 per month for health insurance premiums for the retirees and surviving spouses during fiscal years 2004 and 2003, respectively. These benefits, less a modest premium contribution, are fully funded by the District and accounted for on a pay-as-you-go basis. Cash reimbursements for these benefits totaled $5,525,000 in 2004 ($3,986,000 in 2003). See Appendix B - "San Francisco Bay Area Rapid Transit District Report on Audits of Financial Statements for the Years Ended June 30, 2004 and 2003."

Retiree Health Benefit Trust. In 2004, the Government Accounting Standards Board ("GASB") issued Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions ("GASB 45"). GASB 45 will require the District to change its accounting for other postemployment benefits ("OPEB") from pay-as-you-go to an accrual basis. Pursuant to Section 53620 of the California Government Code, a local agency may create a trust to fund postretirement benefits. The assets of such a trust will qualify as an offset against liability under GASB 45. On May 18, 2004, the District created the Retiree Health Benefit Trust for the San Francisco Bay Area Rapid Transit District (the "Health Benefit Trust") in order to create a trust to provide for prefunding of retiree health benefits. Pursuant to the terms of the Health Benefit Trust, the assets of the Health Benefit Trust are to be held for the sole and exclusive purpose of providing benefits to participants and beneficiaries and to defray the reasonable expenses of administering the Health Benefit Trust and designated plans. Assets placed into the Health Benefit Trust cannot be used for any other purposes and are not available to satisfy general creditors of the District. The Health Benefit Trust is administered by a trustee appointed by the Board of Directors. The current trustee is the Controller/Treasurer of the District.

At February 28, 2005, assets held in the Health Benefit Trust included money market investments, U. S. Treasury agency short-term obligations, corporate obligations, foreign obligations, domestic common stocks and foreign stocks with a fair market value of $33,468,000. These investments are included in the District's audited financial statements and are restricted to use for payment of retiree benefit liabilities that will be recorded when GASB 45 is adopted.

The most recent actuarial analysis, dated September 28, 2004, estimated that the unfunded actuarial accrued liability of the District for retiree medical benefits as of June 30, 2004, assuming investment earnings ranging from 3% to 7. 75%, was between $245 million and $515 million

A-25 and annual required contributions were estimated to be between 12.13% and 23.47% of payroll if funded beginning in Fiscal Year 2005.

Risk Management

The District is partially self-insured for workers' compensation, public liability and property damage claims. For workers compensation, the District purchases $10 million above a self insured limit of $4 million per accident. For public liability, the District purchases $95 million above a self-insured limit of $5 million per occurrence. Property is insured for $70 million per occurrence for certain leased rail cars and $25 million per occurrence for other insured property. The self-insured limit for property is $2.5 million per occurrence, except for losses at the Hayward Test Track where the self insured limit is $3 million per occurrence. Terrorism coverage is provided for workers' compensation and the first $50 million of public liability. Property is insured against flood damage but is not insured against earthquake damage.

The District's self-insurance programs are administered by independent claims adjustment firms. Claim expenses and liabilities are reported when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. Liabilities are discounted at a 5% rate and are based, in part, upon the independent adjustment firms' estimate of reserves necessary for the settlement of outstanding claims and related administrative costs, and included estimates of claims that have been incurred but not yet reported. Such reserves are reviewed by professional actuaries and are subject to periodic adjustments as conditions warrant.

See also see Note 5 to the audited financial statements of the San Francisco Bay Area Rapid Transit District included as Appendix B to this Official Statement.

A-26 APPENDIX B

SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT REPORT ON AUDITS OF FINANCIAL STATEMENTS FOR THE YEARS ENDED JUNE 30, 2004 AND 2003 (Page intentionally left llank.) San Francisco Bay Area Rapid Transit District Report on Audits of Financial Statements For the years ended J une 30, 2004 and 2003 San Francisco Bay Area Rapid Transit District Table of Contents J une 30, 2004 and 2003

Page(s)

Report of Independent Anditors ...... 1

Management's Discnssion and Analysis ...... 2 - 7

Financial Statements

Statements of Net Assets ...... 8

Statements of Revenues, Expenses and Changes in Net Assets ...... 9

Statements of Cash Flows ...... 10 - 11

Notes to Financial Statements

1. Description of Reporting Entity and Significant Accounting Policies ...... 12 - 15 2. Restatement of Previously Issued Financial Statements ...... 15 - 17 3. Cash, Cash Equivalents and Investments ...... 18 - 19 4. Changes in Capital Assets ...... 19 - 21 5. Risk Management ...... 21 6. Related Organizations and Projects ...... 22 - 24 7. Long-Term Debt ...... 24 - 31 8. Deferred Revenue and Other Liabilities ...... 32 -33 9. Federal Financial Assistance ...... 33 10. State and Local Financial Assistance ...... 34 11. Employees' Retirement Benefits ...... 34 - 3 7 12. Retiree Health Benefit Trust ...... 37 - 38 13. Deferred Compensation Plan ...... 3 8 14. Money Purchase Pension Plan ...... 3 8 15. Board of Directors' Expenses ...... 38 16. Commitments and Contingencies ...... 39 - 40 fJR1cEWA1ERHOUsE(roPERS I

PricewaterhouseCoopers LLP 333 Market Street San Francisco CA 94105-2119 Telephone (415) 498 5000 Facsimile (415) 498 7100 Report oflndependent Anditors

To the Board of Directors of San Francisco Bay Area Rapid Transit District

In our opinion, the accompanying statements of net assets and the related statements of revenues, expenses and changes in net assets and of cash flows present fairly, in all material respects, the financial position of San Francisco Bay Area Rapid Transit District (the "District") at June 30, 2004 and 2003, and the changes in its financial position and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the District's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As more fully described in Note 2, the accompanying 2003 financial statements have been restated.

Management's Discussion and Analysis on pages 2 through 7 is not a required part of the basic financial statements but is supplementary information required by the Governmental Accounting Standards Board. We have applied certain limited procedures, which consisted principally of inquiries of management regarding the methods of measurement and presentation of the supplementary information. However, we did not audit the information and express no opinion on it.

December 8, 2004

1 San Francisco Bay Area Rapid Transit District J une 30, 2004 and 2003 Management's Discussion and Analysis (unaudited)

Introductiou The following discussion and analysis of the financial performance and activity of the San Francisco Bay Area Rapid Transit District (the "District") provide an introduction and understanding of the basic financial statements of the District for the years ended June 30, 2004 and 2003. This discussion was prepared by management and should be read in conjunction with the fmancial statements and the notes thereto, which follow this section.

The District is an independent agency created in 1957 by the legislature of the State of California for the purpose of providing an adequate, modem, interurban mass rapid transit system in the various portions of the metropolitan area surrounding the San Francisco Bay. The District started its revenue operations in September 1972. It presently owns a 104-mile, 43-station system serving the four counties of Alameda, Contra Costa, San Francisco and San Mateo. The government of the District is vested in a Board of Directors composed of nine members, each representing an election district within the District.

In 2003, the District substantially completed the construction of the system extension to the San Francisco International Airport. The new extension added 10 track miles and 4 stations to the existing system. The San Francisco International Airport Extension started its revenue operations on June 22, 2003.

The Fiuaucial Statemeuts The District's basic financial statements include the (I) Staterrent of Net Assets, (2) Staterrent of Revenues, Expenses and Changes in Net Assets, and (3) Staterrent of Cash FIOM. The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America as promulgated by the Governmental Accounting Standards Board ("GASB") principles.

Certain amounts in the 2003 fmancial statements were restated to record demutualization revenue received by the District from the Principal Financial Group in December 200 I, to reverse the accrual of postemployment benefits in prior years, and to reclassify certain assets and liabilities as current or noncurrent and/or restricted and unrestricted. The adjustments are fully discussed in Note 2 to the fmancial statements.

Overview of the Fiuaucial Statemeuts The Staterrent of Net Assets reports assets, liabilities and the difference as net assets. The entire equity section is combined to report total net assets and is displayed in three components - invested in capital assets, net of related debt; restricted net assets; and unrestricted net assets.

The net asset component invested in capital assets, net of related debt, consists of capital assets, including restricted capital assets, net of accumulated depreciation and reduced by the outstanding balances of any borrowings attributable to the acquisition, construction or improvements of those assets.

Restricted net assets consist of assets where constraints on their use are either (a) externally imposed by creditors (such as debt covenants), grantors, contributors, or laws or regulations of other governments or (b) imposed by law through constitutional provisions or enabling legislation.

Unrestricted net assets consist of net assets that do not meet the definition of restricted or invested in capital assets, net of related debt. This net asset component includes net assets that have been designated by management for specific purposes which in the case of the District include allocations to fund capital projects and other liabilities, which indicate that management does not consider them to be available for general operations.

2 San Francisco Bay Area Rapid Transit District J une 30, 2004 and 2003 Management's Discussion and Analysis (unaudited)

The Staterrent of Revenues, Expenses and Changes in Net Assets consists of operating and nonoperating revenues and expenses based upon definitions provided by GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, as amended by GASB Statement No. 36, Recipient Reporting for Certain Shared Nonexchange Revenues, and GASB Statement No. 34, Basic Financial Staterrents-and Managerrent's Discussion and Analysis-for State and Local Gc:wernrrents, as amended by GASB Statement No. 37, Basic Financial Staterrents-and Managerrent's Discussion andAnalysis for State and Local Gc:wernrrents: Ormi bus. Accordingly, significant recurring sources of the District's revenues, such as capital contributions, are reported separately, after nonoperating revenues and expenses.

Staterrent of Cash FI ONS is presented using the direct method and includes a reconciliation of operating cash flows to operating income/loss.

Financial Highlights

Statements of Revenues, Expenses and Changes in Net Assets A summary of the District's Staterrents of Revenues, Expenses and Changes in Net Assets for fiscal years 2004, 2003 and 2002 is as follows:

2004 2003 2002 (in thousands of ck:JI lars) As restated As restated

Operating revenues $ 234,546 $ 205,104 $ 207,608 Operating expenses (498,503) (442,936) ( 432,656) Operating loss (263,957) (237,832) (225,048) Nonoperating revenues 162,178 185,617 205,437 Capital contributions 75,010 130,193 235,825 (Decrease) increase in net assets $ (26,769) $ 77,978 $ 216,214

The increase of $29,442,000 in operating revenues in fiscal year 2004 is mainly credited to: (I) an increase of 11,411 ( 4%) in the average weekday ridership from 295, 158 in fiscal year 2003 to 306,569 in fiscal year 2004, which is all attributed to the first full year of revenue operations of the San Francisco International Airport Extension (SFO Extension); and (2) the cumulative effect of the two consecutive years of fare increases of 5% on January I, 2003 and 10% on January I, 2004.

The operating expenses increased by $55,567,000 in fiscal year 2004, which is mostly accounted for as due to (I) an increase of $12,899,000 in depreciation expense, a non-cash item; (2) an increase of $22,479,000 in salaries and benefits which include the 5% contractual salary increase in 2004, a 45% increase in overtime hours, and a 19% increase in medical health insurance premiums; (3) a net decrease of $4, 788,000 in labor reimbursements from capital projects; and ( 4) an increase of $13,000,000 in non labor costs which include an increase of $4,163,000 in rent expense because of the first full year ofrent charged to operations for the station facilities at the San Francisco International Airport and the accrual of rent at the District's new administrative office location and an $8,883,000 increase in traction power, materials usage and other non-labor expenses.

3 San Francisco Bay Area Rapid Transit District J une 30, 2004 and 2003 Management's Discussion and Analysis (unaudited)

The decrease of $23,439,000 in nonoperating revenues in fiscal year 2004 is mainly due to the net effect of increases and decreases in the following accounts:

( I) An increase of $17,456,000 in local financial assistance which relates to the subsidy received from the San Mateo County Transit District to cover the operating deficit of the SFO Extension. The fiscal year 2004 subsidy covered the whole year of operations while the fiscal year 2003 subsidy covered less than half a month of operations, the SFO Extension having started its revenue operations only on June 22, 2003.

(2) A decrease in investment income of $13,336,000 which is mainly due to the decrease in earned investment income related to certain portions of the proceeds from the lease/leaseback of some rail traffic equipment in 2002 which were earmarked for purchase option deposit and the prepayment of the sublease rent obligations.

(3) Interest expenses increased by $31,665,000. The actual interest expenses incurred for fiscal year 2004 amounted to $74,475,000 and $77,379,000 for fiscal year 2003, or an actual decrease in interest expenses paid/incurred of$2,904,000. However, for accounting purposes, a portion of the interest expense on tax-free borrowings incurred during the construction of a project has to be capitalized as an additional cost of the project. The capitalization has the effect ofreducing the interest expense for financial reporting purposes. In fiscal year 2003, the capitalized interest amounted to $36,877,000 as compared to only $2,308,000 in fiscal year 2004 or a difference of $34,569,000, which is due to the completion, in late fiscal year 2003, of the District's two major capital projects, which are the SFO Extension and the A&B Car Rehabilitation.

The revenues from capital contributions relate to grants and other financial assistance received by the District from the federal, state and local agencies to fund capital projects. The District receives reimbursement-type grants where the District has to first incur eligible costs under the provider's program before qualifying for the grant resources. Revenues from capital contributions are recognized at the time when the eligible project costs are incurred. For the most part of fiscal year 2003, the District's two major capital projects, the SFO Extension and the A&B Car Rehabilitation, were still under construction. The completion of these two major capital projects in late fiscal year 2003 account for most of the decrease of $55, 183,000 in the revenues from capital contributions in fiscal year 2004.

The decrease in operating revenues of $2,504,000 in fiscal year 2003 was due to a 5% drop in average weekday ridership from 310,725 in 2002 to 295,158 in 2003. The increase in operating expenses of $10,280,000 was mainly due to the increase in depreciation expense, which is a non-cash transaction. Excluding depreciation expense, the operating expenses for fiscal year 2003 showed a very slight increase of $898,000 over fiscal year 2002, which was made possible through aggressive cost control measures, efficiencies and one-time savings adopted by the District throughout the year. The revenues from capital contributions in fiscal year 2003 amount to $130,193,000 as compared to $235,825,000 in 2002, which was a decrease of $105,632,000. The decrease was due to less eligible capital costs incurred in 2003 because of the winding down to completion of the SFO Extension and the A&B Car Rehabilitation projects.

4 San Francisco Bay Area Rapid Transit District J une 30, 2004 and 2003 Management's Discussion and Analysis (unaudited)

Statements of Net Assets A comparison of the District's Staterrents of Net Assets as of June 30, 2004, 2003 and 2002 is as follows:

2004 2003 2002 (in thousands of ck:JI lars) As restated As restated

Current assets $ 425,715 $ 438,877 $ 573,195 Noncurrent assets - capital assets, net 5,009,777 4,999,477 4,817,029 Noncurrent assets - other 703,622 767,280 793,630 Total assets $ 6,139,114 $ 6,205,634 $ 6,183,854

Current liabilities $ 300,865 $ 299,560 $ 311,282 Noncurrent liabilities 1,440,516 1,481,572 1,526,048 Total liabilities $ 1,741,381 $ 1,781,132 $ 1,837,330

Net assets Invested in capital assets, net of debt $ 3,884,807 $ 3,869,281 $ 3,715,588 Restricted net assets 357,343 371,215 461,611 Unrestricted net assets 155,583 184,006 169,325 Total net assets $ 4,397,733 $ 4,424,502 $ 4,346,524

Capital Assets As of the end of fiscal year 2004, the District's capital assets, before accumulated depreciation, increased by $112,252,000. The major additions in 2004 included capital expenditures for acquisitions and major improvements on the core system and extensions ($81,374,000), train control equipment ($6,363,000), revenue cars ($13,360,000), and automatic fare collection equipment ($24,503,000).

As of the end of fiscal year 2003, the District's capital assets, before accumulated depreciation, increased by $274,678,000. The major additions in 2003 included capital expenditures for the San Francisco International Airport Extension project ($122,909,000), system wide construction ($31,916,000), revenue car modification and rehabilitation ($46,552,000) and the automatic fare collection equipment ($21,764,000).

Details of the capital assets, net of accumulated depreciation, as of June 30, 2004, 2003 and 2002 are as follows:

(in thousands of ck:JI lars) 2004 2003 2002

Land $ 481,466 $ 476,202 $ 245,835 Stations, track, structures and improvements 2,555,907 2,518,050 1,439,955 Buildings 22,409 22,058 22,346 Revenue transit vehicles 628,460 669,801 699,753 Other 288,625 301,445 240,034 Construction in progress 1,032,910 1,011,921 2,169,106 $ 5,009,777 $ 4,999,477 $ 4,817,029

5 San Francisco Bay Area Rapid Transit District J une 30, 2004 and 2003 Management's Discussion and Analysis (unaudited)

Long-Term Debt The outstanding balance of long-term debt showed a decrease of$40,687,000 and $7,813,000 at the end of fiscal years 2004 and 2003, respectively. Below is a summary of long-term debt as of June 30, 2004, 2003 and 2002 (including current portion but excluding unamortized balance of debt issue costs and bond premium/discounts):

(in thousands of ck:JI lars) 2004 2003 2002

Bonds payable from and collateralized by a pledge of sales tax revenues $ 732,365 $ 748,802 $ 762,501 Bonds payable from and collateralized by the Federal Full Funding Grant Agreement for the SFO Extension 347,540 368,035 426,655 Notes payable from bridge toll revenues 38,355 46,035 53,355 Construction loans payable from the net operating surplus of the SFO Extension 88,500 88,500 88,500 Construction loan for temporary cash flow requirements of the SFO Extension 27,325 19,645 12,325 Lease/leaseback obligation, including option price, for rail traffic control equipment 190,652 194,407 186,616 Bonds payable from the premium fare imposed on the passengers who board on or depart from the San Francisco International Airport Station 56,715 56,715 $ 1,481,452 $ 1,522,139 $ 1,529,952

The principal payments of the bonds payable from the Federal Full Funding Grant Agreement for the SFO Extension include prepayments of bonds due in fiscal year 2008 amounting to $28,000,000 in fiscal year 2004 and $17,000,000 in fiscal year 2003.

Addition to Long-Term Debt in Fiscal Year 2004 On June 14, 2004, the Association of Bay Area Governments ("ABAG") issued BART SFO Extension Refunding Bonds, 2004 Series A (Auction Rate Securities) (the "Series 2004 Bonds") with an aggregate principal amount of $66,000,000, for the benefit of the District. The issuance of the Series 2004 Bonds had the effect of freeing up $14,600,000 from the debt service reserve fund of the BART SFO Extension Bonds (FTA Capital Grant), 200 I Series A, and making the amount available as an additional source of cash for the payment of the SFO Extension Project expenditures. The Series 2004 Bonds are payable solely from amounts received by the District pursuant to a Full Funding Grant Agreement with the United States of America, acting through the Department of Transportation, Federal Transit Administration and revenues, if any, under an interest rate cap agreement executed by the District in connection with the Series 2004 Bonds. The bonds were given ratings of Aaa and AAA by two national rating agencies.

Addition to Long-Term Debt in Fiscal Year 2003 On October I, 2002, ABAG issued BART SFO Extension Bonds (Airport Premium Fare), 2002 Series A, in the amount of $56,715,000. The proceeds are used to finance a portion of the costs of the SFO Extension project. The bonds are payable solely from the premium fare imposed on passengers who

6 San Francisco Bay Area Rapid Transit District J une 30, 2004 and 2003 Management's Discussion and Analysis (unaudited) board or depart the District's rapid transit system at the San Francisco International Airport Station. The bonds were given ratings of AAA, Aaa and AAA by three national rating agencies.

Statements of Cash Flows/Cash, Cash Equivalents and Investments A comparative presentation of the major sources and uses of cash for 2004, 2003 and 2002 is as follows:

(in thousands of ck:JI lars) 2004 2003 2002

Net cash used by operating activities $ (148,899) $ (132,666) $ (123,383) Net cash provided by noncapital financing activities 152,417 130,470 136,992 Net cash used by capital and related financing activities (65,687) (132,045) (189,485) Net cash provided (used) by investing activities 10,157 (15,009) 79,136 Net decrease in cash and cash equivalents (52,012) (149,250) (96,740) Cash and cash equivalents, beginning of year 282,763 432,013 528,753 Cash and cash equivalents, end of year 230,751 282,763 432,013 Investments, end of year 356,440 360,475 324,637 Cash, cash equivalents and investments, end of year $ 587,191 $ 643,238 $ 756,650

The total cash, cash equivalents and investments held by the District and trustee banks at the end of fiscal year 2004 amounted to $587,191,000 which is a decrease of$56,047,000 compared to the balance of $643,238,000 on June 30, 2003. The decrease in cash and investments is mainly attributed to (I) capital expenditures during the year amounting to $128,403,000 reduced by reimbursements received from federal, state and other local grants of $103,385,000 or a net disbursement for capital projects of $25,018,000, (2) the advance payment in fiscal year 2004, amounting to $28,000,000, of a portion of the FT A Capital Grant Bond due in fiscal year 2008.

The total cash, cash equivalents and investments held by the District and trustee banks at the end of fiscal year 2003 amounted to $643,238,000 which is a decrease of $113,412,000 compared to the balance of $756,650,000 on June 30, 2002. The decrease in cash and investments is mainly attributed to capital expenditures during the year amounting to $301,714,000 reduced by reimbursements received from federal, state and other local grants of $187,328,000 or a net disbursement for capital projects of $114,386,000.

Contacting the District's Financial Management The District's financial report is designed to provide the District's Board of Directors, management, investors, creditors, legislative and oversight agencies, citizens and customers with an overview of the San Francisco Bay Area Rapid Transit District's fmances and to demonstrate its accountability for funds received. For additional information about this report, please contact Scott Schroeder, Controller Treasurer, at 300 Lakeside Drive, P.O. Box 12688, Oakland, California 94604.

7 San Francisco Bay Area Rapid Transit District Statements of Net Assets J une 30, 2004 and 2003

(in thousands of dollars) 2004 2003 (Restated - Note 2) Assets Current assets Umestricted assets Cash and cash equivalents $ 135,744 $ 86,185 Investments 80, 717 115,225 Capital grants receivable 28,320 59,232 Other receivables 24,938 19,067 Current portion of capital lease receivable 3,154 3,154 Materials and supplies 25,692 25,514 Total unrestricted current assets 298,565 308,377 Restricted assets Cash and cash equivalents 95,007 91,381 Investments 32,143 39, 119 Total restricted current assets 127,150 130,500 Total current assets 425,715 438,877 Noncurrent assets Capital assets Facilities, property and equipment, net 5,009,777 4,999,477 Umestricted assets Investments 53,745 69,469 Deferred charges 515 994 Long-term portion of capital lease receivable 17,350 20,504 Other assets 1, 189 1,436 Restricted assets Cash and cash equivalents 105,197 Investments 189,835 136,662 Capital grants receivable 277,503 270,896 Other receivables 17,432 16,069 Deposits for sublease obligation 146,053 146,053 Total noncurrent assets 5,713,399 5,766,757 Total assets 6,139,114 6,205,634 Liabilities and Net Assets Liabilities Current liabilities Accounts payable and other liabilities 185,517 174,685 Current portion of long-term debt 93,631 100,442 Self-insurance liabilities 10,155 12,681 Deferred revenue 8,408 8,598 Capital lease liability 3,154 3,154 Total current liabilities 300,865 299,560 Noncurrent liabilities Long-term debt, net of current portion 1,372,429 1,408,507 Self-insurance liabilities 16,852 16,344 Deferred revenue 31,261 33,534 Capital lease liability 17,350 20,504 Other noncurrent liabilities 2,624 2,683 Total noncurrent liabilities 1,440,516 1,481,572 Total liabilities 1,741,381 1,781,132 Connnitments and contingencies (Notes 4 and 16). Net assets Invested in capital assets, net of related debt 3,884,807 3,869,281 Restricted net assets For debt service and other liabilities 333,745 371,215 For retiree health benefits 23,598 Umestricted net assets 155,583 184,006 Total net assets $ 4,397,733 $ 4,424,502

The accompanying notes are an integral part of these financial statements, 8 San Francisco Bay Area Rapid Transit District Statements of Revenues, Expenses and Changes in Net Assets For the years ended June 30, 2004 and 2003

(in thousands of ck:JI lars) 2004 2003 (Restated - Note 2) Operating revenues Fares $ 220,391 $ 191,386 Other 14,155 13,718 Total operating revenues 234,546 205,104 Operating expenses Transportation 121,257 105,155 Maintenance 145,683 135,938 Police services 31,080 28,135 Construction and engineering 15,824 16,654 General and administrative 102,849 94,900 Depreciation 116,568 103,669 Total operating expenses 533,261 484,451 Less - capitalized costs (34,758) (41,515) Net operating expenses 498,503 442,936 Operating loss (263,957) (237,832) Nonoperating revenues (expenses) Transactions and use tax (sales tax) 170,566 167,441 Property tax 21,372 20,253 State and local financial assistance 19,875 2,419 Investment income 22,940 36,276 Interest expense (72,167) (40,502) Other expense, net (408) (270) Total nonoperating revenues, net 162,178 185,617 Loss before capital contributions (101,779) (52,215) Capital contributions Grants restricted for capital expenditures (Note I) 75,010 130,193 Net assets (Decrease) increase in net assets (26,769) 77,978 Total net assets, beginning of year, as restated (Note 2) 4,424,502 4,346,524 Total net assets, end of year $4,397,733 $4,424,502

The accompanying notes are an integral part of these financial statements. 9 San Francisco Bay Area Rapid Transit District Statements of Cash Flows For the years ended June 30, 2004 and 2003

(in thousands of ck:JI lars) 2004 2003

Cash flows from operating activities Receipts from customers $ 220,258 $ 192,532 Payments to suppliers (108,404) (95,670) Payments to employees (273,854) (241,657) Other operating cash receipts 13,101 12,129 Net cash used by operating activities (148,899) (132,666) Cash flows from noncapital financing activities Transactions and use tax (sales tax) received 111,200 108,223 Property tax received 22,150 19,606 Financial assistance received 19,067 2,641 Net cash provided by noncapital financing activities 152,417 130,470 Cash flows from capital and related financing activities Transactions and use tax (sales tax) received 59,366 59,218 Capital grants received 103,385 187,328 Proceeds from issuance of2002 SFO Extension Premium Fare Bonds 56,715 Proceeds from issuance of 2004 SFO Extension Refunding Bonds 66,000 Proceeds from construction loans 10,000 10,000 Expenditures for facilities, property and equipment (128,403) (301,714) Principal paid on long-term debt (114,328) (80,830) Payments of long term debt issuance and service costs (2,248) (2,630) Premium received from issuance of long term debt 1,136 Interest paid on long term debt (60,148) (61,650) Principal payments received from installment receivable 689 382 Net cash used by capital and related financing activities (65,687) (132,045) Cash flows from investing activities Proceeds from sale and maturity of investments 234,870 230,933 Purchase of investments (230,834) (262,166) Investment income 6,121 16,224 Net cash provided (used) by investing activities 10,157 (15,009) Net decrease in cash and cash equivalents (52,012) (149,250) Cash and cash equivalents, beginning of year 282,763 432,013 Cash and cash equivalents, end of year $ 230,751 $ 282,763

The accompanying notes are an integral part of these financial statements. 10 San Francisco Bay Area Rapid Transit District Statements of Cash Flows, continued For the years ended June 30, 2004 and 2003

(in thousands of ck:JI lars) 2004 2003

Reconciliation of operating loss to net cash used by operating activities Operating loss $ (263,957) $ (237,832) Adjustments to reconcile operating loss to net cash used by operating activities Depreciation 116,568 103,669 Amortization of deferred charges 126 135 Net effect of changes in Decrease in other receivables (7,867) (4,033) Increase in materials and supplies (178) (803) Increase in accounts payable and other liabilities 8,703 5,349 (Increase) decrease in self-insurance liabilities (2,018) 1,105 Decrease in deferred revenue (276) (256) Net cash used by operating activities $ (148,899) $ (132,666) Noncash transactions Capital assets acquired with a liability at year end $ 40,020 $ 44,243 Lease/leaseback obligation additions 10,847 10,782 Lease/leaseback obligation amortization 14,114 5,531

The accompanying notes are an integral part of these financial statements. 11 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

1. Description of Reporting Entity and Significant Acconnting Policies

Description of Reporting Entity The San Francisco Bay Area Rapid Transit District (the "District") is a public agency created by the legislature of the State of California in 1957 and regulated by the San Francisco Bay Area Rapid Transit District Act, as amended, and subject to transit district law as codified in the California Public Utilities Code. The disbursements of funds received by the District is controlled by statutes and by provisions of various grant contracts entered into with federal, state and local agencies.

