TABLE OF CONTENTS

Item 1.		Reports to Stockholders.
Item 2.		Code of Ethics.
Item 3.		Audit Committee Financial Expert.
Item 4.		Principal Accountant Fees and Services.
Item 5.		Audit Committee of Listed Registrants.
Item 6.		Investments.
Item 7.		Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Item 8.		Portfolio Managers of Closed-End Management Investment Companies.
Item 9.		Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchases.
Item 10.		Submission of Matters to a Vote of Security Holders.
Item 11.		Controls and Procedures.
Item 12.		Exhibits.
EX-99.CERT
EX-99.906CERT

 

May 26, 2009

 

Dear Shareholders,

 

Last year, the tax-exempt credit market was in utter chaos reaching a crescendo in December 2008. Conditions in the first quarter of 2009 have been more constructive as credit markets have been trying to return to what had previously been considered normal. High grade rated bonds have improved greatly in value but may now be overdone. Some bond mutual funds which were heavily penalized and lost as much as 50% of their value last year have recovered lost principal. However, the cumulative returns in the industry, during this period, have been abysmal.

 

At Colorado BondShares our performance, while not terrific, has at least been a little less volatile. From top to bottom of the move we lost 5.3% of principal last year which was offset in large part by earnings for the year. We have not yet rebounded in price quite as much as some of our competitors because we are still maintaining a staunchly defensive posture. Our historically high cash and near cash positions have been stable in price as expected and our non-rated bonds have remained at very nearly the same levels over the course of the first quarter. There is still great disagreement between buyers and sellers of the appropriate price levels in our markets. As a result, many new projects are going unfunded and existing projects are undervalued. Eventually, a consensus of opinion on prices will have to be reached so that trading can resume on a more efficient and predictable basis.

 

I am keenly aware of the future risks to fixed income investors posed by undisciplined expenditures in Washington and will continue to maintain a cautious approach to making long term investments on your behalf. On the bright side, I expect to see some great generational value available in the future brought about by ongoing financial disintermediation which is working its way down from Wall Street to the local level.

 

While some local governments will undoubtedly experience pain during the months ahead, I believe that many, whose debt we own, are better managed than their federal counterpart. Please find for your review on the following pages, the detailed financial results of the six-months ended March 31, 2009.

 

Thank you all very much for your support.

 

Sincerely,

 

Fred R. Kelly, Jr.

Portfolio Manager

 

Officers and Trustees

George N. Donnelly, Chairman of the Board
of Trustees, Interim President, Secretary,
Treasurer and Trustee

Bruce G. Ely, Trustee

James R. Madden, Trustee

Fred R. Kelly, Jr., Portfolio Manager

 

Investment Adviser

Freedom Funds Management Company

 

Transfer, Shareholder Servicing, and Dividend Disbursing Agent

Freedom Funds Management Company

 

Distributor

SMITH HAYES Financial Services Corporation

 

Custodian of Portfolio Securities

UMB Bank, N.A.

 

Independent Registered Public Accounting Firm

Anton Collins Mitchell LLP

 

Legal Counsel

Kutak Rock LLP

 

This report is submitted for the general information of the shareholders of Colorado BondShares — A Tax-Exempt Fund. This report must be preceded or accompanied by a Prospectus of the Fund. The prospectus contains information concerning the investment policies and expenses of the portfolio in addition to other pertinent information. Shares of Colorado BondShares — A Tax-Exempt Fund are not deposits or obligations of any bank, are not guaranteed by any bank, are not insured by the FDIC or any other agency, and involve investment risks, including possible loss of the principal amount invested.

 

CREDIT QUALITY (unaudited)

 

Colorado BondShares — A Tax-Exempt Fund

Based on a Percentage of Total Net Assets as of March 31, 2009

 

 

SECTOR BREAKDOWN (unaudited)

 

Colorado BondShares — A Tax-Exempt Fund

Based on a Percentage of Total Net Assets as of March 31, 2009

 

 

*Cash & cash equivalents include cash, receivables less liabilities plus securities with a maturity date of one year or redemption feature of one year or less. This includes variable rate securities that carry an “A” rating or better, as identified in the accompanying Schedule of Investments.

