The short version of the brouhaha is this: the parents of an agnostic senior filed suit in federal court here in San Antonio alleging that having student-led prayers to open and close graduation ceremonies was tantamount to state sponsorship of religion. The initial court ruling agreed, barring the prayers in question and also forbidding any speakers from asking those in attendance to bow their heads or to say the word "amen." For what it's worth, I think they were right about removing official school sanction of the prayers, but went too far with their attempts to forbid it altogether, as the First Amendment also protects free expression of religion. (And the 5th Circuit Court of Appeals seems to concur; according to the linked story, they have ruled that "it's not substantially likely the plaintiffs will be able to prove individual student prayers equate to school-sponsored prayer.")
The school seems to have danced neatly around the issue:
Representatives of the Medina Valley Independent School District have maintained they weren't violating the Constitution. The district did, however, remove the words “invocation” and “benediction” from the commencement program.
Instead, a student gave what were labeled opening remarks that began, “Those who wish, would you please pray with me?”