The District has defined its financial reporting entity in accordance with the Governmental Accounting Standards Board ("GASB") Statement No. 14, The Financial Reporting Entity, which states that the fmancial reporting entity should consist of (a) the primary government, (b) the organizations for which the primary government is financially accountable, and (c) the other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity's fmancial statements to be misleading or incomplete. Based on this definition, and the fact that the Transit Financing Authority (the "Authority") provides services ahnost entirely to the District (the "primary government"), the Authority's financial information is presented as a blended component unit of the District's financial statements (See Note 6).

Basis of Accounting and Presentation The District is accounted for as a Proprietary Fund, as defined by GASB Statement No. 34, Basic Financial Staterrents - Managerrent's Discussion and Analysis- for State and Local Gc:wernrrents, and its fmancial statements are presented on the accrual basis of accounting and using the economic resources measurement focus. Under this method, revenues are recognized when they are earned, and expenses are recognized when they are incurred.

The District applies all applicable GASB pronouncements as well as Financial Accounting Standards Board ("FASB") Statements and Interpretations, Accounting Principles Board ("APB") Opinions and Accounting Research Bulletins ("ARBs ") of the Committee on Accounting Procedures issued on or before November 30, 1989, unless those pronouncements conflict with or contradict GASB pronouncements. The District has elected under GASB not to apply FASB Statements and Interpretations issued after November 30, 1989, due to the nature of the District's operations.

Grants Restricted for Capital Expenditures The District receives grants from the Federal Transit Administration ("FTA") and other agencies of the U.S. Department of Transportation, state, and local transportation funds for the acquisition of transit-related equipment and improvements. In accordance with GASB Statement No. 33, Accounting and Financial Reporting for Nonexchange Transactions, capital grants are required to be included in the determination of change in net assets resulting in an increase in net revenue of $75,010,000 and $130,193,000 for the fiscal years 2004 and 2003, respectively. Capital grants receivable represent amounts expected from governmental agencies to reimburse the District for costs incurred for capital projects (see Note 9).

Net Assets Net assets invested in capital assets, net of related debt include capital assets net of accumulated depreciation and outstanding principal balances of debt attributable to the acquisition, construction or improvement of those assets. Net assets are restricted when constraints are imposed by third parties or by law through constitutional provisions or enabling legislation and include amounts restricted for

12 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

debt service, retiree health benefits, and certain long-term liabilities. All other net assets are unrestricted. Generally, the District's policy is to spend restricted resources first when an expense is incurred for purposes for which both restricted and unrestricted net assets are available.

Cash Equivalents The District considers all money market funds and highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

Investments Investments are stated at fair value, which is based on quoted market prices. As a matter of policy, the District usually holds investments until their maturity.

Restricted Assets Certain assets are classified as restricted assets on the Staterrent of Net Assets because, as noted above, their use is subject to externally imposed stipulations, either by certain bond covenants, laws or regulations or provisions of debt agreements. Assets that are restricted as to withdrawal or use for other than current operations, are designated for expenditure in the acquisition or construction of noncurrent assets, or are segregated for the liquidation of long-term debts are classified as restricted noncurrent assets regardless of the liquidity of the asset itself.

Materials and Supplies Materials and supplies consist primarily of replacement parts for the system and rail vehicles. Materials and supplies are stated at cost using the average-cost method. Materials and supplies are expensed as consumed.

Facilities, Property and Equipment Facilities, property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets ranging from 3 to 80 years.

Major improvements and betterments to existing facilities and equipment are capitalized. Costs for maintenance and repairs which do not extend the useful life of the applicable assets are charged to expense as incurred. Upon disposition, costs and accumulated depreciation are removed from the accounts and resulting gains or losses are included in operations.

The District capitalizes certain interest income and expense related to tax-free borrowings until the assets are ready for their intended use. The amount capitalized is the difference between the interest revenue and interest expense associated with the applicable tax-free borrowings. Net interest in the amount of $2,308,000 and $30, 193,000 was capitalized during the years ended June 30, 2004 and 2003, respectively.

Compensated Absences Compensated absences are reported and accrued as a liability in the period incurred.

Fare Operating Revenues Fare operating revenues are earned as passengers utilize the train service. Deferred revenue includes an estimate of passenger tickets purchased which have not yet been used as well as prepayments of revenues related to license fees paid by telecommunication companies for the use of the District's right of way for wireless accessibility to their customers.

13 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

Transactions and Use Tax (Sales Tax) Revennes The State of California legislation authorizes the District to impose a 0.5% transaction and use tax within District boundaries which is collected and administered by the State Board of Equalization. Of amounts available for distribution, 75% is paid directly to the District for the purpose of paying operating expenses, except for a portion which is paid directly to the trustees to cover principal and interest payments of maturing sales tax revenue bonds and equity reserves. The remaining 25% is allocated by the Metropolitan Transportation Commission ('MTC") to the District, the City and County of San Francisco, and the Alameda-Contra Costa Transit District for transit services. The District records the total transactions and use taxes earned (including amounts paid to the trustee) as revenue.

Property Taxes, Collection and Maximum Rates The State of California Constitution Article XIII.A provides that the general purpose maximum property tax rate on any given property may not exceed 1% of its assessed value unless an additional amount for general obligation debt has been approved by voters. Assessed value is calculated at 100% of market value as defined by Article XIII.A and may be adjusted by no more than 2% per year unless the property is sold or transferred. The State Legislature has determined the method of distribution of receipts from a 1% tax levy among the counties, cities, school districts and other districts, such as the District.

The District receives an allocation of property tax revenues for transit operations. San Francisco, Alameda and Contra Costa Counties assess properties and bill for, collect, and distribute property taxes. Property taxes are recorded as revenue in the fiscal year of levy.

State and Local Financial Assistance Financial assistance grants are reported as nonoperating revenue in the period to which the grant applies and, for cost reimbursement grants, to the period in which the related expenditures are incurred. (See Note' 10).

Capitalized Costs The District initially charges employee salaries, wages and benefits to operating expenses. Labor costs included in those amounts that are associated with capital projects are subsequently reclassified to be included in the cost of the related capital asset. This reclassification is reflected in the statement of revenues, expenses and changes in net assets as a reduction of operating expenses.

Collective Bargaining Approximately 87% of the District's employees are subject to collective bargaining. The current labor contracts expire on June 30, 2005.

Revisions and Reclassifications Certain revisions and reclassifications to cash flows from capital and related fmancing activities and from investing activities within the prior year statement of cash flows were made. These revisions and reclassifications had no impact on the overall change in cash and cash equivalents.

14 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

Use of Estimates The preparation offmancial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

New Accounting Pronouncements The GASB has issued Statement No. 40, Deposit and I nvestrrent Risk Disclosures, effective for the District's fiscal year beginning July 1, 2004. Statement No. 40 establishes additional disclosure requirements addressing common risks of investments. The statement will have no effect on the District's net assets or changes in net assets.

In November 2003, the GASB issued Statement No. 42, Accounting and Reporting for I rrµai rrrent of Capital Assets and for Insurance Recc:weries, effective for the District's fiscal year beginning July 1, 2005. Statement No. 42 requires an evaluation of prominent events or changes in circumstances to determine whether an impairment loss on capital assets should be recorded and that any insurance recoveries be netted with the impairment loss. The District is currently evaluating the effect that Statement No. 42 will have on its fmancial statements.

In August 2004, the GASB issued Statement No. 45, Accounting and Financial Reporting b,I Erl1)iO{ers for PosterrplO(rrent Benefits Other Than Pensions, effective for the District's fiscal year beginning July 1, 2007. Statement No. 45 requires accrual-based and actuarially calculated measurement, recognition and disclosure of other postemployment benefits ("OPEB") expense, such as retiree medical and dental costs, over the employees' years of service, along with the related liability, net of any plan assets. The District has not determined the effect that Statement No. 45 will have on its fmancial statements. As more fully described in Note 12, in anticipation of Statement No. 45 implementation, the District created a Retiree Health Benefit Trust (the "Trust") in fiscal 2004.

2. Restatement of Previously Issued Financial Statements

Certain amounts in the 2003 fmancial statements were restated to record demutualization revenue received by the District from the Principal Financial Group in December 2001, to reverse the accrual of postemployment benefits in prior years, and to reclassify certain assets and liabilities as current or noncurrent and/or restricted and unrestricted.

The District provides certain health and welfare benefits to employees and certain other individuals. The District contracted with Principal Life Insurance Company ("Principal Life"), formerly Bankers Life, in January 1979 to provide long-term disability insurance, life insurance, and accidental death and dismemberment insurance benefits. The District has continued to contract with Principal Life for one or more insured products from 1979 to the present. As a policyholder of Principal Life, the District was also a member of its parent company, the Principal Mutual Holding Company ("Principal Mutual"). As a member of Principal Mutual, the District had certain rights including the right to participate in the distribution of any residual value in the event of a liquidation of the company. In October 2001, Principal Mutual converted from a mutual insurance holding company into a stock company in a process called a demutualization. Upon demutualization, the membership interests of Principal Life's policyholders in Principal Mutual were extinguished, and eligible policyholders received compensation in exchange for the extinguishment of their membership

15 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

interests. In December 2001, the District received compensation in the form of shares of common stock from the new stock corporation, the Principal Financial Group. However, receipt and ownership of these shares was not reflected in the fiscal 2002 financial statements as revenue and investments.

Upon issuance of the shares resulting from the demutualization, the Principal Financial Group placed the shares in a custodial account on behalf of the District where they remained until all shares were sold in March 2004. In June 2004, the District transferred all the demutualization-related cash received in fiscal year 2004 to a Trust established solely to provide funds for retiree health benefits. (See Note 12 for a detailed discussion of the Trust.)

Additionally, in accordance with GASB guidance, the District historically accounted for the provision of post-employment benefits on a "pay-as-you-go" basis. Anticipating that at some point in the future the GASB would require recording the liability in the fmancial statements for such benefits on an accrual basis (the GASB had announced its intention to do so in 1988), the District accrued certain amounts, primarily during the 1990s, to provide for such benefits. Such accruals were not actuarially determined and were inconsistent with the District's "pay as you go" methodology and therefore needed to be reversed.

In accordance with Accounting Research Bulletin No. 43, the District reclassified certain restricted assets that were previously reported as current assets to noncurrent assets. Assets reclassified include those assets that are restricted as to withdrawal or use for other than current operations, are designated for expenditure in the acquisition or construction of noncurrent assets, or are segregated for the liquidation of long-term debts. Such assets are classified as restricted noncurrent assets regardless of the liquidity of the asset itself. In addition, certain other reclassifications of amounts were made within the statement of net assets.

16 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

As a result of these matters, certain amounts in the accompanying 2003 fmancial statements have been restated to reflect the District's financial statements in accordance with accounting principles generally accepted in the United States of America. The adjustments and reclassifications recorded had the following effects on the fiscal 2003 fmancial statements:

Adjustments Other resulting reclassifications As previously from the and reported demutualization adjustments As restated

Statement of Net Assets- June 30, 2003 Current assets Umestricted assets Investments $ 93,237 $ 21,988 $ $ 115,225 Other 189,998 3,154 193,152 Total unrestricted current assets 283,235 21,988 3,154 308,377 Restricted assets Cash and cash equivalents 196,578 (105,197) 91,381 Capital grants receivable 100,000 (100,000) Other receivables 19,887 (19,887) Other 42,273 (3,154) 39,119 Total restricted current assets 358,738 (228,238) 130,500 Total current assets 641,973 21,988 (225,084) 438,877 N oncurrent assets Capital assets 4,999,477 4,999,477 Umestricted assets Long-term portion of capital lease receivable 20,504 20,504 Other 71,899 71,899 Restricted assets Cash and cash equivalents 105,197 105,197 Capital grants receivable 170,896 100,000 270,896 Long-term portion of capital lease receivable 20,504 (20,504) Other receivables 142,235 (126,166) 16,069 Deposits for sublease obligation 146,053 146,053 Other 136,662 136,662 Total noncurrent assets 5,541,673 225,084 5,766,757 Total assets 6,183,646 21,988 6,205,634 Liabilities and Net Assets Liabilities Current liabilities Accounts payable and other liabilities 186,762 (12,077) 174,685 Other 124,875 124,875 Total current liabilities 311,637 (12,077) 299,560 Noncurrent liabilities 1,478,889 2,683 1,481,572 Total liabilities 1,790,526 (9,394) 1,781,132 Net assets Umestricted 152,624 31,382 184,006 Other 4,240,496 4,240,496 $ 4,393,120 $ 31,382 $ $ 4,424,502 Umestricted net assets - July 1, 2002 $ 138,795 $ 21,136 $ 9,394 $ 169,325

17 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

3. Cash, Cash Equivaleuts aud Iuvestmeuts

The District maintains a cash and investment pool that includes cash, cash equivalents and investments that are restricted due to externally imposed constraints, available for general use and designated by management for specific purposes.

Deposits The carrying amount of the District's deposits with banks and cash on hand was $67,663,000 and $57,475,000 at June 30, 2004 and 2003, respectively. The corresponding bank balance was $65,828,000 and $55,004,000 at June 30, 2004 and 2003, respectively. Of the bank balance, $1,882,000 and $1,935,000 for 2004 and 2003, respectively, was insured by federal depository insurance or collateralized by securities held by the District's agent in the District's name, and $63,946,000 and $53,069,000 for 2004 and 2003, respectively, is required by Section 53652 of the California Government Code to be collateralized 110% by the pledging financial institutions. Such collateral is not required to be in the District's name.

Iuvestmeuts State of California statutes and District policy authorize the District to invest in obligations of the U.S. Treasury, its agencies and instrumentalities, bankers' acceptances, repurchase and reverse repurchase agreements, and the State Treasurer's investment pool.

The District's investments are categorized below to give an indication of the credit risk assumed by the District at June 30, 2004 and 2003. Category 1 includes investments that are insured or registered or for which the securities are held by the District or its agent in the District's name. Category 2 includes uninsured and unregistered investments for which the securities are held by the broker's or dealer's trust department or agent in the District's name. The District's investment pools are reported at fair value.

(in thousards of dollars) 2004 2003 Fair Fair Category (at cost) Value Category (at cost) Value 1 2 1 2

Money market $ 5.000 $ 3.826 $ 8.826 $ $ 130.674 $ 130.674 U.S. Treasury securities 55.520 97.011 152.923 124.176 48.010 173.625 Federal agency obligations 130.161 35.915 165.466 101.381 48.043 150.513 Repurchase agreements 40.019 92.995 133.014 25.819 34.704 60.523 Local agency investment fund 20.000 3.688 23.688 3.627 3.627 Corporate obligations/shares 35.611 35.611 52.142 66.801 Total $ 250.700 $ 269.046 519.528 $ 255.003 $ 313.573 585.763

Cash on hand 2.535 3.044 Time and demand deposits 65.128 54.431 Total $ 587.191 $ 643.238

18 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

Cash, cash equivalents and investments are presented at fair value in the Statement of Net Assets as follows:

(in th:Jusards of dollars) 2004 2003 Unrestricted Restricted Total Unrestricted Restricted Total (Restated- Note 2) Current assets Cash and cash equivalents $ 135,744 $ 95,007 $ 230,751 $ 86,185 $ 91,381 $ 177,566 Investments 80,717 32,143 112,860 115,225 39,119 154,344 Noncurrent assets Cash and cash equivalents 105,197 105,197 Investments 53,745 189,835 243,580 69,469 136,662 206,131 Total $ 270,206 $ 316,985 $ 587,191 $ 270,879 $ 372,359 $ 643,238

4, Changes in Capital Assets

Facilities, property and equipment at June 30, 2004 and 2003 are summarized as follows:

Additions Retirements Lives and and (in thousands of dollars) (Years) 2003 Transfers Transfers 2004

Non Depreciated Assets Land $ 476,202 $ 5,854 $ (590) $ 481,466 Construction-in-progress 1,011,921 126,827 (105,838) 1,032,910 Total non depreciated assets 1,488,123 132,681 (106,428) 1,514,376 Depreciated Assets Stations, track, structures and improvements 80 3,001,233 78,390 (181) 3,079,442 Buildings 80 26,632 701 27,333 System-wide operation and control 20 502,195 10,830 (11,616) 501,409 Revenue transit vehicles 30 1,029,729 8,257 1,037,986 Revenue transit vehicles under capital lease 30 55,593 55,593 Service and miscellaneous equipment 3-20 52,264 1,923 (2,170) 52,017 Capitalized construction and start-up costs 30 98,305 98,305 Repairable property items 30 16,249 (17) (118) 16,114 Total depreciated assets 4,782,200 100,084 (14,085) 4,868, 199 Less: accumulated depreciation (1,270,846) (116,568) 14,616 (1,372,798) Depreciated assets net of accumulated depreciation 3,511,354 (16,484) 531 3,495,401 Total $ 4,999,477 $ 116,197 $ (105,897) $ 5,009,777

19 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

Additions Retirements Lives and and (in thousands of dol lar,l (Years) 2002 Transfers Transfers 2003

Non Depreciated Assets Land $ 245,835 $ 230,898 $ (531) $ 476,202 Construction-in-progress 2,169,106 306,347 (1,463,532) 1,011,921 Total non depreciated assets 2,414,941 537,245 (1,464,063) 1,488,123 Depreciated Assets Stations, track, structures and improvements 80 1,896,367 1,105,421 (555) 3,001,233 Buildings 80 26,587 45 26,632 System-\Vl.de operation and control 20 419,284 87,050 (4,139) 502,195 Revenue transit vehicles 30 1,008,773 21,524 (568) 1,029,729 Revenue transit vehicles under capital lease 30 55,593 55,593 Service and miscellaneous equipment 3-20 51,605 5,645 (4,986) 52,264 Capitalized construction and start-up costs 30 98,314 (9) 98,305 Repairable property items 30 24,181 (7 ,932) 16,249 Total depreciated assets 3,580,704 1,219,685 (18,189) 4,782,200 Less: accumulated depreciation (1,178,616) (103,669) 11,439 (1,270,846) Depreciated assets net of accumulated depreciation 2,402,088 1,116,016 (6,750) 3,511,354 Total $ 4,817,029 $1,653,261 $ (1,470,813) $ 4,999,477

The District is currently involved in construction of Phase I of an extension program that will add 38 miles of track and 10 new stations to the system at a total cost of approximately $3,477, 127,000. Of these 10 new stations included in Phase I, the stations at the Dublin/Pleasanton, Pittsburgffiay Point, Colma and San Francisco International Airport extensions are open and in service. The funding for Phase I comes from the Federal Government ($877,634,000), State of California ($741,770,000), San Mateo County ($502,719,000), Alameda and Contra Costa Counties ($505,000,000), bridge tolls ($279,811,000), San Francisco International Airport ($200,000,000), and the District ($370,193,000).

The District has entered into contracts for the construction of various facilities and equipment totaling approximately $548,306,000 at June 30, 2004, ($678,180,000 in 2003).

Under the Federal Full Funding Grant Agreement, $1,347,230,000 was approved for project costs associated with the San Francisco International Airport Extension ("SFO Extension project") with funding participation from the Federal Government, State of California and certain local agencies. As a local funding participant, the San Francisco International Airport Commission ("SFIA") pledged to contribute funds to the federally approved project ofup to $77,000,000. The District entered into various agreements with the City and County of San Francisco, acting by and through SFIA, which defined the specific project costs that could be funded from the $ 77,000,000 contribution. The agreement stated that the contribution would be used for the eligible BART Operating Systems Work on the portion of the project related to the San Francisco International Airport station ("On Airport project"). Eligible project costs include the design, construction, construction support, management and oversight, general and administrative costs and other associated costs of the On Airport project. Based on the agreements between SFIA and the District, SFIA shall own all rights, titles and interest associated with the assets paid from the $77,000,000 until the end of the projected useful life of each asset at which time, all of SFIA's rights, titles and interest associated with the assets shall transfer to the District, without payment by the District. The risk of loss on all assets acquired from the SFIA contributions are, at all times, assumed by the District.

20 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

The construction of the SFO Extension project was substantially completed in 2003 and revenue operations started on June 22, 2003. All costs incurred as of June 30, 2004, including those paid from and/or incurred against the SFIA contribution, have been capitalized to fixed assets and accordingly are subject to depreciation. As of June 30, 2004, the fixed assets related to the SFIA contribution amounted to $60,227,000 with an accumulated depreciation of $894,000.

5. Risk Management

The District is partially self-insured for workers' compensation, public liability and property damage claims. Beginning July 2003, the self-insured maximum for workers' compensation was increased from $1,000,000 to $2,500,000. The self-insured maximum for public liability and property damage remains at $2,000,000 for any one occurrence. Claims in excess of self-insured retentions are covered up to a total of $98,000,000 by insurance policies.

The self-insurance programs are administered by independent claims adjustment firms. Claim expenses and liabilities are reported when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. Liabilities are discounted at a 5% rate and are based, in part, upon the independent adjustment firms' estimate of reserves necessary for the settlement of outstanding claims and related administrative costs, and include estimates of claims that have been incurred but not yet reported. Such reserves are reviewed by professional actuaries and are subject to periodic adjustments as conditions warrant.

The estimated liability for insurance claims at June 30, 2004 is believed to be sufficient to cover any costs arising out of claims filed or to be filed for accidents which occurred through that date.

At June 30, 2004 and 2003, the amount of these liabilities was $27,007,000 and $29,025,000, respectively. Changes in the reported liabilities since the beginning of the respective fiscal year are as follows:

(in thousands of ck:JI lars) 2004 2003

Liabilities at beginning of year $ 29,025 $ 27,920 Current year claims and changes in estimates 7,910 8,266 Payments of claims (9,928) (7,161) Liabilities at end of year 27,007 29,025 Less current portion (10,155) (12,681) Net noncurrent portion $ 16,852 $ 16,344

21 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

6. Related Organizations and Projects

Transit Financing Anthority The Joint Exercise of Powers Agreement (the "Agreement"), dated August 1, 1991, between the District and MTC provided for the creation of the Transit Financing Authority (the "Authority"), a public instrumentality of the State of California. The initial term of the Agreement was for ten years, unless extended or earlier terminated. On May 1, 1998, the term of the Agreement was extended to August 1, 2010. The Authority was formed for the purpose of providing financing and contracting for public transit improvements, including the refinancing of prior indebtedness and acquiring, selling and fmancing public capital improvements, working capital, liability and other insurance needs, and for the specific purpose of assisting in financing the District's East-Bay and West-Bay extensions. The Authority's financial information is presented as a blended component unit of the District's financial statements because the Authority provides services almost exclusively to the District.

The governing board of the Authority consists of two members each from the District and MTC. Neither the District nor MTC is responsible for any debt, liabilities or obligations of the Authority.

At the end of the term or upon the earlier termination of the Agreement, all assets of the Authority shall be distributed to the two participants, and any surplus money on hand shall be returned to these participants in proportion to their respective contributions to the Authority.

A summary of the amount and percentage of the Authority's total assets, total liabilities and total net assets as compared with the District is as follows:

(in thousands of ck:JI lars) 2004 2003

Authority's Total Assets Amount $ 94,258 $ 93,602 As a % of District's Total Assets 1.5% 1.5% Authority's Total Liabilities Amount $ 94,258 $ 93,602 As a % of District's Total Liabilities 5.4% 5.3% Authority's Total Net Assets Amount $ $

In order to fund a portion of the costs of SFO Extension project, in September 1999, the Authority issued a limited liability note (the "Bridge Toll Note") in the amount of $65,680,000, payable from and collateralized solely by a pledge of certain bridge toll revenues allocated to the District by MTC. At June 30, 2004, the notes outstanding amount to $38,355,000 with interest rates ranging from 4.90% to 5.75% and mature from August 2004 through February 2007. See Note 7.

The Authority issues a financial report that includes financial statements and required supplementary information. This report may be obtained by contacting the District at 300 Lakeside Drive, P.O. Box 12688, Oakland, California 94604.

22 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

Capitol Corridor Joint Powers Anthority The Joint Exercise of Powers Agreement (the "Capitol Corridor Agreement") dated December 31, 1996, between the District and five other transportation authorities in surrounding counties ("Agencies") provided for the creation of the Capitol Corridor Joint Powers Authority ("Capitol Corridor"), a public instrumentality of the State of California. Capitol Corridor was formed for the purpose of administering and managing the operation of the Capitol Corridor Rail Service as part of the California intercity passenger rail system. The District is the managing agency of Capitol Corridor and in that capacity shall provide all necessary administrative support to Capitol Corridor. Capitol Corridor entered into an Interagency Transfer Agreement with the State of California and assumed the administration and operation commencing at the service on July 1, 1998. The initial term of the Interagency Agreement was for three years, from July 1, 1998 and was extended for three more years effective July 1, 2001. In 2004, State legislation was enacted that eliminated the sunset date of the Interagency Transfer Agreement.

The governing board of Capitol Corridor consists of six members from the District and two members from each of the five other Agencies. Neither the District nor the other Agencies are responsible for any debt, liabilities and obligations of Capitol Corridor and the District would not be entitled to any of Capitol Corridor's net assets should it terminate.