 

FUND EXPENSES (unaudited)

 

The following examples are intended to help you understand the ongoing costs (in dollars) of investing in the Fund and compare these costs with those of other mutual funds. The examples (actual and hypothetical 5% return) are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period.

 

As a shareholder of Colorado BondShares — A Tax-Exempt Fund you can incur two types of costs:

 

 

Actual Fund Expenses

 

The first line of the table below provides information about actual account values and actual expenses. The “Ending Account Value” shown is derived from the Fund’s actual return, which includes the effect of Fund expenses. You can estimate the expenses that you paid over the period by using the information below together with the amount you invested. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given in the first line under the heading “Expenses Paid During Period.”

 

Hypothetical Example for Comparison Purposes

 

The second line of the table below provides information that is intended to help you compare the ongoing costs of investing in the Fund with those of other mutual funds. The hypothetical “Ending Account Value” is based on the actual expense ratio of the Fund and an assumed 5% rate of return per year before expenses. The results do not apply to your investment because the return used is not the Fund’s actual return. This information is useful for making comparisons with the 5% hypothetical examples that appear in shareholder reports of other funds.

 

Six Months Ended March 31, 2009

 

 

¹The expenses shown in this table are equal to the Fund’s annualized expense ratio, multiplied by the average account value over the period, multiplied by 182/365 to reflect the one-half year period.

 

Please note that expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect any transaction costs, such as sales charges. If transaction costs were included, your total costs would have been higher. You can find more information about the Fund’s expenses in the Financial Statements section of this report. For additional information on operating costs please see the Fund’s prospectus.

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited)

March 31, 2009

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

 

Colorado BondShares

A Tax-Exempt Fund

 

Schedule of Investments (unaudited) — (Continued)

 

 

 

The following abbreviations are used in the descriptions of securities included in the Schedule of Investments:

 

G.O. — General Obligation

GID — General Improvement District

LID — Local Improvement District

LTD — Limited

 

See accompanying notes to financial statements.

 

Colorado BondShares

A Tax-Exempt Fund

 

Statement of Assets and Liabilities (unaudited)

March 31, 2009

 

 

See accompanying notes to financial statements.

Colorado BondShares

A Tax-Exempt Fund

 

Statement of Operations (unaudited)

For the Six Months Ended March 31, 2009

 

 

See accompanying notes to financial statements.

Colorado BondShares

A Tax-Exempt Fund

 

Statements of Changes in Net Assets (unaudited)

 

 

See accompanying notes to financial statements.

Colorado BondShares

A Tax-Exempt Fund

 

Financial Highlights

 

 

 

 

See accompanying notes to financial statements.

Colorado BondShares

A Tax-Exempt Fund

 

Notes to Financial Statements (unaudited)

 

 

Colorado BondShares — A Tax-Exempt Fund (the “Fund”) is registered under the Investment Company Act of 1940, as amended, as a diversified, open-end management company. The Fund’s investment objectives are to maximize income exempt from federal income taxes and from personal income taxes of the State of Colorado to the extent consistent with the preservation of capital and to seek opportunities for capital appreciation. The Fund’s investment adviser is Freedom Funds Management Company (“Freedom Funds”). The following is a summary of significant accounting policies consistently followed by the Fund.

 

 

The values of most investment securities are determined at their market price using prices provided by a national independent pricing service approved by the Fund’s Board of Trustees. In cases where a market price is not available from the pricing service, or where the Fund determines that the “market price” so determined is not reflective of the true “fair value” or realizable value of these securities, the securities are valued at “fair value” as determined in good faith by the Fund’s Board of Trustees. As part of the process of determining “fair value”, the Fund’s Board of Trustees will periodically obtain independent broker quotes for these securities. The Fund values the municipal bonds and other securities taking into consideration yield, stability, risk, quality, coupon, maturity, type of issue, trading characteristics and any other relevant trading or market factors. The Fund records amortization of premiums and accretion of original issue discount on zero coupon bonds using the effective yield method, in accordance with federal income tax purposes. Short-term debt securities are stated at amortized cost, which approximates fair value.