The District charged Capitol Corridor a total of $2,858,000 for marketing and administrative services in 2004 ($2, 797,000 in 2003). The District is also reimbursed by Capitol Corridor for its advances for capital project expenditures and other operating expenses. Reimbursements for expenses incurred by the District on behalf of and in providing services to Capitol Corridor are netted against the corresponding expense in the statement of revenues, expenses and changes in net assets. At June 30, 2004, unreimbursed expenses from Capitol Corridor amount to $10,062,000 ($6,066,000 on June 30, 2003). All unreimbursed expenses are included as current other receivables, in the Statements of Net Assets. As the District has no ownership involvement or ongoing fmancial interest or responsibility in Capitol Corridor, its financial statements include only amounts related to the services it provides to Capitol Corridor.

Technology Reinvestment Project In 1994, the District and the joint venture of Hughes Transportation Control Systems, Inc. ("Hughes"), and Morrison Knudsen Train Control, Inc. ("HMK") entered into a memorandum of understanding ("MOU") to form an alliance ("Alliance") to develop a cost-effective, highly reliable and safe train control system for passenger and freight-carrying trains. The project is partially funded under the Technology Reinvestment Project managed by the Advanced Research Projects Agency ("ARPA"). The Federal Transit Administration ("FTA") has agreed to manage and oversee the project on behalf of ARPA.

During fiscal year 1998, the Alliance was reorganized. Hughes and HMK withdrew and were replaced by Harmon Industries, Inc. ("Harmon"). In August 1998, a MOU was executed between the District and Harmon which replaced the 1994 MOU between the District and the joint venture of Hughes and HMK. In 2000, Harmon Industries was purchased by GE Transportations Systems, and Harmon became known as GE Transportation Systems, Global Signaling.

The District's participation in this project was in the form of in-kind contributions which consist primarily of labor costs and direct costs that are partially reimbursable by the Alliance. As of June 30, 2004 and 2003, the District had provided the Alliance with approximately $12, 758,000 in cumulative in-kind contributions. In addition, the District incurred $26,200,000 and $21,528,000 of

23 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

direct costs as of fiscal year 2004 and 2003, respectively, of which $948,000 was reimbursed by the Alliance. A majority of the direct costs have been capitalized as construction-in-progress on the District's financial statements. The District has no equity interest in this Project.

East Bay Paratransit Consortium In 1994, the District and the Alameda Contra Costa Transit District ("AC Transit") executed an agreement establishing the East Bay Paratransit Consortium (the "Consortium"). The purpose of the Consortium is to enable the District and AC Transit to jointly provide paratransit services in the overlapping service area of the District and AC Transit. Revenues and expenditures for the Consortium are split 31 % and 69% between the District and AC Transit, respectively and the District's financial statements reflect its portion ofrevenues and expenditures as operating activities. The District supported the project primarily through its own operating funds, with some financial assistance from Alameda County Measure B funds. See Note 10. The District has no equity interest in the Consortium.

7. Long-Term Debt

Long-term debt at June 30, 2004 and 2003 is summarized as follows:

Payments/ Additions/ Defeasance and (in thousands of dollars) 2003 Accretion Amortization 2004

1990 Sales Tax Revenue Refunding Bonds $ 47,322 $ 618 $ (9,550) $ 38,390 1995 Sales Tax Revenue Bonds 51,920 (2, 120) 49,800 1998 Sales Tax Revenue Bonds 345,965 (915) 345,050 1999 Sales Tax Revenue Bonds 134,945 (1,785) 133,160 2001 Sales Tax Revenue Bonds 168,650 (2,685) 165,965 TFA Bridge Toll Notes (See Note 6) 46,035 (7,680) 38,355 Construction Loans 108,145 7,680 115,825 FIA Capital Grant Bonds 368,035 (86,495) 281,540 Lease/Leaseback Obligation 194,407 13,457 (17,212) 190,652 2002 SFO Extension Premium Fare Bonds 56,715 56,715 2004 SFO Extension Refunding Bonds 66,000 66,000 1,522, 139 87,755 (128,442) 1,481,452 Less: premium/discounts (13, 190) (2,086) (116) (15,392) Long-term debt net of premium/discounts 1,508,949 $ 85,669 $ (128,558) 1,466,060 Less: current portion of long-term debt (100,442) (93,631) Net long-term debt $ 1,408,507 $ 1,372,429

24 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

Payments/ Additions/ Defeasance and (in thousands of dollars) 2002 Accretion Amortization 2003

1990 Sales Tax Revenue Refunding Bonds $ 55,616 $ 1,191 $ (9,485) $ 47,322 1991 Sales Tax Revenue Bonds 2,465 (2,465) 1995 Sales Tax Revenue Bonds 53,980 (2,060) 51,920 1998 Sales Tax Revenue Bonds 346,845 (880) 345,965 1999 Sales Tax Revenue Bonds 134,945 134,945 2001 Sales Tax Revenue Bonds 168,650 168,650 IFA Bridge Toll Noles (See Note 6) 53,355 (7,320) 46,035 Construction Loans 100,825 7,320 108,145 FIA Capital Grant Bonds 426,655 (58,620) 368,035 Lease/Leaseback Obligation 186,616 13,322 (5,531) 194,407 2002 SFO Extension Premium Fare Bonds 56,715 56,715 1,529,952 78,548 (86,361) 1,522,139 Less: premium/discounts (11,746) (2,219) 775 (13,190) Long-term debt net of premium/discounts 1,518,206 $ 76,329 $ (85,586) 1,508,949

Less: current portion of long-term debt (69,361) (I 00,442) Net long-term debt $1,448,845 $ 1,408,507

Bond and note discount, premium and issuance costs are amortized over the life of the related debt.

1990 Sales Tax Revenue Refunding Bonds (the 1990 Bonds) In July 1990, the District issued sales tax revenue refunding bonds totaling $158,478,000. The 1990 Bonds are special obligations of the District payable from and collateralized by a pledge of the sales tax revenues. At June 30, 2004, the 1990 Bonds consist of $28, 775,000 of current interest serial bonds due from 2010 to 2011 with interest rate of 6. 75% and $9,615,000 of capital appreciation serial bonds ($3,821,000 original amount) with a yield of 6.75% due in 2004. Interest on the capital appreciation bonds is payable at maturity. For fmancial reporting purposes, accrued interest is added to the principal balance.

1991 Sales Tax Revenue Bonds (the 1991 Bonds) The 1991 Bonds were issued in August 1991 in the amount of $56,010,000 and are special obligations of the District, payable from and collateralized by a pledge of sales tax revenues. The final principal payment of $2,465,000 was made during fiscal year 2003. There were no bonds payable related to the 1991 Bonds at June 30, 2003 and 2004.

1995 Sales Tax Revenue Bonds (the 1995 Bonds) In June 1995, the District issued sales tax revenue bonds totaling $135,000,000 to provide funds for certain capital improvements including rehabilitation of District vehicles and facilities and energy conservation measures. The bonds are special obligations of the District, payable from and collateralized by a pledge of sales tax revenues. In July 2001, the District used part of the proceeds from 2001 Sales Tax Revenue Bonds to defease $18,585,000 of serial bonds due from 2002 to 2010 and $19,915,000 term bonds due from 2012 to 2015. At June 30, 2004, the 1995 Bonds consist of $19,440,000 serial bonds due from 2004 to 2011 with interest rates ranging from 5.1 % to 5. 7% and

25 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

$30,360,000 of term bonds due from 2012 to 2020 with an interest rate of 5.5%. The District is required to make sinking fund payments on the term bonds beginning on July 1, 2012. In addition, the 1995 Bonds maturing after June 30, 2006 will be redeemable after July 1, 2005 at the option of the District at prices ranging from 100% to 101 %.

1998 Sales Tax Revenue Bonds (the 1998 Bonds) In March 1998, the District issued sales tax revenue bonds totaling $348,510,000 to provide funds for certain capital improvements, including rehabilitation of the District's vehicles and facilities, to repay obligations of approximately $49,645,000 related to a lease of certain telecommunications equipment, and to refund certain outstanding bonds with principal amounts of $155, 115,000 to achieve debt service savings. The bonds are special obligations of the District payable from and collateralized by a pledge of sales tax revenues. At June 30, 2004, the 1998 Bonds consist of $152,680,000 serial bonds due from 2004 to 2018 with interest rates ranging from 4.0% to 5.50%, $79, 105,000 of a term bond due July 1, 2023 with interest rate of 4. 75% and $113,265,000 of a term bond due July 1, 2028 with interest rate of 5%. The District is required to make sinking fund payments on the term bond due July 1, 2023 beginning on July 1, 2019 and on the term bond due July 1, 2028 beginning on July 1, 2024. In addition, the 1998 bonds maturing after June 30, 2009 may be redeemed prior to their respective maturities after June 30, 2008 and at the option of the District at prices ranging from 100% to 101 %.

1999 Sales Tax Revenue Bonds (the 1999 Bonds) In October 1999, the District issued sales tax revenue bonds totaling $134,945,000 to provide funds for certain capital improvements including rehabilitation of the District's vehicles, initial deposit to a capital reserve account for the SFO Extension project and rehabilitation of the District's maintenance facility. The bonds are special obligations of the District, payable from and collateralized by a pledge of sales tax revenues. At June 30, 2004, the 1999 Bonds consist of $43, 145,000 serial bonds due from 2004 to 2019 with interest rates ranging from 4.25% to 5.25% and three 5.5% term bonds in the amounts of$33,210,000, $18,515,000 and $38,290,000 due in 2026, 2029 and 2034, respectively. The District is required to make sinking fund payments on the term bond due July 1, 2026 beginning on July 1, 2020 and on the term bond due July 1, 2029 beginning on July 1, 2027 and on the term bond due July 1, 2034 beginning on July 1, 2030. In addition, the 1999 bonds maturing on or after July 1, 2010 may be redeemed prior to their respective maturities on or after July 1, 2009 and at the option of the District at prices ranging from 100% to 101 %.

2001 Sales Tax Revenue Bonds (the 2001 Bonds) In July 2001, the District issued sales tax revenue bonds totaling $168,650,000 to fund the rehabilitation of District rail cars and certain other capital improvements, to fund capital reserves to be utilized in connection with the SFO Extension project and to refund certain outstanding bonds with principal amounts of $41,175,000 to achieve cash flow savings. At June 30, 2004, the 2001 Bonds consist of $57,990,000 serial bonds due from 2012 to 2021 with interest rates ranging from 4.375% to 5.25%, $27,420,000 of a term bond due July 1, 2026 with an interest rate of 5%, $35,205,000 of a term bond due July 1, 2031 with an interest rate of 5%, and $45,350,000 of a term bond due July 1, 2036 with an interest rate of 5.125%. The District is required to make sinking fund payments on the term bond due July 1, 2026 beginning on July 1, 2022; on the term bond due July 1, 2031 beginning July 1, 2027; and on the term bond due on July 1, 2036 beginning on July 1, 2032. In addition, the 2001 bonds maturing on or after July 1, 2012 may be redeemed prior to their respective stated maturities, at the option of the District, as a whole or in part, on any date on or after July 1, 2011, at the principal amount called for redemption plus interest accrued thereon to the date fixed for redemption without premium.

26 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

Construction Loans In March 1999, the District, MTC and San Mateo County Transit District ("Sam Trans") entered into a Memorandum of Understanding ("MOU"), which provided additional funds to the extension project at the San Francisco International Airport.

Pursuant to the MOU, the construction loans as of June 30, 2004, consist of funds received for the SFO Extension project costs from Sam Trans for $72,000,000 and MTC for $16,500,000 and $27,325,000 from MTC for the SFO Extension project's temporary cash requirements. The District loaned $50,000,000 of its own funds to assist with the fmancing of the SFO Extension project costs. The terms and conditions of the MOU provide that the loans for project costs will be repaid, without interest, from the future net operating surplus generated by the SFO Extension. Such repayments of the project cost loans from Sam Trans and MTC totaling $88,500,000 plus the District's $50,000,000, will commence after Sam Trans' capital contribution to the District's Warm Springs Extension project is fully paid from future net operating surplus. MTC's loan for the project's temporary cash requirements of $27,325,000 will be repaid when the District receives the last Federal Full Funding Grant allocation for the SFO Extension project, currently expected to be in fiscal year 2006.

FTA Capital Grant Bonds On February 15, 2001, the Association of Bay Area Govermuents ("ABAG") issued BART SFO Extension Bonds (FTA Capital Grant), 2001 Series A, in the amount of $485,350,000. The FTA Capital Grant bonds were issued for the benefit of the District's SFO Extension project. The proceeds were used mainly to provide additional financing for the SFO Extension and to refund and defease $300,000,000 aggregate principal amount of the San Francisco Bay Area Transit Financing Authority Commercial Paper Notes, Series A, B, C, D, E and F. The bonds are limited obligations of ABAG and are payable from the monies coming from the Federal Full Funding Grant Agreement between the United States Department of Transportation, Federal Transit Administration and the District for the District's SFO Extension project. The District's obligation to make bond payments is not a general obligation of the District. Payment of the principal and interest on the bonds when due are insured by a financial guaranty insurance policy issued by an insurance company. In fiscal year 2004, $28,000,000 ($17,000,000 in fiscal year 2003) of the bonds due in fiscal year 2008 were paid in advance. At June 30, 2004, the bonds outstanding amount to $281,540,000, with interest rates ranging from 3.625% to 5.0% with maturities from June 15, 2005 to June 15, 2009.

Lease/Leaseback Obligation On March 19, 2002, the District entered into a transaction to lease rail traffic control equipment (the "Network") to investors through March 19, 2042 (the "head lease") and simultaneously sublease the Network back through January 2, 2018 (the "sublease"). At the expiration of the sublease term the District has the option to purchase back the remaining head lease interest.

At closing, the Network had a fair market value of approximately $206,000,000 and a book value of $203,000,000. Under the terms of the head lease, the District received a prepayment equivalent to the net present value of the head lease obligation totaling approximately $206,000,000, of which the District paid approximately $146,000,000 to a Payment Undertaker. Under the terms of the agreement, the Payment Undertaker committed to pay the debt portion of the District's sublease obligation and to set aside funds to enable the District to exercise its purchase option of the head lease interest, if it chooses to do so. Of the remaining head lease proceeds, approximately $37,000,000 was deposited to a trust account to be used to pay the remaining equity portion of the District's sublease obligation and to set aside additional funds to enable the District to exercise its purchase option of the head lease interest, if it chooses to do so. The District received cash from the

27 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

lease/leaseback transaction amounting to approximately $23,000,000. This cash gain was deferred and is being amortized over a period of 15.75 years through January 2, 2018. In accordance with generally accepted accounting principles, the District has reflected this transaction as a fmancing transaction. The District has recorded the payment to the Payment Undertaker as a deposit for sublease obligation and the deposit to the trust account as investments, and the net present value of the future sublease payments and exercise price of the purchase option as long-term debt.

Under this transaction, the District maintains the right to continued use and control of the Network through the end of the sublease term.

The details of the lease/leaseback obligation are as follows:

( i n thousands of dol Iars) 2004 2003

Long-term debt at beginning of year $ 194,407 $ 186,616 Interest expense incurred during the year 13,457 13,322 Payments made during the year (17,212) (5,531) 190,652 194,407 Lease payments due in one year (6,716) (17,212) Net long-term debt at end of year $ 183,936 $ 177,195

2002 SFO Extension Premium Fare Bonds On October 1, 2002, the Association of Bay Area Governments ("ABAG") issued BART SFO Extension Bonds ("Airport Premium Fare Bonds"), 2002 Series, in the amount of $56,715,000. The Airport Premium Fare Bonds were issued for the benefit of the District's SFO Extension project. The proceeds were used to finance a portion of the costs of the SFO Extension project, including all system-wide and associated improvements and expenditures related to the extension. The bonds are limited obligations of ABAG payable solely from and collateralized solely by amounts received from the District pursuant to a Pledge and Contribution Agreement, dated October 1, 2002, between ABAG and the District. The Airport Premium Fare Bonds are not a general obligation of ABAG. The District's obligation to make payments under the Pledge and Contribution Agreement is limited to and payable solely from and collateralized solely by a pledge of the premium fare imposed and collected by the District from passengers who board or depart the District's rapid transit system at the San Francisco International Airport station. The District's obligation to make such payments under the Pledge and Contribution Agreement is not a general obligation of the District. The payment of the principal and interest when due are insured by a fmancial guaranty insurance policy issued by an insurance company. At June 30, 2004, the 2002 Airport Premium Fare Bonds consist of $21,515,000 serial bonds due from 2006 to 2022 with interest rates ranging from 2.25% to 5.0%, $11,230,000 term bonds due August 1, 2026 with interest rate of 5.0%, and $23,970,000 term bonds due August 1, 2032 with interest rate of 5%. The District is required to make sinking fund payments on the term bonds due August 1, 2026 beginning on August 1, 2023 and on the term bonds due August 1, 2032 beginning on August 1, 2027.

2004 SFO Extension Refunding Bonds On June 14, 2004, ABAG issued BART SFO Extension Refunding Bonds (FTA Capital Grant), 2004 Series A (Auction Rate Securities) (the "Series 2004 Bonds") with an aggregate principal amount of $66,000,000 for the benefit of the District. The Series 2004 Bonds were issued in order to refund a portion of the ABAG BART SFO Extension Bonds (FTA Capital Grant), 2001 Series A (the "Series

28 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

2001 Bonds"), to fund the reserve fund deposit with respect to the Series 2004 Bonds, and to pay certain costs of issuance of the Series 2004 Bonds. The issuance of the Series 2004 Bonds had the effect of freeing up $14,600,000 from the debt service reserve fund of the BART SFO Extension Bonds (FTA Capital Grant), 2001 Series A, and making the amount available as an additional source of cash for the payment of the SFO Extension Project expenditures. The Series 2004 Bonds are limited obligations of ABAG payable solely from and collateralized by Revenues, which are amounts received from the District pursuant to the Pledge Agreement dated February 1, 2001 between ABAG and the District, amounts on deposit in the funds and accounts established under the Indenture ( except the Rebate Fund and any Bond Purchase Fund), and investment earnings thereon. Amounts payable by the District pursuant to the Pledge Agreement are payable solely from and collateralized by amounts received by the District pursuant to a Full Funding Grant Agreement with the United States of America, acting through the Department of Transportation, Federal Transit Administration (the "Grant Agreement") and revenues, if any, under an interest rate cap agreement executed by the District in connection with the Series 2004 Bonds. The financial obligation of the District under the Pledge Agreement is solely to transfer all receipts under the Grant Agreement to the Trustee. The Series 2004 Bonds are not a general obligation of ABAG. The Series 2004 Bonds were issued initially as Auction Rate Securities ("ARS") at an interest rate of 1.05%. Thereafter, the Series 2004 Bonds will bear interest at the Auction Rate for the Auction Period, until a conversion to a daily, weekly, bond interest term or long-term interest rate period occurs. The initial auction period was on June 21, 2004, with the subsequent auction dates generally scheduled on each Monday of each week. An auction period generally consists of seven days. Interest payments are payable on the day following the end of each auction period. Payment of the principal and interest when due is insured by a financial guaranty insurance policy issued by an insurance company. At June 30, 2004, the balance of bonds outstanding is $66,000,000 due from 2008 to 2009. The Series 2004 Bonds are not subject to optional tender for purchase, nor does the District have a commitment to purchase them in the event of a "failed" auction. However, the bonds would be subject to mandatory tender if the District elects to convert the bonds to a different interest rate mode, provided certain conditions regarding the conversion are satisfied.

The interest rate cap effectively limits the amount the District may be required to pay pursuant to the Pledge Agreement. Since the interest rate on the Series 2004 Bonds is reset weekly, the District chose to hedge its exposure to high interest rates by the purchase of the interest rate cap.

Term; Under the interest rate cap agreement, the District will receive, on an annual basis, payments from Citibank N.A. should the BMA Municipal Swap Index TM ("BMA"), or any successor index, exceed 7.00%. BART paid $248,000 upfront to Citibank N.A. for the interest rate cap for the full term of the agreement. As of June 30, 2004, the notional amount of the rate cap was $66,000,000, which was equivalent to the amount of outstanding Series 2004 Bonds as of that date; the notional amount will be reduced to $19,975,000 on June 15, 2008 corresponding to a scheduled principal reduction on the Series 2004 bonds as of that date. The agreement terminates on June 15, 2009, which is the final maturity of the Series 2004 Bonds.

Credit Risk As of June 30, 2004, the interest rate cap agreement had a fair market value of $110,230. Citibank N.A. is rated Aal by Moody's Investors Service, AA by Standard & Poor's, and AA+ by Fitch Ratings.

29 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

Basis Risk The interest rate cap agreement exposes the District to basis risk due to any difference between the actual variable interest rate on the Series 2004 Bonds and BMA. While BMA is a national tax exempt index commonly used as a proxy for variable rate transactions, there is no guarantee that BMA will perform exactly as the District's variable interest rate. While the District believes BMA is a reasonable proxy for the District's expected variable interest rate, it is possible that the District's variable interest rate could exceed 7.00% while BMA does not. In this case the District would pay interest costs in excess of 7.00%.

Temination Risk The District retains the right to terminate the interest rate cap prior to maturity. If the interest rate cap agreement is terminated, the interest rate on the Series 2004 Bonds would no longer be effectively capped at 7.00%.

Defeased Bonds In March 1998, the District defeased several bonds amounting to $155,115,000 by placing part of the proceeds of the 1998 Sales Tax Revenue Bonds in an irrevocable trust to provide for future debt service payments on these bonds. The advance refunding met the requirement of an in-substance debt defeasance, and the term bonds were removed from the District's long-term debt. Accordingly, the trust account assets and liabilities for the defeased bonds are not included in the District's financial statements. The amount outstanding on these defeased bonds was $23,615,000 at June 30, 2004.

In July 200 I, the District defeased a portion of 1991 and 1995 Sales Tax Revenue Bonds amounting to $41,175,000 by placing part of the proceeds of the 2001 Sales Tax Revenue Bonds in an irrevocable trust to provide for future debt service payments on these bonds. The advance refunding met the requirement of an in-substance debt defeasance, and the defeased bonds were removed from the District's long-term debt. Accordingly, the trust account assets and liabilities for the defeased bonds are not included in the District's financial statements. The advance refunding was made to achieve budgetary savings by extending debt service requirements further into the future and to take advantage of lower interest rates. The amount outstanding on these defeased bonds was $35, 140,000 at June 30, 2004.

The District deferred and amortized as a component of interest the difference between the reacquisition price and the net carrying amount of the old debt of$9,143,000 related to the defeasance from the proceeds of the 1998 and 2001 Sales Tax Revenue Bonds. These deferred charges are amortized over the life of the defeased bonds. Amortization expense on these deferred charges was $478,000 in fiscal years 2004 and 2003.

Arbitrage Bonds The District is subject to certain bond covenants, including the rules set forth by IRS Code Section 148a which requires that interest earned on the proceeds of a tax exempt bond issuance does not exceed the interest expense related to those bonds, which qualifies those bonds as arbitrage bonds. Any excess interest income is subject to a 100% tax and is payable to the federal government. As of June 30, 2004, the District has recorded estimated arbitrage liabilities amounting to $2,820,000 ($2,683,000 in 2003), which are included in other liabilities in the Statements of Net Assets (Note 8).

30 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

Debt Repayments The following is a schedule of long-term debt principal payments required as of June 30, 2004:

(in tlnusand of ddlars) 2002 SFO 2004 SFO TFA FTA Lease/ Extension Extension 1990 1995 1998 1999 2001 Bridge Toll Construction Capital Leaseback Premirnn Refunding Bonds Bonds Bonds Bonds Bonds Notes Loans Grant Bonds Obligation Fare Bonds Bonds Total

Year ending June 30: 2005 $ 9,615 $ 2,210 $ 3,860 $ 1,860 $ $ 8,075 $ $ 61,295 $ 6,716 $ $ $ 93,631 2006 2,315 13,775 1,940 8,495 27,325 64,210 51,473 169,533 2007 2,435 14,675 2,025 21,785 46,330 39,362 550 127,162 2008 2,555 15,415 2,115 6,040 12,812 570 46,025 85,532 2009 2,685 16,405 2,215 103,665 7,298 640 19,975 152,883 2010-2014 28,775 10,500 46,580 12,765 15,690 36,158 4,405 154,873 2015-2019 16,950 41,970 16,410 28,855 165,954 7,080 277,219 2020-2024 10,150 79,105 21,255 23,600 10,775 144,885 2025-2029 113,265 27,780 30,305 15,665 187,015 2030-2034 36,295 38,925 17,030 92,250 2035-2039 8,500 28,590 37,090 Thereafter 88,500 88,500 $ 38,390 $ 49,800 $ 345,050 $ 133,160 $ 165,965 $ 38,355 $ 115,825 $ 281,540 $ 319,773 $ 56,715 $ 66,000 1,610,573

Add/(deduct): Unamortized bond premium 10,692 Unamortized bond discount and issuance cost (26,084) Future imputed interest on lease/leaseback obligation (129,121) Current portion of long-term debt (93,631) Net long-term debt portion $ 1,372,429

31 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

8. Deferred Revenne and Other Liabilities

At June 30, 2004 and 2003 the balances and changes in deferred revenue and other liabilities are summarized as follows:

Deferred Other Sale/ (in thousands of ck:JI lars) Revenue Liabilities Leaseback

Fiscal Year 2004 Liabilities at beginning of year $ 42,132 $ 2,683 $ 23,658 Additions during the year 7,683 2,036 Amortization/payments during the year (10,146) (3,154) Liabilities at end of year 39,669 4,719 20,504 Less - current portion (8,408) (2,095) (3,154) Net noncurrent portion $ 31,261 $ 2,624 $ 17,350

Fiscal Year 2003 Liabilities at beginning of year $ 43,228 $ 2,563 $ 26,812 Additions during the year 7,281 925 Amortization/payments during the year (8,377) (805) (3,154) Liabilities at end of year 42,132 2,683 23,658 Less - current portion (8,598) (3,154) Net noncurrent portion $ 33,534 $ 2,683 $ 20,504

Deferred revenue consists mainly of the cash gain received by the District from the lease/leaseback of certain rail traffic equipment in 2002 (see Note 7) and from the sale/leaseback of25 C-2 rail cars in 1995 (discussed below), prepayments of fiber optic revenues received from others, and an estimate of passenger tickets sold but unused.

Other liabilities include estimated arbitrage liabilities related to the District's tax exempt bond issuance (see Note 7) and accrual ofrent expense on the District's new administrative office.

Sale/leaseback amounts reflect changes in the liability recorded as part of that transaction as discussed below.

Sale/Leaseback - Revenue Transit Vehicles On March 30, 1995, the District entered into an agreement with a Swedish corporation to sell 25 newly manufactured C-2 rail cars for $50,383,000 and simultaneously entered into an agreement to lease them back. The lease agreement was effective on the closing date of September 15, 1995, and continues through January 15, 2011.

The District recorded a gain on the sale of approximately $2,000,000 which is equal to the amount of cash received on the sale. The gain was deferred and is being amortized over 30 years. In addition, the District recorded a receivable of $48,368,000 and a capital lease obligation of the same amount. The receivable and the liability will be reduced by a corresponding amount over the term of the lease. At June 30, 2004 and 2003, the balance of the deferred gain was $1,162,000 and $1,217,000,

32 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

respectively. The balance of both the receivable and the liability was $20,504,000 and $23,658,000 as of June 30, 2004 and 2003, respectively and is reflected in the statement of net assets as capital lease receivable and capital lease liability, respectively. Other than the cash received upon the sale, no cash will be exchanged between the parties in settlement of the receivable and liability.

Accumulated depreciation related to the C-2 rail cars covered by the sale/leaseback agreement totaled $16,820,000 and $14,967,000 as of June 30, 2004 and 2003, respectively.

9. Federal Financial Assistance

The U.S. Department of Transportation provides financial assistance to the District for capital projects, planning and technical assistance. Cumulative information for grants which were active during the year ended June 30, 2004 are summarized as follows:

(in thousands of dollars) SFO Extension Project

Total approved project costs $ 1,347,230 Total approved federal allocation received $ 471,726 Less: cumulative amounts of project costs incurred and earned 749,229 Capital grants receivable $ (277,503)

(in thousands of dollars) Other Capital Projects

Total approved project costs $ 659,099 Total approved federal allocation $ 530,541 Less: cumulative amounts of project costs incurred and earned 472,554 Remaining approved federal allocation $ 57,987

The SFO Extension Project is covered by a Federal Full Funding Grant Agreement which authorizes the District to incur costs or expend local funds prior to an award of Federal funding assistance without prejudice to possible future Federal participation.

33 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

10. State and Local Financial Assistance

The District is eligible to receive local operating and capital assistance from the Transportation Development Act Funds ("TDA"). For the year ended June 30, 2004, there was no TDA operating assistance. In fiscal year 2003, the District received $357,000 TDA operating assistance from the County of Alameda. There was no TDA capital assistance received in fiscal years 2004 or 2003.

The District may be entitled to receive state operating and capital assistance from the State Transit Assistance Funds ("STA"). These funds are allocated by MTC based on the ratio of the District's transit operation revenue and local support to the revenue and local support of all state transit agencies. There was no STA operating or capital assistance for the fiscal years 2004 or 2003.

The District receives Paratransit funds provided to cities and transit operators from Alameda County Measure B funds to be used for services aimed at improving mobility for seniors and persons with disabilities. The Alameda County Transportation Improvement Authority ("ACTIA") is the administrator of Measure B funds. A summary of the transactions related to the Measure B funds allocated to the District for fiscal years 2004 and 2003 are as follows:

2004 2003

Prior year allocation received in the current year $ 209,000 $ 319,000 Current year allocation received in the current year 1,054,000 1,103,000 Current year allocation received in the following year 344,000 209,000 $1,607,000 $1,631,000

The District's revenues in fiscal 2004 and 2003 that relate to the Measure B funds were $1,607,000 and $1,422,000, respectively.

The fmancial assistance from San Mateo County Transit District ("SamTrans") relates to the reimbursement of a portion of the operating costs in excess of fare revenues identified to the SFO Extension, which covers the Cohna, South San Francisco, San Bruno, San Francisco International Airport and Millbrae stations. The SFO Extension started its revenue operations on June 22, 2003. For fiscal year ended June 30, 2004, the District recognized $18,268,000 ($599,000 in 2003) in operating fmancial assistance from SamTrans.

11. Employees' Retirement Benefits

Plan Description All employees are eligible to participate in the Public Employees' Retirement Fund (the "Fund") of the State of California's Public Employees' Retirement System ("CalPERS") under the Miscellaneous Plan and the Safety Plan of the San Francisco Bay Area Rapid Transit District. The Fund is an agent multiple-employer defined-benefit retirement plan that acts as a common investment and administrative agent for 2,560 local public agencies and school districts within the State of California. The Fund provides retirement, disability, and death benefits based on the employee's years of service, age and compensation. Employees vest after five years of service and may receive

34 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

retirement benefits at age 50. These benefit provisions and all other requirements are established by State statute and District contractual agreements.

All Fund investments are reported at fair value. The fair value of investments in securities is generally based on published market prices and quotations from major investment firms. Many factors are considered in arriving at fair value. In general, however, corporate bonds are valued based on yields currently available on comparable securities of issuers with similar credit ratings. Investments in certain restricted common stocks are valued at the quoted market price of the issuer's unrestricted common stock less an appropriate discount. Investments held in internal investment pools have been reported at fair value.

Mortgages are valued on the basis of their future principal and interest payments discounted at prevailing interest rates for similar instruments. The fair value of real estate investments, principally rental property subject to long-term net leases, are estimated based on independent appraisals. Short term investments are reported at fair value, when available, or at cost plus accrued interest, which approximates market value when market values are not available. For investments where no readily ascertainable market value exists, Ca!PERS' management in consultation with their investment advisors has determined the fair values for the individual investments.

Each plan issues a publicly available financial report that includes financial statements and required supplementary information for that plan. Those reports may be obtained by writing or calling the Plan: California PERS, P.O. Box 942709, Sacramento, CA 94229-2709, (916) 326-3420.

Funding Policy The Plan's funding policy provides for periodic District contributions at actuarially- determined amounts sufficient to accumulate the necessary assets to pay benefits when due as specified by contractual agreements. The individual entry age normal method is used to determine the normal cost, and beginning on July I, 1997, the unfunded actuarial accrued surplus or liability (past service liability) is amortized as a level percentage of future covered payroll over 13 years for the Miscellaneous Plan and the Safety Plan. District contributions for the year ended June 30, 2004 to cover normal cost and to amortize the unfunded actuarial accrued surplus approximated 7.20 I% (7.051% in 2003) and 15.029% (15.050% in 2003) ofcovered payroll for the Miscellaneous Plan and the Safety Plan, respectively.

The District was not required to make contributions to the Fund for covered employees for the fiscal year 2004 due to a surplus of the District's portion of the Fund's net assets over the District's pension benefit obligation caused by a change in 1988 in the actuarial valuation method and an actual rate of return on investment assets that exceeded the assumed rate.

The District's covered payroll for employees participating in the Fund for the years ended June 30, 2004 and 2003 was $222,678,000 and $213,902,000, respectively. The District's 2004 and 2003 payroll for all employees was $245,589,000 and $230,839,000, respectively. The District, due to Collective Bargaining Agreements, also reimburses the employees for their contributions, which are 9% for public safety personnel and 7% for miscellaneous covered employees. Effective October I, 2001, due to the 2001 Collective Bargaining Agreements and because of the superfunded status of the Fund, all employees, except sworn police officers, were not required to make contributions to the Fund.

35 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

Since the District has made the actuarially-determined required contributions since 1988, the pension liability or asset was zero at June 30, 2004, in accordance with GASB Statement No. 27, Accounting for Pensions b{Stateandlocal Gc:wernrrental Erl1)ioyers.

Funding Status and Annual Pension Cost Three-¥ear Trend I nforrration for the Fund:

( i n thousands of dol Iars) Fiscal Annual Percentage Net Year Pension of APC Pension Ending Cost (APC) Contributed Obligation

Miscellaneous Plan: June 30, 2002 $ 12,203 100% $ June 30, 2003 $ 14,801 100% $ June 30, 2004 $ 15,356 100% $

Safety Plan: June 30, 2002 $ 1,803 100% $ June 30, 2003 $ 2,026 100% $ June 30, 2004 $ 2,102 100% $

The required contribution was determined as part of an actuarial valuation performed as of June 30, 2003, the latest available for the Fund. The significant actuarial assumptions used in the 2003 valuation to compute the pension benefit obligation were an assumed rate of return on investment assets of7.75%, annual payroll increases of3.00% attributable to inflation, 3.25% attributable to real salary increases, and merit increases that vary by length of service, and no postretirernent benefit increases.

The funding status applicable to the District's employee group at June 30, 2003 (the latest available for the Fund) is summarized as follows:

Funded Status of the Miscellaneous Plan (in thousands of dollars)

Entry Age Unfunded Normal Actuarial Liability Annual UAAL asa Valuation Accrued Value (Excess Funded Covered Percentage Date Liability of Assets Assets) Status Payroll of Payroll

6/30/01 $ 722,298 $ 991,464 $ (269,166) 137.3% $ 184,513 (149.970)% 6/30/02 $ 801,662 $ 944,685 $ (143,023) 117.8% $ 196,260 (72.900)% 6/30/03 $ 939,072 $ 950,571 $ (11,499) 101.2% $ 202,170 (5.700)%

36 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

Funded Status of the Safety Plan (in thousands of dollars)

Entry Age Unfunded Normal Actuarial Liability Annual UAAL asa Valuation Accrued Value (Excess Funded Covered Percentage Date Liability of Assets Assets) Status Payroll of Payroll

6/30/01 $ 70,958 $ 83,306 $ (12,348) 117.4% $ 12,385 (99.700)% 6/30/02 $ 78,154 $ 80,207 $ (2,053) 102.6% $ 12,753 (16.100)% 6/30/03 $ 100,960 $ 82,329 $ 18,631 81.5% $ 14,277 (130.500)%

Postretirement Health Care Cost In addition to the retirement benefits described above, as specified in the District's contractual agreements, the District provides postretirement health care benefits assistance to employees. Most employees who retire directly from the District or their surviving spouses are eligible if the employee retires at or after age 50 with a minimum of 5 years of service with the District, elects to take an annuity from CalPERS and makes a timely election ofretiree medical. Currently, 915 retirees and surviving spouses (818 in 2003) are provided this benefit. The District paid up to $508,000 and $405 ,000 per month for health insurance premiums for the retirees and surviving spouses during fiscal years 2004 and 2003, respectively. These benefits, less a modest premium contribution, are fully funded by the District and accounted for on a pay-as-you-go basis. Cash reimbursements of these benefits totaled $5,525,000 in 2004 ($3,986,000 in 2003). See Note 12.

12. Retiree Health Benefit Trust

In 2004, GASB issued Statement No. 45, Accounting and Financial Reporting b,t ErrplO{ers for Posterrployrrent Benefits Other Than Pensions. The new GASB statement will require the District to change its accounting for OPEB from pay-as-you-go to an accrual basis. If an employer elects to fund its OPEB liability, GASB 45 requires that for an asset to be recognized as an offset to the employer's OPEB obligation, the asset must be irrevocably transferred to a trust or an equivalent arrangement, and legally protected from creditors of the employer. The District will be required to implement the requirements of Statement No. 45 beginning in fiscal year 2008.

On May 18, 2004, the District created the Retiree Health Benefit Trust for the San Francisco Bay Area Rapid Transit District (the "Trust"). The purpose of establishing the Trust is to facilitate the provision of medical benefits and other health and welfare benefits for the qualifying retirees of the District; to provide the means for financing the costs and expenses of operating and administering such benefits; to hold Trust assets for the sole and exclusive purpose of providing benefits to participants and beneficiaries; and to defray the reasonable expenses of administering the Trust and designated plans. Assets placed into the Trust cannot be used for any other purposes and are not available to satisfy general creditors of the District. Under California state law, the restrictions on the use of any proceeds from liquidation of the Trust are significant enough to render the Trust effectively irrevocable. The Trust is administered by one or more Trustees appointed by the District's Board of Directors. Currently, the Board has appointed the District's Controller-Treasurer as the Trustee.

In fiscal year 2004, the District sold shares it had received in a transaction involving the demutualization of Principal Life Insurance Company (see Note 2). The demutualization-related

37 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

cash received was transferred to the Trust in recognition of the District's desire to set aside funds that can be used to satisfy the obligation it will be required to accrue upon adoption of GASB 45. At June 30, 2004, assets held in the Trust included money market, U.S. Treasury and agency short-term obligation investments with a fair value of $23,598,000. These investments are included in the District's fmancial statements and are restricted to use for payment of retiree benefit liabilities that will be recorded when GASB 45 is adopted.

13. Deferred Compensation Plan

The District offers its employees a deferred compensation plan created in accordance with Internal Revenue Code ("IRC") Section 457. The deferred compensation plan, available to all officers and employees, permits them to defer receipt of a portion of their salary until future years. The deferred compensation is not available to employees until retirement, termination, or certain other covered events.

On January 1, 1997, the District amended the deferred compensation plan to conform to the Federal Small Business Protection Act of 1996 ("SBPA"). The amendment provided for the creation of a third party trust for the deferred compensation plan and all income attributable to those amounts. The funds are not included as part of the District's assets in the accompanying fmancial statements.

14. Money Purchase Pension Plan

Most District employees participate in the Money Purchase Pension Plan, which is a supplemental retirement defmed contribution plan. In January 1981, the District's employees elected to withdraw from the Federal Social Security System ("FICA") and established the Money Purchase Pension Plan. The District contributes an amount equal to 6.65% of eligible employees' annual compensation (up to $29,700 after deducting the first $133 paid during each month) up to a maximum annual contribution of $1,868. Non-represented employees receive an additional 1.627% of annual regular earnings up to $160,000. Additionally, effective October 1, 2001, most employees receive 3.5% of their wages subject to certain funding thresholds in the Ca!PERS Retirement Plan. Each employee's account is available for distribution upon such employee's termination.

The District's total expense and funded contribution for this plan for the years ended June 30, 2004 and 2003 were $6,947,000 and $6,933,000, respectively. The Money Purchase Pension Plan assets at June 30, 2004 and 2003 ( excluded from the accompanying financial statements) per the plan administrator's unaudited report were $260,656,000 and $233,078,000, respectively. At June 30, 2004, there were approximately 251 (294 in 2003) participants receiving benefits under this plan.

The plan issues a publicly available financial report that includes fmancial statements and required supplementary information. This report may be obtained by writing or calling: BART Investments Plans Committee, 300 Lakeside Drive, Oakland, California 94612, (510) 464-6238.

15. Board of Directors' Expenses

Total Directors' expenses, consisting of travel and other business related expenses for the years ended June 30, 2004 and 2003 amounted to $22,000 and $26,000, respectively.

38 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

16. Commitments and Contingencies

Litigation The District is involved in various lawsuits, claims and disputes, which for the most part are normal to the District's operations. It is the opinion of the District's management that the costs that might be incurred in the disposition of these matters, if any, would not materially affect the District's financial position.

Lease Commitments The District leases certain facilities under operating leases with original terms ranging from one to 50 years with options to renew.

Future minimum rental payments under noncancelable operating leases with initial or remaining lease terms of over one year at June 30, 2004 are as follows:

( i n thousands of dol Iars) Operating Leases

2005 $ 4,102 2006 6,671 2007 8,243 2008 8,185 2009 8,107 Thereafter 127,846 Total minimum payments $ 163,154

Rent expense under all operating leases was $7,881,000 and $4,743,000 for the years ended June 30, 2004 and 2003, respectively.

Fruitvale Development Corp. On October 1, 2001, the District entered into a ground lease agreement with Fruitvale Development Corp ("FDC") pertaining to 1. 8 acres ofland for the purpose of constructing thereon portions of a mixed-use development project commonly known as the Fruitvale Transit Village, which was planned to consist of approximately 250,000 square feet of commercial, community service and residential improvements. The lease agreement was effective December 9, 2003, the regular term date, which was also the opening date, and continues through January 31, 2077.

The terms of the lease require FDC to pay the District a Base Rent and a Percentage Rent. The Base Rent is a fixed amount determined at the inception of the lease subject to periodic CPI adjustments. Percentage Rent is calculated equal to 15% of annual gross receipts actually received by FDC's tenants, subtenants, sublessees, licensees and concessionaires from gross rental income, operations of any garage and/or parking lot included in the project improvements and all other gross receipts of whatsoever kind and categories from the operation of the premises.

The District provided FDC a Rent Credit amounting to $7,247,000, to acknowledge its assistance in obtaining grants for the construction of a Replacement BART Commuter Parking Garage near the Fruitvale Transit Village. The Rent Credit earns interest on the outstanding balance at simple interest based on the prime rate and can only be applied to satisfy the Base Rent. Based on the agreement,

39 San Francisco Bay Area Rapid Transit District Notes to Financial Statements J une 30, 2004 and 2003

FDC shall not be under any obligation to make any cash payment to the District for Base Rent at any time that Rent Credit still has a positive balance.

40 APPENDIX C

SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT STATEMENT OF INVESTMENT POLICY (Page intentionally left llank.) SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT STATEMENT OF INVESTMENT POLICY

The Treasurer of the District shall invest District funds in a manner the Treasurer deems prudent, suitable and advantageous under existing circumstances and in accordance with the following objectives, in order of priority:

I. Preservation of Capital

2. Liquidity - funds shall be invested only until date of anticipated need or for a lesser period.

3. Yield - generation of a favorable return on investment without compromise of the first two objectives.

The Treasurer may invest in Securities authorized by the Public Utilities Code Sections 29100 through 29102; Government Code Sections 53601, 53601.1 and 53635 and Board Resolution 2697 with the following exception: the Treasurer will not invest in commercial paper, fmancial or commodity futures, options contracts, medium-term corporate notes, or mutual funds unless specifically authorized by the Board.

The Treasurer may invest in repurchase agreements and will accept as security only securities of the U.S. government and U.S. governmental agencies which have a market value, including accrued interest, equal to the amount of the repurchase agreement. The maturity date of the collateral may, however, be later than that required by Objective 2 above.

The Treasurer may invest in reverse repurchase agreements with a maturity of 90 days or less.

The Treasurer may invest in "swaps" defmed as, the simultaneous buying and selling of a security of approximately the same maturity to increase yield, cash flow or to improve quality.

In addition to the securities authorized above, the Treasurer may invest in public time deposits in fmancial institutions having at least one branch within the BART boundaries. The Treasurer will accept as collateral securities authorized by the Government Code Section 53651 (a) through (p) excluding subsection (m) promissory notes secured by first mortgages and first trust deeds. The Treasurer will require 110% collateralization, less the portion authorized by Government Code Section 53653 on public time deposits, except for San Francisco Federal Home Loan Bank Letters of Credit, in which case the collateralization will be 105%.

The Treasurer has the authority to waive the required collateralization and substitute Federal Deposit Insurance Corporation (FDIC) for the first $100,000 of the investment.

The Treasurer will continue to seek minority Banks and Savings and Loan Associations, as defined by the Federal Government, for the placement of some of the District's funds.

The Treasurer may invest in money market mutual funds as authorized by Section 5360 l(k) of the Government Code up to a maximum total of $25,000,000. The funds must carry a credit rating of "AAA" by both Standard & Poor's and Moody's and their portfolio must consist entirely of direct obligations of the U. S. Government, its agencies or instrumentalities, and repurchase agreements backed by such obligations. The Treasurer may invest in the State of California Local Agency Investment Fund as authorized by Government Code Sections 16429.1 et req. in an amount not to exceed $25,000,000.

The District's investment policy shall also discourage the investment of funds in any institution or business which conducts operations or invests funds in any country whose laws discriminate against individuals based upon race, color or creed.

The foregoing defines the Treasurer's investment policies for calendar year 2003 and thereafter unless and until they are modified by the Treasurer and approved by the Board.

C-2 APPENDIXD

SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE (Page intentionally left llank.) SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE

The following is a brief summary of certain provisions of the Indenture, dated as of July 1, 1990, as supplemented and amended, including as supplemented and amended by the Eighth Supplemental Indenture, to be dated the date of issuance of the San Francisco Bay Area Rapid Transit District Sales Tax Revenue Bonds, Refunding Series 2005 A (the "Eighth Supplemental Indenture"), between the San Francisco Bay Area Rapid Transit District (the "District") and U.S. Bank National Association, as trustee (the "Trustee"). Such summary does not purport to be complete or definitive, is supplemental to the summary of other provisions of the Indenture contained elsewhere in this Official Statement, and is qualified in its entirety by reference to the full terms of the Indenture. All capitalized terms used and not otherwise defined in this Official Statement shall have the meanings assigned to such terms in the Indenture. Copies of the Indenture are available from the Trustee.

Definitions

"Accreted Value" means, with respect to any Capital Appreciation Bond, the principal amount thereof plus the interest accrued thereon, compounded at the approximate interest rate thereon on each date specified therein and, with respect to any Combination Bond, the principal amount thereof plus the interest accrued thereon, compounded at the approximate interest rate thereon, on each date specified therein for compounding and after the last date specified for such compounding, the principal and interest so determined as of such last compounding date. The Accreted Value at any date shall be the amounts set forth in the Accreted Value Table as of such date, if such date is a compounding date, and if not, as of the immediately preceding compounding date.

"Accreted Value Table" means the table denominated as such which appears as an exhibit to a Supplemental Indenture providing for a Series of Capital Appreciation Bonds issued pursuant to such Supplemental Indenture.

"Act" means Article 2, Chapter 7, Part 2, Division 10 of the Public Utilities Code of the State of California, as amended from time to time hereafter, and the Revenue Bond Law of 1941, as amended from time to time hereafter, to the extent made applicable to the District by Section 29143 of Article 2, Chapter 7, Part 2 of said Division 10, and Articles 10 and 11 of Chapter 3, Part 1 of Division 2 of Title 5 of, and other generally applicable provisions of, the Government Code of the State of California, as amended from time to time hereafter.

"Annual Debt Service" means for any Fiscal Year the aggregate amount of principal and interest on all Bonds and Parity Debt becoming due and payable during such Fiscal Year calculated using the principles and assumptions set forth under the definition of Maximum Annual Debt Service.

"Associated Sales Tax Revenues" means, for any designated period, an amount of Sales Tax Revenues that would have been received by the District from a transaction and use tax imposed in a jurisdiction, if such jurisdiction had been annexed to the District during such period of time, as set forth in a Certificate of the District delivered to the Trustee.

"Board" means the Board of Directors of the District.

"Bond Insurer" shall mean any issuer of a Municipal Bond Insurance Policy and which shall be: (i) Ambac Assurance Corporation, formerly known as AMBAC Indemnity Corporation, or any successor thereto, with respect to the Series 1990 Bonds maturing on or after July 1, 2001, the Series 1998 Bonds maturing on or after July 1, 2019 and the Series 2001 Bonds maturing on or after July 1, 2012; and (ii) with respect to the Series 2005 A Bonds maturing on or after July I, 2008, MBIA Insurance Corporation, or any successor thereto, with respect to the Series 2005 A Bonds maturing on or after July I, 2008.

"Bond Obligation" means, as of any given date of calculation, (I) with respect to any Outstanding Current Interest Bond, the principal amount of such Bond, (2) with respect to any Outstanding Combination Bonds, the Accreted Value thereof and (3) with respect to any Outstanding Capital Appreciation Bond, the Accreted Value thereof.

"Bond Reserve Fund" means the fund by that name established pursuant to the provisions of the Indenture.

"Bond Reserve Requirement" means, as of any date of calculation, an amount equal to the lesser of (i) Maximum Annual Debt Service on all Bonds Outstanding; or (ii) 125% of average Annual Debt Service on all Bonds Outstanding; provided that with respect to a Series of Bonds consisting of Variable Rate Indebtedness, for which an Interest Rate Swap Agreement is not in place, the interest rate thereon for purposes of calculating the Bond Reserve Requirement, shall be assumed to be equal to the highest interest rate published in The Bond Buyer "25 Bond Revenue Bond Index" most recently published preceding the date of sale of such Series of Bonds; and provided further that with respect to the issuance of a Series of Bonds if the Bond Reserve Fund would have to be increased by an amount greater than ten percent (10%) of the stated principal amount of such Series of Bonds (or, if the Series has more than a de minimis amount of original issue discount or premium, of the issue price of such Series of Bonds) then the Bond Reserve Requirement shall be such lesser amount as is determined by a deposit of such ten percent (10%)."

"Bonds" means the San Francisco Bay Area Rapid Transit District Sales Tax Revenue Bonds authorized by, and at any time Outstanding pursuant to, the Indenture.

"Business Day" means any day other than (I) a Saturday, Sunday, or a day on which banking institutions in the State are authorized or obligated by law or executive order to be closed, and (2) for purposes of payments and other actions relating to Bonds secured by a letter of credit, a day upon which commercial banks in the city in which is located the office of the issuing bank at which demands for payment under the letter of credit are to be presented are authorized or obligated by law or executive order to be closed.

"Capital Appreciation Bonds" means the Bonds of any Series designated as Capital Appreciation Bonds in the Supplemental Indenture providing for the issuance of such Series and on which interest is compounded and paid at maturity or on prior redemption.

"'Certificate, "Statement," "Request," "Requisition," and "Order" of the District mean, respectively, a written certificate, statement, request, requisition or order signed in the name of the District by the President of the Board or the General Manager or the Secretary or Treasurer of the District or any other person authorized by the General Manager to execute such instruments.

"Code" means the Internal Revenue Code of 1986, and the regulations applicable thereto or issued thereunder.

"Combination Bonds" means the Bonds of any Series designated as Combination Bonds in the Supplemental Indenture providing for the issuance of such Series and on which interest is compounded for a period of time and, following a specific date, is paid currently on the compounded amount.

"Costs of Issuance" means all items of expense directly or indirectly payable by or reimbursable to the District and related to the authorization, execution, sale and delivery of the Bonds, including but

D-2 not limited to advertising and printing costs, costs of preparation and reproduction of documents, filing and recording fees, travel expenses and costs relating to rating agency meetings and other meetings concerning the Bonds, initial fees and charges of the Trustee, legal fees and charges, fees and disbursements of consultants and professionals, financial advisor fees and expenses, rating agency fees, fees and charges for preparation, execution, transportation and safekeeping of Bonds, surety, insurance and credit enhancements costs, and any other cost, charge or fee in connection with the delivery of Bonds.

"Current Interest Bonds" means the Bonds of any Series designated as Current Interest Bonds in the Supplemental Indenture providing for the issuance of such Series of Bonds and which pay interest at least semiannually to the Owners thereof excluding the first payment of interest thereon.

"District" means San Francisco Bay Area Rapid Transit District and any successor entity thereto.

"Escrow Agreement" means the Escrow Agreement, dated as of September I, 2005, between the District and U. S. Bank National Association, as trustee and escrow agent.

"Escrow Fund" means the fund by that name created pursuant to the Escrow Agreement.

"Event of Default" means any of the events specified as such in the Indenture.

"Expense Account" means the account by that name established pursuant to the provisions of the Indenture.

"Fiscal Year" means the period beginning on July I of each year and ending on the next succeeding June 30, or any other 12-month period hereafter selected and designated as the official fiscal year period of the District which designation shall be provided to the Trustee in a Certificate of the District.