 

 

On January 23, 2009, the Fund adopted Statement of Financial Accounting Standard No. 157, Fair Value Measurements in an effort to establish a framework for measuring fair value in generally accepted accounting principals (GAAP) which requires expanded disclosure of those fair value measures. The issue date for FAS No. 157 was September 2006, effective for fiscal years beginning after November 15, 2007.

 

Preliminary changes to FAS 157 (FSP FAS 157-c) were proposed at a meeting of Financial Accounting Standard Board on February 25, 2009 with a 30-day comment period. The proposed guidance would be effective for periods beginning after July 1, 2009. It is believed at this time that the proposed changes would not materially affect the Fund’s financial statements.

 

FAS No. 157 employs a hierarchical prioritization that classifies securities based on valuation techniques used to measure fair value and then assigns them into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

Colorado BondShares

A Tax-Exempt Fund

 

Notes to Financial Statements (unaudited) — (Continued)

 

Level 1 Inputs: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

Level 2 Inputs: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.

 

Level 3 Inputs: Unobservable inputs for the asset or liability (including the Fund’s own assumptions in determining the fair market of investments). Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not available.

 

The following table summarizes the valuation of the Fund’s investments as defined by FAS 157 fair value hierarchy levels as of March 31, 2009:

 

There were no Level 1 securities at the beginning or end of the period.

 

The following table presents information about the Fund’s assets and liabilities measured at fair value as of March 31, 2009 (in thousands):

 

 

 

Realized and unrealized gains and losses are included in net gain (loss) on investments in the Statement of Operations.

 

 

The Fund intends to comply with the requirements of subchapter M of the Internal Revenue Code, as amended, applicable to regulated investment companies and to distribute all its net investment income and

Colorado BondShares

A Tax-Exempt Fund

 

Notes to Financial Statements (unaudited) — (Continued)

 

any net realized gain on investments not offset by capital loss carryforwards to shareholders. The Fund distributes investment income monthly and due to the tax-exempt nature of its investments the income is generally non-taxable to the shareholders. The Fund distributes net realized capital gains, if any, to its shareholders at least annually. Income distributions and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. These differences are primarily due to the differing treatment of tax allocations.

 

The Fund has adopted Financial Accounting Standards Board (FASB) Interpretation No. 48 “Accounting for Uncertainty In Income Taxes” (“FIN 48”). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax return to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. The adoption of FIN 48 did not result in the recording of any tax benefit or expense in the current period. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in the Statement of Operations.

 

FIN 48 requires management of the fund to analyze all open tax years, 2004 – 2007 as defined by statute of limitations, for all major jurisdictions, including federal and certain state tax authorities. As of March 31, 2009, the Fund did not have a liability for any unrecognized tax benefits. The Fund has no examinations in progress and is not aware of any tax positions for which it is reasonably possible that the total amount of unrecognized tax benefits will significantly change in the next twelve months.

 

 

Investment transactions are accounted for on the date the investments are purchased or sold (trade date). Dividends to shareholders are declared each business day and paid monthly. Distributions to shareholders are recorded on the ex-dividend date. Realized gains and losses from investment transactions are calculated using the identified-cost basis, which is the same basis the Fund uses for federal income tax purposes. Interest income is recorded on the accrual basis. The Fund concentrates its investments in Colorado and, therefore, may have more credit risks related to the economic conditions of Colorado than a portfolio with a broader geographical diversification. The Fund invests in non-rated securities, which may be subject to a greater degree of credit risk and risk of loss of income and principal, and may be more sensitive to economic conditions than lower yielding, higher rate fixed income securities.

 

The Fund discontinues the accrual of interest income on municipal bonds when the securities become delinquent as to payment of principal or interest, or when the Fund’s investment adviser determines that an uncertainty exists as to the realization of all or a portion of the principal balance. The face amount of bonds

Colorado BondShares

A Tax-Exempt Fund

 

Notes to Financial Statements (unaudited) — (Continued)

 

for which the accrual of interest income has been discontinued approximates $12,977,529 and such bonds have a market value of $3,738,756 or less than 1% of net assets, as of March 31, 2009. These securities have been identified on the accompanying Schedule of Investments.