"Indenture" means the indenture, dated as of July I, 1990, between the Trustee and the District, as originally executed or as it may from time to time be supplemented or amended by any Supplemental Indenture delivered pursuant to the provisions thereof. As of the date of issuance of the Series 2005 A Bonds, "Indenture" includes the First Supplemental Indenture, dated as of August 7, 1990, the Second Supplemental Indenture, dated as of August 29, 1991, the Third Supplemental Indenture, dated as of June 7, 1995, the Fourth Supplemental Indenture, dated as of April 1, 1997, the Fifth Supplemental Indenture, dated as of March 12, 1998, the Sixth Supplemental Indenture, dated as of October 7, 1999, the Seventh Supplemental Indenture, dated as of July 12, 200 I, and the Eighth Supplemental Indenture, to be dated as of the date of issuance of the Series 2005 A Bonds.

"Interest Fund" means the fund by that name established pursuant to the prov1s10ns of the Indenture.

"Interest Rate Swap Agreement"' shall mean, effective as of the date of issuance of the Series 2005 A Bonds, an interest rate swap agreement relating to a Series of Bonds or portion thereof or Parity Debt in which the party with which the District or the Trustee may contract is limited to: (i) entities the debt securities of which are rated in one of the two highest long-term debt Rating Categories by either Moody's or Standard & Poor's and the debt securities of which are rated not lower than the third highest long-term debt Rating Category by the other rating agency; (ii) entities the obligations of which under the interest rate swap agreement are either guaranteed or insured by an entity the debt securities or insurance policies of which are so rated; or (iii) entities the debt securities of which are rated in the third highest

'Effective upon the issuance of the Series 2005 A Bonds, the definition oflnterest Rate Swap Agreement will be amended pursuant to the provisions of the Eighth Supplemental Indenture to read in its entirety as set forth above.

D-3 long-tenn debt Rating Categories by Moody's and Standard & Poor's or whose obligations are guaranteed or insured by an entity so rated and, in either case, the obligations of which under the interest rate swap agreement are continuously and fully secured by Investment Securities described in clauses (i) through (iv) of the defmition thereof, which shall have a market value determined, by the party designated in such interest rate swap agreement, at least monthly ( exclusive of accrued interest) at least equal to the termination value, if any, that would be payable by the provider of the interest rate swap agreement under such interest rate swap agreement and which shall be deposited with a custodian acceptable to the District.

"Investment Securities" means the following:

(i) any bonds or other obligations which as to principal and interest constitute direct obligations of, or are unconditionally guaranteed by, the United States of America, including obligations of any of the federal agencies and federally sponsored entities set forth in clause (iii) below to the extent unconditionally guaranteed by the United States of America;

(ii) any certificates, receipts, securities or other obligations evidencing ownership of, or the right to receive, a specified portion of one or more interest payments or principal payments, or any combination thereof, to be made on any bond, note, or other obligation described above in clause (i);

(iii) obligations of the Federal National Mortgage Association, the Government National Mortgage Association, Federal Home Loan Banks, Farmers Home Administration and Federal Home Loan Mortgage Corporation;

(iv) housing authority bonds issued by public agencies or municipalities and fully secured as to the payment of both principal and interest by a pledge of annual contributions under an annual contributions contract or contracts with the United States of America; or project notes issued by public agencies or municipalities and fully secured as to the payment of both principal and interest by a requisition or payment agreement with the United States of America;

(v) obligations of any state, territory or commonwealth of the United States of America or any political subdivision thereof or any agency or department of the foregoing; provided that at the time of their purchase such obligations are rated in either of the two highest Rating Categories by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(vi) any bonds or other obligations of any state of the United States of America or any political subdivision thereof (a) which are not callable prior to maturity or as to which irrevocable instructions have been given to the trustee of such bonds or other obligations by the obligor to give due notice of redemption and to call such bonds for redemption on the date or dates specified in such instructions, (b) which are secured as to principal and interest and redemption premium, if any, by a fund consisting only of cash or bonds or other obligations of the character described above in clause (i), (ii) or (iii) which fund may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the interest payment dates and the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, ( c) as to which the principal of and interest on the bonds and obligations of the character described above in clause (i), (ii) or (iii) which have been deposited in such fund along with any cash on deposit in such fund are sufficient to pay the principal of and interest and redemption premium, if any, on the bonds or other obligations described in this clause (vi) on the interest payment dates and the maturity date or dates thereof or on the redemption date or dates specified in the irrevocable

D-4 instructions referred to in subclause (a) of this clause (vi), as appropriate, and (d) which have been rated in one of the two highest long-term Rating Categories by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(vii) bonds, notes, debentures or other evidences of indebtedness issued or guaranteed by any corporation which are, at the time of purchase, rated by a nationally recognized rating agency in its highest short-term Rating Category, or, if the term of such indebtedness is longer than 3 years, rated by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds) in one of its two highest long-term Rating Categories, for comparable types of debt obligations;

(viii) demand or time deposits or certificates of deposit, whether negotiable or nonnegotiable, issued by any bank or trust company organized under the laws of any state of the United States of America or any national banking association (including the Trustee), provided that such certificates of deposit shall be purchased directly from such a bank, trust company or national banking association and shall be either (1) continuously and fully insured by the Federal Deposit Insurance Corporation, or (2) continuously and fully secured by such securities and obligations as are described above in clauses (i) through (v), inclusive, which shall have a market value ( exclusive of accrued interest) at all times at least equal to the principal amount of such certificates of deposit and shall be lodged with the Trustee, as custodian, by the bank, trust company or national banking association issuing such certificates of deposit, and the bank, trust company or national banking association issuing each such certificate of deposit required to be so secured shall furnish the Trustee with an undertaking satisfactory to it that the aggregate market value of all such obligations securing each such certificate of deposit will at all times be an amount equal to the principal amount of each such certificate of deposit and the Trustee shall be entitled to rely on each such undertaking;

(ix) taxable commercial paper or tax-exempt commercial paper rated in the highest Rating Category by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(x) variable rate obligations required to be redeemed or purchased by the obligor or its agent or designee upon demand of the holder thereof secured as to such redemption or purchase requirement by a liquidity agreement with a corporation and as to the payment of interest and principal either upon maturity or redemption ( other than upon demand by the holder thereof) thereof by an unconditional credit facility of a corporation, provided that the variable rate obligations themselves are rated in the highest Rating Category for its short-term rating, if any, and in either of the two highest Rating Categories for its long-term rating, if any, by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds), and that the corporations providing the liquidity agreement and credit facility have, at the date of acquisition of the variable rate obligation by the Trustee, an outstanding issue of unsecured, uninsured and unguaranteed debt obligations rated in either of the two highest long term Rating Categories by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(xi) any repurchase agreement with any bank or trust company organized under the laws of any state of the United States or any national banking association (including the Trustee) having a minimum permanent capital of one hundred million dollars ($100,000,000) or government bond dealer reporting to, trading with, and recognized as a primary dealer by the Federal Reserve Bank of New York, which agreement is secured by any one or more of the securities and obligations described in clauses (i), (ii), (iii) or (iv) above, which shall have a market value ( exclusive of accrued interest and valued at least monthly) at least equal to the

D-5 principal amount of such investment and shall be lodged with the Trustee or other fiduciary, as custodian for the Trustee, by the bank, trust company, national banking association or bond dealer executing such repurchase agreement, and the entity executing each such repurchase agreement required to be so secured shall furnish the Trustee with an undertaking satisfactory to it that the aggregate market value of all such obligations securing each such repurchase agreement (as valued at least monthly) will be an amount equal to the principal amount of each such repurchase agreement and the Trustee shall be entitled to rely on each such undertaking;

(xii) any cash sweep or similar account arrangement of or available to the Trustee, the investments of which are limited to investments described in clauses (i), (ii), (iii), (iv), (v) and (xi) of this definition oflnvestment Securities and any money market fund, the entire investments of which are limited to investments described in clauses (i), (ii), (iii), (iv), (v) and (xi) of this definition of Investment Securities; provided that as used in this clause (xii) and clause (xiii) investments will be deemed to satisfy the requirements of clause (xi) if they meet the requirements set forth in clause (xi) ending with the words "clauses (i), (ii), (iii) or (iv) above" and without regard to the remainder of such clause (xi);

(xiii) any investment agreement with a financial institution or insurance company which has at the date of execution thereof and during the term thereof an outstanding issue of unsecured, uninsured and unguaranteed debt obligations or a claims paying ability rated in either of the two highest long-term Rating Categories by Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds);

(xiv) bonds, notes, certificates, bills, acceptances or other securities in which funds of the District may now or hereafter be legally invested as provided by the law in effect at the time of such investment; and

(xv) any investment approved by the Board for which confirmation is received from Moody's (if Moody's is then rating the Bonds) and Standard & Poor's (if Standard & Poor's is then rating the Bonds) that such investment will not adversely affect such agency's rating on such Bonds.

"Mandatory Sinking Account Payment" means, with respect to Bonds of any Series and maturity, the amount required by the Indenture or a Supplemental Indenture to be deposited by the District in a Sinking Account for the payment of Term Bonds of such Series and maturity.

"Maximum Annual Debt Service"' shall mean, effective as of the date of issuance of the Series 2005 A Bonds, the greatest amount of principal and interest becoming due and payable on all Bonds and Parity Debt in the Fiscal Year in which the calculation is made or any subsequent Fiscal Year as set forth in a Certificate of the District; provided, however, that for the purposes of computing Maximum Annual Debt Service:

'Effective upon the issuance of the Series 20025 A Bonds, the definition of Maximum Annual Debt Service will be amended pursuant to the provisions of the Eighth Supplemental Indenture to read in its entirety as set forth above.

D-6 (b) principal and interest payments on Bonds and Parity Debt shall be excluded to the extent such payments are to be paid from amounts on deposit with the Trustee or other fiduciary in escrow specifically therefor and to the extent that such interest payments are to be paid from the proceeds of Bonds or Parity Debt held by the Trustee or other fiduciary as capitalized interest specifically to pay such interest by the Trustee or other fiduciary;

(c) in determining the principal amount due in each Fiscal Year, payment shall (unless a different subsection of this defmition applies for purposes of determining principal maturities or amortization) be assumed to be made in accordance with any amortization schedule established for such debt, including any Mandatory Sinking Account Payments or any scheduled redemption or payment of Bonds on the basis of Accreted Value, and for such purpose, the redemption payment or payment of Accreted Value shall be deemed a principal payment and interest that is compounded and paid as Accreted Value shall be deemed due on the scheduled redemption or payment date of such Capital Appreciation Bond or Combination Bond;

( d) if the Bonds or Parity Debt are debt, the principal of which the District determines (in a Supplemental Indenture or other document delivered on a date not later than the date of issuance of such Bonds or Parity Debt) that the District intends to pay with moneys which are not Revenues (such as commercial paper, balloon indebtedness or bond anticipation notes), but from future debt obligations of the District, grants received from the State or federal govermnent, or any agency or instrumentality thereof, or any other source of funds of the District, the principal of such Bonds or Parity Debt will be treated as if such principal were due based upon a 30-year level amortization of principal from the date of calculation and the interest on such Bonds or Parity Debt shall be calculated as if such Bonds were Variable Rate Indebtedness;

( e) if any Bonds feature an option, on the part of the Bondowners or an obligation under the terms of such Bonds, to tender all or a portion of such Bonds to the District, the Trustee, or other fiduciary or agent and require that such Bonds or portion thereof be purchased if properly presented, then for purposes of determining the amounts of principal and interest due in any Fiscal Year on such Bonds, the options or obligations of the Owners of such Bonds to tender the same for purchase or payment prior to their stated maturity or maturities shall be treated as a principal maturity occurring on the first date on which Owners of such Bonds may or are required to tender such Bonds except that any such option or obligation to tender Bonds shall be ignored and not treated as a principal maturity, if ( 1) such Bonds are rated in one of the two highest long term Rating Categories by Moody's and by Standard & Poor's or such Bonds are rated in the highest short-term, note or commercial paper Rating Categories by Moody's and by Standard & Poor's and (2) funds for the purchase price of such Bonds have been set aside by the District and pledged to such payment or are to be provided by a letter of credit or standby bond purchase agreement and the obligation of the District with respect to the provider of such letter of credit or standby bond purchase agreement, other than its obligations on such Bonds, shall be subordinated to the obligation of the District on the Bonds or, if not subordinate, shall be incurred ( assuming such immediate tender) under the conditions and meeting the tests for the issuance of Parity Debt set forth in the Indenture, in which latter case, such repayment obligations of the District to the provider of such letter of credit or standby bond purchase agreement shall be included in the computation of the Maximum Annual Debt Service in accordance with the terms of such obligation.

D-7 variable rate that is expected to equal or approximate the rate of interest on such Variable Rate Indebtedness), the Variable Rate Indebtedness shall be treated as bearing such synthetic fixed rate for the duration of the synthetic fixed rate; and

(g) if any Bonds or Parity Debt bear a fixed interest rate or the Bonds or Parity Debt proposed to be issued will bear a fixed interest rate and an Interest Rate Swap Agreement is entered into with respect to such Bonds or Parity Debt, if ( i) the interest rate on such fixed rate Bonds or Parity Debt, plus (ii) the payments received and made by the District under an Interest Rate Swap Agreement with respect to such fixed rate Bonds or Parity Debt, are expected to produce a synthetic variable rate to be paid by the District ( e.g., an interest rate swap under which the District pays a variable rate and receives a fixed rate that is expected to equal or approximate the rate of interest on such fixed interest rate debt), the fixed interest rate debt, shall be treated as bearing such synthetic variable rate for the duration of the Interest Rate Swap Agreement calculated as if such Bonds or Parity Debt were Variable Rate Indebtedness.

"Moody's" means Moody's Investors Service, a corporation duly organized and existing under and by virtue of the laws of the State of Delaware, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "Moody's" shall be deemed to refer to any other nationally recognized securities rating agency selected by the District and not objected to by the Trustee.

"Municipal Bond Insurance Policy" means the municipal bond new issue insurance policy issued by a Bond Insurer that guarantees payment of principal of and interest on a Series of Bonds or a portion thereof.

"Opinion of Bond Counsel" means a written opinion of a law firm of national standing in the field of public fmance selected by the District.

"Outstanding," when used as of any particular time with reference to Bonds, means (subject to the provisions of the Indenture) all Bonds theretofore, or thereupon being, authenticated and delivered by the Trustee under the Indenture except: (1) Bonds theretofore cancelled by the Trustee or surrendered to the Trustee for cancellation; (2) Bonds with respect to which all liability of the District shall have been discharged in accordance with the provisions of the Indenture; and (3) Bonds for the transfer or exchange of or in lieu of or in substitution for which other Bonds shall have been authenticated and delivered by the Trustee pursuant to the Indenture.

"Owner" or "Bondholder" or "Bondowner", whenever used with respect to a Bond, means the person in whose name such Bond is registered.

"Parity Debt" means any indebtedness, instalhnent sale obligation, lease obligation or other obligation of the District for borrowed money or interest rate swap agreement having an equal lien and charge upon the Sales Tax Revenues and therefore payable on a parity with the Bonds (whether or not any Bonds are Outstanding).

"Person" means a corporation, firm, association, partnership, trust, or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof.

"Policy Costs" means the accrued interest and expenses owed to the provider of a Reserve Policy or letter of credit with respect to a payment thereunder.

"Principal Fund" means the fund by that name established pursuant to the provisions of the Indenture.

D-8 "Project" means the planning, acquisition, construction, operation or maintenance of any facility or facilities necessary or convenient for the transportation of passengers and their incidental baggage by any means, or incidental to, or in connection with, the operation of the rapid transit system of the District, which shall constitute an "enterprise" within the meaning of Section 54309 of the California Government Code. Such facilities shall include, but are not limited to, any and all works, structures, property, rolling stock or other facilities of any kind which the District is authorized to acquire, construct or complete.

"Project Fund" means the fund by that name established by a Supplemental Indenture to hold the proceeds of a Series of Bonds or a portion thereof prior to expenditure on the Project.

"Proportionate Basis," when used with respect to the redemption of Bonds, means that the amount of Bonds of each maturity to be redeemed shall be determined as nearly as practicable by multiplying the total amount of funds available for redemption by the ratio which the amount of Bond Obligation of Bonds of such maturity bears to the amount of all Bond Obligation of Bonds to be redeemed, provided that if the amount available for redemption of Bonds of any maturity is insufficient to redeem a multiple of $5,000 principal amount or Accreted Value payable at maturity, such amount shall be applied to the redemption of the highest possible integral multiple (if any) of $5,000 principal amount or Accreted Value payable at maturity. For purposes of the foregoing, Term Bonds shall be deemed to mature in the years and in the amounts of the Mandatory Sinking Account Payments, and Capital Appreciation Bonds, Combination Bonds and Current Interest Bonds maturing or subject to Mandatory Sinking Account Payments in the same year shall be treated as separate maturities. When used with respect to the payment or purchase of Bonds, "Proportionate Basis" shall have the same meaning set forth above except that "pay" or "purchase" shall be substituted for "redeem" or "redemption" and "paid" or "purchased" shall be substituted for "redeemed."

"Rating Category" means (i) with respect to any long-term rating category, all ratings designated by a particular letter or combination of letters, without regard to any numerical modifier, plus or minus sign or other modifier and (ii) with respect to any short-term or commercial paper rating category, all ratings designated by a particular letter or combination of letters and taking into account any numerical modifier, but not any plus or minus sign or other modifier.

"Rebate Fund" means that fund by that name established pursuant to the prov1S1ons of the Indenture.

"Rebate Instructions" means those calculations and directions required to be delivered to the Trustee by the District under the Tax Certificate.

"Rebate Requirement" means the Rebate Requirement as such term 1s defined m the Tax Certificate.

"Redemption Price" means, with respect to any Bond ( or portion thereof) the principal amount or accreted value of such Bond ( or portion thereof) plus the applicable premium, if any, payable upon redemption thereof pursuant to the provisions of such Bond and the Indenture.

"Reserve Policy" means a surety bond or insurance policy satisfying the Bond Reserve Requirement or portion thereof.

"Revenue Fund" means the Sales Tax Revenue Fund established pursuant to the provisions of the Indenture.

D-9 "Sales Tax Revenues" means the amounts available for distribution to the District pursuant to Section 29142.2(a) of the Act on account of the transactions and use tax imposed pursuant to Section 29140 of the Act.

"Serial Bonds" means Bonds, maturing in specified years, for which no Mandatory Sinking Account Payments are provided.

"Series," whenever used with respect to Bonds, means all of the Bonds designated as being of the same series, authenticated and delivered in a simultaneous transaction, regardless of variations in maturity, interest rate, redemption and other provisions, and any Bonds thereafter authenticated and delivered upon transfer or exchange or in lieu of or in substitution for (but not to refund) such Bonds as provided in the Indenture.

"Series 2005 A Costs of Issuance Fund" means the fund by that name established pursuant to the Eighth Supplemental Indenture.

"Sinking Accounts" means the accounts in the Principal Fund so designated and established pursuant to the Indenture for the payment of Term Bonds.

"Standard & Poor's" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc., a corporation duly organized and existing under and by virtue of the laws of the State of New York, and its successors and assigns, except that if such corporation shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, then the term "Standard & Poor's" shall be deemed to refer to any other nationally recognized securities rating agency selected by the District and not objected to by the Trustee.

"State" means the State of California.

"Supplemental Indenture" means any indenture duly executed and delivered, supplementing, modifying or amending the Indenture, but only if and to the extent that such Supplemental Indenture is specifically authorized under the Indenture.

"System" means any and all works, structures, property, rolling stock or other facilities of any kind, which the District is now or hereafter authorized by law to acquire, construct or complete.

"Tax Certificate" means the Tax Certificate delivered by the District at the time of the issuance and delivery of any Series of Bonds, as the same may be amended or supplemented in accordance with its terms.

"Term Bonds" means Bonds payable at or before their specified maturity date or dates from Mandatory Sinking Account Payments established for that purpose and calculated to retire such Bonds on or before their specified maturity date or dates.

"Trustee' means U. S. Bank National Association, successor by merger to U. S. Bank Trust National Association, which was formerly known as First Trust of California, National Association, successor trustee to Bank of America National Trust and Savings Association, which was successor trustee to Security Pacific National Bank, a national banking association organized and existing under the laws of the United States, or its successor as Trustee as provided in the Indenture."

"Variable Rate Indebtedness" means any indebtedness the interest rate on which is not fixed at the time of incurrence of such indebtedness, and has not at some subsequent date been fixed, at a single numerical rate for the entire term of the indebtedness.

D-10 Additional Bonds; Refnnding Bonds; Parity Debt; Snbordinate Obligations

Additional Bonds. The District may, by Supplemental Indenture, establish one or more Series of Bonds, payable from Sales Tax Revenues and secured by a pledge under the Indenture equally and ratably with Bonds previously issued, and the District may issue, and the Trustee may authenticate and deliver to or upon the written order of the District, Bonds of any such Series so established, in such principal amount as shall be determined by the District, but only upon compliance by the District with certain requirements and conditions, including the following:

(a) The Trustee shall have received a Certificate of the District stating that no Event of Default has occurred and is then continuing.

(b) The Trustee shall have received an Opinion of Bond Counsel to the effect that the Supplemental Indenture authorizing such Series of Bonds has been duly authorized by the District, that the Bonds of the Series, when duly executed by the District and authenticated by the Trustee, will be valid and binding limited obligations of the District, and that upon delivery of such Series of Bonds, the aggregate principal amount of Bonds then Outstanding will not exceed the amount permitted by law or by the Indenture.

(c) The Trustee shall have received a Certificate of the District certifying that: (1) the amount of Sales Tax Revenues received plus the amount of Associated Sales Tax Revenues relating to any recently annexed jurisdiction for any period of 12 consecutive months during the 18 months immediately preceding the date on which such additional Series of Bonds will become Outstanding shall have been at least equal to 1. 5 times the amount of Maximum Annual Debt Service on all Series of Bonds and Parity Debt then Outstanding, and the additional Series of Bonds then proposed to be issued; (2) the amount of Sales Tax Revenues for the Fiscal Year in which the Bonds are to be issued and each of the next succeeding 4 Fiscal Years under the laws then in existence at the time of issuance of such additional Series of Bonds are estimated by the District to be at least 1. 5 times the amount of Annual Debt Service on all Series of Bonds and Parity Debt then Outstanding, including the additional Series of Bonds then proposed to be issued, in each such Fiscal Year; and (3) Sales Tax Revenues for the Fiscal Year in which the additional Series of Bonds are to be issued under the laws then in existence at the time of the issuance of such additional Series of Bonds shall be at least 1.0 times the amount of the District's obligations with respect to repayment of any withdrawals under a Reserve Policy plus Policy Costs, if any, then due and owing under the Reserve Policy.

(d) The Trustee shall have received the amount, if any, necessary for deposit in the Bond Reserve Fund so that the amount on deposit in such fund immediately after authentication and delivery of such Series of Bonds shall equal the Bond Reserve Requirement with respect to all Bonds considered to be Outstanding upon the issuance of the additional Series of Bonds.

Refunding Bonds. Refunding Bonds may be authorized and issued by the District, without compliance with the requirements described immediately above under the subcaption "Additional Bonds," in an aggregate principal amount sufficient (together with any additional funds available or to become available) to provide funds for the payment of all of the following:

(a) The principal or Redemption Price of the Outstanding Bonds or Parity Debt to be refunded.

(b) All expenses incident to the calling, retiring or paying of such Outstanding Bonds or Parity Debt and the Costs oflssuance of such refunding Bonds.

D-11 ( c) Interest on all Outstanding Bonds or Parity Debt to be refunded to the date such Bonds or Parity Debt will be called for redemption or paid at maturity.

( d) Interest on the refunding Bonds from the date thereof to the date of payment or redemption of the Bonds or Parity Debt to be refunded.

Before such additional Series of refunding Bonds shall be issued and delivered, the District shall file the following documents with the Trustee:

(a) An Opinion of Bond Counsel to the effect that the execution of the Supplemental Indenture authorizing the refunding Bonds has been duly authorized by the District, that such Series, when duly executed by the District and authenticated and delivered by the Trustee, will be valid and binding limited obligations of the District, and that upon delivery of such Series the aggregate principal amount of Bonds then Outstanding will not exceed the amount permitted by law or by the Indenture.

(b) If any of the Bonds to be refunded are to be redeemed prior to their stated maturity dates, irrevocable instructions to the Trustee to give the applicable notice of redemption or a waiver of the notice of redemption signed by the Owners of all or the portion of the Bonds or Parity Debt to be redeemed, or proof that such notice has been given by the District; provided, however, that in lieu of such instructions or waiver or proof of notice of redemption, the District may cause to be deposited with the Trustee all of the Bonds and Parity Debt proposed to be redeemed (whether cancelled or uncancelled) with irrevocable instructions to the Trustee to cancel said Bonds or Parity Debt so to be redeemed upon the exchange and delivery of said refunding Bonds.

(c) A Certificate of the District certifying that: (I) the amount of Sales Tax Revenues received plus the amount of Associated Sales Tax Revenues relating to any recently annexed jurisdiction for any period of 12 consecutive months during the 18 months immediately preceding the date on which such additional Series of Bonds will become Outstanding shall have been at least equal to I. 5 times the amount of Maximum Annual Debt Service on all Series of Bonds and Parity Debt then Outstanding, and the additional Series of Bonds then proposed to be issued (provided that in calculating the amount of Maximum Annual Debt Service on all Series of Bonds and Parity Debt then Outstanding, the Bonds and Parity Debt to be refunded by such refunding Bonds shall not be treated as Outstanding); (2) the amount of Sales Tax Revenues for the Fiscal Year in which the Bonds are to be issued and each of the next succeeding 4 Fiscal Years under the laws then in existence at the time of issuance of such additional Series of Bonds are estimated by the District to be at least I. 5 times the amount of Annual Debt Service on all Series of Bonds and Parity Debt then Outstanding, including the additional Series of Bonds then proposed to be issued, in each such Fiscal Year; and (3) Sales Tax Revenues for the Fiscal Year in which the additional Series of Bonds are to be issued under the laws then in existence at the time of the issuance of such additional Series of Bonds shall be at least 1.0 times the amount of the District's obligations with respect to repayment of any withdrawals under a Reserve Policy plus Policy Costs, if any, then due and owing under the Reserve Policy.

Parity Debt. The District will not, so long as any of the Bonds are outstanding, issue any obligations or securities, payable in whole or in part from Sales Tax Revenues, except additional Bonds issued pursuant to the provisions of the Indenture described above under the subcaption "Additional Bonds," refunding Bonds issued pursuant to the provisions of the Indenture described above under the subcaption "Refunding Bonds," and Parity Debt payable on a parity with the Bonds, which Parity Debt will have, when issued, an equal lien and charge upon the Sales Tax Revenues, provided that the following conditions to the issuance of such Parity Debt are satisfied:

D-12 ( 1) Such Parity Debt has been duly and legally authorized for any lawful purpose.

(2) No Event of Default shall have occurred and then be continuing, as evidenced by a Certificate the District filed with the Trustee.

(3) Unless such Parity Debt is for refunding purposes as specified in the Indenture, the District shall have obtained and placed on file with the Trustee a Certificate of the District certifying that the debt service coverage ratio requirements applicable to the issuance of additional Bonds described above under the subcaption "Additional Bonds" have been met with respect to such Parity Debt.

( 4) The District shall have filed with the Trustee an Opinion of Bond Counsel to the effect that such Parity Debt has been duly authorized in accordance with law.

(5) The Trustee shall be designated as paying agent or trustee for such Parity Debt and the District shall deliver to the Trustee a transcript of the proceedings providing for the issuance of such Parity Debt.

Subordinate Obligations. The District may also issue obligations which are junior and subordinate to the payment of the principal, premium, interest and reserve fund requirements for the Bonds and all Parity Debt, which subordinated obligations are payable as to principal, premium, interest and reserve fund requirements, if any, only out of Sales Tax Revenues after the prior payment of all amounts then required to be paid under the Indenture from Sales Tax Revenues for principal, premium, interest and reserve fund requirements for the Bonds and all Parity Debt.

Establishment and Application of Funds and Accounts; Investments

The following funds and accounts are established pursuant to the Indenture: the Revenue Fund, the Interest Fund, the Principal Fund, the Bond Reserve Fund, the Redemption Fund, the Rebate Fund and the Expense Account. In addition, the Series 2005 A Costs of Issuance Fund is established pursuant to the Eighth Supplemental Indenture.

For a description of the allocation of Sales Tax Revenues and the Interest Fund, Principal Fund, Bond Reserve Fund and Expense Account see "SECURITY FOR THE SERIES 2005 A BONDS" in the front portion of this Official Statement.

Redemption Fund. All moneys deposited by the District with the Trustee for the purpose of optionally redeeming Bonds of any Series shall, unless otherwise directed by the District, be deposited in the Redemption Fund. All amounts deposited in the Redemption Fund shall be used and withdrawn by the Trustee solely for the purpose of redeeming Bonds of such Series and maturity as shall be specified by the District in a request to the Trustee, in the manner, at the times and upon the terms and conditions specified in the Supplemental Indenture pursuant to which such Series of Bonds was created; provided that, at any time prior to giving such notice of redemption, the Trustee shall, upon receipt of a Request of the District, apply such amounts to the purchase of Bonds of such Series at public or private sale, as and when and at such prices (including brokerage and other charges) as is directed by the District, except that the purchase price ( exclusive of accrued interest) may not exceed the Redemption Price or Accreted Value then applicable to such Bonds. All Term Bonds purchased or redeemed from the Redemption Fund shall be allocated to Mandatory Sinking Account Payments applicable to such Series and maturity of Term Bonds as may be specified in a Request of the District.

Investments. All moneys in any of the funds and accounts held by the Trustee and established pursuant to the Indenture shall be invested, as directed by the District solely in Investment Securities,

D-13 subject to the limitations set forth in the Indenture. If and to the extent the Trustee does not receive investment instructions from the District with respect to the moneys in the funds and accounts held by the Trustee pursuant to the Indenture, such moneys will be invested in Investment Securities described in clause (xii) of the defmition thereof and the Trustee shall request investment instructions from the District for such moneys.

Moneys in the Bond Reserve Fund shall be invested in Investment Securities available on demand or maturing within 10 years of the date of such investment. Moneys in the remaining funds and accounts shall be invested in Investment Securities maturing or available on demand not later than the date on which it is estimated that such moneys will be required by the Trustee.

Unless otherwise provided in a Supplemental Indenture, all interest, profits and other income received from the investment of moneys in any fund or account, other than the Rebate Fund or a Project Fund, shall be transferred to the District when received. All investment earnings on funds held in each Project Fund shall be deposited in such Project Fund unless transferred by the District to the Trustee to be deposited in the Rebate Fund. All interest, profits and other income received from the investment of moneys in the Rebate Fund shall be deposited in the Rebate Fund pursuant to the Indenture, unless the Trustee is otherwise directed by the District in accordance with the provisions of the Tax Certificate.

Certain Covenants of the District

Collection of Sales Tax Revenues. The District has duly levied a transactions and use tax in accordance with the Act, pursuant to and in accordance with Ordinance No. 1, as amended by Ordinance Nos. 2, 3, 4, 5, 7, 8, 9 and 10. Said Ordinance has not and will not be amended, modified or altered so long as any of the Bonds are Outstanding in any manner which would reduce the amount of or timing of receipt of Sales Tax Revenues, and the District will continue to levy and collect such transactions and use taxes to the full amount permitted by law. The District has entered into an agreement with the State Board of Equalization under and pursuant to which the State Board of Equalization processes and supervises collection of said transactions and use taxes and transmits Sales Tax Revenues directly to the Trustee. Said agreement will be continued in effect so long as any of the Bonds are Outstanding and shall not be amended, modified or altered without the written consent of the Trustee so long as any of the Bonds are Outstanding. The District will receive and hold in trust for ( and remit immediately to) the Trustee any Sales Tax Revenues paid to the District by the State Board of Equalization.

The District covenants and agrees to separately account for all Sales Tax Revenues and to provide to the Trustee access to such accounting records at reasonable hours and under reasonable circumstances.

The District covenants that so long as the Bonds are Outstanding, it will not, to the best of its ability, suffer or permit any change, modification or alteration to be made to the legislation authorizing the levy and collection of the transactions and use tax which would materially and adversely affect the rights of Bondholders.

General Covenants. The District has covenanted, among other things, (1) to punctually pay or cause to be paid the principal or Redemption Price of and interest on the Bonds, but only out of Sales Tax Revenues as provided in the Indenture, (2) to maintain and preserve the System in good repair and working order at all times and to operate the System in an efficient and economical manner, (3) to keep proper books of record and accounts, prepared in accordance with generally accepted accounting principles, relating to Sales Tax Revenues, which shall be available for inspection by the Trustee at reasonable hours and under reasonable circumstances, (4) to cause the annual preparation and filing with the Trustee, so long as any of the Bonds are Outstanding, of reasonably detailed financial statements for the preceding Fiscal Year, which fmancial statements shall be accompanied by an opinion of an independent certified public accountant, (5) to pay and discharge, or cause to be paid and discharged, all

D-14 taxes, assessments and other governmental charges, if any, lawfully imposed upon the System or any part thereof or upon any Sales Tax Revenues, when the same shall become due, and (6) to commence and continue to completion the acquisition and construction of all facilities for which any of the Bonds are issued.

Tax Covenants. The District has covenanted in the Indenture not to take any action, or fail to take any action, if any such action or failure to act would adversely affect the exclusion from gross income of the interest on the Bonds under Section I 03 of the Code. The District has covenanted to comply with the provisions of the Tax Certificate.

The District specifically covenants to pay or cause to be paid to the federal govermnent of the United States of America the Rebate Requirement at the times and in the amounts determined under and as described in the Tax Certificate. This covenant shall survive the defeasance of the Bonds or any Series thereof.

If the District shall receive an Opinion of Bond Counsel to the effect that any action required under the tax covenants of the Indenture is no longer required, or to the effect that some further action is required, to maintain the exclusion from gross income of the interest on the Bonds pursuant to Section 103 of the Code, the District and the Trustee may rely conclusively on such opinion in complying with the provisions of the Indenture, and such tax covenants in the Indenture shall be deemed to be modified to that extent.

Events of Default and Remedies

The following events shall be Events of Default:

(a) default in the due and punctual payment of the principal or Redemption Price of any Bond when and as the same shall become due and payable, whether at maturity as therein expressed, by proceedings for redemption, by declaration or otherwise, or default in the redemption from any Sinking Account of any Bonds in the amounts and at the times provided therefor;

(b) default in the due and punctual payment of any installment of interest on any Bond when and as such interest instalhnent shall become due and payable;

(c) if the District shall fail to observe or perform any covenant, condition, agreement or provision in the Indenture on its part to be observed or performed, other than as described in subsection (a) or (b) above, for a period of 60 days after written notice, specifying such failure and requesting that it be remedied, has been given to the District by the Trustee; except that, if such failure can be remedied but not within such 60-day period and if the District has taken all action reasonably possible to remedy such failure within such 60-day period, such failure shall not become an Event of Default for so long as the District shall diligently proceed to remedy the same in accordance with and subject to any directions or limitations of time established by the Trustee;

( d) if any default shall exist under any agreement governing any Parity Debt and such default shall continue beyond the grace period, if any, provided for with respect to such default;

( e) if the District files a petition in voluntary bankruptcy, for the composition of its affairs or for its corporate reorganization under any state or federal bankruptcy or insolvency law, or makes an assignment for the benefit of creditors, or admits in writing to its insolvency or

D-15 inability to pay debts as they mature, or consents in writing to the appointment of a trustee or receiver for itself;

(f) if a court of competent jurisdiction shall enter an order, judgment or decree declaring the District insolvent, or adjudging it bankrupt, or appointing a trustee or receiver of the District, or approving a petition filed against the District seeking reorganization of the District under any applicable law or statute of the United States of America or any state thereof, and such order, judgment or decree shall not be vacated or set aside or stayed within 60 days from the date of the entry thereof;

(g) if, under the provisions of any other law for the relief or aid of debtors, any court of competent jurisdiction shall assume custody or control of the District or of the Sales Tax Revenues, and such custody or control shall not be terminated within 60 days from the date of assumption of such custody or control; or

(h) if the Legislature of the State shall repeal or amend all or any portion of the provisions of the Act relating to the retail transactions and use tax, being Section 29140 of the Public Utilities Code, unless the District determines that said repeal or amendment does not materially and adversely affect the rights of Bondholders.

Determination of Events of Default. So long as a Municipal Bond Insurance Policy is in effect with respect to a Series of Bonds, for purposes of determining whether any Event of Default concerning such Bonds, as set forth in clause (a) or (b) above, has occurred, no effect shall be given to payments made under such Municipal Bond Insurance Policy.

Application ofSales Tax Revenues and Other Funds After Default. If and for so long as an Event of Default shall occur and be continuing, the District shall immediately transfer to the Trustee all Sales Tax Revenues held by it and the Trustee shall apply all Sales Tax Revenues and any other funds then held or thereafter received by the Trustee under any of the provisions of the Indenture ( except as otherwise provided in the Indenture) as follows and in the following order:

(I) To the payment of any expenses necessary in the opinion of the Trustee to protect the interests of the Owners of the Bonds and Parity Debt, including the costs and expenses of the Trustee and the Bondholders in declaring such Event of Default, and payment of reasonable fees and expenses of the Trustee (including reasonable fees and disbursements of its counsel and other agents) incurred in and about the performance of its powers and duties under the Indenture;

(2) To the payment of the whole amount of Bond Obligation then due on the Bonds and Parity Debt (upon presentation of the Bonds and Parity Debt to be paid, and stamping thereon of the payment if only partially paid, or surrender thereof if fully paid) subject to the provisions of the Indenture, with interest on such Bond Obligation, at the rate or rates of interest borne by the respective Bonds and Parity Debt, to the payment to the persons entitled thereto of all instalhnents of interest then due and the unpaid principal or Redemption Price of any Bonds and Parity Debt which shall have become due, whether at maturity or by call for redemption, in the order of their due dates, with interest on the overdue Bond Obligation and Parity Debt at the rate borne by the respective Bonds and Parity Debt, and, if the amount available shall not be sufficient to pay in full all the Bonds and Parity Debt due on any date, together with such interest, then to the payment thereof ratably, according to the amounts of principal or interest or Accreted Value (plus accrued interest) due on such date to the persons entitled thereto, without any discrimination or preference.

D-16 (3) To the payment of reimbursement of withdrawals under a Reserve Policy and Policy Costs.

Trustee to Represent Bondholders. The Trustee is irrevocably appointed (and the successive respective Owners of the Bonds, by taking and holding the same, shall be conclusively deemed to have so appointed the Trustee) as trustee and true and lawful attorney-in-fact of the Owners of the Bonds for the purpose of exercising and prosecuting on their behalf such rights and remedies as may be available to such Owners under the provisions of the Bonds, the Indenture, the Act and applicable provisions of any other law. Upon the occurrence and continuance of an Event of Default or other occasion giving rise to a right in the Trustee to represent the Bondholders, the Trustee in its discretion may, and upon the written request of the Owners of not less than 25% in aggregate amount of Bond Obligation of the Bonds then Outstanding, and upon being indemnified to its satisfaction therefor, shall, proceed to protect or enforce its rights or the rights of such Owners by such appropriate action, suit, mandamus or other proceedings as it shall deem most effectual to protect and enforce any such right, at law or in equity, either for the specific performance of any covenant or agreement contained herein, or in aid of the execution of any power herein granted, or for the enforcement of any other appropriate legal or equitable right or remedy vested in the Trustee or in such Owners under the Indenture, the Act or any other law; and upon instituting such proceeding, the Trustee shall be entitled, as a matter of right, to the appointment of a receiver of the Sales Tax Revenues and other assets pledged under the Indenture, pending such proceedings. All rights of action under the Indenture or the Bonds or otherwise may be prosecuted and enforced by the Trustee without the possession of any of the Bonds or the production thereof in any proceeding relating thereto, and any such suit, action or proceeding instituted by the Trustee shall be brought in the name of the Trustee for the benefit and protection of all the Owners of such Bonds, subject to the provisions of the Indenture.

Bond Insurer's Direction of Proceedings. So long as a Municipal Bond Insurance Policy is in effect with respect to a Series of Bonds, upon the occurrence and continuance of an Event of Default concerning such Series of Bonds, the rights of the Owners of the Series of Bonds to direct or institute remedies as set forth in the Indenture shall be subject to the prior written consent of the Bond Insurer, and the Bond Insurer, acting alone, shall have the right to direct all remedies upon an Event of Default concerning such Series of Bonds and shall be required to consent in writing to any waiver of an Event of Default concerning such Series of Bonds, pursuant to any provision of the Indenture, so long as the Bond Insurer has not failed to comply with its payment obligations under the Municipal Bond Insurance Policy; provided, however, that such direction from the Bond Insurer shall not materially adversely affect the rights of the Owners of any other Series of Bonds.

Termination ofProceedings. In case any proceedings taken by the Trustee, the Bond Insurer or any one or more Owners on account of any Event of Default shall have been discontinued or abandoned for any reason or shall have been determined adversely to the Trustee, the Bond Insurer or the Owners, then in every such case the District, the Trustee, the Bond Insurer and the Owners, subject to any determination in such proceedings, shall be restored to their former positions and rights under the Indenture, severally and respectively, and all rights, remedies, powers and duties of the District, the Trustee, the Bond Insurer and the Owners shall continue as though no such proceedings had been taken.

Remedies Not Exclusive. No remedy in the Indenture conferred upon or reserved to the Trustee, the Bond Insurer or to the Owners is intended to be exclusive of any other remedy or remedies, and each and every such remedy, to the extent permitted by law, shall be cumulative and in addition to any other remedy given under the Indenture or now or hereafter existing at law or in equity or otherwise.

Bondholders' Direction of Proceedings. Except as provided under "Bond Insurer's Direction of Proceedings" anything in the Indenture to the contrary notwithstanding, the Owners of a majority in aggregate amount of Bond Obligation of the Bonds then Outstanding shall have the right, by an

D-17 instrument or concurrent instruments in writing executed and delivered to the Trustee and upon furnishing the Trustee with indemnification satisfactory to it, to direct the method of conducting all remedial proceedings taken by the Trustee under the Indenture, all as more fully described in the Indenture.

Limitation on Bondholders' Right to Sue. No Owner of any Bond shall have the right to institute any suit, action or proceeding at law or in equity, for the protection or enforcement of any right or remedy under the Indenture, the Act or any other applicable law with respect to such Bond, unless: ( 1) such Owner shall have given to the Trustee written notice of the occurrence of an Event of Default; (2) the Owners of not less than 25% in aggregate amount of Bond Obligation of the Bonds then Outstanding shall have made written request upon the Trustee to exercise the powers granted in the Indenture or to institute such suit, action or proceeding in its own name; (3) such Owner or said Owners shall have tendered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; ( 4) the Trustee shall have refused or omitted to comply with such request for a period of 60 days after such written request shall have been received by, and said tender of indemnity shall have been made to, the Trustee; and (5) the Trustee shall not have received contrary directions from the Owners of a majority in aggregate amount of Bond Obligation of the Bonds then Outstanding.

Such notification, request, tender of indemnity and refusal or omission are hereby declared, in every case, to be conditions precedent to the exercise by any Owner of Bonds of any remedy under the Indenture or under law; it being understood and intended that no one or more Owners of Bonds shall have any right in any manner whatever by his or their action to affect, disturb or prejudice the security of the Indenture or the rights of any other Owners of Bonds, or to enforce any right under the Indenture, the Act or other applicable law with respect to the Bonds, except in the manner in the Indenture provided, and that all proceedings at law or in equity to enforce any such right shall be instituted, had and maintained in the manner in the Indenture provided and for the benefit and protection of all Owners of the Outstanding Bonds, subject to the provisions of the Indenture.

Reserve Policy Remedies. If any reimbursement for prior withdrawals and Policy Costs shall not be repaid in accordance with the requirements of the Indenture, the provider of a Reserve Policy delivered in connection with a Series of Bonds shall be entitled to exercise any and all remedies available at law or under the Indenture with respect to such Series of Bonds other than remedies which would adversely affect Bondholders.

Defeasance

Bonds of any Series or a portion thereof may be paid by the District in any of the following ways:

(a) by paying or causing to be paid the Bond Obligations of and interest on such Outstanding Bonds, as and when the same become due and payable;

(b) by depositing with the Trustee, an escrow agent or other fiduciary, in trust, at or before maturity, money or securities in the necessary amount ( as provided in the Indenture) to pay or redeem such Outstanding Bonds; or

( c) by delivering to the Trustee, for cancellation by it, such Outstanding Bonds.

If the District shall pay all Bonds Outstanding and also pay or cause to be paid all other sums payable under the Indenture by the District, then and in that case, at the election of the District (evidenced by a Certificate of the District filed with the Trustee, signifying the intention of the District to discharge all such indebtedness and the Indenture), and notwithstanding that any Bonds shall not have been surrendered for payment, the Indenture and the pledge of Sales Tax Revenues and other assets made

D-18 under the Indenture and all covenants, agreements and other obligations of the District under the Indenture shall cease, terminate, become void and be completely discharged and satisfied.

So long as a Reserve Policy is in effect, the Indenture shall not be discharged until all reimbursement for prior withdrawals and Policy Costs owing to the provider of such Reserve Policy shall have been paid in full.

Discharge of Liability on Bonds. Upon the deposit with the Trustee, escrow agent or other fiduciary, in trust, at or before maturity, of money or securities in the necessary amount (as provided in the Indenture and described below under the subcaption "Deposit of Money or Securities with Trustee") to pay or redeem any Outstanding Bond (whether upon or prior to its maturity or the redemption date of such Bond), provided that, if such Bond is to be redeemed prior to maturity, notice of such redemption shall have been given as in the Indenture provided or provision satisfactory to the Trustee shall have been made for the giving of such notice, then all liability of the District in respect of such Bond shall cease, terminate and be completely discharged, provided that the Owner thereof shall thereafter be entitled to the payment of the principal of and premium, if any, and interest on the Bonds, and the District shall remain liable for such payment, but only out of such money or securities deposited with the Trustee as aforesaid for their payment, subject, however, to the provisions of the Indenture described below under the subcaption "Payment of Bonds After Discharge of Indenture," and continuing duties of the Trustee thereunder.

Deposit of Money or Securities with Trustee. Whenever in the Indenture it is provided or permitted that there be deposited with or held in trust by the Trustee money or securities in the necessary amount to pay or redeem any Bonds, the money or securities so to be deposited or held may include money or securities held by the Trustee in the funds and accounts established pursuant to the Indenture and shall be:

(a) lawful money of the United States of America in an amount equal to the principal amount of such Bonds and all unpaid interest thereon to maturity, except that, in the case of Bonds which are to be redeemed prior to maturity and in respect of which notice of such redemption shall have been given as in the Indenture provided or provision satisfactory to the Trustee shall have been made for the giving of such notice, the amount to be deposited or held shall be the principal amount or Redemption Price of such Bonds and all unpaid interest thereon to the redemption date; or

(b) Non-callable Investment Securities described in clauses (i), (ii) or (vi) of the definition thereof the principal of and interest on which when due will, in the opinion of an independent certified public accountant delivered to the Trustee, provide money sufficient to pay the principal or Redemption Price of and all unpaid interest to maturity, or to the redemption date, as the case may be, on the Bonds to be paid or redeemed, as such principal or Redemption Price and interest become due, provided that, in the case of Bonds which are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as in the Indenture provided or provision satisfactory to the Trustee shall have been made for the giving of such notice;

provided, in each case, that the Trustee shall have been irrevocably instructed (by the terms of the Indenture or by request of the District) to apply such money to the payment of such principal or Redemption Price and interest with respect to such Bonds.

Payment ofBonds After Discharge ofIndenture. Any moneys held by the Trustee in trust for the payment of the principal or Redemption Price of, or interest on, any Bonds and remaining unclaimed for 4 years after the principal of all of the Bonds has become due and payable (whether at maturity or upon call for redemption as provided in the Indenture), if such moneys were so held at such date, or 4 years after

D-19 the date of deposit of such moneys if deposited after said date when all of the Bonds became due and payable, shall, upon Request of the District, be repaid to the District free from the trusts created by the Indenture, and all liability of the Trustee with respect to such moneys shall thereupon cease; provided, however, that before the repayment of such moneys to the District as aforesaid, the Trustee may (at the cost of the District) first mail to the Owners of any Bonds remaining unpaid at the addresses shown on the registration books maintained by the Trustee a notice, in such form as may be deemed appropriate by the Trustee, with respect to the Bonds so payable and not presented and with respect to the provisions relating to the repayment to the District of the moneys held for the payment thereof. All moneys held by or on behalf of the Trustee for the payment of principal of Accreted Value of or interest or premium on Bonds, whether at redemption or maturity, shall be held in trust for the account of the Owners thereof and the Trustee shall not be required to pay Owners any interest on, or be liable to the Owners or any other person ( other than the District) for any interest earned on, moneys so held. Any interest earned thereon shall belong to the District and shall be deposited monthly by the Trustee into the Revenue Fund.

Amendments

The Indenture and the rights and obligations of the District, the Owners of the Bonds and the Trustee may be modified or amended at any time by a Supplemental Indenture, with the written consent of the Owners of a majority in the aggregate amount of Bond Obligation of the Bonds ( or, if such Supplemental Indenture is only applicable to a Series of Bonds, such Series of Bonds) then Outstanding; provided that if such modification or amendment will, by its terms, not take effect so long as any Bonds of any particular maturity remain Outstanding, the consent of the Owners of such Bonds shall not be required and such Bonds shall not be deemed to be Outstanding for the purpose of any calculation of Bonds Outstanding under this caption.

The Indenture and the rights and obligations of the District and of the Owners of the Bonds and of the Trustee may also be modified or amended at any time by a Supplemental Indenture entered into by the District and the Trustee which shall become binding when the written consents of each provider of a letter of credit or a policy of bond insurance for the Bonds shall have been filed with the Trustee, provided that at such time the payment of all the principal of and interest on all Outstanding Bonds shall be insured by a policy or policies of municipal bond insurance or payable under a letter of credit the provider of which shall be a financial institution or association having unsecured debt obligations rated, or insuring or securing other debt obligations rated on the basis of such insurance or letters of credit, in one of the two highest Rating Categories of Moody's or Standard & Poor's.

No such modification or amendment shall (a) extend the fixed maturity of any Bond or reduce the amount of principal thereof, or extend the time of payment or reduce the amount of any Mandatory Sinking Account payment provided for the payment of any Bond, or reduce the rate of interest thereon, or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, without the consent of the Owner of each Bond so affected, or (b) reduce the aforesaid percentage of Bond Obligation the consent of the Owners of which is required to effect any such modification or amendment, or permit the creation of any lien on the Sales Tax Revenues or other assets pledged under the Indenture prior to or on a parity with the lien created by the Indenture, or deprive the Owners of the Bonds of the lien created by the Indenture on such Sales Tax Revenues and other assets ( except as expressly provided in the Indenture), without the consent of the Owners of all of the Bonds then Outstanding.

The Indenture and the rights and obligations of the District, of the Trustee and of the Owners of the Bonds may also be modified or amended at any time by a Supplemental Indenture, without the consent of any Bondholders, but only to the extent permitted by law and only for any one or more of the following purposes:

D-20 ( 1) To add to the covenants and agreements of the District in the Indenture contained other covenants and agreements thereafter to be observed, to pledge or assign additional security for the Bonds ( or any portion thereof) or to surrender any right or power reserved to or conferred upon the District;

(2) To make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing or correcting any defective provision contained in the Indenture, or in regard to matters or questions arising under the Indenture, as the District may deem necessary or desirable, and which shall not materially and adversely affect the interests of the Owners of the Bonds;

(3) To modify, amend or supplement the Indenture in such manner as to permit qualification under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect and to add such other terms, conditions and provisions as may be permitted by said act or similar federal statute, and which shall not materially and adversely affect the interests of the Owners of the Bonds;

( 4) To make modifications or adjustments necessary, appropriate or desirable to provide for the issuance of Variable Rate Indebtedness, Capital Appreciation Bonds or Parity Debt with such interest rate, payment, maturity and other terms as the District may deem desirable, subject to the provisions of the Indenture described above under the caption "Additional Bonds, Refunding Bonds, Parity Debt, Subordinate Obligations," provided such modifications or adjustments shall not materially and adversely affect the interests of Owners of the Bonds;

(5) To provide for the issuance of Bonds in book-entry form or bearer form, provided that no such provisions shall materially and adversely affect the interest of the Owners of the Bonds;

( 6) To make modifications or adjustments necessary, appropriate or desirable to accommodate credit enhancements including letters of credit, surety bonds and insurance policies delivered with respect to the Bond Reserve Fund, provided such modifications or adjustments shall not materially and adversely affect the interests of Owners of the Bonds;

(7) If the District agrees in a Supplemental Indenture to maintain the exclusion of interest on a Series of Bonds from gross income for purposes of federal income taxation, to make such provisions as are necessary or appropriate to ensure such exclusion;

(8) To provide for the issuance of an additional Series of Bonds pursuant to provisions of the Indenture described above under the caption "Additional Bonds, Refunding Bonds, Parity Debt, Subordinate Obligations;" and

(9) For any other purpose that does not materially and adversely affect the interests of the Owners of the Bonds.

Other Provisions

Waiver ofPersonal Liability. No Board member, officer, agent or employee of the District or the Trustee shall be individually or personally liable for the payment of the principal or Redemption Price of or interest on the Bonds or be subject to any personal liability or accountability by reason of the issuance thereof; but nothing in the Indenture contained shall relieve any such Board member, officer, agent or employee of the District or the Trustee from the performance of any official duty provided by law or by the Indenture.