 

 

The preparation of financial 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 income and expenses during the reporting period. Actual results could differ from those estimates.

 

 

The character of distributions made during the year from net investment income or net realized gains may differ from its ultimate characterization for federal income tax purposes. Also, due to timing of dividend distributions, the fiscal year in which amounts are distributed may differ from the fiscal year in which the income or realized gain was recorded by the Fund.

 

 

The Fund may purchase securities on a when-issued basis with payment and delivery scheduled for a future date. These transactions are subject to market fluctuations and may increase or decrease in value prior to the delivery date. The Fund maintains segregated assets with a market value equal to or greater than the amount of its purchases commitments.

 

 

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures About Derivative Instruments and Hedging Activities” (“SFAS 161”), which requires qualitative disclosures about objectives and strategies for using derivatives, gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Management is in the process of evaluating the impact of SFAS 161 on the Fund’s financial statement disclosures.

Colorado BondShares

A Tax-Exempt Fund

 

Notes to Financial Statements (unaudited) — (Continued)

 

 

The Fund has an unlimited number of no par value shares of beneficial interest authorized. Transactions in shares of beneficial interest were as follows:

 

 

 

At March 31, 2009, the net unrealized depreciation on investments of $32,822,768 was comprised of gross appreciation of $20,503,749 and gross depreciation of $53,326,517.

 

 

Management fees paid to Freedom Funds were in accordance with the investment advisory agreement with the Fund which provides for an annual fee equivalent to 0.5% of the net assets of the Fund. Freedom Funds pays all expenses associated with advertising, marketing, and distributing the Fund’s shares and serves as the transfer agent, dividend disbursing agent, and registrar for the Fund. Freedom Funds provided certain transfer agency and shareholder services as part of the management fee arrangement for the period ended March 31, 2009. Transfer agency expenses on the Statement of Operations represent direct expenses charged to the Fund by third parties.

 

(5)    Earnings Credits on Cash Balances

 

Expenses paid indirectly by the Fund represent earnings credits on cash balances maintained with the Fund’s custodian bank, UMB Bank, N.A. The earnings credits resulted in offsetting custodian fees of $20,048, for the period ended March 31, 2009.

Colorado BondShares

A Tax-Exempt Fund

 

Notes to Financial Statements (unaudited) — (Continued)

 

 

From time to time the Fund may be involved in certain disputes and legal actions arising in the ordinary course of its business. While it is not feasible to predict or determine the outcome of these proceedings, in management’s opinion, based on a review with legal counsel, none of these disputes and legal actions is expected to have a material impact on its financial position or results of operations. However, litigation is subject to inherent uncertainties, and an adverse result in these matters may arise from time to time that may harm the Fund’s business.

Officers and Trustees of the Fund

 

The following tables list the trustees and officers of the Fund, together with their address, age, positions held with the Fund, the term of each office held and the length of time served in each office, principal business occupations during the past five years and other directorships, if any, held by each trustee and officer. Each trustee and officer has served in that capacity for the Fund continuously since originally elected or appointed. The Board supervises the business activities of the Fund. Each trustee serves as a trustee until termination of the Fund unless the Trustee dies, resigns, retires, or is removed.

 

Non-Interested Trustees

 

 

 

Other Information (Unaudited)

 

Proxy Voting Record

 

The Fund does not invest in equity securities. Accordingly, there were no matters relating to a portfolio security considered during the 12 months ended June 30, 2008 with respect to which the Fund was entitled to vote. Applicable regulations require us to inform you that the foregoing proxy voting information is available on the SEC website at http://www.sec.gov or you may call us at 1-800-572-0069.

 

Quarterly Statement of Investments

 

The Fund files a complete statement of investments with the Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission’s website at http://www.sec.gov. The filed form may also be viewed and copied at the Commission’s Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800-732-0330 or you may call us at 1-800-572-0069.