D-21 (Page intentionally left llank.) APPENDIX E

THE ECONOMY OF THE THREE BART COUNTIES (Page intentionally left llank.) THE ECONOMY OF THE THREE BART COUNTIES

General

The San Francisco Bay Area (the "Bay Area") encompasses the nine counties which border San Francisco Bay. The Three BART Counties, the City and County of San Francisco, Alameda County and Contra Costa County, comprise a 1,512- square-mile central core of the nearly 7,000 square miles of land in the Bay Area. The City and County of San Francisco occupies approximately 45 square miles, while Alameda County and Contra Costa County are approximately 733 and 734 square miles in size, respectively. The San Francisco Bay Area Rapid Transit District (the "District" or "BART") service area also includes northern San Mateo County, adjacent to the southern border of San Francisco. The non-member six counties, four to the north and two south, provide reciprocal economic support and potential users and expansion area for the District's centrally located System. All capitalized terms used and not otherwise defined in this Appendix C shall have the meanings set forth in the front portion of this Official Statement.

The City and County of San Francisco occupies the tip of a peninsula situated between the Pacific Ocean and San Francisco Bay (the "Bay") and is separated from Marin County and other northerly counties by the Golden Gate, which forms the entrance to the Bay and is spanned by the Golden Gate Bridge. Alameda and Contra Costa Counties, bordering the east side of the Bay across from San Francisco, stretch eastward up to 40 miles beyond the series of hills between the Bay and the Central Valley (the Sacramento and San Joaquin Valleys) of California. Contra Costa County is bordered on the northwest by San Pablo Bay and the north by the Carquinez Strait and the extensive Delta area of the Sacramento and San Joaquin Rivers, which empty into the Bay. Alameda County adjoins Santa Clara County at the southern tip of the Bay. Linking the Bay Area are seven major bridges.

Sales taxes levied in the Three BART Counties are a principal source of District revenues. Sales Tax Revenues depend on economic activity and trends as well as the demographic characteristics of the Three BART Counties. To provide a basis for assessing likely future Sales Tax Revenues in the District, historical trends are summarized below and forecasts are presented for the population and employment of the Three BART Counties.

Historical Population and Employment Trends

Table 1 shows historical population for cities within the Three BART Counties for the selected years between 1980 and 2004. Population in the Three BART Counties increased approximately 26.65% between 1980 and 2004. Table 1 IDSTORICAL POPULATION Alameda and Contra Costa Counties and City and County of San Francisco Selected Years, 1980 through 2004 Percentage Change 1980 1990 1995 2000 2004* 1980-2004** Alameda County Alameda 63,852 72,500 77,100 72,259 74,581 14.74% Albany 15,130 16,350 16,350 16,444 16,743 9.63 Berkeley 103,328 103,000 100,900 102,743 104,534 1.15 Dublin°> C2> NIA 23,450 24,200 29,973 39,931 41.27 Emeryville 3,714 5,750 6,150 6,882 8,261 55.04 Fremont 131,945 172,700 181,800 203,413 210,445 37.30 Hayward 94,167 111,300 126,200 140,030 146,027 35.51 Livermore 48,349 56,400 63,000 73,345 80,723 40.11 Newark 32,126 37,850 39,200 42,471 43,708 26.50 Oakland 339,337 372,300 378,600 399,566 412,318 17.70 Piedmont 10,498 10,600 10,750 10,952 11,055 5.04 Pleasanton 35,160 50,700 55,100 63,654 67,650 48.03 San Leandro 63,952 68,300 72,300 79,452 81,422 21.46 Union City 39,406 53,700 57,200 66,869 70,685 44.25 Other Areas 124,415 119,900 124,000 135,717 139,397 10.75 1,105,379 1,274,700 1,332,900 1,443,939 1,507,500 26.67% Contra Costa County Antioch 42,683 61,200 75,800 90,532 101,049 57.76% Brentwood 4,434 7,500 10,950 23,302 40,912 89.16 Clayton 4,325 7,150 8,425 10,762 10,982 60.62 Concord 103,763 111,000 115,000 121,782 124,798 16.86 Danville0> C2> NIA 31,200 36,150 41,715 43,273 27.90 El Ceni.to 22,731 22,900 22,850 23,171 23,407 2.89 Hercules 5,963 16,500 18,500 19,488 23,360 74.47 Lafayette 20,837 23,400 23,250 23,908 24,317 14.31 Martinez 22,582 31,450 34,400 35,866 36,818 38.67 Moraga 15,014 15,950 15,950 16,290 16,434 8.64 1 3 Oakley > C l NIA NIA NIA 25,619 28,265 9.36 Orinda Cl) C2> NIA 16,650 16,900 17,599 17,797 6.44 Pinole 14,253 17,000 18,250 19,039 19,604 27.30 Pittsburg 33,465 47,250 51,300 56,769 62,605 46.55 Pleasant Hill 25,547 31,550 31,250 32,837 33,638 24.05 Richmond 74,676 86,700 93,000 99,216 103,012 27.51 San Pablo 19,750 24,700 27,550 30,256 31,344 36.99 San Ramon NIA 35,000 39,250 44,722 51,027 31.41 Walnut Creek 54,062 60,400 61,600 64,296 66,501 18.70 Other Areas 192,246 150,100 168,600 151,557 161,754 (18.85) 656,331 797,600 869,200 948,816 1,020,898 35.71%

City and County of 678,974 724,100 741,600 776,733 799,263 15.05% San Francisco

Three BART Counties 2,440,684 2,796,400 2,943,700 3,169,488 3,327,661 26.65%

* As of January I, 2005. ** Percentage Change calculated based on Historical Population information set forth in Table 1. (I) The cities of Danville, Dublin, Orinda and Oakley were incorporated in 1982, 1982, 1985 and 1999, respectively. (2) Percentage change from 1990-2004. (3) Percentage change from 2000-2004. Source: U.S. Census; California Department of Finance.

E-2 Table 2-A shows historical nonagricultural employment for the Three BART Counties by industry sector in 2003 and Table 2-B shows change in total nonagricultural employment for the Three BART Counties by industry sector between 1992 and 2002. Table 2-A NONAGRICULTURAL EMPLOYMENT BY INDUSTRY SECTOR Alameda and Contra Costa Counties and City and County of San Francisco 2003*

Alameda County Contra Costa County City and County of San Francisco Number Percent Number Percent Number Percent

J\.1ining and construction . 40,400 5.85% 27,600 8.26% 17,600 3.41% Manufacturing .. 76,700 11.11 20,700 6.19 13,500 2.62 Transportation, Warehousing and Public Utilities .. 28, 100 4.07 8,800 2.63 18,000 3.49 Trade Wholesale .. 41,800 6.05 9,300 2.78 12,900 2.50 Retail . 67,700 9.81 42,300 12.66 41,800 8.10 Finance, insurance, and real estate .. 35,500 5.14 32,400 9.70 60,100 11.65 Services .. 268,800 38.93 142,500 42.64 268,700 52.07 Government.. 131 500 19 04 50 600 15.14 83 400 16.16

Total nonagricultural employment**. 690,500 1000% 334,200 1000% 516,000 1000%

* Most recent annual data available. ** Figures may not add due to independent rounding. Source: California Employment Development Department, Labor Market Information Division.

Table 2-B CHANGES IN NONAGRICULTURAL EMPLOYMENT BY INDUSTRY SECTOR Total Three BART Counties (Compared to United States)*

1992 2002 2002 United States Number Percent Number Percent Percent

Mining and Construction .. 56,200 4.02% 85,600 5.44% 5.53% Manufacturing .. 127,300 9.10 118,700 7.54 11.68 Transportation and Public Utilities .. 63,600 4.55 57,400 3.65 3.67 Trade Wholesale .. 56,900 4.07 65,900 4.19 4.30 Retail . 140,500 10 04 155,600 9.88 11.48 Finance, insurance, and real estate .. 115,900 8.28 126,000 8.00 18.20 Services .. 580,300 41.48 696,700 44.25 28.75 Government.. 258 200 18.46 268 500 17.05 16.39

Total nonagricultural employment** .. 1,399,100 100 00% 1,574,400 100 00% 100 00%

* Most recent annual data available. ** Figures may not add due to independent rounding. Sources: Counties: California Employment Development Department; United States Department of Labor, Bureau of Labor Statistics.

E-3 Nonagricultural employment in the Three BART Counties increased approximately 11.3% between 1992 and 2002, for an average annual growth rate of approximately 1.13% between 1992 and 2002.

As shown in Table 2-A and Table 2-B, the economy of the Three BART Counties is well diversified, with emphasis on retail trade and services.

Alameda County. Alameda County accounts for approximately 45.3% of the population and approximately 44.8% of the nonagricultural employment of the Three BART Counties. Alameda County's population increased approximately 26.7% between 1980 and January 2004.

Alameda County has a diverse economic base. A large number of new jobs have been, and are expected to be, created by firms classified in the services industry. Many of these jobs will be highly skilled professional, technical, and managerial positions. The two largest employment sectors are services and government, which account for approximately 58% of total employment. The trade sector, including both retail and wholesale, averaged 109,500 jobs in 2003, comprising approximately 15.6% of total employment. The service industry, averaging 268,800 jobs in 2003, comprising approximately 38.9% of total employment, is the largest employment sector. Major employers in Alameda County include University of California at Berkeley, Kaiser Permanente, Alameda County, Oakland Unified School District, and Lawrence Livermore National Laboratory, as shown in Table 3.

Contra Costa County. Contra Costa County, predominantly a low-density residential area, accounts for approximately 30. 7% of the population and approximately 21. 7% of the nonagricultural employment of the Three BART Counties. Contra Costa County's population increased approximately 35.7% between 1980 and January 2004.

Contra Costa County has one of the fastest-growing work forces among Bay Area counties, with growth in its employment base being driven primarily by the need to provide services to an increasing local population. Contra Costa County has also experienced an influx of white-collar jobs due to the relocation of companies from more expensive locations in the Bay Area. The services, retail trade and government employment sectors account for over two thirds (approximately 70.4%) of the employment base. Major employers in Contra Costa County include SBC Communications Inc., Contra Costa County, Safeway Inc. and ChevronTexaco Corp., as shown in Table 3.

City and County of San Francisco. The City and County of San Francisco (the "City") is a major employment center of the Three BART Counties, accounting for approximately 33.5% of the nonagricultural employment and approximately 24.0% of the population of the Three BART Counties. The population of San Francisco is relatively dense and has increased slowly in recent years, with an overall increase of approximately 15.0% between 1980 and January 2004.

The City has the benefit of a highly skilled, professional labor force. Key industries include tourism, real estate, banking and finance, retailing, apparel design and manufacturing. Emerging industries include multimedia and bioscience. J\Aajor employers in San Francisco include the City and County of San Francisco, the University of California at San Francisco, Wells Fargo & Co. Inc., and the San Francisco Unified School District, as shown in Table 4.

Table 3 shows the average annual unemployment rates for the Three BART Counties, the State of California and the United States for the calendar years ended December 31, 2000 through 2004 and Table 4 lists the major employers for the Three BART Counties.

E-4 Table 3 AVERAGE ANNUAL UNEMPLOYMENT RATES Alameda and Contra Costa Counties and City and County of San Francisco (Compared to the State of California and the United States) Calendar Alameda Contra Costa City and County State of Year County County of San Francisco California United States

2000 3.6% 3.6% 3.4 50% 40% 2001 4.8 4.0 5.1 5.4 4.7 2002 6.8 5.7 7.0 6.7 5.8 2003 6.9 6.1 6.8 6.8 6.0 2004 6.0 5.5 5.9 6.2 5.5

Sources: California Employment Development Department and US. Department of Labor, Bureau of Labor Statistics.

Table 4 MAJOR EMPLOYERS Alameda and Contra Costa Counties and the City and County of San Francisco Alameda and Contra Costa County Employees University of California, Berkeley .. 21,035 Kaiser Permanente. 19,862 SBC Communications Inc .. 10,648 Alameda County . 9,784 Contra Costa County .. 8,960 Safeway Inc .. 7,196 ChevronTexaco Corp .. 6,820 Oakland Unified School District.. 6,473 United States Postal Service, Oakland District .. 6,000 Lawrence Livermore National Laboratory .. 5,725 New United Motor Manufacturing Inc .. 5,088 Alta Bates Summit Medical Center.. 5,000 John Muir/Mt Diablo Health System . 4,923 Wells Fargo & Co .. 4,659 City of Oakland .. 4,248 PeopleSoft Inc .. 3,500 BART 3,253 Mervyn' s Inc .. 3,210 PG&E Corp .. 3,050 Fremont United School District .. 2,602 Southwest Airlines Co .. 2,500

City and County of San Francisco City and County of San Francisco .. 28,732 University of California, San Francisco .. 18,600 Wells Fargo & Co. Inc .. 7,275 San Francisco Unified School District .. 7,208 California Pacific Medical Center.. 5,000 United States Postal Service .. 4,886 PG&E Corp .. 4,850 The Gap .. 4,084 San Francisco Municipal Railway .. 3,828 Kaiser Permanente . 3,424

Source: 2005 and 2004 Book of Lists and BART.

E-5 Population and Employment Forecasts

Table 5 presents population and employment projections for the Three BART Counties prepared by the Association of Bay Area Governments ("ABAG"). ABAG projects the population of the Three BART Counties to increase by approximately 722,600 people between 2005 and 2030, with most of the growth occurring in Contra Costa and Alameda counties. Employment in the Three BART Counties is expected to increase by approximately 765,520 jobs between 2005 and 2030. Most of the growth in employment is projected by ABAG to occur in the professional and managerial services and health and educational services sectors in each of the Three Bart Counties. ABAG also projects the largest growth in employment will occur in Alameda County. Table 5 PROJECTED POPULATION AND EMPLOYMENT Alameda and Contra Costa Counties and City and County of San Francisco

Population Percent 2005 2030 Change County (Estimated) (Projected) 2005-2030

Alameda .. 1,517,100 1,884,600 19.50% Contra Costa . 1,016,300 1,244,800 16.75 San Francisco .. 798 000 924 600 13.69

Three BART counties .. 3,331,400 4,054,000 17.82%

Employment Percent 2005 2030 Change County (Estimated) (Projected) 2005-2030

Alameda .. 747,500 1,088,870 31.35% Contra Costa . 373,000 543,860 31.42 San Francisco .. 575 800 829 090 30.55

Three BART counties .. 1,696,300 2,461,820 31.10%

Source: Association of Bay Area Governments, Projections 2005.

Table 6 shows median household effective buying income in the Three BART Counties for the Fiscal Years ended June 30, 1999 through 2003.

Table 6 MEDIAN HOUSEHOLD EFFECTIVE BUYING INCOME Alameda and Contra Costa Counties and the City and County of San Francisco Fiscal Years Ended June 30, 2000 through 2003 County 1999 2000 2001 2002 2003

Alameda $45,029 $44,730 $50,631 $54,076 $50,431 Contra Costa 49,645 53,234 60, 189 56,507 54,862 San Francisco 45,574 42,934 49,618 49, 173 51,015

Source: Sales and Marketing Management Magazine.

E-6 Table 7 shows the total dollar volume of sales and other taxable transactions (which correlate with sales tax receipts) in the Three BART Counties for Fiscal Years ended June 30, 1970 through 2003.

Table 7 HISTORICAL TAXABLE TRANSACTIONS Alameda and Contra Costa Counties and City and County of San Francisco 1970-2003 Fiscal Years Ended June 30 (in thousands)

Fiscal Alameda Contra Costa San Francisco Total Three BART Percentage Year County County County Counties Change

1970 $ 2,406, 179 $ 920,795 $2,304,649 $ 5,631,623 1971 2,460,829 976,307 2,281,096 5,718,232 15% 1972 2,703,396 1,096,225 2,338,981 6,138,602 7.4 1973 3,116,224 1,338,682 2,537,428 6,992,334 13.9 1974 3,385,374 1,546,424 2,778,887 7,710,685 10.3 1975 3,618,342 1,721,036 3,006,565 8,345,943 8.2 1976 3,881,303 2,015,626 3,135,922 9,032,851 8.2 1977 4,380,366 2,629,282 3,413,469 10,423,117 15.4 1978 4,973,230 2,896,003 3,791,990 11,661,223 11.9 1979 5,747,050 3,289,165 4,262,401 13,298,616 14.0 1980 6,336,468 3,942,780 4,743,328 15,022,576 no 1981 6,785,725 3,889,574 5,214,589 15,889,889 5.8 1982 7,031,139 4,000,837 5,595,208 16,627,184 4.6 1983 7,379,694 4,080,658 5,764,150 17,224,502 3.6 1984 8,611,542 4,618,081 6,327,660 19,557,283 135 1985 9,615,703 5,038,587 6,761,168 21,415,458 9.5 1986 9,971,384 5,386,907 6,903,312 22,261,603 4.0 1987 10,461,602 5,592,959 7,106,651 23,161,212 4.0 1988 11,163,251 6,082,945 7,381,057 24,627,253 6.3 1989 12,187,116 6,511,304 7,986,414 26,684,834 8.3 1990 13,105,872 7,223,356 8,382,345 28,711,573 7.6 1991 12,826,643 7,378,243 8,480,289 28,685, 175 (0.1) 1992 13,277,866 7,583,172 8,390,923 29,251,961 2.0 1993 13,403,253 7,435,385 8,176,762 29,015,400 (0.8) 1994 13,414,411 7,476,420 8,192,011 29,082,842 0.2 1995 15,476,364 8,339,755 9,554,946 33,371,065 14.7 1996 17,087,375 8,575,704 10,392,212 36,055,291 8.0 1997 18,505,619 9,227,418 10,966,223 38,749,260 7.4 1998 19,221,688 10,093,690 11,268,689 40,584,067 5.4 1999 20,672,287 11,114,476 12,336,761 44,123,524 8.7 2000 23,763,516 12,330,560 14,089,926 50,184,002 13.7 2001 22,758,085 12,256,721 12,455,236 47,470,042 (5.7) 2002 21,264,629 12,159,424 11,589,440 45,013,493 (5.5) 2003 21,375,029 12,223,295 11,496,746 45,095,070 0.2

Source: California State Board of Equalization, quarterly reports, 1970-1996, annual reports 1997-2003.

E-7 Table 8 shows taxable transactions by type of business for the Three BART Counties for the year ended December 31, 2003. Table 8 TAXABLE TRANSACTIONS BY TYPE OF BUSINESS Alameda and Contra Costa Counties and the City and County of San Francisco For Calendar Year Ended December 31, 2003* (in thousands) Alameda Contra Costa City and County Total Three Percentage Type of Business County County of San Francisco BART Counties of Total**

Retail Sales Women's Apparel $ 143,016 $ 110,643 $ 234,434 $ 488,093 1.08% Men's Apparel 28,568 27,830 60,621 117,019 .26 Family Apparel 257,778 176,432 371,108 805,318 1.78 Shoes 89,912 62,666 94,552 247,130 .55 Apparel stores group $ 519,274 $ 377,571 $ 760,715 $ 1,657,560 3.68% Drug Stores $ 290,908 $ 200,847 --t $ 491,755 1.09% Other general merchandise 1,613,104 1,520,126 $ 1,065,160 4,198,390 9 .31 General merchandise group $ 1,904,012 $ 1,720,973 $ 1,065,160 $ 4,690,145 10.40% Gifts, art goods, & novelties $ 55,395 $ 46,942 $ 166,010 $ 268,347 .59% Sporting goods 158,635 108,075 79,227 345,937 .77 Florists 40,879 25,017 28,008 93,904 .21 Photo equipment & supplies 16,557 10,392 38,186 65,135 .14 Musical instruments 75,193 54,201 91,750 221,144 .49 Stationery and books 208,382 91,219 162,582 462,183 1.02 Jewelry 71,187 72,401 190,917 334,505 .74 Office, store & school supplies 688,439 370,921 577,059 1,636,419 3.63 Other specialties 807, 705 462,152 577,018 1,846,875 4.10 Specialty stores group $ 2,122,372 $ 1,241,320 $ 1,910,757 $ 5,274,449 11.70% Stores selling all types of liquor $ 529,669 $ 444,754 $ 314,824 $ 1,289,247 2.86% All other food stores 203,939 145,072 90,849 439,860 .97 Food stores group $ 733,608 $ 589,826 $ 405,673 $ 1,729,107 3.83% Eating places: no alcohol sold $ 669,207 $ 380,973 $ 409,937 $ 1,460,117 3.24% Eating places: beer and wine 457,515 272,399 521,508 1,251,422 2.77 Eating places: all types of liquor 415,520 275,502 948,434 1,639,456 3.64 Eating and drinking group $ 1,542,242 $ 928,874 $ 1,879,879 $ 4,350,995 9.65% Household and home furnishings $ 583,756 $ 333,547 $ 397,486 $ 1,314,789 2.91% Household appliance dealers 214,127 143,768 86,969 444,864 .99 Household group $ 797,883 $ 477,315 $ 484,455 $ 1,759,653 3.90% Lumber and building materials $ 930,662 $ 630,835 $ 140,066 $ 1,701,563 3.77% Hardware Stores 160,997 101,055 54,215 316,267 .70 Plumbing and electrical supplies 175,907 162,135 96,837 434,879 .96 Paint, glass and wallpaper 48,119 31,683 28,385 108,187 .24 Building material group $ 1,315,685 $ 925,708 $ 319,503 $ 2,560,896 5.68% New motor vehicle dealers $ 2,547,897 $1,510,938 $ 372,469 $ 4,431,304 9.83% Used motor vehicle dealers 175,435 109,584 21,744 306, 763 .68 Automotive supplies and parts 207,926 130,754 43,456 382,136 .85 Service stations 1,133,991 763,870 367,295 2,265,156 5.02 Automotive group $ 4,065,249 $ 2,515,146 $ 804,964 $ 7,385,359 16.38% Packaged liquor stores $ 126,594 $ 70,956 $ 78,709 $ 276,259 .61% Second-hand merchandise 16,904 9,514 17,292 43,710 JO Fann implement dealers 171,850 7,157 813 179,820 .40 Fann and garden supply stores 54,076 69,055 9,823 132,954 .29 Fuel and ice dealers 4,491 10,084 14,575 .03 Mobile homes, trailers, and campers 50, 701 10,818 61,519 .14 Boat, motorcycle, and plane dealers 137,208 70,797 28,945 236,950 .52 All other retail stores group $ 561,824 $ 248,381 $ 135,582 $ 945,787 2.10% Retail stores total $13,562,149 $ 9,025,114 $ 7,766,688 $30,353,951 67.31 % Business and personal services 1,092,232 512,140 945,689 2,550,061 5.65 All other outlets 6,720,648 2,686,041 2,784,369 12,191,058 27.03 Total all outlets $21,375,029 $12,223,295 $11,496,746 $45,095,070 100.00%

* Most recent annual data available. ** Numbers may not add due to independent rollllding. t Sales omitted because their publication would result in the disclosure of confidential information (typically resulting from there being only a limited number of outlets in a certain type of business).

Source: California State Board of Equalization, 2003 Annual Report. E-8 Table 9 shows a comparison of taxable transactions among several large northern and southern California counties (including the Three BART Counties) and Statewide over the calendar years 1998-2003.

Table 9 COMPARISON OF TAXABLE TRANSACTIONS TREND FOR MAJOR CALIFORNIA COUNTIES 1998-2003* (in thousands) Percentage Change (2002-2003) 1998 1999 2000 ~ Three BART Northern Counties Alameda $ 19,221,688 $ 20,672,287 $23,763,516 $ 22,758,085 $ 21,264,629 $ 21,375,029 0.5% Contra Costa 10,093,690 11,114,476 12,330,560 12,256.721 12,159,424 12,223,295 0.5 San Francisco 11 268 689 12 336 761 14 089 926 12 455 236 11 589 440 11 496 746 filfil Total Three BART Counties $ 40,584,067 $ 44,123,524 $50,184,002 $ 47,470,042 $ 45,013,493 $ 45,095,070 0.2%

Other Northern Counties Sacramento $ 13,328,646 $ 14,979,393 $16,593,725 $ 17,221,801 $ 17,577,559 $18,506,466 5.3% San Mateo 11,035,003 12,130,051 14,044,016 12,859,589 11,614,809 11,358,439 (2.2) Santa Clara 27,488,815 30,348,644 37,303,662 32,133,247 27,453,942 27,062,663 (1.4)

Southern Counties Los Angeles $ 90,205,600 $ 97,316,828 $106,673,534 $107,426,692 $108,753,064 $113,685,422 4.5% Orange 37,108,350 40,366,090 44,462,460 44,595,314 44,869,156 47,517,066 5.9 Riverside 13,140,854 15,076,945 16,979,449 18,231,555 19,498,994 21,709,135 11.3 San Bernardino 15,002,297 16,787,378 18,885,438 19,684,143 20,849,502 22,599,947 8.4 San Diego 29,616,004 32,752,405 36,245,418 3 7,699,333 38,595,547 40,863,978 5.9 Ventura 7,470,934 8,339,182 9,096,092 9,532,990 9,803,513 10,382,440 5.9

Statewide $358,858,378 $394, 736,245 $441,854,412 $441,517,560 $440,950,094 $460,096,468 4.3%

* Most recent annual data available. Source: California State Board of Equalization.

E-9 (Page intentionally left llank.) APPENDIX F

BOOK-ENTRY ONLY SYSTEM

The information in this Appendix concerning The Depository Trust Company ("DTC'') and DTC's book-entry system has been obtained from sources that the San Francisco Bay Area Rapid Transit District (the "District'') believes to be reliable, but the District takes no responsibility for the accuracy thereof Beneficial Owners (as such term is defined herein) should confirm the following information with DTC or the DTC Particzpants (as such term is defined herein). All defined terms used and not otherwise defined herein shall have the meanings assigned to such terms in the front portion of this Official Statement.

DTC will act as securities depository for the Series 2005 A Bonds. The Series 2005 A Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC's partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered bond certificate will be issued for the Series 2005 A Bonds, in the aggregate principal amount of such issue, and will be deposited with DTC.

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

Purchases of Series 2005 A Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2005 A Bonds on DTC's records. The ownership interest of each actual purchaser of each Series 2005 A Bond ( each a "Beneficial Owner") is in turn to be recorded on the Direct and Indirect Participants' records. Beneficial Owners will not receive written confinnation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confinnations providing details of the transaction, as well as periodic statements of their holdings, from

F-1 the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Series 2005 A Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Series 2005 A Bonds, except in the event that use of the book-entry system for the Series 2005 A Bonds is discontinued.

To facilitate subsequent transfers, all Series 2005 A Bonds deposited by Direct Participants with DTC are registered in the name of DTC's partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Series 2005 A Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2005 A Bonds; DTC's records reflect only the identity of the Direct Participants to whose accounts such Series 2005 A Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers.

Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.

Redemption notices shall be sent to DTC. If less than all of the Series 2005 A Bonds within an issue are being redeemed, DTC's practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed.

Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Series 2005 A Bonds unless authorized by a Direct Participant in accordance with DTC's Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the District or to the Trustee as soon as possible after the record date. The Onmibus Proxy assigns Cede & Co.'s consenting or voting rights to those Direct Participants to whose accounts Series 2005 A Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Redemption proceeds, distributions, and dividend payments on the Series 2005 A Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC's practice is to credit Direct Participants' accounts upon DTC's receipt of funds and corresponding detail information from the District or the Trustee, on payable date in accordance with their respective holdings shown on DTC's records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in "street name," and will be the responsibility of such Participant and not of the DTC, the Trustee, or the District, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. ( or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the District or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants.

DTC may discontinue providing its services as depository with respect to the Series 2005 A Bonds at any time by giving reasonable notice to the District or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, bond certificates are required to be printed and delivered.

F-2 The District may decide to discontinue use of the system of book-entry transfers through DTC (or a successor securities depository). In that event, bond certificates will be printed and delivered.

The foregoing description of the procedures and record-keeping with respect to beneficial ownership interests in the Series 2005 A Bonds, payment of the principal, interest and other payments on the Series 2005 A Bonds to DTC Participants or Beneficial Owners, confinnation and transfer of beneficial ownership interests in such Series 2005 A Bonds and other related transactions by and between DTC, the DTC Participants and the Beneficial Owners is based solely on information provided by DTC. Accordingly, no representations can be made concerning these matters and neither the DTC Participants nor the Beneficial Owners should rely on the foregoing information with respect to such matters, but should instead confirm the same with DTC or the DTC Participants, as the case may be.

The District cannot and does not give any assurances that DTC will distribute to DTC Participants, or that DTC Participants or others will distribute to the Beneficial Owners, payments of principal, interest and premium, if any, with respect to the Series 2005 A Bonds paid or any redemption or other notices or that they will do so on a timely basis or will serve and act in the manner described in this Official Statement. The District is not responsible or liable for the failure of DTC or any DTC Participant or Indirect Participant to make any payments or give any notice to a Beneficial Owner with respect to the Series 2005 A Bonds or any error or delay relating thereto.

So long as Cede & Co. is the registered owner of the Series 2005 A Bonds, as nominee of DTC, references herein to the Owners or registered Series 2005 A Bondholders of the Series 2005 A Bonds, shall mean Cede & Co., as aforesaid, and shall not mean the Beneficial Owners of the Series 2005 A Bonds.

F-3 (Page intentionally left llank.) APPENDIXG

FORM OF CONTINUING DISCLOSURE AGREEMENT (Page intentionally left llank.) FORM OF CONTINUING DISCLOSURE AGREEMENT

The Continuing Disclosure Agreement (the "Disclosure Agreement") is being executed and delivered by the San Francisco Bay Area Rapid Transit District (the "Issuer") and U.S. Bank National Association, successor by merger to U.S. Bank Trust National Association, formerly known as First Trust of California, National Association, successor trustee to Bank of America National Trust and Savings Association which was successor trustee to Security Pacific National Bank, as trustee (the "Trustee") and as dissemination agent (the "Dissemination Agent"), in connection with the issuance of $352,095,000 aggregate principal amount of San Francisco Bay Area Rapid Transit District Sales Tax Revenue Bonds, Refunding Series 2005 (the "Bonds"). The Bonds are being issued pursuant to an Indenture, dated as of July I, 1990, as supplemented and amended by a First Supplemental Indenture, dated as of August 7, 1990, a Second Supplemental Indenture, dated as of August 29, 1991, a Third Supplemental Indenture, dated as of June 7, 1995, a Fourth Supplemental Indenture, dated as of April I, 1997, a Fifth Supplemental Indenture, dated as of March 12, 1998, a Sixth Supplemental Indenture, dated as of October 7, 1999, a Seventh Supplemental Indenture, dated as of July 12, 2001, and an Eighth Supplemental Indenture, dated as of September 7, 2005 (hereinafter collectively referred to as the "Indenture"), between the Issuer and the Trustee. The Issuer, the Trustee and the Dissemination Agent covenant and agree as follows:

SECTION I. Purpose of the Disclosure Agreement. The Disclosure Agreement is being executed and delivered by the Issuer, the Trustee and the Dissemination Agent for the benefit of the Owners ( as such term is defined in the Indenture) and the Beneficial Owners ( as hereinafter defined) of the Bonds and in order to assist the Participating Underwriters (as hereinafter defined) in complying with Securities and Exchange Commission Rule 15c2-12(b )(5).

SECTION 2. Definitions. In addition to the definitions set forth in the Indenture, which apply to any capitalized term used in the Disclosure Agreement and not otherwise defined in this Section, the following capitalized terms shall have the following meanings:

"Annual Report" shall mean any Annual Report provided by the Issuer pursuant to, and as described in, Sections 3 and 4 of the Disclosure Agreement.

"Beneficial Owner" shall mean any person which has or shares the power, directly or indirectly, to make investment decisions concerning ownership of any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries).

"Disclosure Representative" shall mean the Controller/Treasurer of the Issuer or his designee, or such other officer or employee of the Issuer as the Controller/Treasurer of the Issuer shall designate in writing to the Trustee and the Dissemination Agent from time to time.

"Dissemination Agent" shall mean U.S. Bank National Association, acting in its capacity as Dissemination Agent under the Continuing Disclosure Agreement, or any successor Dissemination Agent designated in writing by the Issuer and which has filed with the Trustee a written acceptance of such designation.

"Listed Events" shall mean any of the events listed in Section 5( a) of the Disclosure Agreement.

"National Repository" shall mean any Nationally Recognized Municipal Securities Information Repository for purposes of the Rule. The National Repositories currently approved by the Securities and Exchange Commission are listed at http://www.sec.gov/info/municipal/nrmsir.htm. "Participating Underwriter" shall mean any of the original underwriters of the Bonds required to comply with the Rule in connection with offering of the Bonds.

"Repository" shall mean each National Repository and the State Repository.

"Rule" shall mean Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as the same may be amended from time to time.

"State" shall mean the State of California.

"State Repository" shall mean any public or private repository or entity designated by the State as the state repository for the purpose of the Rule and recognized as such by the Securities and Exchange Commission. As of the date of the Disclosure Agreement, there is no State Repository.

SECTION 3. Provision of Annual Reports.

(a) The Issuer shall, or shall cause the Dissemination Agent to, not later than eight (8) months after the end of the Issuer's fiscal year (presently June 30), commencing with the Annual Report for the fiscal year of the Issuer ending June 30, 2005, provide to each Repository an Annual Report which is consistent with the requirements of Section 4 of the Disclosure Agreement. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 4 of the Disclosure Agreement; provided that the audited fmancial statements of the Issuer may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. Neither the Trustee nor the Dissemination Agent shall have any duties or responsibilities with respect to the contents of the Annual Report. If the Issuer's fiscal year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(f).

(b) Not later than fifteen (15) Business Days prior to the date specified in subsection (a) for providing the Annual Report to the Repositories, the Issuer shall provide the Annual Report to the Dissemination Agent and the Trustee (if the Trustee is not the Dissemination Agent). Ifby such date, the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall contact the Issuer and the Trustee to determine if the Issuer is in compliance with the first sentence of this subsection (b ).

(c) If the Trustee is unable to verify that an Annual Report has been provided to the Repositories by the date required in subsection (a), the Trustee shall send a notice to each Repository in substantially the form attached as Exhibit A to the Continuing Disclosure Agreement.

( d) If the Annual Report is delivered to the Dissemination Agent for filing, the Dissemination Agent shall: (i) determine each year prior to the date for providing the Annual Report the name and address of each National Repository and the State Repository, if any, and file the Annual Report so provided therewith; and (ii) upon verification of filing, file a report with the Issuer and (if the Dissemination Agent is not the Trustee) the Trustee certifying that the Annual Report has been filed pursuant to the Disclosure Agreement, stating the date it was provided and listing all the Repositories to which it was provided.

SECTION 4. Content of Annual Reports. The Annual Report shall contain or include by reference the following:

G-2 (a) The audited financial statements of the Issuer for the prior fiscal year, prepared in accordance with generally accepted accounting principles as promulgated to apply to governmental entities from time to time by the Governmental Accounting Standards Board. If the Issuer's audited financial statements are not available by the time the Annual Report is required to be filed pursuant to Section 3(a), the Annual Report shall contain unaudited fmancial statements in a format similar to the fmancial statements contained in the Official Statement, dated August 10, 2005, relating to the Bonds (the "Official Statement"), and the audited fmancial statements shall be filed in the same manner as the Annual Report when they become available.

(b) An update (as of the most recently ended fiscal year of the Issuer) for the table entitled "Sales Tax Revenues" set forth in the Official Statement under the caption "Security for the Series 2005 A Bonds - Sales Tax Revenues" and an update for the table entitled "Debt Service Requirements" set forth in the Official Statement under the caption "Debt Service Requirements."

Any or all of the items listed above may be included by specific reference to other documents, including official statements of debt issues of the Issuer or related public entities, which have been submitted to each of the Repositories or the Securities and Exchange Commission. If the document included by reference is a fmal official statement, it must be available from the Municipal Securities Rulemaking Board. The Issuer shall clearly identify each such other document so included by reference.

SECTION 5. Reporting of Significant Events.

(a) Pursuant to the provisions of this Section 5, the Issuer shall give, or cause to be given, notice of the occurrence of any of the following events with respect to the Bonds, if material:

I. principal and interest payment delinquencies;

2. non-payment related defaults;

3. modifications to rights of Owners;

4. optional, contingent or unscheduled bond calls;

5. defeasances;

6. rating changes;

7. adverse tax opinions or events adversely affecting the tax-exempt status of the Bonds;

8. unscheduled draws on the debt service reserves reflecting financial difficulties;

9. unscheduled draws on credit enhancements reflecting fmancial difficulties;

10. substitution of credit or liquidity providers, or their failure to perform;

11. release, substitution or sale of property securing repayment of the Bonds.

(b) The Trustee shall, within one (I) Business Day, or as soon thereafter as practicable, of obtaining actual knowledge of the occurrence of any of the Listed Events, contact the Disclosure Representative, inform the Disclosure Representative of the event, and request that the Issuer

G-3 promptly notify the Dissemination Agent in writing whether or not to report the event pursuant to subsection (f).

(c) Whenever the Issuer obtains knowledge of the occurrence of a Listed Event, whether because of a notice from the Trustee pursuant to subsection (b) or otherwise, the Issuer shall as soon as practicable determine if such event would be material under applicable federal securities laws.

(d) If the Issuer has determined that knowledge of the occurrence of a Listed Event would be material under applicable federal securities laws, the Issuer shall promptly notify the Dissemination Agent in writing. Such notice shall instruct the Dissemination Agent to report the occurrence pursuant to subsection (f).

( e) If in response to a request under subsection (b ), the Issuer determines that the Listed Event would not be material under applicable federal securities laws, the Issuer shall so notify the Dissemination Agent in writing and instruct the Dissemination Agent not to report the occurrence pursuant to subsection (f).

(f) If the Dissemination Agent has been instructed by the Issuer to report the occurrence of a Listed Event, the Dissemination Agent shall file a notice of such occurrence of such event with the Municipal Securities Rulemaking Board or the Repositories. Notwithstanding the foregoing, notice of Listed Events described in subsections (a)(4) and (a)(5) need not be given under this subsection any earlier than the notice (if any) of the underlying event is given to Owners of the affected Bonds pursuant to the Indenture.

SECTION 6. Electronic Filing. Submission of Annual Reports and notices of Listed Events to DisclosureUSA.org or another "Central Post Office" designated and accepted by the Securities and Exchange Commission as an intermediary through which filings required by the Disclosure Agreement may be made in compliance with the Rule shall constitute compliance with the requirement of filing such reports and notices with each Repository under the Continuing Disclosure Agreement.

SECTION 7. Termination of Reporting Obligation. The obligations of the Issuer, the Trustee and the Dissemination Agent under the Disclosure Agreement shall terminate upon the legal defeasance, prior redemption or payment in full of all of the Bonds. If such termination occurs prior to the final maturity of the Bonds, the Issuer shall give notice of such termination in the same manner as for a Listed Event under Section 5(f).

SECTION 8. Dissemination Agent. The Issuer may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under the Disclosure Agreement, and may discharge such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent may resign by providing thirty (30) days written notice to the Issuer and the Trustee. The Dissemination Agent shall not be responsible in any manner for the form or the content of any notice or report prepared by the Issuer pursuant to the Disclosure Agreement. If at any time there is not any other designated Dissemination Agent, the Trustee shall be the Dissemination Agent.

SECTION 9. Amendment; Waiver. Notwithstanding any other provision of the Disclosure Agreement, the Issuer, the Trustee and the Dissemination Agent may amend the Disclosure Agreement (and the Trustee and the Dissemination Agent shall agree to any amendment so requested by the Issuer, provided neither the Trustee nor the Dissemination Agent shall be obligated to enter into any such amendment that modifies or increases its duties or obligations under the Continuing Disclosure Agreement), and any provision of the Disclosure Agreement may be waived, provided that the following conditions are satisfied:

G-4 (a) If the amendment or waiver relates to the provisions of Sections 3(a), 4, or 5(a), it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to the Bonds, or the type of business conducted;

(b) The Disclosure Agreement, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original issuance of the Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and

(c) The amendment or waiver does not, in the opinion of nationally recognized bond counsel, materially impair the interests of the Owners or Beneficial Owners of the Bonds.

In the event of any amendment or waiver of a provision of the Disclosure Agreement, the Issuer shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type ( or, in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by the Issuer. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, (i) notice of such change shall be given in the same manner as for a Listed Event under Section 5(f), and (ii) the Annual Report for the year in which the change is made should present a comparison (in narrative form and also, if feasible, in quantitative form) between the financial statements as prepared on the basis of the new accounting principles and those prepared on the basis of the former accounting principles.

SECTION 10. Additional Information. Nothing in the Disclosure Agreement shall be deemed to prevent the Issuer from disseminating any other information, using the means of dissemination set forth in the Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event in addition to that which is required by the Disclosure Agreement. If the Issuer chooses to include any information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is specifically required by the Disclosure Agreement, the Issuer shall have no obligation under the Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event.

SECTION 11. Default. In the event of a failure of the Issuer, the Dissemination Agent or the Trustee to comply with any provision of the Disclosure Agreement, the Trustee may (and, at the written request of any Participating Underwriter or the Owners of at least 25% aggregate principal amount of Outstanding Bonds, shall) (but only to the extent funds in an amount satisfactory to the Trustee have been provided to it or it has been otherwise indemnified to its satisfaction from any cost, liability, expense or additional charges and fees of the Trustee whatsoever, including, without limitation, fees and expenses of its attorneys), or any Owner or Beneficial Owner of the Bonds may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Issuer, the Dissemination Agent or the Trustee, as the case may be, to comply with its obligations under the Disclosure Agreement. A default under the Disclosure Agreement shall not shall not be deemed an Event of Default under the Indenture, and the sole remedy under the Disclosure Agreement in the event of any failure of the Issuer or the Trustee or the Dissemination Agent to comply with the Disclosure Agreement shall be an action to compel performance.

SECTION 12. Duties, Immunities and Liabilities of Trustee and Dissemination Agent. Article VII of the Indenture is hereby made applicable to the Disclosure Agreement as if the Disclosure Agreement were (solely for this purpose) contained in the Indenture and the Trustee and the

G-5 Dissemination Agent shall be entitled to the protections, limitations from liability and indemnities afforded the Trustee thereunder. The Dissemination Agent (if other than the Trustee or the Trustee in its capacity as Dissemination Agent) shall have only such duties as are specifically set forth in the Disclosure Agreement, and the Issuer agrees to indemnify and save the Dissemination Agent and the Trustee and their officers, directors, employees and agents, harmless against any loss, expense and liabilities which they may incur arising out of or in the exercise or performance of their powers and duties under the Continuing Disclosure Agreement, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Trustee's or the Dissemination Agent's negligence or willful misconduct. The Dissemination Agent shall be paid compensation by the Issuer for its services provided under the Continuing Disclosure Agreement in accordance with its schedule of fees as amended from time to time and all expenses, legal fees and advances made or incurred by the Dissemination Agent in the performance of its duties under the Continuing Disclosure Agreement. The obligations of the Issuer under this Section shall survive resignation or removal of the Trustee or the Dissemination Agent and payment of the Bonds.

SECTION 13. Notices. Any notices or communications to or among any of the parties to the Disclosure Agreement may be given as follows:

(i) Ifto the Issuer:

San Francisco Bay Area Rapid Transit District 300 Lakeside Drive Oakland, California 94612-3534 Attention: Controller/Treasurer Telephone: (510) 464-6070 Fax: (510) 464-6011

(ii) Ifto the Trustee or the Dissemination Agent:

U.S. Bank National Association One California Street, Suite 2100 San Francisco, California 94111 Attention: Corporate Trust Administration Telephone: (415) 273-4540 Fax: (415) 273-4590

Any person may, by written notice to the other persons listed above, designate a different address or telephone number(s) to which subsequent notices or communications should be sent.

SECTION 14. Beneficiaries. The Disclosure Agreement shall inure solely to the benefit of the Issuer, the Trustee, the Dissemination Agent, the Participating Underwriters and Owners and Beneficial Owners from time to time of the Bonds, and shall create no rights in any other person or entity.

G-6 SECTION 15. Counteroarts. The Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.

, 2005. Date: ----

SAN FRANCISCO BAY AREA RAPID TRANSIT DISTRICT

By______~ Controller/Treasurer

U.S. BANK NATIONAL ASSOCIATION, as Trustee and Dissemination Agent

By______~ Authorized Officer

G-7 Exhibit A to the Continning Disclosnre Agreement

NOTICE TO REPOSITORIES OF FAILURE TO FILE ANNUAL REPORT

Name oflssuer: San Francisco Bay Area Rapid Transit District Name of Bond Issue: San Francisco Bay Area Rapid Transit District Sales Tax Revenue Bonds Refunding Series 2005

Date oflssuance of Bonds: ___,2005

NOTICE IS HEREBY GIVEN that the San Francisco Bay Area Rapid Transit District (the "Issuer") has not provided an Annual Report with respect to the above-named Bonds as required by Section 19.13 of the Indenture, dated as of July I, 1990, as supplemented and amended by the First Supplemental Indenture, dated as of August 7, 1990, the Second Supplemental Indenture, dated as of August 29, 1991, the Third Supplemental Indenture, dated as of June 7, 1995, the Fourth Supplemental Indenture, dated as of April I, 1997, the Fifth Supplemental Indenture, dated as of March 12, 1998, the Sixth Supplemental Indenture, dated as of October 7, 1999, the Seventh Supplemental Indenture, dated as of July 12, 2001, and the Eighth Supplemental Indenture, dated as of September 7, 2005, between the Issuer and U. S. Bank National Association, as trustee. [The Issuer anticipates that the Annual Report will be filed by .]

U.S. BANK NATIONAL ASSOCIATION, as Trustee on behalf of the San Francisco Bay Area Rapid Transit District cc: Issuer APPENDIXH

PROPOSED FORM OF OPINION OF CO-BOND COUNSEL (Page intentionally left llank.) [Date of Closing]

San Francisco Bay Area Rapid Transit District Oakland, California

San Francisco Bay Area Rapid Transit District Sales Tax Revenue Bonds, Refunding Series 2005 A (Final Opinion)

Ladies and Gentlemen:

We have acted as co-bond counsel in connection with the issuance by the San Francisco Bay Area Rapid Transit District (the "District") of $352,095,000 aggregate principal amount of "San Francisco Bay Area Rapid Transit District Sales Tax Revenue Bonds, Refunding Series 2005 A (the "Series 2005 A Bonds"), issued pursuant to the provisions of Article 2, Chapter 7, Part 2, Division IO of the Public Utilities Code of the State of California and applicable portions of the Revenue Bond Law of 1941 ( collectively, the "Law") and an Indenture, dated as of July I, 1990, as supplemented and amended by a First Supplemental Indenture, dated as of August 7, 1990, a Second Supplemental Indenture, dated as of August 29, 1991, a Third Supplemental Indenture, dated as of June 7, 1995, a Fourth Supplemental Indenture, dated as of April 1, 1997, a Fifth Supplemental Indenture, dated as of March 12, 1998, a Sixth Supplemental Indenture, dated as of October 7, 1999, a Seventh Supplemental Indenture, dated as of July 12, 200 I, and an Eighth Supplemental Indenture, dated as of the date hereof (hereinafter collectively referred to as the "Indenture"), between the District and U. S. Bank National Association, successor by merger to U. S. Bank Trust National Association, formerly known as First Trust of California, National Association, successor to Bank of America National Trust and Savings Association, successor by merger to Security Pacific National Bank, as trustee (the "Trustee"). Capitalized terms not otherwise defmed herein shall have the meanings ascribed thereto in the Indenture.

In such connection, we have reviewed the Indenture, the Tax Certificate, dated the date hereof (the "Tax Certificate"), opinions of counsel to the District, the Trustee and others, certificates of the District, the Trustee, and others, and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein.

Certain agreements, requirements and procedures contained or referred to in the Indenture, the Tax Certificate and other relevant documents may be changed and certain actions (including, without limitation, defeasance of the Series 2005 A Bonds) may be taken or omitted under the circumstances and subject to the terms and conditions set forth in such documents. No opinion is expressed herein as to any Series 2005 A Bond or the interest thereon if any such change occurs or action is taken or omitted upon the advice or approval of counsel other than ourselves.

The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. We disclaim any obligation to update this opinion. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the District. We have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinions, referred to in the second paragraph hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Indenture and the Tax Certificate, including, without limitation, covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the Series 2005 A Bonds to be included in gross income for federal income tax purposes. We call attention to the fact that the rights and obligations under the Series 2005 A Bonds, the Indenture and the Tax Certificate and their enforceability may be subject to bankruptcy, insolvency, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases and to the limitations on legal remedies against public transit districts in the State of California. We express no opinion with respect to any indemnification, contribution, penalty, choice of law, choice of forum, waiver or severability provisions contained in the foregoing documents, nor do we express any opinion with respect to the state or quality of title to or interest in any of the assets described in or as subject to the lien of the Indenture or the accuracy or sufficiency of the description contained therein of, or the remedies available to enforce liens on, any such assets. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the Official Statement, dated August 10, 2005, or other offering material relating to the Series 2005 A Bonds and express no opinion with respect thereto.

Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions:

I. The Series 2005 A Bonds constitute the valid and binding special obligations of the District payable from and secured by a pledge of Sales Tax Revenues.

2. The Series 2005 A Bonds are special obligations of the District and are payable only from Sales Tax Revenues. Parity Bonds are currently Outstanding and additional Bonds and other obligations of the District may be issued from time to time payable from Sales Tax Revenues on a parity basis with the Series 2005 A Bonds.

3. The Indenture has been duly executed and delivered by, and constitutes the valid and binding obligation of, the District.

4. Interest on the Series 2005 A Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. Interest on the Series 2005 A Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although we observe that interest on the Series 2005 A Bonds is included in adjusted current earnings when calculating corporate alternative minimum taxable income. We express no opinion regarding other tax consequences relating to the ownership or disposition of, or the accrual or receipt of interest on, the Series 2005 A Bonds.

Faithfully yours,

ORRICK, HERRINGTON & SUTCLIFFE LLP

per

LOFTON & JENNINGS

H-2 APPENDIX I

SPECIMEN FINANCIAL GUARANTY INSURANCE POLICY (Page intentionally left llank.) FINANCIAL GUARANTY INSURANCE POLICY MBIA Insurance Corporation Armonk, New York 10504 Policy No. [NUMBER] MBIA Insurance Corporation (the "Insurer"), in consideratim of the payment of the premium and subject to the terms of this policy, hereby uncmditionally and irrevocably guarantees to any owner, as hereinafter defmed, of the following described obligations, the full and complete payment required to be made by or on behalf of the Issuer to [PA YING AGENI/TRUSTEE] or its successor (the "Paying Agent") of an amount equal to (i) the principal of (either at the stated maturity or by any advancement of maturity pursuant to a mandatory sinking fund payment) and interest on, the Obligations (as that term is defined below) as such payments shall become due but shall not be so paid (except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleratim resulting from default or otherwise, other than any advancement of maturity pursuant to a mandatory sinking fund payment, the payments guaranteed hereby shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration, unless the Insurer elects in its sole discretion, to pay in whole or in part any principal due by reasm of such acceleration); and (ii) the reimbursement of a such payment which is subsequently recovered from any owner pursuant to a final judgment by a court of competent jurisdiction that such payment constitutes an avoidable preference to such owner within the meaning of any applicable bankruptcy law. The amounts referred to in clauses (i) and (ii) of the preceding sentence shall be referred to herein collectively as the "Insured Amounts." "Obligations" shall mean:

[PAR] [LEGAL NAME OF ISSUE]

Upm receipt of telephonic or telegraphic notice, such notice subsequently confmned in writing by registered or certified mail or upon receipt of written notice by registered or certified mail, by the Insurer from the Paying Agent or any owner of an Obligatim the payment of an Insured Amount for which is then due, that such required payment has not been made, the Insurer m the due date of such payment or within me business day after receipt of notice of such nmpayment, whichever is later, will make a deposit of funds, in an account with US. Bank Trust National Association, in New York, New Yark, or its successor, sufficient for the payment of any such Insured Amounts which are then due. Upon presentment and surrender of such Obligations or presentment of such other proof of ownership of the Obligations, together with any appropriate instruments of assigrnnent to evidence the assigrnnent of the Insured Amounts due on the Obligations as are paid by the Insurer, and appropriate instruments to effect the appointment of the Insurer as agent for such owners of the Obligations in any legal proceeding related to payment of Insured Amounts m the Obligations, such instruments being in a form satisfactory to US. Bank Trust National Association, US. Bank Trust National Association shall disburse to such owners, or the Paying Agent payment of the Insured Amounts due m such Obligations, less any amount held by the Paying Agent for the payment of such Insured Amounts and legally available therefor. This policy does not insure against loss of any prepayment premium which may at any time be payable with respect to any Obligation As used herein, the term "owner" shall mean the registered owner of any Obligation as indicated in the books maintained by the Paying Agent, the Issuer, or any designee of the Issuer for such purpose. The term owner shall not include the Issuer or any party whose agreement with the Issuer cmstitutes the underlying security for the Obligations. Any service of process on the Insurer may be made to the Insurer at its offices located at 113 King Street, Armonk, New Yark 10504 and such service of process shall be valid and binding. This policy is nm-cancellable for any reason The premium on this policy is not refundable for any reason including the payment prior to maturity of the Obligations. In the event the Insurer were to become insolvent, any claims arising under a policy of financial guaranty insurance are excluded from coverage by the California Insurance Guaranty Association, established pursuant to Article 14.2 (commencing with Section 1CX53) of Chapter 1 of Part 2 of Divisim 1 of the California Insurance Code. IN WITNESS WHEREOF, the Insurer has caused this policy to be executed in facsimile m its behalf by its duly authorized officers, this [DAY] day of [MONTH, YEAR].

Attest: Assistant Secretary STD-R-CA-7 01/05 (Page intentionally left llank.)