 

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Item 2. CODE OF ETHICS.

Not required in this filing.

Item 3. AUDIT COMMITTEE FINANCIAL EXPERT.

Not required in this filing.

Item 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Not required in this filing.

Item 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

Not applicable.

Item 6. INVESTMENTS.

(a) Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this report.
(b) Not applicable.

Item 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

Item 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

Not applicable.

Item 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.

Not applicable.

Item 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The registrant has not adopted procedures by which shareholders may recommend nominees to the registrant’s board of trustees.

Item 11. CONTROLS AND PROCEDURES.

(a) The registrant has adopted and maintained disclosure controls and procedures (as such term is defined in Rules 30a-3(c) under the Investment Company Act of 1940, as amended (the “Act”)) that are designed to ensure that information required to be disclosed in the registrant’s reports under the Act, is recorded, processed, summarized and reported within the time periods required under the SEC’s rules and forms and that the information is accumulated and communicated to the registrant’s management, including its principal executive officer and principal financial officer to allow for timely decisions regarding required disclosure.

          As required by Rule 30a-3(b) of the Act, the registrant carried out an evaluation under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the registrant’s disclosure controls and procedures within the 90-day period prior to the filing date of this report. Based on the foregoing, the registrant’s principal executive officer and principal financial officer have concluded, as a result of the changes to the registrant’s internal control over financial reporting effected beginning in the December 2008 quarter as described in paragraph (b) below, that the registrant’s disclosure controls and procedures were effective, as of that date.

(b) There were changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

          As disclosed in the registrant’s Form N-Q filed March 2, 2009 and its Form N-CSR filed December 10, 2008, in November of 2008 and in connection with its audit of the registrant’s financial statements for the period ended September 30, 2008, Anton Collins Mitchell LLP advised management of the registrant, and management of the registrant agreed with Anton Collins Mitchell LLP, that the registrant did not maintain effective controls over the financial reporting process to eliminate the reasonable possibility that a material misstatement of the registrant’s annual or interim financial statements will not be prevented or detected on a timely basis. Specifically, due to the reliance by the registrant on manual spreadsheets for its primary accounting system and lack of adequate monitoring controls, management failed to detect a financial statement adjustment recorded in the incorrect accounting period. Anton Collins Mitchell LLP’s internal control report, which discusses this matter, is filed as an Exhibit to the registrant’s Form N-SAR filed December 1, 2008.

          In November of 2008, the registrant began to implement changes to its internal control over financial reporting to remediate the aforementioned deficiency and to strengthen the registrant’s internal control processes. The registrant implemented a portfolio management, reporting and accounting system tailored to the investment management industry with the intention of reducing management’s reliance on manual spreadsheets as the registrant’s primary accounting system. The costs of acquiring and implementing the new system were borne by the registrant’s investment advisor and not by the registrant. During the quarter ended March 31, 2009, the registrant continued to enhance the system with additional reporting and automated processing features to further strengthen the registrant’s internal control processes. Additional modifications to the system are also expected to be made in future reporting periods in response to any management, accounting or disclosure needs, including any that may result from the changing regulatory environment.

ITEM 12. EXHIBITS.

(a)(2)(i)		President’s (Principal Executive Officer) Section 302 Certification
(a)(2)(ii)		Treasurer’s (Principal Financial Officer) Section 302 Certification
(b)		Combined President & Treasurer (Principal Executive Officer and Principal Financial Officer) Section 906 Certification

SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		COLORADO BONDSHARES — A TAX-EXEMPT FUND
		/s/ George N. Donnelly
		George N. Donnelly,
		Interim President, Secretary and Treasurer
		Date: June 10, 2009

     Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

		/s/ George N. Donnelly
		George N. Donnelly,
		Interim President, Secretary and Treasurer (Principal
		Executive Officer and Principal Financial Officer)
		Date: June 10, 2009

EXHIBIT INDEX

(a)

Certifications of principal executive and principal financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940 attached hereto as Exhibit 99-CERT.